<PAGE>
2,800,000 Shares of Common Stock
GRAND COURT LIFESTYLES, INC.
This Prospectus relates to an offering (the "Offering") of 2,800,000
shares of Common Stock, $.01 par value per share ("Common Stock") of Grand Court
Lifestyles, Inc. (the "Company"). Prior to this Offering, there has been no
market for the Common Stock and there can be no assurance that such a market
will develop after the completion of this Offering or, if developed, that it
will be sustained. For information regarding the factors considered in
determining the initial public offering price of the Common Stock, see "Risk
Factors" and "Underwriting." The Common Stock has been approved for listing
on the Nasdaq National Market under the symbol "GCLI".
An investment in the Common Stock involves substantial risks. See
"Risk Factors" beginning on page 13 for a discussion of certain
matters that should be considered by prospective investors.
------------------------
Portions of proceeds from this Offering may be used to make required
payments on outstanding securities of Company affiliates.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)(3)
- --------------------------------------------------------------------------------
Per Share $9.50 $0.57 $8.93
- --------------------------------------------------------------------------------
Total $26,600,000 $1,596,000 $25,004,000
================================================================================
<PAGE>
------------------------
(1) Does not include additional compensation payable to Royce Investment
Group, Inc., the representative of the several Underwriters (the
"Representative"), in the form of (i) a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, (ii) Warrants to
purchase from the Company up to 280,000 shares of Common Stock at a
price equal to 165% of the per share price to the public of the Common
Stock ("Representative's Warrants"), exercisable over a period of four
years commencing one year after the date of this Prospectus, and (iii)
a consulting fee equal to 1% of the gross proceeds of the Offering, up
to a maximum of $305,900. In addition, the Company and the principal
stockholders of the Company (the "Principal Stockholders") have agreed
to indemnify the Underwriters for certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company and the Principal
Stockholders (which include, but are not limited to, the 3%
non-accountable expense allowance and the 1% consulting fee payable to
the Representative) estimated at approximately $2,034,000. All expenses
of the Offering will be paid by the Company, except that the Principal
Stockholders will pay underwriting discounts, the consulting fee and
the non-accountable expense allowance with respect to shares to be sold
by them if the Over-allotment Option (as defined below) is exercised.
See "Underwriting."
(3) The Principal Stockholders have granted to the Underwriters an option
exercisable within 45 days after the date of this Prospectus to
purchase up to 420,000 additional shares of Common Stock, upon the same
terms and conditions as set forth above, solely to cover
over-allotments, if any (the "Over-allotment Option"). If such
Over-allotment Option is exercised in full, proceeds to the Company
will be unchanged and the total Price to Public, Underwriting Discounts
and proceeds to Principal Stockholders will be $30,590,000, $1,835,400,
and $3,750,600, respectively.
The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this Offering and to reject any order in whole or in part. It is expected
that delivery of the Common Stock will be made in New York, New York, on or
about March 19, 1998.
------------------------
ROYCE INVESTMENT GROUP, INC.
The date of this Prospectus is March 13, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING SYNDICATE COVERING TRANSACTIONS, PENALTY BIDS AND SHORT
SALES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless the context otherwise
requires, (i) all references herein to the "Company" include the Company, its
subsidiaries and its predecessors taken as a whole, (ii) all references herein
to a "fiscal" year refer to the fiscal year beginning on February 1 of that year
(for example, "fiscal 1995" refers to the fiscal year beginning on February 1,
1995) and (iii) all information in this Prospectus assumes no exercise of the
Over-allotment Option. All share and per share data has been restated to give
effect to a 1,626.19-for-1 stock split and reduction in par value per share of
Common Stock from $.10 to $.01 which occurred after the beginning of fiscal
1997. This Prospectus contains certain forward-looking statements which involve
certain risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of the factors set forth under "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
General
Grand Court Lifestyles, Inc. (the "Company"), a fully integrated
provider of adult living accommodations and services, acquires, develops and
manages adult living communities. The Company's revenues have been, and are
expected to continue to be, primarily derived from sales of partnership
interests ("Syndications") of partnerships it organizes to acquire existing
adult living communities. The Company manages the Syndicated adult living
communities and is one of the largest operators of adult living communities in
the United States. The Company currently manages 37 adult living communities
containing 5,265 apartment units offering both independent and assisted-living
services in 12 states in the Sun Belt and the Midwest. The Company also manages
one nursing home. The Company has approximately 1,600 employees and directly
conducts the day-to-day operations of the adult living communities it manages.
As of January 31, 1998, the Company had an average occupancy rate at the adult
living communities it manages of approximately 93%.
Prior to 1986, the Company acquired, developed, arranged for the
Syndication of, and in most cases managed, 170 multi-family properties
containing approximately 20,000 apartment units, primarily in the Sun Belt and
the Midwest. The Company is no longer engaged in the acquisition, development,
Syndication or management of multi-family properties and the Company does not
presently intend to do so in the future. The Company's only involvement with
multi-family properties is as a holder of notes and receivables from the
partnerships that own 128 multi-family properties containing 13,886 apartment
units, which notes and receivables are paid from the cash flow and sale or
refinancing proceeds these properties generate. As of October 31, 1997, the
recorded value, net of deferred income, of these notes on the Company's
Consolidated Balance Sheets was $107.1 million and the recorded amount of these
receivables was $54.8 million.
The Company intends to continue to arrange for future acquisitions of
existing adult living communities utilizing mortgage financing and Syndications.
As described below, the Company has instituted a development plan to construct
new adult living communities. The Company intends to own the newly-constructed
communities, or lease them pursuant to long term leases or similar arrangements,
and to manage these communities. The Company does not intend to Syndicate any of
its newly-constructed adult living communities. To the extent that the
development plan to construct new adult living communities is successfully
implemented, the Company anticipates that the percentage of its revenues derived
from Syndications of acquired adult living communities would decrease and the
percentage of its revenues derived from newly constructed adult living
communities would increase. The Company also believes that, over time, revenues
derived from newly constructed adult living communities will become the primary
source of the Company's revenues. Largely as a result of anticipated start-up
losses from the Company's newly developed adult living communities, the Company
anticipates that it will incur operating losses for fiscal 1998.
Partnership Offerings
The Company has arranged for the acquisition of the 37 adult living
communities and one nursing home that it manages by utilizing mortgage financing
and by arranging Syndications of 41 limited partnerships ("Investing
Partnerships") formed to acquire interests in the 37 other partnerships that own
the adult living communities and the nursing home ("Owning Partnerships"). The
37 Syndicated adult living communities and one nursing home managed by the
Company are owned by the respective Owning Partnerships and not by the Company.
The Company is the managing general partner of all but one of the Owning
Partnerships and manages all of the adult living communities and the one nursing
home in its portfolio. The Company is also the general partner of 32 of the 41
Investing Partnerships.
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In a typical Syndication, the Company identifies an adult living
community suitable for acquisition and forms an Owning Partnership (in which it
is the managing general partner and initially owns all of the partnership
interests) to acquire the property. An Investing Partnership is also formed ( in
which the Company is also the general partner with a 1% interest) to purchase
from the Company a 99% partnership interest in the Owning Partnership (the
"Purchased Interest"), leaving the Company with a 1% interest in the Owning
Partnership and a 1% interest in the Investing Partnership. The purchase price
for the Purchased Interest is paid in part in cash and in part by a note from
the Investing Partnership with a term of approximately five years ( a "Purchase
Note"). Limited partners purchase partnership interests in the Investing
Partnership by agreeing to make capital contributions over approximately five
years to the Investing Partnership, which allows the Investing Partnership to
pay the purchase price for the Purchased Interest, including the Purchase Note.
The limited partnership agreement of the Investing Partnership provides that the
limited partners are entitled to receive, for a period not to exceed five years,
distributions equal to between 11% and 12% per annum of their then paid-in
scheduled capital contributions. Although the Company incurs certain costs in
connection with acquiring a community and arranging for the Syndication of
partnership interests, the Company makes a profit on the sale of the Purchased
Interest. In addition, as part of the purchase price for the Purchased Interest
paid by the Investing Partnership, the Company receives a 40% interest in sale
and refinancing proceeds after certain priority payments to the limited
partners. The Company also enters into a management contract with the Owning
Partnership pursuant to which the Company agrees to manage the adult living
community. As part of the management fee arrangements, the management contract
requires the Company, for a period not to exceed five years, to pay to the
Owning Partnership (to the extent that cash flows generated by the property are
insufficient) amounts sufficient to fund (i) any operating cash deficiencies of
such Owning Partnership and (ii) any part of such 11% to 12% return not paid
from cash flow from the related property (which the Owning Partnerships
distribute to the Investing Partnerships for distribution to limited partners)
(collectively, the "Management Contract Obligations"). The Company, therefore,
has no direct obligation to pay specified returns to limited partners. Rather,
the Company is obligated pursuant to the management contract to pay to the
Owning Partnership amounts sufficient to make the specified returns to the
limited partners, to the extent the cash flows generated by the property are
insufficient to do so. The Owning Partnership then distributes these amounts to
the Investing Partnership which, in turn, distributes these amounts to the
limited partners. As a result of the Management Contract Obligations, the
Company and its stockholders bear the risks of operations and financial
viability of the related property for such five-year period. The management
contract, however, rewards the Company for successful management of the property
by allowing the Company to retain any cash flow generated by the property in
excess of the amount needed to satisfy the Management Contract Obligations as an
incentive management fee. After the initial five-year period, the limited
partners are entitled to the same specified rate of return, but only to the
extent there is sufficient cash flow from the property, and any amounts of cash
flow available after payment of the specified return to limited partners are
shared as follows: 40% to the Company as an incentive management fee and 60% for
distribution to the limited partners. The management contract is not terminable
during this initial five-year period and is terminable thereafter by either
party upon thirty to sixty days notice.
During the fiscal year ended January 31, 1997 and the nine months
ended October 31, 1997, the Company paid approximately $5.6 million and $5.2
million, respectively, with respect to its Management Contract Obligations. The
aggregate amount of such Management Contract Obligations relating solely to
returns to limited partners for the last quarter of fiscal 1997 and for each of
the fiscal years 1998 through 2002 based on existing management contracts is
$3.9 million, $15.4 million, $17.4 million, $16.4 million, $11.2 million and
$2.4 million, respectively. Such amounts of Management Contract Obligations are
calculated based upon paid-in scheduled capital contributions of limited
partners as of October 31, 1997 with respect to fiscal 1997, and remaining
scheduled capital contributions with respect to fiscal years 1998 through 2002.
Actual amounts of Management Contract Obligations in respect of such contracts
will vary based upon the timing and amount of such capital contributions.
Furthermore, such amounts of Management Contract Obligations are calculated
without regard to any cash flow the related properties may generate, which cash
flow would reduce such obligations, and are calculated without regard to the
Management Contract Obligations relating to future Syndications.
The Company anticipates that for at least the next two years, the
aggregate Management Contract Obligations with respect to existing and future
Syndications will exceed the aggregate cash flow generated by the related
properties, which will result in the need to utilize cash generated by the
Company from sources other than the operations of the Syndicated adult living
communities to meet its Management Contract Obligations (including payment of
required returns for distribution to limited partners) for these periods. The
payment of expenses arising from obligations of the Company, including
Management Contract Obligations, have priority over earnings that might
otherwise be available for distribution to stockholders.
The initial five-year term of the management contracts and the related
Management Contract Obligations have expired for 10 Owning Partnerships, which
Management Contract Obligations relate to fourteen Investing Partnerships.
Although the Company has no obligation to fund operating shortfalls after the
five-year term of the management contracts, as of October 31, 1997, the Company
had advanced an aggregate of approximately $400,000 to two Owning Partnerships
to fund operating shortfalls . In both cases, the Company had arranged for
Syndications involving multi-family properties that the Company acquired from
third parties and believed could be successfully converted to adult living
communities.
2
<PAGE>
One of these conversion attempts was unsuccessful and the property is now being
operated as a multi-family property by a third-party managing agent. The other
property has experienced difficulties in its conversion to an adult living
community, but the conversion process is continuing. These advances are recorded
as "Other Partnership Receivables" on the Company's Consolidated Balance Sheet.
The Company has no present intention to attempt other conversions of
multi-family properties to adult living communities.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of the prepayments received upon the closings of
the sales of limited partnership interests in Investing Partnerships averaged
71.7% in fiscal 1994, 60.9% in fiscal 1995, 65.7% in fiscal 1996 and 64.4% for
the nine months ended October 31, 1997. Prepayments of capital contributions do
not result in the prepayment of the related Purchase Notes held by the Company.
Instead, such amounts are loaned to the Company by the Investing Partnership. As
a result of such loans and crediting provisions of the related purchase
agreements, the Company records the purchase notes net of such loans. Therefore,
these prepayments act to reduce the recorded value of the Company's note
receivables and reduce interest income received by the Company. Pursuant to the
terms of the offerings, the Company has the option not to accept future
prepayments by limited partners of capital contributions. The Company has not
determined whether it will continue to accept prepayments by limited partners of
capital contributions.
Future revenues, if any, of the Company relating to previously
Syndicated adult living communities would primarily arise in the form of (i)
deferred income earned on sales of the Purchased Interest in the related Owning
Partnership, (ii) management fees, (iii) amounts payable by the Investing
Partnerships to the Company in the event of the subsequent sale or refinancing
of such communities, (iv) interest income on Purchase Notes, and (v) earnings
derived from the Company's equity interests in Owning Partnerships and Investing
Partnerships. Future revenues, if any, of the Company relating to future
Syndications of adult living communities would primarily arise from any initial
profit recognized upon completion of the Syndication and from the same items
listed in the previous sentence.
In the process of considering potential property acquisitions, the
Company considered the acquisition of previously Syndicated properties whose
value had appreciated sufficiently to support a purchase price that would be
acceptable to the original limited partners. In fiscal 1996 and 1997, the
Company acquired three previously Syndicated adult living communities (the
"Resyndicated Communities") from the original Owning Partnerships, which
acquisitions were arranged by utilizing mortgage financing and by arranging for
the ownership of the properties by new Owning Partnerships and the Syndication
of interests in new Investing Partnerships (the "Resyndications"). The terms and
structure of these Resyndications are the same as for other original
Syndications, except that the new Owning Partnership formed by the Company
purchases the property from the original Owning Partnership rather than from a
third party owner. The net proceeds from the purchase price paid to the original
Owning Partnership were distributed to the original Investing Partnership and
its limited partners and resulted in the original limited partners receiving a
return of all of their capital plus a profit ranging from an amount equal to 10%
of their capital with regard to two of the Resyndications and 30% of their
capital with regard to the third Resyndication. The Company has the same
interests in a Resyndicated property as it has in other Syndications. The
Company manages the Resyndicated communities pursuant to new management
contracts. The Company will not engage in other Resyndication transactions in
the future.
The Company plans to acquire between six and twelve existing adult
living communities over the next two years. The Company presently intends to
continue to arrange for future acquisitions of existing adult living communities
by utilizing mortgage financing and Syndications. In January 1998, the Company
acquired and Syndicated an adult living community in Adrian, Michigan containing
73 apartment units.
<PAGE>
Receivables Relating To Multi-Family Properties
Although prior to 1986, the Company developed, acquired, arranged for
the Syndication of, and in most cases managed, multi-family properties, the
Company does not own, and no longer has any direct involvement with, these
multi-family properties. The Company's only involvement with the multi-family
properties is that it holds Purchase Notes ("Multi-Family Notes") from Investing
Partnerships which were formed to acquire interests in Owning Partnerships which
own multi-family properties ("Multi-Family Owning Partnerships"). These
Multi-Family Notes are secured by the Purchased Interests in the related
Multi-Family Owning Partnerships. Although it has no obligation to do so, the
Company has also made advances to various Multi-Family Owning Partnerships to
support the operation of their properties, which advances are recorded as "Other
Partnership Receivables" on the Company's Consolidated Balance Sheet. The
Multi-Family Notes and the other receivables entitle the Company to receive all
cash flow and sale or refinancing proceeds generated by the respective
multi-family property until the Multi-Family Note and receivables are satisfied.
As of October 31, 1997, the recorded value, net of deferred income, of
Multi-Family Notes was $107.1 million. All but approximately $1.2 million of the
$56.0 million of "Other Partnership Receivables" recorded on the Company's
Consolidated Balance Sheet as of October 31, 1997 relate to advances to
Multi-Family Owning Partnerships.
3
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Historically, if the mortgage encumbering a multi-family property was
in default or the property was experiencing material financial difficulties, the
Company established reserves, as appropriate, due to the deemed impairment of
the related Multi-Family Note and any related receivables. If the property was
ultimately foreclosed upon, or when otherwise appropriate under applicable
accounting rules, the Company recognized a loss equal to the recorded value of
such note and receivables, net of any deferred income and reserves previously
established. Nine Multi-Family Owning Partnerships which were in default of
their mortgages previously filed bankruptcy petitions seeking protection from
foreclosure actions ("Chapter 11 Petitions"). One additional Multi-Family Owning
Partnership which was in default of its mortgage surrendered its property
pursuant to an uncontested foreclosure sale of such property (such Multi-Family
Owning Partnership, together with the nine Multi-Family Owning Partnerships that
filed bankruptcy petitions, are referred to herein as the "Protected
Partnerships"). John Luciani and Bernard M. Rodin, the principal stockholders of
the Company (the "Principal Stockholders,") were each a general partner of three
Protected Partnerships, but withdrew as a general partner prior to their filing
their respective Chapter 11 Petitions. The Company neither owns nor manages
these properties, nor is it the general partner of any Multi-Family Owning
Partnerships, including the Protected Partnerships, but rather, merely holds the
related Multi-Family Notes and Other Partnership Receivables as receivables. The
Company, therefore, has no liability in connection with these mortgage defaults
or bankruptcy proceedings. Seven of the Chapter 11 petitions resulted in the
respective Protected Partnerships losing their properties through foreclosure or
voluntary conveyances of their properties. The remaining two Protected
Partnerships successfully emerged from their bankruptcy proceedings by paying
off their mortgages at a discount with the proceeds of new mortgage financings,
resulting in these properties having current, fully performing mortgages.
The bankruptcy petitions and risk of loss faced by the Protected
Partnerships caused the related Multi-Family Notes and receivables to be deemed
fully impaired. As a result, the Company recorded a non-cash loss in fiscal 1996
in the amount of $18.4 million (representing the recorded value of these
Multi-Family Notes and receivables, net of deferred income and any previously
established reserves). The Principal Stockholders and one of their affiliates
assigned certain partnership interests in various partnerships that own
multi-family properties (the "Assigned Interests") to the Investing Partnerships
which own interests in the Protected Partnerships, which Assigned Interests were
owned personally by the Principal Stockholders and their affiliate, providing
additional security for the multi-family notes and receivables payable to the
Company by such Investing Partnerships. In that the Principal Stockholders
transferred the Assigned Interests in July 1996, the Company recorded a $21.3
million capital contribution in fiscal 1996. As a result of the transfers by the
Principal Stockholders and their affiliate of the Assigned Interests and the
additional security provided thereby, the Company believes that the outcome of
the bankruptcy proceedings will not affect its ability to collect on these
Multi-Family Notes and receivables.
Fifteen of the Multi-Family Owning Partnerships remain in default on
their respective mortgages. As of October 31, 1997, the recorded value, net of
deferred income, of the Multi-Family Notes and "Other Partnership Receivables"
held by the Company relating to these fifteen Multi-Family Owning Partnerships
was $31.9 million. The Company has established reserves of $10.1 million to
address the possibility that these notes and receivables may not be collected in
full. It is possible that other Multi-Family Owning Partnerships which are in
default of their mortgages will file bankruptcy petitions or take similar
actions seeking protection from their creditors.
<PAGE>
In addition, many of the multi-family properties are dependent to
varying degrees on housing assistance payment contracts with the United States
government, most of which will expire over the next few years. In view of the
foregoing, there can be no assurance that other Multi-Family Owning Partnerships
will not default on their mortgages, file bankruptcy petitions, and/or lose
their properties through foreclosure. The Company neither owns nor manages these
properties, nor is it the general partner of these Multi-Family Owning
Partnerships, but, rather, holds the related Multi-Family Notes and Other
Partnership Receivables as receivables. Any such future mortgage defaults could,
and any such future filings of Chapter 11 petitions or the loss of any such
property through foreclosure would, cause the Company to realize a non-cash loss
equal to the recorded value of the applicable Multi-Family Note plus any related
advances, net of any deferred income recorded for such Multi-Family Note and any
reserves for such note and receivables previously established by the Company,
which would reduce such loss. In addition, the Company could be required to
realize such a non-cash loss even in the absence of mortgage defaults, Chapter
11 Petitions or the loss of any such property through foreclosure if, at any
time in which the Company's financial statements are issued, such note is
considered impaired. Such impairment would be measured under applicable
accounting rules. Such losses, if any, while non-cash in nature, could adversely
affect the Company's business, operating results and financial condition.
New Development Program
Beginning in 1986, the Company has focused primarily on the
acquisition, development and management of adult living communities. Through its
management of 37 adult living communities containing 5,265 adult living
apartment units and one nursing home, the Company has become an experienced
provider of both independent and assisted-living services.
The Company believes that its experience in the acquisition, development and
management of adult living
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communities positions it to take advantage of social and economic trends that
are projected to increase demand for adult living services.The Company's
operating objective is to provide high-quality, personalized living services to
senior residents, primarily persons over the age of 75.
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community and intends to commence construction on between 30
and 34 additional new adult living communities over the next two years. The
Company plans to own or lease pursuant to long-term operating leases or similar
arrangements the adult living communities that will be developed under the plan.
The Company will manage and operate each of the newly developed communities. The
Company does not intend to Syndicate any of its newly developed adult living
communities. The Company estimates that the cost of developing each new adult
living community (including reserves necessary to carry the community through
its lease up period) utilizing mortgage financing will be approximately $9.5
million and utilizing long-term lease financing will be approximately $10
million. The Company expects to complete the construction of four of the five
communities currently under construction by the end of the first quarter of
fiscal 1998 and expects to complete the construction of the remaining community
under construction by the end of fiscal 1998. The eight adult living communities
already completed or under construction pursuant to the development plan contain
an aggregate of approximately 1,150 adult living apartment units and the 30 to
34 additional new communities which the Company intends to commence construction
on over the next two years will contain between 4,260 and 4,828 additional adult
living apartment units.
The first new communities being constructed pursuant to the Company's
development plan are in Texas. The Company has obtained development financing
from Capstone Capital Corporation ("Capstone") pursuant to which Capstone is
providing up to $39 million for development of four new adult living communities
that will be operated by the Company pursuant to long-term leases with Capstone.
The Company has completed construction on two of these communities which are
located in El Paso and San Angelo, Texas, respectively, and is nearing
completion of construction on two communities which are located in Wichita Falls
and Abilene, Texas, respectively. The Company has completed construction, with
mortgage financing for up to $7 million, on an adult living community in Corpus
Christi, Texas, and is nearing completion of construction with mortgage
financing for up to $7.3 million, on an adult living community in Temple, Texas.
The Company is also nearing completion of construction, with mortgage financing
for up to $7.6 million, of an adult living community in Round Rock, Texas. The
Company has commenced construction on one additional site in Tyler, Texas with
mortgage financing of $7.1 million. When developed, the Corpus Christi, Temple,
Round Rock and Tyler facilities will be owned and operated directly by the
Company. The Company also holds options to acquire three additional sites in
Texas and is negotiating with several additional lenders to obtain financing to
develop these sites. The Company generally plans to concentrate on developing
projects in only a limited number of states at any given time. The Company
believes that this focus will allow it to realize certain efficiencies in the
development and management of communities.
The effectuation of the development plan will expose the Company to
additional risk. These risks include, but are not limited to, the Company's
anticipation that the construction of each community will require approximately
12 months and that each newly constructed community will incur start-up losses
for at least nine additional months after commencing operations. In addition,
there can be no assurance that newly constructed communities will generate
positive cash flow or that the Company will not suffer delays or cost overruns
in instituting its development plan.
