FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ -------------
COMMISSION FILE NUMBER: 0-21249
GRAND COURT LIFESTYLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3423087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2650 North Military Trail, 33431
Suite 350, Boca Raton, Florida (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code (561) 997-0323
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
---- -----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (<section>229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by nonaffiliates
of the registrant was $32,738,686.88 at April 29, 1998.
On April 29, 1998, the Company had 17,800,000 shares of common
stock outstanding.
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GRAND COURT LIFESTYLES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED January 31, 1998
PAGE
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 5. Market for Registrant's Common Equity and Related
Stockholder matters . . . . . . . . . . . . . . . . 20
Item 6. Selected Financial Data . . . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 23
Item 8. Financial Statements and Supplementary Data . . . . 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . 60
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation . . . . . . . . . . . . . . 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . 65
Item 13. Certain Relationships and Related Transactions . . 66
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . 67
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PART I
This Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements should be read with the cautionary
statements and important factors included in this Form 10-K at
Item 7, "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Safe Harbor for Forward-
Looking Statements." Forward-looking statements are all
statements other than statements of historical fact, including
without limitation those that are identified by the use of the
words "anticipates", "estimates", "expects", "intends",
"believes", and similar expressions. Unless the context
otherwise requires, (i) all references herein to a "Fiscal" year
refer to the fiscal year beginning on February 1 of that year
(for example, "Fiscal 1995" refers to the fiscal year beginning
on February 1, 1995) and (ii) all references to the Company,
include the Company, its subsidiaries and its predecessors taken
as a whole.
ITEM 1. BUSINESS
GENERAL
Grand Court Lifestyles, Inc. (the "Company") 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. 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 sales of partnership interests
("Syndications") of partnerships it organizes to acquire existing
adult living communities. The Company has established a new
development program pursuant to which it is building new adult
living communities, which it owns directly or operates pursuant
to long-term leases. The Company does not intend to Syndicate
the adult living communities constructed pursuant to its new
development program. To the extent the Company successfully
implements its new development program for the construction of
new adult living communities, it anticipates that the percentage
of revenues derived therefrom will increase. The Company manages
adult living communities which have been acquired utilizing
Syndications. The Company also manages adult living communities
it directly owns or operates under long-term leases. 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 Syndicated adult living
communities containing 5,261 adult living apartment units in 12
states in the Sun Belt and the Midwest. The Company also manages
one Syndicated nursing home containing 57 beds. One of the
Syndicated adult living communities the Company operates also
contains 70 skilled nursing beds. In addition, the Company
manages (i) two newly developed adult living communities
containing 268 units which it owns and (ii) two newly developed
adult living communities containing 284 units which it operates
under long-term leases. These four adult living communities were
developed and constructed pursuant to the Company's development
program. The Company has approximately 1,900 employees and
directly conducts the day-to-day operations of the adult living
communities it manages. At April 10, 1998 the Syndicated
communities managed by the Company had an average occupancy rate
of approximately 91%. The four newly developed communities are
all in their initial lease-up phase. 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 Company continues to successfully
implement the development plan described below, 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.
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 (the "Multi-Family
Properties"), which notes and receivables are paid from the cash
flow and sale or refinancing proceeds these properties generate.
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As of January 31, 1998, the recorded value, net of deferred
income, of these notes on the Company's Consolidated Balance
Sheets was $107.3 million and the recorded amount of these
receivables was $58.7 million.
Historically, the Company has arranged for the acquisition of
adult living properties 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 Syndicated adult living communities and
the Syndicated nursing home ("Owning Partnerships") managed by
the Company. These 37 Syndicated 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. 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
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 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
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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.
All Syndicated adult living communities and the Syndicated
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.
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.
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 four adult living communities,
is nearing completion of the construction of three 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 three of the four 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 four adult
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living communities, along with the four 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 has completed
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 and Temple communities are owned and operated
directly by the Company and the Round Rock and Tyler facilities
are owned and, upon completion, will be operated directly by the
Company. The Company has acquired additional sites in Amarillo
and South Shore, Texas, holds options to acquire one additional
site in Texas and one additional site in Kansas and is
negotiating with several additional lenders to obtain financing
to develop these four 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
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supplemented by assistance with ADLs including eating, bathing,
dressing, grooming, personal hygiene and ambulating; health
monitoring; medication management; personal laundry services; and
daily housekeeping services.
The Company focuses exclusively on "private-pay" residents, who
pay for housing or related services out of their own funds or
through private insurance, rather than relying on the few states
that have enacted legislation enabling assisted-living facilities
to receive 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 Syndicated
adult living communities and one Syndicated nursing home that it
manages by utilizing mortgage financing and Syndications of the
Investing Partnerships formed to acquire investments in the
Owning Partnerships that own these properties. The Company is the
managing general partner of all but one of the Owning
Partnerships that own the Syndicated adult living communities and
one Syndicated nursing home. The Company manages all of the
Syndicated adult living communities and the one Syndicated
nursing home in its portfolio. The Company is also the general
partner of 32 of the 41 Investing Partnerships. The Company has a
participation in the cash flow, sale proceeds and refinancing
proceeds of the Syndicated adult living communities 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 in the
Owning Partnership owned by the Company (the "Purchased
Interest"). 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 Purchased Interest 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 Purchased
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. 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
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satisfy the Management Contract Obligations. 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. After the
initial five-year period, 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.
The initial five-year term of the management contracts and the
related Management Contract Obligations have expired for 10
Owning Partnerships and their fourteen related Investing
Partnerships. Although the Company has no obligation to fund
operating shortfalls after the five-year term of the management
contract, as of January 31, 1998, the Company has advanced an
aggregate of approximately $500,000 to two of these 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. From time to time, the
Company has also made discretionary payments to Owning
Partnerships beyond the Management Contract Obligations period
for the purpose of making distributions to limited partners.
In the past, limited partners have been allowed to prepay
capital contributions. 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.
All of the Syndicated adult living communities and the
Syndicated 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. 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. 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 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
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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.
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 the acquisition and
Syndication of existing adult living communities. The Company
has taken advantage of the inexperience and operating
inefficiencies of the previous owners of these communities and
has improved the financial performance of these properties by
implementing its own management and marketing techniques. The
Company's sophistication in management and marketing is evidenced
by its approximate 91% occupancy rate at April 10, 1998 at the
existing Syndicated adult living communities managed by the
Company. The newly developed communities are in their initial
lease-up phases.
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, at least through
Fiscal 1998, 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.
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
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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.
The Company's prototype also incorporates two interior
courtyards, from which the Company's "Grand Court"<registered
trademark> 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
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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"<registered
trademark> 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.
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.
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The primary consumers of long-term care services are persons
over the age of 65. This group represents one of the fastest
growing segments of the population. According to U.S. Bureau of
the Census data, the number of people in the U.S. age 65 and
older increased by more than 27% from 1981 to 1994, growing from
26.2 million to 33.2 million. Such census data also shows that
the segment of the population over 85 years of age, which
comprises the largest percentage of residents at long-term care
facilities, is projected to increase by more than 37% between the
years 1990 and 2000, growing from 3.0 million to 4.1 million.
The Company believes that these trends depicted in the graph
below will contribute to continued strong demand for adult living
communities.
Projected Percentage Change in the Elderly Population of the U.S.
1981 1990 1995 2000 2005 2010
---- ---- ---- ---- ---- ----
65-84 0 17.5% 25.2% 26.2% 27.3% 34.6%
85+ 0 28.4% 54.3% 76.3% 94.1% 112.7%
SOURCE: U.S. BUREAU OF THE CENSUS
A trend benefiting the Company, and especially its provision of
independent-living services, is that as the population of seniors
swells, the percentage of seniors that are disabled and need
assistance with ADLs has steadily declined. According to the
National Long Term Care Surveys, a federal study, disability
rates for persons aged 65 and older have declined by 1 to 2
percent each year since 1982, the year the study was commenced.
In 1982, approximately 21% of the 65 and over population was
disabled and in 1995 only 10% was disabled. This trend suggests
that demand for independent living services will increase in the
future.
Other trends benefiting the Company include the increased
financial net worth of the elderly population, the changing role
of women and the increase in the population of individuals living
alone. As the number of 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.
SERVICES
It is important to identify the specific tastes and needs of
the residents of an adult living community, which can vary from
region to region and from one age group to the next. Residents
who are 70 years old have different needs than those who are 85.
The Company has retained a gerontologist to insure that programs
and activities are suitable for all of the residents in a
community and that they are adjusted as these residents "age in
place". Both independent and assisted-living services will be
offered at all of the Company's newly, developed communities.
Basic Service and Care Package. The Company provides 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
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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.
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: Two
responsible for nine Florida communities, one responsible for two
communities in Tennessee and one community in Virginia and one
community in Illinois; one responsible for two communities in
Arizona and four communities in Texas; one responsible for four
communities in Michigan and one community in Texas and one
community in Nevada and New Mexico; one responsible for three
communities in Texas, including the nursing home operated by the
Company, and one community in Tennessee; on responsible for one
community in Tennessee and one community in Kansas and one
community in Missouri and three communities in Texas; one
responsible for four communities in Ohio and one community in
Kansas and one community in Missouri. The Company also has a
regional administrator and a registered dietician who oversee the
food division. Each regional administrator is reported to by the
manager of those communities he oversees.
