<PAGE>
As filed with the Securities and Exchange Commission on March 10, 1998
Registration Nos. 333-05955 and 333-43331
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 5
TO FORM S-1
REGISTRATION STATEMENT
AND
AMENDMENT NO. 3
TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GRAND COURT LIFESTYLES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8059 22-3423087
------------------------------- ---------------------------- ----------------
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
----------------------
</TABLE>
------------------------
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 200 Park Avenue
(212) 603-2000 New York, New York 10166
(212) 801-9200
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion, Dated March 10, 1998
3,000,000 Shares of Common Stock
GRAND COURT LIFESTYLES, INC.
This Prospectus relates to an offering (the "Offering") of 3,000,000
shares of Common Stock, $.01 par value per share ("Common Stock") of Grand Court
Lifestyles, Inc. (the "Company"). Prior to this Offering, there has been no
market for the Common Stock 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 currently anticipated that the initial offering price
of the Common Stock will be between $9.50 and $10.00 per share. For information
regarding the factors considered in determining the initial public offering
price of the Common Stock, see "Risk Factors" and "Underwriting." The Company
intends to apply for the Common Stock to be listed on the Nasdaq National
Market.
An investment in the Common Stock involves substantial risks. See
"Risk Factors" beginning on page 13 for a discussion of certain
matters that should be considered by prospective investors.
------------------------
Portions of proceeds from this Offering may be used to make required
payments on outstanding securities of Company affiliates.
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.
================================================================================
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)(3)
- --------------------------------------------------------------------------------
Per Share $ $ $
- --------------------------------------------------------------------------------
Total $ $ $
================================================================================
<PAGE>
------------------------
(1) Does not include additional compensation payable to Royce Investment
Group, Inc., the representative of the several Underwriters (the
"Representative"), in the form of (i) a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, (ii) Warrants to
purchase from the Company up to 300,000 shares of Common Stock at a
price equal to 165% of the per share price to the public of the Common
Stock ("Representative's Warrants"), exercisable over a period of four
years commencing one year after the date of this Prospectus, and (iii)
a consulting fee equal to 1% of the gross proceeds of the Offering. In
addition, the Company and the principal stockholders of the Company
(the "Principal Stockholders") have agreed to indemnify the
Underwriters for certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company and the Principal
Stockholders (which include, but are not limited to, the 3%
non-accountable expense allowance and the 1% consulting fee payable to
the Representative) estimated at approximately $2,170,000. All expenses
of the Offering will be paid by the Company, except that the Principal
Stockholders will pay underwriting discounts, the consulting fee and
the non-accountable expense allowance with respect to shares to be sold
by them if the Over-allotment Option (as defined below) is exercised.
See "Underwriting."
(3) The Principal Stockholders have granted to the Underwriters an option
exercisable within 45 days after the date of this Prospectus to
purchase up to 450,000 additional shares of Common 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, proceeds to the Company
will be unchanged and the total Price to Public, Underwriting Discounts
and proceeds to Principal Stockholders will be $ , $ , and
$ , respectively.
The Common Stock is 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 Common Stock will be made in New York, New York, on or
about ______________, 1998.
------------------------
ROYCE INVESTMENT GROUP, INC.
The date of this Prospectus is , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF 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 per share of Common Stock and no exercise of the Over-allotment
Option. All share and per share data has been restated to give effect to a
1,626.19-for-1 stock split and reduction in par value per share of Common Stock
from $.10 to $.01 which occurred after the beginning of fiscal 1997. 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, 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 ("Syndications") of partnerships it organizes to acquire existing
adult living communities. The Company manages the Syndicated adult living
communities and is one of the largest operators of adult living communities in
the United States. The Company currently manages 37 adult living communities
containing 5,265 apartment units offering both independent and assisted-living
services in 12 states in the Sun Belt and the Midwest. The Company also manages
one nursing home. The Company has approximately 1,600 employees and directly
conducts the day-to-day operations of the adult living communities it manages.
As of January 31, 1998, the Company had an average occupancy rate at the adult
living communities it manages of approximately 93%.
Prior to 1986, the Company acquired, developed, arranged for the
Syndication of, and in most cases managed, 170 multi-family properties
containing approximately 20,000 apartment units, primarily in the Sun Belt and
the Midwest. The Company is no longer engaged in the acquisition, development,
Syndication or management of multi-family properties and the Company does not
presently intend to do so in the future. The Company's only involvement with
multi-family properties is as a holder of notes and receivables from the
partnerships that own 128 multi-family properties containing 13,886 apartment
units, which notes and receivables are paid from the cash flow and sale or
refinancing proceeds these properties generate. As of October 31, 1997, the
recorded value, net of deferred income, of these notes on the Company's
Consolidated Balance Sheets was $107.1 million and the recorded amount of these
receivables was $54.8 million.
The Company intends to continue to arrange for future acquisitions of
existing adult living communities utilizing mortgage financing and Syndications.
As described below, the Company has instituted a development plan to construct
new adult living communities. The Company intends to own the newly-constructed
communities, or lease them pursuant to long term leases or similar arrangements,
and to manage these communities. The Company does not intend to Syndicate any of
its newly-constructed adult living communities. To the extent that the
development plan to construct new adult living communities is successfully
implemented, the Company anticipates that the percentage of its revenues derived
from Syndications of acquired adult living communities would decrease and the
percentage of its revenues derived from newly constructed adult living
communities would increase. The Company also believes that, over time, revenues
derived from newly constructed adult living communities will become the primary
source of the Company's revenues. Largely as a result of anticipated start-up
losses from the Company's newly developed adult living communities, the Company
anticipates that it will incur operating losses for fiscal 1998.
Partnership Offerings
The Company has arranged for the acquisition of the 37 adult living
communities and one nursing home that it manages by utilizing mortgage financing
and by arranging Syndications of 41 limited partnerships ("Investing
Partnerships") formed to acquire interests in the 37 other partnerships that own
the adult living communities and the nursing home ("Owning Partnerships"). The
37 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 32 of the 41
Investing Partnerships.
1
<PAGE>
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. An 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 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.
During the fiscal year ended January 31, 1997 and the nine months
ended October 31, 1997, the Company paid approximately $5.6 million and $5.2
million, respectively, with respect to its Management Contract Obligations. The
aggregate amount of such Management Contract Obligations relating solely to
returns to limited partners for the last quarter of fiscal 1997 and for each of
the fiscal years 1998 through 2002 based on existing management contracts is
$3.9 million, $15.4 million, $17.4 million, $16.4 million, $11.2 million and
$2.4 million, respectively. Such amounts of Management Contract Obligations are
calculated based upon paid-in scheduled capital contributions of limited
partners as of October 31, 1997 with respect to fiscal 1997, and remaining
scheduled capital contributions with respect to fiscal years 1998 through 2002.
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 cash
flow would reduce such obligations, and are calculated without regard to the
Management Contract Obligations relating to 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
required returns for distribution to limited partners) for these periods. 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 initial five-year term of the management contracts and the related
Management Contract Obligations have expired for 10 Owning Partnerships, which
Management Contract Obligations relate to fourteen Investing Partnerships.
Although the Company has no obligation to fund operating shortfalls after the
five-year term of the management contracts, as of October 31, 1997, the Company
had advanced an aggregate of approximately $400,000 to two Owning Partnerships
to fund operating shortfalls . In both cases, the Company had arranged for
Syndications involving multi-family properties that the Company acquired from
third parties and believed could be successfully converted to adult living
communities.
2
<PAGE>
One of these conversion attempts was unsuccessful and the property is now being
operated as a multi-family property by a third-party managing agent. The other
property has experienced difficulties in its conversion to an adult living
community, but the conversion process is continuing. These advances are recorded
as "Other Partnership Receivables" on the Company's Consolidated Balance Sheet.
The Company has no present intention to attempt other conversions of
multi-family properties to adult living communities.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of the prepayments received upon the closings of
the sales of limited partnership interests in Investing Partnerships averaged
71.7% in fiscal 1994, 60.9% in fiscal 1995, 65.7% in fiscal 1996 and 64.4% for
the nine months ended October 31, 1997. Prepayments of capital contributions do
not result in the prepayment of the related Purchase Notes held by the Company.
Instead, such amounts are loaned to the Company by the Investing Partnership. As
a result of such loans and crediting provisions of the related purchase
agreements, the Company records the purchase notes net of such loans. Therefore,
these prepayments act to reduce the recorded value of the Company's note
receivables and reduce interest income received by the Company. Pursuant to the
terms of the offerings, the Company has the option not to accept future
prepayments by limited partners of capital contributions. The Company has not
determined whether it will continue to accept prepayments by limited partners of
capital contributions.
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) amounts payable by the Investing
Partnerships to the Company in the event of the subsequent sale or refinancing
of such communities, (iv) interest income on Purchase Notes, and (v) earnings
derived from the Company's equity interests in Owning Partnerships and Investing
Partnerships. 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.
In the process of considering potential property acquisitions, the
Company considered the acquisition of previously Syndicated properties whose
value had appreciated sufficiently to support a purchase price that would be
acceptable to the original limited partners. In fiscal 1996 and 1997, the
Company acquired three previously Syndicated adult living communities (the
"Resyndicated Communities") from the original Owning Partnerships, which
acquisitions were arranged by utilizing mortgage financing and by arranging for
the ownership of the properties by new Owning Partnerships and the Syndication
of interests in new Investing Partnerships (the "Resyndications"). The terms and
structure of these Resyndications are the same as for other original
Syndications, except that the new Owning Partnership formed by the Company
purchases the property from the original Owning Partnership rather than from a
third party owner. The net proceeds from the purchase price paid to the original
Owning Partnership were distributed to the original Investing Partnership and
its limited partners and resulted in the original limited partners receiving a
return of all of their capital plus a profit ranging from an amount equal to 10%
of their capital with regard to two of the Resyndications and 30% of their
capital with regard to the third Resyndication. The Company has the same
interests in a Resyndicated property as it has in other Syndications. The
Company manages the Resyndicated communities pursuant to new management
contracts. The Company will not engage in other Resyndication transactions in
the future.
The Company plans to acquire between six and twelve existing adult
living communities over the next two years. The Company presently intends to
continue to arrange for future acquisitions of existing adult living communities
by utilizing mortgage financing and Syndications. In January 1998, the Company
acquired and Syndicated an adult living community in Adrian, Michigan containing
73 apartment units.
<PAGE>
Receivables Relating To Multi-Family Properties
Although prior to 1986, the Company developed, acquired, arranged for
the Syndication of, and in most cases managed, multi-family properties, the
Company does not own, and no longer has any direct involvement with, these
multi-family properties. The Company's only involvement with the multi-family
properties is that it holds Purchase Notes ("Multi-Family Notes") from Investing
Partnerships which were formed to acquire interests in Owning Partnerships which
own multi-family properties ("Multi-Family Owning Partnerships"). These
Multi-Family Notes are secured by the Purchased Interests in the related
Multi-Family Owning Partnerships. 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 recorded as "Other
Partnership Receivables" on the Company's Consolidated Balance Sheet. The
Multi-Family Notes and the other receivables 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 receivables are satisfied.
As of October 31, 1997, the recorded value, net of deferred income, of
Multi-Family Notes was $107.1 million. All but approximately $1.2 million of the
$56.0 million of "Other Partnership Receivables" recorded on the Company's
Consolidated Balance Sheet as of October 31, 1997 relate to advances to
Multi-Family Owning Partnerships.
3
<PAGE>
Historically, if the mortgage encumbering a multi-family property was
in default or the property was experiencing material financial difficulties, the
Company established reserves, as appropriate, due to the deemed impairment of
the related Multi-Family Note and any related receivables. If the property was
ultimately foreclosed upon, or when otherwise appropriate under applicable
accounting rules, the Company recognized a loss equal to the recorded value of
such note and receivables, net of any deferred income and reserves previously
established. Nine Multi-Family Owning Partnerships which were in default of
their mortgages previously filed bankruptcy petitions seeking protection from
foreclosure actions ("Chapter 11 Petitions"). One additional Multi-Family Owning
Partnership which was in default of its mortgage surrendered its property
pursuant to an uncontested foreclosure sale of such property (such Multi-Family
Owning Partnership, together with the nine Multi-Family Owning Partnerships that
filed bankruptcy petitions, are referred to herein as the "Protected
Partnerships"). John Luciani and Bernard M. Rodin, the principal stockholders of
the Company (the "Principal Stockholders,") were each a general partner of three
Protected Partnerships, but withdrew as a general partner prior to their filing
their respective Chapter 11 Petitions. The Company neither owns nor manages
these properties, nor is it the general partner of any Multi-Family Owning
Partnerships, including the Protected Partnerships, but rather, merely holds the
related Multi-Family Notes and Other Partnership Receivables as receivables. The
Company, therefore, has no liability in connection with these mortgage defaults
or bankruptcy proceedings. Seven of the Chapter 11 petitions resulted in the
respective Protected Partnerships losing their properties through foreclosure or
voluntary conveyances of their properties. The remaining two Protected
Partnerships successfully emerged from their bankruptcy proceedings by paying
off their mortgages at a discount with the proceeds of new mortgage financings,
resulting in these properties having current, fully performing mortgages.
The bankruptcy petitions and risk of loss faced by the Protected
Partnerships caused the related Multi-Family Notes and receivables to be deemed
fully impaired. As a result, the Company recorded a non-cash loss in fiscal 1996
in the amount of $18.4 million (representing the recorded value of these
Multi-Family Notes and receivables, net of deferred income and any previously
established reserves). The Principal Stockholders and one of their affiliates
assigned certain partnership interests in various partnerships that own
multi-family properties (the "Assigned Interests") to the Investing Partnerships
which own interests in the Protected Partnerships, which Assigned Interests were
owned personally by the Principal Stockholders and their affiliate, providing
additional security for the multi-family notes and receivables payable to the
Company by such Investing Partnerships. In that the Principal Stockholders
transferred the Assigned Interests in July 1996, the Company recorded a $21.3
million capital contribution in fiscal 1996. As a result of the transfers by the
Principal Stockholders and their affiliate of the Assigned Interests and the
additional security provided thereby, the Company believes that the outcome of
the bankruptcy proceedings will not affect its ability to collect on these
Multi-Family Notes and receivables.
Fifteen of the Multi-Family Owning Partnerships remain in default on
their respective mortgages. As of October 31, 1997, the recorded value, net of
deferred income, of the Multi-Family Notes and "Other Partnership Receivables"
held by the Company relating to these fifteen Multi-Family Owning Partnerships
was $31.9 million. The Company has established reserves of $10.1 million to
address the possibility that these notes and receivables may not be collected in
full. It is possible that other Multi-Family Owning Partnerships which are in
default of their mortgages will file bankruptcy petitions or take similar
actions seeking protection from their creditors.
<PAGE>
In addition, many of the multi-family properties are dependent to
varying degrees on housing assistance payment contracts with the 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 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 these Multi-Family Owning
Partnerships, but, rather, holds the related Multi-Family Notes and Other
Partnership Receivables as receivables. 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 non-cash 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 and receivables 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, 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 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.
New Development Program
Beginning in 1986, the Company has focused primarily on the
acquisition, development and management of adult living communities. Through its
management of 37 adult living communities containing 5,265 adult living
apartment units and one nursing home, the Company has become an experienced
provider of both independent and assisted-living services.
The Company believes that its experience in the acquisition, development and
management of adult living
4
<PAGE>
communities positions it to take advantage of social and economic trends that
are projected to increase demand for adult living services.The Company's
operating objective is to provide high-quality, personalized living services to
senior residents, primarily persons over the age of 75.
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community 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 will be 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 $9.5
million and utilizing long-term lease financing will be approximately $10
million. The Company expects to complete the construction of four of the five
communities currently under construction by the end of the first quarter of
fiscal 1998 and expects to complete the construction of the remaining community
under construction by the end of fiscal 1998. The eight adult living communities
already completed or under construction pursuant to the development plan contain
an aggregate of approximately 1,150 adult living apartment units and the 30 to
34 additional new communities which the Company intends to commence construction
on over the next two years will contain between 4,260 and 4,828 additional adult
living apartment units.
The first new communities being constructed pursuant to the Company's
development plan are in Texas. The Company has obtained development financing
from Capstone Capital Corporation ("Capstone") pursuant to which Capstone is
providing up to $39 million for development of four new adult living communities
that will be operated by the Company pursuant to long-term leases with Capstone.
The Company has completed construction on two of these communities which are
located in El Paso and San Angelo, Texas, respectively, and is nearing
completion of construction on two communities which are located in Wichita Falls
and Abilene, Texas, respectively. The Company has completed construction, with
mortgage financing for up to $7 million, on an adult living community in Corpus
Christi, Texas, and is nearing completion of construction with mortgage
financing for up to $7.3 million, on an adult living community in Temple, Texas.
The Company is also nearing completion of construction, with mortgage financing
for up to $7.6 million, of an adult living community in Round Rock, Texas. The
Company has commenced construction on one additional site in Tyler, Texas with
mortgage financing of $7.1 million. When developed, the Corpus Christi, Temple,
Round Rock and Tyler facilities will be owned and operated directly by the
Company. The Company also 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 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 effectuation of the development plan will expose the Company to
additional risk. These risks include, but are not limited to, the Company's
anticipation that the construction of each community will require approximately
12 months and that each newly constructed community will incur start-up losses
for at least nine additional months after commencing operations. In addition,
there can be no assurance that newly constructed communities will generate
positive cash flow or that the Company will not suffer delays or cost overruns
in instituting its development plan.
<PAGE>
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 and contains certain design features
that the Company believes are innovative and will appeal to the elderly. The
prototype contains 142 adult living 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. 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, whose smaller size limits the size and variety of common areas. The
Company believes that its prototype adult living community is attractive to both
independent-living residents who foresee their future need for assisted-living
services and residents who initially seek assisted-living services. 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. Although the licensing requirements and the expense
and difficulty of converting between independent-living units and
assisted-living units typically make it impractical to accomplish such
conversions, 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" which the Company
5
<PAGE>
offers in the same community. In the Company's opinion, 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 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 31, 1998 of
approximately 93%. In addition, the Company plans to use the common facility
design of its prototype and its "The Grand Court"(R) trademarked name to promote
recognition of its properties nationally. The Company focuses exclusively on
"private-pay" residents who pay for housing or related services out of their own
funds, rather than relying on the few states that have enacted legislation which
enables assisted-living facilities to receive Medicare funding similar to
funding generally provided to skilled nursing facilities. The Company believes
this "private-pay" focus will allow it 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 primarily
dependent on Medicare 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.
6
<PAGE>
The following diagram illustrates the typical relationship among the
Company, the Owning Partnerships and the Investing Partnerships in a transaction
where the Company acquires and Syndicates an adult living community.
(Diagram illustrating the relationship among the Company, the Owning
Partnerships and the Investing Partnerships in a transaction where the Company
acquires and Syndicates an adult living community 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 "Owning 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.)
7
<PAGE>
The following diagram illustrates the flow of funds when a syndicated
adult living community experiences profitable or unprofitable operations during
the Management Contract Obligations period.
(Diagram illustrating the flow of funds when a syndicated adult living
community experiences profitable or unprofitable operations during the
Management Contract Obligations period appears here. In the middle of the
diagram is a box entitled "Owning Partnership" (the "Owning Partnership box").
An arrow with the words "Specified Rate of Return" is drawn from the Owning
Partnership box to the upper left portion of the diagram to a box entitled
"Investing Partnership" (the "IP box"). An arrow with the words "Specified Rate
of Return" is drawn from the IP box to a box appearing directly above entitled
"Limited Partners". An arrow with the words "Incentive Management Fee Equal to
Cash Flow above Specified Rate of Return to Limited Partners" is drawn from the
Owning Partnership box to the upper right portion of the diagram to a box
entitled "The Company" (the "Company box"). In return, an arrow with breaks and
the words "Amount Equal to Cash Flow Shortfall and Specified Rate of Return to
Limited Partners (Management Contract Obligation Payments)" is drawn from the
Company box to the Owning Partnership box. An arrow with breaks and the words
"(Unprofitable Operations) Cash Flow Shortfall" is drawn from the Owning
Partnership box to a box below entitled "Adult Living Community" (the "ALC
box"). In return, an arrow with the words "Cash Flow (Profitable Operations)" is
drawn from the ALC box to the Owning Partnership box.)
8
<PAGE>
The following diagram illustrates how the cash generated from each of
the following sources flows to the Company and how it is available to pay the
Company's expenses, including Management Contract Obligations.
(Diagram illustrating how cash generated from Adult Living Investing
Partnerships, Adult Living Owning Partnerships, Multi-Family Investing
Partnerships, Debt Holders and Newly Developed Adult Living Communities flows to
the Company and how it is available to pay the Company's expenses, including
Management Contract Obligations appears here.) At the top of the diagram is a
box containing the words "Expenses, including Management Contract Obligations"
(the "Expenses box"). An arrow with the words "Available Company Cash Flow" is
drawn directly below the Expenses box from a box entitled "The Company" (the
"Company box"). An arrow with the words "Capital Contributions" is drawn to the
left of the diagram from a box entitled "Limited Partners" (the "LP box") to a
box appearing directly above entitled "Adult Living Investing Partnerships" (the
"ALIP box"). An arrow with the words "Purchase Price for Purchased Interest,
Including Payments on Purchase Notes" is drawn from the ALIP box to the Company
box. An arrow with the words "Net Cash Flow after Operating Expenses" is drawn
from a box entitled "Adult Living Properties" (the "ALP box"), which appears
directly to the right of the LP box, to a box appearing directly above entitled
"Adult Living Owning Partnerships" (the "ALOP box"). An arrow with the words
"Incentive Management Fees" is drawn from the ALOP box to the Company box. An
arrow with the words "Net Cash Flow and Sale and Refinancing Proceeds" is drawn
from a box entitled "Multi-Family Properties" (the "M-FP box") to a box
appearing directly above the M-FP box and to the right of the ALP box entitled
"Multi-Family Owning Partnership" (the "M-FOP box"). An arrow with the words
"Net Cash Flow and Sale and Refinancing Proceeds" is drawn from the M-FOP box to
a box appearing directly above entitled "Multi-Family Investing Partnerships"
(the "M-FIP box"). An arrow with the words "Purchase Note and Receivables
Payments" is drawn from the M-FIP box to the Company box. An arrow with the
words "Management Fees" is drawn from the M-FP box to a box appearing directly
to the right of the M-FP box entitled "Third Party Managing Agent". An arrow
with the words "Proceeds of Debenture Debt and Unsecured Debt" is drawn from a
box entitled "Debt Holders" (the "Debt Holders box"), which appears directly to
the right of the M-FIP box, to the Company box. An arrow with the words "Cash
Flow" is drawn from a box entitled "Newly Developed Adult Living Communities",
which appears directly to the right of the Debt Holders box, to the Company
box.)
9
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock to be sold by
the Company(1)............................ 3,000,000 shares
Common Stock outstanding before
this Offering............................. 15,000,000 shares of Common Stock
Common Stock to be outstanding
after this Offering(1)(2): 18,000,000 shares of Common Stock
Use of proceeds............................. The Company intends to use (i) approximately $3 million of its net
proceeds from the Offering for working capital and general
corporate purposes and (ii) the balance of approximately $23
million to finance development of new adult living communities.
</TABLE>
- -------------
(1) Excludes up to 450,000 additional shares of Common Stock to be sold by
the Principal Stockholders upon exercise of the Over-allotment Option
and up to 300,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants. 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".
10
<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
for the full year. The results of operations for the nine months ended October
31, 1996 and 1997 may not give a true indication of results for the full year.
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). See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine months
Years Ended January 31, (5) ended October 31,(5)
------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales......................... $ 18,170 $ 20,973 $ 22,532 $ 31,973 $ 36,021 $ 21,524 $31,401
Syndication fee income........ 6,484 7,654 5,587 8,603 7,690 4,976 6,529
Deferred income earned........ 792 7,502 4,399 9,971 5,037 708 4,246
Interest income............... 13,209 13,315 9,503 12,689 13,773 11,043 8,081
Property management fees from
related parties ........... 560 3,854 4,351 4,057 2,093 1,604 3,250
Equity in earnings from
partnerships............... 129 206 276 356 423 250 357
Other income.................. -- -- -- 1,013 -- -- 283
--------- -------- --------- -------- -------- -------- --------
Total Revenues 39,344 53,504 46,648 68,662 65,037 40,105 54,147
========= ======== ========= ======== ======== ====== =======
Costs and expenses:
Cost of sales................. 14,411 26,876 21,743 27,688 34,019 19,468 25,947
Selling....................... 7,027 6,706 6,002 7,664 7,176 4,603 6,186
Interest...................... 11,874 10,991 13,610 15,808 16,394 12,017 13,991
General and administrative.... 5,617 5,226 6,450 7,871 7,796 5,687 6,415
Loss on impairment of notes
and receivables.............. -- -- -- -- 18,442 18,442 --
Write-off of registration costs -- -- -- -- -- -- 3,107
Officers' compensation(1)..... 1,200 1,200 1,200 1,200 1,200 900 900
Depreciation and amortization. 975 1,433 2,290 2,620 3,331 2,539 2,650
--------- -------- --------- -------- -------- -------- --------
Total Cost and Expenses 41,104 52,432 51,295 62,851 88,358 63,656 59,196
========= ======== ========= ======== ======== ====== =======
Income (loss) before provision
(benefit) for income taxes ... (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Provision for income taxes...... -- -- -- -- -- -- --
--------- -------- --------- -------- -------- -------- --------
Net income (loss)(6)............. (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Pro-forma income tax provision
(benefit)(2).................. (704) 429 (1,859) 2,324 -- -- --
--------- -------- --------- -------- -------- -------- --------
Pro-forma net income (loss)(2).. $ (1,056) $ 643 $ (2,788) $ 3,487 $(23,321) $(23,551) $(5,049)
========= ======== ========= ======== ======== ====== =======
Pro-forma earnings (loss) per
common share(2)............... $ (.07) $ .04 $ (.19) $ .23 $(1.55) $(1.57) $ (.34)
========= ======== ========= ======== ======== ====== =======
Pro-forma weighted average
common shares used............ 15,000 15,000 15,000 15,000 15,000 15,000 15,000
========= ======== ========= ======== ======== ====== =======
Other Data:
Adult living communities
operated (end of period).... 14 18 24 28 31 29 36
========= ======== ========= ======== ======== ====== =======
Number of units (end of
period)..................... 2,336 2,834 3,683 4,164 4,480 4,119 5,192
========= ======== ========= ======== ======== ====== =======
Average occupancy
percentage (3).............. 90.6% 90.4% 89.3% 94.7% 91.3% 93.4% 93.1%
========= ======== ========= ======== ======== ====== =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
As of January 31, (as restated) (6) As of October 31, 1997
---------------------------------------------- ----------------------
1993 1994 1995 1996 1997 Actual Adjusted(4)
---- ---- ---- ---- ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 6,455 $ 9,335 $ 10,950 $ 17,961 $ 14,111 $ 9,679 $ 35,679
Notes and receivables-net 234,583 227,879 220,482 224,204 222,399 238,128 238,128
Total assets........... 251,116 248,854 248,553 260,023 261,661 288,074 314,074
Total liabilities...... 203,990 211,647 217,879 225,238 229,658 261,120 261,120
Stockholders' equity... 47,126 37,207 30,674 34,785 32,003 26,954 52,954
</TABLE>
- ----------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and President,
respectively, of the Company received dividends and distributions from the
Company's predecessors but did not receive compensation. Officers'
Compensation is based upon the aggregate compensation currently received by
such officers, $600,000 a year for each such officer. Amounts received by
such officers in excess of such amount are treated as dividends for
purposes of the Company's financial statements. In fiscal 1992 through
fiscal 1996, such officers also received $360,000; $5,496,000; $943,000;
$850,000; and $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 the years ended
January 31, 1993 through January 31, 1996.
(3) Average occupancy percentages were determined by adding all of the
occupancy percentages of the individual communities and dividing that
number by the total number of communities. The average occupancy percentage
for each particular community was determined by dividing the number of
occupied apartment units in the particular community on the given date by
the total number of apartment units in the particular community.
(4) "Adjusted" amounts give effect to the application by the Company of its net
proceeds of this Offering (based upon an assumed initial public offering
price of $10 per share of Common Stock, after deducting underwriting
discounts and other offering expenses payable by the Company). See
"Capitalization."
(5) Reclassification - Certain amounts in prior years have been reclassified to
conform with current period presentation.
(6) Subsequent to the issuance of the Company's fiscal 1996 Consolidated
Financial Statements, the Company discovered that certain prior period
costs and advances were erroneously expensed in a prior period. As a
result, the Company's Consolidated Financial Statements have been restated
from the amounts previously reported to reflect the correction of this
error. See Note 13 to Consolidated Financial Statements.
12
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should
consider carefully the factors set forth below, as well as other information
contained in this Prospectus, before making a decision to purchase the Common
Stock offered hereby.
Recent Net Losses and Anticipated Operating Losses
The Company incurred net losses of approximately $1.8 million, $4.6
million, $23.3 million and $5.0 million for the fiscal years ended January 31,
1993, 1995 and 1997, and the nine months ended October 31, 1997, respectively.
Largely 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 fiscal 1998.
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 approximately 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 Syndications 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 of the Syndications 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 year, 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 Management
Contract Obligations. As a result the Company expects to incur operating losses
until its newly constructed communities are completed, leased up and begin
generating positive cash flow. There can be no assurance that the Company will
be able to complete its development plan as expected. In addition, 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 "-- Need for Additional Financing", "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, 1997 the Company had approximately $156.2 million
principal amount of debt, excluding accrued interest of $900,000 ("Total Debt"),
at an average interest rate of 12.2% per annum. Of the principal amount of Total
Debt, $2.9 million becomes due in the fiscal year ending January 31, 1998; $35.5
million becomes due in the fiscal year ending January 31, 1999; $35.3 million
becomes due in the fiscal year ending January 31, 2000; $23.7 million becomes
due in the fiscal year ending January 31, 2001; $28.9 becomes due in the fiscal
year ending January 31, 2002, and the balance of $29.9 million becomes due
thereafter.
Of the Total Debt at October 31, 1997, $72.4 million principal amount
were debentures ("Debenture Debt") issued in twelve separate series, secured by
notes (the "Multi-Family Notes") owed to the Company by partnerships, investor
notes and limited partnership interests arising from Syndications to finance
acquisitions of multi-family housing (the "Purchase Note Collateral"). The
Debenture Debt has an average interest rate of 12.05% per annum and has
maturities ranging from 1997 through 2004. During the fiscal year ended January
31, 1997 and the nine months ended October 31, 1997, total interest expense with
respect to Debenture Debt was approximately $9.2 million and $6.2 million,
respectively. The Purchase Note Collateral produced approximately $2.3 million
and $1.5 million of interest and related payments to the Company, which was
approximately $6.9 million and $4.7 million less than the amount required to pay
interest on the Debenture Debt. The Company paid the shortfall from cash
generated by its business operations. Debenture Debt in the aggregate principal
amount of approximately $1.3 million, $12.4 million, $17.1 million, $15.1
million and $17.8 million will mature in the respective fiscal years 1997
through 2001. There can be no assurance that amounts received with respect to
the Purchase Note Collateral will be sufficient to pay the Company's future debt
service obligations with respect to the Debenture Debt. Fifty-one of the 169
Multi-Family Notes have reached their final maturity dates and, due to the
inability,
13
<PAGE>
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
underlying property relating to one extended Multi-Family Note was refinanced in
Fiscal 1996 and such refinancing generated an approximate $800,000 payment to
the Company under such Multi-Family Note. In addition, the Company anticipates
that two more multi-family properties relating to two other extended
Multi-Family Notes will be refinanced in the first quarter of fiscal 1998. There
can be no assurance that such refinancings will actually close. During the
period such notes are extended, the Company will continue to receive the cash
flow and sale or refinancing proceeds, if any, generated by the underlying
properties. The Company expects to extend maturities of other Multi-Family
Notes.
Of the Company's Total Debt at October 31, 1997, an additional $49.7
million principal amount was unsecured, having an average interest rate of 13.3%
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, 1997, the Company had approximately $29.1 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 10.9% 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 business 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
Syndications of existing adult living communities. The Company intends to incur
additional Debenture Debt or Unsecured Debt as a means of refinancing existing
debt, and may incur additional debt to finance a portion of costs associated
with the Company's development plan for new adult living communities or for
working capital purposes; provided, however, that any such issuances will be
subject to market conditions and the availability of funds generated by the
Company's operations. Neither the Company nor the Owning Partnerships have
policies limiting the amount or proportion of indebtedness incurred.
The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in some obligations, certain
Investing Partnerships, Owning Partnerships or affiliates of the Company.
Certain obligations contain provisions requiring the Company to maintain a net
worth of, in the most restrictive case, $26,250,000, 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. On a pro forma basis, after giving effect to this
Offering, the Company would have had a net worth of $53.0 million at October 31,
1997. Therefore, the Company would be required, pursuant to the Capstone
Agreement to maintain a net worth of no less than $39.8 million. 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 6 to 1. At January 31, 1997 and at October 31,
1997 the Company's debt for borrowed money to consolidated net worth ratio was
4.6 to 1 and 5.8 to 1, respectively and would have been 3.0 to 1 on a pro forma
basis at October 31, 1997, after giving effect to this Offering. 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.
Management Contract Obligations and Prepayment Rights of Limited Partners
The Company has arranged for the acquisition of existing adult living
communities it operates through Syndications of Investing Partnerships and
intends to continue this practice for future acquisitions of existing adult
living communities. The Company does not intend to Syndicate its newly developed
adult living communities. The limited partners typically agree to pay their
capital contributions over a five-year period. Past Syndications have provided,
and it is anticipated that future Syndications will provide, that the limited
partners will receive 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 the Management Contract
Obligations. Since the aggregate scheduled capital contributions relating to a
particular property increase during the Management Contract Obligations period,
the specified return to limited partners relating to such property also
increases during this period. As a result of the Management
14
<PAGE>
Contract Obligations, the Company and its stockholders bear the risk of
operations and financial liability of the related property for such five-year
period.