<PAGE>
The Company's development plan is based upon a "prototype" adult living
community that it has designed. The prototype incorporates attributes of the
various facilities managed by the Company and contains certain design features
that the Company believes are innovative and will appeal to the elderly. The
prototype contains 142 adult living apartment units and will be located on sites
of up to seven acres. The Company believes that its development prototype is
larger than most assisted-living facilities, which typically range from 40 to 80
units. The Company believes that the greater number of units will allow the
Company to achieve economies of scale in operations, resulting in lower
operating costs per unit, without sacrificing quality of service. The Company
believes that the common areas and amenities offered by its prototype represent
the state of the art for independent-living facilities and are superior to those
offered by smaller independent-living facilities or by most assisted-living
facilities, whose smaller size limits the size and variety of common areas. The
Company believes that its prototype adult living community is attractive to both
independent-living residents who foresee their future need for assisted-living
services and residents who initially seek assisted-living services. Each such
community will offer residents a choice between independent-living and
assisted-living services. As a result, the market for each facility will be
broader than for facilities that offer only either independent-living or
assisted-living services. Although the licensing requirements and the expense
and difficulty of converting between independent-living units and
assisted-living units typically make it impractical to accomplish such
conversions, the Company's prototype is designed to allow, at any time, for
conversion of units, at minimum expense, for use as either independent-living or
assisted-living units. Each community, therefore, may adjust its mix of
independent-living and assisted-living units as the market or existing residents
demand. The Company believes that part of the appeal of this type of community
is that residents will be able to "age in place" with the knowledge that they
need not move to another facility if they require assistance with "activities of
daily living" which the Company
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offers in the same community. In the Company's opinion, the ability to retain
residents by offering them higher levels of services will result in stable
occupancy with enhanced revenue streams.
The Company believes that management and marketing are critical to the
success of an adult living community. In order to attain high occupancy rates at
newly developed properties, the Company plans to continue its marketing program
which has resulted in an average occupancy rate at January 31, 1998 of
approximately 93%. In addition, the Company plans to use the common facility
design of its prototype and its "The Grand Court"(R) trademarked name to promote
recognition of its properties nationally. The Company focuses exclusively on
"private-pay" residents who pay for housing or related services out of their own
funds, rather than relying on the few states that have enacted legislation which
enables assisted-living facilities to receive Medicare funding similar to
funding generally provided to skilled nursing facilities. The Company believes
this "private-pay" focus will allow it to increase rental revenues as
demographic pressure increases demand for adult living facilities and to avoid
potential financial difficulties it might encounter if it were primarily
dependent on Medicare or other reimbursement programs that may be scaled back as
a result of health care reform, budget deficit reduction or other pending or
future state or Federal government initiatives.
Grand Court Lifestyles, Inc. is a Delaware corporation formed in 1996
to consolidate substantially all of the assets of its predecessors, J&B
Management Company, Leisure Centers, Inc., and their affiliates. Unless the
context otherwise indicates, all references to the Company include Grand Court
Lifestyles Inc., its subsidiaries and predecessors. The Company's principal
executive offices are located at 2650 N. Military Trail, Suite 350, Boca Raton,
Florida 33431 and its telephone number is (561) 997-0323.
6
<PAGE>
The following diagram illustrates the typical relationship among the
Company, the Owning Partnerships and the Investing Partnerships in a transaction
where the Company acquires and Syndicates an adult living community.
(Diagram illustrating the relationship among the Company, the Owning
Partnerships and the Investing Partnerships in a transaction where the Company
acquires and Syndicates an adult living community appears here. At the top of
the diagram is a box containing the name "Grand Court Lifestyles, Inc." (the
"Company box"). An arrow with the words "Manager of Adult Living Community" is
drawn to the left of the diagram from the Company box to a box appearing at the
bottom of the page entitled "Adult Living Community" (the "Adult Living
Community box"). An arrow with the words "Sale of a General Partnership Interest
in Owning Partnership" is drawn from the Company box to a box below it entitled
"Investing Partnership" (the "Investing Partnership box"). In return, an arrow
with the words "Cash, Purchase Note and Investor Notes as Consideration for
Sale" is drawn from the Investing Partnership box to the Company box. An arrow
with the words "Sale of Limited Partnership Interest" is drawn from the
Investing Partnership box to a box appearing to its left entitled "Limited
Partners" (the "Limited Partners box"). In return, an arrow with the words "Cash
and Investor Notes as consideration for Sale" is drawn from the Limited Partners
box to the Investing Partnership box. An arrow with the words "General Partner"
is drawn from the Investing Partnership box to a box below entitled "Owning
Partnership" (the "Owning Partnership box"). An arrow with the words "Owner of
Adult Living Community" is drawn from the Owning Partnership box to the Adult
Living Community box appearing directly below the Owning Partnership box. Arrows
with the words "Directly or Through A Wholly-Owned Subsidiary - General Partner"
is drawn to the right of the diagram from the Company box to the Investing
Partnership box and the Owning Partnership box.)
7
<PAGE>
The following diagram illustrates the flow of funds when a syndicated
adult living community experiences profitable or unprofitable operations during
the Management Contract Obligations period.
(Diagram illustrating the flow of funds when a syndicated adult living
community experiences profitable or unprofitable operations during the
Management Contract Obligations period appears here. In the middle of the
diagram is a box entitled "Owning Partnership" (the "Owning Partnership box").
An arrow with the words "Specified Rate of Return" is drawn from the Owning
Partnership box to the upper left portion of the diagram to a box entitled
"Investing Partnership" (the "IP box"). An arrow with the words "Specified Rate
of Return" is drawn from the IP box to a box appearing directly above entitled
"Limited Partners". An arrow with the words "Incentive Management Fee Equal to
Cash Flow above Specified Rate of Return to Limited Partners" is drawn from the
Owning Partnership box to the upper right portion of the diagram to a box
entitled "The Company" (the "Company box"). In return, an arrow with breaks and
the words "Amount Equal to Cash Flow Shortfall and Specified Rate of Return to
Limited Partners (Management Contract Obligation Payments)" is drawn from the
Company box to the Owning Partnership box. An arrow with breaks and the words
"(Unprofitable Operations) Cash Flow Shortfall" is drawn from the Owning
Partnership box to a box below entitled "Adult Living Community" (the "ALC
box"). In return, an arrow with the words "Cash Flow (Profitable Operations)" is
drawn from the ALC box to the Owning Partnership box.)
8
<PAGE>
The following diagram illustrates how the cash generated from each of
the following sources flows to the Company and how it is available to pay the
Company's expenses, including Management Contract Obligations.
(Diagram illustrating how cash generated from Adult Living Investing
Partnerships, Adult Living Owning Partnerships, Multi-Family Investing
Partnerships, Debt Holders and Newly Developed Adult Living Communities flows to
the Company and how it is available to pay the Company's expenses, including
Management Contract Obligations appears here.) At the top of the diagram is a
box containing the words "Expenses, including Management Contract Obligations"
(the "Expenses box"). An arrow with the words "Available Company Cash Flow" is
drawn directly below the Expenses box from a box entitled "The Company" (the
"Company box"). An arrow with the words "Capital Contributions" is drawn to the
left of the diagram from a box entitled "Limited Partners" (the "LP box") to a
box appearing directly above entitled "Adult Living Investing Partnerships" (the
"ALIP box"). An arrow with the words "Purchase Price for Purchased Interest,
Including Payments on Purchase Notes" is drawn from the ALIP box to the Company
box. An arrow with the words "Net Cash Flow after Operating Expenses" is drawn
from a box entitled "Adult Living Properties" (the "ALP box"), which appears
directly to the right of the LP box, to a box appearing directly above entitled
"Adult Living Owning Partnerships" (the "ALOP box"). An arrow with the words
"Incentive Management Fees" is drawn from the ALOP box to the Company box. An
arrow with the words "Net Cash Flow and Sale and Refinancing Proceeds" is drawn
from a box entitled "Multi-Family Properties" (the "M-FP box") to a box
appearing directly above the M-FP box and to the right of the ALP box entitled
"Multi-Family Owning Partnership" (the "M-FOP box"). An arrow with the words
"Net Cash Flow and Sale and Refinancing Proceeds" is drawn from the M-FOP box to
a box appearing directly above entitled "Multi-Family Investing Partnerships"
(the "M-FIP box"). An arrow with the words "Purchase Note and Receivables
Payments" is drawn from the M-FIP box to the Company box. An arrow with the
words "Management Fees" is drawn from the M-FP box to a box appearing directly
to the right of the M-FP box entitled "Third Party Managing Agent". An arrow
with the words "Proceeds of Debenture Debt and Unsecured Debt" is drawn from a
box entitled "Debt Holders" (the "Debt Holders box"), which appears directly to
the right of the M-FIP box, to the Company box. An arrow with the words "Cash
Flow" is drawn from a box entitled "Newly Developed Adult Living Communities",
which appears directly to the right of the Debt Holders box, to the Company
box.)
9
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock to be sold by
the Company(1)............................ 2,800,000 shares
Common Stock outstanding before
this Offering............................. 15,000,000 shares of Common Stock
Common Stock to be outstanding
after this Offering(1)(2): 17,800,000 shares of Common Stock
Use of proceeds............................. The Company intends to use (i) approximately $3 million of its net
proceeds from the Offering for working capital and general
corporate purposes and (ii) the balance of approximately $20
million to finance development of new adult living communities.
</TABLE>
- -------------
(1) Excludes up to 420,000 additional shares of Common Stock to be sold by
the Principal Stockholders upon exercise of the Over-allotment Option
and up to 280,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants. See "Underwriting".
(2) Excludes 2,500,000 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plans. As of the date hereof,
there were not any options granted under the Company's stock option
plans. See "Management-- Stock Plans".
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and other data)
The summary consolidated financial data have been taken or derived
from, and should be read in conjunction with, the Company's consolidated
financial statements and the related notes thereto, and the capitalization data
included elsewhere in this Prospectus. The results of operations for an interim
period have been prepared on the same basis as the year end financial statements
and, in the opinion of management, contain all adjustments, consisting of only
normally recurring adjustments, necessary for a fair presentation of the results
for the full year. The results of operations for the nine months ended October
31, 1996 and 1997 may not give a true indication of results for the full year.
All references herein to a "fiscal" year refer to the fiscal year beginning on
February 1 of that year (for example, "fiscal 1995" refers to the fiscal year
beginning on February 1, 1995). See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine months
Years Ended January 31, (5) ended October 31,(5)
------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales......................... $ 18,170 $ 20,973 $ 22,532 $ 31,973 $ 36,021 $ 21,524 $31,401
Syndication fee income........ 6,484 7,654 5,587 8,603 7,690 4,976 6,529
Deferred income earned........ 792 7,502 4,399 9,971 5,037 708 4,246
Interest income............... 13,209 13,315 9,503 12,689 13,773 11,043 8,081
Property management fees from
related parties ........... 560 3,854 4,351 4,057 2,093 1,604 3,250
Equity in earnings from
partnerships............... 129 206 276 356 423 250 357
Other income.................. -- -- -- 1,013 -- -- 283
--------- -------- --------- -------- -------- -------- --------
Total Revenues 39,344 53,504 46,648 68,662 65,037 40,105 54,147
========= ======== ========= ======== ======== ====== =======
Costs and expenses:
Cost of sales................. 14,411 26,876 21,743 27,688 34,019 19,468 25,947
Selling....................... 7,027 6,706 6,002 7,664 7,176 4,603 6,186
Interest...................... 11,874 10,991 13,610 15,808 16,394 12,017 13,991
General and administrative.... 5,617 5,226 6,450 7,871 7,796 5,687 6,415
Loss on impairment of notes
and receivables.............. -- -- -- -- 18,442 18,442 --
Write-off of registration costs -- -- -- -- -- -- 3,107
Officers' compensation(1)..... 1,200 1,200 1,200 1,200 1,200 900 900
Depreciation and amortization. 975 1,433 2,290 2,620 3,331 2,539 2,650
--------- -------- --------- -------- -------- -------- --------
Total Cost and Expenses 41,104 52,432 51,295 62,851 88,358 63,656 59,196
========= ======== ========= ======== ======== ====== =======
Income (loss) before provision
(benefit) for income taxes ... (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Provision for income taxes...... -- -- -- -- -- -- --
--------- -------- --------- -------- -------- -------- --------
Net income (loss)(6)............. (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Pro-forma income tax provision
(benefit)(2).................. (704) 429 (1,859) 2,324 -- -- --
--------- -------- --------- -------- -------- -------- --------
Pro-forma net income (loss)(2).. $ (1,056) $ 643 $ (2,788) $ 3,487 $(23,321) $(23,551) $(5,049)
========= ======== ========= ======== ======== ====== =======
Pro-forma earnings (loss) per
common share(2)............... $ (.07) $ .04 $ (.19) $ .23 $(1.55) $(1.57) $ (.34)
========= ======== ========= ======== ======== ====== =======
Pro-forma weighted average
common shares used............ 15,000 15,000 15,000 15,000 15,000 15,000 15,000
========= ======== ========= ======== ======== ====== =======
Other Data:
Adult living communities
operated (end of period).... 14 18 24 28 31 29 36
========= ======== ========= ======== ======== ====== =======
Number of units (end of
period)..................... 2,336 2,834 3,683 4,164 4,480 4,119 5,192
========= ======== ========= ======== ======== ====== =======
Average occupancy
percentage (3).............. 90.6% 90.4% 89.3% 94.7% 91.3% 93.4% 93.1%
========= ======== ========= ======== ======== ====== =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
As of January 31, (as restated) (6) As of October 31, 1997
---------------------------------------------- ----------------------
1993 1994 1995 1996 1997 Actual Adjusted(4)
---- ---- ---- ---- ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 6,455 $ 9,335 $ 10,950 $ 17,961 $ 14,111 $ 9,679 $ 32,679
Notes and receivables-net 234,583 227,879 220,482 224,204 222,399 238,128 238,128
Total assets........... 251,116 248,854 248,553 260,023 261,661 288,074 311,074
Total liabilities...... 203,990 211,647 217,879 225,238 229,658 261,120 261,120
Stockholders' equity... 47,126 37,207 30,674 34,785 32,003 26,954 49,954
</TABLE>
- ----------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and President,
respectively, of the Company received dividends and distributions from the
Company's predecessors but did not receive compensation. Officers'
Compensation is based upon the aggregate compensation currently received by
such officers, $600,000 a year for each such officer. Amounts received by
such officers in excess of such amount are treated as dividends for
purposes of the Company's financial statements. In fiscal 1992 through
fiscal 1996, such officers also received $360,000; $5,496,000; $943,000;
$850,000; and $397,000 each as a dividend. See "Management."
(2) The Company's predecessors were Sub-chapter S corporations and a
partnership. The pro forma statement of operations data reflects provisions
for federal and state income taxes as if the Company had been subject to
federal and state income taxation as a C corporation during the years ended
January 31, 1993 through January 31, 1996.
(3) Average occupancy percentages were determined by adding all of the
occupancy percentages of the individual communities and dividing that
number by the total number of communities. The average occupancy percentage
for each particular community was determined by dividing the number of
occupied apartment units in the particular community on the given date by
the total number of apartment units in the particular community.
(4) "Adjusted" amounts give effect to the application by the Company of its net
proceeds of this Offering (after deducting underwriting discounts and
other offering expenses payable by the Company). See "Capitalization".
(5) Reclassification - Certain amounts in prior years have been reclassified to
conform with current period presentation.
(6) Subsequent to the issuance of the Company's fiscal 1996 Consolidated
Financial Statements, the Company discovered that certain prior period
costs and advances were erroneously expensed in a prior period. As a
result, the Company's Consolidated Financial Statements have been restated
from the amounts previously reported to reflect the correction of this
error. See Note 13 to Consolidated Financial Statements.
12
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should
consider carefully the factors set forth below, as well as other information
contained in this Prospectus, before making a decision to purchase the Common
Stock offered hereby.
Recent Net Losses and Anticipated Operating Losses
The Company incurred net losses of approximately $1.8 million, $4.6
million, $23.3 million and $5.0 million for the fiscal years ended January 31,
1993, 1995 and 1997, and the nine months ended October 31, 1997, respectively.
Largely as a result of start-up losses anticipated to result from the
implementation of the Company's development plan for the construction of new
adult living communities, the Company anticipates that it will incur operating
losses for fiscal 1998.
The Company began construction of the first of its new adult living
communities in November, 1996. The Company anticipates that the construction of
each community will take approximately 12 months and expects each newly
constructed community to incur start-up losses for at least nine months after
commencing operations. During the past ten years the Company's revenues have
been derived principally from Syndications of existing adult living communities.
Factors that have impacted earnings related to existing adult living communities
during a particular period have included (i) the amount of partnership interests
sold, (ii) the terms of the Syndications and (iii) the amount of deferred income
recognized. Competition to acquire existing adult living communities has
intensified, and the Company anticipates that, for at least the next year, it
will not be able to arrange for the acquisition of such communities on terms
favorable enough to offset both the anticipated start-up losses associated with
newly developed communities and the costs and cash requirements arising from the
Company's existing and expected additional overhead and debt and Management
Contract Obligations. As a result the Company expects to incur operating losses
until its newly constructed communities are completed, leased up and begin
generating positive cash flow. There can be no assurance that the Company will
be able to complete its development plan as expected. In addition, there can be
no assurance that such newly constructed communities will generate positive cash
flow at any time, and the resulting operating losses could have a material
adverse effect on the Company's business, operating results and financial
condition. See "-- Need for Additional Financing", "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" and "--Liquidity and Capital Resources" and "Business -- Partnership
Offerings" and "-- Strategy."
Substantial Debt Obligations of the Company
At October 31, 1997 the Company had approximately $156.2 million
principal amount of debt, excluding accrued interest of $900,000 ("Total Debt"),
at an average interest rate of 12.2% per annum. Of the principal amount of Total
Debt, $2.9 million becomes due in the fiscal year ending January 31, 1998; $35.5
million becomes due in the fiscal year ending January 31, 1999; $35.3 million
becomes due in the fiscal year ending January 31, 2000; $23.7 million becomes
due in the fiscal year ending January 31, 2001; $28.9 becomes due in the fiscal
year ending January 31, 2002, and the balance of $29.9 million becomes due
thereafter.
Of the Total Debt at October 31, 1997, $72.4 million principal amount
were debentures ("Debenture Debt") issued in twelve separate series, secured by
notes (the "Multi-Family Notes") owed to the Company by partnerships, investor
notes and limited partnership interests arising from Syndications to finance
acquisitions of multi-family housing (the "Purchase Note Collateral"). The
Debenture Debt has an average interest rate of 12.05% per annum and has
maturities ranging from 1997 through 2004. During the fiscal year ended January
31, 1997 and the nine months ended October 31, 1997, total interest expense with
respect to Debenture Debt was approximately $9.2 million and $6.2 million,
respectively. The Purchase Note Collateral produced approximately $2.3 million
and $1.5 million of interest and related payments to the Company, which was
approximately $6.9 million and $4.7 million less than the amount required to pay
interest on the Debenture Debt. The Company paid the shortfall from cash
generated by its business operations. Debenture Debt in the aggregate principal
amount of approximately $1.3 million, $12.4 million, $17.1 million, $15.1
million and $17.8 million will mature in the respective fiscal years 1997
through 2001. There can be no assurance that amounts received with respect to
the Purchase Note Collateral will be sufficient to pay the Company's future debt
service obligations with respect to the Debenture Debt. Fifty-one of the 169
Multi-Family Notes have reached their final maturity dates and, due to the
inability,
13
<PAGE>
in view of the current cash flows of the properties, to maximize the value of
the underlying property at such maturity dates, either through a sale or
refinancing, these final maturity dates have been extended by the Company. The
underlying property relating to one extended Multi-Family Note was refinanced in
Fiscal 1996 and such refinancing generated an approximate $800,000 payment to
the Company under such Multi-Family Note. In addition, the Company anticipates
that two more multi-family properties relating to two other extended
Multi-Family Notes will be refinanced in the first quarter of fiscal 1998. There
can be no assurance that such refinancings will actually close. During the
period such notes are extended, the Company will continue to receive the cash
flow and sale or refinancing proceeds, if any, generated by the underlying
properties. The Company expects to extend maturities of other Multi-Family
Notes.
Of the Company's Total Debt at October 31, 1997, an additional $49.7
million principal amount was unsecured, having an average interest rate of 13.3%
per annum ("Unsecured Debt") and an additional $5.0 million of such debt is
mortgage debt ("Mortgage Debt") with an average interest rate of 12% per annum.
The Company incurred the Mortgage Debt, which is secured by an adult living
community, in order to facilitate the acquisition financing for such community.
At October 31, 1997, the Company had approximately $29.1 million principal
amount of debt ("Investor Note Debt") secured by promissory notes from investors
in offerings of limited partnership interests, which debt has an average
interest rate of 10.9% per annum. The average collection rate with respect to
such investor notes in the last 5 years was in excess of 99% of the principal
amount thereof that became due and such collections have been sufficient to pay
interest and principal with respect to the Company's related Investor Note Debt.
There can be no assurance that future collections will continue at such rate. In
the event that future collections are not sufficient to pay interest and
principal with respect to the Company's related Investor Note Debt, the Company
would need to pay the shortfall from cash generated by its business operations
and, as a result, the Company's business, operating results and financial
condition could be adversely affected. The Company intends to continue to incur
Investor Note Debt, utilizing as collateral investor notes generated by future
Syndications of existing adult living communities. The Company intends to incur
additional Debenture Debt or Unsecured Debt as a means of refinancing existing
debt, and may incur additional debt to finance a portion of costs associated
with the Company's development plan for new adult living communities or for
working capital purposes; provided, however, that any such issuances will be
subject to market conditions and the availability of funds generated by the
Company's operations. Neither the Company nor the Owning Partnerships have
policies limiting the amount or proportion of indebtedness incurred.
The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in some obligations, certain
Investing Partnerships, Owning Partnerships or affiliates of the Company.
Certain obligations contain provisions requiring the Company to maintain a net
worth of, in the most restrictive case, $26,250,000, except that, under the
Capstone agreements the Company will be required to maintain a net worth in an
amount no less than 75% of the net worth of the Company immediately after the
closing of this Offering. On a pro forma basis, after giving effect to this
Offering, the Company would have had a net worth of $50.0 million at October 31,
1997. Therefore, the Company would be required, pursuant to the Capstone
Agreement to maintain a net worth of no less than $37.5 million. Certain
obligations of the Company contain covenants requiring the Company to maintain a
debt for borrowed money to consolidated net worth ratio of, in the most
restrictive case, no more than 6 to 1. At January 31, 1997 and at October 31,
1997 the Company's debt for borrowed money to consolidated net worth ratio was
4.5 to 1 and 5.8 to 1, respectively and would have been 3.1 to 1 on a pro forma
basis at October 31, 1997, after giving effect to this Offering. In addition,
certain obligations of the Company provide that an event of default will arise
upon the occurrence of a material adverse change in the financial condition of
the Company or upon a default in other obligations of the Company.
Management Contract Obligations and Prepayment Rights of Limited Partners
The Company has arranged for the acquisition of existing adult living
communities it operates through Syndications of Investing Partnerships and
intends to continue this practice for future acquisitions of existing adult
living communities. The Company does not intend to Syndicate its newly developed
adult living communities. The limited partners typically agree to pay their
capital contributions over a five-year period. Past Syndications have provided,
and it is anticipated that future Syndications will provide, that the limited
partners will receive distributions during each of the first five years of their
investment equal to between 11% to 12% of their then paid-in scheduled capital
contributions. Pursuant to the management contracts with the Owning
Partnerships, for such five-year period, the Company is required to pay to the
Owning Partnerships amounts sufficient to fund the Management Contract
Obligations. Since the aggregate scheduled capital contributions relating to a
particular property increase during the Management Contract Obligations period,
the specified return to limited partners relating to such property also
increases during this period. As a result of the Management
14
<PAGE>
Contract Obligations, the Company and its stockholders bear the risk of
operations and financial liability of the related property for such five-year
period.