Community. The management team at each community consists of
an administrator, who has overall responsibility for the
operation of the community, an activity director, a marketing
director and, at certain larger communities, one or two assistant
administrators. Each community which offers assisted-living
services has a staff responsible for the assisted-living care
giving services. This staff consists of a lead resident aide, a
medication room aide, certified nurse aides and trained aides,
and, in those states which so require, registered nurses. At
least one staff member is on duty 24 hours per day to respond to
the emergency or scheduled 24-hour assisted-living services
available to the residents. Each community has a kitchen staff, a
housekeeping staff and a maintenance staff. The average community
currently operated by the Company has 40 to 50 full-time
employees depending on the size of the community and the extent
of services provided in that community. 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
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issues such as policies, procedures and systems, activities for
the elderly, the administration and provision of specific
services, food service, maintenance, reporting systems and other
operational areas of the business. At the community level, the
administrators of each community conduct training sessions on at
least a monthly basis relating to various practical areas of
care-giving at the community. These monthly sessions cover, on
an annual basis, all phases of the community's operations,
including special areas such as safety, fire and disaster
procedures, resident care, and policies and procedures.
COMPETITION
The senior housing and health care industries are highly
competitive and the Company expects that both the independent-
living business, and assisted-living businesses in particular,
will become more competitive in the future. The Company will
continue to face competition from numerous local, regional and
national providers of long-term care whose communities and
services are on either end of the senior care continuum. The
Company will compete in providing independent-living services
with home health care providers and other providers of
independent-living services, primarily on the basis of quality
and cost of communities and services offered. The Company will
compete in providing assisted-living with other providers of
assisted-living services, skilled nursing communities and acute
care hospitals primarily on the bases of cost, quality of care,
array of services provided and physician referrals. The Company
also will compete with companies providing home based health
care, and even family members, based on those factors as well as
the reputation, geographic location, physical appearance of
communities and family preferences. In addition, the Company
expects that as the provision of long-term care receives
increased attention, competition from new market entrants,
including, in particular, companies focused on independent and
assisted-living, will grow. Some of the Company's competitors
operate on a not-for-profit basis or as charitable organizations,
while others have, or may obtain, greater financial resources
than those of the Company. However, the Company anticipates that
its most significant competition will come from other adult
living communities within the same geographic area as the
Company's communities because management's experience indicates
that senior citizens frequently elect to move into communities
near their homes.
Moreover, in the implementation of the Company's expansion
program, the Company expects to face competition for the
development of adult living communities. Some of the Company's
present and potential competitors are significantly larger or
have, or may obtain, greater financial resources than those of
the Company. Consequently, there can be no assurance that the
Company will not encounter increased competition in the future
which could limit its ability to attract residents or expand its
business and could have a material adverse effect on the
Company's financial condition, results of operations and
prospects. In addition, if the development of new adult living
communities outpaces demand for those communities in certain
markets, such markets may become saturated. Such an oversupply
of facilities could cause the Company to experience decreased
occupancy, depressed margins and lower operating results.
COMPANY HISTORY
In April, 1996, John Luciani and Bernard M. Rodin, the
principal stockholders of the Company (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
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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.
J&B Management Company managed certain multi-family properties
for which the United States Department of Housing and Urban
Development ("HUD") provided mortgage insurance. In 1990 and
1991, J&B Management Company 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.
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, all states
except South Dakota require licenses to provide the assisted-
living services. 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 Syndicated nursing home and one Syndicated adult
living community operated by the Company contains 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 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
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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 April 24, 1998, the Company employed approximately 1,900
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.
ITEM 2. PROPERTIES
SYNDICATED COMMUNITIES
The Company currently manages 37 Syndicated adult living
communities containing 5,261 adult living apartment units and one
Syndicated nursing home containing 57 beds. One of the Company's
Syndicated adult living communities contains 70 nursing home
beds. Such communities are owned by Owning Partnerships and not
by the Company. The Company generally has a 1% interest in the
Owning Partnerships and a 1% interest in the Investing
Partnerships which are formed to purchase a 99% partnership
interest in the Owning Partnership. The following chart sets
forth information regarding the Syndicated adult living
communities managed by the Company:
AVERAGE
OCCUPANCY
NUMBER YEAR % AS OF
OF ACQUIRED APRIL 10,
COMMUNITY (1) STATE UNITS (2) 1998(8)
-------------------- --------- ------ -------- ---------
The Grand Court Mesa Arizona 174 1997 99%
The Grand Court Arizona 136 1991 99%
Phoenix
The Grand Court Fort Florida 184 1989 94%
Myers
The Grand Court Florida 126 1996 74%
Lakeland
The Grand Court Lake Florida 170 1992 84%
Worth
The Grand Court Florida 189 1995 69%
North Miami
The Grand Court Florida 60 1993 96%
Pensacola
The Grand Court I Florida 72 1994 93%
Pompano Beach(3)
The Grand Court II Florida 42 1994 73%(7)
Pompano Beach(3)
The Grand Court Florida 164 1997 99%
Tampa
The Grand Court Florida 94 1995 99%
Tavares
16
<PAGE>
AVERAGE
OCCUPANCY
NUMBER YEAR % AS OF
OF ACQUIRED APRIL 10,
COMMUNITY (1) STATE UNITS (2) 1998(8)
-------------------- --------- ------ -------- ---------
The Grand Court Florida 133 1997 92%
Winterhaven
The Grand Court Illinois 76 1993 99%
Belleville
The Grand Court II Kansas 127 1994 99%
Kansas City
The Grand Court Kansas 275 1997 100%(7)
Overland Park
The Grand Court Michigan 73 1998 100%
Adrian
The Grand Court Michigan 164 1993 100%
Farmington Hills
The Grand Court Novi Michigan 114 1994 100%
The Grand Court Michigan 153 1997 100%
Westland
The Grand Court I Missouri 173 1989 100%
Kansas City
The Grand Court III Missouri 217 1989 81%(7)
Kansas City(4)
The Grand Court Las Nevada 152 1991 97%
Vegas
The Grand Court New 140 1997 93%
Albuquerque Mexico
The Grand Court Ohio 120 1994 96%
Columbus
The Grand Court Ohio 185 1994 100%
Dayton
The Grand Court Ohio 73 1992 90%
Findlay
The Grand Court Ohio 77 1992 91%
Springfield
The Grand Court I Tennessee 143(5) 1995 82%
Chattanooga
The Grand Court II Tennessee 146 1995 98%
Chattanooga
The Grand Court Tennessee 197 1992 96%
Memphis
The Grand Court Tennessee 197 1996 69%(7)
Morristown
The Grand Court Texas 180 1992 95%
Bryan
The Grand Court Texas 112 1997 83%(7)
Garland
The Grand Court Texas 132 1990 95%
Longview
The Grand Court Texas 139 1991 94%
Lubbock
The Grand Court I Texas 198 1993 97%
San Antonio
The Grand Court II Texas 57(6) 1995 85%
San Antonio
The Grand Court Texas 60 1996 87%
Weatherford
The Grand Court Virginia 98 1995 100%
Bristol
17
<PAGE>
--------------
(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.
(2) Represents year in which the Owning Partnership 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 managed by the Company and
dividing that number by the total number of months the
community was managed by the Company during the periods
April 1997 through March 1998. 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.
The Syndicated 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
January 31, 1998, (i) the Company is liable as a general partner
for approximately $10.9 million in principal amount of mortgage
debt relating to five Syndicated adult living communities and
(ii) wholly-owned entities are liable as general partners for
approximately $25.7 million in principal amount of mortgage debt
relating to five syndicated adult living communities and one
syndicated nursing home managed by the Company as of January 31,
1998. In the case of the general partner liabilities of the
wholly-owned entities, the only assets of the Company at risk of
loss are the general partner interests in the specific
properties. As of January 31, 1998, the aggregate principal
amount of the mortgage debt of the Owning Partnerships was
approximately $192.0 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 it will continue to arrange for future
acquisitions of existing adult living communities through
mortgage financing and Syndications.
OWNED OR LEASED COMMUNITIES
The Company currently manages four newly developed adult
living communities containing 552 adult living apartment units
which were constructed pursuant to the Company's development
plan. Two of these four adult living communities are owned by
the Company and two are operated by the Company pursuant to long-
term leases. The following chart sets forth information
regarding such adult living communities:
18
<PAGE>
AVERAGE
NUMBER OF YEAR OCCUPANCY
COMMUNITY STATE UNITS BUILT (1) (2)
----------------- ------- --------- ---------- ----------
The Grand Court Texas 142 1998 --
Corpus Christi
(3)
The Grand Court El Texas 142 1998 --
Paso (4)
The Grand Court Texas 142 1998 --
San Angelo (4)
The Grand Court Texas 126 1998 --
Temple (3)
----------------
(1) Represents the year in which the property was placed into
service.
(2) There is no occupancy percentage calculated as yet due to
the properties being in the early stages of their initial
lease-up period.
(3) Represents newly developed properties which are owned by the
Company.
(4) Represents newly developed properties which are operated by
the Company pursuant to long-term leases.
The adult living communities owned by the Company were
developed through mortgage financing. 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.
ITEM 3. LEGAL PROCEEDINGS
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 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
19
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security
holders, through the solicitation of proxies or otherwise, during
the fourth quarter of the fiscal year ended January 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") is traded on
the National Market tier of the Nasdaq Stock Market, which
reports the daily high, low and closing transaction prices, as
well as volume data, under the symbol "GCLI". Trading in the
Common Stock began on March 16, 1998. The high and low bid
prices of the Common Stock since March 16, 1998 through April 29,
1998 have been $11.00 per share and $10.00 per share,
respectively. As of April 29, 1998, there are approximately 10
holders of record of the Common Stock.
The Company has not declared and paid cash dividends and it
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.
In March 1998, the Company sold to the public 2,800,000
shares of its common stock at an initial offering price of $9.50
per share. The net proceeds that the Company received as a
result of this offering were $24.0 million. The Company intends
to use approximately $21.0 million of the net proceeds to finance
the development of new adult living communities and the remainder
for working capital. The Company has purchased a series of 30
day, 90 day and 180 day treasury bills with the entire net
proceeds pending application of such funds.