During the fiscal year ended January 31, 1997 and the nine months ended
October 31, 1997, the Company paid approximately $5.6 million and $5.2 million,
respectively, with respect to Management Contract Obligations. Of the $5.6
million the Company paid in respect to Management Contract Obligations for
fiscal 1996 (i) approximately 64% was attributable to difficulties the Company
experienced in two Syndications involving multi-family properties that the
Company acquired from third parties and believed could successfully be converted
to adult living communities (the conversion of one of these properties to an
adult living community is continuing but has not been completed and the
conversion of the other property was unsuccessful and the property is being
operated as a multi-family property by a third-party managing agent) and one
under performing adult living community, (ii) approximately 27% was attributable
to operating expenses (including maintenance repairs and costs) increasing at a
greater rate than historically, as partially offset by increases in rental
revenues, and (iii) approximately 9% was attributable to the increased debt
service, including the establishment of capital improvement reserves, on certain
adult living communities due to the refinancing of such adult living communities
(which includes the initial mortgage financing of certain adult living
communities that had been previously acquired without a mortgage), which
refinancings reduced the cash flow generated by such adult living communities to
a greater extent than the resulting reduction of the Company's Management
Contract Obligations relating to such properties. As a result of the
refinancings, $43 million was distributed to limited partners as a return of
capital. This return of capital reduced the amount of capital upon which the
Company has Management Contract Obligations. Of the $5.2 million the Company
paid in respect to Management Contract Obligations for the nine months ended
October 31, 1997 (i) approximately 45% was attributable to operating expenses
(including maintenance and repair costs) increasing at a greater rate than
historically, as partially offset by increases in rental revenues, (ii)
approximately 33% was attributable to the decrease in the average occupancy of
the Company's portfolio of adult living communities, and (iii) approximately 22%
was attributable to difficulties the Company experienced in one Syndication
where a multi-family property was converted to an adult living community and one
under performing adult living community. The initial five-year term of the
management contracts and the related Management Contract Obligation period has
expired for each of the two Syndications involving multi-family properties which
the Company attempted to convert to adult living communities.
The aggregate amount which the Company will be required to pay with
respect to such 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 the Company currently
operates, the terms of future Syndications 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 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 required returns for distribution to limited
partners). The aggregate amount of Management Contract Obligations relating
solely to guaranteed return obligations for the remaining portion of fiscal 1997
and for each of the fiscal years 1998 through 2002 based on existing management
contracts is $3.9 million, $15.4 million, $17.4 million, $16.4 million, $11.2
million and $2.4 million, respectively. Such amounts of Management Contract
Obligations are calculated based upon paid-in scheduled capital contributions of
limited partners as of October 31, 1997 with respect to the remaining portion of
fiscal 1997 and remaining scheduled capital contributions with respect to fiscal
years 1998 through 2002. 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 cash flow would reduce such obligations, and are
calculated without regard to the Management Contract Obligations relating to
future Syndications.
Historically, the Company has funded, and it is anticipated that in the
future the Company will fund, its expenses, including Management Contract
Obligations, from its various sources. These sources consist of profits from new
Syndications, incentive management fees from previous Syndications, collections
on its multi-family Purchase Notes and receivables, and, to a limited extent,
the proceeds from the issuance of debt. In the future, the Company anticipates
that cash flow from newly developed adult living communities will be an
additional source of revenue. To the extent that the Company must expend funds
to meet its Management Contract Obligations, the Company will have fewer funds
available to utilize for other purposes, including funds for application to its
new development plan, distributions to stockholders, and
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to meet other liquidity and capital resource commitments. The Company will
attempt to structure future Syndications to minimize the likelihood that it will
be required to utilize the cash it generates to pay the Management Contract
Obligations, but there can be no assurance that this will be the case.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of these prepayments received upon the closings of
the Syndications averaged 71.7% in fiscal 1994, 60.9% in fiscal 1995, 65.7% in
fiscal 1996 and 64.4% for the nine months ended October 31, 1997. 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 notes receivable and reduce interest income
received by the Company. Pursuant to the terms of the typical Syndication, the
Company, as the general partner of the Investing Partnership, has the option not
to accept future prepayments by limited partners of capital contributions. In
addition, by arranging for the acquisition of existing adult living communities
through, and acting as the general partner of, partnerships, the potential
exists for claims by limited partners for violations of the terms of the
partnership agreements or management contracts and of applicable federal and
state securities and blue sky laws and regulations.
The Company's Management Contract Obligations are contractual
obligations of the Company to make payments under the management contracts to
the Owning Partnerships. 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 Management Contract Obligations. As a
result of such deferrals, the net revenues relating to sales are reduced and
actual payments of such Management Contract 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 Management Contract Obligations is greater than the
amount assumed in establishing the amount of such deferred income. Such amounts
are recorded as a cost of sales expense in the period such amounts are known or
paid. If the underlying property's cash flow is greater than the amount assumed
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 the
Management Contract Obligations, incentive management fees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Revenues," "-- Liquidity and Capital Resources" and "Business -- Partnership
Offerings."
Need for Additional Financing
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living community, is nearing completion of
the construction of four additional communities, has commenced construction on
one additional community and intends to commence construction of between 30 and
34 additional new adult living communities over the next two years. The Company
expects to complete the construction of four of the five communities currently
under construction by the end of the first quarter of fiscal 1998 and expects to
complete the construction of the remaining community currently under
construction by the end of fiscal 1998. These five adult living communities,
along with the three communities whose construction is already completed
pursuant to the development plan, contain an aggregate of approximately 1,150
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 4,260 and 4,828 additional adult living apartment units. Three of the
adult living communities that are being developed pursuant to the development
plan have been financed in part through the Syndication of partnership interests
in partnerships organized to make second mortgage loans to the Company to fund
approximately 20% of the development costs. The Company will own, manage and
operate these three adult living communities. All of the adult living
communities developed pursuant to the Company's development plan will be owned
by the Company or leased by the Company pursuant to long-term leases or similar
arrangements. The Company will manage and operate each of the newly developed
communities.
The Company intends to use approximately $23.0 million of its net
proceeds of this Offering to fund a portion of development costs not provided by
mortgage loans, which is currently anticipated to be sufficient to permit the
development of approximately 12 new adult living communities, if such proceeds
funded approximately 20% of the development costs. The Company will also utilize
funds generated from its business operations to fund development costs not
provided by construction financing for the development of additional
communities. The Company anticipates that these funding sources
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will provide the Company with sufficient equity capital to pursue its
development plan for at least 12 months at the projected rate of development.
There can be no assurance that the Company will generate sufficient funds from
its business operations to satisfy its projected equity investment requirements
for this period. 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, may complete additional equity or debt offerings, and/or
utilize long term leases or similar forms of financing which require the
investment of little or no capital on the part of the Company, to proceed with
its development plan past this 12 month period at the projected rate of
development. There can be no assurance that the Company will be able to
successfully complete such future refinancings, offerings or obtain such long
term lease or similar financing. The Company currently has no commitments for
construction financing for the additional 30 to 34 adult living communities it
intends to construct over the next two years. In addition, the Company intends
to repay from cash from its business operations and/or refinance the
approximately $2.9 million and $35.5 million in principal amount of indebtedness
that becomes due in the remainder fiscal 1997 and fiscal 1998, respectively.
There can be no assurance that the Company will be able to refinance such
obligations in a timely manner or on acceptable terms. In addition, there are a
number of circumstances beyond the Company's control and which the Company
cannot predict that may result in the Company's financial resources being
inadequate to meet its needs. The Company may need to seek additional funding
through public or private financing, including equity financing, to satisfy
these obligations. If additional funds are raised by issuing equity securities,
the Company's shareholders may experience dilution. There can be no assurance,
however, that adequate financing will be available as needed or on terms
acceptable to the Company. A lack of available funds may require the Company to
delay, scale back or eliminate development of some of the adult living
communities that are currently contemplated in its development plan. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." Also see "Shares
Eligible for Future Sale" for restrictions on additional issuance of common
stock.
Development Delays and Cost Overruns
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community and intends to commence construction of between 30
and 34 additional new adult living communities over the next two years. The
Company expects to complete the construction of four of the five communities
currently under construction by the end of the first quarter of fiscal 1998 and
expects to complete the construction of the remaining community currently under
construction by the end of fiscal 1998. These five adult living communities,
along with the three communities already completed pursuant to the development
plan, contain an aggregate of approximately 1,150 adult living apartment units
and the 30 to 34 additional new communities which the Company intends to
commence construction on over the next two years will contain between 4,260 and
4,828 adult living apartment units. Although the eight adult living communities
already completed or currently under construction have been, or are being,
completed according to their respective construction schedules, there can be no
assurance that the Company will not suffer future delays in its development
program, which could adversely affect the Company's growth. 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 financing, shortages of or the inability to
obtain labor or materials, the inability of the general contractors or
subcontractors to perform under their contracts, strikes, adverse weather
conditions, delays in property lease-ups and changes in applicable laws or
regulations or in the method of applying such laws and regulations. If the
Company's development schedule is delayed or scaled back, the Company's
business, operating results and financial condition could be adversely affected.
See " -- Need for Additional Financing", "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Liquidity and Capital
Resources," "Business -- Strategy" and "-- Operations."
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Property Encumbered with Mortgage Financing
The adult living communities currently operated by the Company are
generally encumbered with mortgage financing. While these mortgage loans are
obligations of the Owning Partnerships rather than direct obligations of the
Company, the Company typically provides a guaranty of certain obligations under
the mortgages including, for example, any costs incurred for the correction of
hazardous environmental conditions. To date, the Company has incurred no
material costs or expenses relating to the correction of hazardous environmental
conditions. Although most of the mortgage loans are non-recourse, as of October
31, 1997 the Company was liable as a general partner for approximately $36.7
million in principal amount of mortgage debt relating to ten adult living
communities and the one nursing home managed by the Company. As of October 31,
1997, the aggregate principal amount of the mortgage debt of the Owning
Partnerships was approximately $192.8 million and the aggregate annual debt
service obligations, excluding any balloon amounts payable at maturity, was
approximately $18.0 million. Most of this debt contains provisions which limit
the ability of the respective Owning Partnerships to further encumber the
property. Through January 31, 2002, approximately $178.7 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 entitled to an annual
distribution of between 11% and 12% of their paid-in scheduled 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
arrange for future acquisitions of existing adult living communities through
mortgage financing and Syndications.
The Company intends to finance its future development of new adult
living communities primarily through mortgage financing and other types of
financing, including long-term operating leases arising through sale/leaseback
transactions and may issue additional debt or equity securities, to the extent
necessary. The financing of Company-developed communities will be direct
obligations of the Company and, accordingly, the amount of mortgage indebtedness
is expected to increase and the Company expects to have substantial debt
service, and may have substantial annual lease payment, requirements in the
future as the Company pursues its growth strategy. As a result, a substantial
portion of the Company's revenues is expected to be devoted to debt service
payments and may be devoted to fixed lease payments. There can be no assurance
that the Company will generate sufficient revenues to pay its interest and
principal obligations on its mortgage debt or to make any potential 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.
Receivables Relating to Multi-Family Properties - Defaults and Bankruptcies
The Company holds promissory notes ("Adult Living Notes", and, together
with the Multi-Family Notes, "Purchase Notes") from Investing Partnerships which
were formed to acquire controlling interests in Owning Partnerships which own
adult living communities and Multi-Family Notes from Investing Partnerships
which were formed to acquire controlling interests in Multi-Family Owning
Partnerships which own multi-family properties ("Multi-Family Properties").
Although it had 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 recorded as "Other Partnership Receivables" on
the Company's Consolidated Balance Sheet. The Multi-Family Notes and the other
receivables 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 receivables are satisfied. As of October 31, 1997, the
recorded value, net of deferred income, of Multi-Family Notes was $107.1
million. All but approximately $1.2 million of the $56.0 million of "Other
Partnership Receivables" recorded on the Company's Consolidated Balance Sheet as
of October 31, 1997 relate to advances to Multi-Family Owning Partnerships. (See
Note 4 of Notes to the Company's Consolidated Financial Statements.) The Company
holds 169 Multi-Family Notes which are secured by controlling interests in 128
Multi-Family Properties. As a result of the Company not being the sole payee
with regard to 28 of the 169 Multi-Family Notes, the values reflected on the
Company's Consolidated Financial Statements relate to only the Company's
proportionate interests in these 28 Multi-Family Notes, which is typically a 50%
interest. Due to the interests of third parties in these 28 Multi-Family Notes,
the Company will not have sole discretion as to certain actions taken with
regard to said notes, as it would if it were the only payee on the notes. The
Company is not a partner in any of the Owning Partnerships which own
Multi-Family Properties or in any of the corresponding Investing Partnerships.
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Historically, if the mortgage encumbering a Multi-Family Property was
in default or the property was experiencing material financial difficulties, the
Company established reserves, as appropriate (which reduce the Company's
reported net income) due to the deemed impairment of the related Multi-Family
Note and any related receivables. If the property was ultimately foreclosed
upon, the Company recognized a loss equal to the recorded value of such note and
receivables, net of any deferred income and reserves previously established.
Nine Multi-Family Owning Partnerships which were in default under their
mortgages previously filed petitions seeking protection from foreclosure actions
under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11 Petitions") and one
additional Multi-Family Owning Partnership has surrendered its property pursuant
to an uncontested foreclosure sale of such property (said ten Multi-Family
Owning Partnerships are, collectively, the "Protected Partnerships"). The
Company neither owns nor manages, nor is the general partner of these
Multi-Family Owning Partnerships, but, rather, holds the related Multi-Family
Notes as receivables. The Company, therefore, has no liability in connection
with these mortgage defaults or bankruptcy proceedings. Seven of the Chapter 11
petitions resulted in the respective Protected Partnerships losing their
properties through foreclosure or voluntary conveyances of their properties. The
remaining two Protected Partnerships successfully emerged from their bankruptcy
proceedings in January, 1998 by paying off their mortgages at a discount with
the proceeds of new mortgage financings, resulting in these properties having
current, fully performing mortgages.
The bankruptcy petitions and risk of loss faced by the Protected
Partnerships caused the related Multi-Family Notes and receivables to be deemed
fully impaired. As a result, the Company recorded a non-cash loss for the year
ended January 31, 1997 in the amount of $18.4 million (representing the recorded
value of those Multi-Family Notes, net of deferred income and any previously
established reserves). The Principal Stockholders and one of their affiliates
assigned certain partnership interests 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 were
owned personally by the Principal Stockholders and their affiliate, and which
Assigned Interests provided additional assets at the Investing Partnership level
and, as a result, additional security for the related Multi-Family Notes. In
that the Principal Stockholders transferred the Assigned Interests in July 1996,
the Company recorded a $21.3 million capital contribution in fiscal 1996. As a
result of the transfers by the Principal Stockholders and their affiliates of
the Assigned Interest and the additional security provided thereby, the Company
believes that the outcome of the bankruptcy proceedings will not affect its
ability to collect on these Multi-Family Notes.
Fifteen of the Multi-Family Owning Partnerships remain in default on
their respective mortgages. These Multi-Family Owning Partnerships have been
negotiating with the respective mortgage lenders and, in some cases, have
obtained workout agreements pursuant to which the lenders generally agree during
the term of the agreement not to take any action regarding the mortgage default
and to accept reduced debt service payments for a period of time, with the goal
of increasing property cash flow to enable the property to fully service its
mortgage. As of October 31, 1997, the recorded value, net of deferred income, of
the Multi-Family Notes and "Other Partnership Receivables" held by the Company
relating to these fifteen Multi-Family Owning Partnerships was $31.9 million.
The Company has established reserves of $10.1 million to address the possibility
that these notes and receivables may not be collected in full. It is possible
that other Multi-Family Owning Partnerships which are in default of their
mortgages will file bankruptcy petitions or take similar actions seeking
protection from their creditors. The Company neither owns nor manages these
properties, nor is it the general partner of these Multi-Family Owning
Partnerships, but, rather, holds the related Multi-Family Notes as receivables.
The Company, therefore, would have no liability in connection with any such
mortgage defaults or possible bankruptcy proceedings.
The Multi-Family Properties were typically built or acquired with the
assistance of programs administered by the United States Department of Housing
and Urban Development ("HUD") that provide mortgage insurance, favorable
financing terms and/or rental assistance payments to the owners. As a condition
to the receipt of assistance under these and other HUD programs, the properties
must comply with various HUD requirements, including limiting rents on these
properties to amounts approved by HUD. Most of the rental assistance payment
contracts relating to the Multi-Family Properties will expire over the next few
years. HUD has introduced various initiatives to restructure its housing subsidy
programs by increasing reliance on prevailing market rents, and by reducing
spending on future rental assistance payment contracts by, among other things,
not renewing expiring contracts and by restructuring mortgage debt on those
properties where a decline in rental revenues is anticipated. Due to uncertainty
regarding the final policies that will result from these initiatives and
numerous other factors that affect each property which can change over time
(including the local real estate market, the provisions of the mortgage debt
encumbering the property, prevailing interest rates and the general state of the
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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 may not renew rental assistance contracts as
part of a strategy to reposition those Multi-Family Properties as market-rate,
non-subsidized properties. Six of such Multi-Family Owning Partnerships have
refinanced their HUD-insured mortgages with conventional mortgage financing and
a number of other Multi-Family Owning Partnerships have applications for such
commitments pending. To the extent that any of these Multi-Family Owning
Partnerships complete such actions, the Company believes this will enhance and
accelerate the ability of the Multi-Family Owning Partnerships to make payments
to the Company on their respective Multi-Family Notes. However, there can be no
assurance that the Multi-Family Owning Partnerships will be able to refinance
additional mortgages or will be able to successfully reposition any of the
Multi-Family Properties.
In view of the foregoing, there can be no assurance that other Owning
Partnerships that own Multi-Family Properties will not default on their
mortgages, file Chapter 11 Petitions, and/or lose their properties through
foreclosure. Although the Company would have no liability in connection
therewith, any such future mortgage defaults could, and, any such future filings
of Chapter 11 petitions or losses of any such property through foreclosure
would, cause the Company to realize a non-cash 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 non-cash 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 note is considered impaired. Such impairment would
be measured under applicable accounting rules. Such losses could result in a
default by the Company in its covenants under various debt obligations to
maintain a specified net worth or debt-to-net worth ratio and could adversely
affect the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources".
Fifty-one of the 169 Multi-Family Notes have reached their final
maturity dates, and, due to the inability, in view of the current cash flows of
the properties, to maximize the value of the underlying property at such
maturity dates, either through a sale or refinancing, these final maturity dates
have been extended by the Company. The Multi-Family Property relating to one
extended Multi-Family Note was refinanced in Fiscal 1996 and such refinancing
generated an approximate $800,000 payment to the Company under such Multi-Family
Note. In addition, the Company anticipates that two more Multi-Family Properties
relating to two other extended Multi-Family Notes will be refinanced in the
first quarter of fiscal 1998. There can be no assurance that such refinancings
will actually close. During the period such notes are extended, the Company will
continue to receive the cash flow and sale or refinancing proceeds, if any,
generated by the underlying properties. The Company expects to extend maturities
of other Multi-Family Notes.
Liabilities Arising From General Partner Status
The Company is a general partner of all but one of the Adult Living
Owning Partnerships and the general partner of 32 of 41 adult living Investing
Partnerships. The mortgage financing of the Syndicated adult living communities
and other Syndicated properties 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 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, the Company was liable as a general partner
for approximately $36.7 million in principal amount of mortgage debt as of
October 31, 1997 relating to ten adult living communities and the one nursing
home managed by the Company.
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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."
Potential Increases in Debt Service Obligations Relating to Variable Rate Debt
The Investor Note Debt, which totaled $29.1 million in aggregate
principal amount at October 31, 1997, bears interest at variable rates
determined by reference to the prime rate of the lending banks. Each 1% increase
or decrease of the interest rate on such debt would result in an increase or
decrease in the annual debt service obligation of the Company of approximately
$291,000. Therefore, increases in interest rates could adversely affect the
operating results and financial condition of the Company.
Right of Partnerships to Terminate Management Contracts
All of the adult living communities and the nursing home currently
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 Management Contract Obligations under such contracts The five-year
Management Contract Obligations period has expired for ten of the Owning
Partnerships which Management Contract Obligations relate to fourteen of the
Investing Partnerships. After the initial five year term, the Management
Contract Obligations terminate and 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 or operation of the partnership. The
Company is the general partner of 36 of the 37 Owning Partnerships that own the
adult living communities and the nursing home operated by the Company. The
Company is also the general partner of 32 of the 41 Investing Partnerships
formed to acquire 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. However, the new adult living communities being developed
by the Company will be owned and operated directly by the Company or operated
pursuant to long-term leases and, therefore, will not be subject to such
management contracts. See "-- Conflicts of Interest" and "Business --
Partnership Offerings."
Right to Remove General Partner
The partnership agreements for the 32 adult living 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 Management Contract Obligations period for the respective Investing
Partnership. Such period has expired with respect to the Investing Partnerships
related to such two Owning Partnerships and such period has expired with respect
to 5 of the 32 Investing Partnerships for which the Company is the general
partner.
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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 certain 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 such partnerships. The Company held (i) notes,
aggregating $107.1 million, net of deferred income, at October 31, 1997 that
were secured by the limited partnership interests in such partnerships and (ii)
other partnership receivables of $54.8 million from such partnerships at October
31, 1997. These individuals have provided personal guarantees in certain
circumstances to obtain mortgage financing for certain adult living communities
operated by the Company and for certain of the Company's Investor Note Debt, and
the obligations thereunder may continue. In addition, Messrs. Luciani and Rodin
and certain employees will devote a limited portion of their time to overseeing
the third-party managers of Multi-Family Properties and one adult living
community in which the Company has financial interests in that it holds the
related Multi-Family Notes, but in which Messrs. Luciani and Rodin have equity
interests and 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 36 of the 37 Owning
Partnerships which own the 37 adult living communities and one nursing home
managed by the Company. 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 32 of the 41 adult living Investing Partnerships that
own equity interests in these 37 Owning Partnerships. In addition, the Company
is the managing agent for the 37 adult living communities and one nursing home
managed by the Company. The Company has arranged for the acquisition of adult
living communities by utilizing mortgage financings and Syndications. By serving
in all of these capacities, the Company may have conflicts of interest in that
it has both a duty to act in the best interests of partners of various
partnerships, including the limited partners of the Investing Partnerships, and
the desire to maximize earnings for the Company's stockholders in the operation
of such adult living communities and other properties. See "Business --
Partnership Offerings" and Note 11 of Notes to the Company's Consolidated
Financial Statements.
In Fiscal 1996 and 1997, the Company Resyndicated three previously
Syndicated adult living communities by acquiring them from the original Owning
Partnerships, which acquisitions were arranged by utilizing mortgage financing
and by arranging for the ownership of the properties by new Owning Partnerships
and the Syndication of interests in new Investing Partnerships. The consent of
the original limited partners is required and obtained for the sale of any
Syndicated adult living community, including a sale accomplished through a
Resyndication. As the general partner of the original Owning Partnership and, in
many cases, as the general partner of the original Investing Partnership, the
Company had a fiduciary duty to make sure that the original limited partners
received a fair price for the purchase of the property. Potential conflicts of
interest regarding Resyndications may exist because of the Company's roles as
general partner of: each of the selling and acquiring Owning Partnerships; each
of the acquiring Investing Partnerships; and, in some cases, the selling
Investing Partnerships. The Company will not engage in Resyndication
transactions in the future.
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. See "Business -- Communities."
Dependence on Senior Management and Skilled Personnel
The Company depends, and will continue to depend, on the services of
its principal executive officers. The loss of the services of one or more of
them could have a material adverse effect on the Company's operating results and
financial condition. Certain of the Company's officers or entities controlled by
them are general partners of partnerships that own or invest in real property
and they may be required to devote time to such partnerships. The Company also
depends on its ability to attract and retain management personnel who will be
responsible for the day-to-day operations of each of its adult living
communities. If the Company is unable to hire qualified management personnel to
operate such communities, the Company's business, operating results and
financial condition could be adversely affected. See "-- Conflicts of Interest"
and "Management."
22
<PAGE>
Competition
The long-term care industry is highly competitive, and the Company
believes that the assisted-living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home healthcare
agencies, community-based service programs, adult living communities and
convalescent centers. The Company expects that, as the provision of
assisted-living services receives increased attention and the number of states
providing reimbursement for assisted-living rises, competition will intensify as
a result of new market entrants. The Company also faces potential competition
from skilled-nursing facilities that provide long-term care services. Moreover,
in implementing its growth strategy, the Company expects to face competition in
its efforts to develop and acquire adult living communities. Some of the
Company's present and potential competitors are significantly larger and have,
or may obtain, greater financial resources than those of the Company.
Consequently, there can be no assurance that the Company will not encounter
increased competition in the future that could limit its ability to attract
residents or expand its business and therefore have a material adverse effect on
its business, operating results and financial condition. Moreover, if the
development of new adult living communities outpaces demand for those facilities
in certain markets, such markets may become saturated. Such an oversupply of
such communities could cause the Company to experience decreased occupancy and
depressed cash flows and operating results. See "Business --Competition."
Staffing and Labor Costs
The Company competes with other providers of independent- and
assisted-living services with respect to attracting and retaining qualified
personnel. The Company also is dependent upon the available labor pool of
employees. A shortage of trained or other personnel may require the Company to
enhance its wage and benefits package in order to compete. No assurance can be
given that the Company's labor costs will not increase, or that if they do
increase, they can be matched by corresponding increases in rental or management
revenue. Any significant failure by the Company to attract and retain qualified
employees, to control its labor costs or to match increases in its labor
expenses with corresponding increases in revenues could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Employees."
Dependence on Attracting Seniors With Sufficient Resources to Pay
The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's fees from their own or
familial financial resources. Inflation or other circumstances that adversely
affect the ability of seniors to pay for the Company's services could have an
adverse effect on the Company. If the Company encounters difficulty in
attracting seniors with adequate resources to pay for its services, its
business, operating results and financial condition could be adversely affected.
See "Business -- Operations."
Government Regulation
Healthcare is heavily regulated at the Federal, state and local levels
and represents an area of extensive and frequent regulatory change. Currently no
federal rules explicitly define or regulate independent- or assisted-living
communities. A number of legislative and regulatory initiatives relating to
long-term care are proposed or under study at both the federal and state levels
that, if enacted or adopted, could have an adverse effect on the Company's
business and operating results. The Company cannot predict whether and to what
extent any such legislative or regulatory initiative will be enacted or adopted,
and therefore cannot assess what effect any current or future initiative would
have on the Company's business and operating results. Changes in applicable laws
and new interpretations of existing laws can significantly affect the Company's
operations, as well as its revenues and expenses. The Company's adult living
communities are subject to varying degrees of regulation and licensing by local
and state health and social service agencies and other regulatory authorities
specific to their location. While regulations and licensing requirements often
vary significantly from state to state, they typically relate to fire safety,
sanitation, staff training, staffing levels and living accommodations such as
room size, number of bathrooms and ventilation, as well as regulatory
requirements relating specifically to certain of the Company's health-related
services. The Company's success will depend in part on its ability to satisfy
such regulations and requirements and to acquire and maintain any required
licenses. Federal, state and local governments occasionally conduct unannounced
investigations, audits and reviews to determine whether violations of applicable
rules and regulations exist. Devoting management and staff
23
<PAGE>
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, the Principal Stockholders, John Luciani and Bernard M. Rodin,
will collectively beneficially own shares of Common Stock representing
approximately 83.34% of the Company's Common Stock, excluding any shares of
Common Stock sold pursuant to the Over-allotment Option. If the Over-allotment
Option is exercised in full, the Principal Stockholders will beneficially own
shares representing 80.83% of the Company's Common Stock. As a result, they will
maintain control over the election of a majority of the Company's Board of
Directors ("Board of 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. To date, the Company has not incurred any
material costs of removal or remediation of such hazardous or toxic substances.
However, 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, the availability of
financing and defects in title with respect to which the title companies
insuring fee title have taken exception. To date, the Company has not incurred
any material costs of removal or remediation with respect to such exceptions to
title. 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 liquid and, therefore, limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
24
<PAGE>
Restrictions Imposed by Laws Benefiting Disabled Persons
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
places of public accommodation are required to meet certain federal requirements
related to access and use by disabled persons. A number of additional Federal,
state and local laws exist which also may require modifications to existing and
planned properties to create access to the properties by disabled persons. While
the Company believes that its 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 Risk
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 may 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."
Absence of Public Market; Possible Volatility of Market Price of Securities
Prior to the Offering, there have been no public markets for the Common
Stock and there can be no assurance that active trading markets will develop or,
if developed, be sustained after the Offering. The Company intends to apply for
the Common Stock to be listed on the Nasdaq National Market. After completion of
the Offering, the market price of the Common Stock could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the markets for the shares of Common Stock, market sales of
shares of Common Stock, variations in the Company's operating results, new
statutes or regulations or changes in the interpretation of existing statutes or
regulations affecting the healthcare industry in general or the independent or
assisted-living industry in particular. In addition, the stock market in recent
years has experienced broad price and volume fluctuations that often have been
unrelated to the operating performance of particular companies. These market
fluctuations also may adversely affect the market price of the shares of Common
Stock. See "Shares Eligible for Future Sale" and "Underwriting."
Negotiated Offering Price
The initial public offering price of the Common Stock was 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. The factors considered
in determining the price included, but were not limited to, 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 Common Stock can be resold at the initial offering price, if
at all. Purchasers of the Common Stock will be exposed to a substantial risk of
a decline in the market price of the Common Stock after the Offering, if a
market develops. See "Underwriting."
25
<PAGE>
Policy Not to Pay Dividends on Common Stock and Potential Limitations on Ability
to Pay Dividends
The Company does not anticipate paying future dividends on its Common
Stock. It is the present policy of the Board of Directors 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."
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 obtaining financing or in
project development could cause the Company to use such net proceeds to acquire
existing adult living communities and for general corporate purposes (including
payment of Management Contract Obligations). The Company's management will,
therefore, retain broad discretion in allocating all of the net proceeds of the
Offering. See "Use of Proceeds."
Anti-takeover Considerations
The Company's Board of Directors has the authority to issue up to
15,000,000 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. Such preferred stock could have voting and
conversion rights that adversely affect the voting power of the holders of
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
Common Stock. Issuance of such preferred stock may have an adverse effect on the
then prevailing market price of the 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 Common Stock at a premium
over the market price of the Common Stock, and may adversely affect the market
price of, and the voting and other rights of the holders of, the Common Stock.
Additionally, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Section 203 could have the effect of delaying or preventing
a change of control of the Company. See "Description of Capital Stock."
Immediate and Substantial Dilution
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 $7.53 per share. Additional dilution may occur if the
Company issues additional equity securities in the future. See "Dilution."
Shares Eligible for Future Sale
Sales of substantial amounts of shares of Common Stock in the public
market after the Offering or the perception that such sales could occur could
adversely affect the market price of the Common Stock and the Company's ability
to raise equity. Upon completion of the Offering, the Company will have
18,000,000 shares of Common Stock outstanding (excluding 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
26
<PAGE>
Company intends to register approximately 2,500,000 shares of Common Stock
reserved for issuance pursuant to the Company's stock option plan. The Company,
the Principal Stockholders and the Company's officers and directors 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 dispose of any interest
therein under Rule 144 or otherwise for a period of 13 months following the date
of this Prospectus, and may not do so for an additional six month period without
the prior written consent of the Representative (the "Transfer Restrictions").
However, the issuances of shares of Common Stock, whether directly or upon the
exercise or conversion of exchangeable or convertible securities (including
options granted under the Company's stock option plan), and the transfers of
shares of Common Stock by the Principal Stockholders to effectuate estate
planning, are allowed as long as the recipients of shares of Common Stock in any
such transactions agree to be bound by the Transfer Restrictions.
Notwithstanding the foregoing, the Transfer Restrictions do not apply to the
issuance of the Company's securities in connection with mergers or acquisitions,
the sale of Common Stock in connection with the exercise of the Over-allotment
Option or shares of Common Stock, or securities convertible or exchangeable for
shares of Common Stock, which are publically offered by the Company. In
addition, the Representative holds Representative's Warrants which entitles it
to purchase an aggregate of up to 300,000 shares of the Company's Common Stock
at a price equal to 165% of the per share price to the public of the Common
Stock. 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" and "Underwriting."
27
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (excluding the
exercise of the Representative's Warrants), after deducting estimated
underwriting discounts and offering expenses payable by the Company, are
estimated to be approximately $26.0 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 $23.0 million to
finance the development of new adult living communities. However, delays or
difficulties in obtaining financing or project development could cause the
Company to use the portion of such net proceeds intended for development to
acquire additional existing adult living communities and for general corporate
purposes, including payment of Management Contract Obligations. 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
approximately 80% of such costs, requiring the Company to contribute
approximately 20% of such costs. The Company estimates that the cost of
developing each new adult living community utilizing construction financing
(including reserves necessary to carry the community through its lease-up
period) will be approximately $9.5 million. The Company will use approximately
$23.0 million of its net proceeds of this Offering to fund the portion of
development costs not provided by construction financing, which is currently
anticipated to be sufficient to permit the development of approximately 12 of
the 30 to 34 new adult living communities on which the Company plans to commence
construction over the next two years if such proceeds funded approximately 20%
of the development costs. The Company anticipates that the proceeds of this
Offering and funds generated by its business operations will be sufficient to
fund approximately 20% of these development costs for a period of at least 12
months at the anticipated rate of development. In order to maintain its
development program at its projected level beyond this 12-month period, the
Company intends to utilize 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, or raise additional funds through the issuance of
additional debt or equity securities to fund the development costs not provided
by construction financing and/or utilize long term leases or similar forms of
financings which require the investment of little or no capital on the part of
the Company. Although the Company has obtained financing for the eight adult
living communities whose construction is completed or currently under
construction, the Company does not have commitments for construction financing
for any of the 30 to 34 new adult living communities on which the Company plans
to commence construction over the next two years. The Company believes that it
will be able to obtain such needed additional financing. There can be no
assurance, however, that the Company will be able to obtain the financing and/or
sale-leasebacks, or complete any additional debt or equity offerings, necessary
to complete its development plan. See "Risk Factors -- Need for Additional
Financing," "-- Discretionary Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Strategy".
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 has not established
investment criteria for such short-term investments.
DIVIDEND POLICY
The Company does not anticipate paying future dividends on its Common
Stock. It is the present policy of the Board of Directors to retain earnings, if
any, 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. During fiscal 1995
and fiscal 1996, the Company and its predecessors paid dividends and other
distributions of $1,700,000, and $794,000, respectively, exclusive of amounts
reflected as officers' compensation. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Transactions."