During the fiscal year ended January 31, 1997 and the nine months ended
October 31, 1997, the Company paid approximately $5.6 million and $5.2 million,
respectively, with respect to Management Contract Obligations. Of the $5.6
million the Company paid in respect to Management Contract Obligations for
fiscal 1996 (i) approximately 64% was attributable to difficulties the Company
experienced in two Syndications involving multi-family properties that the
Company acquired from third parties and believed could successfully be converted
to adult living communities (the conversion of one of these properties to an
adult living community is continuing but has not been completed and the
conversion of the other property was unsuccessful and the property is being
operated as a multi-family property by a third-party managing agent) and one
under performing adult living community, (ii) approximately 27% was attributable
to operating expenses (including maintenance repairs and costs) increasing at a
greater rate than historically, as partially offset by increases in rental
revenues, and (iii) approximately 9% was attributable to the increased debt
service, including the establishment of capital improvement reserves, on certain
adult living communities due to the refinancing of such adult living communities
(which includes the initial mortgage financing of certain adult living
communities that had been previously acquired without a mortgage), which
refinancings reduced the cash flow generated by such adult living communities to
a greater extent than the resulting reduction of the Company's Management
Contract Obligations relating to such properties. As a result of the
refinancings, $43 million was distributed to limited partners as a return of
capital. This return of capital reduced the amount of capital upon which the
Company has Management Contract Obligations. Of the $5.2 million the Company
paid in respect to Management Contract Obligations for the nine months ended
October 31, 1997 (i) approximately 45% was attributable to operating expenses
(including maintenance and repair costs) increasing at a greater rate than
historically, as partially offset by increases in rental revenues, (ii)
approximately 33% was attributable to the decrease in the average occupancy of
the Company's portfolio of adult living communities, and (iii) approximately 22%
was attributable to difficulties the Company experienced in one Syndication
where a multi-family property was converted to an adult living community and one
under performing adult living community. The initial five-year term of the
management contracts and the related Management Contract Obligation period has
expired for each of the two Syndications involving multi-family properties which
the Company attempted to convert to adult living communities.
The aggregate amount which the Company will be required to pay with
respect to such Management Contract Obligations will depend upon a number of
factors, including, among others, the expiration of such obligations for certain
partnerships, the cash flow generated by the properties the Company currently
operates, the terms of future Syndications and the cash flow to be generated by
the related properties. Based upon its estimates of these factors, which
estimates may vary materially from actual results, the Company anticipates that
for at least the next two years, the aggregate Management Contract Obligations
with respect to existing and future Syndications will exceed the aggregate cash
flow generated by the related properties, which will result in the need to
utilize cash generated by the Company from sources other than the operations of
the Syndicated adult living communities to meet its Management Contract
Obligations (including payment of required returns for distribution to limited
partners). The aggregate amount of Management Contract Obligations relating
solely to guaranteed return obligations for the remaining portion of fiscal 1997
and for each of the fiscal years 1998 through 2002 based on existing management
contracts is $3.9 million, $15.4 million, $17.4 million, $16.4 million, $11.2
million and $2.4 million, respectively. Such amounts of Management Contract
Obligations are calculated based upon paid-in scheduled capital contributions of
limited partners as of October 31, 1997 with respect to the remaining portion of
fiscal 1997 and remaining scheduled capital contributions with respect to fiscal
years 1998 through 2002. Actual amounts of Management Contract Obligations in
respect of such contracts will vary based upon the timing and amount of such
capital contributions. Furthermore, such amounts of Management Contract
Obligations are calculated without regard to any cash flow the related
properties may generate, which cash flow would reduce such obligations, and are
calculated without regard to the Management Contract Obligations relating to
future Syndications.
Historically, the Company has funded, and it is anticipated that in the
future the Company will fund, its expenses, including Management Contract
Obligations, from its various sources. These sources consist of profits from new
Syndications, incentive management fees from previous Syndications, collections
on its multi-family Purchase Notes and receivables, and, to a limited extent,
the proceeds from the issuance of debt. In the future, the Company anticipates
that cash flow from newly developed adult living communities will be an
additional source of revenue. To the extent that the Company must expend funds
to meet its Management Contract Obligations, the Company will have fewer funds
available to utilize for other purposes, including funds for application to its
new development plan, distributions to stockholders, and
15
<PAGE>
to meet other liquidity and capital resource commitments. The Company will
attempt to structure future Syndications to minimize the likelihood that it will
be required to utilize the cash it generates to pay the Management Contract
Obligations, but there can be no assurance that this will be the case.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of these prepayments received upon the closings of
the Syndications averaged 71.7% in fiscal 1994, 60.9% in fiscal 1995, 65.7% in
fiscal 1996 and 64.4% for the nine months ended October 31, 1997. Prepayments of
capital contributions do not result in the prepayment of the related Purchase
Notes. Instead, such amounts are loaned to the Company by the Investing
Partnership. As a result of such loans and crediting provisions of the related
purchase agreements, the Company records the notes receivable corresponding to
the Purchase Notes net of such loans. Therefore, these prepayments act to reduce
the recorded value of the Company's notes receivable and reduce interest income
received by the Company. Pursuant to the terms of the typical Syndication, the
Company, as the general partner of the Investing Partnership, has the option not
to accept future prepayments by limited partners of capital contributions. In
addition, by arranging for the acquisition of existing adult living communities
through, and acting as the general partner of, partnerships, the potential
exists for claims by limited partners for violations of the terms of the
partnership agreements or management contracts and of applicable federal and
state securities and blue sky laws and regulations.
The Company's Management Contract Obligations are contractual
obligations of the Company to make payments under the management contracts to
the Owning Partnerships. As described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview --
Deferred Income Earned", the Company has deferred income on sales of interests
in Owning Partnerships in respect of such Management Contract Obligations. As a
result of such deferrals, the net revenues relating to sales are reduced and
actual payments of such Management Contract Obligations will generally not
result in the recognition of expense unless the underlying property's cash flows
are less than anticipated and, as a result thereof, the amount paid by the
Company in respect of the Management Contract Obligations is greater than the
amount assumed in establishing the amount of such deferred income. Such amounts
are recorded as a cost of sales expense in the period such amounts are known or
paid. If the underlying property's cash flow is greater than the amount assumed
in determining deferred income, the Company's earnings will be enhanced by the
recognition of deferred income earned and, to the extent cash flow exceeds the
Management Contract Obligations, incentive management fees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Revenues," "-- Liquidity and Capital Resources" and "Business -- Partnership
Offerings."
Need for Additional Financing
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living community, is nearing completion of
the construction of four additional communities, has commenced construction on
one additional community and intends to commence construction of between 30 and
34 additional new adult living communities over the next two years. The Company
expects to complete the construction of four of the five communities currently
under construction by the end of the first quarter of fiscal 1998 and expects to
complete the construction of the remaining community currently under
construction by the end of fiscal 1998. These five adult living communities,
along with the three communities whose construction is already completed
pursuant to the development plan, contain an aggregate of approximately 1,150
adult living apartment units. The 30 to 34 additional new communities which the
Company intends to commence construction on over the next two years will contain
between 4,260 and 4,828 additional adult living apartment units. Three of the
adult living communities that are being developed pursuant to the development
plan have been financed in part through the Syndication of partnership interests
in partnerships organized to make second mortgage loans to the Company to fund
approximately 20% of the development costs. The Company will own, manage and
operate these three adult living communities. All of the adult living
communities developed pursuant to the Company's development plan will be owned
by the Company or leased by the Company pursuant to long-term leases or similar
arrangements. The Company will manage and operate each of the newly developed
communities.
The Company intends to use approximately $20.0 million of its net
proceeds of this Offering to fund a portion of development costs not provided by
mortgage loans, which is currently anticipated to be sufficient to permit the
development of approximately 12 new adult living communities, if such proceeds
funded approximately 20% of the development costs. The Company will also utilize
funds generated from its business operations to fund development costs not
provided by construction financing for the development of additional
communities. The Company anticipates that these funding sources
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will provide the Company with sufficient equity capital to pursue its
development plan for at least 12 months at the projected rate of development.
There can be no assurance that the Company will generate sufficient funds from
its business operations to satisfy its projected equity investment requirements
for this period. The Company will use the proceeds of anticipated refinancings
of construction financing on, and/or sale-leasebacks of, stabilized, newly
constructed communities at higher principal amounts than the original
construction financing, may complete additional equity or debt offerings, and/or
utilize long term leases or similar forms of financing which require the
investment of little or no capital on the part of the Company, to proceed with
its development plan past this 12 month period at the projected rate of
development. There can be no assurance that the Company will be able to
successfully complete such future refinancings, offerings or obtain such long
term lease or similar financing. The Company currently has no commitments for
construction financing for the additional 30 to 34 adult living communities it
intends to construct over the next two years. In addition, the Company intends
to repay from cash from its business operations and/or refinance the
approximately $2.9 million and $35.5 million in principal amount of indebtedness
that becomes due in the remainder fiscal 1997 and fiscal 1998, respectively.
There can be no assurance that the Company will be able to refinance such
obligations in a timely manner or on acceptable terms. In addition, there are a
number of circumstances beyond the Company's control and which the Company
cannot predict that may result in the Company's financial resources being
inadequate to meet its needs. The Company may need to seek additional funding
through public or private financing, including equity financing, to satisfy
these obligations. If additional funds are raised by issuing equity securities,
the Company's shareholders may experience dilution. There can be no assurance,
however, that adequate financing will be available as needed or on terms
acceptable to the Company. A lack of available funds may require the Company to
delay, scale back or eliminate development of some of the adult living
communities that are currently contemplated in its development plan. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." Also see "Shares
Eligible for Future Sale" for restrictions on additional issuance of common
stock.
Development Delays and Cost Overruns
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community and intends to commence construction of between 30
and 34 additional new adult living communities over the next two years. The
Company expects to complete the construction of four of the five communities
currently under construction by the end of the first quarter of fiscal 1998 and
expects to complete the construction of the remaining community currently under
construction by the end of fiscal 1998. These five adult living communities,
along with the three communities already completed pursuant to the development
plan, contain an aggregate of approximately 1,150 adult living apartment units
and the 30 to 34 additional new communities which the Company intends to
commence construction on over the next two years will contain between 4,260 and
4,828 adult living apartment units. Although the eight adult living communities
already completed or currently under construction have been, or are being,
completed according to their respective construction schedules, there can be no
assurance that the Company will not suffer future delays in its development
program, which could adversely affect the Company's growth. Development of adult
living communities can be delayed or precluded by various zoning, healthcare
licensing and other applicable governmental regulations and restrictions. Real
estate development projects generally are subject to various risks, including
permitting, licensing and construction delays, that may result in construction
cost overruns and longer periods of operating losses. The Company intends to
rely on third-party general contractors to construct new communities. There can
be no assurance that the Company will not experience difficulties in working
with general contractors and subcontractors, any of which difficulties also
could result in increased construction costs and delays. Furthermore, project
development is subject to a number of contingencies over which the Company will
have little control and that may adversely affect project cost and completion
time, including inability to obtain financing, shortages of or the inability to
obtain labor or materials, the inability of the general contractors or
subcontractors to perform under their contracts, strikes, adverse weather
conditions, delays in property lease-ups and changes in applicable laws or
regulations or in the method of applying such laws and regulations. If the
Company's development schedule is delayed or scaled back, the Company's
business, operating results and financial condition could be adversely affected.
See " -- Need for Additional Financing", "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Liquidity and Capital
Resources," "Business -- Strategy" and "-- Operations."
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Property Encumbered with Mortgage Financing
The adult living communities currently operated by the Company are
generally encumbered with mortgage financing. While these mortgage loans are
obligations of the Owning Partnerships rather than direct obligations of the
Company, the Company typically provides a guaranty of certain obligations under
the mortgages including, for example, any costs incurred for the correction of
hazardous environmental conditions. To date, the Company has incurred no
material costs or expenses relating to the correction of hazardous environmental
conditions. Although most of the mortgage loans are non-recourse, as of October
31, 1997 the Company was liable as a general partner for approximately $36.7
million in principal amount of mortgage debt relating to ten adult living
communities and the one nursing home managed by the Company. As of October 31,
1997, the aggregate principal amount of the mortgage debt of the Owning
Partnerships was approximately $192.8 million and the aggregate annual debt
service obligations, excluding any balloon amounts payable at maturity, was
approximately $18.0 million. Most of this debt contains provisions which limit
the ability of the respective Owning Partnerships to further encumber the
property. Through January 31, 2002, approximately $178.7 million of balloon
payments under the mortgages will become due and payable. The Company
anticipates that the Owning Partnerships will make these balloon payments by
refinancing the mortgages on their respective properties. The debt service
payments on such mortgage debt reduces the cash flow available for distribution
by partnerships to limited partners who are typically entitled to an annual
distribution of between 11% and 12% of their paid-in scheduled capital during
the first five years of any partnership, to the extent not paid from cash flow
from the related property. The Company anticipates that it will continue to
arrange for future acquisitions of existing adult living communities through
mortgage financing and Syndications.
The Company intends to finance its future development of new adult
living communities primarily through mortgage financing and other types of
financing, including long-term operating leases arising through sale/leaseback
transactions and may issue additional debt or equity securities, to the extent
necessary. The financing of Company-developed communities will be direct
obligations of the Company and, accordingly, the amount of mortgage indebtedness
is expected to increase and the Company expects to have substantial debt
service, and may have substantial annual lease payment, requirements in the
future as the Company pursues its growth strategy. As a result, a substantial
portion of the Company's revenues is expected to be devoted to debt service
payments and may be devoted to fixed lease payments. There can be no assurance
that the Company will generate sufficient revenues to pay its interest and
principal obligations on its mortgage debt or to make any potential lease
payments. In addition, the Company arranged for the sale of limited partnership
interests in two partnerships organized to make second mortgage loans to the
Company to fund approximately 20% of the costs of developing three new adult
living communities.
Receivables Relating to Multi-Family Properties - Defaults and Bankruptcies
The Company holds promissory notes ("Adult Living Notes", and, together
with the Multi-Family Notes, "Purchase Notes") from Investing Partnerships which
were formed to acquire controlling interests in Owning Partnerships which own
adult living communities and Multi-Family Notes from Investing Partnerships
which were formed to acquire controlling interests in Multi-Family Owning
Partnerships which own multi-family properties ("Multi-Family Properties").
Although it had no obligation to do so, the Company has also made advances to
various Multi-Family Owning Partnerships to support the operation of their
properties, which advances are recorded as "Other Partnership Receivables" on
the Company's Consolidated Balance Sheet. The Multi-Family Notes and the other
receivables entitle the Company to receive all cash flow and sale or refinancing
proceeds generated by the respective multi-family property until the
Multi-Family Note and receivables are satisfied. As of October 31, 1997, the
recorded value, net of deferred income, of Multi-Family Notes was $107.1
million. All but approximately $1.2 million of the $56.0 million of "Other
Partnership Receivables" recorded on the Company's Consolidated Balance Sheet as
of October 31, 1997 relate to advances to Multi-Family Owning Partnerships. (See
Note 4 of Notes to the Company's Consolidated Financial Statements.) The Company
holds 169 Multi-Family Notes which are secured by controlling interests in 128
Multi-Family Properties. As a result of the Company not being the sole payee
with regard to 28 of the 169 Multi-Family Notes, the values reflected on the
Company's Consolidated Financial Statements relate to only the Company's
proportionate interests in these 28 Multi-Family Notes, which is typically a 50%
interest. Due to the interests of third parties in these 28 Multi-Family Notes,
the Company will not have sole discretion as to certain actions taken with
regard to said notes, as it would if it were the only payee on the notes. The
Company is not a partner in any of the Owning Partnerships which own
Multi-Family Properties or in any of the corresponding Investing Partnerships.
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Historically, if the mortgage encumbering a Multi-Family Property was
in default or the property was experiencing material financial difficulties, the
Company established reserves, as appropriate (which reduce the Company's
reported net income) due to the deemed impairment of the related Multi-Family
Note and any related receivables. If the property was ultimately foreclosed
upon, the Company recognized a loss equal to the recorded value of such note and
receivables, net of any deferred income and reserves previously established.
Nine Multi-Family Owning Partnerships which were in default under their
mortgages previously filed petitions seeking protection from foreclosure actions
under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11 Petitions") and one
additional Multi-Family Owning Partnership has surrendered its property pursuant
to an uncontested foreclosure sale of such property (said ten Multi-Family
Owning Partnerships are, collectively, the "Protected Partnerships"). The
Company neither owns nor manages, nor is the general partner of these
Multi-Family Owning Partnerships, but, rather, holds the related Multi-Family
Notes as receivables. The Company, therefore, has no liability in connection
with these mortgage defaults or bankruptcy proceedings. Seven of the Chapter 11
petitions resulted in the respective Protected Partnerships losing their
properties through foreclosure or voluntary conveyances of their properties. The
remaining two Protected Partnerships successfully emerged from their bankruptcy
proceedings in January, 1998 by paying off their mortgages at a discount with
the proceeds of new mortgage financings, resulting in these properties having
current, fully performing mortgages.
The bankruptcy petitions and risk of loss faced by the Protected
Partnerships caused the related Multi-Family Notes and receivables to be deemed
fully impaired. As a result, the Company recorded a non-cash loss for the year
ended January 31, 1997 in the amount of $18.4 million (representing the recorded
value of those Multi-Family Notes, net of deferred income and any previously
established reserves). The Principal Stockholders and one of their affiliates
assigned certain partnership interests in various partnerships that own
Multi-Family Properties (the "Assigned Interests") to the Investing Partnerships
that own interests in the Protected Partnerships, which Assigned Interests were
owned personally by the Principal Stockholders and their affiliate, and which
Assigned Interests provided additional assets at the Investing Partnership level
and, as a result, additional security for the related Multi-Family Notes. In
that the Principal Stockholders transferred the Assigned Interests in July 1996,
the Company recorded a $21.3 million capital contribution in fiscal 1996. As a
result of the transfers by the Principal Stockholders and their affiliates of
the Assigned Interest and the additional security provided thereby, the Company
believes that the outcome of the bankruptcy proceedings will not affect its
ability to collect on these Multi-Family Notes.
Fifteen of the Multi-Family Owning Partnerships remain in default on
their respective mortgages. These Multi-Family Owning Partnerships have been
negotiating with the respective mortgage lenders and, in some cases, have
obtained workout agreements pursuant to which the lenders generally agree during
the term of the agreement not to take any action regarding the mortgage default
and to accept reduced debt service payments for a period of time, with the goal
of increasing property cash flow to enable the property to fully service its
mortgage. As of October 31, 1997, the recorded value, net of deferred income, of
the Multi-Family Notes and "Other Partnership Receivables" held by the Company
relating to these fifteen Multi-Family Owning Partnerships was $31.9 million.
The Company has established reserves of $10.1 million to address the possibility
that these notes and receivables may not be collected in full. It is possible
that other Multi-Family Owning Partnerships which are in default of their
mortgages will file bankruptcy petitions or take similar actions seeking
protection from their creditors. The Company neither owns nor manages these
properties, nor is it the general partner of these Multi-Family Owning
Partnerships, but, rather, holds the related Multi-Family Notes as receivables.
The Company, therefore, would have no liability in connection with any such
mortgage defaults or possible bankruptcy proceedings.
The Multi-Family Properties were typically built or acquired with the
assistance of programs administered by the United States Department of Housing
and Urban Development ("HUD") that provide mortgage insurance, favorable
financing terms and/or rental assistance payments to the owners. As a condition
to the receipt of assistance under these and other HUD programs, the properties
must comply with various HUD requirements, including limiting rents on these
properties to amounts approved by HUD. Most of the rental assistance payment
contracts relating to the Multi-Family Properties will expire over the next few
years. HUD has introduced various initiatives to restructure its housing subsidy
programs by increasing reliance on prevailing market rents, and by reducing
spending on future rental assistance payment contracts by, among other things,
not renewing expiring contracts and by restructuring mortgage debt on those
properties where a decline in rental revenues is anticipated. Due to uncertainty
regarding the final policies that will result from these initiatives and
numerous other factors that affect each property which can change over time
(including the local real estate market, the provisions of the mortgage debt
encumbering the property, prevailing interest rates and the general state of the
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economy) it is impossible for the Company to determine whether these initiatives
will have an impact on the Multi-Family Properties and, if there is an impact,
whether the impact will be positive or negative.
Certain of the Multi-Family Owning Partnerships intend to take
advantage of the new HUD initiatives and/or improving market conditions to
either refinance their HUD-insured mortgages with conventional mortgage
financing or restructure their HUD-insured mortgage debt. In some cases, the
Multi-Family Owning Partnerships may not renew rental assistance contracts as
part of a strategy to reposition those Multi-Family Properties as market-rate,
non-subsidized properties. Six of such Multi-Family Owning Partnerships have
refinanced their HUD-insured mortgages with conventional mortgage financing and
a number of other Multi-Family Owning Partnerships have applications for such
commitments pending. To the extent that any of these Multi-Family Owning
Partnerships complete such actions, the Company believes this will enhance and
accelerate the ability of the Multi-Family Owning Partnerships to make payments
to the Company on their respective Multi-Family Notes. However, there can be no
assurance that the Multi-Family Owning Partnerships will be able to refinance
additional mortgages or will be able to successfully reposition any of the
Multi-Family Properties.
In view of the foregoing, there can be no assurance that other Owning
Partnerships that own Multi-Family Properties will not default on their
mortgages, file Chapter 11 Petitions, and/or lose their properties through
foreclosure. Although the Company would have no liability in connection
therewith, any such future mortgage defaults could, and, any such future filings
of Chapter 11 petitions or losses of any such property through foreclosure
would, cause the Company to realize a non-cash loss equal to the recorded value
of the applicable Multi-Family Note plus any related advances, net of any
deferred income recorded for such Multi-Family Note and any reserves for such
note previously established by the Company, which would reduce such loss. In
addition, the Company could be required to realize such a non-cash loss even in
the absence of mortgage defaults, Chapter 11 Petitions or the loss of any such
property through foreclosure if, at any time in which the Company's financial
statements are issued, such note is considered impaired. Such impairment would
be measured under applicable accounting rules. Such losses could result in a
default by the Company in its covenants under various debt obligations to
maintain a specified net worth or debt-to-net worth ratio and could adversely
affect the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources".
Fifty-one of the 169 Multi-Family Notes have reached their final
maturity dates, and, due to the inability, in view of the current cash flows of
the properties, to maximize the value of the underlying property at such
maturity dates, either through a sale or refinancing, these final maturity dates
have been extended by the Company. The Multi-Family Property relating to one
extended Multi-Family Note was refinanced in Fiscal 1996 and such refinancing
generated an approximate $800,000 payment to the Company under such Multi-Family
Note. In addition, the Company anticipates that two more Multi-Family Properties
relating to two other extended Multi-Family Notes will be refinanced in the
first quarter of fiscal 1998. There can be no assurance that such refinancings
will actually close. During the period such notes are extended, the Company will
continue to receive the cash flow and sale or refinancing proceeds, if any,
generated by the underlying properties. The Company expects to extend maturities
of other Multi-Family Notes.
Liabilities Arising From General Partner Status
The Company is a general partner of all but one of the Adult Living
Owning Partnerships and the general partner of 32 of 41 adult living Investing
Partnerships. The mortgage financing of the Syndicated adult living communities
and other Syndicated properties are generally without recourse to the general
credit or assets of the Company except with respect to certain specified
obligations, including, for example, costs incurred for the correction of
hazardous environmental conditions. However, except for such non-recourse
obligations, as a general partner, the Company is fully liable for all
partnership obligations, including those presently unknown or unobserved, and
unknown or future environmental liabilities. The cost of any such obligations or
claims, if partially or wholly borne by the Company, could adversely affect the
Company's business, operating results and financial condition. Although most of
the mortgage loans are non-recourse, the Company was liable as a general partner
for approximately $36.7 million in principal amount of mortgage debt as of
October 31, 1997 relating to ten adult living communities and the one nursing
home managed by the Company.