20
<PAGE>
ITEM 6. 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 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. 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
YEARS ENDED JANUARY 31
-----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
Revenues:
Sales . . . . $ 20,973 $ 22,532 $ 31,973 $ 36,021 $ 38,135
Syndication
fee income. 7,654 5,587 8,603 7,690 7,923
Deferred
income
earned . . . 7,502 4,399 9,971 5,037 7,254
Interest
income . . 13,315 9,503 12,689 13,773 12,051
Property
management
fees from
related
parties . . 3,854 4,351 4,057 2,093 3,684
Equity in
earnings
from
partnerships 206 276 356 423 541
Other income -- -- 1,013 -- 4,683
-------- -------- -------- -------- --------
Total Revenues 53,504 46,648 68,662 65,037 74,271
======== ======== ======== ======== ========
Costs and
expenses:
Cost of sales 26,876 21,743 27,688 34,019 33,635
Selling . . . 6,706 6,002 7,664 7,176 7,602
Interest . . 10,991 13,610 15,808 16,394 19,409
General and
administra-
tive . . . 5,226 6,450 7,871 7,796 8,437
Loss on
impairment
of notes
and
receivables -- -- -- 18,442 --
Write-off of
registration
costs . . . -- -- -- -- 3,107
Officers'
compen-
sation(1) . 1,200 1,200 1,200 1,200 1,200
Depreciation
and
amortization 1,433 2,290 2,620 3,331 3,340
-------- -------- -------- -------- --------
Total Costs and
Expenses 52,432 51,295 62,851 88,358 76,730
======== ======== ======== ======== ========
Net income
(loss) . . . 1,072 (4,647) 5,811 (23,321) (2,459)
Pro-forma income
tax provision
(benefit)(2) 429 (1,859) 2,324 -- --
-------- --------- -------- -------- --------
Pro-forma net
income
(loss)(2) . . $ 643 $ (2,788) $ 3,487 $(23,321) $ (2,459)
======== ======== ======== ======== ========
Pro-forma
earnings
(loss) per
common share
(basic and
diluted)(2) $ .04 $ (.19) $ .23 $ (1.55) $ (.16)
======== ======== ======== ======== ========
Pro-forma
weighted
average
common shares
used . . . . 15,000 15,000 15,000 15,000 15,000
======== ======== ======== ======== ========
OTHER DATA:
Adult living
communities
operated (end
of period) . 18 24 28 31 37
======== ======== ======== ======== ========
Number of
units
(end of
period). . 2,834 3,683 4,164 4,480 5,261
======== ======== ======== ======== ========
Average
occupancy
percentage(3) 90.4% 89.3% 94.7% 91.3% 93.3%
======== ======== ======== ======= ========
21
<PAGE>
AS OF JANUARY 31,
------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and
cash equivalents . . $ 9,335 $ 10,950 $ 17,961 $ 14,111 $ 11,964
Notes and
receivables-net . . 227,879 220,482 224,204 222,399 231,140
Total assets . . . . 248,854 248,553 260,023 261,661 295,799
Total liabilities . . 211,647 217,879 225,238 229,658 269,387
Stockholders' equity 37,207 30,674 34,785 32,003 26,412
--------------------------
(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 distributions for purposes of the Company's
financial statements. In fiscal 1993 through fiscal
1997, such officers also received $5,496; $943; $850,
$397 and $1,566 each respectively as a distribution.
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.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statements
to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995 for any forward-looking statements made by, or on behalf, of
the Company in this Annual Report on Form 10-K. Forward-looking
statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying
assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words
"anticipates", "estimates", "expects", "intends", "believes" and
similar expressions. From time to time, the Company or one of
its subsidiaries individually may publish or otherwise make
available forward-looking statements of this nature. All such
forward-looking statements, whether written or oral, and whether
made by or on behalf of the Company or its subsidiaries, are
expressly qualified by these cautionary statements and any other
cautionary statements which may accompany the forward-looking
statements. In addition, the Company disclaims any obligation to
update any forward-looking statements to reflect events or
circumstances after the date hereof.
Forward-looking statements made by the Company are subject
to risks and uncertainties that could cause actual results or
events to differ materially from those expressed in, or implied
by, the forward-looking statements. These forward-looking
statements include, among others, statements concerning the
Company's revenue and cost and expense, trends, the number and
economic impact of anticipated acquisitions and new developments,
planned capital expenditures and financing needs and
availability. Investors or other users of the forward-looking
statements are cautioned that such statements are not a guarantee
of future performance by the Company and that such forward-
looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those
expressed in, or implied by, such statements. Some, but not all,
of the risks and uncertainties include recent net losses and
anticipated operating losses, general economic and real estate
risks in the areas in which the Company has operations,
competitive factors in the long-term care services industry,
potential increases in operating costs (including staffing and
labor costs), complying with and potential changes in government
regulation, the substantial debt obligations of the Company,
Management Contract Obligations and prepayment rights of limited
partners, the need for additional financing, potential
development delays and cost overruns relating to the Company's
development plan, possible defaults and/or bankruptcies relating
to Multi-Family Properties, liabilities arising from general
partner status, difficulties of managing rapid expansion, the
Company's dependence on senior management and skilled personnel,
the dependence on attracting seniors with sufficient resources to
pay for the Company's services, possible environmental
liabilities, restrictions imposed by laws benefiting disabled
persons, liability and insurance risk, tax rates and policies,
rates of interest and changes in accounting principles or the
application of such principals to the Company.
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. 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 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
23
<PAGE>
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. These Syndicated
adult living communities and the one Syndicated nursing home are
managed by the Company but 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 Syndicated adult living community owned by such Owning
Partnership. 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 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
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.
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,
24
<PAGE>
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 (each a
"Resyndication") 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 four adult living
communities, is nearing completion of the construction of three
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 are being developed under the plan. The
Company will manage and operate each of the newly developed
communities. The Company does not intend to Syndicate any of its
newly developed adult living communities. The Company estimates
that the cost of developing each new adult living community
(including reserves necessary to carry the community through its
lease-up period) utilizing mortgage financing will be
approximately $9.5 million and utilizing long-term lease
financing will be approximately $10 million. The Company expects
to complete the construction of three of the four 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
four adult living communities, along with the four 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 the
Company's initial public offering which occurred in March, 1998,
funds generated by its business operations, mortgage construction
financing, the proceeds of anticipated refinancings of
construction financing on, and/or sale-leasebacks of, stabilized,
newly constructed communities, and may complete additional
issuances of debt or equity securities to finance the
development, construction and initial operating costs of
additional new adult living communities. 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:
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. 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 Syndicated adult living
communities as well as other factors such as age, location and
cash flow of the underlying property.
. Syndication Fee Income. The Company earns Syndication fee
income equal to the expenses of the Syndication which include
commissions.
. Deferred Income Earned. The Company has deferred income on
sales to Investing Partnerships of interests in Owning
Partnerships. The Company has arranged for the 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 $3.3 million,
$1.2 million and $2.8 million for the years ended January 31,
1996, 1997 and 1998, respectively. The Company accounts for the
Syndication of Investing Partnerships which were formed to
acquire controlling interests in Owning Partnerships which own
Multi-Family Properties ("Multi-Family Owning Partnerships")
under the installment method. Under the installment method the
gross profit is determined at the time of sale. The revenue
recorded in any given year would equal the cash collections
multiplied by the gross profit percentage. 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.
. Interest Income. The Company has notes receivable with
respect to Purchase Notes arising from the Syndication of adult
living communities ("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.
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The Company also has notes receivable with respect to
Purchase Notes arising from the Syndication of multi-family
properties (" 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 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
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 Multi-Family Property. Interest payments on
each Multi-Family Note also are collateralized by the related
investor notes.
. Property Management Fees. Property management fees earned
for services provided to related parties are recognized as
revenue when related services have been performed.
. Equity in Earnings from Partnerships. The Company accounts
for its interest in limited partnerships under the equity method
of accounting. Under this method the Company records its share
of income and loss of the entity based upon its general
partnership interest.
. Existing Defaults and Bankruptcies of Owning Partnerships.
As described in "Liquidity and Capital Resources", 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 (this Multi-
Family Owning Partnership along with the nine Multi-Family Owning
Partnerships that filed bankruptcy petitions, are referred to
herein as the "Protected Partnerships"). 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 fifteen Multi-Family Owning Partnerships
currently in default on their mortgages will also file Chapter 11
Petitions or lose their properties through foreclosure. 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
receivables relating to Multi-Family Properties 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 Company to realize a non-cash loss
of up to the recorded value for such Multi-Family Note plus any
related receivables, 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).
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RESULTS OF OPERATION
. Revenues
Total revenues for year ended January 31, 1998 ("Fiscal
1997") were $74.3 million as compared to $65.0 million for the
year ended January 31, 1997 ("Fiscal 1996"), representing an
increase of $9.3 million or 14.3%. Total revenues for 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%.
Sales (income from the sale of partnership interests) for
Fiscal 1997 were $38.1 million as compared to $36.0 million for
Fiscal 1996, representing an increase of $2.1 million, or 5.8%.
The increase in sales was attributable to more favorable
Syndication terms in Fiscal 1997 as compared to Syndications
completed in Fiscal 1996, as partially offset by the Syndication
of properties with less initial cash flow in Fiscal 1997 as
compared to the Syndications in Fiscal 1996. 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 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.
Syndication fee income for Fiscal 1997 was $7.9 million as
compared to $7.7 million, representing an increase of $200,000 or
2.6%. The increase is attributable to higher total commissions
paid relating to a greater sales volume in Fiscal 1997 as
compared to Fiscal 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.
Deferred income earned for Fiscal 1997 was $7.3 million as
compared to $5.0 million for Fiscal 1996, representing an
increase of $2.3 million or 46%. The increase is attributable to
the cash flows generated by adult living communities during
Fiscal 1997 exceeding the estimates used to establish deferred
income liabilities in Fiscal 1997 to a greater degree than such
cash flow exceeded estimates in Fiscal 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.