28
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization
of the Company at October 31, 1997, and as adjusted to reflect (i) the sale of
the Common Stock by the Company in this Offering and (ii) the application of the
estimated net proceeds thereof. The table should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes thereto
included elsewhere in this Prospectus. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
As of October 31, 1997
Actual As Adjusted
------ -----------
(in thousands)
--------------
<S> <C> <C>
Bank Debt................................................ $ 40,123 $ 40,123
Other debt, principally debentures....................... 117,017 117,017
Construction Loan Payable................................ 16,755 16,755
Stockholders' equity:
Preferred Stock, $.0001 par value; 15,000,000
shares authorized; none issued and outstanding....... -- --
Common Stock, $.01 par value;
40,000,000 shares authorized; 15,000,000 shares
issued and outstanding; 18,000,000 shares issued
and outstanding as adjusted(1)....................... 150 180
Additional paid-in capital (1)......................... 54,321 80,291
Accumulated deficit.................................... (27,517) ( 27,517)
-------- ---------
Total stockholders' equity......................... 26,954 52,954
-------- ---------
Total capitalization............................. $200,849 $ 226,849
======== =========
</TABLE>
(1) Does not include 2,500,000 shares reserved for issuance under the Company's
stock option plan and 300,000 shares issuable upon exercise of the
Representative's Warrants.
29
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock at October
31, 1997 was approximately $18,449,000, or $1.23 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 $26,954,000 less intangible assets of
$8,505,000). After giving effect to the sale of the Common Stock offered hereby
(based upon an assumed initial public offering price of $10 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, 1997 would have been $44,479,000 or $2.47 per
share, representing an immediate increase in pro forma net tangible book value
of $1.24 per share to existing shareholders and an immediate dilution of $7.53
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, 1997.......................................... 1.23
Increase per share attributable to new investors............
1.24
Pro forma net tangible book value per share ------
after offering.............................................. 2.47
------
Net tangible book value dilution per share to new investors... $ 7.53
------
The following tables summarize, on a pro forma basis at October 31,
1997, the difference between the number of shares purchased from the Company,
total consideration paid and the average price paid per share by existing
stockholders (based upon Total Stockholders' Equity at October 31, 1997) and new
investors after giving effect to the Offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Paid
---------------- ------------------------
Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Principal Stockholders(1)............... 15,000,000 83.34% 26,954,000 47.33% 1.80
New investors(1) ....................... 3,000,000 16.66% 30,000,000 52.67% 10.00
----------- ------ ---------- ------
Total.......................... 18,000,000 100.0% 56,954,000 100.0%
=========== ====== ========== ======
</TABLE>
(1) Upon completion of the Offering (excluding the Over-allotment Option), the
Principal Stockholders will own 15,000,000 shares of Common Stock, and the
new investors will own 3,000,000 shares of Common Stock, representing 100%
of the outstanding shares of Common Stock.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and other data)
The following selected consolidated financial statement of operations and
balance sheet data 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 the nine months ended October 31, 1996 and 1997 (as restated)
have been prepared on the same basis as the year end financial statements and
are unaudited, but in the opinion of management, contain all adjustments,
consisting of only normally recurring adjustments, necessary for a fair
presentation of the results for the full year. The results of operations for an
interim period may not give a true indication of results for the full year. 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). See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine months
Years Ended January 31, (4) ended October 31,(4)
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales .......................... $ 18,170 $ 20,973 $ 22,532 $ 31,973 $ 36,021 $ 21,524 $ 31,401
Syndication fee income ......... 6,484 7,654 5,587 8,603 7,690 4,976 6,529
Deferred income earned ......... 792 7,502 4,399 9,971 5,037 708 4,246
Interest income ................ 13,209 13,315 9,503 12,689 13,773 11,043 8,081
Property management fees from
related parties ............. 560 3,854 4,351 4,057 2,093 1,604 3,250
Equity in earnings from
partnerships ................ 129 206 276 356 423 250 357
Other income ................... -- -- -- 1,013 -- -- 283
-------- --------- -------- -------- -------- -------- --------
Total Revenues ................... 39,344 53,504 46,648 68,662 65,037 40,105 54,147
======== ========= ======== ======== ======== ======== ========
Costs and expenses:
Cost of sales .................. 14,411 26,876 21,743 27,688 34,019 19,468 25,947
Selling ........................ 7,027 6,706 6,002 7,664 7,176 4,603 6,186
Interest ....................... 11,874 10,991 13,610 15,808 16,394 12,017 13,991
General and administrative ..... 5,617 5,226 6,450 7,871 7,796 5,687 6,415
Loss on impairment of notes
and receivables ............... -- -- -- -- 18,442 18,442 --
Write-off of registration costs -- -- -- -- -- -- 3,107
Officers' compensation(1) ...... 1,200 1,200 1,200 1,200 1,200 900 900
Depreciation and amortization .. 975 1,433 2,290 2,620 3,331 2,539 2,650
-------- --------- -------- -------- -------- -------- --------
Total Costs and Expenses 41,104 52,432 51,295 62,851 88,358 63,656 59,196
======== ========= ======== ======== ======== ======== ========
Income (loss) before provision
(benefit) for income taxes ....... (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Provision for income taxes ....... -- -- -- -- -- -- --
-------- --------- -------- -------- -------- -------- --------
Net income (loss)(5)............... (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Pro-forma income tax provision
(benefit)(2) ................... (704) 429 (1,859) 2,324 -- -- --
-------- --------- -------- -------- -------- -------- --------
Pro-forma net income (loss)(2) ... $ (1,056) $ 643 $ (2,788) $ 3,487 $(23,321) $(23,551) $(5,049)
======== ========= ======== ======== ======== ======== ========
Pro-forma earnings (loss) per
common share(2) ................ $(.07) $ .04 $ (.19) $ .23 $ (1.55) $ (1.57) $ (.34)
======== ========= ======== ======== ======== ======== ========
Pro-forma weighted average
common shares used ............. $ 15,000 15,000 15,000 15,000 15,000 15,000 15,000
======== ========= ======== ======== ======== ======== ========
Other Data:
Adult living communities
operated (end of period) ..... 14 18 24 28 31 29 36
======== ========= ======== ======== ======== ======== ========
Number of units (end of
period) ...................... 2,336 2,834 3,683 4,164 4,480 4,119 5,192
======== ========= ======== ======== ======== ======== ========
Average occupancy
percentage (3) ............... 90.6% 90.4% 89.3% 94.7% 91.3% 93.4% 93.1%
======== ========= ======== ======== ======== ======== ========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
As of
As of January 31, (as restated) (5) October 31,
----------------------------------------------- -----------
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 6,455 $ 9,335 $ 10,950 $ 17,961 $ 14,111 $ 9,679
Notes and receivables-net 234,583 227,879 220,482 224,204 222,399 238,128
Total assets........... 251,116 248,854 248,553 260,023 261,661 288,074
Total liabilities...... 203,990 211,647 217,879 225,238 229,658 261,120
Stockholders' equity... 47,126 37,207 30,674 34,785 32,003 26,954
</TABLE>
- ----------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and President,
respectively, of the Company received dividends and distributions from the
Company's predecessors but did not receive compensation. Officers'
Compensation is based upon the aggregate compensation currently received by
such officers, $600,000 a year for each such officer. Amounts received by
such officers in excess of such amounts are treated as dividends for
purposes of the Company's financial statements. In fiscal 1992 through
fiscal 1996, such officers also received $360,000; $5,496,000; $943,000;
$850,000 and $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 the years ended
January 31, 1993 through January 31, 1996.
(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) Reclassification - Certain amounts in prior years have been reclassified to
conform with current period presentation.
(5) Subsequent to the issuance of the Company's fiscal 1996 Consolidated
Financial Statements, the Company discovered that certain prior period
costs and advances were erroneously expensed in a prior period. As a
result, the Company's Consolidated Financial Statements have been restated
from the amounts previously reported to reflect the correction of this
error. See Note 13 to Consolidated Financial Statements.
32
<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, develops and manages adult living
communities. The Company's revenues have been, and are expected to continue to
be, primarily derived from Syndications of partnerships it organizes to acquire
existing adult living communities. The Company manages the Syndicated adult
living communities and is one of the largest operators of adult living
communities in the United States. The Company manages 37 adult living
communities containing 5,265 adult living apartment units offering both
independent and assisted-living services in 12 states in the Sun Belt and the
Midwest. The Company also manages one nursing home. The Company has
approximately 1,600 employees and directly conducts the day-to-day operations of
the adult living communities it manages. As of January 31, 1998, the Company had
an average occupancy rate at the adult living communities it manages of
approximately 93%. 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
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 Company's revenues.
The Company was formed pursuant to the merger of various Sub-Chapter S
corporations which were wholly owned by the Principal Stockholders and the
transfer of certain assets by and assumption of certain liabilities of (i) a
partnership that was wholly owned by the Principal Stockholders and (ii) the
Principal Stockholders individually. In exchange for the transfer of such stock
and assets, the Principal 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 Principal Stockholders, were historically
reported on a combined basis.
Historically, the Company has arranged for the acquisition and
development of adult living and multi-family communities by utilizing mortgage
financing and Syndications. The Company is the general partner of all but one of
the Owning Partnerships that own the 37 adult living communities and the one
nursing home in the Company's portfolio and the Company manages all of the adult
living communities and the nursing home in its portfolio. These 37 adult living
communities and the one nursing home managed by the Company are owned by the
respective Owning Partnerships and not by the Company.
The Company enters into a management contract with each 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
not sufficient) amounts sufficient to fund 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 which, in turn,
distributes these amounts to the limited partners. As a result of the Management
Contract Obligations, the Company essentially bears 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. After the initial five-year period, the limited partners are
entitled to the same rate of return they were entitled to during the initial
five-year period, 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 five-year period and is
terminable thereafter by either party upon thirty to sixty days notice. As part
of the purchase price for the Purchased Interest paid by the Investing
Partnership to the Company, the Company receives a 40% interest in sale and
refinancing proceeds after certain priority payments to the limited partners.
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<PAGE>
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) amounts payable by the Investing
Partnerships to the Company in the event of the subsequent sale or refinancing
of such communities, (iv) interest income on purchase notes receivable, and (v)
earnings derived from the Company's equity interests in Owning Partnerships and
Investing Partnerships. 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.
In Fiscal 1996 and 1997, the Company Resyndicated three previously
Syndicated adult living communities by acquiring them from the original Owning
Partnerships, which acquisitions were arranged by utilizing mortgage financing
and by arranging for the ownership of the properties by new Owning Partnerships
and the Syndication of interests in new Investing Partnerships. Since two of
these Resyndications occurred after the termination of the Management Contract
Obligations for the respective properties, and the third Resyndication occurred
towards the end of the Management Contract Obligations period for such property,
the Resyndications have generally had the same impact on current and future
revenues and expenses (i.e. an opportunity for new earnings and a new set of
Management Contract Obligations) as the Syndication of a property acquired from
an unaffiliated third party. The consent of the original limited partners is
required and obtained for the sale of any Syndicated adult living community,
including a sale accomplished through a Resyndication. In obtaining the consent
of the limited partners to the Resyndications, the Company waived its rights to
participate in the proceeds of sale received by the original Owning
Partnerships. The Company does, however, recognize sales revenues and related
cost of sales resulting in a net profit from the Resyndications. Each of the
management contracts with the original Owning Partnerships was terminated. The
Company manages the Resyndicated Communities pursuant to new management
contracts and has Management Contract Obligations thereunder. As the general
partner of the original Owning Partnership and, in many cases, general partner
of the original Investing Partnership, the Company had a fiduciary duty to make
sure that the original limited partners received a fair price for the purchase
of the property. Potential conflicts of interest regarding Resyndications may
have existed because of the Company's roles as general partner of: each of the
selling and acquiring Owning Partnerships; each of the acquiring Investing
Partnerships; and, in some cases, the selling Investing Partnerships.
The Company will not engage in Resyndication transactions in the future.
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community 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 will be 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 $9.5
million and utilizing long-term lease financing will be approximately $10
million. The Company expects to complete
34
<PAGE>
the construction of four of the five communities currently under construction by
the end of the first quarter of fiscal 1998 and expects to complete construction
of the remaining community under construction by the end of fiscal 1998. These
five adult living communities, along with the three communities already
completed pursuant to the development plan, contain an aggregate of
approximately 1,150 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 4,260 and 4,828 additional adult living apartment
units. The Company will use a substantial portion of the proceeds of this
Offering, 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. Two of the completed adult living communities and two of the
adult living communities currently under construction are being financed, and
will be 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.
The Company derives its revenues from sales of general partnership
interests in Owning Partnerships to Investing Partnerships, recognition of
deferred income with respect to such sales of general partnerships interests,
interest on notes received by the Company from such Investing Partnerships as
part of the purchase price for the sale of such general partnership interests,
and property management fees received by the Company:
o Sales. Income from sales of general partnership interests in Owning
Partnerships is 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 Syndications of Investing Partnerships which were formed to acquire
controlling interests in Owning Partnerships which own adult living properties
("Adult Living Owning Partnerships"). In a typical Syndication, the Company
enters into a management contract with the Adult Living Owning Partnership,
pursuant to which the Company is required to pay, for a five-year period, any
Management Contract Obligations not paid from cash flow from the related
property. The amount of deferred income for each property is calculated 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 Management Contract Obligations period (the "Initial Cash
Flow"). The Initial Cash Flow is then compared to the Management Contract
Obligations for the property for each remaining year of the five-year period. If
the Initial Cash Flow exceeds the Management Contract Obligations 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 Management Contract Obligations for said following fiscal year. If the
Initial Cash Flow is less than the Management Contract Obligations 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 on a quarterly basis,
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
increases the cost of sales for that period. The payment of the Management
Contract 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 Management Contract Obligations is greater
than the amount assumed in establishing the deferred income liability (such
excess amount is included as a component of cost of sales). 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 Management Contract
Obligations, incentive management fees. The Company recognized such incentive
management fees in the amount of $3.9 million, $3.3 million, $1.2 million and
$2.6 million for the years ended January 31, 1995, 1996 and 1997 and the nine
months ended October 31, 1997, respectively. The Company accounts for the
Syndication of Investing Partnerships which were formed to acquire controlling
interests in
35
<PAGE>
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. At the time of the sale, the Company deferred all future income to
be recognized on each of these transactions. Losses on these properties are
recognized immediately upon sale. Syndications relating to Multi-Family Owning
Partnerships account for 87% of the Company's deferred income.
o Interest Income. The Company has notes receivable with respect to Adult Living
Notes. Such Adult Living Notes have stated interest rates ranging from 11% to
13.875% per annum and are due in installments over five years from the date the
Investing Partnership acquired its interest in the Adult Living Owning
Partnership. Each Adult Living Note represents senior indebtedness of the
related Investing Partnership and is collateralized by the Investing
Partnership's interest in the Adult Living Owning Partnership that owns the
related adult living community. These properties generally are encumbered by
mortgages. The mortgages generally bear interest at rates ranging from 8% to
9.5% per annum. The mortgages generally are collateralized by a mortgage lien on
the related adult living communities. Principal and interest payments on each
Adult Living Note also are collateralized by the investor notes payable to the
Investing Partnership to which the limited partners are admitted.
The Company also has notes receivable with respect to the Multi-Family
Notes. Such Multi-Family Notes have maturity dates ranging from ten to fifteen
years from the date the partnership interests were sold. Fifty-one of the 169
MultiFamily 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 underlying property relating to one extended Multi-Family Note was
refinanced in Fiscal 1996 and such refinancing generated an approximate $800,000
payment to the Company under such Multi-Family Note. In addition, the Company
anticipates that two more Multi-Family properties relating to two other extended
Multi-Family Notes will be refinanced in the first quarter of fiscal 1998. There
can be no assurance that such refinancings will actually close. During the
period such notes are extended, the Company will continue to receive the cash
flow and sale or refinancing proceeds, if any, generated by the underlying
properties. 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 typically are collateralized by a 99% partnership
interest in the Multi-Family Owning Partnership that owns the related
Multi-Family Property. These properties are encumbered by mortgages, which
generally bear interest at rates ranging from 7% to 12% per annum. The mortgages
are typically collateralized by a mortgage lien on the related MultiFamily
Property. Interest payments on each Multi-Family Note also are collateralized by
the related investor notes.
o Property 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 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", fifteen of the Multi-Family Owning
Partnerships are currently in default on their mortgages. Nine other
Multi-Family Owning Partnerships, previously filed petitions seeking protection
from foreclosure under Chapter 11 of the U.S. Bankruptcy Code. In addition, one
Multi-Family Owning Partnership surrendered its property pursuant to an
uncontested foreclosure sale of such property. Seven of the Chapter 11 Petitions
resulted in the respective Protected Partnerships losing their properties
through foreclosure or voluntary conveyances of their properties. The remaining
two Protected Partnerships successfully emerged from their bankruptcy
proceedings by paying off their mortgages at a discount with the proceeds of new
mortgage financings, resulting in these properties having current, fully
performing mortgages. It is possible that the other Multi-Family Owning
Partnerships are in default on their mortgages will also file Chapter 11
Petitions. In addition, there can be no assurance that other Multi-Family Owning
Partnerships will not default on their mortgages, file Chapter 11 Petitions,
and/or lose their properties through foreclosure. The Company neither owns nor
manages these properties, nor is it the general partner of any Multi-Family
Owning Partnerships, including the Protected Partnerships, but rather merely
holds the related Multi-Family Notes and Other Partnership Receivables as
receivables. The Company, therefore, has no liability in connection with these
mortgage defaults or bankruptcy proceedings. Any such future mortgage defaults,
however, could, and any such future filings of Chapter 11 Petitions or the loss
of any such property through foreclosure would, cause the
36
<PAGE>
Company to realize a non-cash 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). See "Risk Factors - Receivables
Relating to Multi-Family Properties - Existing Defaults and Bankruptcies.
Results of Operation
o Revenues
Total revenues for the three months ended October 31, 1997 were $20.8
million compared to $12.7 million for the three months ended October 31, 1996,
representing an increase of $8.1 million or 63.8%. Total revenues for the nine
months ended October 31, 1997 were $54.1 million compared to $40.1 million for
the nine months ended October 31, 1996, representing an increase of $14.0
million or 34.9%. Total revenues for the year ended January 31, 1997 ("Fiscal
1996") were $65.0 million compared to $68.7 million for the year ending January
31, 1996 ("Fiscal 1995"), representing a decrease of 3.7 million or 5.4%. Total
revenues for Fiscal 1995 were $68.7 million compared to $46.6 million for year
ended January 31, 1995, ("Fiscal 1994"), representing an increase of $22.1
million or 47.4%.
Sales (income from the sale of partnership interests) for the three
months ended October 31, 1997 were $10.5 million compared to $6.9 million for
the three months ended October 31, 1996, representing an increase of $3.6
million or 52.2%. The increase in sales was attributable to more favorable
Syndication terms as compared to Syndications completed in the earlier period,
as partially offset by the Syndication of properties with less initial cash flow
as compared to the Syndications in the prior period. The terms of a Syndication
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
community. Sales for the nine months ended October 31, 1997 were $31.4 million
compared to $21.5 million for the nine months ended October 31, 1996,
representing an increase of $9.9 million or 46.0%. Approximately 55% of the
increase in sales was attributable to more favorable Syndication terms as
compared to Syndications completed in the earlier period, and approximately 45%
of the increase in sales was attributable to the Syndication of properties with
greater initial cash flow as compared to the Syndications in the prior period.
Sales for Fiscal 1996 were $36.0 million compared to $32.0 million for Fiscal
1995, representing an increase of $4.0 million or 12.5%. The increase in sales
was attributable to the Syndication of properties with greater initial cash flow
as compared to the Syndications in the prior period, as partially offset by less
favorable Syndication terms as compared to Syndications completed in the earlier
period. Sales for Fiscal 1995 were $32.0 million compared to $22.5 million for
Fiscal 1994, representing an increase of $9.5 million or 42.2%. The increase is
attributable to more favorable Syndication terms obtained in Fiscal 1995 as
compared to Syndications in the prior period, as offset by the Syndication of
properties with less initial cash flow as compared to Syndications in the prior
period.
Syndication fee income for the three months ended October 31, 1997 was
$1.9 million compared to $1.5 million for the three months ended October 31,
1996, representing an increase of $400,000 or 26.7%. Syndication fee income for
the nine months ended October 31, 1997 was $6.5 million compared to $5.0 million
for the nine months ended October 31, 1996, representing an increase of $1.5
million or 30%. The increases are attributable to higher total professional fees
and commissions paid relating to the greater sales revenues generated in the
three and nine months ended October 31, 1997 as compared to the three and nine
months ended October 31, 1996. Syndication fee income for Fiscal 1996 was $7.7
million compared to $8.6 million for Fiscal 1995, a decrease of $900,000 or
10.5%. The decrease is attributable to a slightly lower commission rate for the
Syndication of six Investing Partnerships during Fiscal 1996 as compared to the
commission rate for the Syndication of six Investing Partnerships during Fiscal
1995. Syndication fee income for Fiscal 1995 was $8.6 million as compared to
$5.6 million for Fiscal 1994, an increase of $3.0 million or 53.6%. The increase
is attributable to higher total commissions paid for the Syndication of six
Investing Partnerships in Fiscal 1995 as compared to the total commissions paid
for the Syndication of four Investing Partnerships in Fiscal 1994.
Deferred income earned for the three months ended October 31, 1997 was
$3.8 million as compared to $200,000 for the three months ended October 31,
1996, representing an increase of $3.6 million or 1,800%. Deferred income earned
for the nine months ended October 31, 1997 was $4.2 million as compared to
$700,000 for the nine months ended October 31, 1996, representing an increase of
$3.5 million or 500%. The increases are attributable to the cash flows generated
by adult living communities in the three and nine months ended October 31, 1997
exceeding the estimates used to establish deferred income liabilities in the
three and nine months ended October 31, 1997 to a greater degree than such cash
flow
37
<PAGE>
exceeded estimates in the three and nine months ended October 31, 1996. Deferred
income realized for Fiscal 1996 was $5.0 million as compared to $10.0 million
for the Fiscal 1995, representing a decrease of $5.0 million or 50.0%. The
decrease is attributable to (i) the cash flows generated by adult living
communities in Fiscal 1995 exceeding the estimates used to establish deferred
income liabilities for Fiscal 1995 to a greater degree than such cash flow in
Fiscal 1996 exceeded estimates used to establish deferred income liabilities for
Fiscal 1996; and (ii) the refinancing of a number of adult living communities
during March 1996 which resulted in additional deferred income being earned in
Fiscal 1995. In March 1996, the Company arranged for the refinancing of existing
mortgages on seven adult living communities and initial mortgage financing on
four adult living communities which had previously been acquired on an all cash
basis, which resulted in the return of over $43.0 million of capital to limited
partners and which reduced the Company's Management Contract Obligations with
respect to such limited partners. Because the refinancings were committed to in
Fiscal 1995 and closed before the completion of the Company's financial
statements for Fiscal 1995, the Company recognized the effect on deferred income
with respect to such refinanced properties in Fiscal 1995 rather than Fiscal
1996. Deferred income earned increased to $10.0 million in Fiscal 1995 from $4.4
million in Fiscal 1994, representing an increase of $5.6 million or 127.3%. The
increase in the recognition of deferred income earned is primarily as a result
of increased cash flows from adult living communities and the refinancing of a
number of adult living communities in March 1996, as described above.
Interest income for the three months ended October 31, 1997 was $2.5
million as compared to $3.2 million for the three months ended October 31, 1996,
representing a decrease of $700,000 or 21.9%. The decrease is primarily
attributable to an interest payment realized on a mortgage debt restructuring
for a Multi-Family Property in the three months ended October 31, 1996. Interest
income for the nine months ended October 31, 1997 was $8.1 million as compared
to $11.0 million for the nine months ended October 31, 1996, representing a
decrease of $2.9 million or 26.4%. The decrease is primarily attributable to (i)
the accelerated receipt of interest payments in the three months ended April 30,
1996 due to the refinancing of a number of adult living communities (which
includes the initial mortgage financing of certain adult living communities that
had been previously acquired without a mortgage) in March 1996 which reduced
interest payments that otherwise would have been received in the three months
ended April 30, 1997, (ii) an interest payment realized on a mortgage debt
restructuring for a Multi-Family Property in the nine months ended October 31,
1996, and (iii) a reduction of interest income due to the refinancings of the
adult living communities which resulted in the prepayment of mortgages which
were assets of the Company. Interest income for Fiscal 1996 was $13.8 million
compared to $12.7 million for Fiscal 1995, an increase of $1.1 million or 8.7%.
The refinancing of a number of adult living communities in March 1996 resulted
in the return of over $43.0 million of capital to limited partners, thereby
accelerating the receipt of scheduled interest payments received by the Company
in the three months ending April 30, 1996. This accelerated receipt of scheduled
interest payments in the three months ended April 30, 1996 caused interest
income for Fiscal 1996 to be greater than interest income for Fiscal 1995, but
was partially offset by (a) a reduction of the scheduled interest payments and
(b) a reduction of interest income due to the prepayment of mortgages held by
the Company, which resulted from the adult living refinancings. In addition,
this increase in interest income was partially offset by a decrease in Fiscal
1996 of the cash flow generated by various Multi-Family Properties, which the
Company receives as interest income, as compared to such cash flows generated in
Fiscal 1995. Interest income for Fiscal 1995 was $12.7 million compared to $9.5
million for Fiscal 1994, representing an increase of $3.2 million or 33.7%. Such
increase reflects the increased aggregate interest received on notes from
limited partnerships as a result of an increase in the aggregate principal
amount of such notes. The increase in aggregate principal amount reflects an
increase in the number of Syndicated adult living communities operated by the
Company and in the six Syndications completed in Fiscal 1995, compared to the
four Syndications completed 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 MultiFamily Property. The revenues of the
Company in the periods covered in the Consolidated Financial Statements reflect
little or no cash flow throughout such periods (which the Company would receive
as interest income on Multi-Family Notes) from those Multi-Family Properties
with respect to which there are existing mortgage defaults.
Property management fees from related parties for the three months
ended October 31, 1997 was $2.1 million compared to $800,000 for the three
months ended October 31, 1996, representing an increase of $1.3 million or
162.5%. Property management fees from related parties for the nine months ended
October 31, 1997 was $3.3 million compared to $1.6 million for the nine months
ended October 31, 1996, representing an increase of $1.7 million or 106.3%. The
increases are primarily attributable to the increase in cash flows from the
underlying Owning Partnerships exceeding the specified rate of return to the
limited partners. Property management fees from related parties was $2.1 million
in Fiscal 1996 as compared to $4.1 million in Fiscal 1995, representing a
decrease of $2.0 million or 48.8%. This decrease is attributable to (i)
operating expenses (including maintenance and repair expenses) increasing at a
rate greater than historically, as partially offset by increases in rental
revenues, (ii) a decrease in the average occupancy of the Company's portfolio of
adult living communities,
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(iii) the increased debt service on various adult living communities due to the
refinancing of such properties (which include the initial mortgage financing of
certain properties that had been previously acquired without mortgage financing)
in March 1996, which reduced the cash flow produced by such properties and the
incentive management fees these properties generate to a greater extent than the
resulting reduction of the Company's Management Contract Obligations in Fiscal
1996 due to said refinancing, and (iv) the establishment of capital improvement
reserves pursuant to the terms of the newly refinanced loans, which reserves
reduce the cash flow and incentive management fees these properties generate.
Property management fees from related parties was $4.1 million in Fiscal 1995 as
compared to $4.4 million in Fiscal 1994, representing a decrease of $300,000 or
6.8%. The decrease is attributable to a decrease in incentive management fees
generated by the adult living communities during Fiscal 1995.
Equity in earnings from partnerships was $100,000 for the three months
ended October 31, 1997 as compared to $100,000 for the three months ended
October 31, 1996, representing no change. Equity in earnings from partnerships
was $400,000 for the nine months ended October 31, 1997 as compared to $300,000
for the nine months ended October 31, 1996, representing an increase of $100,000
or 33.3%. The increase is attributable to the Syndication of additional
properties in which the Company retains a general partnership interest. Equity
in earnings from partnerships was $400,000 for Fiscal 1996 and Fiscal 1995,
representing no change. Equity in earnings from partnerships was $400,000 in
Fiscal 1995 as compared to $300,000 in Fiscal 1994, representing an increase of
$100,000 or 33.3%. The increase is attributable to the Syndication of additional
properties in which the Company retains a general partnership interest.
The Company realized other income for the nine months ended October 31,
1997 of approximately $300,000 due to the write-off of a liability that is no
longer required. There was no other income earned for the three months and the
nine months ended October 31, 1996. The Company recognized other income for
Fiscal 1995 of $1.0 million which resulted from the restructuring and reduction
of a development fee obligation of the Company. There was no other income in
either Fiscal 1996 or Fiscal 1994.
o Cost of Sales
Cost of sales (which includes (i) the cash portion of the purchase
price for properties plus related transaction costs and expenses and (ii) any
payments by the Company in respect of Management Contract Obligations) for the
three months ended October 31, 1997 was $10.9 million compared to $8.7 million
for the three months ended October 31, 1996, representing an increase of $2.2
million or 25.3%. The increase is attributable to (i) increased funding due to
Management Contract Obligations and (ii) greater aggregate purchase prices of
the adult living communities in the three months ended October 31, 1997 as
compared to the three months ended October 31, 1996. Cost of sales as a
percentage of sales and syndication fee income was 88.0% in the three months
ended October 31, 1997 as compared to 103.5% in the three months ended October
31, 1996. The decrease is attributable to the ability to obtain more favorable
mortgage financings for the acquisitions as partially offset by (i) less
favorable terms when acquiring adult living communities (in view of the
relationship between the initial cash flow generated by the properties and their
purchase prices), and (ii) increased funding due to the Management Contract
Obligations in three months ended October 31, 1997 as compared to the three
months ended October 31, 1996. Cost of sales for the nine months ended October
31, 1997 was $25.9 million compared to $19.5 million for the nine months ended
October 31, 1996, representing an increase of $6.4 million or 32.8%. The
increase is attributable to (i) greater purchase prices of the adult living
communities, and (ii) increased funding due to Management Contract Obligations
in the nine months ended October 31, 1997 as compared to the nine months ended
October 31, 1996. Cost of sales as a percentage of sales and syndication fee
income was 68.4% in the nine months ended October 31, 1997 as compared to 73.5%
in the nine months ended October 31, 1996. The decrease is attributable to the
ability to obtain more favorable mortgage financings for the acquisitions as
partially offset by (i) less favorable terms when acquiring adult living
communities (in view of the relationship between the initial cash flow generated
by the properties and their purchase prices), and (ii) increased funding due to
Management Contract Obligations in the nine months ended October 31, 1997 as
compared to the nine months ended October 31, 1996. Cost of sales for Fiscal
1996 was $34.0 million as compared to $27.7 million for Fiscal 1995,
representing an increase of $6.3 million or 22.7%. The increase is attributable
to increased funding due to Management Contract Obligations in Fiscal 1996 as
compared to Fiscal 1995. Cost of sales as a percentage of sales and syndication
fee income was 77.8% in Fiscal 1996 as compared to 68.2% in Fiscal 1995. The
increase is attributable to increased funding due to Management Contract
Obligations, as partially offset by 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 which reduces the cash portion of
the purchase prices and preferred interest rates) in Fiscal 1996 as compared to
Fiscal 1995. Cost of sales for Fiscal 1995 was $27.7 million compared to $21.7
million in Fiscal 1994, representing an increase
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of $6.0 million or 27.6%. The increase can be primarily attributed to the
acquisition by the Company of six properties in Fiscal 1995 with combined
purchase prices of $35.0 million as compared to the acquisition of four
properties in Fiscal 1994 with combined purchase prices of $22.3 million. The
increase in the aggregate purchase price of properties acquired was partially
offset by an increased use of mortgage financing for acquisitions in Fiscal 1995
from levels of mortgage financing for Fiscal 1994, which reduced the cash
expenditures by the Company for such acquisitions. Cost of sales as a percentage
of sales and syndication fee income decreased from 77.3% in Fiscal 1994 to 68.2%
in Fiscal 1995. The decrease can be attributed principally to the Company's
ability to obtain more favorable mortgage financing for its acquisitions (i.e. -
higher loan-to-value ratios and preferred interest rates), which has contributed
to the decrease in the cost of sales, and has enabled the Company also to obtain
more favorable terms for Syndications which has contributed to the increase in
sales, thus creating larger gross margins.
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. The Company,
however, has been able to obtain mortgage financing on increasingly favorable
terms (i.e. the Company has obtained mortgages for a greater percentage of the
purchase price and at preferred interest rates). These factors, combined with an
overall reduction of interest rates, have partially offset the factors that have
led to more unfavorable acquisition terms. A significant change in these or
other factors (including, in particular, a significant rise in interest rates)
could prevent the Company from acquiring communities on terms favorable enough
to offset the start-up losses of newly-developed communities as well as the
Company's debt service obligations, Management Contract Obligations and the
Company's selling, and general and administrative expenses.
o Selling Expenses
Selling expenses for the three months ended October 31, 1997 was $1.8
million as compared to $1.1 million in the three months ended October 31, 1996,
representing an increase of $700,000 or 63.6%. Selling expenses for the nine
months ended October 31, 1997 was $6.2 million as compared to $4.6 million for
the nine months ended October 31, 1996, representing an increase of $1.6 million
or 34.8%. The increases are attributable to higher commissions paid on a greater
sales volume for Syndications completed in the three and nine months ended
October 31, 1997 as compared to the commissions paid on a lower sales volume for
Syndications completed in the three and nine months ended October 31, 1996.
Selling expenses for Fiscal 1996 was $7.2 million as compared to $7.7 million
for Fiscal 1995, representing a decrease of $500,000 or 6.5%. The decrease is
attributable to a lower commission rate paid on a higher sales volume for
Syndications completed in Fiscal 1996 as compared to the commission rate and
sales volume for Syndications completed in Fiscal 1995.