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Difficulties of Managing Rapid Expansion
The Company will pursue an aggressive expansion program, and it expects
that its rate of growth will increase as it implements its development program
for new adult living communities. The Company's success will depend in large
part on identifying suitable development opportunities, and its ability to
pursue such opportunities, complete development, and lease up and effectively
operate its adult-living communities. The Company's growth has placed a
significant burden on the Company's management and operating personnel. The
Company's ability to manage its growth effectively will require it to continue
to attract, train, motivate, manage and retain key employees. If the Company is
unable to manage its growth effectively, its business, operating results and
financial condition could be adversely affected. See "Business -- Strategy" and
"Management -- Directors and Executive Officers."
Potential Increases in Debt Service Obligations Relating to Variable Rate Debt
The Investor Note Debt, which totaled $29.1 million in aggregate
principal amount at October 31, 1997, bears interest at variable rates
determined by reference to the prime rate of the lending banks. Each 1% increase
or decrease of the interest rate on such debt would result in an increase or
decrease in the annual debt service obligation of the Company of approximately
$291,000. Therefore, increases in interest rates could adversely affect the
operating results and financial condition of the Company.
Right of Partnerships to Terminate Management Contracts
All of the adult living communities and the nursing home currently
operated by the Company are managed by the Company pursuant to written
management contracts, which generally have a five year term coterminous with the
Company's Management Contract Obligations under such contracts The five-year
Management Contract Obligations period has expired for ten of the Owning
Partnerships which Management Contract Obligations relate to fourteen of the
Investing Partnerships. After the initial five year term, the Management
Contract Obligations terminate and the management contracts are automatically
renewed each year, but are cancelable on 30 to 60 days notice at the election of
either the Company or the Owning Partnership. In general, under the terms of the
Investing Partnership's partnership agreement, limited partners have only
limited rights to take part in the conduct or operation of the partnership. The
Company is the general partner of 36 of the 37 Owning Partnerships that own the
adult living communities and the nursing home operated by the Company. The
Company is also the general partner of 32 of the 41 Investing Partnerships
formed to acquire equity interests in said Owning Partnerships. The termination
of any management contracts would result in the loss of fee income, if any,
under those contracts. However, the new adult living communities being developed
by the Company will be owned and operated directly by the Company or operated
pursuant to long-term leases and, therefore, will not be subject to such
management contracts. See "-- Conflicts of Interest" and "Business --
Partnership Offerings."
Right to Remove General Partner
The partnership agreements for the 32 adult living Investing
Partnerships where the Company is the general partner provide that a majority in
ownership interests of the limited partners can remove the Company as the
general partner at any time. It is anticipated that all future Investing
Partnership agreements will contain the same right to remove the Company as the
general partner. The Investing Partnerships, acting through their general
partners, have various rights relating to matters affecting the business and
affairs of the Owning Partnerships. In addition, the partnership agreements for
two Owning Partnerships which are limited partnerships and for which the Company
is the managing general partner provide that a majority in interest of the
limited partners of the Investing Partnership and the general partner of the
Investing Partnership can remove the Company as the managing general partner of
the Owning Partnership. The removal of the Company as the general partner of an
Investing Partnership or as the managing general partner of such an Owning
Partnership could have adverse effects on the business, operating results and
financial condition of the Company, especially if such removal occurs during the
five-year Management Contract Obligations period for the respective Investing
Partnership. Such period has expired with respect to the Investing Partnerships
related to such two Owning Partnerships and such period has expired with respect
to 5 of the 32 Investing Partnerships for which the Company is the general
partner.
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Conflicts of Interest
Messrs. Luciani and Rodin, the Chairman of the Board and President of
the Company, respectively, and entities controlled by them serve as general
partners of certain partnerships directly and indirectly owning Multi-Family
Properties. As a result of their general partner status, such persons have
personal liability for recourse partnership obligations and own small equity
ownership interests in such partnerships. The Company held (i) notes,
aggregating $107.1 million, net of deferred income, at October 31, 1997 that
were secured by the limited partnership interests in such partnerships and (ii)
other partnership receivables of $54.8 million from such partnerships at October
31, 1997. These individuals have provided personal guarantees in certain
circumstances to obtain mortgage financing for certain adult living communities
operated by the Company and for certain of the Company's Investor Note Debt, and
the obligations thereunder may continue. In addition, Messrs. Luciani and Rodin
and certain employees will devote a limited portion of their time to overseeing
the third-party managers of Multi-Family Properties and one adult living
community in which the Company has financial interests in that it holds the
related Multi-Family Notes, but in which Messrs. Luciani and Rodin have equity
interests and the Company does not. Mr. Luciani devotes approximately 20% of his
time to such activities and Mr. Rodin devotes approximately 5% of his time to
such activities, although these amounts can vary from year to year. These
activities, ownership interests and general partner interests create actual or
potential conflicts of interest on the part of these officers. See "Certain
Transactions" and Note 11 of Notes to the Company's Consolidated Financial
Statements.
The Company is the managing general partner for 36 of the 37 Owning
Partnerships which own the 37 adult living communities and one nursing home
managed by the Company. The general partner of the remaining partnership is
Terrace Lion Corp., a Missouri corporation whose sole officer, director and
shareholder is Maurice Barksdale, a consultant to the Company. The Company also
is the general partner for 32 of the 41 adult living Investing Partnerships that
own equity interests in these 37 Owning Partnerships. In addition, the Company
is the managing agent for the 37 adult living communities and one nursing home
managed by the Company. The Company has arranged for the acquisition of adult
living communities by utilizing mortgage financings and Syndications. By serving
in all of these capacities, the Company may have conflicts of interest in that
it has both a duty to act in the best interests of partners of various
partnerships, including the limited partners of the Investing Partnerships, and
the desire to maximize earnings for the Company's stockholders in the operation
of such adult living communities and other properties. See "Business --
Partnership Offerings" and Note 11 of Notes to the Company's Consolidated
Financial Statements.
In Fiscal 1996 and 1997, the Company Resyndicated three previously
Syndicated adult living communities by acquiring them from the original Owning
Partnerships, which acquisitions were arranged by utilizing mortgage financing
and by arranging for the ownership of the properties by new Owning Partnerships
and the Syndication of interests in new Investing Partnerships. The consent of
the original limited partners is required and obtained for the sale of any
Syndicated adult living community, including a sale accomplished through a
Resyndication. As the general partner of the original Owning Partnership and, in
many cases, as the general partner of the original Investing Partnership, the
Company had a fiduciary duty to make sure that the original limited partners
received a fair price for the purchase of the property. Potential conflicts of
interest regarding Resyndications may exist because of the Company's roles as
general partner of: each of the selling and acquiring Owning Partnerships; each
of the acquiring Investing Partnerships; and, in some cases, the selling
Investing Partnerships. The Company will not engage in Resyndication
transactions in the future.
The Company also may have a conflict of interest in that certain of the
adult living communities operated by the Company may face direct competition
from other communities operated by the Company. Decisions made by the Company to
benefit one such community may not be beneficial to the other, thus exposing the
Company to a claim of a breach of fiduciary duty. See "Business -- Communities."
Dependence on Senior Management and Skilled Personnel
The Company depends, and will continue to depend, on the services of
its principal executive officers. The loss of the services of one or more of
them could have a material adverse effect on the Company's operating results and
financial condition. Certain of the Company's officers or entities controlled by
them are general partners of partnerships that own or invest in real property
and they may be required to devote time to such partnerships. The Company also
depends on its ability to attract and retain management personnel who will be
responsible for the day-to-day operations of each of its adult living
communities. If the Company is unable to hire qualified management personnel to
operate such communities, the Company's business, operating results and
financial condition could be adversely affected. See "-- Conflicts of Interest"
and "Management."
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Competition
The long-term care industry is highly competitive, and the Company
believes that the assisted-living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home healthcare
agencies, community-based service programs, adult living communities and
convalescent centers. The Company expects that, as the provision of
assisted-living services receives increased attention and the number of states
providing reimbursement for assisted-living rises, competition will intensify as
a result of new market entrants. The Company also faces potential competition
from skilled-nursing facilities that provide long-term care services. Moreover,
in implementing its growth strategy, the Company expects to face competition in
its efforts to develop and acquire adult living communities. Some of the
Company's present and potential competitors are significantly larger and have,
or may obtain, greater financial resources than those of the Company.
Consequently, there can be no assurance that the Company will not encounter
increased competition in the future that could limit its ability to attract
residents or expand its business and therefore have a material adverse effect on
its business, operating results and financial condition. Moreover, if the
development of new adult living communities outpaces demand for those facilities
in certain markets, such markets may become saturated. Such an oversupply of
such communities could cause the Company to experience decreased occupancy and
depressed cash flows and operating results. See "Business --Competition."
Staffing and Labor Costs
The Company competes with other providers of independent- and
assisted-living services with respect to attracting and retaining qualified
personnel. The Company also is dependent upon the available labor pool of
employees. A shortage of trained or other personnel may require the Company to
enhance its wage and benefits package in order to compete. No assurance can be
given that the Company's labor costs will not increase, or that if they do
increase, they can be matched by corresponding increases in rental or management
revenue. Any significant failure by the Company to attract and retain qualified
employees, to control its labor costs or to match increases in its labor
expenses with corresponding increases in revenues could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Employees."
Dependence on Attracting Seniors With Sufficient Resources to Pay
The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's fees from their own or
familial financial resources. Inflation or other circumstances that adversely
affect the ability of seniors to pay for the Company's services could have an
adverse effect on the Company. If the Company encounters difficulty in
attracting seniors with adequate resources to pay for its services, its
business, operating results and financial condition could be adversely affected.
See "Business -- Operations."
Government Regulation
Healthcare is heavily regulated at the Federal, state and local levels
and represents an area of extensive and frequent regulatory change. Currently no
federal rules explicitly define or regulate independent- or assisted-living
communities. A number of legislative and regulatory initiatives relating to
long-term care are proposed or under study at both the federal and state levels
that, if enacted or adopted, could have an adverse effect on the Company's
business and operating results. The Company cannot predict whether and to what
extent any such legislative or regulatory initiative will be enacted or adopted,
and therefore cannot assess what effect any current or future initiative would
have on the Company's business and operating results. Changes in applicable laws
and new interpretations of existing laws can significantly affect the Company's
operations, as well as its revenues and expenses. The Company's adult living
communities are subject to varying degrees of regulation and licensing by local
and state health and social service agencies and other regulatory authorities
specific to their location. While regulations and licensing requirements often
vary significantly from state to state, they typically relate to fire safety,
sanitation, staff training, staffing levels and living accommodations such as
room size, number of bathrooms and ventilation, as well as regulatory
requirements relating specifically to certain of the Company's health-related
services. The Company's success will depend in part on its ability to satisfy
such regulations and requirements and to acquire and maintain any required
licenses. Federal, state and local governments occasionally conduct unannounced
investigations, audits and reviews to determine whether violations of applicable
rules and regulations exist. Devoting management and staff
23
<PAGE>
time and legal resources to such investigations, as well as any material
violation by the Company that is discovered in any such investigation, audit or
review, could have a material adverse effect on the Company's business and
operating results. See "Business -- Strategy" and "--Governmental Regulation."
Control by Certain Stockholders
Each share of Common Stock is entitled to one vote on all matters
submitted to a vote of the holders of the Common Stock. After giving effect to
this Offering, the Principal Stockholders, John Luciani and Bernard M. Rodin,
will collectively beneficially own shares of Common Stock representing
approximately 84.27% of the Company's Common Stock, excluding any shares of
Common Stock sold pursuant to the Over-allotment Option. If the Over-allotment
Option is exercised in full, the Principal Stockholders will beneficially own
shares representing 81.91% of the Company's Common Stock. As a result, they will
maintain control over the election of a majority of the Company's Board of
Directors ("Board of Directors") and, thus, over the operations and business of
the Company as a whole. In addition, such stockholders will have the ability to
prevent certain types of material transactions, including a change of control of
the Company. The control by John Luciani and Bernard M. Rodin over a substantial
majority of the Company's Common Stock may make the Company a less attractive
target for a takeover than it otherwise might be, or render more difficult or
discourage a merger proposal or a tender offer. See "Principal and Selling
Stockholders."
Possible Environmental Liabilities
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose liability whether or not the owner or operator knows of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations, and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
any entity who arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for
these costs, as well as certain other costs, including governmental fines and
injuries to persons or properties. To date, the Company has not incurred any
material costs of removal or remediation of such hazardous or toxic substances.
However, the presence, with or without the Company's knowledge, of hazardous or
toxic substances at any property held or operated by the Company could have an
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Government Regulation."
General Real Estate Risks
The performance of the Company's adult living communities is influenced
by factors affecting real estate investments, including the general economic
climate and local conditions, such as an oversupply of, or a reduction in demand
for, adult living communities. Other factors include the attractiveness of
properties to tenants, zoning, rent control, environmental quality regulations
or other regulatory restrictions, competition from other forms of housing and
the ability of the Company to provide adequate maintenance and insurance and to
control operating costs, including maintenance, insurance premiums and real
estate taxes. Real estate investments also are affected by such factors as
applicable laws, including tax laws, interest rates, the availability of
financing and defects in title with respect to which the title companies
insuring fee title have taken exception. To date, the Company has not incurred
any material costs of removal or remediation with respect to such exceptions to
title. The performance of the Company's adult living communities also may be
adversely affected by energy shortages and the costs attributable thereto,
strikes and other work stoppages by employees of the adult living communities,
damage to or destruction of the adult living communities, various catastrophic
or other uninsurable losses and defaults by a substantial number of tenants
under their leases. The potential for operating losses and the risk of
development delays and cost overruns have been previously described. In
addition, real estate investments are relatively liquid and, therefore, limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
24
<PAGE>
Restrictions Imposed by Laws Benefiting Disabled Persons
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
places of public accommodation are required to meet certain federal requirements
related to access and use by disabled persons. A number of additional Federal,
state and local laws exist which also may require modifications to existing and
planned properties to create access to the properties by disabled persons. While
the Company believes that its existing properties and its prototype for new
development are substantially in compliance with present requirements or are
exempt therefrom, if required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by the Company. Further legislation may
impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial. See "Business
- -- Government Regulation."
Liability and Insurance Risk
The Company's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry have become subject to an
increasing number of lawsuits alleging malpractice or related legal claims, many
of which seek large amounts and result in significant legal costs. The Company
expects that from time to time it may be subject to such suits as a result of
the nature of its business. The Company currently maintains insurance policies
in amounts and with such coverage and deductibles as it deems appropriate, based
on the nature and risks of its business, historical experience and industry
standards. There can be no assurance, however, that claims in excess of the
Company's insurance coverage or claims not covered by the Company's insurance
coverage will not arise. A successful claim against the Company not covered by,
or in excess of, the Company's insurance could have a material adverse effect on
the Company's operating results and financial condition. Claims against the
Company, regardless of their merit or eventual outcome, may also have a material
adverse effect on the Company's ability to attract residents or expand its
business and would require management to devote time to matters unrelated to the
operation of the Company's business. In addition, the Company's insurance
policies must be renewed annually, and there can be no assurance that the
Company will be able to obtain liability insurance coverage in the future or, if
available, that such coverage will be on acceptable terms. See "Business --
Legal Proceedings."
Absence of Public Market; Possible Volatility of Market Price of Securities
Prior to the Offering, there have been no public markets for the Common
Stock and there can be no assurance that active trading markets will develop or,
if developed, be sustained after the Offering. The Company intends to apply for
the Common Stock to be listed on the Nasdaq National Market. After completion of
the Offering, the market price of the Common Stock could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the markets for the shares of Common Stock, market sales of
shares of Common Stock, variations in the Company's operating results, new
statutes or regulations or changes in the interpretation of existing statutes or
regulations affecting the healthcare industry in general or the independent or
assisted-living industry in particular. In addition, the stock market in recent
years has experienced broad price and volume fluctuations that often have been
unrelated to the operating performance of particular companies. These market
fluctuations also may adversely affect the market price of the shares of Common
Stock. See "Shares Eligible for Future Sale" and "Underwriting."
Negotiated Offering Price
The initial public offering price of the Common Stock was determined
based upon negotiations between the Company and the Representative and do not
necessarily bear any relationship to the Company's assets, book value, results
of operations or any other generally accepted criteria. The factors considered
in determining the price included, but were not limited to, the history of, and
the prospects for, the Company and the industry in which it competes, its past
and present operations, its past and present earnings and the trend of such
earnings, the present state of the Company's development, the general condition
of the securities markets at the time of this offering and the recent market
prices of publicly traded securities of comparable companies. There can be no
assurance that the Common Stock can be resold at the initial offering price, if
at all. Purchasers of the Common Stock will be exposed to a substantial risk of
a decline in the market price of the Common Stock after the Offering, if a
market develops. See "Underwriting."
25
<PAGE>
Policy Not to Pay Dividends on Common Stock and Potential Limitations on Ability
to Pay Dividends
The Company does not anticipate paying future dividends on its Common
Stock. It is the present policy of the Board of Directors to finance the
expansion of the Company's business. The payment of dividends on its Common
Stock in the future will depend on the results of operations, financial
condition, capital expenditure plans and other cash obligations of the Company
and will be at the sole discretion of the Board of Directors. In addition,
certain provisions of future indebtedness of the Company may prohibit or limit
the Company's ability to pay dividends. See "Dividend Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Discretionary Use of Proceeds
The Company intends to use all of its net proceeds from the Offering to
finance the development of new adult living communities except for approximately
$3 million which the Company intends to use for working capital and general
corporate purposes. However, delays or difficulties in obtaining financing or in
project development could cause the Company to use such net proceeds to acquire
existing adult living communities and for general corporate purposes (including
payment of Management Contract Obligations). The Company's management will,
therefore, retain broad discretion in allocating all of the net proceeds of the
Offering. See "Use of Proceeds."
Anti-takeover Considerations
The Company's Board of Directors has the authority to issue up to
15,000,000 shares of Preferred Stock, par value $.0001 per share and to fix the
rights and preferences of such shares. Such issuance could occur without action
by the holders of the Common Stock. Such preferred stock could have voting and
conversion rights that adversely affect the voting power of the holders of
Common Stock, or could result in one or more classes of outstanding securities
that would have dividend, liquidation or other rights superior to those of the
Common Stock. Issuance of such preferred stock may have an adverse effect on the
then prevailing market price of the Common Stock. This authority, together with
certain provisions in the Company's Restated Certificate of Incorporation (the
"Certificate") and By-Laws (including provisions that limit stockholder ability
to call a stockholders meeting or to remove directors and require a two-thirds
vote of stockholders for amendment of certain provisions of the Certificate or
approval of certain business combinations), may delay, deter or prevent a change
in control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock, and may adversely affect the market
price of, and the voting and other rights of the holders of, the Common Stock.
Additionally, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Section 203 could have the effect of delaying or preventing
a change of control of the Company. See "Description of Capital Stock."
Immediate and Substantial Dilution
Purchasers of Common Stock in the Offering will experience immediate
and substantial dilution of $7.17 per share from the initial public offering
price per share. Additional dilution may occur if the Company issues additional
equity securities in the future. See "Dilution."
Shares Eligible for Future Sale
Sales of substantial amounts of shares of Common Stock in the public
market after the Offering or the perception that such sales could occur could
adversely affect the market price of the Common Stock and the Company's ability
to raise equity. Upon completion of the Offering, the Company will have
17,800,000 shares of Common Stock outstanding (excluding the exercise of the
Representative's Warrants). Of the shares of Common Stock outstanding after this
Offering, all shares sold in the Offering will be freely tradable without
restriction or limitation under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by "affiliates" of the
Company, as such term is defined in Rule 144 promulgated under the Securities
Act. The remaining shares of Common Stock are "restricted securities" within the
meaning of Rule 144. Such restricted securities may be sold subject to the
limitations of Rule 144. Furthermore, the
26
<PAGE>
Company intends to register approximately 2,500,000 shares of Common Stock
reserved for issuance pursuant to the Company's stock option plan. The Company,
the Principal Stockholders and the Company's officers and directors have agreed
not to, directly or indirectly, offer, sell, transfer, pledge, assign,
hypothecate or otherwise encumber any shares of Common Stock or securities
convertible into Common Stock, whether or not owned, or dispose of any interest
therein under Rule 144 or otherwise for a period of 13 months following the date
of this Prospectus, and may not do so for an additional six month period without
the prior written consent of the Representative (the "Transfer Restrictions").
However, the issuances of shares of Common Stock, whether directly or upon the
exercise or conversion of exchangeable or convertible securities (including
options granted under the Company's stock option plan), and the transfers of
shares of Common Stock by the Principal Stockholders to effectuate estate
planning, are allowed as long as the recipients of shares of Common Stock in any
such transactions agree to be bound by the Transfer Restrictions.
Notwithstanding the foregoing, the Transfer Restrictions do not apply to the
issuance of the Company's securities in connection with mergers or acquisitions,
the sale of Common Stock in connection with the exercise of the Over-allotment
Option or shares of Common Stock, or securities convertible or exchangeable for
shares of Common Stock, which are publically offered by the Company. In
addition, the Representative holds Representative's Warrants which entitles it
to purchase an aggregate of up to 280,000 shares of the Company's Common Stock
at a price equal to 165% of the per share price to the public of the Common
Stock. The Representative's Warrants are exercisable for a period of four years,
commencing one year after their issuance. The Company has agreed that, under
certain circumstances, it will use its best efforts to register the
Representative's Warrants and/or the underlying Common Stock for sale in the
public market. See "Shares Eligible for Future Sale" and "Underwriting."
27
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (excluding the
exercise of the Representative's Warrants), after deducting estimated
underwriting discounts and offering expenses payable by the Company, are
estimated to be approximately $23.0 million. The Company intends to use (i)
approximately $3 million of such proceeds for working capital and general
corporate purposes and (ii) the balance of approximately $20.0 million to
finance the development of new adult living communities. However, delays or
difficulties in obtaining financing or project development could cause the
Company to use the portion of such net proceeds intended for development to
acquire additional existing adult living communities and for general corporate
purposes, including payment of Management Contract Obligations. The Company
anticipates that most of the construction loans it obtains to finance the
development and lease-up costs of the new adult living communities will fund
approximately 80% of such costs, requiring the Company to contribute
approximately 20% of such costs. The Company estimates that the cost of
developing each new adult living community utilizing construction financing
(including reserves necessary to carry the community through its lease-up
period) will be approximately $9.5 million. The Company will use approximately
$20.0 million of its net proceeds of this Offering to fund the portion of
development costs not provided by construction financing, which is currently
anticipated to be sufficient to permit the development of approximately 11 of
the 30 to 34 new adult living communities on which the Company plans to commence
construction over the next two years if such proceeds funded approximately 20%
of the development costs. The Company anticipates that the proceeds of this
Offering and funds generated by its business operations will be sufficient to
fund approximately 20% of these development costs for a period of at least 12
months at the anticipated rate of development. In order to maintain its
development program at its projected level beyond this 12-month period, the
Company intends to utilize the proceeds of anticipated refinancings of
construction financing on, and/or sale-leasebacks of, stabilized, newly
constructed communities at higher principal amounts than the original
construction financing, or raise additional funds through the issuance of
additional debt or equity securities to fund the development costs not provided
by construction financing and/or utilize long term leases or similar forms of
financings which require the investment of little or no capital on the part of
the Company. Although the Company has obtained financing for the eight adult
living communities whose construction is completed or currently under
construction, the Company does not have commitments for construction financing
for any of the 30 to 34 new adult living communities on which the Company plans
to commence construction over the next two years. The Company believes that it
will be able to obtain such needed additional financing. There can be no
assurance, however, that the Company will be able to obtain the financing and/or
sale-leasebacks, or complete any additional debt or equity offerings, necessary
to complete its development plan. See "Risk Factors -- Need for Additional
Financing," "-- Discretionary Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Strategy".
Pending the uses outlined above, funds will be placed into short term
investments such as governmental obligations, bank certificates of deposit,
banker's acceptances, repurchase agreements, short term debt obligations, money
market funds, and interest bearing accounts. The Company has not established
investment criteria for such short-term investments.