Interest income for Fiscal 1997 was $12.1 million as
compared to $13.8 million for Fiscal 1996, representing a
decrease of $1.7 million or 12.3%. The decrease is attributable
to (i) the accelerated receipt of interest payments in Fiscal
1996 due to the refinancing of a number of adult living
communities (which includes the initial mortgage financing of
certain adult living communities that has been previously
acquired without a mortgage) in March 1996, which reduced
interest payments that otherwise would have been received in
Fiscal 1997, and (ii) a reduction of interest income due to the
refinancings of the adult living communities which resulted in
the prepayment of mortgages which were previously assets of the
Company as partially offset by interest payments realized on
Multi-Family notes as a result of excess refinancing proceeds
received as a result of mortgage debt restructurings on four
Multi-Family Properties. Interest income for Fiscal 1996 was
$13.8 million compared to $12.7 million for Fiscal 1995, an
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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 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.
Property management fees from related parties for Fiscal
1997 was $3.7 million as compared to $2.1 million for Fiscal
1996, representing an increase of $1.6 million or 76.2%. The
increase is primarily attributable to the cash flows from the
underlying Owning Partnerships exceeding the specified rate of
return to the limited partners in Fiscal 1997 to an extent
greater than in Fiscal 1996. 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,
(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.
Equity in earnings from partnerships was $500,000 in Fiscal
1997 as compared to $400,000 in Fiscal 1996, representing an
increase of $100,000 or 25%. 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.
The Company realized other income of $4.7 million in Fiscal
1997. 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. This allowed the Company to recognize non-
cash other income of $3.1 million see "Liquidity and Capital
Resources". Approximately $1.0 million of this non-cash income
resulted from the reduction of certain previously established
reserves associated with the Company's notes and receivables.
The remaining $600,000 of this non-cash income resulted from the
write-off of liabilities which are no longer required. 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 Fiscal 1996.
. Cost of Sales
Cost of sales (which includes (i) the cash portion of the
purchase price for Syndicated adult living communities plus
related transaction costs and expenses and (ii) any payments in
respect of Management Contract Obligations) for Fiscal 1997 was
$33.6 million as compared to $34.0 million for Fiscal 1996,
representing a decrease of $400,000 or 1.0%. The decrease is
primarily attributable to the lesser aggregate cash portion of
the purchase prices of the adult living communities acquired and
Syndicated in Fiscal 1997 as compared to the cash portion of the
purchase prices of the adult living communities acquired and
Syndicated in Fiscal 1996 as partially offset by increased
funding due to Management Contract Obligations in Fiscal 1997 as
compared to Fiscal 1996. Cost of sales as a percentage of sales
and syndication fee income was 73.0% in Fiscal 1997 as compared
to 77.8% in Fiscal 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. Cost of sales for Fiscal 1996
was $34.0 million as compared to $27.7 million for Fiscal 1995,
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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.
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.
. Selling Expenses
Selling expenses for Fiscal 1997 was $7.6 million as
compared to $7.2 million for Fiscal 1996 representing an increase
of $400,000 or 5.6%. The increase is attributable to higher
commissions paid on a greater sales volume for Syndications
completed in Fiscal 1997 as compared to Fiscal 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.
. Interest Expense
Interest expense for Fiscal 1997 was $19.4 million as
compared to $16.4 million for Fiscal 1996, representing an
increase of $3.0 million or 18.3%. The increase is attributable
to an increase in the principal amount of debt and an increase in
interest rates for such debt during Fiscal 1997 as compared to
Fiscal 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 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 1997 and was secured
by the Purchase Note Collateral. During Fiscal 1996 and 1997,
total interest expense with respect to Debenture Debt was
approximately $9.2 million and $8.4 million respectively and the
$3.0 million respectively of interest and related payments to the
Company, which was $6.9 million and $5.4 million respectively
less than the amount required to pay interest on the Debenture
Debt.
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. General and Administrative Expenses
General and administrative expenses were $8.4 million in
Fiscal 1997 as compared to $7.8 million in Fiscal 1996,
representing an increase of $600,000 or 7.7%. 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 Syndicated adult living
communities which increased by six in Fiscal 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.
. Loss on Impairment of Notes and Receivables
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 1997, 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."
. Write-off of Registration Costs
The Company expensed approximately $3.1 million of costs
relating to its proposed initial public offering of equity
securities in Fiscal 1997. Such costs were incurred prior to
April 30, 1997.
. Officers' Compensation
Officers' compensation was $1.2 million for Fiscal 1997,
Fiscal 1996 and Fiscal 1995.
. Depreciation and Amortization
Depreciation and amortization consists of amortization of
deferred debt expense incurred in connection with debt issuance.
Depreciation and amortization for Fiscal 1997 was $3.3 million as
compared to $3.3 million for Fiscal 1996, representing no change.
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.
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. Now that the Company has completed
development of four newly-developed adult living communities, the
ownership and operation of these communities is an additional
source of cash flow. 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.
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Cash flows used by operating activities for Fiscal 1997 were
$11.3 million and were comprised of (i) net loss of $2.5 million
less (ii) adjustments for non-cash items of $5.0 million less
(iii) the net change in operating assets and liabilities of $3.9
million. The adjustments for non-cash items is comprised of
depreciation and amortization of $3.3 million, plus write-off of
registration costs of $3.1 million, offset by deferred income
earned of $7.3 million reduction of impairment reserves on notes
and receivables of $1.0 million and non-cash other income of $3.1
million. The net change in operating assets and liabilities of
$3.9 million was primarily attributable to an increase in notes
and receivables and accrued interest on notes and receivables of
$7.7 million. Approximately 27% of the increase in notes and
receivables was attributable to an increase in Adult Living Notes
due to new Syndications as offset by principal reductions on
Adult Living Notes relating to previous Syndications,
approximately 65% 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 8% 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
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 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.
Net cash used by investing activities for Fiscal 1997 of
$20.4 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. 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 provided by financing activities for Fiscal 1997 of
$29.5 million was comprised of (i) proceeds from the issuance of
new debt of $63.4 million less debt repayments of $44.2 million
plus (ii) proceeds from construction mortgage financing of $19.8
million less (iii) payments of notes payable of $400,000 plus
(iv) increase in notes payable of $4.5 million less (v) the
increase in other assets of $13.6 million. 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) distributions
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) distributions 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.
At January 31, 1998, the Company had total indebtedness,
excluding accrued interest, of $160.9 million, consisting of
$65.5 million of Debenture Debt, $66.2 million of Unsecured Debt,
$5.0 million of Mortgage Debt and $24.2 million of Investor Note
Debt, and the Company had cash and cash equivalents at January
31, 1998 of $12.3 million.
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Of the principal amount of total indebtedness at January 31,
1998, $25.5 million becomes due in the fiscal year ending January
31, 1999; $38.6 million becomes due in the fiscal year ending
January 31, 2000; $25.6 million becomes due in the fiscal year
ending January 31, 2001; $32.4 million becomes due in the fiscal
year ending January 31, 2002; $15.1 million becomes due in the
fiscal year ending January 31, 2003, and the balance of $23.7
million becomes due thereafter. Of the amount maturing in the
fiscal year ending January 31, 1999, $2.3 million is Investor
Note Debt which the Company expects to repay through the
collection of investor notes. The balance, approximately $23.2
million, includes $2.4 million of Debenture Debt and $20.8
million of Unsecured Debt, a portion of which the Company expects
to repay through funds generated by the Company's business
operations and the balance of which the Company expects to
refinance by the issuance of new debt.
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. Under the Capstone agreements the
Company is required to maintain a net worth in an amount no less
than 75% of the net worth of the Company immediately after the
close of the Company's initial public offering, which took place
in March 1998. 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
January 31, 1998, the Company had a net worth of $26.4 million.
On a pro forma basis, after giving effect to the initial public
offering which closed in March 1998, the Company would have had a
net worth of $50.0 million at January 31, 1998. Pursuant to the
Capstone Agreement, the Company is required to maintain a net
worth of no less than $37.6 million. Certain obligations of the
Company contain covenants requiring the Company to maintain
maximum ratios of the Company's liabilities to its net worth.
The most restrictive covenant requires that the Company maintain
a ratio of "loans and accrued interest payable" to consolidated
net worth of no more than 7 to 1. At January 31, 1997 and 1998,
the Company's loan and accrued interest to consolidated net worth
ratio was 4.5 to 1 and 6.1 to 1, respectively and would have been
3.2 to 1 on January 31, 1998 on a pro forma basis, after giving
effect to the initial public offering which closed in March 1998.
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 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 $11.0 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 $6.4 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
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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 $6.4 million the Company paid in respect to
Management Contract Obligations for Fiscal 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 adult living units relating to one
Syndicated adult living community which had been converted from a
multi-family property (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 $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 all
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 and
property cash flows 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 and their fourteen related Investing
Partnerships. Although the Company has no obligation to fund
operating shortfalls after the five-year term of the management
contracts, as of January 31, 1998, the Company had advanced an
aggregate of approximately $500,000 to two of these 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. From time to time, the Company has
also made discretionary payments to Owning Partnerships beyond
the Management Contract Obligations period for the purpose of
making distributions to limited partners.
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
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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 60.9% in Fiscal
1995, 65.7% in Fiscal 1996 and 78.8% for Fiscal 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.
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 January 31, 1998, the recorded
value, net of deferred income, of Multi-Family Notes was $107.3
million. All but approximately $1.6 million of the $60.3 million
of "Other Partnership Receivables" recorded on the Company's
Consolidated Balance Sheet as of January 31, 1998 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.