Selling expenses for Fiscal 1995 were $7.7 million compared to $6.0 million in
Fiscal 1994, representing an increase of $1.7 million or 28.3%. The increase was
attributable to higher commissions paid on greater sales volume for Syndications
completed in Fiscal 1995 as compared to commissions paid for Syndications
completed in Fiscal 1994.
o Interest Expense
Interest expense for the three months ended October 31, 1997 was $5.2
million as compared to $4.2 million for the three months ended October 31, 1996,
representing an increase of $1.0 million or 23.8%. Interest expense for the nine
months ended October 31, 1997 was $14.0 million as compared to $12.0 million for
the nine months ended October 31, 1996, representing an increase of $2.0 million
or 16.7%. The increases are attributable to increases in the principal amount of
debt and an increase in interest rates for such debt during the three and nine
months ended October 31, 1997 as compared to the three and nine months ended
October 31, 1996, as partially offset by the elimination of certain of the
Company's mortgage debt due to the refinancing of two adult living communities
in March 1996 and the refinancing of a third adult living community in July
1996. Interest expense for Fiscal 1996 was $16.4 million as compared to $15.8
million in Fiscal 1995, representing an increase of $600,000 or 3.8%. The
increase can be primarily attributed to increases in debt and related interest
rates on such debt during the period as partially offset by decreases in debt
due to the refinancing of two adult living communities in March 1996. Until the
refinancings, the mortgages on the two communities were direct obligations
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of the Company and the corresponding interest payments were included in the
Company's interest expense. These mortgages are now direct obligations of the
Owning Partnerships that own these properties and the corresponding interest
payments are no longer included in the Company's interest expense. Interest
Expense included interest payments on Debenture Debt which had an average
interest rate of 12.05% per annum in Fiscal 1996 and the nine months ended
October 31, 1997 and was secured by the Purchase Note Collateral. During Fiscal
1996 and the nine months ended October 31, 1997, total interest expense with
respect to Debenture Debt was approximately $9.2 million and $6.2 million
respectively and the Purchase Note Collateral produced approximately $2.3
million and $1.5 million respectively of interest and related payments to the
Company, which was $6.9 million and $4.7 million respectively less than the
amount required to pay interest on the Debenture Debt. Interest expense for
Fiscal 1995 was $15.8 million compared to $13.6 million for Fiscal 1994,
representing an increase of $2.2 million or 16.2%. Interest expense included
interest payments on Debenture Debt which had an average interest rate of 11.95%
per annum in Fiscal 1995 and was secured by the Purchase Note Collateral. During
Fiscal 1995, total interest expense with respect to Debenture Debt was
approximately $8.7 million and the Purchase Note Collateral produced
approximately $2.0 million of interest and related payments to the Company,
which was $6.7 million less than the amount required to pay interest on the
Debenture Debt.
o General and Administrative Expenses
General and administrative expenses for the three months ended October
31, 1997 was $2.4 million as compared to $2.0 million in the three months ended
October 31, 1996 representing an increase of $400,000 or 20%. The increase is
attributable to increases in professional fees, salary cost and other office
expenses in managing and arranging for the acquisition of the Company's
portfolio of adult living communities which increased by two in the three months
ended October 31, 1997, as partially offset by the capitalization of expenses
relating to the implementation of the Company's development program. General and
administrative expenses for the nine months ended October 31, 1997 was $6.4
million as compared to $5.7 million for the nine months ended October 31, 1996,
representing an increase of $700,000 or 12.3%. The increase is attributable to
increases in professional fees, salary costs and other office expenses in
managing and arranging for the acquisition of the Company's portfolio of adult
living communities which increased by five adult living communities during the
nine months ended October 31, 1997, as partially offset by the capitalization of
expenses relating to the implementation of the Company's development program.
General and administrative expenses for Fiscal 1996 was $7.8 million as compared
to $7.9 million in Fiscal 1995, representing a decrease of $100,000 or 1.3%. The
decrease is attributable to the capitalization of expenses relating to the
implementation of the Company's development program, which became significant
during the year, as partially offset by increases in salary costs and other
office expenses in implementing the Company's development program and in
managing and arranging for the acquisition of the Company's adult living
communities portfolio which increased by four adult living communities in Fiscal
1996. General and administrative expenses were $7.9 million in Fiscal 1995
compared to $6.5 million in Fiscal 1994, representing an increase of $1.4
million or 21.5%. The increase primarily reflects additional salary costs
incurred in instituting the Company's new development program and in managing
and arranging for the acquisition of the Company's portfolio of adult living
communities, which increased by six adult living communities in Fiscal 1995, and
also reflects increases in various office expenses.
o Loss on Impairment of Notes and Receivables
The Company realized no loss on impairment of notes and receivables for
the three months ended October 31, 1997 as compared to a non-cash loss of $1.6
million for the three months ended October 31, 1996, representing a decrease of
$1.6 million or 100%. The Company recognized no loss on impairment of notes and
receivables for the nine months ended October 31, 1997 as compared to a $18.4
million non-cash loss for the nine months ended October 31, 1996, representing a
decrease of $18.4 million or 100%. The Company realized a non-cash loss on
impairment of notes and receivables of $18.4 million in Fiscal 1996 as compared
to no such loss for Fiscal 1995 or Fiscal 1994. These losses equal the recorded
value, net of deferred income and reserves, of Multi-Family Notes and the
related "Other Partnership Receivables" relating to nine Multi-Family Owning
Partnerships which filed petitions under Chapter 11 of the U.S. Bankruptcy Code
seeking protection from foreclosure actions and one Multi-Family Owning
Partnership that surrendered its property pursuant to an uncontested foreclosure
sale of such property. As a result of the related transfers by the Principal
Stockholders and one of their affiliates of additional assets to the Investing
Partnerships which issued such Multi-Family Notes, the Company recorded a
contribution to capital of $21.3 million. See --"Liquidity and Capital
Resources."
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o 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 the nine months
ended October 31, 1997. Such costs were incurred prior to April 30, 1997.
o Officers' Compensation
Officers' Compensation was $300,000 for the three months ended October
31, 1997 and October 31, 1996, respectively and $900,000 for the nine months
ended October 31, 1997 and October 31, 1996, respectively. Officers'
compensation was $1.2 million for Fiscal 1996, Fiscal 1995 and Fiscal 1994.
o Depreciation and Amortization
Depreciation and amortization consists of amortization of deferred debt
expense incurred in connection with debt issuance. Depreciation and amortization
for the three months ended October 31, 1997 was $1.1 million as compared to
$800,000 for the three months ended October 31, 1996, representing an increase
of $300,000 or 37.5%. Depreciation and amortization for the nine months ended
October 31, 1997 was $2.7 million as compared to $2.5 million for the nine
months ended October 31, 1996, representing an increase of $200,000 or 8.0%. The
increases are attributable to the increased amortization of deferred loan costs
due to the issuance of additional debenture debt and unsecured debt during the
three and nine months ended October 31, 1997 as compared to the three and nine
months ended October 31, 1996. Depreciation and amortization was $3.3 million in
Fiscal 1996 as compared to $2.6 million in Fiscal 1995, representing an increase
of $700,000 or 26.9%. The increase is attributable primarily to the prepayment
of debt which resulted in the acceleration of the unamortized portion of the
related costs and also to the issuance of additional Debenture Debt and
Unsecured Debt in Fiscal 1995 which had its full amortization impact in Fiscal
1996. Depreciation and amortization for Fiscal 1995 was $2.6 million compared to
$2.3 million for Fiscal 1994, representing an increase of $300,000 or 13.0%. The
increase is attributable to the issuance of additional Debenture Debt in Fiscal
1994, which had its full amortization impact in Fiscal 1995.
Liquidity and Capital Resources
The Company historically has financed operations through cash flow
generated by operations, Syndications and borrowings consisting of Investor Note
Debt, Unsecured Debt, Mortgage Debt and Debenture Debt. The Company's principal
liquidity requirements are for payment of operating expenses, costs associated
with development of new adult living communities, debt service obligations, and
Management Contract Obligations.
Cash flows used by operating activities for the nine months ended
October 31, 1997 were $13.9 million and were comprised of (i) net loss of $5.0
million plus (ii) adjustments for non-cash items of $1.6 million less (iii) the
net change in operating assets and liabilities of $10.5 million. The adjustments
for non-cash items is comprised of depreciation and amortization of $2.7
million, plus write-off of registration costs of $3.1 million, offset by
deferred income earned of $4.2 million. The net change in operating assets and
liabilities of $10.5 million was primarily attributable to an increase in notes
and receivables of $15.7 million. Approximately 65% of the increase in notes and
receivables was attributable to an increase in adult living Purchase Notes due
to new Syndications as offset by principal reductions on adult living Purchase
Notes relating to previous Syndications, approximately 18% of the increase in
notes and receivables were attributable to an increase in other partnership
receivables primarily due to advances made to Multi-Family Owning Partnerships,
and approximately 17% of the increase in notes and receivables was attributable
to an increase in accrued interest receivable, which represents the accrual of
interest on the Multi-Family Notes. The Multi-Family Notes accrue interest based
on the collectibility of such interest. The proceeds from the collection of the
investor notes pay interest on the related Multi-Family Notes. The investors
make one annual payment on their investor notes every January. Interest on the
Multi-Family Notes accrues during each fiscal year as the annual collection date
for the related investor notes draws nearer. The increase in accrued interest on
Multi-Family Notes, therefore, is not reflective of any impairment of
Multi-Family Notes. 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 $20.3 million plus (iii) the
net change in operating assets and liabilities of $3.1 million. The adjustments
for non-cash items is comprised of depreciation and amortization of $2.6 million
and loss on impairment of receivables of $18.4 million offsest by deferred
income earned of $700,000. Cash flows provided by operating activities for
Fiscal 1996 were $2.5 million and were comprised of: (i) net loss of $23.3
million plus (ii) adjustments for non-cash items of $16.7 million plus (iii) the
net change in operating assets and liabilities of $9.1 million. The adjustments
for non-cash
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items is comprised of depreciation and amortization of $3.3 million and loss on
impairment of receivables of $18.4 million less deferred income earned of $5.0
million. Cash flows provided by operating activities for Fiscal 1995 were $1.0
million and were comprised of: (i) net income of $5.8 million less (ii)
adjustments for non-cash items of $7.4 million plus (iii) the net change in
operating assets and liabilities of $2.6 million. The adjustments for non-cash
items is comprised of depreciation and amortization of $2.6 million offset by
deferred income earned of $10.0 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 $2.1 million plus
(iii) the net change in operating assets and liabilities of $7.8 million. The
adjustments for non-cash items is comprised of depreciation and amortization of
$2.3 million offset by deferred income earned of $4.4 million.
Net cash used by investing activities for the nine months ended October
31, 1997 of $13.8 million was comprised of the increase in the investment in the
adult living communities the Company is currently constructing and the increase
in investments in general partner interests in Syndicated adult living
communities. Net cash used by investing activities for the nine months ended
October 31, 1996 of $5.7 million was comprised of the increase in the investment
in the adult living communities the Company is currently constructing and the
increase in investments in general partner interests in adult living communities
as offset by the distribution of refinancing proceeds due to the Company's
portion of general partner interests in adult living communities. Net cash used
by investing activities for Fiscal 1996 of $7.2 million was comprised of the
increase in the investment in the adult living communities the Company is
currently constructing and the increase in investments and general partner
interests in Syndicated adult living communities for the period offset by a
decrease in investments due to the distribution of refinancing proceeds due to
the Company's portion of general partner interests in adult living communities.
Net cash used by investing activities for Fiscal 1995 of $567,000 was comprised
of the increase in investments in general partner interests in adult living
communities. Net cash used by investing activities for Fiscal 1994 of $591,000
was comprised of the increase in investments in general partner interests in
adult living communities.
Net cash provided by financing activities for the nine months ended
October 31, 1997 of $23.3 million was comprised of (i) proceeds from the
issuance of new debt of $36.3 million less debt repayments of $21.8 million plus
(ii) proceeds from construction mortgage financing of $14.0 million less (iii)
payments of notes payable of $100,000 plus (iv) increase in notes payable of 2.0
million less (v) the increase in other assets of $7.1 million. Net cash used by
financing activities for the nine months ended October 31, 1996 of $3.2 million
was comprised of (i) proceeds from the issuance of new debt of $38.2 million
less debt repayments of $39.4 million less (ii) payments of notes payable of
$100,000 less (iii) an increase in other assets of $1.1 million less (iv)
dividends paid of $800,000. Net cash used by financing activities for Fiscal
1996 of $900,000 was comprised of: (i) proceeds from the issuance of new debt of
$57.8 million less debt repayments of $55.3 million plus (ii) proceeds from
construction mortgage financing of $2.8 million less (iii) payments of notes
payable of $200,000 less (iv) dividends paid of $800,000 and less (v) the
increase in other assets of $3.4 million due to the capitalization of costs
relating to the development and construction of new properties and the issuance
of new debt offset by the amortization of loan costs primarily in connection
with Debenture Debt. Net cash provided by financing activities for Fiscal 1995
of $6.6 million was comprised of: (i) proceeds from the issuance of new debt of
$52.0 million less debt repayments of $39.3 million less (ii) payments of notes
payable of $1.6 million less (iii) dividends paid of $1.7 million and less (iv)
the increase in other assets of $2.8 million due to the capitalization of loan
costs primarily in connection with Debenture Debt. Net cash provided by
financing activities for Fiscal 1994 of $1.1 million was comprised of: (i) debt
repayments of $31.3 million less proceeds from the issuance of new debt of $44.0
million less (ii) payments of notes payable of $2.6 million less (iii) dividends
paid of $1.9 million less (iv) the increase in other assets of $7.1 million due
to the capitalization of loan costs primarily in connection with Debenture Debt.
At January 31, 1997, the Company had total indebtedness, excluding
accrued interest, of $141.8 million, consisting of $69.9 million of Debenture
Debt, $46.1 million of Unsecured Debt, $5.0 million of Mortgage Debt and $20.8
million of Investor Note Debt. As of October 31, 1997, the Company has increased
Investor Note Debt from $20.8 million to $29.1 million, increased Unsecured Debt
from $46.1 million to $49.7 million and increased Debenture Debt from $69.9
million to $72.4 million. As a result, total indebtedness increased from $141.8
million to $156.2 million and the Company had cash and cash equivalents at
October 31, 1997 of $9.7 million.
Of the principal amount of total indebtedness at January 31, 1997,
$21.4 million becomes due in the fiscal year ending January 31, 1998; $33.6
million becomes due in the fiscal year ending January 31, 1999; $20.9 million
becomes due in the fiscal year ending January 31, 2000; $21.1 million becomes
due in the fiscal year ending January 31, 2001; $25.6 million becomes due in the
fiscal year ending January 31, 2002, and the balance of $19.2 million becomes
due thereafter.
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Of the amount maturing in the fiscal year ending January 31, 1998, $900,000 is
Investor Note Debt which the Company repaid as of October 31, 1997 through the
collection of investor notes. The balance, approximately $20.5 million, includes
$2.7 million of Debenture Debt, and $17.8 million of Unsecured Debt. During the
nine months ended October 31, 1997, the Company extended approximately $300,000
of Debenture Debt and repaid approximately $1.1 million of Debenture Debt and
approximately $16.2 million of Unsecured Debt. The balance of $1.6 million of
Unsecured Debt and $1.3 million of Debenture Debt which mature during the last
quarter of fiscal 1997, together with interest on outstanding debt, will be
repaid from a portion of the proceeds of the $12 million of new Unsecured Debt
and $ 8.0 million of new Debenture Debt which the Company is in the process of
issuing (of which none of the Unsecured Debt and approximately $3.6 million of
the Debenture Debt was issued as of October 31, 1997), the issuance of
additional debt securities and funds generated by the Company's business
operations.
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 recently renegotiated certain of its most restrictive covenants.
Certain obligations contain provisions requiring the Company to maintain a net
worth of, in the most restrictive case, $26,250,000, 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. 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, and at October 31, 1997, the Company had a net worth of $27.0 million.
On a pro forma basis, after giving effect to this Offering, the Company would
have had a net worth of $53.0 million at October 31, 1997. Pursuant to the
Capstone Agreement, the Company would be required to maintain a net worth of no
less than $39.8 million. Certain obligations of the Company contain covenants
requiring the Company to maintain a debt for borrowed money to net worth ratio
of, in the most restrictive case, no more than 6 to 1. At January 31, 1997 and
October 31, 1997, the Company's debt for borrowed money to consolidated net
worth ratio was 4.6 to 1 and 5.8 to 1, respectively and would have been 3.0 to 1
on October 31, 1997 on a pro forma basis, after giving effect to this Offering.
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 Fiscal 1996 and the nine months
ended October 31, 1997, the adult living communities with respect to which the
Company had such Management Contract Obligations distributed to the Company,
after payment of all operating expenses and debt service, an aggregate of $9.7
million and $7.9 million, respectively, for application to the Company's
Management Contract Obligations. During such periods, the Company's Management
Contract Obligations exceeded such distributions by an aggregate of $5.6 million
and $5.2 million, respectively. Of the $5.6 million the Company paid in respect
to Management Contract Obligations for Fiscal 1996 (i) approximately 64% was
attributable to difficulties the Company experienced in renting a sufficient
number of adult living units relating to two Syndications involving multi-family
properties that the Company acquired from third parties and believed could
successfully be converted to adult living communities (the conversion of one of
these properties to an adult living community is continuing and is currently 80%
occupied by adult living residents, and the conversion of the other property was
unsuccessful and the property is being operated as a multi-family property by a
third-party managing agent) and one underperforming adult living community, (ii)
approximately 27% was attributable to operating expenses (including maintenance
repairs and costs) increasing at a greater rate than historically, as partially
offset by increases in rental revenues, and (iii) approximately 9% was
attributable to the increased debt service, including the establishment of
capital improvement reserves, on certain adult living communities due to the
refinancing of such adult living communities (which includes the initial
mortgage financing of certain adult living communities that had been previously
acquired without a mortgage), which refinancings reduced the cash flow generated
by such adult living communities to a greater extent than the resulting
reduction of the Company's Management Contract Obligations relating to such
properties. As a result of the refinancings, $43 million was distributed to
limited partners as a return of capital. This return of capital reduced the
amount of capital upon which the Company has Management Contract Obligations. Of
the $5.2 million the Company paid in respect to Management Contract Obligations
for the nine months
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ended October 31, 1997 (i) approximately 45% was attributable to operating
expenses (including maintenance and repair costs) increasing at a greater rate
than historically, as partially offset by increases in rental revenues, (ii)
approximately 33% was attributable to the decrease in the average occupancy of
the Company's portfolio of adult living communities, and (iii) approximately 22%
was attributable to difficulties the Company experienced in renting a sufficient
number of adult living units relating to one Syndication where a multi-family
property was converted to an adult living community (which community is
currently 80% occupied by adult living residents) and one underperforming adult
living community.
The aggregate amount of Management Contract Obligations relating solely
to returns to limited partners based on existing management contracts is $3.9
million for the remaining portion of Fiscal year 1997, $15.4 million for Fiscal
1998, which will increase to $17.4 in Fiscal 1999, and decrease to $16.4 million
in Fiscal 2000, decrease to $11.2 million in Fiscal 2001 and decrease to $2.4
million in Fiscal 2002. Such amounts of Management Contract Obligations are
calculated based upon paid-in scheduled capital contributions of limited
partners as of October 31, 1997 with respect to Fiscal 1997 and remaining
scheduled capital contributions with respect to fiscal years 1998 through 2002.
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 relating to future Syndications.
The initial five-year term of the management contracts and the related
Management Contract Obligations have expired for 10 Owning Partnerships which
Management Contract Obligations relate to fourteen Investing Partnerships.
Although the Company has no obligation to fund operating shortfalls after the
five-year term of the management contracts, as of October 31, 1997, the Company
had advanced an aggregate of approximately $400,000 to two Owning Partnerships
to fund operating shortfalls . In both cases, the Company had arranged for
Syndications involving multi-family properties that the Company acquired from
third parties and believed could be successfully converted to adult living
communities. One of these conversion attempts was unsuccessful and the property
is now being operated as a multi-family property by a third-party managing
agent. The other property has experienced difficulties in its conversion to an
adult living community, but the conversion process is continuing. These advances
are recorded as "Other Partnership Receivables" on the Company's Consolidated
Balance Sheet. The Company has no present intention to attempt other conversions
of multi-family properties to adult living communities.
The refinancings of a number of adult living communities in Fiscal 1996
resulted in over $43 million being returned to limited partners, which reduced
the amount of capital upon which the Company is obligated to make payments in
respect of the Management Contract Obligations. The amount paid by the Company
with respect to its Management Contract Obligations for Fiscal 1996 was
partially offset by an increase in interest income received by the Company for
Fiscal 1996, which was also the result of the refinancings. While the
refinancings increased the Company's funding of Management Contract Obligations
in the short term, the long term effect will be a reduction of the Company's
Management Contract Obligations relating to the refinanced properties. The
capital that was returned to the limited partners (which causes the reduction in
the Company's Management Contract 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 Management Contract
Obligations more in future years than in the current year and the following
year. 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
two years the Management Contract Obligations with respect to existing and
future Syndications will exceed the cash flow generated by the related
properties, which will result in the need to utilize funds generated by the
Company from sources other than the operations of the Syndicated adult living
communities to make Management Contract Obligations payments. The Company
intends to structure future Syndications to minimize the likelihood that it will
be required to utilize the cash it generates to pay amounts utilized to pay
Management Contract Obligations, but there can be no assurance that this will be
the case.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of the prepayments received upon the closings of
the sales of limited partnership interests in Investing Partnerships averaged
71.7% in Fiscal 1994, 60.9% in Fiscal 1995, 65.7% in Fiscal 1996 and 64.4% for
the nine months ended October 31, 1997. 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
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to reduce the recorded value of the Company's note receivables and reduce
interest income received by the Company. Pursuant to the terms of the offerings,
the Company has the option not to accept future prepayments by limited partners
of capital contributions. The Company has not determined whether it will
continue to accept prepayments by limited partners of capital contributions.
The Company holds 169 Multi-Family Notes which are secured by
controlling interests in Multi-Family Owning Partnerships which own 128
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 recorded as "Other Partnership
Receivables" on the Company's Consolidated Balance Sheet. The Multi-Family Notes
and the Other Partnership Receivables 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 Other Partnership Receivables are
satisfied. As of October 31, 1997, the recorded value, net of deferred income,
of Multi-Family Notes was $107.1 million. All but approximately $1.2 million of
the $56.0 million of "Other Partnership Receivables" recorded on the Company's
Consolidated Balance Sheet as of October 31, 1997 relate to advances to
Multi-Family Owning Partnerships. (See Note 4 of Notes to the Company's
Consolidated Financial Statements.)
The Multi-Family Notes relating to the Protected Partnerships were
first deemed impaired when the mortgages on their respective properties went
into default, which defaults occurred between August 1989 and June 1994. Once in
default, the holders of these mortgages assigned them to the United States
Department of Housing and Urban Development ("HUD"). The Protected Partnerships
then attempted to negotiate, and in some cases obtained, workout agreements with
HUD. Although it could temporarily lower or suspend debt service payments during
the term of a workout agreement, HUD, unlike a conventional lender, did 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
Protected Partnerships could not reach agreement with the new mortgage holders
and such new mortgage holders began to threaten and institute foreclosure
proceedings. In July 1996, the Principal Stockholders and one of their
affiliates assigned partnership interests in 12 partnerships that own 12
multi-family properties located in various towns and cities in Georgia and South
Carolina (the "Assigned Interests") to the Investing Partnerships that own
interests in the Protected Partnerships, which Assigned Interests were owned
personally by the Principal Stockholders and their affiliate and provided
additional assets at the Investing Partnership level and, as a result,
additional security for the related Multi-Family Notes. Seven of the Protected
Partnerships filed Chapter 11 Petitions in August 1996, two of the Protected
Partnerships filed Chapter 11 Petitions in February 1997, and one of the
Protected Partnerships did not file a Chapter 11 Petition and allowed the holder
of the mortgage to foreclose on its property due to the unlikelihood of
confirming a plan of reorganization. The Company neither owns nor manages these
properties, nor is it the general partner of any Multi-Family Owning
Partnerships, including the Protected Partnerships, but rather, merely holds the
related Multi-Family Notes and Other Partnership Receivables as receivables. The
Company, therefore, has no liability in connection with these mortgage defaults
or bankruptcy proceedings.
The Company established appropriate reserves during these time periods
to reflect the varying extent of impairment of the applicable Multi-Family Notes
in view of the state of facts at such times. The bankruptcy petitions and risk
of loss faced by the Protected Partnerships caused the related Multi-Family
Notes and receivables to be deemed fully impaired. As a result, the Company
recorded a non-cash loss in fiscal 1996 in the amount of $18.4 million
(representing the recorded value of these Multi-Family Notes and receivables,
net of deferred income and any previously established reserves). In that the
Principal Stockholders transferred the Assigned Interests in July 1996, the
Company recorded a $21.3 million capital contribution in Fiscal 1996. As a
result of the transfer by the Principal Stockholders and their affiliate of the
Assigned Interests and the additional security provided thereby, the Company
believes that the outcome of the bankruptcy proceedings will not affect its
ability to collect on those Multi-Family Notes and receivables.
Seven of the Chapter 11 Petitions resulted in the respective Protected
Partnerships losing their properties through foreclosure or voluntary
conveyances of their properties. The remaining two Protected Partnerships
successfully emerged from their bankruptcy proceedings in January 1998 by paying
off their mortgages at a discount with the proceeds of new mortgage financings,
resulting in these properties having current, fully performing mortgages. The
two Investing Partnerships related to these two Protected Partnerships have
transferred the respective Assigned Interests back to the Principal Stockholders
and their affiliate.
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Fifteen of the Multi-Family Owning Partnerships remain in default on
their respective mortgages. As of October 31, 1997, the recorded value, net of
deferred income, of the multi-family Purchase Notes and "Other Partnership
Receivables" held by the Company relating to these fifteen Multi-Family Owning
Partnerships was $31.9 million. The Company has established reserves of $10.1
million to address the possibility that these notes and receivables may not be
collected in full. It is possible that other Multi-Family Owning Partnerships
which are in default of their mortgages will file bankruptcy petitions or take
similar actions seeking protection from their creditors.
In addition, many of the multi-family properties are dependent to
varying degrees on housing assistance payment contracts with the 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 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 these Multi-Family Owning
Partnerships, but rather, holds the related Multi-Family Notes and Other
Partnership Receivables as receivables. 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 non-cash 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 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, 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 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 may make certain improvements to the properties
and may not renew rental assistance contracts as part of a strategy to
reposition those MultiFamily Properties as market-rate, non-subsidized
properties. Six of such Multi-Family Owning Partnerships refinanced their
HUD-insured mortgages with 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 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 the Multi-Family Owning
Partnership will be able to refinance their mortgages or will be able to
successfully reposition any of the Multi-Family Properties.
As previously described, the Protected Partnerships (and the other
defaulting Multi-Family Owning Partnerships) have generated little or no cash
flow and, therefore, the related Multi-Family Notes have contributed little or
no interest income in the periods covered in the Consolidated Financial
Statements of the Company. The Assigned Interests have, prior to their
assignment to the Investing Partnerships, generated positive cash flows. To the
extent the Assigned Interests continue to generate positive cash flows, the
Company will be entitled to receive such amounts as interest income on the
related Multi-Family Notes.
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The future growth of the Company will be based upon the continued
acquisition of existing adult living communities and the development of
newly-constructed adult living communities. The Company anticipates that it will
acquire between 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 January, 1998, the Company acquired and Syndicated one
adult living community in Adrian, Michigan containing 73 apartment units. The
Company regularly obtains such 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. In Fiscal 1996 and 1997, the
Company acquired three previously Syndicated adult living communities (the
"Resyndicated Communities") from the original Owning Partnerships, which
acquisitions were arranged by utilizing mortgage financing and Resyndications.
The Company manages the Resyndicated Communities pursuant to new management
contracts and has Management Contract Obligations thereunder.
The Company will not engage in other Resyndication transactions in the future.
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 has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community 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 will be developed under the plan.
The Company will manage and operate each of the newly developed 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 $9.5 million and
utilizing long-term lease financing will be approximately $10 million. The
Company expects to complete the construction of four of the five communities
currently under construction by the end of the first quarter of fiscal 1998. The
Company expects to complete construction of the remaining community currently
under construction by the end of fiscal 1998. These five adult living
communities, along with the three communities already completed pursuant to the
development plan, contain an aggregate of approximately 1,150 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
4,260 and 4,828 addtional adult living apartment units. With respect to two of
the five adult living communities currently under construction, the Company has
entered into long-term leases to finance these developments. The Company
anticipates that the proceeds of this Offering, funds generated by its business
operations and construction mortgage financing will provide sufficient funds to
pursue its development plan for at least 12 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
12 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. See "Risk Factors -- Need for Additional
Financing" and "Use of Proceeds."
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, and is nearing the completion of construction on sites in Round Rock, and
Temple, Texas, with mortgage financing for up to $7.6 million and $7.3 million,
respectively. The Company has commenced construction with construction
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financing for $7.1 million on an adult living community in Tyler, Texas. The
Company holds options to acquire three additional sites in Texas and is
negotiating with several additional lenders to obtain financing to develop these
sites.
The Company has, and may in the future, utilize long-term lease
financing arrangements to develop and operate new communities. The Company has
obtained up to $39 million of financing from Capstone 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 completed
construction on two of these communities in San Angelo and El Paso, Texas, and
is nearing completion of construction on two of these communities which are
located in Wichita Falls and Abilene, Texas. Pursuant to this financing
arrangement, Capstone acquired the properties and entered into a development
agreement and a lease agreement with the Company with respect to each property.
Each development agreement required 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 granted a right of first refusal and an option to purchase the
properties. 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. On a pro forma basis, after giving effect to this Offering, the
Company would have had a net worth of $53.0 million at October 31, 1997.
Therefore, the Company would be required, pursuant to the Capstone Agreement, to
maintain a net worth of no less than $39.8 million.
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 approximately 80% of such costs,
requiring the Company to contribute approximately 20% 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.
o Impact of the Year 2000 on Computer Systems and Applications
The Company has assessed the potential for its computer systems and
applications to fail and create erroneous results by or at the year 2000 and has
modified, and plans to continue to test and modify as necessary, its computer
systems and applications to permit proper functioning in and after the year
2000. The Company believes that most such required modifications have been made
and does not expect to have any material year 2000 problems. The costs incurred
to date for such modifications have been, and it is expected that any future
costs will be, immaterial.
The Company's assessment of the adult living communities which it
manages has led it to believe that such communities will not be affected by year
2000 issues to any material extent. Since the computer systems of the Company
and the adult living communites managed by it are not linked to those of any
other party, the Company does not believe that year 2000 problems of third
parties will create the potential for system failures for the Company or the
adult living communities that it manages. The Company does not believe that year
2000 problems, if any, faced by its suppliers, creditors or others will have any
material impact on the Company, although there can be no assurance that this
will be the case.
o New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 128, "Earnings per Share"
establishes standards for computing and presenting earnings per share, and is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Statement No. 129, "Disclosure of Information about
Capital Structure" establishes standards for disclosing information about an
entity's capital structure, and is effective for financial statements for
periods ending after December 15, 1997. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display of
comprehensive income and its components, and is effective for fiscal years
beginning after December 15, 1997. 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, and is
effective for financial statements for periods
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beginning after December 15, 1997. The Company believes that its future adoption
of these standards will not have a material effect on the Companys financial
position or results of operations.
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BUSINESS
General
The Company is a fully integrated provider of adult living
accommodations and services which acquires, develops and manages adult living
communities. Although, the Company's revenues have been and are expected to
continue to be, primarily derived from Syndications, to the extent the Company
implements its new development program, it anticipates that the revenues derived
therefrom will increase. The Company manages adult living communities which have
been acquired utilizing Syndications. The Company is one of the largest managers
of adult living communities in the United States, operating communities offering
both independent- and assisted-living services. The Company currently manages 37
adult living communities containing 5,265 adult living apartment units in 12
states in the Sun Belt and the Midwest. The Company also manages one nursing
home containing 57 beds. One of the adult living communities the Company
operates contains 70 skilled nursing beds. The Company has approximately 1,600
employees and directly conducts the day-to-day operations of the adult living
communities it manages. At January 31, 1998 the communities managed by the
Company had an average occupancy rate of approximately 93%. 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 Syndications would
decrease and the percentage of revenues derived from newly constructed adult
living communities would increase and, the Company believes, over time, become
the primary source of the Company's revenues.
Historically, the Company has arranged for the acquisition and
development of multi-family and adult living properties by utilizing mortgage
financing and by arranging Syndications of 41 Investing Partnerships formed to
acquire interests in the 37 Owning Partnerships that own the adult living
communities and the nursing home managed by the Company. These 37 adult living
communities and one nursing home 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 the Company manages all of the adult living
communities and one nursing home in its portfolio. The Company is also the
general partner of 32 of the 41 Investing Partnerships.
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. An 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 each of the
Owning Partnership and 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.
Limited Partners are typically permitted to pre-pay their scheduled capital
contributions. 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 the community and arranging for the
Syndication of partnership interests in the Investing Partnership, the Company
makes a profit on the sale of the Purchased Interest. In addition, as part of
the purchase price paid by the Investing Partnership for the Purchased Interest,
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 the specified rate of return to
limited partners 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
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flows generated by the property are insufficient to do so. The Owning
Partnership then distributes these amounts to the Investing Partnership which,
in turn, distributes these amounts to the limited partners. As a result of the
Management Contract Obligations, the Company essentially bears 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 as an incentive
management fee any cash flow generated by the property in excess of the amount
needed to satisfy the Management Contract Obligations. 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. 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 five-year period and is
terminable thereafter by either party upon thirty to sixty days notice.
The Company intends to continue to arrange for future acquisitions of
existing adult living communities by utilizing mortgage financing and by
arranging Syndications, and anticipates acquiring between six and twelve
communities during the next two years. The Company does not intend to Syndicate
it's newly developed adult living communities, which it will own and operate or
operate pursuant to long-term leases.
The management contract with each Owning Partnership requires the
Company to manage and operate the day-to-day operations of the adult living
community. Under each management contract, the Company acts as an independent
contractor. Required services performed by the Company for each community
include marketing and advertising; renting apartment units and collecting rents
and charges; providing independent and assisted living services (including
providing meals, activities, transportation and, for assisted-living residents,
assistance with activities of daily living ("ADLs")); hiring, paying and
supervising the on-site employees; maintaining the property; purchasing
supplies; and preparing operating budgets and reports. Although the Company has
the right to sub-contract for such services, the Company directly performs such
services utilizing employees of the Company.
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 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.
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community 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 will be 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 $9.5
million and utilizing long-term lease financing will be approximately $10
million. The Company expects to complete the construction of four of the five
communities currently under construction by the end of the first quarter of
fiscal 1998 and expects to complete the construction of the remaining community
under construction by the end of fiscal 1998. These five adult living
communities,
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along with the three communities whose construction is already completed
pursuant to the development plan, contain an aggregate of approximately 1,150
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 4,260 and 4,828 additional adult living apartment units. Each new
community to be developed by the Company will offer both independent and
assisted-living services.