DIVIDEND POLICY
The Company does not anticipate paying future dividends on its Common
Stock. It is the present policy of the Board of Directors to retain earnings, if
any, to finance the expansion of the Company's business. The payment of
dividends on its Common Stock in the future will depend on the results of
operations, financial condition, capital expenditure plans and other cash
obligations of the Company and will be at the sole discretion of the Board of
Directors. In addition, certain provisions of future indebtedness of the Company
may prohibit or limit the Company's ability to pay dividends. During fiscal 1995
and fiscal 1996, the Company and its predecessors paid dividends and other
distributions of $1,700,000, and $794,000, respectively, exclusive of amounts
reflected as officers' compensation. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Transactions."
28
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization
of the Company at October 31, 1997, and as adjusted to reflect (i) the sale of
the Common Stock by the Company in this Offering and (ii) the application of the
estimated net proceeds thereof. The table should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes thereto
included elsewhere in this Prospectus. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
As of October 31, 1997
Actual As Adjusted
------ -----------
(in thousands)
--------------
<S> <C> <C>
Bank Debt................................................ $ 40,123 $ 40,123
Other debt, principally debentures....................... 117,017 117,017
Construction Loan Payable................................ 16,755 16,755
Stockholders' equity:
Preferred Stock, $.0001 par value; 15,000,000
shares authorized; none issued and outstanding....... -- --
Common Stock, $.01 par value;
40,000,000 shares authorized; 15,000,000 shares
issued and outstanding; 17,800,000 shares issued
and outstanding as adjusted(1)....................... 150 178
Additional paid-in capital (1)......................... 54,321 77,293
Accumulated deficit.................................... (27,517) ( 27,517)
-------- ---------
Total stockholders' equity......................... 26,954 49,954
-------- ---------
Total capitalization............................. $200,849 $ 223,849
======== =========
</TABLE>
(1) Does not include 2,500,000 shares reserved for issuance under the Company's
stock option plan and 280,000 shares issuable upon exercise of the
Representative's Warrants.
29
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock at October
31, 1997 was approximately $18,449,000, or $1.23 per share of Common Stock. Net
tangible book value per share of Common Stock is determined by dividing the
number of outstanding shares of Common Stock into the net tangible book value of
the Company (total net assets of $26,954,000 less intangible assets of
$8,505,000). After giving effect to the sale of the Common Stock offered hereby
(based upon the initial public offering price of $9.50 per share of Common
Stock, and after deduction of underwriting discounts and estimated offering
expenses payable by the Company), pro forma net tangible book value of the
Common Stock as of October 31, 1997 would have been $41,419,000 or $2.33 per
share, representing an immediate increase in pro forma net tangible book value
of $1.10 per share to existing shareholders and an immediate dilution of $7.17
per share to new investors purchasing Common Stock. The following table
illustrates the immediate per share dilution:
Assumed initial public offering price per share............... $ 9.50
------
Net tangible book value per share as of
October 31, 1997.......................................... 1.23
Increase per share attributable to new investors............
1.10
Pro forma net tangible book value per share ------
after offering.............................................. 2.33
------
Net tangible book value dilution per share to new investors... $ 7.17
------
The following tables summarize, on a pro forma basis at October 31,
1997, the difference between the number of shares purchased from the Company,
total consideration paid and the average price paid per share by existing
stockholders (based upon Total Stockholders' Equity at October 31, 1997) and new
investors after giving effect to the Offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Paid
---------------- ------------------------
Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Principal Stockholders(1)............... 15,000,000 84.27% 26,954,000 50.33% 1.80
New investors(1) ....................... 2,800,000 15.73% 26,600,000 49.67% 9.50
----------- ------ ---------- ------
Total.......................... 17,800,000 100.0% 53,554,000 100.0%
=========== ====== ========== ======
</TABLE>
(1) Upon completion of the Offering (excluding the Over-allotment Option), the
Principal Stockholders will own 15,000,000 shares of Common Stock, and the
new investors will own 2,800,000 shares of Common Stock, representing 100%
of the outstanding shares of Common Stock.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and other data)
The following selected consolidated financial statement of operations and
balance sheet data have been taken or derived from the Company's consolidated
financial statements and should be read in conjunction with the consolidated
financial statements and the related notes thereto included herein. The results
of operations for the nine months ended October 31, 1996 and 1997 (as restated)
have been prepared on the same basis as the year end financial statements and
are unaudited, but in the opinion of management, contain all adjustments,
consisting of only normally recurring adjustments, necessary for a fair
presentation of the results for the full year. The results of operations for an
interim period may not give a true indication of results for the full year. All
references herein to a "fiscal" year refer to the fiscal year beginning on
February 1 of that year (for example, "fiscal 1995" refers to the fiscal year
beginning on February 1, 1995). See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine months
Years Ended January 31, (4) ended October 31,(4)
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales .......................... $ 18,170 $ 20,973 $ 22,532 $ 31,973 $ 36,021 $ 21,524 $ 31,401
Syndication fee income ......... 6,484 7,654 5,587 8,603 7,690 4,976 6,529
Deferred income earned ......... 792 7,502 4,399 9,971 5,037 708 4,246
Interest income ................ 13,209 13,315 9,503 12,689 13,773 11,043 8,081
Property management fees from
related parties ............. 560 3,854 4,351 4,057 2,093 1,604 3,250
Equity in earnings from
partnerships ................ 129 206 276 356 423 250 357
Other income ................... -- -- -- 1,013 -- -- 283
-------- --------- -------- -------- -------- -------- --------
Total Revenues ................... 39,344 53,504 46,648 68,662 65,037 40,105 54,147
======== ========= ======== ======== ======== ======== ========
Costs and expenses:
Cost of sales .................. 14,411 26,876 21,743 27,688 34,019 19,468 25,947
Selling ........................ 7,027 6,706 6,002 7,664 7,176 4,603 6,186
Interest ....................... 11,874 10,991 13,610 15,808 16,394 12,017 13,991
General and administrative ..... 5,617 5,226 6,450 7,871 7,796 5,687 6,415
Loss on impairment of notes
and receivables ............... -- -- -- -- 18,442 18,442 --
Write-off of registration costs -- -- -- -- -- -- 3,107
Officers' compensation(1) ...... 1,200 1,200 1,200 1,200 1,200 900 900
Depreciation and amortization .. 975 1,433 2,290 2,620 3,331 2,539 2,650
-------- --------- -------- -------- -------- -------- --------
Total Costs and Expenses 41,104 52,432 51,295 62,851 88,358 63,656 59,196
======== ========= ======== ======== ======== ======== ========
Income (loss) before provision
(benefit) for income taxes ....... (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Provision for income taxes ....... -- -- -- -- -- -- --
-------- --------- -------- -------- -------- -------- --------
Net income (loss)(5)............... (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049)
Pro-forma income tax provision
(benefit)(2) ................... (704) 429 (1,859) 2,324 -- -- --
-------- --------- -------- -------- -------- -------- --------
Pro-forma net income (loss)(2) ... $ (1,056) $ 643 $ (2,788) $ 3,487 $(23,321) $(23,551) $(5,049)
======== ========= ======== ======== ======== ======== ========
Pro-forma earnings (loss) per
common share(2) ................ $(.07) $ .04 $ (.19) $ .23 $ (1.55) $ (1.57) $ (.34)
======== ========= ======== ======== ======== ======== ========
Pro-forma weighted average
common shares used ............. $ 15,000 15,000 15,000 15,000 15,000 15,000 15,000
======== ========= ======== ======== ======== ======== ========
Other Data:
Adult living communities
operated (end of period) ..... 14 18 24 28 31 29 36
======== ========= ======== ======== ======== ======== ========
Number of units (end of
period) ...................... 2,336 2,834 3,683 4,164 4,480 4,119 5,192
======== ========= ======== ======== ======== ======== ========
Average occupancy
percentage (3) ............... 90.6% 90.4% 89.3% 94.7% 91.3% 93.4% 93.1%
======== ========= ======== ======== ======== ======== ========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
As of
As of January 31, (as restated) (5) October 31,
----------------------------------------------- -----------
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 6,455 $ 9,335 $ 10,950 $ 17,961 $ 14,111 $ 9,679
Notes and receivables-net 234,583 227,879 220,482 224,204 222,399 238,128
Total assets........... 251,116 248,854 248,553 260,023 261,661 288,074
Total liabilities...... 203,990 211,647 217,879 225,238 229,658 261,120
Stockholders' equity... 47,126 37,207 30,674 34,785 32,003 26,954
</TABLE>
- ----------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and President,
respectively, of the Company received dividends and distributions from the
Company's predecessors but did not receive compensation. Officers'
Compensation is based upon the aggregate compensation currently received by
such officers, $600,000 a year for each such officer. Amounts received by
such officers in excess of such amounts are treated as dividends for
purposes of the Company's financial statements. In fiscal 1992 through
fiscal 1996, such officers also received $360,000; $5,496,000; $943,000;
$850,000 and $397,000 each as a dividend. See "Management."
(2) The Company's predecessors were Sub-chapter S corporations and a
partnership. The pro forma statement of operations data reflects provisions
for federal and state income taxes as if the Company had been subject to
federal and state income taxation as a C corporation during the years ended
January 31, 1993 through January 31, 1996.
(3) Average occupancy percentages were determined by adding all of the
occupancy percentages of the individual communities and dividing that
number by the total number of communities. The average occupancy percentage
for each particular community was determined by dividing the number of
occupied apartment units in the particular community on the given date by
the total number of apartment units in the particular community.
(4) Reclassification - Certain amounts in prior years have been reclassified to
conform with current period presentation.
(5) Subsequent to the issuance of the Company's fiscal 1996 Consolidated
Financial Statements, the Company discovered that certain prior period
costs and advances were erroneously expensed in a prior period. As a
result, the Company's Consolidated Financial Statements have been restated
from the amounts previously reported to reflect the correction of this
error. See Note 13 to Consolidated Financial Statements.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a fully integrated provider of adult living
accommodations and services which acquires, develops and manages adult living
communities. The Company's revenues have been, and are expected to continue to
be, primarily derived from Syndications of partnerships it organizes to acquire
existing adult living communities. The Company manages the Syndicated adult
living communities and is one of the largest operators of adult living
communities in the United States. The Company manages 37 adult living
communities containing 5,265 adult living apartment units offering both
independent and assisted-living services in 12 states in the Sun Belt and the
Midwest. The Company also manages one nursing home. The Company has
approximately 1,600 employees and directly conducts the day-to-day operations of
the adult living communities it manages. As of January 31, 1998, the Company had
an average occupancy rate at the adult living communities it manages of
approximately 93%. To the extent that the development plan to construct new
adult living communities, as described below, is successfully implemented, the
Company anticipates that the percentage of its revenues derived from
Syndications would decrease and the percentage of its revenues derived from
newly constructed adult living communities would increase and, the Company
believes, over time, become the primary source of the Company's revenues.
The Company was formed pursuant to the merger of various Sub-Chapter S
corporations which were wholly owned by the Principal Stockholders and the
transfer of certain assets by and assumption of certain liabilities of (i) a
partnership that was wholly owned by the Principal Stockholders and (ii) the
Principal Stockholders individually. In exchange for the transfer of such stock
and assets, the Principal Stockholders received shares of the Company's Common
Stock. These transactions are collectively called the "reorganization". All of
the assets and liabilities of the reorganization were transferred at historical
cost. The reorganization was effective as of April 1, 1996. Prior to the
reorganization, the various Sub-chapter S corporations and the partnership,
which were wholly-owned by the Principal Stockholders, were historically
reported on a combined basis.
Historically, the Company has arranged for the acquisition and
development of adult living and multi-family communities by utilizing mortgage
financing and Syndications. The Company is the general partner of all but one of
the Owning Partnerships that own the 37 adult living communities and the one
nursing home in the Company's portfolio and the Company manages all of the adult
living communities and the nursing home in its portfolio. These 37 adult living
communities and the one nursing home managed by the Company are owned by the
respective Owning Partnerships and not by the Company.
The Company enters into a management contract with each Owning
Partnership pursuant to which the Company agrees to manage the adult living
community. As part of the management fee arrangements, the management contract
requires the Company, for a period not to exceed five years, to pay to the
Owning Partnership (to the extent that cash flows generated by the property are
not sufficient) amounts sufficient to fund the Management Contract Obligations.
The Company, therefore, has no direct obligation to pay specified returns to
limited partners. Rather, the Company is obligated pursuant to the management
contract to pay to the Owning Partnership amounts sufficient to make the
specified returns to the limited partners, to the extent the cash flows
generated by the property are insufficient to do so. The Owning Partnership then
distributes these amounts to the Investing Partnership which, in turn,
distributes these amounts to the limited partners. As a result of the Management
Contract Obligations, the Company essentially bears the risks of operations and
financial viability of the related property for such five-year period. The
management contract, however, rewards the Company for successful management of
the property by allowing the Company to retain any cash flow generated by the
property in excess of the amount needed to satisfy the Management Contract
Obligations. After the initial five-year period, the limited partners are
entitled to the same rate of return they were entitled to during the initial
five-year period, but only to the extent there is sufficient cash flow from the
property, and any amounts of cash flow available after payment of the specified
return to limited partners are shared as follows: 40% to the Company as an
incentive management fee and 60% for distribution to the limited partners. The
management contract is not terminable during this five-year period and is
terminable thereafter by either party upon thirty to sixty days notice. As part
of the purchase price for the Purchased Interest paid by the Investing
Partnership to the Company, the Company receives a 40% interest in sale and
refinancing proceeds after certain priority payments to the limited partners.
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<PAGE>
Future revenues, if any, of the Company relating to previously
Syndicated adult living communities would primarily arise in the form of (i)
deferred income earned on sales of the Purchased Interest in the related Owning
Partnership, (ii) management fees, (iii) amounts payable by the Investing
Partnerships to the Company in the event of the subsequent sale or refinancing
of such communities, (iv) interest income on purchase notes receivable, and (v)
earnings derived from the Company's equity interests in Owning Partnerships and
Investing Partnerships. Future revenues, if any, of the Company relating to
future Syndications of adult living communities would primarily arise from any
initial profit recognized upon completion of the Syndication and from the same
items listed in the previous sentence.
The Company intends to continue to arrange for future acquisitions of
existing adult living communities by utilizing mortgage financing and
Syndications, and anticipates that between six and twelve communities will be
acquired in this manner during the next two years. Future Syndications will
require the allocation of funds generated by the Company to cover the Company's
initial costs relating to the Syndication transactions (primarily any funds
required to acquire the property above the amounts received from the mortgage
financing obtained, the costs of any improvements to the property deemed
necessary and the costs associated with arranging for the sale of the
partnership interests). The Company typically pays these costs from the proceeds
it receives from its sale of the Purchased Interests to the Investing
Partnership. In addition, future Syndications may require the allocation of the
Company's funds to satisfy any associated Management Contract Obligations
(including payment of required returns for distribution to limited partners)
that are not funded from the respective property's operations.
The Company continually seeks adult living communities which it deems
are good acquisition prospects. In deciding which properties it has and will
acquire, the Company's senior management exercises its business judgement to
determine which properties are good acquisition candidates and what constitutes
an acceptable purchase price. There are no fixed criteria for these decisions,
but rather, a number of factors are considered, including the size, location,
occupancy history, physical condition, current income and expenses, quality of
current management, local demographic and market conditions, existing
competition and proposed entrants to the market.
In Fiscal 1996 and 1997, the Company Resyndicated three previously
Syndicated adult living communities by acquiring them from the original Owning
Partnerships, which acquisitions were arranged by utilizing mortgage financing
and by arranging for the ownership of the properties by new Owning Partnerships
and the Syndication of interests in new Investing Partnerships. Since two of
these Resyndications occurred after the termination of the Management Contract
Obligations for the respective properties, and the third Resyndication occurred
towards the end of the Management Contract Obligations period for such property,
the Resyndications have generally had the same impact on current and future
revenues and expenses (i.e. an opportunity for new earnings and a new set of
Management Contract Obligations) as the Syndication of a property acquired from
an unaffiliated third party. The consent of the original limited partners is
required and obtained for the sale of any Syndicated adult living community,
including a sale accomplished through a Resyndication. In obtaining the consent
of the limited partners to the Resyndications, the Company waived its rights to
participate in the proceeds of sale received by the original Owning
Partnerships. The Company does, however, recognize sales revenues and related
cost of sales resulting in a net profit from the Resyndications. Each of the
management contracts with the original Owning Partnerships was terminated. The
Company manages the Resyndicated Communities pursuant to new management
contracts and has Management Contract Obligations thereunder. As the general
partner of the original Owning Partnership and, in many cases, general partner
of the original Investing Partnership, the Company had a fiduciary duty to make
sure that the original limited partners received a fair price for the purchase
of the property. Potential conflicts of interest regarding Resyndications may
have existed because of the Company's roles as general partner of: each of the
selling and acquiring Owning Partnerships; each of the acquiring Investing
Partnerships; and, in some cases, the selling Investing Partnerships.
The Company will not engage in Resyndication transactions in the future.
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community and intends to commence construction on between 30
and 34 additional new adult living communities over the next two years. The
Company plans to own or lease pursuant to long-term operating leases or similar
arrangements the adult living communities that will be developed under the plan.
The Company will manage and operate each of the newly developed communities. The
Company does not intend to Syndicate any of its newly developed adult living
communities. The Company estimates that the cost of developing each new adult
living community (including reserves necessary to carry the community through
its lease up period) utilizing mortgage financing will be approximately $9.5
million and utilizing long-term lease financing will be approximately $10
million. The Company expects to complete
34
<PAGE>
the construction of four of the five communities currently under construction by
the end of the first quarter of fiscal 1998 and expects to complete construction
of the remaining community under construction by the end of fiscal 1998. These
five adult living communities, along with the three communities already
completed pursuant to the development plan, contain an aggregate of
approximately 1,150 adult living apartment units. The 30 to 34 additional new
communities which the Company intends to commence construction on over the next
two years will contain between 4,260 and 4,828 additional adult living apartment
units. The Company will use a substantial portion of the proceeds of this
Offering, funds generated by its business operations, mortgage construction
financing, the proceeds of anticipated refinancings of construction financing
on, and/or sale-leasebacks of, stabilized, newly constructed communities, and
may complete additional issuances of debt or equity securities to finance the
development, construction and initial operating costs of additional new adult
living communities. Two of the completed adult living communities and two of the
adult living communities currently under construction are being financed, and
will be operated, by the Company pursuant to long-term leases. The Company may
use additional long-term leases or similar arrangements which require the
investment of little or no capital on the part of the Company, to the extent
necessary to proceed with this development plan.
The Company derives its revenues from sales of general partnership
interests in Owning Partnerships to Investing Partnerships, recognition of
deferred income with respect to such sales of general partnerships interests,
interest on notes received by the Company from such Investing Partnerships as
part of the purchase price for the sale of such general partnership interests,
and property management fees received by the Company:
o Sales. Income from sales of general partnership interests in Owning
Partnerships is recognized when the profit on the transaction is determinable,
that is, the collectibility of the sales price is reasonably assured and the
earnings process is virtually complete. The Company determines the
collectibility of the sales price by evidence supporting the buyers' substantial
initial and continuing investment in the adult living communities as well as
other factors such as age, location and cash flow of the underlying property.
o Syndication Fee Income. The Company earns syndication fee income equal to the
expenses of the syndication which include commissions.
o Deferred Income Earned. The Company has deferred income on sales to Investing
Partnerships of interests in Owning Partnerships. The Company has arranged for
the Syndications of Investing Partnerships which were formed to acquire
controlling interests in Owning Partnerships which own adult living properties
("Adult Living Owning Partnerships"). In a typical Syndication, the Company
enters into a management contract with the Adult Living Owning Partnership,
pursuant to which the Company is required to pay, for a five-year period, any
Management Contract Obligations not paid from cash flow from the related
property. The amount of deferred income for each property is calculated in a
multi-step process. First, based on the property's cash flow in the previous
fiscal year, the probable cash flow for the property for the current fiscal year
is determined and that amount is initially assumed to be constant for each
remaining year of the Management Contract Obligations period (the "Initial Cash
Flow"). The Initial Cash Flow is then compared to the Management Contract
Obligations for the property for each remaining year of the five-year period. If
the Initial Cash Flow exceeds the Management Contract Obligations for any fiscal
year, the excess Initial Cash Flow is added to the assumed Initial Cash Flow for
the following fiscal year and this adjusted Initial Cash Flow is then compared
to the Management Contract Obligations for said following fiscal year. If the
Initial Cash Flow is less than the Management Contract Obligations for any
fiscal year, a deferred income liability is created in an amount equal to such
shortfall and no adjustment is made to the Initial Cash Flow for the following
year. As this process is performed for each property on a quarterly basis,
changes in a property's actual cash flow will result in changes to the assumed
Initial Cash Flow utilized in this process and will result in increases or
decreases to the deferred income liability for the property. Any deferred income
liability created in the year the interest in the Owning Partnership is sold
increases the cost of sales for that period. The payment of the Management
Contract Obligations, however, will generally not result in the recognition of
expense unless the property's actual cash flow for the year is less than the
Initial Cash Flow for the year, as adjusted, and as a result thereof, the amount
paid by the Company in respect of the Management Contract Obligations is greater
than the amount assumed in establishing the deferred income liability (such
excess amount is included as a component of cost of sales). If, however, the
property's actual cash flow is greater than the Initial Cash Flow for the year,
as adjusted, the Company's earnings will be enhanced by the recognition of
deferred income earned and, to the extent cash flow exceeds Management Contract
Obligations, incentive management fees. The Company recognized such incentive
management fees in the amount of $3.9 million, $3.3 million, $1.2 million and
$2.6 million for the years ended January 31, 1995, 1996 and 1997 and the nine
months ended October 31, 1997, respectively. The Company accounts for the
Syndication of Investing Partnerships which were formed to acquire controlling
interests in
35
<PAGE>
Owning Partnerships which own Multi-Family Properties ("Multi-Family Owning
Partnerships") under the installment method. Under the installment method the
gross profit is determined at the time of sale. The revenue recorded in any
given year would equal the cash collections multiplied by the gross profit
percentage. At the time of the sale, the Company deferred all future income to
be recognized on each of these transactions. Losses on these properties are
recognized immediately upon sale. Syndications relating to Multi-Family Owning
Partnerships account for 87% of the Company's deferred income.
o Interest Income. The Company has notes receivable with respect to Adult Living
Notes. Such Adult Living Notes have stated interest rates ranging from 11% to
13.875% per annum and are due in installments over five years from the date the
Investing Partnership acquired its interest in the Adult Living Owning
Partnership. Each Adult Living Note represents senior indebtedness of the
related Investing Partnership and is collateralized by the Investing
Partnership's interest in the Adult Living Owning Partnership that owns the
related adult living community. These properties generally are encumbered by
mortgages. The mortgages generally bear interest at rates ranging from 8% to
9.5% per annum. The mortgages generally are collateralized by a mortgage lien on
the related adult living communities. Principal and interest payments on each
Adult Living Note also are collateralized by the investor notes payable to the
Investing Partnership to which the limited partners are admitted.
The Company also has notes receivable with respect to the Multi-Family
Notes. Such Multi-Family Notes have maturity dates ranging from ten to fifteen
years from the date the partnership interests were sold. Fifty-one of the 169
MultiFamily Notes have reached their final maturity dates and, due to the
inability, in view of the current cash flows of the properties, to maximize the
value of the underlying property at such maturity dates, either through a sale
or refinancing, these final maturity dates have been extended by the Company.