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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 has not affected 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. This allowed the Company to recognize non-
cash other income of $3.1 million. The two Investing Partnerships
related to these two Protected Partnerships have transferred the
respective Assigned Interests back to the Principal Stockholders
and their affiliate. This transfer is recorded as a non-cash
distribution to the Principal Stockholders for the release of the
previously assigned collateral of $3.1 million in Fiscal 1997.
Fifteen of the Multi-Family Owning Partnerships remain in
default on their respective mortgages. As of January 31, 1998,
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
$32.7 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 Other
Partnership Receivables, net of any deferred income recorded for
such Multi-Family Note and any reserves for such Multi-Family
Note and Other Partnership 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.
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
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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 will make certain improvements to the properties and
may not renew rental assistance contracts as part of a strategy
to reposition those Multi-Family Properties as market-rate, non-
subsidized properties. 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.
The future growth of the Company will be based upon the
continued acquisition and Syndication of existing adult living
communities and the development of newly-constructed adult living
communities, which the Company does not intend to Syndicate. The
Company anticipates that it will acquire between six and twelve
existing adult living communities over the next two years. It is
anticipated that acquisitions of existing adult living
communities will be arranged by utilizing a combination of
mortgage financing and Syndications. In February, 1998, the
Company entered into a contract to acquire an adult living
community in Sacramento, California containing 88 apartment
units. The Company regularly obtains acquisition mortgage
financing from three different commercial mortgage lenders and,
in view of its ready access to such mortgage financing, has not
sought any specific commitments or letters of intent with regard
to future, unidentified acquisitions. Similarly, the Company
believes that it has sufficient ability to arrange for
acquisitions of existing adult living communities in part by
Syndications. 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 four adult living
communities, is nearing completion of the construction of three
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
three of the four communities currently under construction by the
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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 four adult living
communities, along with the four 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 anticipates that the proceeds of the Company's recently
completed initial public offering, funds generated by its
business operations and construction mortgage financing will
provide sufficient funds to pursue its development plan 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.
The first new communities being constructed pursuant to the
Company's development plan are in Texas. The Company completed
construction with mortgage financing for up to $7.0 million on an
adult living community in Corpus Christi, Texas, for up to $7.3
million on an adult living community in Temple, Texas and is
nearing the completion of construction on a site in Round Rock,
Texas, with mortgage financing for up to $7.6 million,
respectively. The Company has commenced construction with
construction financing for $7.1 million on an adult living
community in Tyler, Texas. The Company has acquired additional
sites in Amarillo and South Shore, Texas, holds options to
acquire one additional site in Texas and one additional site in
Kansas 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
the two remaining communities which are located in Wichita Falls
and Abilene, Texas, respectively. 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 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.
. 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.
38
<PAGE>
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
communities 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.
. New Accounting Pronouncements
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.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Page
----
Independent Auditors' Report 41
Consolidated Balance Sheets as of January 31, 1997 and 1998 42
Consolidated Statements of Operations for the Years
Ended January 31, 1996, 1997 and 1998 43
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended January 31, 1996,
1997 and 1998 44
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1996, 1997 and 1998 45
Notes to Consolidated Financial Statements 47
40
<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,
1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended January 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period
ended January 31, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
April 27, 1998
41
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
-----------------------------------------------------------------
January 31,
-------------------------
1997 1998
---- ----
ASSETS
Cash and cash equivalents $ 14,111 $ 11,964
Notes and receivables -
net . . . . . . . . . . 222,399 231,140
Investments in
partnerships . . . . . . 3,056 3,924
Construction in progress 6,742 26,241
Other assets - net . . . 15,353 22,530
-------- --------
Total assets . . . . . . $261,661 $295,799
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans and accrued
interest payable . . . . $142,628 $161,850
Construction loan payable 2,750 22,595
Notes and commissions
payable . . . . . . . . 1,716 5,299
Other liabilities . . . . 4,393 3,531
Deferred income . . . . . 78,171 76,112
-------- --------
Total liabilities . . . . 229,658 269,387
======== ========
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
Paid-in capital 54,321 51,189
Accumulated deficit (22,468) (24,927)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . 32,003 26,412
-------- --------
Total liabilities and
stockholders' equity . . $261,661 $295,799
======== ========
See Notes to Consolidated Financial Statements.
42
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
----------------------------------------------------------------
Years ended January 31
----------------------------------
1996 1997 1998
---- ---- ----
Revenues:
Sales . . . . . . $31,973 $36,021 $38,135
Syndication fee
income . . . . . 8,603 7,690 7,923
Deferred income
earned . . . . . 9,971 5,037 7,254
Interest income . 12,689 13,773 12,051
Property
management fees
from related
parties . . . . 4,057 2,093 3,684
Equity in
earnings from
partnerships . . 356 423 541
Other income . . 1,013 -- 4,683
------- ------- -------
68,662 65,037 74,271
------- ------- -------
Cost and Expenses:
Cost of sales . . 27,688 34,019 33,635
Selling . . . . . 7,664 7,176 7,602
Interest . . . . 15,808 16,394 19,409
General and
administrative . 7,871 7,796 8,437
Loss on
impairment of
notes and
receivables . . -- 18,442 --
Write-off of
registration
costs . . . . . . -- -- 3,107
Officers'
compensation . . 1,200 1,200 1,200
Depreciation and
amortization . . 2,620 3,331 3,340
------- ------- -------
62,851 88,358 76,730
------- ------- -------
Net income (loss) . 5,811 (23,321) (2,459)
Pro forma income
tax provision
(benefit) . . . . 2,324 -- --
------- ------- -------
Pro forma net
income (loss) . . $ 3,487 $(23,321) $ (2,459)
======= ======= =======
Pro forma earnings
(loss) per common
share (basic and
diluted) . . . . . $ 0.23 $ (1.55) $ (0.16)
======= ======= =======
Pro forma weighted
average common
shares used . . . 15,000 15,000 15,000
======= ======= =======
See Notes to Consolidated Financial Statements.
43
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED January 31, 1996, 1997 AND 1998
(In Thousands)
-----------------------------------------------------------------
Stockholders' equity, January
31, 1995 . . . . . . . . . . 30,674
Net income . . . . . . . . . 5,811
Distributions . . . . . . . . (1,700)
-------
Stockholders' equity, January
31, 1996 . . . . . . . . . . 34,785
Net loss . . . . . . . . . . (23,321)
Capital Contribution . . . . 21,333
Distributions . . . . . . . (794)
-------
Stockholders' equity, January
31, 1997 . . . . . . . . . . 32,003
Net loss . . . . . . . . . . (2,459)
Distributions . . . . . . . . (3,132)
-------
Stockholders' equity, January
31, 1998 . . . . . . . . $26,412
=======
See Notes to Consolidated Financial Statements.
44
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
-----------------------------------------------------------------
YEARS ENDED JANUARY 31,
-----------------------------------
1996 1997 1998
---- ---- ----
Cash flows provided
(used) from operating
activities:
Net income (loss) . . . $ 5,811 $ (23,321) $ (2,459)
------- -------- -------
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization . . . . 2,620 3,331 3,340
Loss on impairment of
notes and
receivables . . . . -- 18,442 --
Reduction to
allowance for
uncollectible
notes receivable . . -- -- (1,023)
Deferred income
earned . . . . . . . (9,971) (5,037) (7,254)
Write-off of
registration costs . -- -- 3,107
Other Income (non
-cash) . . . . . . . -- -- (3,132)
Adjustment for changes
in assets and
liabilities:
(Increase) decrease
in accrued interest
on notes and
receivables . . . . (2,560) 715 (3,611)
(Increase) decrease
in notes and
receivables . . . . (1,162) 3,981 (4,107)
Increase (decrease)
in commissions
payable . . . . . . (244) 211 (503)
Increase (decrease)
in other liabilities 2,018 375 (862)
Decrease in deferred
income . . . . . . . 4,458 3,766 5,195
------- -------- -------
(4,841) 25,784 (8,850)
------- -------- -------
Net cash provided
(used) by
operating
activities . . . . 970 2,463 (11,309)
------- -------- -------
Cash flows from investing
activities:
Increase in investments (567) (449) (868)
Increase in
Construction in
progress . . . . . -- (6,742) (19,499)
------- -------- -------
Net cash used by
investing
activities . . . . (567) (7,191) (20,367)
------- -------- -------
Cash flows from financing
activities:
Payments on loans
payable . . . . . . . (39,326) (55,340) (44,178)
Proceeds from loans
payable . . . . . . . 52,065 57,874 63,400
Proceeds from
construction loan
payable . . . . . . . -- 2,750 19,845
Increase in other
assets . . . . . . . . (2,790) (3,433) (13,624)
Payments of notes
payable . . . . . . . (1,641) (179) (434)
Proceeds from notes
payable . . . . . . . -- -- 4,520
Distributions . . . . . (1,700) (794) --
------- -------- -------
Net cash provided
in financing
activities . . . . 6,608 878 29,529
------- -------- -------
Increase (decrease) in
cash and cash
equivalents . . . . . . 7,011 (3,850) (2,147)
45
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
Cash and cash
equivalents, beginning
of period . . . . . . . 10,950 17,961 14,111
------- -------- -------
Cash and cash
equivalents, end of
period . . . . . . . . . $ 17,961 $ 14,111 $ 11,964
======= ======== =======
Supplemental information:
Interest paid . . . . . $ 16,922 $ 16,739 $ 19,396
======= ======== =======
Non cash capital
contribution . . . . . -- $ 21,333 --
======= ======== =======
See Notes to Consolidated Financial Statements.
46
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED January 31, 1996, 1997, and 1998
(In Thousands, except per share data)
-----------------------------------------------------------------
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.
LINES OF BUSINESS - The Company, a fully integrated provider
of adult living accommodations and services, acquires,
develops and manages adult living communities in 12 states
in the Sun Belt and the Midwest. The Company's revenues
have been and are expected to continue to be primarily
derived from sales of partnership interests ("Syndications")
in partnerships it organizes to acquire existing adult
living communities. As a result of the Company's
Syndication 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.