The first new communities being constructed pursuant to the Company's
development plan are in Texas. The Company has obtained development financing
from Capstone Capital Corporation ("Capstone") pursuant to which Capstone is
providing up to $39 million for development of four new adult living communities
that will be operated by the Company pursuant to long-term leases with Capstone.
The Company has completed construction on two of these communities in El Paso
and San Angelo, Texas, respectively, and is nearing completion of construction
on the remaining two communities which are located in Wichita Falls, and
Abilene, Texas, respectively. The Company has completed construction, with
mortgage financing for up to $7 million, on an adult living community in Corpus
Christi, Texas, and is nearing completion of construction with mortgage
financing for up to $7.3 million, on an adult living community in Temple, Texas.
The Company is also nearing completion of construction, with mortgage financing
for up to $7.6 million, of an adult living community in Round Rock, Texas. The
Company has commenced construction on one additional site in Tyler, Texas with
mortgage financing of $7.1 million. The Corpus Christi community is owned and
operated directly by the Company and the Temple, Round Rock and Tyler facilities
are owned and, upon completion will be operated directly by the Company. The
Company also holds options to acquire three additional sites in Texas and is
negotiating with several additional lenders to obtain financing to develop these
sites.
Upon the completion of construction of each adult living community
developed and constructed pursuant to the Capstone Development Agreement, and
upon the satisfaction of certain other conditions, the Company will be the
lessee under long-term lease arrangements with Capstone which provide financing
for development of four of the newly developed adult living communities. The
initial term of each lease, which begins upon the completion of a facility and
meeting of other criteria, is 15 years with three five-year extension options.
Under the terms of each lease, the Company has the option to acquire the
community after operating the community for four years. The option price is
equal to the sum of 100% of the cost incurred to develop the property and an
additional 20% of such cost (which declines by 2 percentage points per year but
in no event declines below 10%). The initial lease rate is 350 basis points in
excess of the ten-year Treasury Bill yield (but in no event less than 9.75% per
annum). The lease rate has an annual upward adjustment equal to 3% of the
previous year's rent. The four leases have cross-default provisions. Each lease
is a triple net lease, as the Company is responsible for all costs, including
but not limited to maintenance, repair, insurance, taxes, utilities, and
compliance with legal and regulatory requirements. If a community is damaged or
destroyed, the Company is required to restore the community to substantially the
same condition it was in immediately before such damage or destruction, or
acquire the facility for the option price described above.
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 effectuation of the development plan will expose
the Company to additional risk. These risks include, but are not limited to, the
Company's anticipation that the construction of each community will require
approximately 12 months and that each newly constructed community will incur
start-up losses for at least nine months after commencing operations. In
addition, there can be no assurance that newly constructed communities will
generate positive cash flow or that the Company will not suffer delays or cost
overruns in instituting its development plan.
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.
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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 Medicare 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 communities and avoid potential financial difficulties it might encounter
if it were dependent on Medicare or other government reimbursement programs that
may suffer from health care reform, budget deficit reduction or other pending or
future government initiatives.
Partnership Offerings
The Company has arranged for the acquisition of the 37 adult living
communities and one nursing home that it manages by utilizing mortgage financing
and Syndications of the 41 Investing Partnerships formed to acquire investments
in the 37 Owning Partnerships that own the adult living communities and the
nursing home in its current portfolio. The Company is the managing general
partner of all but one of the Owning Partnerships that own such adult living
communities and one nursing home. The Company manages all of the adult living
communities and the one nursing home in its portfolio. The Company is also the
general partner of 32 of the 41 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. In a typical Syndication, 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 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 certain amounts.
The limited partners purchase partnership interests in the Investing
Partnerships 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.
Limited partners are typically permitted to pre-pay their scheduled capital
contributions. 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. Pursuant to the management
contracts with the Owning Partnerships, the Company is required to pay the
Management Contract Obligations which support the property's operations and the
payment of such returns to the limited partners. During the fiscal year ended
January 31, 1997 and the nine months ended October 31, 1997, the Company paid
approximately $5.6 million and $5.2 million, respectively, with respect to its
Management Contract Obligations. The aggregate amount of such Management
Contract Obligations relating solely to returns to limited partners for the last
quarter of fiscal 1997 and for each of the fiscal years 1998 through 2002 based
on existing management contracts is $3.9 million, $15.4 million, $17.4 million,
$16.4 million, $11.2 million and $2.4 million, respectively. Such amounts of
Management Contract Obligations are calculated based upon paid-in scheduled
capital contributions of limited partners as of October 31, 1997 with respect to
fiscal 1997 and remaining scheduled capital contributions with respect to fiscal
years 1998 through 2002. 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
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cash flow would reduce such obligations, and are calculated without regard to
the Management Contract Obligations relating to 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
required 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 initial five-year term of the management contracts and the related
Management Contract Obligations have expired for 10 Owning Partnerships which
Management Contract Obligations relate to fourteen Investing Partnerships.
Although the Company has no obligation to fund operating shortfalls after the
five-year term of the management contract, as of October 31, 1997, the Company
advanced an aggregate of approximately $400,000 to two Owning Partnerships to
fund operating shortfalls . In both cases, the Company had arranged for
Syndications involving multi-family properties that the Company acquired from
third parties and believed could be successfully converted to adult living
communities. The Company experienced difficulties in obtaining a sufficient
number of adult living tenants in these converted properties. One of these
conversion attempts was unsuccessful and the property is now being operated as a
multi-family property by a third-party managing agent. The other property has
experienced difficulties in its conversion to an adult living community, but the
conversion process is continuing. These advances are recorded as "Other
Partnership Receivables" on the Company's Consolidated Balance Sheet. The
Company has no present intention to attempt other conversions of multi-family
properties to adult living properties. The Company intends to structure future
Syndications to minimize the likelihood that it will be required to utilize the
cash it generates to make payments pursuant to the management contracts.
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 its Syndications, 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 Management Contract
Obligations as an incentive management fee. Thereafter, the Company's incentive
management fee is 40% of the excess of cash flow over the amount necessary to
make the specified rate of return to the limited partners.. 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 Syndicated adult living communities and the nursing home are
managed by the Company pursuant to written management contracts, which generally
have a five year term coterminous with the Company's Management Contract
Obligations. These five-year obligations have terminated for 10 of the 37 Owning
Partnerships which Management Contract Obligations relate to fourteen Investing
Partnerships. After the initial five-year term, the Management Contract
Obligations terminate and 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 36 of the 37 Owning Partnerships
that own the Syndicated adult living communities and the nursing home managed by
the Company. The Company also is the general partner of 32 of the 41 adult
living Investing Partnerships formed to acquire
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equity interests in 37 of 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 conduct or operation of the
partnerships. The partnership agreements for the 32 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 arrange for acquisitions of existing
adult living communities by utilizing mortgage financing and by arranging
Syndications. The Company plans to acquire between six and twelve 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
Management Contract Obligations. The Company is, and will continue to be, the
managing general partner of the partnerships that own acquired communities. The
Company does not intend to Syndicate any of its newly-developed adult living
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.
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The increased financial net worth of the elderly population is
illustrated by the following chart:
Median Net Worth
1988 1991
---- ----
45-54 57,466 56,250
55-64 80,032 83,041
65+ 73,471 88,192
SOURCE: U.S. BUREAU OF THE CENSUS
Another trend benefiting the Company, and especially its provision of
assisted-living services, is the effort by the government, private insurers and
managed care organizations to contain health care costs by limiting lengths of
stay, services, and reimbursement amounts. This has resulted in hospitals
discharging patients earlier and referring them to nursing homes. At the same
time, nursing home operators continue to focus on providing services to
sub-acute patients requiring significantly higher levels of skilled nursing
care. The Company believes that this "push down" effect has and will continue to
increase demand for assisted-living facilities that offer the appropriate levels
of care in a non-institutional setting in a more cost-effective manner. The
Company believes that all of these trends have, and will continue to, result in
an increasing demand for adult living facilities which provide both independent
and assisted-living services.
Strategy
Growth. The Company's growth strategy focuses on the development of
communities offering both independent and assisted-living apartment units and on
continued intensive communities management. The Company believes that there are
numerous markets that are not served or are underserved by existing adult living
communities and intends to take advantage of these circumstances, plus the
present availability of construction financing on favorable terms, to develop
new communities of its own design in desirable markets. Historically, the
Company has expanded by acquisition of existing communities. The Company has
taken advantage of the inexperience and operating inefficiencies of the previous
owners of these communities and has improved the financial performance of these
properties by implementing its own management and marketing techniques. The
Company's sophistication in management and marketing is evidenced by its
approximate 93% occupancy rate at January 31, 1998 at the existing adult living
communities managed by the Company.
The Company will continue to acquire existing communities and intends
to arrange for these acquisitions, in part, by Syndications. The Company
believes that its continuing the practice of arranging for the acquisition of
adult living communities through Syndications 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 year, 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 Management Contract
Obligations. The Company also believes its established ability to privately
place equity and debt securities could enhance its ability to pursue its
development plan.
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New Development. While the acquisition of existing adult living
communities utilizing Syndications will continue to play a significant role in
the Company's expansion program, the primary focus of the expansion program is
the development of new adult living communities. The Company's development plan
emphasizes a "prototype" adult living community that it has designed. The
Company designed the prototype based upon its experience operating its existing
portfolio of communities. Because each of its adult living communities has a
different design, and due to the Company's experience in operating such
communities, the Company believes it has been able to identify certain
characteristics of the communities it operates which are beneficial. In addition
to incorporating the characteristics which the Company believes are beneficial,
the Company has incorporated the following features into the prototype which it
believes are innovative and make the prototype a "state of the art" community.
The prototype contains 142 adult living 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. 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 economies of scale also are realized in that
more apartment units are being produced for each community that is developed.
Common areas will include recreation areas, dining rooms, a kitchen,
administrative offices, an arts and crafts room, a multi-purpose room, laundry
rooms for each floor, a beauty salon/barber shop, a library reading area, card
rooms, a billiards room, a health center to monitor residents' medical needs and
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. The
Company believes that such substantial common areas, which would often be
unaffordable in smaller communities, will provide the Company's prototype
communities with a competitive advantage over smaller communities. The Company
believes that these common areas will attract residents and promote continued
stable occupancy of its prototype communities. Unit sizes 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.
The Company anticipates that it will rent apartment units in its
prototype communities pursuant to annual leases on a strictly "private pay"
basis. The Company believes this "private pay" focus will allow it to increase
rental revenues as demographic pressure increases demand for adult living
communities and avoid potential financial difficulties it might encounter if it
were dependent on Medicare or other government reimbursement programs that may
suffer from health care reform, budget deficit reduction or other pending or
future government initiatives. The prototype community is targeted to the
"middle to upper-middle income" segment of the elderly population, which is the
broadest segment of the elderly population, and will allow the Company to
provide a high-quality level of service.
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. Although the licensing requirements and the expense
and difficulty of converting between existing independent-living units and
assisted-living units typically make it impractical to accomplish such
conversions, 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 this innovative feature distinguishes its
prototype community. 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.
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The Company's prototype also incorporates two interior courtyards, from
which the Company's "Grand Court"(R) name originates. These courtyards allow
residents to enjoy the outdoors while remaining in a secure environment. The
Company believes that this feature distinguishes its prototype community.
In summary, the Company believes that the size, design and target
markets of its prototype and the convertibility of its apartments to either
independent or assisted-living units will result in "state of the art"
communities that will provide an excellent vehicle for economic growth.
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 and anticipated 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. Communities with these characteristics are referred to as secondary
markets as opposed to primary markets, which are major urban centers, or
tertiary markets, which are smaller rural communities. The Company has found
that secondary markets generally have a receptive population of seniors who
desire and can afford the services offered in the Company's adult living
communities. The Company believes that it can obtain zoning and other necessary
approvals in secondary markets more quickly and easily than would be the case in
primary markets. 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. The
Company believes that high-quality, affordable employees are easier to attract
and retain in secondary markets than in primary markets.
Centralized Management. The adult living business is highly management
intensive. While the location of a community and its physical layout are
extremely important, another key to the success of an adult living community
lies in the ability to maximize its financial potential through sophisticated,
experienced management. Such success requires the establishment and supervision
of programs involving the numerous facets of an adult living community,
including menu planning, food and supply purchasing, meal preparation and
service, assistance with "activities of daily living," recreational activities,
social events, health care services, housekeeping, maintenance and security. The
Company's strategy emphasizes centralized management in order to achieve
operational efficiencies and ensure consistent quality of services. The Company
has established standardized policies and procedures governing, among other
things, social activities, maintenance and housekeeping, health care services,
and food services. An annual budget is established by the Company for each
community against which performance is tested each month.
Marketing. Marketing is critical to the rent up and continued high
occupancy of a community. The Company's marketing strategy focuses on enhancing
the reputation of the Company's communities and creating awareness of the
Company and its services among potential referral sources. The Company's
experience is that satisfied residents and their families are an important
source of referrals for the Company. In addition, the Company plans to use its
common community design and its "The Grand Court"(R) trademarked name to promote
national brand-name recognition. The Company has 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.
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Basic Service and Care Package. The Company provides three levels of
service at its adult-living communities:
Level I, Independent Living, includes three meals per day, weekly
housekeeping, activities program, 24-hour security and transportation for
shopping and medical appointments.
Level II, Catered Living, offers all of the amenities of Level I in
addition to all utilities, personal laundry and daily housekeeping.
Level III, Assisted Living, provides three meals per day, daily
housekeeping, 24-hour security, all utilities, medication management, activities
and nurse's aides to assist the residents with any ADLs which they might
require. 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.
Several of the Company's Syndicated communities are designed to meet the needs
of assisted living residents who suffer from the early stages of alzheimer's or
dementia.
The Company charges an average fee of $1,400 per month for Level I
services, $1,700 per month for Level II services, and $2,000 per month for Level
III services, but the fee levels vary from community to community. Residents at
the communities which offer services for early stages of Alzheimer's or dementia
pay an average of an additional $500 per month for such services. 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 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 manages 37 adult living communities containing
5,265 adult living apartment units and one nursing home containing 57 beds. One
of the Company's adult living communities contains 70 nursing home beds. The
following chart sets forth information regarding the communities managed by the
Company:
<TABLE>
<CAPTION>
Average
Number of Year Occupancy %
Community(1) State Units Acquired(2) for fiscal 1997(8)
- ---------------------------------- ------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
The Grand Court Mesa Arizona 174 1997 99%
The Grand Court Phoenix Arizona 136 1991 99%
The Grand Court Fort Myers Florida 184 1989 94%
The Grand Court Lakeland Florida 126 1996 73%
The Grand Court Lake Worth Florida 170 1992 85%
The Grand Court North Miami Florida 189 1995 68%
The Grand Court Pensacola Florida 60 1993 97%
The Grand Court I Pompano Florida 72 1994 94%
Beach(3)
The Grand Court II Pompano Florida 42 1994 73%(7)
Beach(3)
The Grand Court Tampa Florida 164 1997 99%
The Grand Court Tavares Florida 94 1995 98%
The Grand Court Winterhaven Florida 133 1997 92%
The Grand Court Belleville Illinois 76 1993 100%
</TABLE>
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<TABLE>
<CAPTION>
Average
Number of Year Occupancy %
Community(1) State Units Acquired(2) for fiscal 1997(8)
- ---------------------------------- ------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
The Grand Court II Kansas City Kansas 127 1994 99%
The Grand Court Overland Park Kansas 275 1997 100%(7)
The Grand Court Adrian Michigan 73 1998 100%
The Grand Court Farmington Michigan 164 1993 100%
Hills
The Grand Court Novi Michigan 114 1994 99%
The Grand Court Westland Michigan 153 1997 100%
The Grand Court I Kansas City Missouri 173 1989 100%
The Grand Court III Kansas Missouri 217 1989 80%(7)
City(4)
The Grand Court Las Vegas Nevada 152 1991 97%
The Grand Court Albuquerque New Mexico 140 1997 91%
The Grand Court Columbus Ohio 120 1994 97%
The Grand Court Dayton Ohio 185 1994 100%
The Grand Court Findlay Ohio 73 1992 89%
The Grand Court Springfield Ohio 77 1992 90%
The Grand Court I Chattanooga Tennessee 143(5) 1995 82%
The Grand Court II Chattanooga Tennessee 146 1995 100%
The Grand Court Memphis Tennessee 197 1992 96%
The Grand Court Morristown Tennessee 197 1996 65%(7)
The Grand Court Bryan Texas 180 1992 94%
The Grand Court Garland Texas 112 1997 84%(7)
The Grand Court Longview Texas 132 1990 96%
The Grand Court Lubbock Texas 139 1991 94%
The Grand Court I San Antonio Texas 198 1993 97%
The Grand Court II San Antonio Texas 57(6) 1995 86%
The Grand Court Weatherford Texas 60 1996 84%
The Grand Court Bristol Virginia 98 1995 100%
</TABLE>
- ------------------
(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 39 properties listed, but
only 37 Owning Partnerships. In addition,
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this chart does not include the three recently completed adult living
communities that have been developed by the Company in that such
communities are in the early stages of their initial lease-up period.
(2) Represents year in which the Company or an affiliate of the Company
acquired the community.
(3) These are adjacent properties and are counted as one adult living
community.
(4) A portion of the units at The Grand Court III Kansas City are currently
rented as residential apartment units.
(5) Grand Court I Chattanooga's unit count includes a 70-bed nursing wing.
(6) Grand Court II San Antonio is a 57-bed licensed nursing facility.
(7) Occupancy percentage includes 1-2 units occupied by staff.
(8) The average occupancy percentage of each individual community was
determined by adding the average occupancy percentages as of the end of
each month in which the individual community was operated by the Company
and dividing that number by the total number of months the community was
operated by the Company in fiscal 1997. The average monthly occupancy
percentage for each individual community was determined by dividing the
number of occupied units in the individual community as of the end of the
month by the total number of apartment units in the individual community.
All 37 Syndicated adult living communities and the nursing home are
managed by the Company in its capacity as property manager and, for all but one
of the related Owning Partnerships, as managing general partner. Because the
Company serves as both the managing general partner and the property manager, it
receives partnership administration fees and property management fees. As the
managing general partner of these partnerships, the Company generally has full
authority and power to act for the partnerships as if it were the sole general
partner. The Company has fiduciary responsibility for the management and
administration of these partnerships and, subject to certain matters requiring
the consent of the other partners such as a sale of the related property, may
generally, on behalf of the partnerships, borrow money, execute contracts,
employ persons and services, compromise and settle claims, determine and pay
distributions, prepare and distribute reports, and take such other actions which
are necessary or desirable with respect to matters affecting the partnerships or
individual partners.
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 conducts 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 nine regional administrators: three
responsible for nine Florida communities, and one community in Texas; one
responsible for three communities in Tennessee; one responsible for two
communities in Arizona, and one community in each of Nevada, and New Mexico; one
responsible for two communities in Kansas, two communities in Missouri, and
three communities in Michigan; one responsible for four communities in Ohio and
one community in Illinois and one community in Virginia; one responsible for one
community in Tennessee and six communities in Texas, including the nursing home
operated by the company. The Company also has a regional administrator and a
registered dietician who oversee the food division. Each regional administrator
is reported to by the manager of those communities he oversees.
Community. The management team at each community consists of an
administrator, who has overall responsibility for the operation of the
community, an activity director, a marketing director and, at certain larger
communities, one or two assistant administrators. Each community which offers
assisted-living services has a staff responsible for the assisted-living
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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. Based upon its experience
in operating adult living communities in both primary and secondary markets, the
Company believes that its secondary market focus will make it easier for the
Company to attract and retain high-quality, affordable staff.
The Company places emphasis on diet and nutrition, as well as preparing
attractively presented healthy meals which can be enjoyed by the residents. The
Company's in-house food service program is led by a regional administrator who
reviews all menus and recipes for each community. The menus and recipes are
reviewed and changed based on consultation with the food director and input from
the residents. The Company provides special meals for residents who require
special diets.
Employees. The Company emphasizes maximizing each employee's potential
through support and training. The Company's training program is conducted on
three levels. Approximately six times per year, corporate headquarters staff
conduct training sessions for the management staff in the areas of supervision
and management skills, and caring for the needs of an aging population. At the
regional level, regional staff train the community staff on issues such as
policies, procedures and systems, activities for the elderly, the administration
and provision of specific services, food service, maintenance, reporting systems
and other operational areas of the business. At the community level, the
administrators of each community conduct training sessions on at least a monthly
basis relating to various practical areas of care-giving at the community. These
monthly sessions cover, on an annual basis, all phases of the community's
operations, including special areas such as safety, fire and disaster
procedures, resident care, and policies and procedures.
Competition
The senior housing and health care industries are highly competitive
and the Company expects that both the independent-living business, and
assisted-living businesses in particular, will become more competitive in the
future. The Company will continue to face competition from numerous local,
regional and national providers of long-term care whose communities and services
are on either end of the senior care continuum. The Company will compete in
providing independent-living services with home health care providers and other
providers of independent-living services, primarily on the basis of quality and
cost of communities and services offered. The Company will compete in providing
assisted-living with other providers of assisted-living services, skilled
nursing communities and acute care hospitals primarily on the bases of cost,
quality of care, array of services provided and physician referrals. The Company
also will compete with companies providing home based health care, and even
family members, based on those factors as well as the reputation, geographic
location, physical appearance of communities and family preferences. In
addition, the Company expects that as the provision of long-term care receives
increased attention, competition from new market entrants, including, in
particular, companies focused on independent and assisted-living, will grow.
Some of the Company's competitors operate on a not-for-profit basis or as
charitable organizations, while others have, or may obtain, greater financial
resources than those of the Company. However, the Company anticipates that its
most significant competition will come from other adult living 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.
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Company History
In April, 1996, the Principal Stockholders reorganized their businesses
by consolidating them into the Company. Pursuant to the reorganization,
substantially all of the assets and liabilities of such businesses were
transferred to the Company in exchange for shares of the Company's Common Stock.
See "Certain Transactions". The primary predecessors of Grand Court Lifestyles,
Inc. are J&B Management Company, and Leisure Centers, Inc. 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 is located at the Company's offices in Fort Lee, New Jersey.
Prior to the formation of the Company in April, 1996, the Company's property
development and management operations were conducted through its affiliate,
Leisure Centers, Inc., located in Boca Raton, Florida. Leisure Centers, Inc. was
merged with and into the Company. 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, and management of multi-family properties. Senior
management, collectively, has over 80 years of experience in multi-family
housing, having had interests in 170 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, and
management of adult living communities building one of the largest operating
portfolios of adult living communities in the nation, encompassing the entire
spectrum of the long-term care industry, from independent-living to
assisted-living, with a limited involvement in nursing homes. Senior management,
collectively, has over 40 years of experience in the adult living field. The
Company is one of the largest operators of adult living properties in the United
States. The Company currently has ownership interests in and manages properties
in 12 states including 37 adult living communities containing 5,265 adult living
apartment units (including 70 skilled nursing beds) and one nursing home
containing 57 skilled nursing beds.
Government Regulation
Regulations applicable to the Company's operations vary among the types
of communities operated by the Company and from state to state.
Independent-living communities generally do not have any licensing requirements.
Assisted-living communities are subject to less regulation than other licensed
health care providers but more regulation than independent-living communities.
However, the Company anticipates that additional regulations and licensing
requirements will likely be imposed by the states and the federal government.
Currently, California, New Jersey, Ohio, Massachusetts, Texas and Florida
require licenses to provide the assisted-living services provided by the
Company. The licensing statutes typically establish physical plant
specifications, resident care policies and services, administration and staffing
requirements, financial requirements and emergency service procedures. The
licensing process can take from two months to one year. New Jersey requires
Certificates of Need for assisted-living communities. The Company's communities
also must comply with the requirements of the ADA and are subject to various
local building codes and other ordinances, including fire safety codes. While
the Company relies almost exclusively on private pay residents, the Company
operates a nursing home containing 57 beds and one adult living community
operated by the Company contains 70 nursing home beds in which some residents
rely on Medicare. As a provider of services under the Medicare program, the
Company is subject to Medicare regulations designed to limit fraud and abuse,
violations of which could result in civil and criminal penalties and exclusion
from participation in the Medicare program. Revenues derived from Medicare
comprise less than 1% of the revenues of the communities operated by the
Company. 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
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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.
Although the Company has not incurred any material costs for removal or
remediation of hazardous or toxic substances, there can be no assurance that
this will remain the case in the future.
Under the ADA, all places of public accommodation are required to meet
certain federal requirements related to access and use by disabled persons. A
number of additional federal, state and local laws exist which also may require
modifications to existing and planned properties to create access to the
properties by disabled persons. While the Company believes that its properties
are substantially in compliance with present requirements or are exempt
therefrom, if required changes involve a greater expenditure than anticipated or
must be made on a more accelerated basis than anticipated, additional costs
would be incurred by the Company. Further legislation may impose additional
burdens or restrictions with respect to access by disabled persons, the costs of
compliance with which could be substantial.
Employees
As of the date hereof, the Company employs approximately 1,600 persons,
including 38 in the Company's principal executive offices. 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 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 are 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 is alleging a breach
of the First Partnership's partnership agreement, negligent misrepresentation,
fraud, negligence, breach of guarantee and mail fraud. The plaintiff is seeking
(i) the return of his original investment ($100,000), (ii) market interest on
such investment for the period 1987-1997 and (iii) unspecified damages. The
Company believes the lawsuit is without merit and intends to vigorously contest
the case.
The Company is involved in various lawsuits and other matters arising
in the normal course of business, including employment-related claims. In the
opinion of management of the Company, although the outcomes of these claims and
suits are uncertain, in the aggregate they should not have a material adverse
effect on the Company's financial position or results of operations. The Company
business entails an inherent risk of liability. In recent years, participants in
the long-term care industry have become subject to an increasing number of
lawsuits alleging malpractice or related legal claims, many of which seek large
amounts and result in significant legal costs. The Company expects that from
time to time it may 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
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claims not covered by the Company's insurance coverage will not arise. A
successful claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect on the Company's
operating results and financial condition. Claims against the Company,
regardless of their merit or eventual outcome, may also have a material adverse
effect on the Company's ability to attract residents or expand its business and
would require management to devote time to matters unrelated to the operation of
the Company's business. In addition, the Company's insurance policies must be
renewed annually, and there can be no assurance that the Company will be able to
obtain liability insurance coverage in the future or, if available, that such
coverage will be on acceptable terms.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John Luciani(1) 65 Chairman of the Board and Chief Executive Officer
Bernard M. Rodin(2) 67 Chief Operating Officer, President and Director
John W. Luciani III 45 Executive Vice President and Director
Paul Jawin 42 General Counsel and Senior Vice President
Dorian Luciani 42 Senior Vice President - Acquisition and Construction
Deborah Luciani 41 Vice President - New Business Development and Acquisitions
Catherine V. Merlino 32 Chief Financial Officer and Vice President
Edward J. Glatz 55 Vice President - Construction
Keith Marlowe 35 Secretary
Walter Feldesman(1)(2) 80 Director
Leslie E. Goodman(1)(2) 53 Director
</TABLE>
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN LUCIANI, Chief Executive Officer and Chairman of the Board of
Directors, founded the earliest predecessor of the Company in 1969 and has been
engaged in a number of business activities and investments since 1952.
Commencing in 1960, he entered into the real estate development and construction
business, concentrating initially on the development, construction and sale of
residential high-rise apartment buildings and single-family homes and
subsequently on the acquisition and development of multi-family rental housing
complexes. Since 1986, he has concentrated on the acquisition, development and
financing of adult living communities for the elderly. Mr. Luciani founded the
earliest predecessor of the Company with Bernard M. Rodin in 1969. Mr. Luciani
was a general partner of three Protected Partnerships, but withdrew as a general
partner prior to their filing the respective Chapter 11 Petitions.
BERNARD M. RODIN, Chief Operating Officer, President and Director, has
been engaged, since the formation of the earliest predecessor of the Company in
1969, in the financing of property acquisitions by arranging for the sale of
partnership interests and in property management. This activity initially
focused on the Company's multi-family housing portfolio and, since 1986, on the
Company's adult living communities. Mr. Rodin has a bachelor of science degree
from the City University of New York. Mr. Rodin is a certified public accountant
and was actively engaged in the practice of public accounting prior to founding
the earliest predecessor of the Company with John Luciani in 1969. Mr. Rodin was
a general partner of three Protected Partnerships, but withdrew as a general
partner prior to their filing the respective Chapter 11 Petitions.
JOHN W. LUCIANI III, Executive Vice President and Director, a son of
John Luciani, joined the Company in 1975 and has since been actively involved in
the management and operation of the Company's property portfolios, initially
focusing on multi-family housing and later on the Company's adult-living
communities. Mr. Luciani graduated from Fairleigh Dickinson University with both
a bachelor of science and a master of business administration degree.
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<PAGE>
PAUL JAWIN, General Counsel and Senior Vice President, a son-in-law of
Bernard M. Rodin, joined the Company in May 1991. His activities primarily
involve the various legal and 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. Mr. Jawin graduated from
Ithaca College with a bachelor of science degree in history and earned a juris
doctor degree from Syracuse University School of Law.
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. Mr. Luciani graduated
from Fairleigh Dickinson University with a bachelor of science degree in
business.
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. Ms. Luciani graduated from Boston University
with a bachelor of science degree, a master of political science degree and a
master of economics degree.
CATHERINE V. MERLINO, Chief Financial Officer and Vice President,
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. Mrs. Merlino graduated
from Long Island University in May 1987 with a bachelor of science degree in
Accounting and became a certified public accountant in February 1992.
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.
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. His activities primarily involve the
various legal and financial aspects of the Company's business. Mr. Marlowe
graduated from the University of Virginia with a bachelor of science degree in
economics. Mr. Marlowe earned a juris doctor degree from University of
California Los Angeles School of Law and an LLM in Taxation from New York
University School of Law.
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. Mr. Feldesman is also special counsel on elderlaw to United Senior Health
Cooperative. He has authored an article entitled "Long-Term Care Insurance Helps
Preserve an Estate," and a recently published work entitled the Eldercare Primer
Series. Mr. Feldesman has also authored a recently published book entitled
"Dictionary of Eldercare Terminology". He has written another book
"Medicare-Medicaid-Medicap under the Balanced Budget Act of 1997" which is
expected to be published in February, 1998. Mr. Feldesman has a bachelor's
degree in economics from New York University. Mr. Feldesman earned an LLB from
Harvard Law School.
LESLIE E. GOODMAN, Director, has been the Chairman of CREOL Inc.,
Commercial Real Estate On-line, which provides information over the Internet to
real estate professionals, since January 1997. Until December 1996 Mr. Goodman
was the Area President for the North Jersey Region for First Union National Bank
and a Senior Executive Vice President of First Union Corporation. From September
1990 through January 1994, he served as President and Chief Executive Officer
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<PAGE>
of First Fidelity Bank, N.A., New Jersey. From January 1994 to December 1995,
Mr. Goodman served as a Senior Executive Vice President and a Director of First
Fidelity Bank, National Association until it was merged into First Union. From
January 1990 until December 1995, he also served as Senior Executive Vice
President, member of the Office of the Chairman and a Director of First Fidelity
Bancorporation. Mr. Goodman served as the Chairman of the New Jersey Bankers
Association from March 1995 to March 1996. He is a member of the Board of
Directors and Chairman of the Audit Committee of Wawa Inc. and a member of the
Board of Directors of Tear Drop Golf Company, Inc.
Director Compensation
The Company will pay each Director who is not an employee of the
Company $1,000 per Board meeting attended and $500 per Committee meeting
attended. All Directors are reimbursed by the Company for their out-of-pocket
expenses incurred in connection with attendance at meetings of, and other
activities related to service on, the Board of Directors or any Board Committee.
Audit Committee
The Board of Directors established an Audit Committee in June 1996. The
Audit Committee is currently composed of Messrs. Rodin, Feldesman and Goodman.
The Audit Committee's duties include reviewing internal financial information,
monitoring cash flow, budget variances and credit arrangements, reviewing the
audit program of the Company, reviewing with the Company's independent
accountants the results of all audits upon their completion, annually selecting
and recommending independent accountants, overseeing the quarterly unaudited
reporting process and taking such other action as may be necessary to assure the
adequacy and integrity of all financial information distributed by the Company.
Compensation Committee
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee is currently composed of Messrs. John Luciani,
Feldesman and Goodman. The Compensation Committee recommends compensation levels
of senior management and works with senior management on benefit and
compensation programs for Company employees.
Executive Compensation
The following table shows, as to the Chief Executive Officer and each
of the four other most highly compensated executive officers information
concerning compensation accrued for services to the Company in all capacities
during fiscal 1996 and fiscal 1997, respectively.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Other All
Annual Other
Name and Principal Position Year Salary Bonus($) Compensation($) Compensation($)
- ------------------------------------------------ ---------- ----------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
John Luciani, Chairman of the Board and Chief fiscal
Executive Officer(1)............................. 1996 $500,000 -- -- $497,000
fiscal
1997 $600,000 -- -- --
Bernard M. Rodin, Chief Operating Officer, fiscal
President and Director(1)........................ 1996 $500,000 -- -- $497,000
fiscal
1997 $600,000 -- -- --
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Other All
Annual Other
Name and Principal Position Year Salary Bonus($) Compensation($) Compensation($)
- ------------------------------------------------ ---------- ----------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
John W. Luciani, III, Executive Vice President and fiscal
Director......................................... 1996 $350,000 -- -- --
fiscal
1997 $353,846 -- -- --
fiscal
Dorian Luciani, Senior Vice President............ 1996 $350,000 -- -- --
fiscal
1997 $353,846 -- -- --
Paul Jawin, General Counsel and Senior Vice fiscal
President........................................ 1996 $325,000 -- -- --
fiscal
1997 $344,327 -- -- --
</TABLE>
- ------------------------------
(1) Messrs. Luciani and Rodin received dividends and distributions from the
Company's predecessors but did not receive salaries. As of April 1,
1996 a salary for each of Messrs. Luciani and Rodin was established at
the rate of $600,000 per year. In fiscal 1996 such officers also
received $397,000 each as a dividend and $100,000 each for the period
from February 1, 1996 until April 1, 1996, which was in the form of a
dividend but which is classified as officers' compensation for
financial statement purposes.
Compensation Committee Interlocks and Insider Participation
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee currently consists of Messrs. John Luciani,
Feldesman and Goodman. None of the executive officers of the Company currently
serves on the compensation committee of another entity or on any other committee
of the board of directors of another entity performing similar functions. For a
description of transactions between the Company and members of the Compensation
Committee or their affiliates, see "Certain Transactions."