The underlying property relating to one extended Multi-Family Note was
refinanced in Fiscal 1996 and such refinancing generated an approximate $800,000
payment to the Company under such Multi-Family Note. In addition, the Company
anticipates that two more Multi-Family properties relating to two other extended
Multi-Family Notes will be refinanced in the first quarter of fiscal 1998. There
can be no assurance that such refinancings will actually close. During the
period such notes are extended, the Company will continue to receive the cash
flow and sale or refinancing proceeds, if any, generated by the underlying
properties. The Company expects that it may need to extend maturities of other
Multi-Family Notes. The notes represent senior indebtedness of the related
Investing Partnership and typically are collateralized by a 99% partnership
interest in the Multi-Family Owning Partnership that owns the related
Multi-Family Property. These properties are encumbered by mortgages, which
generally bear interest at rates ranging from 7% to 12% per annum. The mortgages
are typically collateralized by a mortgage lien on the related MultiFamily
Property. Interest payments on each Multi-Family Note also are collateralized by
the related investor notes.
o Property Management Fees. Property management fees earned for services
provided to related parties are recognized as revenue when related services have
been performed.
o Equity in Earnings from Partnerships. The Company accounts for its interest in
limited partnerships under the equity method of accounting. Under this method
the Company records its share of income and loss of the entity based upon its
general partnership interest.
o Existing Defaults and Bankruptcies of Owning Partnerships. As described in
"Liquidity and Capital Resources", fifteen of the Multi-Family Owning
Partnerships are currently in default on their mortgages. Nine other
Multi-Family Owning Partnerships, previously filed petitions seeking protection
from foreclosure under Chapter 11 of the U.S. Bankruptcy Code. In addition, one
Multi-Family Owning Partnership surrendered its property pursuant to an
uncontested foreclosure sale of such property. Seven of the Chapter 11 Petitions
resulted in the respective Protected Partnerships losing their properties
through foreclosure or voluntary conveyances of their properties. The remaining
two Protected Partnerships successfully emerged from their bankruptcy
proceedings by paying off their mortgages at a discount with the proceeds of new
mortgage financings, resulting in these properties having current, fully
performing mortgages. It is possible that the other Multi-Family Owning
Partnerships are in default on their mortgages will also file Chapter 11
Petitions. In addition, there can be no assurance that other Multi-Family Owning
Partnerships will not default on their mortgages, file Chapter 11 Petitions,
and/or lose their properties through foreclosure. The Company neither owns nor
manages these properties, nor is it the general partner of any Multi-Family
Owning Partnerships, including the Protected Partnerships, but rather merely
holds the related Multi-Family Notes and Other Partnership Receivables as
receivables. The Company, therefore, has no liability in connection with these
mortgage defaults or bankruptcy proceedings. Any such future mortgage defaults,
however, could, and any such future filings of Chapter 11 Petitions or the loss
of any such property through foreclosure would, cause the
36
<PAGE>
Company to realize a non-cash loss of up to the recorded value for such
Multi-Family Note plus any related advances, net of any deferred income recorded
for such Multi-Family Note and any reserve for said note previously established
by the Company (which would reduce such loss). See "Risk Factors - Receivables
Relating to Multi-Family Properties - Existing Defaults and Bankruptcies.
Results of Operation
o Revenues
Total revenues for the three months ended October 31, 1997 were $20.8
million compared to $12.7 million for the three months ended October 31, 1996,
representing an increase of $8.1 million or 63.8%. Total revenues for the nine
months ended October 31, 1997 were $54.1 million compared to $40.1 million for
the nine months ended October 31, 1996, representing an increase of $14.0
million or 34.9%. Total revenues for the year ended January 31, 1997 ("Fiscal
1996") were $65.0 million compared to $68.7 million for the year ending January
31, 1996 ("Fiscal 1995"), representing a decrease of 3.7 million or 5.4%. Total
revenues for Fiscal 1995 were $68.7 million compared to $46.6 million for year
ended January 31, 1995, ("Fiscal 1994"), representing an increase of $22.1
million or 47.4%.
Sales (income from the sale of partnership interests) for the three
months ended October 31, 1997 were $10.5 million compared to $6.9 million for
the three months ended October 31, 1996, representing an increase of $3.6
million or 52.2%. The increase in sales was attributable to more favorable
Syndication terms as compared to Syndications completed in the earlier period,
as partially offset by the Syndication of properties with less initial cash flow
as compared to the Syndications in the prior period. The terms of a Syndication
become more favorable for the Company if there is an increase in the ratio of
(a) the purchase price paid to the Company by the Investing Partnership for its
interest in the Operating Partnership, to (b) the initial cash flow of the
community. Sales for the nine months ended October 31, 1997 were $31.4 million
compared to $21.5 million for the nine months ended October 31, 1996,
representing an increase of $9.9 million or 46.0%. Approximately 55% of the
increase in sales was attributable to more favorable Syndication terms as
compared to Syndications completed in the earlier period, and approximately 45%
of the increase in sales was attributable to the Syndication of properties with
greater initial cash flow as compared to the Syndications in the prior period.
Sales for Fiscal 1996 were $36.0 million compared to $32.0 million for Fiscal
1995, representing an increase of $4.0 million or 12.5%. The increase in sales
was attributable to the Syndication of properties with greater initial cash flow
as compared to the Syndications in the prior period, as partially offset by less
favorable Syndication terms as compared to Syndications completed in the earlier
period. Sales for Fiscal 1995 were $32.0 million compared to $22.5 million for
Fiscal 1994, representing an increase of $9.5 million or 42.2%. The increase is
attributable to more favorable Syndication terms obtained in Fiscal 1995 as
compared to Syndications in the prior period, as offset by the Syndication of
properties with less initial cash flow as compared to Syndications in the prior
period.
Syndication fee income for the three months ended October 31, 1997 was
$1.9 million compared to $1.5 million for the three months ended October 31,
1996, representing an increase of $400,000 or 26.7%. Syndication fee income for
the nine months ended October 31, 1997 was $6.5 million compared to $5.0 million
for the nine months ended October 31, 1996, representing an increase of $1.5
million or 30%. The increases are attributable to higher total professional fees
and commissions paid relating to the greater sales revenues generated in the
three and nine months ended October 31, 1997 as compared to the three and nine
months ended October 31, 1996. Syndication fee income for Fiscal 1996 was $7.7
million compared to $8.6 million for Fiscal 1995, a decrease of $900,000 or
10.5%. The decrease is attributable to a slightly lower commission rate for the
Syndication of six Investing Partnerships during Fiscal 1996 as compared to the
commission rate for the Syndication of six Investing Partnerships during Fiscal
1995. Syndication fee income for Fiscal 1995 was $8.6 million as compared to
$5.6 million for Fiscal 1994, an increase of $3.0 million or 53.6%. The increase
is attributable to higher total commissions paid for the Syndication of six
Investing Partnerships in Fiscal 1995 as compared to the total commissions paid
for the Syndication of four Investing Partnerships in Fiscal 1994.
Deferred income earned for the three months ended October 31, 1997 was
$3.8 million as compared to $200,000 for the three months ended October 31,
1996, representing an increase of $3.6 million or 1,800%. Deferred income earned
for the nine months ended October 31, 1997 was $4.2 million as compared to
$700,000 for the nine months ended October 31, 1996, representing an increase of
$3.5 million or 500%. The increases are attributable to the cash flows generated
by adult living communities in the three and nine months ended October 31, 1997
exceeding the estimates used to establish deferred income liabilities in the
three and nine months ended October 31, 1997 to a greater degree than such cash
flow
37
<PAGE>
exceeded estimates in the three and nine months ended October 31, 1996. Deferred
income realized for Fiscal 1996 was $5.0 million as compared to $10.0 million
for the Fiscal 1995, representing a decrease of $5.0 million or 50.0%. The
decrease is attributable to (i) the cash flows generated by adult living
communities in Fiscal 1995 exceeding the estimates used to establish deferred
income liabilities for Fiscal 1995 to a greater degree than such cash flow in
Fiscal 1996 exceeded estimates used to establish deferred income liabilities for
Fiscal 1996; and (ii) the refinancing of a number of adult living communities
during March 1996 which resulted in additional deferred income being earned in
Fiscal 1995. In March 1996, the Company arranged for the refinancing of existing
mortgages on seven adult living communities and initial mortgage financing on
four adult living communities which had previously been acquired on an all cash
basis, which resulted in the return of over $43.0 million of capital to limited
partners and which reduced the Company's Management Contract Obligations with
respect to such limited partners. Because the refinancings were committed to in
Fiscal 1995 and closed before the completion of the Company's financial
statements for Fiscal 1995, the Company recognized the effect on deferred income
with respect to such refinanced properties in Fiscal 1995 rather than Fiscal
1996. Deferred income earned increased to $10.0 million in Fiscal 1995 from $4.4
million in Fiscal 1994, representing an increase of $5.6 million or 127.3%. The
increase in the recognition of deferred income earned is primarily as a result
of increased cash flows from adult living communities and the refinancing of a
number of adult living communities in March 1996, as described above.
Interest income for the three months ended October 31, 1997 was $2.5
million as compared to $3.2 million for the three months ended October 31, 1996,
representing a decrease of $700,000 or 21.9%. The decrease is primarily
attributable to an interest payment realized on a mortgage debt restructuring
for a Multi-Family Property in the three months ended October 31, 1996. Interest
income for the nine months ended October 31, 1997 was $8.1 million as compared
to $11.0 million for the nine months ended October 31, 1996, representing a
decrease of $2.9 million or 26.4%. The decrease is primarily attributable to (i)
the accelerated receipt of interest payments in the three months ended April 30,
1996 due to the refinancing of a number of adult living communities (which
includes the initial mortgage financing of certain adult living communities that
had been previously acquired without a mortgage) in March 1996 which reduced
interest payments that otherwise would have been received in the three months
ended April 30, 1997, (ii) an interest payment realized on a mortgage debt
restructuring for a Multi-Family Property in the nine months ended October 31,
1996, and (iii) a reduction of interest income due to the refinancings of the
adult living communities which resulted in the prepayment of mortgages which
were assets of the Company. Interest income for Fiscal 1996 was $13.8 million
compared to $12.7 million for Fiscal 1995, an increase of $1.1 million or 8.7%.
The refinancing of a number of adult living communities in March 1996 resulted
in the return of over $43.0 million of capital to limited partners, thereby
accelerating the receipt of scheduled interest payments received by the Company
in the three months ending April 30, 1996. This accelerated receipt of scheduled
interest payments in the three months ended April 30, 1996 caused interest
income for Fiscal 1996 to be greater than interest income for Fiscal 1995, but
was partially offset by (a) a reduction of the scheduled interest payments and
(b) a reduction of interest income due to the prepayment of mortgages held by
the Company, which resulted from the adult living refinancings. In addition,
this increase in interest income was partially offset by a decrease in Fiscal
1996 of the cash flow generated by various Multi-Family Properties, which the
Company receives as interest income, as compared to such cash flows generated in
Fiscal 1995. Interest income for Fiscal 1995 was $12.7 million compared to $9.5
million for Fiscal 1994, representing an increase of $3.2 million or 33.7%. Such
increase reflects the increased aggregate interest received on notes from
limited partnerships as a result of an increase in the aggregate principal
amount of such notes. The increase in aggregate principal amount reflects an
increase in the number of Syndicated adult living communities operated by the
Company and in the six Syndications completed in Fiscal 1995, compared to the
four Syndications completed in Fiscal 1994. The increase in interest income in
Fiscal 1995 also reflects an interest payment realized in connection with a
mortgage debt restructuring for a MultiFamily Property. The revenues of the
Company in the periods covered in the Consolidated Financial Statements reflect
little or no cash flow throughout such periods (which the Company would receive
as interest income on Multi-Family Notes) from those Multi-Family Properties
with respect to which there are existing mortgage defaults.
Property management fees from related parties for the three months
ended October 31, 1997 was $2.1 million compared to $800,000 for the three
months ended October 31, 1996, representing an increase of $1.3 million or
162.5%. Property management fees from related parties for the nine months ended
October 31, 1997 was $3.3 million compared to $1.6 million for the nine months
ended October 31, 1996, representing an increase of $1.7 million or 106.3%. The
increases are primarily attributable to the increase in cash flows from the
underlying Owning Partnerships exceeding the specified rate of return to the
limited partners. Property management fees from related parties was $2.1 million
in Fiscal 1996 as compared to $4.1 million in Fiscal 1995, representing a
decrease of $2.0 million or 48.8%. This decrease is attributable to (i)
operating expenses (including maintenance and repair expenses) increasing at a
rate greater than historically, as partially offset by increases in rental
revenues, (ii) a decrease in the average occupancy of the Company's portfolio of
adult living communities,
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(iii) the increased debt service on various adult living communities due to the
refinancing of such properties (which include the initial mortgage financing of
certain properties that had been previously acquired without mortgage financing)
in March 1996, which reduced the cash flow produced by such properties and the
incentive management fees these properties generate to a greater extent than the
resulting reduction of the Company's Management Contract Obligations in Fiscal
1996 due to said refinancing, and (iv) the establishment of capital improvement
reserves pursuant to the terms of the newly refinanced loans, which reserves
reduce the cash flow and incentive management fees these properties generate.
Property management fees from related parties was $4.1 million in Fiscal 1995 as
compared to $4.4 million in Fiscal 1994, representing a decrease of $300,000 or
6.8%. The decrease is attributable to a decrease in incentive management fees
generated by the adult living communities during Fiscal 1995.
Equity in earnings from partnerships was $100,000 for the three months
ended October 31, 1997 as compared to $100,000 for the three months ended
October 31, 1996, representing no change. Equity in earnings from partnerships
was $400,000 for the nine months ended October 31, 1997 as compared to $300,000
for the nine months ended October 31, 1996, representing an increase of $100,000
or 33.3%. The increase is attributable to the Syndication of additional
properties in which the Company retains a general partnership interest. Equity
in earnings from partnerships was $400,000 for Fiscal 1996 and Fiscal 1995,
representing no change. Equity in earnings from partnerships was $400,000 in
Fiscal 1995 as compared to $300,000 in Fiscal 1994, representing an increase of
$100,000 or 33.3%. The increase is attributable to the Syndication of additional
properties in which the Company retains a general partnership interest.
The Company realized other income for the nine months ended October 31,
1997 of approximately $300,000 due to the write-off of a liability that is no
longer required. There was no other income earned for the three months and the
nine months ended October 31, 1996. The Company recognized other income for
Fiscal 1995 of $1.0 million which resulted from the restructuring and reduction
of a development fee obligation of the Company. There was no other income in
either Fiscal 1996 or Fiscal 1994.
o Cost of Sales
Cost of sales (which includes (i) the cash portion of the purchase
price for properties plus related transaction costs and expenses and (ii) any
payments by the Company in respect of Management Contract Obligations) for the
three months ended October 31, 1997 was $10.9 million compared to $8.7 million
for the three months ended October 31, 1996, representing an increase of $2.2
million or 25.3%. The increase is attributable to (i) increased funding due to
Management Contract Obligations and (ii) greater aggregate purchase prices of
the adult living communities in the three months ended October 31, 1997 as
compared to the three months ended October 31, 1996. Cost of sales as a
percentage of sales and syndication fee income was 88.0% in the three months
ended October 31, 1997 as compared to 103.5% in the three months ended October
31, 1996. The decrease is attributable to the ability to obtain more favorable
mortgage financings for the acquisitions as partially offset by (i) less
favorable terms when acquiring adult living communities (in view of the
relationship between the initial cash flow generated by the properties and their
purchase prices), and (ii) increased funding due to the Management Contract
Obligations in three months ended October 31, 1997 as compared to the three
months ended October 31, 1996. Cost of sales for the nine months ended October
31, 1997 was $25.9 million compared to $19.5 million for the nine months ended
October 31, 1996, representing an increase of $6.4 million or 32.8%. The
increase is attributable to (i) greater purchase prices of the adult living
communities, and (ii) increased funding due to Management Contract Obligations
in the nine months ended October 31, 1997 as compared to the nine months ended
October 31, 1996. Cost of sales as a percentage of sales and syndication fee
income was 68.4% in the nine months ended October 31, 1997 as compared to 73.5%
in the nine months ended October 31, 1996. The decrease is attributable to the
ability to obtain more favorable mortgage financings for the acquisitions as
partially offset by (i) less favorable terms when acquiring adult living
communities (in view of the relationship between the initial cash flow generated
by the properties and their purchase prices), and (ii) increased funding due to
Management Contract Obligations in the nine months ended October 31, 1997 as
compared to the nine months ended October 31, 1996. Cost of sales for Fiscal
1996 was $34.0 million as compared to $27.7 million for Fiscal 1995,
representing an increase of $6.3 million or 22.7%. The increase is attributable
to increased funding due to Management Contract Obligations in Fiscal 1996 as
compared to Fiscal 1995. Cost of sales as a percentage of sales and syndication
fee income was 77.8% in Fiscal 1996 as compared to 68.2% in Fiscal 1995. The
increase is attributable to increased funding due to Management Contract
Obligations, as partially offset by the Company's ability to acquire properties
on more favorable terms and to obtain more favorable mortgage financings for its
acquisitions (i.e.-higher-loan-to-value ratios which reduces the cash portion of
the purchase prices and preferred interest rates) in Fiscal 1996 as compared to
Fiscal 1995. Cost of sales for Fiscal 1995 was $27.7 million compared to $21.7
million in Fiscal 1994, representing an increase
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of $6.0 million or 27.6%. The increase can be primarily attributed to the
acquisition by the Company of six properties in Fiscal 1995 with combined
purchase prices of $35.0 million as compared to the acquisition of four
properties in Fiscal 1994 with combined purchase prices of $22.3 million. The
increase in the aggregate purchase price of properties acquired was partially
offset by an increased use of mortgage financing for acquisitions in Fiscal 1995
from levels of mortgage financing for Fiscal 1994, which reduced the cash
expenditures by the Company for such acquisitions. Cost of sales as a percentage
of sales and syndication fee income decreased from 77.3% in Fiscal 1994 to 68.2%
in Fiscal 1995. The decrease can be attributed principally to the Company's
ability to obtain more favorable mortgage financing for its acquisitions (i.e. -
higher loan-to-value ratios and preferred interest rates), which has contributed
to the decrease in the cost of sales, and has enabled the Company also to obtain
more favorable terms for Syndications which has contributed to the increase in
sales, thus creating larger gross margins.
Several factors, including the decline of the real estate market in the
late 1980's and early 1990's, which resulted in a number of distressed property
sales and limited competition from other prospective purchasers, allowed the
Company to acquire existing adult living communities at such time on relatively
favorable terms. Mortgage financing, however, was generally either not available
or available only on relatively unattractive terms during this period, which
made acquisitions more difficult because they either required large outlays of
cash or the use of mortgage financing on relatively unfavorable terms. During
the last several years, several factors have contributed towards a trend to less
favorable terms for acquisitions of adult living communities, including a
recovery in the market for adult living communities and increased competition
from other prospective purchasers of adult living communities. The Company,
however, has been able to obtain mortgage financing on increasingly favorable
terms (i.e. the Company has obtained mortgages for a greater percentage of the
purchase price and at preferred interest rates). These factors, combined with an
overall reduction of interest rates, have partially offset the factors that have
led to more unfavorable acquisition terms. A significant change in these or
other factors (including, in particular, a significant rise in interest rates)
could prevent the Company from acquiring communities on terms favorable enough
to offset the start-up losses of newly-developed communities as well as the
Company's debt service obligations, Management Contract Obligations and the
Company's selling, and general and administrative expenses.
o Selling Expenses
Selling expenses for the three months ended October 31, 1997 was $1.8
million as compared to $1.1 million in the three months ended October 31, 1996,
representing an increase of $700,000 or 63.6%. Selling expenses for the nine
months ended October 31, 1997 was $6.2 million as compared to $4.6 million for
the nine months ended October 31, 1996, representing an increase of $1.6 million
or 34.8%. The increases are attributable to higher commissions paid on a greater
sales volume for Syndications completed in the three and nine months ended
October 31, 1997 as compared to the commissions paid on a lower sales volume for
Syndications completed in the three and nine months ended October 31, 1996.
Selling expenses for Fiscal 1996 was $7.2 million as compared to $7.7 million
for Fiscal 1995, representing a decrease of $500,000 or 6.5%. The decrease is
attributable to a lower commission rate paid on a higher sales volume for
Syndications completed in Fiscal 1996 as compared to the commission rate and
sales volume for Syndications completed in Fiscal 1995.
Selling expenses for Fiscal 1995 were $7.7 million compared to $6.0 million in
Fiscal 1994, representing an increase of $1.7 million or 28.3%. The increase was
attributable to higher commissions paid on greater sales volume for Syndications
completed in Fiscal 1995 as compared to commissions paid for Syndications
completed in Fiscal 1994.
o Interest Expense
Interest expense for the three months ended October 31, 1997 was $5.2
million as compared to $4.2 million for the three months ended October 31, 1996,
representing an increase of $1.0 million or 23.8%. Interest expense for the nine
months ended October 31, 1997 was $14.0 million as compared to $12.0 million for
the nine months ended October 31, 1996, representing an increase of $2.0 million
or 16.7%. The increases are attributable to increases in the principal amount of
debt and an increase in interest rates for such debt during the three and nine
months ended October 31, 1997 as compared to the three and nine months ended
October 31, 1996, as partially offset by the elimination of certain of the
Company's mortgage debt due to the refinancing of two adult living communities
in March 1996 and the refinancing of a third adult living community in July
1996. Interest expense for Fiscal 1996 was $16.4 million as compared to $15.8
million in Fiscal 1995, representing an increase of $600,000 or 3.8%. The
increase can be primarily attributed to increases in debt and related interest
rates on such debt during the period as partially offset by decreases in debt
due to the refinancing of two adult living communities in March 1996. Until the
refinancings, the mortgages on the two communities were direct obligations
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of the Company and the corresponding interest payments were included in the
Company's interest expense. These mortgages are now direct obligations of the
Owning Partnerships that own these properties and the corresponding interest
payments are no longer included in the Company's interest expense. Interest
Expense included interest payments on Debenture Debt which had an average
interest rate of 12.05% per annum in Fiscal 1996 and the nine months ended
October 31, 1997 and was secured by the Purchase Note Collateral. During Fiscal
1996 and the nine months ended October 31, 1997, total interest expense with
respect to Debenture Debt was approximately $9.2 million and $6.2 million
respectively and the Purchase Note Collateral produced approximately $2.3
million and $1.5 million respectively of interest and related payments to the
Company, which was $6.9 million and $4.7 million respectively less than the
amount required to pay interest on the Debenture Debt. Interest expense for
Fiscal 1995 was $15.8 million compared to $13.6 million for Fiscal 1994,
representing an increase of $2.2 million or 16.2%. Interest expense included
interest payments on Debenture Debt which had an average interest rate of 11.95%
per annum in Fiscal 1995 and was secured by the Purchase Note Collateral. During
Fiscal 1995, total interest expense with respect to Debenture Debt was
approximately $8.7 million and the Purchase Note Collateral produced
approximately $2.0 million of interest and related payments to the Company,
which was $6.7 million less than the amount required to pay interest on the
Debenture Debt.
o General and Administrative Expenses
General and administrative expenses for the three months ended October
31, 1997 was $2.4 million as compared to $2.0 million in the three months ended
October 31, 1996 representing an increase of $400,000 or 20%. The increase is
attributable to increases in professional fees, salary cost and other office
expenses in managing and arranging for the acquisition of the Company's
portfolio of adult living communities which increased by two in the three months
ended October 31, 1997, as partially offset by the capitalization of expenses
relating to the implementation of the Company's development program. General and
administrative expenses for the nine months ended October 31, 1997 was $6.4
million as compared to $5.7 million for the nine months ended October 31, 1996,
representing an increase of $700,000 or 12.3%. The increase is attributable to
increases in professional fees, salary costs and other office expenses in
managing and arranging for the acquisition of the Company's portfolio of adult
living communities which increased by five adult living communities during the
nine months ended October 31, 1997, as partially offset by the capitalization of
expenses relating to the implementation of the Company's development program.