The Company has also instituted a development plan pursuant
to which it has substantially completed construction of four
adult living communities and is also nearing completion of
three additional adult living communities, all of which are
in Texas. The Company plans to own or lease pursuant to
long-term operating leases or similar arrangements each of
the newly developed communities. Another source of income
is interest income on notes receivable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers cash and
cash equivalents to include cash on hand, demand deposits
and highly liquid investments with maturities of three
months or less.
REVENUE RECOGNITION - Revenue from sales of interests in
partnerships, is recognized under the full accrual method of
accounting when the profit on the transaction is
determinable, that is, the collectibility of the sales price
is reasonably assured and the earnings process is virtually
complete. The profit recognized has been reduced by the
estimated maximum reasonably possible exposure to loss.
Revenue from sales of interests in Syndicated 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.
47
<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 increases the cost of
sales 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 $282, $2,500 and $5,900 for the years ended
January 31, 1996, 1997, 1998, respectively, and such expense
is included as a component of cost of sales. From time to
time, the Company has also made discretionary payments to
Owning Partnerships beyond the Management Contract
Obligations period for the purpose of making distributions
to limited partners. 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 $3,300, $1,200
and $2,800 for the years ended January 31, 1996, 1997 and
1998 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.
48
<PAGE>
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include those of the Company and its
subsidiaries. The effects of all significant intercompany
transactions have been eliminated.
DEFERRED LOAN COSTS - Costs incurred in connection with
obtaining long-term financing have been deferred and are
amortized over the term of the financing.
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
Syndicated 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
$2,044 and $2,515 as of January 31, 1997 and 1998
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.
RECLASSIFICATION - Certain amounts in prior years have been
reclassified to conform with current year presentation.
EARNINGS PER SHARE - In February, 1997, the Financial
Accounting Standards Board (FASB) issued Statement of
Financial Accounting No. 128, Earnings Per Share (SFAS No.
128), which requires dual presentation of Basic EPS and
Diluted EPS on the face of the income statement for all
entities with complex capital structures and the restatement
of all prior period earnings per share data presented. SFAS
No. 128 also requires a reconciliation of the numerator and
denominator of Basic EPS and Diluted EPS computation.
NEW ACCOUNTING PRONOUNCEMENTS - The Financial Accounting
Standards Board has recently issued several new accounting
pronouncements. 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.
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.
49
<PAGE>
4. NOTES AND RECEIVABLES
Notes and other receivables are from related parties and
consist of the following:
JANUARY 31,
---------------------
1997 1998
-------- --------
Notes receivable -- multi-
family(a)(e) . . . . . . . . $174,164 $173,598
Notes and accrued interest
receivable -- adult
living(b) . . . . . . . . . . 3,906 5,955
Other partnership
receivables(c)(e) . . . . . . 54,645 60,265
Accrued interest receivable . . 816 1,431
-------- --------
233,531 241,249
Less allowance for uncollectible
receivables(d) . . . . . . . 11,132 10,109
-------- --------
$222,399 $231,140
======== ========
At January 31, 1997 and 1998 the carrying value of impaired
notes receivable, net of related deferred income, was
approximately $34,742 and $41,106, respectively. Interest
income on impaired notes is recognized on the cash basis.
Such income recognized was $2,272, $1,261 and $1,342 for the
years ended January 31, 1996, 1997 and 1998 respectively.
(a) The Company has notes receivable from the Syndicated
Investing Partnerships which were formed to acquire
controlling interests in Owning Partnerships which own
multi-family properties. The notes have maturity dates
ranging from ten to fifteen years from the date of the
acquisition of the respective partnership interests.
At January 31, 1998, 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 second 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
$7,481 for the years ended January 31, 1996, 1997 and
1998, respectively.
(b) The Company has notes receivable from the Syndicated
Investing Partnerships which were formed to acquire
controlling interests in Owning Partnerships which own
adult living communities. Such notes generally have
interest rates ranging from 11% to 13.875% and are due
in installments over five years from the date of
acquisition of the respective partnership interests.
The notes represent senior indebtedness of the related
Investing Partnerships, and are collateralized by the
respective interests in the Owning Partnerships.
Principal and interest payments on each note are also
collateralized by the investor notes payable to the
Investing Partnerships to which the investors are
admitted. Limited Partners are allowed to prepay their
capital contributions. These prepayments of capital
contributions do not result in the prepayment of the
related purchase notes held by the Company. Instead,
such amounts are loaned to the Company at a rate of
between 11% and 12% by the Investing Partnerships. As
a result of such loans and the crediting provisions of
the related purchase agreements, the Company records
the notes receivable corresponding to the purchase
notes net of such loans. Therefore, these prepayments
act to reduce the recorded value of the Company's notes
receivable.
50
<PAGE>
(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) Allowance for Uncollectible Notes Receivable:
Balance Charged Balance
------- ------- -------
at to Costs Reductions at
-- -------- ---------- --
Beginning and to End of
--------- --- -- ------
of Period Expenses Allowance Period
--------- -------- --------- ------
Year Ended January 31, 1997
Allowance for notes
receivable . . . . . . . . $14,023 18,442 21,333 $11,132
Year Ended January 31, 1998
Allowance for notes
receivable . . . . . . . . $11,132 -- 1,023 $10,109
The multi-family notes receivable relating to 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 $21,300 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 $18,400 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. This allowed the Company to
recognize non-cash other income of $3,100. The two
Investing Partnerships related to these Protected
Partnerships have transferred the respective Assigned
Interests back to the Principal Stockholders and their
affiliate. This transfer is recorded as a non-cash
distribution to the Principal Stockholders for the
51
<PAGE>
release of the previously assigned collateral of
$3,100. 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.
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 January 31, 1998, 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 $32,700. The Company has established
reserves of $10,100 to address the possibility that
these notes and receivables may not be collected in
full.
(e) 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. CONSTRUCTION IN PROGRESS
The Company has capitalized costs which include interest
associated with its construction and development of
properties it is building. If a project is discontinued,
all capitalized project costs are expensed. Such interest
capitalized for years ended January 31, 1997 and 1998 was
$1,200 and $1,600, respectively.
In March 1998, the Company announced the grand openings of
two of its newly constructed adult living communities. The
two communities, which are located in Corpus Christi and
Temple, Texas, respectively contain a total of 268 apartment
units offering both independent and assisted living
services. Such communities are owned and operated by the
Company.
52
<PAGE>
6. OTHER ASSETS
Other assets are comprised as follows:
JANUARY 31,
-------------------
1997 1998
-------- --------
Deferred loan costs(a) . . . . . . . $ 7,452 $ 9,681
Investment in cooperative apartment
building(b) . . . . . . . . . . . . . 1,782 1,782
Unsold subscription units(c) . . . . 1,176 111
Deferred registration costs(d) . . . 2,357 397
Investment held for resale(e) . . . . -- 7,140
Other assets . . . . . . . . . . . . 2,586 3,419
------- -------
$15,353 $22,530
======= =======
(a) Financing costs of $2,588 and $5,325 were deferred during
the years ended January 31, 1997 and 1998, 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 $1,176 and $111 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, 1997
and 1998, 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. These costs were charged against
additional paid-in capital upon the close of the initial
public offering in March, 1998. Prior to March, 1998, the
Company had expensed approximately $3,100 of registration
costs which were incurred prior to April 30, 1997, due to a
previous postponement of the initial public offering by the
Company.
(e) The Company purchased an adult living community in December
1997 for Syndication which will be sold in the first and
second quarters of Fiscal 1998.
7. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
JANUARY 31,
--------------------
1997 1998
---- ----
Banks (including mortgages)(a)(b) . $ 32,044 $ 35,706
Other, principally debentures(c) . 110,584 126,144
-------- --------
$142,628 $161,850
======== ========
53
<PAGE>
(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, 1997
and 1998 was 8.25% and 8.5%, respectively.
(b) 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 renegotiated, as of April 1998,
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 maximum ratios of the
Company's liabilities to its net worth. The most
restrictive covenant requires that the Company maintain a
ratio of "loans and accrued interest payable" to
stockholders' equity of no more than 7 to 1.
(c) Debentures are collateralized by various purchase notes and
investor notes related to multi-family property financing.
All loans mature in 1999 through 2004 and bear interest
rates of 11% to 15% per annum.
Future annual maturities of all of the Company's loans payable,
excluding interest, over the next five years and thereafter, are
as follows:
Year Ending
January 31
-----------
1999 . . . . . . . . . . $ 25,515
2000 . . . . . . . . . . 38,592
2001 . . . . . . . . . . 25,557
2002 . . . . . . . . . . 32,396
2003 . . . . . . . . . . 15,131
Thereafter . . . . . . . 23,679
--------
160,870
Accrued interest . . . . 980
--------
$161,850
========
54
<PAGE>
8. CONSTRUCTION LOAN PAYABLE
During the year ended January 31, 1998, pursuant to the
Company's development program, first mortgage loans were
obtained to finance approximately 80% of the costs of
developing four new adult living communities. The interest
rate on three of the loans equals the 30 day LIBOR plus 2
3/4% per annum. The fourth loan bears interest at the rate
of the prime rate plus 1.5% per annum. These loans mature
between November, 1999 and January, 2001. As of January 31,
1998, total funding under such first mortgage loans amounted
to $13,345.
Pursuant to the Company's development program, two limited
partnerships, in each of which the Company holds a 1%
general partnership interest, 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.
9. OTHER LIABILITIES
Other liabilities include unearned income of $1,888 and $205
representing the amount of unsubscribed partnership
interests in adult living communities financed during the
year ended January 31, 1997 and 1998, respectively. Upon
full subscription these amounts will be recognized as
income.