Stock Plans
1996 Stock Option and Performance Award Plan
The Company has adopted the 1996 Stock Option and Performance Award
Plan (the "Plan"), which authorizes the grant to officers, key employees and
directors of the Company and any parent or subsidiary of the Company of
incentive or non-qualified stock options, stock appreciation rights, performance
shares, restricted shares and performance units. Under the Plan, directors who
are not employees of the Company may not be granted incentive stock options. The
Company plans to reserve 2,500,000 shares of Common Stock for issuance pursuant
to the Plan. Shares issued pursuant to the Plan will be subject to the Transfer
Restrictions. 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
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<PAGE>
the outstanding Common Stock or stock of any subsidiary or parent of the
Company, in which case the exercise price of any incentive stock option may not
be less than 110% of such fair market value. No option may be exercisable more
than ten years after the date of grant and, in the case of an incentive stock
option granted to an eligible employee owning more than 10% of the outstanding
Common Stock or stock of any subsidiary or parent of the Company, no more than
five years from its date of grant. Incentive stock options are not transferable,
except upon the death of the optionee. In general, upon termination of
employment of an optionee (other than due to death or disability), all options
granted to such person which are not exercisable on the date of such termination
immediately expire, and any options that are so exercisable will expire three
months following termination of employment in the case of incentive stock
options, but not until the date the options otherwise would expire in the case
of non-qualified stock options. However, all options will be forfeited
immediately upon an optionee's termination of employment for good cause and upon
an optionee's voluntary termination of employment without the consent of the
Board of Directors.
Upon an optionee's death or termination of employment due to
disability, all options will become 100% vested and will be exercisable (i) in
the case of death, by the estate or other beneficiary of the optionee at any
time prior to the date the option otherwise would expire and (ii) in the case of
the disability of the optionee, by the optionee within one year of the date of
such termination of employment in the case of incentive stock options, or at any
time prior to the date the option otherwise would expire in the case of
non-qualified stock options.
At the time each grant of restricted shares or performance shares or
units or stock appreciation rights is made, the Board of Directors will
determine the duration of the performance or restriction period, if any, the
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 fiscal 1996, the Principal Stockholders
reorganized their businesses by consolidating them into the Company. The
Principal 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 Principal 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
Principal Stockholders. Six Sub-chapter S corporations which were wholly-owned
by the Principal Stockholders were merged into the Company. Pursuant to the
mergers the shares of the six merged companies were converted into an aggregate
of 10,121,430 shares of the Company's Common Stock. After the reorganization was
complete, the Principal 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
Principal 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 Principal Stockholders of $943,000, $850,000
and $397,000 in fiscal 1994, 1995 and 1996, respectively, exclusive of amounts
reflected as officers' compensation.
Messrs. Luciani and Rodin, the Chairman of the Board and President of
the Company, respectively, and entities controlled by them serve as general
partners (with interests ranging between 1% and 2%) of partnerships directly and
indirectly owning Multi-Family Properties and on account of such general partner
status have personal liability for recourse partnership obligations and own
small equity ownership interests in the partnerships. The Company holds (i)
notes, aggregating $107.1 million, net of deferred income, as of October 31,
1997, that are secured by the limited partnership interests in such partnerships
and (ii) other partnership receivables aggregating $54.8 million from such
partnerships at October 31, 1997. Messrs. Luciani and Rodin have provided
personal guarantees in certain circumstances to obtain mortgage financing for
certain adult living communities operated by the Company and for certain of the
Company's Investor Note Debt and Unsecured Debt, and the obligations thereunder
may continue. The aggregate amount of such debt personally guaranteed by each of
Messrs. Luciani and Rodin is approximately $47.2 million. In addition, Messrs.
Luciani and Rodin and certain employees will devote a limited portion of their
time to overseeing the third-party managers of Multi-Family Properties and one
adult living community in which the Company has financial interests in that it
holds the related Multi-Family Notes, but in which Messrs. Luciani and Rodin
have equity interests and the Company does not.
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<PAGE>
Subsequent to the reorganization, the Principal Stockholders and one of
their affiliates transferred the Assigned Interests to the Investing
Partnerships that own interests in the Protected Partnerships. The Assigned
Interests were owned personally by the Principal Stockholders and their
affiliate and provide additional assets at the Investing Partnership level and,
as a result, additional security for the related Multi-Family Notes. Two
Investing Partnerships related to these Protected Partnerships have agreed to
transfer the respective Assigned Interests back to the Principal Stockholders
and their affiliate if the applicable Protected Partnership emerges from its
bankruptcy proceeding with possession of its real property and improvements
which it owned at the time of its Chapter 11 Petition. In that the Principal
Stockholders transferred the Assigned Interests in July 1996, the Company
recorded a $21.3 million capital contribution in fiscal 1996. The bankruptcy
petitions and risk of loss faced by the Protected Partnerships resulted in the
Company recording a non-cash loss for fiscal 1996 in the amount of $18.4 million
(representing the recorded value of these Multi-Family Notes, net of deferred
income and net of any previously established reserves) due to the deemed full
impairment of the Multi-Family Notes. Each of the Principal Stockholders was a
general partner of three of the Protected Partnerships, but withdrew as a
general partner prior to such partnerships' filings of the respective Chapter 11
Petitions.
During Fiscal 1996 and the nine months ended October 31,1997 the
Company paid to Francine Rodin, the wife of Bernard M. Rodin, the Company's
Chief Operating Officer, President and a Director, $154,875 and $79,000,
respectively, as fees for introducing to the Company broker/dealers that have
assisted the Company in its Syndications of partnership interests and in placing
other securities offered by the Company. Mrs. Rodin will receive a fee with
respect to any future sales through such broker/dealers of such Syndicated
partnership interests and other securities offered by the Company, excluding
shares of Common Stock offered hereby. During Fiscal 1996, Mrs. Rodin received
consulting fees of $49,435 in connection with coordinating the Company's
marketing efforts and travel arrangements. Mrs. Rodin has been an employee of
the Company for the nine months ended October 31, 1997 and performs similar
services.
Walter Feldesman, a Director of the Company, is Of Counsel to the law
firm of Baer Marks & Upham LLP, which acts as counsel to the Company from time
to time. In addition, Mr. Feldesman is a director of Sterling National Bank &
Trust Co. which has entered into a revolving credit agreement with the Company
which permits the Company to borrow up to $8,000,000, of which $4,898,023 was
outstanding at October 31, 1997.
Michele R. Jawin, the daughter of Mr. Rodin and wife of Paul Jawin, the
Company's General Counsel and a Senior Vice President, 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,
1997, before and after giving effect to the Offering, regarding the beneficial
ownership of the Company's Common Stock by (i) each executive officer and
director of the Company, (ii) each stockholder known by the Company to
beneficially own 5% or more of such Common Stock, (iii) each Principal
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.
<TABLE>
<CAPTION>
Before Offering After Offering
----------------------- ------------------------
Shares
Beneficial Owner Number % Offered(1) Number %(1)
- ---------------- ------ ----- ---------- ------ ----
<S> <C> <C> <C> <C> <C>
John Luciani....................... 7,500,000 50 0 7,500,000 41.67
Bernard M. Rodin................... 7,500,000 50 0 7,500,000 41.67
All directors and officers
as a group...................... 15,000,000 100 0 15,000,000 83.34
</TABLE>
- ----------------
(1) Excluding any additional shares of Common Stock sold pursuant to the
Over-allotment Option. Each of the Principal Stockholders has granted to the
Underwriters an Over-allotment Option exercisable within 45 days after the
date of this Prospectus to purchase up to 225,000 shares of Common Stock.
Assuming the full exercise of the Over-allotment Option, the Principal
Stockholders would beneficially own collectively 14,550,000 shares or 80.83%
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 Common Stock sold pursuant to the
Over-allotment Option or the exercise of the Representative's Warrants or any
Common Stock issued pursuant to the Plan), there will be outstanding: (a)
18,000,000 shares of Common Stock, consisting of (i) 15,000,000 shares currently
owned by the Principal Stockholders and not offered hereby; and (ii) 3,000,000
shares to be sold by the Company hereby.
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.
Section 203 of Delaware Law
Section 203 of the Delaware Law prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the corporation; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date, the business combination is approved by the board of directors
and by the affirmative vote of at least 66-2/3%
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<PAGE>
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.
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 helddbrs. These provisions may
have a depressive effect on the market pric market price of the Common 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 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
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<PAGE>
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 is First Union
National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for Common
Stock of the Company. No prediction can be made as to the effect, if any, that
market sales of Common Stock or the availability of Common Stock for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common 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
18,000,000 shares of Common Stock. Of these shares, 3,000,000 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 15,000,000 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 exchanged 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 one-year period (as computed
under Rule 144) is entitled to sell within any three-month period a number of
such shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (approximately 180,000 shares after giving effect to the
Offering) and (ii) the average weekly trading volume in the Company's Common
Stock during the four calendar weeks immediately preceding such sale. Sales
under Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed an
affiliate of the Company at any time during the 90 days immediately preceding a
sale, and who has beneficially owned Restricted Shares for at least a two-year
period (as computed under Rule 144), would be entitled to sell such shares under
Rule 144(k) without regard to the volume limitation and other conditions
described above.
The Company, the Principal Stockholders and the Company's officers and
directors 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 dispose of
any interest therein under Rule 144 or otherwise for a period of 13 months
following the date of this Prospectus, and may not do so for an additional six
month period without the prior written consent of the Representative (the
"Transfer Restrictions"). However, the issuances of shares of Common Stock,
whether directly or upon the exercise or conversion of exchangeable or
convertible securities (including options granted under the Plan), and the
transfers of shares of Common Stock by the Principal Stockholders to effectuate
estate planning, are allowed as long as the recipients of shares of Common Stock
in any such transactions agree to be bound by the Transfer Restrictions.
Notwithstanding the foregoing, the Transfer Restrictions do not apply to the
issuance of the Company's securities in connection with mergers or acquisitions,
the sale
77
<PAGE>
of Common Stock in connection with the exercise of the Over-allotment Option or
shares of Common Stock, or securities convertible or exchangeable for shares of
Common Stock, which are publically offered by the Company or which are privately
offered if the original offering price or conversion or exchange price are
specifically determined at the time of the closing of the private offering. The
Company intends to register approximately 2,500,000 shares of Common Stock
reserved for issuance pursuant to the Plan and has issued the Representative's
Warrants which entitles the holders to purchase up to 300,000 shares of Common
Stock. The Representative's Warrants are issuable for a period of four years
commencing one year from the date of this Prospectus. The sale or issuance, or
the potential for sale or issuance, of Common Stock during or after such
13-month or 19-month periods could have an adverse impact on the market price of
the Common Stock offered hereby. See "Underwriting".
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Royce
Investment Group, Inc. 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 Company has agreed to sell to the Underwriters on a firm
commitment basis, the number of shares of Common Stock set forth opposite their
names:
Number of Shares
Underwriters of Common Stock
Royce Investment Group, Inc.
Total .. . . . . . . . . . . . . . . . . . . . . . 3,000,000
=========
The Underwriters are committed to purchase all the shares of Common
Stock offered hereby, if any of such Shares 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 Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less concessions of a minimum of $ per share of
Common Stock. Such dealers may allow a concession of a minimum of $ per share of
Common 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 Principal 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 has also agreed to pay to the
Representative a non-accountable expense allowance and a consulting fee equal to
3% and 1%, respectively, of the gross proceeds derived from the sale of the
Common Stock offered hereby, of which $50,000 has been paid to date. The
Principal Stockholders will pay the non-accountable expense allowance and
consulting fee with respect to shares sold by them if the Over-allotment Option
is exercised. The Company will pay all other expenses relating to the Offering
and the Over-allotment Option, if exercised. The Company has also paid $50,000
to an underwriter whose participation in the Offering has been terminated.
The Principal Stockholders have granted to the Underwriters the
Over-allotment Option, exercisable during the 45-day period from the date of
this Prospectus, to purchase up to an additional 450,000 shares of Common Stock
at the initial public offering price per share offered hereby, less underwriting
discounts and commissions set forth on the cover page of this Prospectus. Such
option may be exercised only for the purpose of covering over-allotments, if
any, incurred in the sale of the Common Stock 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 Common Stock
78
<PAGE>
proportionate to its initial commitment. The Company will not receive any of the
proceeds from such sale of shares of Common Stock by the Principal Stockholders.
The Company, the Principal Stockholders and the Company's officers and
directors 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 dispose of
any interest therein under Rule 144 or otherwise for a period of 13 months
following the date of this Prospectus, and may not do so for an additional six
month period without the prior written consent of the Representative (the
"Transfer Restrictions"). However, the issuances of shares of Common Stock,
whether directly or upon the exercise or conversion of exchangeable or
convertible securities (including options granted under the Plan), and the
transfers of shares of Common Stock by the Principal Stockholders to effectuate
estate planning, are allowed as long as the recipients of shares of Common Stock
in any such transactions agree to be bound by the Transfer Restrictions.
Notwithstanding the foregoing, the Transfer Restrictions do not apply to the
issuance of the Company's securities in connection with mergers or acquisitions,
the sale of Common Stock in connection with the exercise of the Over-allotment
Option or shares of Common Stock, or securities convertible or exchangeable for
shares of Common Stock, which are publically offered by the Company or which are
privately offered if the original offering price or conversion or exchange price
are specifically determined at the time of the closing of the private offering.
An appropriate legend shall be marked on the face of certificates representing
all such securities.
In connection with this Offering, the Company has agreed to sell to the
Representative, at a price of $.0001 per warrant, the Representative's Warrants
to purchase from the Company up to 300,000 shares of Common 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) 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 other underwriters or
to officers, directors and employees of the Representative or of such other
underwriters (subject to the rules of the National Association of Securities
Dealers, Inc.). 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. The Representative's Warrants
contain anti-dilution provisions providing for the adjustment of the exercise
price and the number of shares of Common Stock 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 with respect to the Representative's
Warrants and the securities issuable upon exercise thereof (which include (i)
one demand registration at the expense of the Company, and one demand
registration at the holder's expense, exercisable during the five-year period
commencing on the closing of this Offering, and (ii) piggyback registration at
the expense of the Company exercisable during the seven-year period commencing
on the closing of this Offering).
The Company will also enter into a five-year non-exclusive agreement
with the Representative which provides the Representative with payment of a
finder's fee if the Company enters into any transaction with a third party
introduced to the Company by the Representative. The finder's fee for
transactions involving the acquisition of other companies shall equal five
percent of the first $1,000,000 of value of such transaction, four percent of
the second $1,000,000 of value of such transaction, and three percent of the
remaining value of such transaction. The finder's fee for any other transactions
will be as mutually agreed to by the Company and the Representative.
<PAGE>
The Representative has been granted the right to select a designee
either to be a member of the Company's board of directors, or to be an observer
at all meetings of the Company's board of directors, at the Representative's
option.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the public offering prices of the Common Stock was
determined based upon negotiations between the Company and the Representative
and does not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in
determining the price include, but were not limited to, 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 Common Stock can be resold at its offering price, if at all.
Purchasers of the Common Stock will be exposed to a substantial risk of a
decline in the market prices of the Common Stock after the Offering, if a market
develops.
The Underwriters may engage in transactions that stabilize, maintain,
or otherwise affect the price of 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
79
<PAGE>
permit the Representative to reclaim from an Underwriter or selling group member
a selling concession accruing to such Underwriter or selling group member 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 "Available Information."
LEGAL MATTERS
The validity of the issuance of the Common Stock 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. Certain legal
matters relating to the sale of the Common Stock will be passed upon for the
Underwriters by Greenberg Traurig Hoffman Lipoff Rosen & Quentel New York, New
York.
EXPERTS
The consolidated financial statements of the Company as of January 31,
1996 and 1997 and for each of the three years in the period ended January 31,
1997, included in this Prospectus and Registration Statement have been audited
by Deloitte & Touche LLP, independent accountants, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington D.C., a Registration Statement under the Securities
Act with respect to the Securities offered hereby. This prospectus, filed as a
part of the Registration Statement, does not contain certain information set
forth in or annexed as exhibits to the Registration Statement. For further
information regarding the Company and the Common Stock 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.
80
<PAGE>
GRAND COURT LIFESTYLES, INC. and SUBSIDIARIES
----------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 1996 and 1997 and (unaudited) October 31, 1997 (as restated) F-3
Consolidated Statements of Operations for the Years Ended January 31, 1995, 1996
and 1997, (unaudited) the Three Months Ended October 31, 1996 and 1997 (as restated) and
(unaudited) the Nine Months Ended October 31, 1996 and 1997 (as restated) F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended January 31,
1995, 1996 and 1997 and (unaudited) the Nine Months Ended October 31, 1997 (as restated) F-5
Consolidated Statements of Cash Flows for the Years Ended January 31, 1995, 1996 and 1997
and (unaudited) the Nine Months ended October 31, 1996 and 1997 (as restated). F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Grand Court Lifestyles, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 13, the accompanying consolidated financial statements have
been restated.
DELOITTE & TOUCHE LLP
New York, New York
April 28, 1997, except for Note 13,
as to which the date is
February 27, 1998
F-2
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (as restated, see Note 13)
(In Thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, (as restated October 31
-- see Noter 13) (unaudited)
------------------------------ ------------
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents ............................................ $ 17,961 $ 14,111 $ 9,679
Notes and receivables - net .......................................... 224,204 222,399 238,128
Investments in partnerships .......................................... 2,607 3,056 3,700
Other assets - net ................................................... 15,251 22,095 36,567
--------- --------- ---------
Total assets ......................................................... $ 260,023 $ 261,661 $ 288,074
========= ========= =========
Liabilities and Stockholders' Equity
Loans and accrued interest payable ................................... $ 140,094 $ 142,628 $ 157,140
Construction loan payable ............................................ -- 2,750 16,755
Notes and commissions payable ........................................ 1,684 1,716 4,012
Other liabilities .................................................... 4,018 4,393 6,685
Deferred income ...................................................... 79,442 78,171 76,528
--------- --------- ---------
Total liabilities .................................................... 225,238 229,658 261,120
--------- --------- ---------
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.001 par value -
authorized, 15,000,000 shares; none issued
and outstanding ...................................................... -- -- --
Common Stock, $.01 par value - authorized,
40,000,000 shares; issued and outstanding,
15,000,000 shares .................................................... 150 150 150
Paid-in capital 34,635 54,321 54,321
Accumulated deficit -- (22,468) (27,517)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY ........................................... 34,785 32,003 26,954
--------- --------- ---------
Total liabilities and stockholders' equity ........................... $ 260,023 $ 261,661 $ 288,074
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(as restated for periods ended October 31, 1997, see Note 13)
(In Thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
Years ended October 31, October 31,
January 31, (unaudited) (unaudited)
------------------------------------- --------------------- ----------------------
1995 1996 1997 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales ........................... $ 22,532 $ 31,973 $ 36,021 $ 6,897 $ 10,483 $ 21,524 $ 31,401
Syndication fee income .......... 5,587 8,603 7,690 1,494 1,886 4,976 6,529
Deferred income earned .......... 4,399 9,971 5,037 236 3,785 708 4,246
Interest income ................. 9,503 12,689 13,773 3,157 2,467 11,043 8,081
Property management fees from
related parties ............. 4,351 4,057 2,093 755 2,073 1,604 3,250
Equity in earnings from
partnerships .................. 276 356 423 136 125 250 357
Other income .................... -- 1,013 -- -- -- -- 283
-------- -------- -------- -------- -------- -------- --------
46,648 68,662 65,037 12,675 20,819 40,105 54,147
-------- -------- -------- -------- -------- -------- --------
Cost and Expenses:
Cost of sales ................... 21,743 27,688 34,019 8,688 10,879 19,468 25,947
Selling ......................... 6,002 7,664 7,176 1,114 1,803 4,603 6,186
Interest ........................ 13,610 15,808 16,394 4,215 5,203 12,017 13,991
General and administrative ...... 6,450 7,871 7,796 1,998 2,352 5,687 6,415
Loss on impairment of
notes and receivables ......... -- -- 18,442 1,589 -- 18,442 --
Write-off of registration costs . -- -- -- -- -- -- 3,107
Officers' compensation .......... 1,200 1,200 1,200 300 300 900 900
Depreciation and
amortization .................. 2,290 2,620 3,331 809 1,054 2,539 2,650
-------- -------- -------- -------- -------- -------- --------
51,295 62,851 88,358 18,713 21,591 63,656 59,196
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes .................... (4,647) 5,811 (23,321) (6,038) (772) (23,551) (5,049)
Provision (benefit) for
income taxes .................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................. (4,647) 5,811 (23,321) (6,038) (772) (23,551) (5,049)
Pro forma income tax
provision (benefit) ............. (1,859) 2,324 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Pro forma net income (loss) ....... $ (2,788) $ 3,487 $(23,321) $ (6,038) $ (772) $(23,551) $ (5,049)
======== ======== ======== ======== ======== ======== ========
Pro forma earnings (loss)
per common share ................ $ (0.19) $ 0.23 $ (1.55) $ (0.40) $ (0.05) $ (1.57) $ (0.34)
======== ======== ======== ======== ======== ======== ========
Pro forma weighted average
common shares used .............. 15,000 15,000 15,000 15,000 15,000 15,000 15,000
======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1995, 1996 AND 1997 AND (UNAUDITED)
NINE MONTHS ENDED OCTOBER 31, 1997 (AS RESTATED, SEE NOTE 13)
(In Thousands)
- --------------------------------------------------------------------------------
Stockholders' equity, February 1, 1994 (as restated)...... $37,207
Net loss ............................................... (4,647)
Dividends............................................... (1,886)
---------
Stockholders' equity, January 31, 1995 (as restated)...... 30,674
Net income.............................................. 5,811
Dividends............................................... (1,700)
---------
Stockholders' equity, January 31, 1996 (as restated)...... 34,785
Net loss ............................................... (23,321)
Capital Contribution ................................... 21,333
Dividends .............................................. (794)
---------
Stockholders' equity, January 31, 1997 (as restated)....... 32,003
Net loss (unaudited) (as restated)....................... (5,049)
---------
Stockholders' equity, October 31, 1997 (unaudited)
(as restated)............................................. $26,954
=========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(as restated for the nine months ended October 31, 1997, see Note 13)
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months ended
Years ended January 31, October 31, (unaudited)
-------------------------------- -----------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash flows provided (used) from operating activities:
Net income (loss) .......................................... $ (4,647) $ 5,811 $(23,321) $(23,551) $ (5,049)
-------- -------- -------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ............................ 2,290 2,620 3,331 2,539 2,650
Loss on impairment of notes and
receivables .............................................. -- -- 18,442 18,442 --
Deferred income earned ................................... (4,399) (9,971) (5,037) (708) (4,246)
Write-off of registration costs .......................... -- -- -- -- 3,107
Adjustment for changes in assets and liabilities:
(Increase) decrease in accrued interest
on notes and receivables ............................... 174 (2,560) 715 (762) (2,981)
(Increase) decrease in notes and
receivables ............................................. 7,223 (1,162) 3,981 3,012 (12,748)
Increase (decrease) in commissions
payable ................................................. (501) (244) 211 574 427
Increase (decrease) in other liabilities ................. (506) 2,018 375 346 2,292
Increase (decrease) in deferred income ................... 1,513 4,458 3,766 (70) 2,603
-------- -------- -------- -------- --------
5,794 (4,841) 25,784 23,373 (8,896)
-------- -------- -------- -------- --------
Net cash provided (used) by operating
activities ........................................... 1,147 970 2,463 (178) (13,945)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Increase in investments .................................... (591) (567) (449) (36) (644)
Increase in Construction in Progress ....................... -- -- (6,742) (5,653) (13,121)
Net cash used by investing
activities ............................................ (591) (567) (7,191) (5,689) (13,765)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Payments on loans payable .................................. (31,311) (39,326) (55,340) (39,450) (21,778)
Increase in loans .......................................... 44,014 52,065 57,874 38,204 36,290
Increase in construction loan payable ...................... -- -- 2,750 -- 14,005
Increase in other assets ................................... (7,180) (2,790) (3,433) (1,070) (7,108)
Payments of notes payable .................................. (2,578) (1,641) (179) (124) (131)
Proceeds from notes payable ................................ -- -- -- -- 2,000
Dividends .................................................. (1,886) (1,700) (794) (794) --
-------- -------- -------- -------- --------
Net cash provided (used) in financing
activities ............................................ 1,059 6,608 878 (3,234) 23,278
-------- -------- -------- -------- --------
</TABLE>
F-6
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents ................................... 1,615 7,011 (3,850) (9,101) (4,432)
Cash and cash equivalents, beginning of
period ........................................ 9,335 10,950 17,961 17,961 14,111
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period ........ $ 10,950 $ 17,961 $ 14,111 $ 8,860 $ 9,679
======== ======== ======== ======== ========
Supplemental information:
Interest paid ................................. $ 12,914 $ 16,922 $ 16,739 $ 11,587 $ 9,015
======== ======== ======== ======== ========
Non cash capital contribution ................. -- -- $ 21,333 $ 21,333 --
======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1995, 1996, and 1997
(In Thousands)
- --------------------------------------------------------------------------------
(Information as of and for the nine months ended October 31, 1997 is unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Grand Court Lifestyles, Inc. (the "Company") was formed pursuant to the
merger of various Sub-chapter S corporations which were wholly-owned by
certain principal stockholders of the Company (the "Principal
Stockholders") and the transfer of certain assets by and assumption of
certain liabilities of (i) a partnership that was wholly-owned by the
Principal Stockholders and (ii) the Principal Stockholders
individually. In exchange for the transfer of such stock, assets and
liabilities, the Principal 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 Principal Stockholders, were historically reported on a combined
basis.
The Company (i) filed a Restated Certificate of Incorporation on March
13, 1997 that provides for, among other things, the authorization of
40,000,000 shares of Common Stock and 15,000,000 shares of Preferred
Stock, (ii) on March 13, 1997 effected an approximate 1,626.19-for-1
stock split of the issued and outstanding Common Stock (all shares have
been restated for prior periods) and (iii) adopted a Stock Option Plan
reserving for issuance up to 2,500,000 shares of Common Stock pursuant
to stock options and other stock awards. No stock options have been
granted to date.
Line of Business - The Company, a fully integrated provider of adult
living accommodations and services, acquires, 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 acquire existing adult living
communities. As a result of the Company's activities, limited
partnerships ("Investing Partnerships") are formed whereby the Company
retains a 1% to 1.5% general partnership interest. Investing
Partnerships generally own a 98.5% to 99% interest in partnerships that
own adult living communities ("Owning Partnerships"). The Company also
arranges for the mortgage financing of the adult living communities and
is involved in the development and management of adult living
communities. Another source of income is interest income on notes
receivable.
Unaudited Interim Financial Statements - 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 for the full year. The
results of operations for an interim period may not give a true
indication of results for the full 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
estimated 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.
F-8
<PAGE>
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 are entitled to receive for a period
not to exceed five years distributions equal to between 11% and 12% of
their then paid-in scheduled 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 of such adult living Owning Partnership and
(ii) any part of such 11% and 12% 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) (collectively, "Management Contract Obligations"). The amount
of deferred income for each property is calculated 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 Management Contract Obligations
period (the "Initial Cash Flow"). The Initial Cash Flow is then
compared to the Management Contract Obligations for the property for
each remaining year of the five-year period. If the Initial Cash Flow
exceeds the Management Contract Obligations 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 Management Contract Obligations for said following
fiscal year. If the Initial Cash Flow is less than the Management
Contract Obligations 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 estimated maximum reasonably possible
exposure to loss as discussed above. As this process is performed for
each property on a quarterly basis, changes in a property's actual cash
flow will result in changes to the assumed Initial Cash Flow utilized
in this process and will result in increases or decreases to the
deferred income liability for an individual property. Any deferred
income liability created in the year the interest in the Owning
Partnership is sold reduces revenues relating to the sale. The payment
of the Management Contract Obligations, however, will generally not
result in the recognition of expense unless the property's actual cash
flow for the year is less than the expected Initial Cash Flow for that
year, as adjusted, and as a result thereof, the amount paid by the
Company in respect of the Management Contract Obligations is greater
than the amount assumed in establishing the deferred income liability.
Such expense amounted to $229,000, $282,000, $2.5 million and $4.6
million for the years ended January 31, 1995, 1996, 1997 and the nine
months ended October 31, 1997, respectively, and such expense is
included as a component of cost of sales. 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 Management
Contract Obligations, incentive management fees. The Company recognized
such incentive management fees in the amount of $3.9 million, $3.3
million, $1.2 million and $2.6 million for the years ended January 31,
1995, 1996 and 1997 and the nine months ended October 31, 1997,
respectively.
The Company accounted for the sales of interests in Owning Partnerships
which own multi-family properties ("Multi-Family Owning Partnerships")
under the installment method. Under the installment method the gross
profit is determined at the time of sale. The revenue recorded in any
given year would equal the cash collections multiplied by the gross
profit percentage. At the time of sale, the Company deferred all future
income to be recognized on these transactions until cash is received.
Losses on these projects were recognized immediately upon sale.
Allowance on Notes Receivable - In the event that the facts and
circumstances indicate that the collectibility of a note may be
impaired, an evaluation of recoverability is performed. If an
evaluation is performed, the Company compares the recorded value of the
note and other partnership receivables, if any, to the value of the
underlying property less any encumbrances to determine if an allowance
is required for impairment. A significant portion of the interest
income on multi-family notes is recognized as cash is collected.
Accounting Estimates - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make significant estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements
include those of the Company and its subsidiaries. The effects of all
significant intercompany transactions have been eliminated.
F-9
<PAGE>
Deferred Loan Costs - Costs incurred in connection with obtaining
long-term financing have been deferred and are amortized over the term
of the financing.
Construction in Progress - Costs incurred in connection with the
construction and development of adult living communities the Company
intends to build are capitalized. Such costs include the capitalization
of interest during the construction period. If a project is
discontinued or capitalized costs are deemed not recoverable, the
applicable capitalized project costs are expensed.
Investments - The Company accounts for its interests in adult living
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. The
unamortized portion of such difference is $1,382, $2,044 and $2,609 as
of January 31, 1996 and 1997 and October 31, 1997, respectively.
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 Principal Stockholders who were the sole
shareholders and partners of those entities.
Earnings per Share - The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" in February 1997. This pronouncement establishes standards for
computing and presenting earnings per share and is effective for the
Company's Fiscal 1997 year-end financial statements. The Company's
management has determined that this standard will not have a
significant impact on the Company's computation or presentation of net
income per common share.
New Accounting Pronouncements - The Financial Accounting Standards
Board has recently issued several new accounting pronouncements.
Statement No. 129, "Disclosure of Information about Capital Structure"
establishes standards for disclosing information about an entity's
capital structure, and is effective for financial statements for
periods ending after December 15, 1997. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display
of comprehensive income and its components, and is effective for fiscal
years beginning after December 15, 1997. 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, and is effective for financial statements for periods
beginning after December 15, 1997. The Company believes that its future
adoption of these standards will not have a material effect on the
Company's financial position or results of operations.
Reclassification - Certain amounts in prior years have been
reclassified to conform with current period presentation.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is unable to determine the fair value of its notes and
receivables as such instruments do not have a ready market. Other
financial instruments are believed to be stated at approximately their
fair value.
F-10
<PAGE>
4. NOTES AND RECEIVABLES
Notes and other receivables are from related parties and consist of the
following:
<TABLE>
<CAPTION>
January 31, October 31,
--------------------------------- ---------------
1996 1997 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Notes receivable-- multi-family (a)(f).................. $174,025 $174,164 $173,911
Notes and accrued interest receivable
-- adult living (b).................................... 3,228 3,906 14,735
Other partnership receivables (c)(f).................... 52,763 53,622 56,029
Mortgages (d)........................................... 7,188 -- --
Accrued interest receivable............................. -- 816 3,562
-------- -------- --------
237,204 232,508 248,237
Less allowance for uncollectible receivables (e)........ 13,000 10,109 10,109
-------- -------- --------
$224,204 $222,399 $238,128
======== ======== ========
</TABLE>
At January 31, 1996 and 1997 and at October 31, 1997 the carrying value
of impaired notes receivable, net of related deferred income, were
approximately $48,900, $34,742 and $35,116, respectively. Interest
income on impaired notes is recognized on the cash basis. Such income
recognized was $2,272, $1,926 and $743 for the years ended January 31,
1996 and 1997 and for the nine months ended October 31, 1997,
respectively.
(a) The Company has notes receivable from the Investing
Partnerships which were formed to acquire controlling
interests in Owning Partnerships which own multi-family
properties. The notes have maturity dates ranging from ten to
fifteen years from the date of the acquisition of the
respective partnership interests. At October 31, 1997, 51 of
the 169 notes (approximate face value $29,600) have reached
their final maturity dates and these final maturity dates have
been extended by the Company. The underlying property relating
to one extended Multi- Family Note was refinanced in Fiscal
1996 and such refinancing generated an approximate $800
payment to the Company under such Multi-Family Note. In
addition, the Company anticipates that two more multi-family
properties relating to two other extended Multi-Family Notes
will be refinanced in the first quarter of Fiscal 1998. There
can be no assurance that such refinancings will actually
close. 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 to extend maturities of other multi-family
notes. Interest income on all of the Multi-Family Notes
amounted to $6,764, $6,949, and $4,827 for the years ended
January 31, 1996 and 1997, and the nine months ended October
31, 1997, respectively.
(b) The Company has notes receivable from the Investing
Partnerships which were formed to acquire controlling
interests in Owning Partnerships which own adult living
communities. Such notes generally have interest rates ranging
from 11% to 13.875% and are due in installments over five
years from the date of acquisition of the respective
partnership interests. The notes represent senior indebtedness
of the related Investing Partnerships, and are collateralized
by the respective interests in the Owning Partnerships.
Principal and interest payments on each note are also
collateralized by the investor notes payable to the Investing
Partnerships to which the investors are admitted. Limited
Partners are allowed to prepay their capital contributions.
These prepayments of capital contributions do not result in
the prepayment of the related purchase notes held by the
Company. Instead, such amounts are loaned to the Company 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
F-11
<PAGE>
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.
(c) Other partnership receivables substantially represent
reimbursable expenses and advances made to the multi-family
partnerships. These amounts do not bear interest and have no
specific repayment date. It is the Company's intention to
collect these notes from the excess cash flows distributed by
the related multi-family properties and the proceeds in the
event of a sale or refinancing.
(d) The mortgages bore interest at rates ranging from 8% to 9%.