General and administrative expenses for Fiscal 1996 was $7.8 million as compared
to $7.9 million in Fiscal 1995, representing a decrease of $100,000 or 1.3%. The
decrease is attributable to the capitalization of expenses relating to the
implementation of the Company's development program, which became significant
during the year, as partially offset by increases in salary costs and other
office expenses in implementing the Company's development program and in
managing and arranging for the acquisition of the Company's adult living
communities portfolio which increased by four adult living communities in Fiscal
1996. General and administrative expenses were $7.9 million in Fiscal 1995
compared to $6.5 million in Fiscal 1994, representing an increase of $1.4
million or 21.5%. The increase primarily reflects additional salary costs
incurred in instituting the Company's new development program and in managing
and arranging for the acquisition of the Company's portfolio of adult living
communities, which increased by six adult living communities in Fiscal 1995, and
also reflects increases in various office expenses.
o Loss on Impairment of Notes and Receivables
The Company realized no loss on impairment of notes and receivables for
the three months ended October 31, 1997 as compared to a non-cash loss of $1.6
million for the three months ended October 31, 1996, representing a decrease of
$1.6 million or 100%. The Company recognized no loss on impairment of notes and
receivables for the nine months ended October 31, 1997 as compared to a $18.4
million non-cash loss for the nine months ended October 31, 1996, representing a
decrease of $18.4 million or 100%. The Company realized a non-cash loss on
impairment of notes and receivables of $18.4 million in Fiscal 1996 as compared
to no such loss for Fiscal 1995 or Fiscal 1994. These losses equal the recorded
value, net of deferred income and reserves, of Multi-Family Notes and the
related "Other Partnership Receivables" relating to nine Multi-Family Owning
Partnerships which filed petitions under Chapter 11 of the U.S. Bankruptcy Code
seeking protection from foreclosure actions and one Multi-Family Owning
Partnership that surrendered its property pursuant to an uncontested foreclosure
sale of such property. As a result of the related transfers by the Principal
Stockholders and one of their affiliates of additional assets to the Investing
Partnerships which issued such Multi-Family Notes, the Company recorded a
contribution to capital of $21.3 million. See --"Liquidity and Capital
Resources."
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o Write-off of Registration Costs
The Company expensed approximately $3.1 million of costs relating to
its proposed initial public offering of equity securities in the nine months
ended October 31, 1997. Such costs were incurred prior to April 30, 1997.
o Officers' Compensation
Officers' Compensation was $300,000 for the three months ended October
31, 1997 and October 31, 1996, respectively and $900,000 for the nine months
ended October 31, 1997 and October 31, 1996, respectively. Officers'
compensation was $1.2 million for Fiscal 1996, Fiscal 1995 and Fiscal 1994.
o Depreciation and Amortization
Depreciation and amortization consists of amortization of deferred debt
expense incurred in connection with debt issuance. Depreciation and amortization
for the three months ended October 31, 1997 was $1.1 million as compared to
$800,000 for the three months ended October 31, 1996, representing an increase
of $300,000 or 37.5%. Depreciation and amortization for the nine months ended
October 31, 1997 was $2.7 million as compared to $2.5 million for the nine
months ended October 31, 1996, representing an increase of $200,000 or 8.0%. The
increases are attributable to the increased amortization of deferred loan costs
due to the issuance of additional debenture debt and unsecured debt during the
three and nine months ended October 31, 1997 as compared to the three and nine
months ended October 31, 1996. Depreciation and amortization was $3.3 million in
Fiscal 1996 as compared to $2.6 million in Fiscal 1995, representing an increase
of $700,000 or 26.9%. The increase is attributable primarily to the prepayment
of debt which resulted in the acceleration of the unamortized portion of the
related costs and also to the issuance of additional Debenture Debt and
Unsecured Debt in Fiscal 1995 which had its full amortization impact in Fiscal
1996. Depreciation and amortization for Fiscal 1995 was $2.6 million compared to
$2.3 million for Fiscal 1994, representing an increase of $300,000 or 13.0%. The
increase is attributable to the issuance of additional Debenture Debt in Fiscal
1994, which had its full amortization impact in Fiscal 1995.
Liquidity and Capital Resources
The Company historically has financed operations through cash flow
generated by operations, Syndications and borrowings consisting of Investor Note
Debt, Unsecured Debt, Mortgage Debt and Debenture Debt. The Company's principal
liquidity requirements are for payment of operating expenses, costs associated
with development of new adult living communities, debt service obligations, and
Management Contract Obligations.
Cash flows used by operating activities for the nine months ended
October 31, 1997 were $13.9 million and were comprised of (i) net loss of $5.0
million plus (ii) adjustments for non-cash items of $1.6 million less (iii) the
net change in operating assets and liabilities of $10.5 million. The adjustments
for non-cash items is comprised of depreciation and amortization of $2.7
million, plus write-off of registration costs of $3.1 million, offset by
deferred income earned of $4.2 million. The net change in operating assets and
liabilities of $10.5 million was primarily attributable to an increase in notes
and receivables of $15.7 million. Approximately 65% of the increase in notes and
receivables was attributable to an increase in adult living Purchase Notes due
to new Syndications as offset by principal reductions on adult living Purchase
Notes relating to previous Syndications, approximately 18% of the increase in
notes and receivables were attributable to an increase in other partnership
receivables primarily due to advances made to Multi-Family Owning Partnerships,
and approximately 17% of the increase in notes and receivables was attributable
to an increase in accrued interest receivable, which represents the accrual of
interest on the Multi-Family Notes. The Multi-Family Notes accrue interest based
on the collectibility of such interest. The proceeds from the collection of the
investor notes pay interest on the related Multi-Family Notes. The investors
make one annual payment on their investor notes every January. Interest on the
Multi-Family Notes accrues during each fiscal year as the annual collection date
for the related investor notes draws nearer. The increase in accrued interest on
Multi-Family Notes, therefore, is not reflective of any impairment of
Multi-Family Notes. Cash flows used by operating activities for the nine months
ended October 31, 1996 were $200,000 and were comprised of (i) net loss of $23.6
million plus (ii) adjustments for non-cash items of $20.3 million plus (iii) the
net change in operating assets and liabilities of $3.1 million. The adjustments
for non-cash items is comprised of depreciation and amortization of $2.6 million
and loss on impairment of receivables of $18.4 million offsest by deferred
income earned of $700,000. Cash flows provided by operating activities for
Fiscal 1996 were $2.5 million and were comprised of: (i) net loss of $23.3
million plus (ii) adjustments for non-cash items of $16.7 million plus (iii) the
net change in operating assets and liabilities of $9.1 million. The adjustments
for non-cash
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items is comprised of depreciation and amortization of $3.3 million and loss on
impairment of receivables of $18.4 million less deferred income earned of $5.0
million. Cash flows provided by operating activities for Fiscal 1995 were $1.0
million and were comprised of: (i) net income of $5.8 million less (ii)
adjustments for non-cash items of $7.4 million plus (iii) the net change in
operating assets and liabilities of $2.6 million. The adjustments for non-cash
items is comprised of depreciation and amortization of $2.6 million offset by
deferred income earned of $10.0 million. Cash flows provided by operating
activities for Fiscal 1994 were $1.1 million and were comprised of: (i) net loss
of $4.6 million less (ii) adjustments for non-cash items of $2.1 million plus
(iii) the net change in operating assets and liabilities of $7.8 million. The
adjustments for non-cash items is comprised of depreciation and amortization of
$2.3 million offset by deferred income earned of $4.4 million.
Net cash used by investing activities for the nine months ended October
31, 1997 of $13.8 million was comprised of the increase in the investment in the
adult living communities the Company is currently constructing and the increase
in investments in general partner interests in Syndicated adult living
communities. Net cash used by investing activities for the nine months ended
October 31, 1996 of $5.7 million was comprised of the increase in the investment
in the adult living communities the Company is currently constructing and the
increase in investments in general partner interests in adult living communities
as offset by the distribution of refinancing proceeds due to the Company's
portion of general partner interests in adult living communities. Net cash used
by investing activities for Fiscal 1996 of $7.2 million was comprised of the
increase in the investment in the adult living communities the Company is
currently constructing and the increase in investments and general partner
interests in Syndicated adult living communities for the period offset by a
decrease in investments due to the distribution of refinancing proceeds due to
the Company's portion of general partner interests in adult living communities.
Net cash used by investing activities for Fiscal 1995 of $567,000 was comprised
of the increase in investments in general partner interests in adult living
communities. Net cash used by investing activities for Fiscal 1994 of $591,000
was comprised of the increase in investments in general partner interests in
adult living communities.
Net cash provided by financing activities for the nine months ended
October 31, 1997 of $23.3 million was comprised of (i) proceeds from the
issuance of new debt of $36.3 million less debt repayments of $21.8 million plus
(ii) proceeds from construction mortgage financing of $14.0 million less (iii)
payments of notes payable of $100,000 plus (iv) increase in notes payable of 2.0
million less (v) the increase in other assets of $7.1 million. Net cash used by
financing activities for the nine months ended October 31, 1996 of $3.2 million
was comprised of (i) proceeds from the issuance of new debt of $38.2 million
less debt repayments of $39.4 million less (ii) payments of notes payable of
$100,000 less (iii) an increase in other assets of $1.1 million less (iv)
dividends paid of $800,000. Net cash used by financing activities for Fiscal
1996 of $900,000 was comprised of: (i) proceeds from the issuance of new debt of
$57.8 million less debt repayments of $55.3 million plus (ii) proceeds from
construction mortgage financing of $2.8 million less (iii) payments of notes
payable of $200,000 less (iv) dividends paid of $800,000 and less (v) the
increase in other assets of $3.4 million due to the capitalization of costs
relating to the development and construction of new properties and the issuance
of new debt offset by the amortization of loan costs primarily in connection
with Debenture Debt. Net cash provided by financing activities for Fiscal 1995
of $6.6 million was comprised of: (i) proceeds from the issuance of new debt of
$52.0 million less debt repayments of $39.3 million less (ii) payments of notes
payable of $1.6 million less (iii) dividends paid of $1.7 million and less (iv)
the increase in other assets of $2.8 million due to the capitalization of loan
costs primarily in connection with Debenture Debt. Net cash provided by
financing activities for Fiscal 1994 of $1.1 million was comprised of: (i) debt
repayments of $31.3 million less proceeds from the issuance of new debt of $44.0
million less (ii) payments of notes payable of $2.6 million less (iii) dividends
paid of $1.9 million less (iv) the increase in other assets of $7.1 million due
to the capitalization of loan costs primarily in connection with Debenture Debt.
At January 31, 1997, the Company had total indebtedness, excluding
accrued interest, of $141.8 million, consisting of $69.9 million of Debenture
Debt, $46.1 million of Unsecured Debt, $5.0 million of Mortgage Debt and $20.8
million of Investor Note Debt. As of October 31, 1997, the Company has increased
Investor Note Debt from $20.8 million to $29.1 million, increased Unsecured Debt
from $46.1 million to $49.7 million and increased Debenture Debt from $69.9
million to $72.4 million. As a result, total indebtedness increased from $141.8
million to $156.2 million and the Company had cash and cash equivalents at
October 31, 1997 of $9.7 million.
Of the principal amount of total indebtedness at January 31, 1997,
$21.4 million becomes due in the fiscal year ending January 31, 1998; $33.6
million becomes due in the fiscal year ending January 31, 1999; $20.9 million
becomes due in the fiscal year ending January 31, 2000; $21.1 million becomes
due in the fiscal year ending January 31, 2001; $25.6 million becomes due in the
fiscal year ending January 31, 2002, and the balance of $19.2 million becomes
due thereafter.
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Of the amount maturing in the fiscal year ending January 31, 1998, $900,000 is
Investor Note Debt which the Company repaid as of October 31, 1997 through the
collection of investor notes. The balance, approximately $20.5 million, includes
$2.7 million of Debenture Debt, and $17.8 million of Unsecured Debt. During the
nine months ended October 31, 1997, the Company extended approximately $300,000
of Debenture Debt and repaid approximately $1.1 million of Debenture Debt and
approximately $16.2 million of Unsecured Debt. The balance of $1.6 million of
Unsecured Debt and $1.3 million of Debenture Debt which mature during the last
quarter of fiscal 1997, together with interest on outstanding debt, will be
repaid from a portion of the proceeds of the $12 million of new Unsecured Debt
and $ 8.0 million of new Debenture Debt which the Company is in the process of
issuing (of which none of the Unsecured Debt and approximately $3.6 million of
the Debenture Debt was issued as of October 31, 1997), the issuance of
additional debt securities and funds generated by the Company's business
operations.
The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in some obligations, certain
Investing Partnerships, Owning Partnerships or affiliates of the Company. The
Company has recently renegotiated certain of its most restrictive covenants.
Certain obligations contain provisions requiring the Company to maintain a net
worth of, in the most restrictive case, $26,250,000, except that, under the
Capstone agreements the Company will be required to maintain a net worth in an
amount no less than 75% of the net worth of the Company immediately after the
closing of this Offering. The Company has experienced fluctuations in its net
worth over the last several years. At January 31, 1995, the Company had a net
worth of $30.7 million, at January 31, 1996, the Company had a net worth of
$34.8 million, at January 31, 1997, the Company had a net worth of $32.0
million, and at October 31, 1997, the Company had a net worth of $27.0 million.
On a pro forma basis, after giving effect to this Offering, the Company would
have had a net worth of $50.0 million at October 31, 1997. Pursuant to the
Capstone Agreement, the Company would be required to maintain a net worth of no
less than $37.5 million. Certain obligations of the Company contain covenants
requiring the Company to maintain a debt for borrowed money to net worth ratio
of, in the most restrictive case, no more than 6 to 1. At January 31, 1997 and
October 31, 1997, the Company's debt for borrowed money to consolidated net
worth ratio was 4.5 to 1 and 5.8 to 1, respectively and would have been 3.1 to 1
on October 31, 1997 on a pro forma basis, after giving effect to this Offering.
In addition, certain obligations of the Company provide that an event of default
will arise upon the occurrence of a material adverse change in the financial
condition of the Company or upon a default in other obligations of the Company.
The Company has utilized mortgage financing and Syndications to arrange
for the acquisitions of the adult living communities it operates and intends to
continue this practice for future acquisitions of existing adult living
communities. The Company does not intend to Syndicate its newly developed
communities. The limited partnership agreements of the Investing Partnerships
provide that the limited partners are entitled to receive for a period not to
exceed five-years specified distributions equal to 11% to 12% per annum of their
then paid-in scheduled capital contributions. Pursuant to the management
contracts with the Owning Partnerships, for such five-year period, the Company
has Management Contract Obligations. During Fiscal 1996 and the nine months
ended October 31, 1997, the adult living communities with respect to which the
Company had such Management Contract Obligations distributed to the Company,
after payment of all operating expenses and debt service, an aggregate of $9.7
million and $7.9 million, respectively, for application to the Company's
Management Contract Obligations. During such periods, the Company's Management
Contract Obligations exceeded such distributions by an aggregate of $5.6 million
and $5.2 million, respectively. Of the $5.6 million the Company paid in respect
to Management Contract Obligations for Fiscal 1996 (i) approximately 64% was
attributable to difficulties the Company experienced in renting a sufficient
number of adult living units relating to two Syndications involving multi-family
properties that the Company acquired from third parties and believed could
successfully be converted to adult living communities (the conversion of one of
these properties to an adult living community is continuing and is currently 80%
occupied by adult living residents, and the conversion of the other property was
unsuccessful and the property is being operated as a multi-family property by a
third-party managing agent) and one underperforming adult living community, (ii)
approximately 27% was attributable to operating expenses (including maintenance
repairs and costs) increasing at a greater rate than historically, as partially
offset by increases in rental revenues, and (iii) approximately 9% was
attributable to the increased debt service, including the establishment of
capital improvement reserves, on certain adult living communities due to the
refinancing of such adult living communities (which includes the initial
mortgage financing of certain adult living communities that had been previously
acquired without a mortgage), which refinancings reduced the cash flow generated
by such adult living communities to a greater extent than the resulting
reduction of the Company's Management Contract Obligations relating to such
properties. As a result of the refinancings, $43 million was distributed to
limited partners as a return of capital. This return of capital reduced the
amount of capital upon which the Company has Management Contract Obligations. Of
the $5.2 million the Company paid in respect to Management Contract Obligations
for the nine months
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ended October 31, 1997 (i) approximately 45% was attributable to operating
expenses (including maintenance and repair costs) increasing at a greater rate
than historically, as partially offset by increases in rental revenues, (ii)
approximately 33% was attributable to the decrease in the average occupancy of
the Company's portfolio of adult living communities, and (iii) approximately 22%
was attributable to difficulties the Company experienced in renting a sufficient
number of adult living units relating to one Syndication where a multi-family
property was converted to an adult living community (which community is
currently 80% occupied by adult living residents) and one underperforming adult
living community.
The aggregate amount of Management Contract Obligations relating solely
to returns to limited partners based on existing management contracts is $3.9
million for the remaining portion of Fiscal year 1997, $15.4 million for Fiscal
1998, which will increase to $17.4 in Fiscal 1999, and decrease to $16.4 million
in Fiscal 2000, decrease to $11.2 million in Fiscal 2001 and decrease to $2.4
million in Fiscal 2002. Such amounts of Management Contract Obligations are
calculated based upon paid-in scheduled capital contributions of limited
partners as of October 31, 1997 with respect to Fiscal 1997 and remaining
scheduled capital contributions with respect to fiscal years 1998 through 2002.
Actual amounts of Management Contract Obligations in respect of such contracts
will vary based upon the timing and amount of such capital contributions.
Furthermore, such amounts of Management Contract Obligations are calculated
without regard to any cash flow the related properties may generate, which would
reduce such obligations, and are calculated without regard to the Management
Contract Obligations relating to future Syndications.
The initial five-year term of the management contracts and the related
Management Contract Obligations have expired for 10 Owning Partnerships which
Management Contract Obligations relate to fourteen Investing Partnerships.
Although the Company has no obligation to fund operating shortfalls after the
five-year term of the management contracts, as of October 31, 1997, the Company
had advanced an aggregate of approximately $400,000 to two Owning Partnerships
to fund operating shortfalls . In both cases, the Company had arranged for
Syndications involving multi-family properties that the Company acquired from
third parties and believed could be successfully converted to adult living
communities. One of these conversion attempts was unsuccessful and the property
is now being operated as a multi-family property by a third-party managing
agent. The other property has experienced difficulties in its conversion to an
adult living community, but the conversion process is continuing. These advances
are recorded as "Other Partnership Receivables" on the Company's Consolidated
Balance Sheet. The Company has no present intention to attempt other conversions
of multi-family properties to adult living communities.
The refinancings of a number of adult living communities in Fiscal 1996
resulted in over $43 million being returned to limited partners, which reduced
the amount of capital upon which the Company is obligated to make payments in
respect of the Management Contract Obligations. The amount paid by the Company
with respect to its Management Contract Obligations for Fiscal 1996 was
partially offset by an increase in interest income received by the Company for
Fiscal 1996, which was also the result of the refinancings. While the
refinancings increased the Company's funding of Management Contract Obligations
in the short term, the long term effect will be a reduction of the Company's
Management Contract Obligations relating to the refinanced properties. The
capital that was returned to the limited partners (which causes the reduction in
the Company's Management Contract Obligations) was applied first to the later
years in which their capital contributions are due and then to the earlier
years. The refinancings, therefore, reduce the Company's Management Contract
Obligations more in future years than in the current year and the following
year. The aggregate amount of the Company's Management Contract Obligations will
depend upon a number of factors, including, among others, the expiration of such
obligations for certain partnerships, the cash flow generated by the properties
and the terms of future Syndications. The Company anticipates that for at least
two years the Management Contract Obligations with respect to existing and
future Syndications will exceed the cash flow generated by the related
properties, which will result in the need to utilize funds generated by the
Company from sources other than the operations of the Syndicated adult living
communities to make Management Contract Obligations payments. The Company
intends to structure future Syndications to minimize the likelihood that it will
be required to utilize the cash it generates to pay amounts utilized to pay
Management Contract Obligations, but there can be no assurance that this will be
the case.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of the prepayments received upon the closings of
the sales of limited partnership interests in Investing Partnerships averaged
71.7% in Fiscal 1994, 60.9% in Fiscal 1995, 65.7% in Fiscal 1996 and 64.4% for
the nine months ended October 31, 1997. Prepayments of capital contributions do
not result in the prepayment of the related Purchase Notes held by the Company.
Instead, such amounts are loaned to the Company by the Investing Partnership. As
a result of such loans and crediting provisions of the related purchase
agreements, the Company records the Purchase Notes net of such loans. Therefore,
these prepayments act
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to reduce the recorded value of the Company's note receivables and reduce
interest income received by the Company. Pursuant to the terms of the offerings,
the Company has the option not to accept future prepayments by limited partners
of capital contributions. The Company has not determined whether it will
continue to accept prepayments by limited partners of capital contributions.
The Company holds 169 Multi-Family Notes which are secured by
controlling interests in Multi-Family Owning Partnerships which own 128
Multi-Family Properties. Although it has no obligation to do so, the Company has
also made advances to various Multi-Family Owning Partnerships to support the
operation of their properties, which advances are recorded as "Other Partnership
Receivables" on the Company's Consolidated Balance Sheet. The Multi-Family Notes
and the Other Partnership Receivables entitle the Company to receive all cash
flow and sale or refinancing proceeds generated by the respective multi-family
property until the Multi-Family Note and Other Partnership Receivables are
satisfied. As of October 31, 1997, the recorded value, net of deferred income,
of Multi-Family Notes was $107.1 million. All but approximately $1.2 million of
the $56.0 million of "Other Partnership Receivables" recorded on the Company's
Consolidated Balance Sheet as of October 31, 1997 relate to advances to
Multi-Family Owning Partnerships. (See Note 4 of Notes to the Company's
Consolidated Financial Statements.)
The Multi-Family Notes relating to the Protected Partnerships were
first deemed impaired when the mortgages on their respective properties went
into default, which defaults occurred between August 1989 and June 1994. Once in
default, the holders of these mortgages assigned them to the United States
Department of Housing and Urban Development ("HUD"). The Protected Partnerships
then attempted to negotiate, and in some cases obtained, workout agreements with
HUD. Although it could temporarily lower or suspend debt service payments during
the term of a workout agreement, HUD, unlike a conventional lender, did not have
the legal authority to restructure the defaulted mortgages it holds by
permanently lowering interest rates or reducing the principal amount of such
mortgages. HUD then sold the mortgages (subject to those workout agreements
which were in place) at auctions in September 1995 and June 1996. Since the new
mortgage holders did not have HUD's legal constraints as to the restructuring of
mortgages they hold, the Protected Partnerships began negotiations with the new
holders to restructure their mortgages or purchase them at a discount. The
Protected Partnerships could not reach agreement with the new mortgage holders
and such new mortgage holders began to threaten and institute foreclosure
proceedings. In July 1996, the Principal Stockholders and one of their
affiliates assigned partnership interests in 12 partnerships that own 12
multi-family properties located in various towns and cities in Georgia and South
Carolina (the "Assigned Interests") to the Investing Partnerships that own
interests in the Protected Partnerships, which Assigned Interests were owned
personally by the Principal Stockholders and their affiliate and provided
additional assets at the Investing Partnership level and, as a result,
additional security for the related Multi-Family Notes. Seven of the Protected
Partnerships filed Chapter 11 Petitions in August 1996, two of the Protected
Partnerships filed Chapter 11 Petitions in February 1997, and one of the
Protected Partnerships did not file a Chapter 11 Petition and allowed the holder
of the mortgage to foreclose on its property due to the unlikelihood of
confirming a plan of reorganization. The Company neither owns nor manages these
properties, nor is it the general partner of any Multi-Family Owning
Partnerships, including the Protected Partnerships, but rather, merely holds the
related Multi-Family Notes and Other Partnership Receivables as receivables. The
Company, therefore, has no liability in connection with these mortgage defaults
or bankruptcy proceedings.
The Company established appropriate reserves during these time periods
to reflect the varying extent of impairment of the applicable Multi-Family Notes
in view of the state of facts at such times. The bankruptcy petitions and risk
of loss faced by the Protected Partnerships caused the related Multi-Family
Notes and receivables to be deemed fully impaired. As a result, the Company
recorded a non-cash loss in fiscal 1996 in the amount of $18.4 million
(representing the recorded value of these Multi-Family Notes and receivables,
net of deferred income and any previously established reserves). In that the
Principal Stockholders transferred the Assigned Interests in July 1996, the
Company recorded a $21.3 million capital contribution in Fiscal 1996. As a
result of the transfer by the Principal Stockholders and their affiliate of the
Assigned Interests and the additional security provided thereby, the Company
believes that the outcome of the bankruptcy proceedings will not affect its
ability to collect on those Multi-Family Notes and receivables.