10. DEFERRED INCOME
Deferred income is comprised of:
January 31,
----------------------
1997 1998
---- ----
Multi-family . . . . . . $67,453 $66,342
Adult living(a) . . . . . 10,718 9,770
------- -------
$78,171 $76,112
======= =======
a. The aggregate amount of Management Contract Obligations
relating solely to returns to limited partners for each
of the fiscal years 1998 through 2002 based on existing
management contracts is $15,400, $17,400, $16,400,
$11,200 and $2,400, respectively. Such amounts of
Management Contract Obligations are calculated based
upon 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
generate. The cash flow generated by the related
properties is applied against the total Management
Contract Obligations and any remaining balance is
established as deferred income at year end.
11. 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 $4,540 to $11,340, because it was more likely
than not that such deferred tax assets in excess of deferred
tax liabilities would not 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:
55
<PAGE>
January 31,
----------------------
Deferred tax assets: 1997 1998
---- ----
Notes and receivables . . . . . . . $ 8,904 $ 6,092
Loans payable . . . . . . . . . . . -- 2,000
Investment in partnerships . . . . 1,337 5,045
Net operating loss carryforward . . 1,339 3,847
Other . . . . . . . . . . . . . . 89 147
------- -------
Total gross deferred tax assets . . 11,669 17,131
Less valuation allowance . . . . . . 4,540 11,340
------- -------
Deferred tax assets net of valuation
allowance . . . . . . . . . . . . . 7,129 5,791
------- -------
Deferred tax liabilities:
Deferred income . . . . . . . . . . 4,272 4,562
Other . . . . . . . . . . . . . . 2,857 1,229
------- -------
Total gross deferred tax liabilities 7,129 5,791
------- -------
Net deferred tax assets (liabilities) $ -- $ --
======= =======
The net operating loss carry forward as of January 31, 1998 was
approximately $9,600. A substantial portion of such loss
carryforward will expire January 31, 2013 and the remainder
thereof will expire through January 31, 2018.
12. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring
February 2000. Annual base rent under such lease is
approximately $197. The Company entered into a ten year
lease for additional office space, commencing September 1,
1991. The annual base rent is approximately $150 and will
increase 5% each year for ten years.
On November 14, 1997, an investor in a limited partnership
(the "First Partnership") which was formed to invest in a
second partnership which was formed to develop and own an
adult living community (the "Second Partnership"), filed a
lawsuit, Palmer v. Country Estates Associates Limited
--------------------------------------------
Partnership, et.al., in the United States District Court,
-------------------
District of New Jersey. The Company has never managed the
property owned by the Second Partnership and is not a
general partner in the Second Partnership or the First
Partnership. A predecessor of the Company was a general
partner of the Second Partnership. The Company has never
been a general partner of the First Partnership. The
defendants in the suits 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
56
<PAGE>
respect to certain specified obligations, including, for
example, costs incurred for the correction of hazardous
environmental conditions. However, except for such non-
recourse obligations, as a general partner, the Company, or
a wholly-owned entity formed solely to be the general
partner, is fully liable for all partnership obligations,
including those presently unknown or unobserved, and unknown
or future environmental liabilities. The cost of any such
obligations or claims, if partially or wholly borne by the
Company, could adversely affect the Company's business,
operating results and financial condition. Although most of
the mortgage loans are non-recourse, (i) the Company is
liable as a general partner for approximately $10.9 million
in principal amount of mortgage debt relating to five
Syndicated adult living communities and (ii) wholly-owned
entities are liable as general partners for approximately
$25.7 million in principal amount of mortgage debt relating
to five Syndicated adult living communities and the one
Syndicated nursing home managed by the Company as of January
31, 1998. In the case of the general partner liabilities of
the wholly-owned entities, the only assets of the Company at
risk of loss are the general partner interests in the
specific properties.
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 $27,283 has been funded as of January 31, 1998. 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 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.
In March 1998, the Company announced the grand openings of
two newly constructed adult living communities developed
pursuant to its development program with Capstone. The two
communities, which are located in El Paso and San Angelo,
Texas, respectively, contain a total of 284 apartment units
offering both independent and assisted living services. The
Company has entered into long-term lease arrangements with
Capstone which provides financing for the development of
four of the newly developed adult living communities,
including two of the completed newly developed adult living
communities described above. 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.
13. 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 $262 and $1,600 as of January 31, 1997 and
1998, respectively.
57
<PAGE>
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 $107,300 net of deferred income, at January 31,
1998 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 Unsecured Debt, and the obligations thereunder may
continue. The aggregate amount of such debt personally
guaranteed by each is approximately $51,400. 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 Syndicated adult living
communities and one Syndicated 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 Syndicated
adult living communities and one Syndicated 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 years ended January 31, 1997 and 1998, the Company
paid to Francine Rodin, the wife of Bernard M. Rodin, the
Company's Chief Operating Officer, President and a Director,
$154 and $133, 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. 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 year ended January 31, 1998 and performs
similar services.
The Company has loans receivable of $464 from the Chairman
of the Board and the President of the Company as of January
31, 1998.
58
<PAGE>
14. SUBSEQUENT EVENTS
In March 1998, the Company sold to the public 2,800,000
shares of its common stock at an initial offering price of
$9.50 per share. The net proceeds that the Company received
as a result of this offering was $23,990. The Company
intends to use approximately $20,900 of the net proceeds to
finance the development of new adult living communities and
the remainder for working capital. The Company has
purchased a series of 30 day, 90 day and 180 day treasury
bills with the entire net proceeds pending application of
such funds to the new development program. Also, included in
the "Other Assets" category on the Company's balance sheet
at January 31, 1998 is $397 of deferred registration costs
which the Company will charge against paid-in capital.
The following pro forma consolidated balance sheet is
presented to reflect the effect of this transaction as if it
occurred on January 31, 1998:
ACTUAL PRO FORMA
-------- -----------
Cash . . . . . . . . . . . . . . . $ 11,964 $ 35,954
Notes and receivables - net . . . . 231,140 231,140
Investments in partnerships . . . . 3,924 3,924
Construction in progress . . . . . 26,241 26,241
Other assets - net . . . . . . . . 22,530 22,133
-------- --------
Total assets . . . . . . . . . . . $295,799 $319,392
======== ========
Total liabilities . . . . . . . . $269,387 $269,387
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;
15,000,000 issued and outstanding,
17,800,000 shares issued and
outstanding as adjusted . . . . . . 150 178
Paid-in capital 51,189 74,754
Accumulated deficit (24,927) (24,927)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . 26,412 50,005
-------- --------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . $295,799 $319,392
======== ========
59
<PAGE>
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as
follows:
Name Age Position
---- --- --------
John Luciani(1) 65 Chairman of the Board and
Chief Executive Officer
Bernard M. Rodin(2) 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 33 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
--------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN LUCIANI, Chief Executive Officer and Chairman of the
Board of Directors since January 1996, 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 since January 1996, 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
60
<PAGE>
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
since June, 1996, 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.
PAUL JAWIN, General Counsel and Senior Vice President since
November, 1997, 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 since June, 1996, 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 since June, 1996, 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 since November, 1997, 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 since June,
1996, 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 since June, 1996,
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.
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WALTER FELDESMAN, Director since June, 1996, 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 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 "Dictionary of Eldercare
Terminology". He has written another book "New Medicare Choices"
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 since June, 1996. Until
December 1996 Mr. Goodman was the Area President for the North
Jersey Region for First Union National Bank and a Senior
Executive Vice President of First Union Corporation. From
September 1990 through January 1994, he served as President and
Chief Executive Officer of First Fidelity Bank, N.A., New Jersey.
From January 1994 to December 1995, Mr. Goodman served as a
Senior Executive Vice President and a Director of First Fidelity
Bank, National Association until it was merged into First Union.
From January 1990 until December 1995, he also served as Senior
Executive Vice President, member of the Office of the Chairman
and a Director of First Fidelity Bancorporation. Mr. Goodman
served as the Chairman of the New Jersey Bankers Association from
March 1995 to March 1996. He is a member of the Board of
Directors and Chairman of the Audit Committee of Wawa Inc. and a
member of the Board of Directors of Tear Drop Golf Company, Inc.
and a director of Admiralty Bank Corporation. In addition, Mr.
Goodman is on the Board of Trustees of Rutgers University.
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.
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ITEM 11. 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
ANNUAL COMPENSATION
-----------------------
OTHER ALL
ANNUAL OTHER
COMPEN- COMPEN-
NAME AND SALARY BONUS SATION SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($)
------------------ ---- ------ ----- ------- -------
John Luciani,
Chairman
of the Board
and Chief
Executive Fiscal
Officer(1) . . . . . 1995 -- -- -- $1,450,000
Fiscal
1996 $500,000 -- -- $497,000
Fiscal
1997 $600,000 1,566,000
Bernard M. Rodin,
Chief Operating
Officer, President Fiscal
and Director(1). . . 1995 -- -- -- $1,450,000
Fiscal
1996 $500,000 -- -- $497,000
Fiscal
1997 $600,000 -- -- 1,566,000
John W. Luciani, III,
Executive Vice
President and Fiscal
Director . . . . . . 1995 $315,000 -- -- --
Fiscal
1996 $350,000 -- -- --
Fiscal
1997 $353,846 -- -- --
Dorian Luciani,
Senior Vice Fiscal
President . . . . . 1995 $315,000 -- -- --
Fiscal
1996 $350,000 -- -- --
Fiscal
1997 $353,846 -- -- --
63
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ANNUAL COMPENSATION
-----------------------
OTHER ALL
ANNUAL OTHER
COMPEN- COMPEN-
NAME AND SALARY BONUS SATION SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($)
------------------ ---- ------ ----- ------- -------
Paul Jawin,
General Counsel
and Senior Vice Fiscal
President . . . . . 1995 $289,050 -- -- --
Fiscal
1996 $325,000 -- -- --
Fiscal
1997 $344,327 -- -- --
----------------
(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. In
January 1998, such officers received a non-cash distribution
for the release of previously assigned collateral of $1,566
each.