The mortgages were generally collateralized by a mortgage lien
on the related adult living communities. As of January 31,
1997 all mortgage receivables were paid in full.
(e) Allowance of Uncollectible Receivables:
<TABLE>
<CAPTION>
Balance at Charged to Costs Deductions to Balance at End of
Beginning of Period and Expenses Allowance Period
------------------- ------------ --------- ------------------
<S> <C> <C> <C> <C>
Year Ended January 31, 1996
Allowance for notes receivable $13,000 -- -- $13,000
Year Ended January 31, 1997
Allowance for notes receivable $13,000 18,442 21,333 $10,109
Nine Months Ended October 31, 1997
Allowance for notes receivable $10,109 -- -- $10,109
</TABLE>
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 lost 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, did 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 Protected
Partnerships could not reach an agreement with the new
mortgage holders and the new mortgage holders began to
threaten and institute foreclosure proceedings. The Principal
Stockholders and one of their affiliates transferred the
partnership interests they owned personally in various
partnerships that own multi-family properties (the "Assigned
Interests") to the Investing Partnerships that owned interests
in the Protected Partnerships in July 1996. Seven of the
Protected Partnerships filed Chapter 11 Petitions in August
1996, two of the Protected Partnerships filed Chapter 11
Petitions in February 1997, and one of the Protected
Partnerships did not file a Chapter 11 Petition and allowed
the holder of the mortgage to foreclose on its property due to
the unlikelihood of confirming a plan of reorganization. The
Company established appropriate reserves during these time
periods to reflect the varying extent of impairment of these
Multi-Family Notes in view of the state of facts at such time.
In that the Principal Stockholders transferred the Assigned
Interests in July 1996, the Company recorded a $21.3 million
capital contribution in Fiscal 1996. The bankruptcy petitions
and risk of loss faced by the Protected Partnerships resulted
in the Company recording a non-cash loss of $18.4 million in
the year ending January 31, 1997 (representing the recorded
value of the notes receivable relating to the Protected
Partnerships, net of deferred income and net of any previously
established reserves) due to the deemed full impairment of
these notes receivable. Seven of the Chapter 11 petitions
resulted in the respective Protected Partnerships losing their
properties through foreclosure or voluntary conveyances of
their properties. The remaining two Protected Partnerships
successfully emerged from their bankruptcy proceedings in
January, 1998 by paying off their mortgages at a discount with
the proceeds of new mortgage financings, resulting in these
properties having current, fully performing mortgages. The two
Investing Partnerships related to these Protected Partnerships
have transferred the respective Assigned Interests back to the
Principal Stockholders and their affiliate. The Company
neither owns nor manages these properties, nor is the general
partner of these Owning Partnerships, but, rather, holds the
related Multi-Family Notes as receivables. The Company,
therefore, has no liability in connection with these mortgage
defaults or bankruptcy proceedings.
F-12
<PAGE>
Fifteen of the Multi-Family Owning Partnerships remain in
default on their respective mortgages. These Multi-Family
Owning Partnerships have been negotiating with the respective
mortgage lenders and, in some cases, have obtained workout
agreements pursuant to which the lenders generally agree
during the term of the agreement not to take any action
regarding the mortgage default and to accept reduced debt
service payments for a period of time, with the goal of
increasing property cash flow to enable the property to fully
service its mortgage. As of October 31, 1997, the recorded
value, net of deferred income, of the MultiFamily Notes and
"Other Partnership Receivables" held by the Company relating
to these fifteen Multi-Family Owning Partnerships was $31.9
million. The Company has established reserves of $10.1 million
to address the possiblity that these notes and receivables may
not be collected in full.
(f) The Multi-Family properties were typically built or acquired
with the assistance of programs administered by HUD that
provide mortgage insurance, favorable financing terms and/or
rental assistance payments to the owners. As a condition to
the receipt of assistance under these and other HUD programs,
the properties must comply with various HUD requirements
including limiting rents on these properties to amounts
approved by HUD. Various proposals are pending before Congress
proposing reorganization of HUD and a restructuring of certain
of its housing assistance programs. It is too early in the
legislative process to predict which, if any, changes might be
implemented. Further, there can be no assurance that changes
in federal subsidies will not be more restrictive than those
currently proposed or that other changes in policy will not
occur. Any such changes could have an adverse effect on the
Company's ability to collect its receivables from the
partnerships owning multi-family properties.
5. OTHER ASSETS
Other assets are comprised as follows:
<TABLE>
<CAPTION>
January 31, October 31,
---------------------------- -------------
1996 1997 1997
------------- ---------- -------------
<S> <C> <C> <C>
Deferred loan costs (a)................................... $ 7,994 $ 7,452 $ 8,311
Investment in cooperative apartment building (b).......... 1,854 1,782 1,782
Unsold subscription units (c)............................. 595 1,176 1,530
Deferred registration costs (d)........................... 833 2,357 194
Construction in progress (e).............................. -- 6,742 19,863
Other assets.............................................. 3,975 2,586 4,887
------- ------- -------
$15,251 $22,095 $36,567
======= ======= =======
</TABLE>
<PAGE>
(a) Financing costs of $3,578, $2,588 and $3,330 were deferred during the
years ended January 31, 1996 and 1997 and the nine months ended October
31, 1997, respectively. These costs are being amortized over the term
of the related debt using the straight-line method over periods ranging
from one to ten years.
(b) The Company owns shares in a cooperative apartment building and owns
interests in a second mortgage collateralized by such cooperative
apartment building.
(c) The Company has deferred $595, $1,176 and $1,530 of remaining costs
associated with the financing of the acquisition of adult living
communities by arranging for the sale of partnership interests, which
were substantially sold at January 31, 1996 and 1997 and October 31,
1997, respectively. Upon completion of these transactions such costs
will be charged to cost of sales.
(d) The Company has capitalized costs relating to the initial public
offering. Upon the closing of the public offering, these costs will be
charged against additional paid-in capital. However, if it is unlikely
that an offering will occur within a period of time in which the costs
could be of benefit, they will be written off. The Company has expensed
approximately $3.1 million of registration costs which were incurred
prior to April 30, 1997 due to a previous postponement of the initial
public offering of equity securities by the Company.
F-13
<PAGE>
(e) 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, all capitalized project costs are
expensed. Such interest capitalized for year ended January 31, 1997 and
the nine months ended October 31, 1997 was $1.2 million and $1.6
million, respectively.
6. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
<TABLE>
<CAPTION>
January 31, October 31,
----------------------------------- -------------
1996 1997 1997
------------- ---------- -------------
<S> <C> <C> <C>
Banks (including mortgages) (a) (b) (c)..... $ 41,361 $ 32,044 $ 40,123
Other, principally debentures (d)........... 98,733 110,584 117,017
-------- -------- --------
$140,094 $142,628 $157,140
======== ======== ========
</TABLE>
(a) The bank loans bear interest per annum at the banks' prime rate plus 1%
to 3%. The bank loans generally have terms of at least one year, but in
the event a particular bank elects not to renew or extend the credit,
the entire unpaid balance is converted to a term loan which is payable
in four to five years. Generally the bank loans are collateralized by
the Company's entitlement to the assigned limited partner investor
notes which serve as collateral for the respective purchase notes. The
prime interest rate at January 31, 1996 and 1997 and October 31, 1997
was 8.5%, 8.25% and 8.5%, respectively.
(b) In addition to the aforementioned bank loans, the Company had three
additional loans from banks. Each of the loans were collateralized by
an assignment of the first mortgage loans payable to the Company. Two
of the loans bore interest at rates varying from 8% to 9% per annum and
were scheduled to mature on various dates through 1996. In March 1996,
the partnerships that own these properties refinanced two of these
mortgages, which eliminated them as obligations of the Company. The
third loan bore interest at the rate of 9.5% per annum and was
scheduled to mature on March 31, 1997. The remaining loan has been paid
in full as of January 31, 1997.
(c) The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in the case of certain of
such obligations, certain Investing Partnerships, Owning Partnerships
or affiliates of the Company. The Company has recently renegotiated
certain of its most restrictive covenants. Certain obligations contain
provisions requiring the Company to maintain a net worth of, in the
most restrictive case, $26,250,000, 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 6 to 1.
(d) Debentures are collateralized by various purchase notes and investor
notes related to multi-family property financing. All loans mature in
1997 through 2004 and bear interest rates of 11% to 15% per annum.
Future annual maturities, excluding interest, over the next five years
and thereafter, are as follows:
Year Ending
January 31
- ------------
1998............................................. $21,372
1999............................................. 33,602
2000............................................. 20,872
2001............................................. 21,110
2002............................................. 25,612
Thereafter....................................... 19,221
-------
141,789
Accrued interest................................. 839
-------
$142,628
=======
F-14
<PAGE>
7. CONSTRUCTION LOAN PAYABLE
During the nine month period ended October 31, 1997, pursuant to the
Company's development program, first mortgage loans were obtained to
finance approximately 80% of the costs of developing three new adult
living communities. The interest rate on two of the loans equals the 30
day LIBOR plus 2 3/4% per annum. The third loan bears interest at the
rate of the prime rate plus 1.5% per annum. These loans mature between
November, 1999 and June, 2000. As of October 31, 1997, total funding
under such first mortgage loans amounted to $7,505.
Pursuant to the Company's development program, two limited partnerships
have issued limited partnership interests for aggregate capital
contributions of $9,250, 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. Such second
mortgage loans bear interest at the rate of 13.125% per annum. These
second mortgage loans mature between November 2001 and March 2002.
8. OTHER LIABILITIES
Other liabilities include unearned income of $963, $1,888 and $3,196
was recorded for the amount of unsubscribed partnership interests in
adult living communities financed during the year ended January 31,
1996 and 1997 and October 31, 1997, respectively. Upon full
subscription these amounts will be recognized as income.
9. DEFERRED INCOME
Deferred income is comprised of:
<TABLE>
<CAPTION>
January 31, October 31,
---------------------------- -------------
1996 1997 1997
------------- ---------- -------------
<S> <C> <C> <C>
Multi-family................................. $ 68,447 $ 67,453 $ 66,763
Adult living(a).............................. 10,995 10,718 9,765
-------- -------- --------
$ 79,442 $ 78,171 $ 76,528
======== ======== ========
</TABLE>
a. The aggregate amount of Management Contract Obligations
relating solely to returns to limited partners for the
remaining portion of fiscal 1997 and for each of the fiscal
years 1998 through 2002 based on existing management contracts
is $3.9 million, $15.4 million, $17.4 million, $16.4 million,
$11.2 million and $2.4 million, respectively. Such amounts of
Management Contract Obligations are calculated based upon
paid-in scheduled capital contributions of limited partners as
of October 31, 1997 with respect to fiscal 1997 and remaining
scheduled capital contributions with respect to fiscal years
1998 through 2002. 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 the cash flow the related
properties will generate, which will reduce such obligations.
<PAGE>
10. INCOME TAXES
The Company became a taxable entity as of April 1, 1996, therefore the
prior years tax provisions (benefit) is presented on a pro forma basis
at an effective tax rate of approximately 40%. The Company has
increased the valuation allowance from $3,214 to $4,540, because it was
more likely than not that such deferred tax assets in excess of
deferred tax liabilities would be realizable in future years. Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amount used for income taxes purposes. The
tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
January 31,
-----------------------------
Deferred tax assets: 1996 1997
------- -------
Notes and receivables...................... $ 8,920 $ 8,904
Accrued expenses and other liabilities..... 1,257 89
Investment in partnerships................. 89 1,337
Net operating loss carryforward............ -- 1,339
------ ------
Total gross deferred tax assets............ 10,266 11,669
F-15
<PAGE>
3,214 4,540
----- -----
Less valuation allowance..........................
Deferred tax assets net of valuation allowance.... 7,052 7,129
----- -----
Deferred tax liabilities:
Deferred income................................. 4,560 4,272
Other assets.................................... 2,492 2,857
----- -----
Total gross deferred tax liabilities.............. 7,052 7,129
----- -----
Net deferred tax assets (liabilities)............. $ -- $ --
===== =====
The net operating loss carry forward as of January 31, 1997 was $8,777.
Such loss carryforward expires January 31, 2012.
11. 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.
The litigation of February 16, 1995 in which the Company was a
defendant, due to the alleged actions of a sales representative of a
broker/dealer unaffiliated with the Company, has been settled for an
immaterial amount. The plaintiffs in such suit had not alleged that the
Company, or its officers, directors or employees engaged in any
improper practices or made any misrepresentations.
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 are 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
is alleging a breach of the First Partnership's partnership agreement,
negligent misrepresentation, fraud, negligence, breach of guarantee and
mail fraud. The plaintiff is seeking (i) the return of his original
investment ($100,000), (ii) market interest on such investment for the
period 1987-1997 and (iii) unspecified damages. The Company believes
the lawsuit is without merit and intends to vigorously contest the
case. It is anticipated that the outcome of the lawsuit will not have a
material effect on the Financial Statements.
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 is a general partner of all but one of the Adult Living
Owning Partnerships and the general partner of 32 of 41 adult living
Investing Partnerships. The mortgage financing of the Syndicated adult
living communities and other Syndicated properties 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 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, the Company is liable as a general partner for
approximately $36.7 million in principal amount of mortgage debt
relating to ten adult living communities and the one nursing home
managed by the Company as of October 31, 1997.
<PAGE>
Pursuant to the Company's development program, on September 18, 1996
the Company entered into a master development agreement with Capstone
for 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 $20,208 has been funded as of October 31, 1997. The
interest rate during the construction period is 1% above the prime
rate. Pursuant to the terms of the development agreement, the Company
was responsible for identifying up to four proposed adult living
community sites and submitting a plan which includes plans,
specifications, drawings, details and pro forma budgets necessary for
the acquisition of such site, and the construction, and operation of an
assisted and independent living community. Upon the acquisition of a
site by Capstone, the Company was required to enter into an agreement
relating specifically to the development
F-16
<PAGE>
of such site. The dates of the four site specific development
agreements are December 5, 1996, January 7, 1997, January 28, 1997 and
January 29, 1997. Pursuant to each site specific agreement, the Company
(i) agreed to develop and construct the community for an agreed upon
cost, (ii) was required to obtain or execute a construction contract
for such community, (iii) commence construction and (iv) complete
construction within 15 months after the commencement of construction.
The Company is in compliance with its responsibilities under the master
development agreement and the four site specific agreements.
Upon the completion of construction of each adult living community, and
upon the satisfaction of certain other conditions, the Company will be
the lessee under long-term lease arrangements with Capstone which
provide financing for development of four of the newly developed adult
living communities. The initial term of each lease, which begins upon
the completion of a facility and meeting of other criteria, is 15 years
with three five-year extension options. Under the terms of each lease,
the Company has the option to acquire the community after operating the
community for four years. The option price is equal to the sum of 100%
of the cost incurred to develop the property and an additional 20% of
such cost (which declines by 2 percentage points per year but in no
event declines below 10%). The initial lease rate is 350 basis points
in excess of the ten-year Treasury Bill yield (but in no event less
than 9.75% per annum). The lease rate has an annual upward adjustment
equal to 3% of the previous year's rent. The four leases have
cross-default provisions. Each lease is a triple net lease, as the
Company is responsible for all costs, including but not limited to
maintenance, repair, insurance, taxes, utilities, and compliance with
legal and regulatory requirements. If a community is damaged or
destroyed, the Company is required to restore the community to
substantially the same condition it was in immediately before such
damage or destruction, or acquire the facility for the option price
described above.
12. RELATED PARTY TRANSACTIONS
The Company has transactions with related parties that are
unconsolidated affiliates of the Company. The Company provides
management, accounting and bookkeeping services to such affiliates. The
Company receives a monthly fee in return for such management services
rendered on behalf of its affiliates for each of their adult living
communities.
In addition, the Company has amounts due from unconsolidated affiliates
of $248, $262 and $1.2 million as of January 31, 1996 and 1997, and
October 31, 1997, 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 notes receivable, aggregating $107.1
million net of deferred income, at October 31, 1997 that were
collateralized by the equity interests in such partnerships. These
individuals have provided personal guarantees in certain circumstances
to obtain mortgage financing for certain adult living properties
operated by the Company and for certain of the Company's Investor Note
Debt, and the obligations thereunder may continue. In addition, such
officers and certain employees will devote a portion of their time to
overseeing the third-party managers of multi-family properties and one
adult living community in which the Company has financial interests in
that it holds the related Multi-Family Notes, but in which such
officers have equity interests and the Company does not. These
activities, ownership interests and general partner interests create
actual or potential conflicts of interest on the part of these
officers.
The Company is the managing general partner for 36 of the 37 Owning
Partnerships which own the 37 adult living communities and one nursing
home managed by the Company. The Company also is the general partner
for 32 of the 41 adult living Investing Partnerships that own equity
interests in these 37 Owning Partnerships. In addition, the Company was
the managing agent for all of the 37 adult living communities and one
nursing home in the Company's portfolio. The Company has arranged for
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 and one nursing home.
During Fiscal 1996 and the nine months ended October 31, 1997, the
Company paid to Francine Rodin, the wife of Bernard M. Rodin, the
Company's Chief Operating Officer, President and a Director, $154 and
$79, respectively, as fees for introducing to the Company
broker/dealers that have assisted the Company in its Syndications of
partnership interests and in placing other securities offered by the
Company. Mrs. Rodin will receive a fee with respect to any future sales
through such broker/dealers of such Syndicated partnership interests
and other securities offered by the Company, excluding shares of Common
Stock offered hereby. During Fiscal 1996, Mrs. Rodin received
consulting fees of $49 in connection with coordinating the Company's
marketing efforts and travel arrangements. Mrs. Rodin has been an
employee of the Company for the nine months ended October 31, 1997 and
performs similar services.
F-17
<PAGE>
13. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's audited fiscal 1996
consolidated financial statements, and unaudited consolidated financial
statements for the three and nine month periods ended October 31, 1997,
the Company determined that (1) $468 in payments made by the Company on
behalf of an affiliated entity, prior to fiscal 1993, which were
incorrectly recorded as expenses of the Company instead of as
receivables from the affiliated entity as they were incurred, and which
were discovered and recorded by the Company as other income and
receivables in three and nine month periods ended October 31, 1997,
should have been recorded as a receivable via a prior period
adjustment, and (2) deferred registration costs associated with a
fiscal 1997 aborted initial public offering of equity securities by the
Company should have been written off in the Company's unaudited
consolidated financial statements as of the date that the offering was
aborted. As a result, the Company's financial statements have been
restated to record the above transactions in the appropriate periods.
A summary of the significant effects of the restatement is as follows:
As previously
reported As restated
------------- -----------
As of January 31, 1996:
Notes and receivables - net .................... $223,736 $224,204
Paid-in capital ................................ 34,167 34,635
As of January 31, 1997:
Notes and receivables - net .................... 221,931 222,399
Paid-in capital ................................ 53,853 54,321
As of October 31, 1997:
Other asset - net .............................. 39,306 36,567
Paid-in capital ................................ 53,853 54,321
Accumulated Deficit ............................ 24,310 27,517
For the three months ended October 31, 1997:
Other income ................................... 468 --
Net loss ....................................... 304 772
Loss per common share .......................... 0.04 0.05
For the nine months ended October 31, 1997:
Other income ................................... 751 283
General and Administrative ..................... 6,783 6,415
Write off of registration costs ................ -- 3,107
Net loss ....................................... 1,842 5,049
Loss per common share .......................... 0.12 0.34
F-18
<PAGE>
================================================================================
Until , 1998 (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 obliga tion of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allot ments or
subscriptions.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUMMARY......................................................... 1
RISK FACTORS............................................................... 13
USE OF PROCEEDS............................................................ 28
DIVIDEND POLICY............................................................ 28
CAPITALIZATION............................................................. 29
DILUTION................................................................... 30
SELECTED CONSOLIDATED FINANCIAL
DATA................................................................. 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 33
BUSINESS................................................................... 51
MANAGEMENT................................................................. 67
CERTAIN TRANSACTIONS....................................................... 71
PRINCIPAL AND SELLING STOCKHOLDERS......................................... 73
DESCRIPTION OF CAPITAL STOCK............................................... 74
SHARES ELIGIBLE FOR FUTURE SALE............................................ 76
UNDERWRITING............................................................... 77
LEGAL MATTERS.............................................................. 79
EXPERTS.................................................................... 79
AVAILABLE INFORMATION...................................................... 79
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................................................... F-1
------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any rep resentations other than those contained in this
Prospec tus, and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company or any of the
Principal 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.
================================================================================
<PAGE>
================================================================================
GRAND COURT
LIFESTYLE, INC.
3,000,000 Shares of
Common Stock
-----------------------
PROSPECTUS
-----------------------
ROYCE INVESTMENT
GROUP, INC.
, 1998
================================================================================
<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 Common Stock being
registered. All expenses will be borne by the Company, except that the Principal
Stockholders will pay a non-accountable expense allowance equal to 3%, and a
consulting fee equal to 1%, of the proceeds from their sale of shares pursuant
to the Over-allotment Option, if exercised.
Amount
------
Securities and Exchange Commission
registration fee................................... $ 33,405
Nasdaq National Market listing fee................... 50,000
Accounting fees and expenses......................... 300,000 *
Legal fees and expenses.............................. 450,000 *
Printing and engraving expenses...................... 100,000 *
Non-accountable expense allowance.................... 900,000
Consulting fee....................................... 300,000
Blue Sky fees and expenses........................... 21,000 *
Transfer agent and registrar fees
and expenses...................................... 3,000 *
Miscellaneous........................................ 12,595 *
-------------
Total.......................................... $2,170,000.00
=============
- ------------------------------
* estimated
Item 15. Recent Sales of Unregistered Securities
Since January 31, 1994, the Company issued Debentures in four
series, bonds in two series and notes in five series, with interest rates
ranging from 11% to 13.125%, and maturity dates from 1997 to 2004 in an
aggregate principal amount of $77,297,002. Each series was issued in reliance on
exemptions from the registration requirements under the Securities Act of 1933,
as amended (the "1933 Act") under Sections 3(b) and 4(2) of such act and
Regulation D promulgated thereunder to accredited investors and up to 35
non-accredited investors. In connection with such issuances, the Company paid
commissions to qualified broker dealers.
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 are entitled to receive distributions
during each of the first five years equal to between 11% and 12% per annum of
their paid-in scheduled capital contributions. Pursuant to the management
contracts with the partnerships which own such communities, the Company is
required to pay such Owning Partnerships, and the Owning Partnerships distribute
to the Investing Partnerships for distribution to limited partners, amounts
sufficient to fund any part of such return not paid from cash flow from the
related property. Since January 31, 1994, there were 23 such limited partnership
offerings for an aggregate of $221,325,000. 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.
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.
II-1
<PAGE>
In connection with the reorganization of the Company's
businesses, the Company issued 15,000,000 shares of Common Stock to Messrs.
Luciani and Rodin in exchange for assets having an aggregate value of
$33,273,000. This offering was issued in reliance on exemptions from the
registration requirements under the 1933 Act under Section 4(2) of such act.
In connection with the Offering contemplated by this
Registration Statement, as additional compensation to the Representative, the
Company intends to issue warrants to the Representative to purchase from the
Company up to 300,000 shares of Common Stock at a price equal to 120% of the per
share price to the public of the Common Stock, 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.
Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 -- Form of Underwriting Agreement.
1.2 -- Form of 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.
*2.1(f) -- Sixth Amendment dated as of April 1, 1996 to
Consolidation Agreement dated as of April 1, 1996 among
John Luciani, Bernard M. Rodin, J&B Management Company and
the Company.
*2.2(a) -- Merger Agreement dated as of April 1, 1996 between
Leisure Centers, Inc. and the Company.
*2.2(b) -- Merger Agreement dated as of April 1, 1996 between
Leisure Centers Development, Inc. and the
Company.
*2.2(c) -- Merger Agreement dated as of April 1, 1996 between J&B
Management Corp. and the Company.
*2.2(d) -- Merger Agreement dated as of April 1, 1996 between
Wilmart Development Corp. and the Company.
*2.2(e) -- Merger Agreement dated as of April 1, 1996 between
Sulgrave Realty Corporation and the Company.
*2.2(f) -- Merger Agreement dated as of April 1, 1996 between Riv
Development Inc. and the Company.
* 3.1 -- Restated Certificate of Incorporation of the Company.
* 3.2 -- By-Laws of the Company.
* 5(a) -- Opinion of Reid & Priest LLP.
<PAGE>
*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.
II-2
<PAGE>
*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.
*10.4(k) -- Form of 12% Debenture due June 30, 2004 - Series 11.
*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.
*10.5(m) -- Bank Agreement dated July 25, 1997 between the Bank of New
York and the Company with respect to 12% Debentures,
Series 11.
*10.6(a) -- Form of Short-term Step-up Bond due March 15, 2001 -
Series
*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.
*10.9(b) -- Second Amendment to Assumption Agreement among
Sterling National Bank, formerly known as
Sterling National Bank & Trust Company, 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.
*10.10(c)-- Form of 13.125% Retirement Financing Notes - V, due June
30, 2003. *10.10(d)-- Form of 13.125% Retirement
Financing Notes - VI, due April 15, 2001.
*10.10(e)-- Form of 13.125% Retirement Financing Notes - VII, due
October 15, 2002.
II-3
<PAGE>
*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.
*10.11(c) -- Bank Agreement dated as of May 14, 1997 between
the Bank of New York and the Company with respect to
13.125% Retirement Financing Notes - V.
*10.11(d) -- Bank Agreement dated as of November 6, 1997 between the
Bank of New York and the Company with respect to 13.125%
Retirement Financing Notes - VI.
*10.11(e) -- Bank Agreement dated as of November 20, 1997 between
Bank of New York and the Company with respect to 13.125%
Retirement Financing Notes - VII.
*21 -- List of Subsidiaries of the Company.
*23.1 -- Consent of Reid & Priest LLP (included in Exhibit 5(a)
hereto).
23.2 -- Consent of Deloitte & Touche LLP
*24 -- Power of Attorney is contained on the signature page of
this Registration Statement.
*27.1 -- Financial Data Schedules for the periods ended January 31,
1996 and 1997 and October 31, 1997.
- ---------------
* Previously filed in Registration Statement No. 333-05955.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this post-effective amendment and this amendment to
the registration statement each 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, 1998.
GRAND COURT LIFESTYLES, Inc.
\s\ Catherine V. Merlino
------------------------------------------
Catherine V. Merlino
Chief Financial Officer and Vice President
Pursuant to the requirements of the Securities Act of 1933, this
post-effective amendment and this amendment to the registration statement each
has been signed by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------- ----------------------------- ----------------
<S> <C> <C>
\s\John Luciani* Chairman of the Board March 10, 1998
-------------------------------- of Directors and
John Luciani Chief Executive Officer
(Principal Executive
Officer)
\s\Bernard M. Rodin* President and Chief Oper- March 10, 1998
-------------------------------- ating Officer and Director
Bernard M. Rodin (Principal Executive Offi-
cer)
\s\John W. Luciani, III* Executive Vice President March 10, 1998
------------------------------- and Director
John W. Luciani, III
\s\Catherine V. Merlino Chief Financial Officer March 10, 1998
------------------------------- and Vice President
Catherine V. Merlino (Principal Financial Offi-
cer and Principal
Accounting Officer)
\s\Walter Feldesman* Director March 10, 1998
-------------------------------
Walter Feldesman
Director March 10, 1998
\s\Leslie E. Goodman*
-------------------------------
Leslie E. Goodman
By:* \s\Catherine V. Merlino
--------------------------
Catherine V. Merlino
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
(a) Exhibits
1.1 -- Form of Underwriting Agreement.
1.2 -- Form of 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.
*2.1(f) -- Sixth Amendment dated as of April 1, 1996 to
Consolidation Agreement dated as of April 1, 1996 among
John Luciani, Bernard M. Rodin, J&B Management Company and
the Company.
*2.2(a) -- Merger Agreement dated as of April 1, 1996 between
Leisure Centers, Inc. and the Company.
*2.2(b) -- Merger Agreement dated as of April 1, 1996 between
Leisure Centers Development, Inc. and the
Company.
*2.2(c) -- Merger Agreement dated as of April 1, 1996 between J&B
Management Corp. and the Company.
*2.2(d) -- Merger Agreement dated as of April 1, 1996 between
Wilmart Development Corp. and the Company.
*2.2(e) -- Merger Agreement dated as of April 1, 1996 between
Sulgrave Realty Corporation and the Company.
*2.2(f) -- Merger Agreement dated as of April 1, 1996 between Riv
Development Inc. and the Company.
* 3.1 -- Restated Certificate of Incorporation of the Company.
* 3.2 -- By-Laws of the Company.
* 5(a) -- Opinion of Reid & Priest LLP.
*10.1 -- 1996 Stock Option and Performance Award Plan.
*10.2(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.
<PAGE>
Exhibit No. Description Page
*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.
*10.4(k) -- Form of 12% Debenture due June 30, 2004 - Series 11.
*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.
*10.5(m) -- Bank Agreement dated July 25, 1997 between the Bank of New
York and the Company with respect to 12% Debentures,
Series 11.
*10.6(a) -- Form of Short-term Step-up Bond due March 15, 2001 -
Series
*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.
*10.9(b) -- Second Amendment to Assumption Agreement among
Sterling National Bank, formerly known as
Sterling National Bank & Trust Company, 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.
*10.10(c)-- Form of 13.125% Retirement Financing Notes - V, due June
30, 2003. *10.10(d)-- Form of 13.125% Retirement
Financing Notes - VI, due April 15, 2001.
*10.10(e)-- Form of 13.125% Retirement Financing Notes - VII, due
October 15, 2002.
<PAGE>
Exhibit No. Description Page
*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.
*10.11(c) -- Bank Agreement dated as of May 14, 1997 between
the Bank of New York and the Company with respect to
13.125% Retirement Financing Notes - V.
*10.11(d) -- Bank Agreement dated as of November 6, 1997 between the
Bank of New York and the Company with respect to 13.125%
Retirement Financing Notes - VI.
*10.11(e) -- Bank Agreement dated as of November 20, 1997 between
Bank of New York and the Company with respect to 13.125%
Retirement Financing Notes - VII.
*21 -- List of Subsidiaries of the Company.
*23.1 -- Consent of Reid & Priest LLP (included in Exhibit 5(a)
hereto).
23.2 -- Consent of Deloitte & Touche LLP
*24 -- Power of Attorney is contained on the signature page of
this Registration Statement.
*27.1 -- Financial Data Schedules for the periods ended January 31,
1996 and 1997 and October 31, 1997.
- ---------------
* Previously filed in Registration Statement No. 333-05955.
<PAGE>
GRAND COURT LIFESTYLES, INC.
3,000,000 Shares of Common Stock
UNDERWRITING AGREEMENT
New York, New York
_______, 1998
Royce Investment Group, Inc.
199 Crossways Park Drive
Woodbury, New York 11797
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 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
confirms its agreement with the Underwriters with respect to the sale by the
Company and the purchase by the Underwriters of an aggregate of three million
(3,000,000) common shares ("Shares") of the Company, par value $.01 per share
("Common Stock"), with the Shares being issued and sold to the Underwriters by
the Company. Such Shares are hereinafter referred to collectively as the "Firm
Securities." Upon your request, as provided in Section 3(b) of this Agreement,
the persons named in Schedule A (the "Selling Stockholders") propose to sell to
the Underwriters up to an additional four hundred fifty thousand (450,000)
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 are
hereinafter referred to collectively as the "Option Securities." The Company
also proposes to issue and sell to Royce Investment Group, as the Representative
of the several Underwriters (the "Representative"), warrants (the
"Representative's Warrants") pursuant to the Representative's Warrant Agreement
dated as of ______________, 1998, between the Company and the Representative
(the "Representative's Warrant Agreement"), for the purchase of an additional
three hundred thousand (300,000) shares of Common Stock. The shares of Common
Stock issuable upon exercise of the Representative's Warrants are hereinafter
referred to collectively as the "Representative's Securities." The aggregate
three million four hundred fifty thousand (3,450,000) shares of Common Stock
(including Common Stock constituting Option Securities) will be separately
tradeable upon issuance. The Firm Securities, the Option Securities, the
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<PAGE>
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. 43331), as well as a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-05955),
collectively, the "Combined Registration Statement", including
the related preliminary prospectus included therein prior to
the time such Combined Registration Statement and any
post-effective amendment to such Combined Registration
Statement becomes effective ("Preliminary Prospectus"), for
the registration of the Firm Securities, the Representative's
Securities and the Option Securities under the Securities Act
of 1933, as amended (the "Act"), which Combined Registration
Statement and amendment or amendments (including
post-effective 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 Combined
Registration Statement, as amended, on file with the
Commission at the time the Combined 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), and all information included in
any post-effective amendments to such Combined Registration
Statement and such post-effective amendment on file with the
Commission at the time the post-effective amendment 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
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<PAGE>
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 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
-3-
<PAGE>
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
-4-
<PAGE>
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
-5-
<PAGE>
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
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<PAGE>
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 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 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,
-7-
<PAGE>
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
-8-
<PAGE>
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
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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. Except as disclosed in the
Prospectus, 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
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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) 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
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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
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<PAGE>
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 (the "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.
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<PAGE>
(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
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<PAGE>
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
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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:
(a) Such Selling Stockholder has full legal right, power and
authority to enter into this Agreement, the Power of Attorney
with John W. Luciani, III and Paul Jawin, 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 Union National 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 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 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),
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<PAGE>
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 authorize the
delivery of the 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 Option Securities or a stock power or powers with respect
thereto, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement and the Custody
Agreement.
(b) 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 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 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 Option Securities to be sold by such Selling Stockholder
under this Agreement.
(c) At the date hereof such Selling Stockholder has, and at the
time of delivery of the 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 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
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 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 Option Securities to be
sold by such Selling Stockholder hereunder, good and
marketable title to such 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
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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 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.
(d) 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.
(e) 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.
(f) There is not pending or, to such Selling Stockholder's
knowledge, threatened against such Selling Stockholder any
action, suit or proceeding which (i) 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 (ii) 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.
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<PAGE>
(g) Upon executing this Agreement, certificates in negotiable form
for the Option Securities to be sold by such Selling
Stockholder under this Agreement on the 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.
(h) Such Selling Stockholders have no registration rights or other
similar rights with respect to any securities of the Company;
and such Selling Stockholders do 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.
(i) 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).
(j) Except for the New York State transfer tax imposed by Section
270 of the New York State Tax Law on the sale of the Option
Securities by the Selling Stockholders, 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 Option Securities, (ii) the purchase by the
Underwriters of the 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 Option Securities sold by such Selling
Stockholder in connection with the distribution contemplated
hereby.