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."
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.
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
64
<PAGE>
exercised after ten years from the date of grant. Stock
appreciation rights may be granted in tandem with options or
separately.
The exercise price of any incentive stock option granted to
an eligible employee may not be less than 100% of the fair market
value of the shares underlying such option on the date of grant,
unless such employee owns more than 10% of the outstanding Common
Stock or stock of any subsidiary or parent of the Company, in
which case the exercise price of any incentive stock option may
not be less than 110% of such fair market value. No option may
be exercisable more than ten years after the date of grant and,
in the case of an incentive stock option granted to an eligible
employee owning more than 10% of the outstanding Common Stock or
stock of any subsidiary or parent of the Company, no more than
five years from its date of grant. Incentive stock options are
not transferable, except upon the death of the optionee. In
general, upon termination of employment of an optionee (other
than due to death or disability), all options granted to such
person which are not exercisable on the date of such termination
immediately expire, and any options that are so exercisable will
expire three months following termination of employment in the
case of incentive stock options, but not until the date the
options otherwise would expire in the case of non-qualified stock
options. However, all options will be forfeited immediately upon
an optionee's termination of employment for good cause and upon
an optionee's voluntary termination of employment without the
consent of the Board of Directors.
Upon an optionee's death or termination of employment due to
disability, all options will become 100% vested and will be
exercisable (i) in the case of death, by the estate or other
beneficiary of the optionee at any time prior to the date the
option otherwise would expire and (ii) in the case of the
disability of the optionee, by the optionee within one year of
the date of such termination of employment in the case of
incentive stock options, or at any time prior to the date the
option otherwise would expire in the case of non-qualified stock
options.
At the time each grant of restricted shares or performance
shares or units or stock appreciation rights is made, the Board
of Directors will determine the duration of the performance or
restriction period, if any, the performance targets, if any, for
earning performance shares or units, and the times at which
restrictions placed on restricted shares shall lapse.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of
April 29, 1998, 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, and (iii) 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.
AMOUNT OF
NAME OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNER CLASS
---------------- ---------- ----------
John Luciani . . . . . . . . 7,326,970 41.16
Bernard M. Rodin . . . . . . 7,326,970 41.16
All directors and officers
as a group . . . . . . . . 14,653,940 82.32
-----------------
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 distributions and other distributions to each of the
Principal Stockholders of $850,000 and $397,000 in Fiscal 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 $107.3 million, net of
deferred income, as of January 31, 1998, that are secured by the
limited partnership interests in such partnerships and (ii) other
partnership receivables aggregating $58.7 million from such
partnerships at January 31, 1998. 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
$51.4 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.
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 transferred the respective Assigned Interests back
to the Principal Stockholders and their affiliate after these
Protected Partnerships successfully emerged from their bankruptcy
proceedings. 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. The transfer of the
Assigned Interest back to the Principal Stockholders caused the
Company to recognize non-cash other income of $3.1 million and to
record a non-cash dividend to the Principal Stockholders for the
release of the previously assigned interest of $3.1 million in
Fiscal 1997. 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 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
$132,885, respectively, as fees for introducing to the Company
broker/dealers that have assisted the Company in its Syndications
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<PAGE>
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. 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 entire year ended January 31,
1998 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 $3,761,274 was
outstanding at January 31, 1998.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Please refer to Item 8, "Financial Statements and
Supplementary Data" for a complete listing of all
consolidated financial statements and financial statement
schedules.
(b) The Company filed the following reports on Form 8-K: No
current reports on Form 8-K were filed during the quarter
ended January 31, 1998.
(c) Exhibits: Reference is made to the Exhibit Index commencing
on page 69.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GRAND COURT LIFESTYLES, INC.
/s/ Catherine V. Merlino
----------------------------
Catherine V. Merlino
Chief Financial Officer and Vice President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ John Luciani Chairman of the Board April 30, 1998
------------------------ of Directors and
John Luciani Chief Executive
Officer (Principal
Executive Officer)
/s/ Bernard M. Rodin President and Chief April 30, 1998
------------------------ Operating Officer and
Bernard M. Rodin Director (Principal
Executive Officer)
/s/ John W. Luciani, III Executive Vice April 30, 1998
------------------------ President and Director
John W. Luciani, III
/s/ Catherine V. Merlino Chief Financial April 30, 1998
------------------------ Officer and Vice
Catherine V. Merlino President (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Walter Feldesman Director April 30, 1998
------------------------
Walter Feldesman
Director April 30, 1998
------------------------
Leslie E. Goodman
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<PAGE>
EXHIBIT INDEX
*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.
+*10.1 -- 1996 Stock Option and Performance Award Plan.
*10.2(a) -- Loan Agreements dated as of November 25, 1996,
by and between Leisure Centers LLC-1 and Bank
United relating to financing of the Corpus
Christi, Texas property.
*10.2(b) -- Guaranty Agreement, dated as of November 25,
1996, between the Company and Bank United
relating to financing of the Corpus Christi,
Texas property.
*10.2(c) -- Loan Agreement, dated as of January 29, 1997,
by and between Leisure Centers LLC-1 and Bank
United relating to financing of the Temple,
Texas property.
*10.2(d) -- Guaranty Agreement, dated as of January 29,
1997, between the Company and Bank United
relating to the financing of the Temple, Texas
property.
*10.3 -- Master Development Agreement dated September
18, 1996 between Capstone Capital Corp. and
the Company.
*10.4(a) -- Form of 12% Debenture due June 16, 2000 -
Series 1.
*10.4(b) -- Form of 12% Debenture due April 15, 1999 -
Series 2.
*10.4(c) -- Form of 11% Debenture due December 31, 1996 -
Series 3.
*10.4(d) -- Form of 11.5% Debenture due April 15, 2000 -
Series 4.
69
<PAGE>
EXHIBIT INDEX (Continued)
*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 1.
*10.6(b) -- Form of 12.375% Bond due April 15, 2003 -
Series 2.
*10.7(a) -- Bank Agreement between The Bank of New York
and the Company with respect to Short-term
Step-up Bonds - Series 1.
*10.7(b) -- Bank Agreement between The Bank of New York
and the Company with respect to 12.375% Bonds
-Series 2.
*10.8 -- Revolving Credit Agreement dated as of May 7,
1985 between Sterling National Bank & Trust
Company and the Company.
*10.9 -- Assumption Agreement dated as of September 10,
1996 among Sterling National Bank & Trust, the
Company, Bernard M. Rodin and John Luciani.
*10.9(a) -- First Amendment to Assumption Agreement dated
as of September 10, 1996 among Sterling
National Bank & Trust, the Company, Bernard M.
Rodin and John Luciani.
70
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EXHIBIT INDEX (Continued)
*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.
*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.
*10.12 -- Warrant Agreement
21 -- List of Subsidiaries of the Company.
27.1 -- Financial Data Schedules for the periods ended
January 31, 1996 and 1997 and January 31,
1998.
---------------
* Previously filed in Registration Statement No. 333-05955.
(+) Management contracts or compensatory plans or arrangements
required to be filed as exhibits to this Form 10-K by item
601(b)(10)(iii) of Regulation S-K.
71
EXHIBIT 21
LIST OF SUBSIDIARIES
FOR
GRAND COURT LIFESTYLES, INC.
FL Executive Financing Corp.
GCGP I, Inc.
GCGP II, Inc.
Grand Court Development Corp.
Grand Court Facilities, Inc.
Grand Court Facilities, Inc., II
Grand Court Facilities, Inc., III
Grand Court Facilities, Inc., IV
Grand Court Facilities, Inc., V
Grand Court Facilities, Inc., VI
Grand Court Facilities, Inc., VII
Grand Court Facilities, Inc., VIII
Grand Court Facilities, Inc., IX
Grand Court Facilities, Inc., X
Grand Court Facilities, Inc., XI
Grand Court Facilities, Inc., XII
Grand Court Facilities, Inc., XIII
Grand Court Facilities, Inc, XIV
Grand Court Facilities, Inc., XV
Grand Court Facilities, Inc., XVI
Grand Court Facilities, Inc., XVII
Grand Court Facilities, Inc., XVIII
<PAGE>
Grand Court Facilities, Inc., XIX
Grand Court Facilities, Inc., XX
Grand Court Facilities, Inc., XXI
Grand Court Facilities, Inc., XXII
Grand Court Facilities, Inc., XXIII
Grand Court Lifestyles Payroll Corp.
J&B Financing, LLC
Leisure Centers, LLC-I
Leisure Centers, LLC-II
Leisure Centers, LLC-III
Leisure Centers, LLC-IV
Leisure Facilities, Inc.
Leisure Facilities, Inc., II
Leisure Facilities, Inc., III
Leisure Facilities, Inc., IV
Leisure Facilities, Inc., V
Leisure Facilities, Inc., VI
Leisure Facilities, Inc., VII
Leisure Facilities, Inc., IX
Leisure Facilities, Inc., X
Leisure Facilities, Inc., XII
Leisure Facilities, Inc. XV
T Lakes L.C.
Texas Properties, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS, STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY AND STATEMENTS OF CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 11,964
<SECURITIES> 0
<RECEIVABLES> 241,249
<ALLOWANCES> 10,109
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 295,799
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> 26,412
<TOTAL-LIABILITY-AND-EQUITY> 295,799
<SALES> 38,135
<TOTAL-REVENUES> 74,271
<CGS> 33,635
<TOTAL-COSTS> 7,602
<OTHER-EXPENSES> 16,084
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,409
<INCOME-PRETAX> (2,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,459)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