(k) 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.
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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 agrees 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 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, in each case on a firm commitment basis
no less than three (3) nor more than four (4) full business
days after the date of this Agreement, at a price of $_______
per share of Common Stock [_____% 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 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
Selling Stockholders, all or any part of the Option Securities
at a price of $_____ per share of Common Stock [100% 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 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
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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 199 Crossways Park Drive,
Woodbury, New York 11797, 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 ___________, 1998 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 date of this Agreement (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 300,000 shares
of Common Stock. The Representative's Warrants shall be
exercisable for a period of four (4) years commencing one (1)
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year from the effective date of the Registration Statement at
an exercise price of $_____ per share of Common Stock [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 4. Public Offering of the Firm Securities.
As soon after the first post-effective amendment to 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 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
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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 Representative) or transmit the
Prospectus by a means reasonably calculated to result in
filing with the Commission pursuant to Rule 424(b)(1) (or, if
applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of
business on the earlier of (i) the second business day
following the execution and delivery of this Agreement, and
(ii) the fifteenth business day after the effective date of
the Registration Statement.
(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
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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 promptly 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
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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;
(vi) any additional information of a public nature
concerning the Company or its businesses which the
Representative may request.
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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, 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) During a period of thirteen (13) months following the
effective date of the Registration Statement, the Company will
not and, for a further period of six (6) months, the Company
will not without the prior written consent of the
Representative, other than as set forth in the Prospectus,
directly or indirectly, offer to sell, transfer, pledge,
assign, 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, whether
or not owned (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; provided, that except as
otherwise restricted under the terms of this Agreement, the
foregoing restriction, whether directly or upon the exercise
or conversion of exchangeable or convertible securities
(including options granted under the Company's Stock Option
and Performance Award Plan), shall not prohibit the issuance
of shares of Common Stock or options to purchase shares of
Common Stock in connection with the exercise of the
over-allotment option referred to in Section 1(a), mergers or
acquisitions, to effectuate estate planning by the Selling
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Stockholders (subject to the restrictions set forth in Section
6(a) below), or shares of Common Stock or securities
convertible or exchangeable for shares of Common Stock which
are publicly offered by the Company. During a period of
thirteen (13) months following the effective date of the
Registration Statement, the Company will not complete an
offering pursuant to Regulation S of shares of Common Stock,
or securities convertible or exchangeable for shares of Common
Stock; provided, that shares of Common Stock, or securities
convertible or exchangeable for shares of Common Stock where
the actual offering price of the Common Stock, or the
conversion or exchange price, is specifically determined at
the time of closing of the offering, are not subject to these
restrictions. Furthermore, during a period of thirteen (13)
months following the effective date of the Registration
Statement, apart from the above referenced limitations on
Regulation S offerings, there is no restriction on private
offerings of Common Stock, or of securities convertible or
exchangeable for Common Stock, if the original offering price
of the Common Stock, or the conversion or exchange price of
the convertible or exchangeable securities, is specifically
determined at the time of closing of the private offering. The
Company will cause the Transfer Agent to mark an appropriate
legend in respect of the transfer restrictions set forth in
this Section 6(k) on the face of stock certificates
representing Common Stock held by the Selling Stockholders
following the sales contemplated hereby and to place "stop
transfer" orders on the Company's stock ledgers for such
shares.
(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, 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 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
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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 to be listed on the 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, 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
and any securities for which the Common Stock is 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, 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 Poor's 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
is not included for trading on the Nasdaq NMS.
(s) The Company hereby agrees that for a period of thirteen (13)
months following the effective date of the Registration
Statement, the Company will not and, for a further period of
six (6) months, the Company will not without the prior written
consent of the Representative 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 (x) at an exercise price that is less
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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 pursuant to which the
Company (x) may issue options for up to one million
(1,000,000) shares (of the two million five hundred thousand
(2,500,000) shares reserved for issuance under the Company's
1996 Stock Option and Performance Award Plan) prior to the
initial public offering with an exercise price equal to the
initial public offering price, (y) may issue options in the
six (6) month period following the closing of the initial
public offering with an exercise price the greater of the
initial public offering price or the then current market
price, or (z) may issue options after the six (6) month period
following the closing of the initial public offering with an
exercise price equal to the then current market price; 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.
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(v) The Company will enter into a non-exclusive agreement with the
Representative (the "Finder's Agreement") providing for a
finder's fee payable to the Representative if the Company
enters into any transaction with a third party introduced to
the Company by the Representative during the five (5) year
period immediately following the Closing Date. The Finder's
Agreement will effectively state that the finder's fee payable
to the Representative will be five percent (5%) of the first
$1,000,000 of value of such transaction, four percent (4%) of
the second $1,000,000 of value of such transaction, and three
percent (3%) of the remaining value of such transaction.
(w) The Company will not have more than 15,000,000 shares of
Common Stock issued and outstanding prior to the initial
public offering, not including 2,500,000 shares reserved for
future issuance pursuant to the Company's 1996 Stock Option
and Performance Award Plan.
(x) During the five (5) year period immediately following the
Closing Date, the Representative will have the right, at its
discretion, to cause the Company to (i) nominate a designee
chosen by the Representative to the Company's Board of
Directors, or (ii) have such designee serve as an advisor to
the Company's Board of Directors, with such designee being
subject to the Company's reasonable approval.
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:
(a) During a period of thirteen (13) months following the
effective date of the Registration Statement, the Selling
Stockholders will not and, for a further period of six (6)
months, the Selling Stockholders will not without the prior
written consent of the Representative, other than as set forth
in the Prospectus, directly or indirectly, offer to sell,
transfer, pledge, assign, 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; provided, that except as
otherwise restricted under the terms of this Agreement, the
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foregoing restriction shall not prohibit the private offering
of securities convertible or exchangeable for Common Stock,
the transfer of shares of Common Stock or options to purchase
shares of Common Stock in connection with the exercise of the
over-allotment option referred to in Section 1(a), mergers or
acquisitions, the grant of options under or the exercise of
options granted under the Company's Stock Option and
Performance Award Plan, and estate planning by the Selling
Stockholders to include transfers to the estate or by the
estate of such Selling Stockholders, so long as any 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. During a period of thirteen
(13) months following the effective date of the Registration
Statement, the Selling Stockholders will not complete an
offering pursuant to Regulation S of shares of Common Stock,
or securities convertible or exchangeable for shares of Common
Stock; provided, that shares of Common Stock, or securities
convertible or exchangeable for shares of Common Stock where
the actual offering price of the Common Stock, or the
conversion or exchange price, is specifically determined at
the time of closing of the offering, are not subject to these
restrictions. Furthermore, during a period of thirteen (13)
months following the effective date of the Registration
Statement, apart from the above referenced limitations on
Regulation S offerings, there is no restriction on private
offerings of Common Stock, or of securities convertible or
exchangeable for Common Stock, if the original offering price
of the Common Stock, or the conversion or exchange price of
the convertible or exchangeable securities, is specifically
determined at the time of closing of the private offering. The
Selling Stockholders will cause the Transfer Agent to mark an
appropriate legend in respect of the transfer restrictions set
forth in this Section 6(a) on the face of stock certificates
representing Common Stock held by the Selling Stockholders
following the sales contemplated hereby and to place "stop
transfer" orders on the Company's stock ledgers for such
shares.
(b) 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.
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(c) 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 any Option Closing Date.
(d) Prior to any Option Closing Date, as applicable, each Selling
Stockholder will pay the full amount owed by such Selling
Stockholder, as required under Section 270 of the New York
State Tax Law, with respect to his transfer under the terms of
this Agreement of Option Securities.
7. Payment of Expenses
(a) Subject to the provisions of Section 7(d) below, 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
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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 the Nasdaq NMS and any other exchange.
(b) 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 3% and a
consulting fee equal to 1% 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 Selling Stockholders, jointly and
severally, agree 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 3%
and a consulting fee equal to 1% of the gross proceeds
received by the Selling Stockholders from the sale of the
Option Securities.
(c) If the Company decides to terminate this Agreement for any
reason, or if the Representative chooses to terminate this
Agreement because of a breach by the Company or the Selling
Stockholders of its or their representations, warranties or
covenants in this Agreement, the Company will pay the
Representative for its accountable expenses the sum of
$100,000, inclusive of the amounts previously paid toward
expenses pursuant to Section 7(b) above. If the Representative
decides to terminate this Agreement for any reason other than
those set forth in the preceding sentence, the Company will
pay the Representative for its accountable expenses the sum of
$50,000, inclusive of the amounts previously paid toward
expenses pursuant to Section 7(b) above. In addition, the
Company will be responsible for the actual fees and expenses
of Underwriter's Counsel with respect to Blue Sky matters,
which fees shall not exceed $5,000.
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;
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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 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
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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;
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(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 Common Stock of the Company or
any security convertible into, or exercisable or
exchangeable for, such 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
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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
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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 could reasonably
be expected, individually or in the aggregate, to
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"; and "Shares Eligible
For Future Sale" 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
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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 and the Custody Agreement and Power of
Attorney, with Paul Jawin and John W. Luciani, III,
or either of them, as attorney-in-fact and with First
Union National Bank as custodian (the "Custody
Agreement"), have been duly and validly executed and
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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 Option Securities hereunder. To such counsel's
knowledge, none of any Selling Stockholder's delivery
and sale of the Option Securities, execution or
delivery of this Agreement, 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
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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 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 Option Securities, (ii)
the purchase by the Underwriters of the 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 Option Securities in connection with
the distribution contemplated hereby.
(v) Each of the Underwriters has received good and valid
title to the Option Securities being sold by the
Selling Stockholder hereunder, free and clear of any
adverse claims; provided that the Underwriters are
purchasing such 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
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Agreement 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;
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(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
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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 Option Closing Date, if any,
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the Underwriters shall have received a certificate from each
of the Selling Stockholders (which may be signed by the
Attorney-in-Fact), dated 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:
(i) The representations and warranties of such Selling
Stockholder in this Agreement are true and correct,
as if made at and as of 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 Option Closing Date,
as the case may be; and
(ii) 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. Specifically, the Selling Stockholders
shall provide such documentation to the Underwriters as is
acceptable to Underwriters' counsel to demonstrate that all
transfer tax amounts due and payable under Section 270 of the
New York State Tax Law with respect to the sale of the Option
Securities under this Agreement by the Selling Stockholders
have been paid prior to the Option Closing Date, as
applicable.
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(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 or the Representative
in its individual capacity, 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
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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, 1997 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,
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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).
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(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 shall have
been duly approved for inclusion and quotation on the Nasdaq
NMS, subject to official notice of issuance.
(s) At the time this Agreement is executed, the Representative
shall receive a letter, addressed to the Underwriters, in form
and substance satisfactory to the Representative and the
Underwriters' Counsel, with respect to certain limited
partnerships and general partnerships identified in the
Registration Statement, as well as with respect to the
Company, from Feldman Radin & Co., P.C. At the Closing Date
and each Option Closing Date, if any, the Representative shall
have received from Feldman Radin & Co., P.C., 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 above pursuant to this subprovision
(s) of Section 8.
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.
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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, the
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
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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, the 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
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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" 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
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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)
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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
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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 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.
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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), subject to application of the
limits identified in Section 7(c) of this Agreement. In
addition, the Company shall remain liable for all Blue Sky
counsel fees (up to a maximum of $30,000) and disbursements,
expenses and filing fees. Notwithstanding any contrary
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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
Selling Stockholders 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.
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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 Royce
Investment Group, Inc., 199 Crossways Park Drive, Woodbury, New York
11797, Attention: _____________, Chairman, with a copy to Greenberg
Traurig Hoffman Lipoff Rosen & Quentel, 200 Park Avenue, 15th Floor,
New York, New York 10166, Attention: Peter Rothberg, 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.
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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.
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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:
ROYCE INVESTMENT GROUP, INC.
For itself and as Representative of the several Underwriters named in
Schedule B hereto.
By: ________________________________
Name: [ ]
Title: Chairman
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SCHEDULE A
Number of
Name Option Securities
- ---- -----------------------------
Bernard M. Rodin 225,000 Firm Securities of
Common Stock
John Luciani 225,000 Firm Securities of
Common Stock
TOTAL.......................................... 450,000 Firm Securities of
Common Stock
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SCHEDULE B
Number of
Name Firm Securities
- ---- ---------------
Common Stock
------------
Royce Investment Group
TOTAL...................... 3,000,000 Shares
================
<PAGE>
[Form of Representative's Warrant Agreement]
GRAND COURT LIFESTYLES, INC.
AND
ROYCE INVESTMENT GROUP, INC.
REPRESENTATIVE'S WARRANT AGREEMENT
Dated as of ___________, 1998
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _____________ __, 1998, by and
between GRAND COURT LIFESTYLES, INC., a corporation incorporated under the laws
of the State of Delaware (the "Company"), and ROYCE INVESTMENT GROUP, INC.,
(hereinafter referred to variously as the "Holder" or the "Representative").
WITNESSETH
WHEREAS, the Company proposes to issue to the Representative or its designees
warrants ("Warrants") to purchase up to an aggregate of 300,000 shares of common
stock, par value $.01 per share, of the Company (the "Common Stock"); and
WHEREAS, the Representative has agreed pursuant to the underwriting agreement
dated as of the date hereof between the Company, certain selling stockholders
identified therein and the several Underwriters listed therein (the
"Underwriting Agreement"), to act as the Representative in connection with the
proposed public offering of up to 3,000,000 shares of Common Stock, at an
initial public offering price of $_______ 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 or its designees 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 $.0001 per Warrant, the agreements herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Grant: Subject to the issuance and sale of the Common Stock in
accordance with the Underwriting Agreement on the Closing Date, the
Representative (and/or its designees, which shall include only officers
of the Representative) is hereby granted the right to purchase up to
300,000 Warrants which give the Holder (as herein defined) the right to
purchase, at any time from ________________ __, 199_ [one year from the
effective date of the Registration Statement] until 5:30 P.M., New York
time, on _______________ ____, 200_ [five years from the effective date
of the Registration Statement] ("the Exercise Period"), up to an
aggregate of 300,000 shares of Common Stock at an initial exercise
price (subject to adjustment as provided in Section 8 hereof) of $_____
per share of Common Stock, [165% of the initial public offering price
per share of Common Stock], subject to the terms and conditions of this
Agreement (the "Warrant Shares"). Each Warrant shall initially be
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exercisable for one share of Common Stock. It is expressly understood
that this Agreement entitles the Representative (and/or its designees)
to purchase Warrants in the aggregate amount of ten percent (10%) of
the number of securities offered to the public (excluding the
overallotment option). Except as expressly set forth herein, the shares
issuable upon exercise of the Warrants are in all respects identical to
the shares of Common Stock being purchased by the Underwriter for
resale to the public pursuant to the terms and provisions of the
Underwriting Agreement.
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.
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 share of Common Stock as set
forth in Section 6 hereof, payable by certified or official
bank check in New York Clearing House funds, subject to the
adjustments provided in Section 8 hereof. Upon surrender of a
Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise
Price (as hereinafter defined) for the shares of Common Stock
purchased, at the Company's principal executive offices in
Boca Raton, Florida, presently located at 2650 N. Military
Trail, Suite 350, Boca Raton, Florida 33431, the registered
holder of a Warrant Certificate ("Holder" or "Holders") shall
be entitled to receive a certificate or certificates for the
shares of Common Stock so purchased. 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 Common Stock underlying the
Warrants.) In the case of the purchase of less than all the
shares of Common Stock 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
Common Stock purchasable thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the method of
payment set forth in Section 3.1 hereof 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 product of (x) the number of shares as to
which the Warrants are being exercised multiplied by (y) a
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fraction, the numerator of which is the aggregate Market Price
(as defined below) of such Common Stock less the aggregate
Exercise Price therefor, and the denominator of which is such
aggregate 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 deemed to have been sent to the Company pursuant to
Section 13 hereof (the "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.
3.3 Definition of Market Price. As used herein with respect to the
Common Stock, the phrase "Market Price" at any date shall be
deemed to be the last reported sale price of the Common Stock,
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
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 any national securities
exchange or quoted by Nasdaq, the average closing bid price as
furnished by the National Association of Security Dealers,
Inc. ("NASD") through Nasdaq or a 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
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 and delivery of certificates for the Common Stock or other
securities, properties or rights underlying such Warrants, shall be
made forthwith (and in any event within three (3) business days
thereafter) without charge to the Holder thereof including, without
limitation, any 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 such 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 Common
Stock (and/or other securities, property or rights issuable upon the
exercise of the Warrants) shall be executed on behalf of the Company by
the manual or facsimile signature of the person(s) authorized therefor
by the Company's Board of Directors under its corporate seal reproduced
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thereon. Warrant Certificates shall be dated the date of execution by
the Company upon initial issuance, division, exchange, substitution or
transfer. Certificates representing the shares of Common Stock (and/or
other securities, property or rights issuable upon 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. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof, and 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..
(a) During the Expiration Period, 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.
(b) 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 option of counsel stating
that the proposed transfer may be made without registration or
qualification under applicable Federal and 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(b) 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 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 five 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.
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6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of
each Warrant shall be $______ per share of Common Stock [165%
of the initial public offering price per share of Common
Stock]. The adjusted exercise price of the Warrant 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 Common Stock or other securities, properties or
rights underlying the Warrants.
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.
7.1 Registration Under the Securities Act of 1933. The Warrants
have not been registered under the Securities Act of 1933, as
amended (the "Act"). Upon exercise, in part or in whole, of
the Warrants, certificates representing the Common Stock
underlying the Warrants and any of the other securities
issuable upon exercise of the Warrants (collectively, the
"Warrant Shares") shall bear the following legend:
The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended ("Act"), and 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.
7.2 Piggyback Registration. 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 in connection with a merger or acquisition
registered on Form S-4 (or a similar special purpose form) or
with an employee benefit plan registered on Form S-8 (or a
similar special purpose form), it will give written notice by
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registered mail, at least thirty (30) days prior to the filing
of each such registration statement, to the Representative and
to all other Holders of the Warrants and/or the Warrant Shares
of its intention to do so. If the Representative or other
Holders of the Warrants and/or the Warrant Shares notify the
Company within twenty (20) 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 each of the Representative and such Holders of the
Warrants and/or Warrant Shares the opportunity to have any
such Warrant Shares registered under such registration
statement; provided, however, that the Representative and such
Holders of the Warrants and/or Warrant Shares shall furnish
the Company with appropriate information in connection
therewith as the Company may reasonably request in writing.
In the event that the managing underwriting 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 Shares 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 Shares 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 Shares in a subsequent registration statement to
be filed by the Company with the Securities 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.
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.
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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 Shares
representing a "Super 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
Representative and Holders, in order to comply with
the provisions of the Act, so as to permit a public
offering and sale of their respective Warrant Shares
for the earlier of (i) nine (9) consecutive months or
(ii) until the sale of all the Warrant Shares
requested to be registered by such Holders and any
other Holders of the Warrants and/or Warrant Shares
who notify the Company within ten (10) days after
receiving notice from the Company of such request;
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,
shall pass a written resolution to that effect and
shall promptly make available to such Holders the
aforementioned written resolution.
(b) The Company covenants and agrees to give written
notice of any registration request under this Section
7.3 by any Holder or Holders to all other registered
Holders of the Warrants and the Warrant Shares 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) and (b) 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 Shares 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, on one occasion
only, with the Commission 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
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sale of all the Warrant Shares requested to be
registered by any such Holder of its Warrant Shares;
provided, however, that the provisions of Section
7.4(b) hereof shall not apply to any such
registration request and the registration and all
costs incident thereto shall be at the expense of the
Holder or Holders making such request; 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, shall
pass a written resolution to that effect and shall
promptly make available to such Holders the
aforementioned written resolution.
(d) Notwithstanding anything to the contrary contained
herein, if the Company shall not have filed a
registration statement for the Warrant Shares within
the time period specified in Section 7.4(a) hereof
pursuant to the written notice specified in Section
7.3(a) of a Super Majority of the Holders of the
Warrants and/or Warrant Shares, the Company may, at
its option, upon the written notice of election of a
Super Majority of the Holders of the Warrants and/or
Warrant Shares requesting such registration,
repurchase (i) any and all Warrant Shares of such
Holders at the higher of the Exercise Price and
Market Price per share of Common Stock on (x) the
date of the notice sent pursuant to Section 7.3(a) or
7.3(c) 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 7.3(d).
7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3
hereof, the Company 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 Shares
such number of prospectuses as shall reasonably be
requested.
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(b) The Company shall pay costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting
or selling commissions on behalf of the Holders),
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 participating
Holder(s) 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 Shares 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 and hold harmless the
Holder(s) of the Warrant Shares to be sold pursuant
to any registration statement and each person, if
any, who controls such Holder(s) within the meaning
of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended
("Exchange Act"), from and against any and all
losses, claims, damages, expenses or liabilities
(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 in writing by
Holder(s) of the Warrant Shares to be sold pursuant
to such registration statement for use in the
preparation thereof.
(e) The Holder(s) of the Warrant Shares to be sold
pursuant to a registration statement, and their
successors and assigns, shall severally, and not
jointly, indemnify the Company, its officers 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, from and
against any and all losses, claims, damages or
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expenses or liabilities (including all expenses
reasonably incurred in investigating, preparing or
defending against any claim whatsoever including,
without limitation, the fees and expenses of legal
counsel and accountants) to which they may become
subject under the Act, the Exchange Act or otherwise,
arising from or 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 in writing 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 Shares 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 Shares representing a Super 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
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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 underwriters 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 the rules and regulations 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) In connection with an underwritten offering pursuant
to Section 7.3, the Company shall enter into an
underwriting agreement with the underwriters selected
for such underwriting by the Holders of a Super
Majority of the Warrant Shares requested to be
included in such underwriting, which may be the
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Representative. Such agreement shall be reasonably
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 the
underwritten sale of their Warrant Shares and may, at
their option, require that any or all 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) In addition to the Warrant Shares, upon the written
request therefor by any Holder(s), the Company shall
include in the registration statement any other
securities of the Company held by such Holder(s) as
of the date of filing of such registration statement,
including without limitation restricted shares of
Common Stock, options, warrants or any other
securities convertible into Common Stock.
(n) For purposes of this Agreement, the term "Super
Majority" in reference to the Holders of Warrants or
Warrant Shares, shall mean in excess of sixty six
point six seven percent (66.67%) of the then
outstanding Warrants or Warrant Shares that (i) are
not 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 and (ii) have not been resold to the public
pursuant to a registration statement filed with the
Commission under the Act.
8. Obligations 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.
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(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, or 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.
9.1 Subdivision and Combination. In case the Company shall at any
time subdivide or combine the outstanding Common Stock, the
Exercise Price shall forthwith be proportionately decreased in
the case of subdivision or increased in the case of
combination.
9.2 Stock Dividends and Distributions. In case the Company shall
pay a dividend in, or make a distribution of, 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.
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 Shares 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 per share of Common Stock purchasable
hereunder in effect immediately prior to such adjustment by
the number of Warrant Shares issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
9.4 Definition of Common Stock. 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 Common Stock
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outstanding as of the date hereof, any Holder, as its option,
may receive upon exercise of any Warrant either shares of
Common Stock or a like number of such securities with greater
or superior voting rights.
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), the corporation
formed by such consolidation or surviving such merger shall
execute and deliver to each Holder a supplemental warrant
agreement providing that the Holder of each Warrant than
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
shares of Common Stock 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 Section 8. The above
provision of this subsection shall similarly apply to
successive consolidations or mergers.
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 Shares;
(b) Upon the issuance or sale of Common Stock (or any
other security convertible exercisable, or
exchangeable into shares of Common 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;
(c) If the amount of said adjustment shall be less than
five cents ($.05) per Warrant Share, provided,
however, that in such case any adjustment that would
otherwise be required then to be made shall be
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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 five cents ($.05) per
Warrant Share.
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 securities theretofore or thereafter issued may
continue to express the same Exercise Price and number of
Warrant Securities as are stated in the respective Warrant
Securities, 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 Shares in such denominations and in such names as shall be
designated by the Holder thereof at the time of such surrender.
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 Warrant Certificate, 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 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
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 Common
Stock, solely for the purpose of issuance upon the exercise of the
Warrants, such number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise thereof.
The Company covenants and agrees that, upon exercise of the Warrants
and payment of the Exercise Price therefor, all 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 or other person or entity. As long
as the Warrants shall be outstanding, the Company shall use its best
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efforts to cause all shares of Common Stock issuable upon the exercise
of the Warrants to be listed (subject to official notice of issuance)
on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed and/or quoted on
Nasdaq/NMS.
13. Notices to Warrant Holders. Nothing contained in this Agreement shall
be construed as conferring upon any Holder 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 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 an event at least twenty (20) days prior to the date
fixed as a record date or the date of the 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 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. 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:
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(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If 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.
(c) If to the Representative, to Royce Investment Group, Inc., 199
Crossways Park Drive, Woodbury, New York 11797, Attention:
General Counsel.
15. Supplements and Amendments. The Company and the Representative may from
time to time supplement or amend this Agreement 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.
16. 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.
17. Termination. This Agreement shall terminate at the close of business on
__________, 2005. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close
of business on ________, 2010.
18. 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 its rules 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
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registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 13 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.
19. 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.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
21. 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.
22. 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 Shares 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 Shares.
23. 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 for all purposes
be deemed to be an original, and such counterparts shall together
constitute but one and the same instrument.
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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: ____________________________
[SEAL]
ROYCE INVESTMENT GROUP, INC.
By: ___________________________________
Name: _____________________________
Title: ____________________________
[SEAL]
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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, ___________, 2003
Warrants to Purchase ________
Shares of Common Stock
No. W-__________
WARRANT CERTIFICATE
This Warrant Certificate certifies that _________________________________, or
registered assigns, is the registered holder of ________ Warrants, each Warrant
to purchase initially, at any time from _______________ __, 1999 [one year from
the effective date of the Registration Statement] until 5:30 p.m. New York time
on _____________ __, 2003 [five years from the effective date of the
Registration Statement] ("Expiration Date"), up to _______ fully-paid and
non-assessable Shares of Common Stock, par value $.01 each ("Common Stock") of
Grand Court Lifestyles, Inc., a corporation organized under the laws of the
State of Delaware (the "Company"), at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $________ [165% of the
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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, but subject to conditions set forth herein and in the Warrant
Agreement dated as of ______________ __, 1998 by and between the Company and
Royce Investment Group, Inc., (the "Warrant Agreement"). 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 and 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, 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 numbered unexercised Warrants pursuant to
the terms of the Warrant Agreement.
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.
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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.
IN WITNESS WHEREOF the Company has caused this Warrant Certificate to be duly
executed under its corporate seal.
Dated as of _____________, 1998
GRAND COURT LIFESTYLES, INC.
By: ___________________________________
Name: _____________________________
Title: ____________________________
[SEAL]
Attest:
_______________________________________
Secretary
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[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 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. (the "Company") in the amount of $__________, all in accordance
with the terms of Section 3.1 of the Underwriter's Warrant Agreement dated as of
_______________ __, 1996 between the Company and ROYCE INVESTMENT GROUP, INC.
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)
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[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 GRAND COURT LIFESTYLES, INC. (the
"Company") Common Stock, all in accordance with the terms of Section 3.2 of the
Underwriter's Warrant Agreement dated as of _____________ __, 1998 between the
Company and ROYCE INVESTMENT GROUP, INC. 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)
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[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)
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GRAND COURT LIFESTYLES, INC.
3,000,000 Shares of Common Stock
AGREEMENT AMONG UNDERWRITERS
_____________, 1998
ROYCE INVESTMENT GROUP, INC.
As Representatives of the
several Underwriters named
in Schedule A to Exhibit A
annexed hereto
199 Crossways Park Drive
Woodbury, New York 11797
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 3,000,000 shares (the "Shares") of
common stock, $.01 par value (the "Common Stock"), of the Company. The Shares
shall be referred to collectively as the "Firm Securities." In addition, the
Selling Stockholders (as defined in the Underwriting Agreement) have agreed to
grant to the Underwriters an option to purchase an additional 450,000 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
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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 up to an additional 300,000
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
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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. We authorize you to reserve for offering
and sale, and on our behalf to sell 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 to Selected Dealers, at the Offering Price less such concession or
concessions as you, in your sole discretion, shall determine. 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 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 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
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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.
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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 by
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
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 under the
terms of the Underwriting Agreement, pursuant to the option contained
in Section 3 of the Underwriting Agreement or otherwise. 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.
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<PAGE>
In the event that you effect any stabilizing purchases pursuant to this
Section 5, you will notify each Underwriter 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 with 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.
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
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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.
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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
Regulation M promulgated under the 1934 Act) of our participation in
the distribution, we will otherwise comply with Regulation M.
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 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 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 not 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.
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<PAGE>
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 or periods not to exceed the aggregate of 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
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<PAGE>
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 upon 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
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<PAGE>
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
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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 Prospectuses. 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
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<PAGE>
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, facsimile or teletype, to us at our address as set forth in
our Underwriter's Questionnaire previously delivered to you, or to you
Royce Investment Group, Inc., 199 Crossways Park Drive, Woodbury, New
York, 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 agree to comply with
the provisions of Rule 2740 of the NASD Conduct Rules, 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 Rules 2730 and 2750
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of the NASD Conduct Rules, and to comply with Rule 2420 of the NASD Conduct
Rules as that Rule 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.
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<PAGE>
Please confirm that the foregoing correctly states the understanding between us
by signing and returning to us a counterpart hereof.
Very truly yours,
________________________________________
Name: [ ]
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:
ROYCE INVESTMENT GROUP, INC.
As Representative of
the several Underwriters
By: ______________________________________
Name: [ ]
Title: [ ]
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GRAND COURT LIFESTYLES, INC
3,000,000 Shares of Common Stock(1)
SELECTED DEALER AGREEMENT
Ladies and Gentlemen:
1. Registration under the Securities Act of 1933, as amended (the "Act"),
of 3,000,000 shares of common stock, $.01 par value ("Common 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 for purchase by a selected group
on the terms and conditions stated herein.
Authorized Public
Offering Price: $_______ per share of Common Stock.
Dealers' Selling A minimum of $_____ per share of Common Stock
Concession: payable fifty percent (50%) upon the settlement
date and fifty percent (50%) upon the earlier to
occur of (i) termination of the Selected Dealer
Agreement or (ii) 90 days after purchase by any
of the Selected Dealers, except as provided
below. We reserve the right not to pay such
concession on any of the shares of Common Stock
purchased by any of the Selected Dealers from us
and repurchased in the open market prior to the
earlier of such termination or 90 days after
purchase by any of the Selected Dealers, subject
to the terms of Paragraph 3 hereof.
Delivery and Delivery of the shares of Common Stock shall be
Payment: made on or about ___________, 1998 or such later
date as we may advise, at the office of Royce
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(1) Plus the Over-Allotment Option available to the Underwriters to purchase up
to an additional 450,000 shares of Common Stock, subject to certain terms
and conditions as described in the Underwriting Agreement.
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<PAGE>
Investment Group, Inc., 199 Crossways Park
Drive, Woodbury, New York 11797, or at such
other place as we shall specify on not less than
one day's notice to you. Payment for the shares
of Common 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
Royce Investment Group, Inc., 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 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
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 applied for. Orders
transmitted by telephone must be promptly confirmed by letter or
telegram.
3. If prior to the termination of this Agreement with respect to the
offering of the Common Stock, you purchase or contract to purchase
shares of Common Stock which were purchased by us from you or from any
dealer at a concession from the public offering price (including any
shares of Common Stock represented by certificates which shares of
Common Stock may have been issued on transfer of or in exchange for
certificates originally representing such shares of Common Stock), in
your discretion you may (i) sell for our account the shares of Common
Stock so purchased and debit or credit our account for the loss of
profit resulting from such sale, (ii) charge our account with an amount
equal to the concession to dealers with respect thereto and credit such
amount against the cost thereof or (iii) require us to purchase such
shares of Common Stock at a price equal to the total cost of such
purchase including commissions, accrued interest, amortization of
original issue discount or dividends and transfer taxes on delivery.
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<PAGE>
4. You, by becoming a member of the Selected Dealers, agree (a) to take up
and pay for the number of shares of Common Stock allotted and confirmed
to you, (b) not to use any of the shares of Common 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 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 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 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.
5. 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.
6. You agree that until termination of this Agreement you will not make
purchases or sales of the shares of Common 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.
7. Additional copies of the Prospectus and any supplements or amendments
thereto shall be supplied in reasonable quantity upon request.
8. The shares of Common 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.
9. 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 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 in any
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jurisdiction. We have caused to be filed a State Notice and Further
State Notice relating to such of the shares of Common 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 were made by such member, the number of shares of Common
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.
10. 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 (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)
Rules 2730, 2740, 2420 (applicable to a non-member broker/dealer in a
foreign country) and 2750 of said NASD's Conduct Rules. 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.
11. 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 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, except as we are notified by you in
writing, 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.
12. 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
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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.
13. 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, (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
for sale under the laws of any jurisdiction, (v) the delivery of the
shares of Common 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.
14. 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.
15. All communications from you shall be addressed to us care of Royce
Investment Group, Inc., 199 Crossways Park Drive, Woodbury, New York
11797, 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.
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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,
ROYCE INVESTMENT GROUP, INC.
By: _______________________________
Name:__________________________
Title: ________________________
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Royce Investment Group, Inc.
199 Crossways Park Drive
Woodbury, New York 11797
Ladies and Gentlemen:
We hereby accept membership in the Selected Dealers on the terms
specified above and confirm all of the representations and warranties contained
in the Selected Dealer Agreement applicable to us by our becoming a member of
the Selected Dealers, including but not limited to the representations and
warranties set forth in Paragraphs 10 and 11 of the Selected Dealer Agreement.
We hereby acknowledge receipt of the final Prospectus and subscribe for
__________ shares of Common Stock of Grand Court Lifestyles. In purchasing any
shares of Common Stock, we have relied solely on the final Prospectus and on no
other statements, written or oral.
Dated:______________ ___, 1998.
__________________________________
By: _______________________________
Name:__________________________
Title: ________________________
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INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 5 to the Registration
Statement (No. 333-05955) and this Amendment No. 3 to the Registration Statement
(No. 333-43331) of Grand Court Lifestyles, Inc., each on Form S-1, of our report
dated April 28, 1997 (except for Note 13 as to which the date is February 27,
1998), appearing in the Prospectus, which is part of this Post-Effective
Amendment No. 5 to the Registration Statement and this Amendment No. 3 to the
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1998