Seven of the Chapter 11 Petitions resulted in the respective Protected
Partnerships losing their properties through foreclosure or voluntary
conveyances of their properties. The remaining two Protected Partnerships
successfully emerged from their bankruptcy proceedings in January 1998 by paying
off their mortgages at a discount with the proceeds of new mortgage financings,
resulting in these properties having current, fully performing mortgages. The
two Investing Partnerships related to these two Protected Partnerships have
transferred the respective Assigned Interests back to the Principal Stockholders
and their affiliate.
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Fifteen of the Multi-Family Owning Partnerships remain in default on
their respective mortgages. As of October 31, 1997, the recorded value, net of
deferred income, of the multi-family Purchase Notes and "Other Partnership
Receivables" held by the Company relating to these fifteen Multi-Family Owning
Partnerships was $31.9 million. The Company has established reserves of $10.1
million to address the possibility that these notes and receivables may not be
collected in full. It is possible that other Multi-Family Owning Partnerships
which are in default of their mortgages will file bankruptcy petitions or take
similar actions seeking protection from their creditors.
In addition, many of the multi-family properties are dependent to
varying degrees on housing assistance payment contracts with the United States
government, most of which will expire over the next few years. In view of the
foregoing, there can be no assurance that other Multi-Family Owning Partnerships
will not default on their mortgages, file bankruptcy petitions, and/or lose
their properties through foreclosure. The Company neither owns nor manages these
properties, nor is it the general partner of these Multi-Family Owning
Partnerships, but rather, holds the related Multi-Family Notes and Other
Partnership Receivables as receivables. Any such future mortgage defaults could,
and any such future filings of Chapter 11 Petitions or the loss of any such
property through foreclosure would, cause the Company to realize a non-cash loss
equal to the recorded value of the applicable Multi-Family Note plus any related
advances, net of any deferred income recorded for such Multi-Family Note and any
reserves for such note and advances previously established by the Company, which
would reduce such loss. In addition, the Company could be required to realize
such a non-cash loss even in the absence of mortgage defaults, Chapter 11
Petitions or the loss of any such property through foreclosure if, at any time
in which the Company's financial statements are issued, such note is considered
impaired. Such impairment would be measured under applicable accounting rules.
Such losses, if any, while non-cash in nature, could adversely affect the
Company's business, operating results and financial condition.
The Multi-Family Properties were typically built or acquired with the
assistance of programs administered by HUD that provide mortgage insurance,
favorable financing terms and/or rental assistance payments to the owners. As a
condition to the receipt of assistance under these and other HUD programs, the
properties must comply with various HUD requirements, including limiting rents
on these properties to amounts approved by HUD. Most of the rental assistance
payment contracts relating to the Multi-Family Properties will expire over the
next few years. HUD has introduced various initiatives to restructure its
housing subsidy programs by increasing reliance on prevailing market rents, and
by reducing spending on future rental assistance payment contracts by, among
other things, not renewing expiring contracts and by restructuring mortgage debt
on those properties where a decline in rental revenues is anticipated. Due to
uncertainty regarding the final policies that will result from these initiatives
and numerous other factors that affect each property which can change over time
(including the local real estate market, the provisions of the mortgage debt
encumbering the property, prevailing interest rates and the general state of the
economy) it is impossible for the Company to determine whether these initiatives
will have an impact on the Multi-Family Properties and, if there is an impact,
whether the impact will be positive or negative.
Certain of the Multi-Family Owning Partnerships intend to take
advantage of the new HUD initiatives and/or improving market conditions to
either refinance their HUD-insured mortgages with conventional mortgage
financing or restructure their HUD-insured mortgage debt. In some cases, the
Multi-Family Owning Partnerships may make certain improvements to the properties
and may not renew rental assistance contracts as part of a strategy to
reposition those MultiFamily Properties as market-rate, non-subsidized
properties. Six of such Multi-Family Owning Partnerships refinanced their
HUD-insured mortgages with conventional mortgage financing and a number of
others have applications for commitments pending. To the extent that any of
these Multi-Family Owning Partnerships complete such actions, the Company
believes that the ability of the multi-family Investing Partnerships to make
payments to the Company on their respective Multi-Family Notes will be enhanced
and accelerated. However, there can be no assurance that the Multi-Family Owning
Partnership will be able to refinance their mortgages or will be able to
successfully reposition any of the Multi-Family Properties.
As previously described, the Protected Partnerships (and the other
defaulting Multi-Family Owning Partnerships) have generated little or no cash
flow and, therefore, the related Multi-Family Notes have contributed little or
no interest income in the periods covered in the Consolidated Financial
Statements of the Company. The Assigned Interests have, prior to their
assignment to the Investing Partnerships, generated positive cash flows. To the
extent the Assigned Interests continue to generate positive cash flows, the
Company will be entitled to receive such amounts as interest income on the
related Multi-Family Notes.
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The future growth of the Company will be based upon the continued
acquisition of existing adult living communities and the development of
newly-constructed adult living communities. The Company anticipates that it will
acquire between six and twelve existing adult living communities over the next
two years. It is anticipated that acquisitions of existing adult living
communities will be arranged by utilizing a combination of mortgage financing
and Syndications. In January, 1998, the Company acquired and Syndicated one
adult living community in Adrian, Michigan containing 73 apartment units. The
Company regularly obtains such acquisition mortgage financing from three
different commercial mortgage lenders and, in view of its ready access to such
mortgage financing, has not sought any specific commitments or letters of intent
with regard to future, unidentified acquisitions. Similarly, the Company
believes that it has sufficient ability to arrange for acquisitions of existing
adult living communities in part by Syndications. In Fiscal 1996 and 1997, the
Company acquired three previously Syndicated adult living communities (the
"Resyndicated Communities") from the original Owning Partnerships, which
acquisitions were arranged by utilizing mortgage financing and Resyndications.
The Company manages the Resyndicated Communities pursuant to new management
contracts and has Management Contract Obligations thereunder.
The Company will not engage in other Resyndication transactions in the future.
In a typical Syndication, limited partners agree to pay their capital
contributions over a five-year period, and deliver notes representing the
portion of their capital contribution that has not been paid in cash. The
Company borrows against the notes delivered by limited partners to generate cash
when needed, including to pursue its plan for the development of new adult
living communities and to repay debt. The Company's present Investor Note Debt
lenders do not have sufficient lending capacity to meet all of the Company's
future requirements. However, the Company currently is negotiating with several
new Investor Note Debt lenders which the Company believes will have sufficient
lending capacity to meet all of the Company's foreseeable Investor Note Debt
borrowing requirements on acceptable terms.
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community and intends to commence construction on between 30
and 34 additional new adult living communities over the next two years. The
Company plans to own or lease pursuant to long-term operating leases or similar
arrangements the adult living communities that will be developed under the plan.
The Company will manage and operate each of the newly developed communities. The
Company estimates that the cost of developing each new adult living community
(including reserves necessary to carry the community through its lease up
period) utilizing mortgage financing will be approximately $9.5 million and
utilizing long-term lease financing will be approximately $10 million. The
Company expects to complete the construction of four of the five communities
currently under construction by the end of the first quarter of fiscal 1998. The
Company expects to complete construction of the remaining community currently
under construction by the end of fiscal 1998. These five adult living
communities, along with the three communities already completed pursuant to the
development plan, contain an aggregate of approximately 1,150 adult living
apartment units. The 30 to 34 additional new communities which the Company
intends to commence construction on over the next two years will contain between
4,260 and 4,828 addtional adult living apartment units. With respect to two of
the five adult living communities currently under construction, the Company has
entered into long-term leases to finance these developments. The Company
anticipates that the proceeds of this Offering, funds generated by its business
operations and construction mortgage financing will provide sufficient funds to
pursue its development plan for at least 12 months at the projected rate of
development. The Company will use the proceeds of anticipated refinancings of
construction financing on, and/or sale-leasebacks of, stabilized, newly
constructed communities at higher principal amounts than the original
construction financing, additional long-term leases or similar forms of
financing which require the investment of little or no capital on the part of
the Company, or may use funds raised through the issuance of additional debt or
equity securities, to continue with its development plan for more than the next
12 months at its projected rate of development. There can be no assurance that
funds generated by these potential sources will be available or sufficient to
complete the Company's development plan. In addition, there are a number of
circumstances beyond the Company's control and which the Company cannot predict
that may result in the Company's financial resources being inadequate to meet
its needs. A lack of available funds may require the Company to delay, scale
back or eliminate some of the adult living communities that are currently
contemplated in its development plan. See "Risk Factors -- Need for Additional
Financing" and "Use of Proceeds."
The first new communities being constructed pursuant to the Company's
development plan are in Texas. The Company completed construction with mortgage
financing for up to $7.0 million on an adult living community in Corpus Christi,
Texas, and is nearing the completion of construction on sites in Round Rock, and
Temple, Texas, with mortgage financing for up to $7.6 million and $7.3 million,
respectively. The Company has commenced construction with construction
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financing for $7.1 million on an adult living community in Tyler, Texas. The
Company holds options to acquire three additional sites in Texas and is
negotiating with several additional lenders to obtain financing to develop these
sites.
The Company has, and may in the future, utilize long-term lease
financing arrangements to develop and operate new communities. The Company has
obtained up to $39 million of financing from Capstone for 100% of the
development cost of four adult living communities that will be operated by the
Company pursuant to long-term leases with Capstone. The Company has completed
construction on two of these communities in San Angelo and El Paso, Texas, and
is nearing completion of construction on two of these communities which are
located in Wichita Falls and Abilene, Texas. Pursuant to this financing
arrangement, Capstone acquired the properties and entered into a development
agreement and a lease agreement with the Company with respect to each property.
Each development agreement required that construction commence within 30 days
after the acquisition of the property and be complete within 15 months of
commencement. Each lease agreement will have a term of 15 years with three
optional five-year renewal periods. The agreement requires a covenant that each
community financed by Capstone maintain annualized earnings before certain
deductions of at least 1.25 times the rent from the respective adult living
community. The obligations under the development agreements are, and the
obligations under the leases will be, direct obligations of the Company. The
Company will be granted a right of first refusal and an option to purchase the
properties. The Company will be required to maintain a net worth in an amount no
less than 75% of the net worth of the Company immediately after the closing of
this Offering. On a pro forma basis, after giving effect to this Offering, the
Company would have had a net worth of $50.0 million at October 31, 1997.
Therefore, the Company would be required, pursuant to the Capstone Agreement, to
maintain a net worth of no less than $37.5 million.
The Company is actively engaged in negotiations with other mortgage and
long-term lease lenders to provide additional construction financing. The
Company anticipates that most of the construction mortgage loans it obtains to
finance the development and lease-up costs of new adult living communities will
contain terms where the lender will fund approximately 80% of such costs,
requiring the Company to contribute approximately 20% of such costs. The Company
arranged for the sale of limited partnership interests in two partnerships
organized to make second mortgage loans to the Company to fund approximately 20%
of the costs of developing three new adult living communities.
o Impact of the Year 2000 on Computer Systems and Applications
The Company has assessed the potential for its computer systems and
applications to fail and create erroneous results by or at the year 2000 and has
modified, and plans to continue to test and modify as necessary, its computer
systems and applications to permit proper functioning in and after the year
2000. The Company believes that most such required modifications have been made
and does not expect to have any material year 2000 problems. The costs incurred
to date for such modifications have been, and it is expected that any future
costs will be, immaterial.
The Company's assessment of the adult living communities which it
manages has led it to believe that such communities will not be affected by year
2000 issues to any material extent. Since the computer systems of the Company
and the adult living communites managed by it are not linked to those of any
other party, the Company does not believe that year 2000 problems of third
parties will create the potential for system failures for the Company or the
adult living communities that it manages. The Company does not believe that year
2000 problems, if any, faced by its suppliers, creditors or others will have any
material impact on the Company, although there can be no assurance that this
will be the case.
o New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 128, "Earnings per Share"
establishes standards for computing and presenting earnings per share, and is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Statement No. 129, "Disclosure of Information about
Capital Structure" establishes standards for disclosing information about an
entity's capital structure, and is effective for financial statements for
periods ending after December 15, 1997. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display of
comprehensive income and its components, and is effective for fiscal years
beginning after December 15, 1997. Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers, and is
effective for financial statements for periods
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beginning after December 15, 1997. The Company believes that its future adoption
of these standards will not have a material effect on the Companys financial
position or results of operations.
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BUSINESS
General
The Company is a fully integrated provider of adult living
accommodations and services which acquires, develops and manages adult living
communities. Although, the Company's revenues have been and are expected to
continue to be, primarily derived from Syndications, to the extent the Company
implements its new development program, it anticipates that the revenues derived
therefrom will increase. The Company manages adult living communities which have
been acquired utilizing Syndications. The Company is one of the largest managers
of adult living communities in the United States, operating communities offering
both independent- and assisted-living services. The Company currently manages 37
adult living communities containing 5,265 adult living apartment units in 12
states in the Sun Belt and the Midwest. The Company also manages one nursing
home containing 57 beds. One of the adult living communities the Company
operates contains 70 skilled nursing beds. The Company has approximately 1,600
employees and directly conducts the day-to-day operations of the adult living
communities it manages. At January 31, 1998 the communities managed by the
Company had an average occupancy rate of approximately 93%. The Company's
operating objective is to provide high-quality, personalized living services to
senior residents, primarily persons over the age of 75. To the extent that the
development plan described below is successfully implemented, the Company
anticipates that the percentage of its revenues derived from Syndications would
decrease and the percentage of revenues derived from newly constructed adult
living communities would increase and, the Company believes, over time, become
the primary source of the Company's revenues.
Historically, the Company has arranged for the acquisition and
development of multi-family and adult living properties by utilizing mortgage
financing and by arranging Syndications of 41 Investing Partnerships formed to
acquire interests in the 37 Owning Partnerships that own the adult living
communities and the nursing home managed by the Company. These 37 adult living
communities and one nursing home are owned by the respective Owning Partnerships
and not by the Company. The Company is the managing general partner of all but
one of the Owning Partnerships and the Company manages all of the adult living
communities and one nursing home in its portfolio. The Company is also the
general partner of 32 of the 41 Investing Partnerships.
In a typical Syndication, the Company identifies an adult living
community suitable for acquisition and forms an Owning Partnership (in which it
is the managing general partner and initially owns all of the partnership
interests) to acquire the property. An Investing Partnership is also formed ( in
which the Company is also the general partner with a 1% interest) to purchase
from the Company a 99% partnership interest in the Owning Partnership (the
"Purchased Interest"), leaving the Company with a 1% interest in each of the
Owning Partnership and the Investing Partnership. The purchase price for the
Purchased Interest is paid in part in cash and in part by a note from the
Investing Partnership with a term of approximately five years ( a "Purchase
Note"). Limited partners purchase partnership interests in the Investing
Partnership by agreeing to make capital contributions over approximately five
years to the Investing Partnership, which allows the Investing Partnership to
pay the purchase price for the Purchased Interest, including the Purchase Note.
Limited Partners are typically permitted to pre-pay their scheduled capital
contributions. The limited partnership agreement of the Investing Partnership
provides that the limited partners are entitled to receive for a period not to
exceed five years distributions equal to between 11% and 12% per annum of their
then paid-in scheduled capital contributions. Although the Company incurs
certain costs in connection with acquiring the community and arranging for the
Syndication of partnership interests in the Investing Partnership, the Company
makes a profit on the sale of the Purchased Interest. In addition, as part of
the purchase price paid by the Investing Partnership for the Purchased Interest,
the Company receives a 40% interest in sale and refinancing proceeds after
certain priority payments to the limited partners.
The Company also enters into a management contract with the Owning
Partnership pursuant to which the Company agrees to manage the adult living
community. As part of the management fee arrangements, the management contract
requires the Company, for a period not to exceed five years, to pay to the
Owning Partnership (to the extent that cash flows generated by the property are
insufficient) amounts sufficient to fund (i) any operating cash deficiencies of
such Owning Partnership and (ii) any part of the specified rate of return to
limited partners not paid from cash flow from the related property (which the
Owning Partnerships distribute to the Investing Partnerships for distribution to
limited partners) (collectively, the "Management Contract Obligations"). The
Company, therefore, has no direct obligation to pay specified returns to limited
partners. Rather, the Company is obligated pursuant to the management contract
to pay to the Owning Partnership amounts sufficient to make the specified
returns to the limited partners, to the extent the cash
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flows generated by the property are insufficient to do so. The Owning
Partnership then distributes these amounts to the Investing Partnership which,
in turn, distributes these amounts to the limited partners. As a result of the
Management Contract Obligations, the Company essentially bears the risks of
operations and financial viability of the related property for such five-year
period. The management contract, however, rewards the Company for successful
management of the property by allowing the Company to retain as an incentive
management fee any cash flow generated by the property in excess of the amount
needed to satisfy the Management Contract Obligations. After the initial
five-year period, the limited partners are entitled to the same specified rate
of return, but only to the extent there is sufficient cash flow from the
property. Any amounts of cash flow available after payment of the specified
return to limited partners are shared as follows: 40% to the Company as an
incentive management fee and 60% for distribution to the limited partners. The
management contract is not terminable during this five-year period and is
terminable thereafter by either party upon thirty to sixty days notice.
The Company intends to continue to arrange for future acquisitions of
existing adult living communities by utilizing mortgage financing and by
arranging Syndications, and anticipates acquiring between six and twelve
communities during the next two years. The Company does not intend to Syndicate
it's newly developed adult living communities, which it will own and operate or
operate pursuant to long-term leases.
The management contract with each Owning Partnership requires the
Company to manage and operate the day-to-day operations of the adult living
community. Under each management contract, the Company acts as an independent
contractor. Required services performed by the Company for each community
include marketing and advertising; renting apartment units and collecting rents
and charges; providing independent and assisted living services (including
providing meals, activities, transportation and, for assisted-living residents,
assistance with activities of daily living ("ADLs")); hiring, paying and
supervising the on-site employees; maintaining the property; purchasing
supplies; and preparing operating budgets and reports. Although the Company has
the right to sub-contract for such services, the Company directly performs such
services utilizing employees of the Company.
Current demographic trends suggest that demand for both
independent-living and assisted-living services will continue to grow. According
to U.S. Bureau of Census data, the Company's target market, people over age 75,
is one of the fastest growing segments of the U.S. population and is projected
to increase by more than 24% to 16.3 million between 1990 and 2000. While the
population of seniors grows, other demographic trends suggest that an increasing
number of them will choose adult living centers as their residences. According
to U.S. Bureau of Census data, the median net worth of householders over age 75
has increased to over $75,000. At the same time, the Census shows that the
number of seniors living alone has increased, while women, who have been the
traditional care-givers, are more likely to be working and unable to provide
care in the home. The Company believes that many seniors find that adult living
centers provide them with a number of services and features that increasingly
they are unable to find at home, including security, good nutritious food and
companionship. Furthermore, the National Long Term Care Surveys, a Federal study
that regularly surveys close to 20,000 people aged 65 and older, indicate that,
despite the growth in the elderly population, the percentage of elderly that are
disabled and need assistance with ADLs has decreased substantially and is
expected to continue to decrease. This suggests that demand for independent
living communities will increase in the future.
Assisted-living supplements independent-living services with assistance
with ADLs in a cost effective manner while maintaining residents' independence,
dignity and quality of life. Such assistance consists of personalized support
services and health care in a non-institutional setting designed to respond to
the individual needs of the elderly who need assistance but who do not need the
level of health care provided in a skilled nursing facility.
The Company has instituted a development plan pursuant to which it has
completed construction of three adult living communities, is nearing completion
of the construction of four additional communities, has commenced construction
on one additional community and intends to commence construction on between 30
and 34 additional new adult living communities over the next two years. The
Company plans to own or lease pursuant to long-term operating leases or similar
arrangements the adult living communities that will be developed under the plan.
The Company will manage and operate each of the newly developed communities. The
Company does not intend to Syndicate any of its newly-developed adult living
communities. The Company estimates that the cost of developing each new adult
living community (including reserves necessary to carry the community through
its lease up period) utilizing mortgage financing will be approximately $9.5
million and utilizing long-term lease financing will be approximately $10
million. The Company expects to complete the construction of four of the five
communities currently under construction by the end of the first quarter of
fiscal 1998 and expects to complete the construction of the remaining community
under construction by the end of fiscal 1998. These five adult living
communities,
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along with the three communities whose construction is already completed
pursuant to the development plan, contain an aggregate of approximately 1,150
adult living apartment units. The 30 to 34 additional new communities which the
Company intends to commence construction on over the next two years will contain
between 4,260 and 4,828 additional adult living apartment units. Each new
community to be developed by the Company will offer both independent and
assisted-living services.
The first new communities being constructed pursuant to the Company's
development plan are in Texas. The Company has obtained development financing
from Capstone Capital Corporation ("Capstone") pursuant to which Capstone is
providing up to $39 million for development of four new adult living communities
that will be operated by the Company pursuant to long-term leases with Capstone.
The Company has completed construction on two of these communities in El Paso
and San Angelo, Texas, respectively, and is nearing completion of construction
on the remaining two communities which are located in Wichita Falls, and
Abilene, Texas, respectively. The Company has completed construction, with
mortgage financing for up to $7 million, on an adult living community in Corpus
Christi, Texas, and is nearing completion of construction with mortgage
financing for up to $7.3 million, on an adult living community in Temple, Texas.
The Company is also nearing completion of construction, with mortgage financing
for up to $7.6 million, of an adult living community in Round Rock, Texas. The
Company has commenced construction on one additional site in Tyler, Texas with
mortgage financing of $7.1 million. The Corpus Christi community is owned and
operated directly by the Company and the Temple, Round Rock and Tyler facilities
are owned and, upon completion will be operated directly by the Company. The
Company also holds options to acquire three additional sites in Texas and is
negotiating with several additional lenders to obtain financing to develop these
sites.
Upon the completion of construction of each adult living community
developed and constructed pursuant to the Capstone Development Agreement, and
upon the satisfaction of certain other conditions, the Company will be the
lessee under long-term lease arrangements with Capstone which provide financing
for development of four of the newly developed adult living communities. The
initial term of each lease, which begins upon the completion of a facility and
meeting of other criteria, is 15 years with three five-year extension options.
Under the terms of each lease, the Company has the option to acquire the
community after operating the community for four years. The option price is
equal to the sum of 100% of the cost incurred to develop the property and an
additional 20% of such cost (which declines by 2 percentage points per year but
in no event declines below 10%). The initial lease rate is 350 basis points in
excess of the ten-year Treasury Bill yield (but in no event less than 9.75% per
annum). The lease rate has an annual upward adjustment equal to 3% of the
previous year's rent. The four leases have cross-default provisions. Each lease
is a triple net lease, as the Company is responsible for all costs, including
but not limited to maintenance, repair, insurance, taxes, utilities, and
compliance with legal and regulatory requirements. If a community is damaged or
destroyed, the Company is required to restore the community to substantially the
same condition it was in immediately before such damage or destruction, or
acquire the facility for the option price described above.
The Company generally plans to concentrate on developing projects in
only a limited number of states at any given time. The Company believes that
this focus will allow it to realize certain efficiencies in the development and
management of communities. The effectuation of the development plan will expose
the Company to additional risk. These risks include, but are not limited to, the
Company's anticipation that the construction of each community will require
approximately 12 months and that each newly constructed community will incur
start-up losses for at least nine months after commencing operations. In
addition, there can be no assurance that newly constructed communities will
generate positive cash flow or that the Company will not suffer delays or cost
overruns in instituting its development plan.
The Company's adult living communities offer personalized assistance,
supportive services and selected health care services in a professionally
managed group living environment. Residents may receive individualized
assistance which is available 24 hours a day, and is designed to meet their
scheduled and unscheduled needs. The services for independent-living generally
include three restaurant-style meals per day served in a common dining room,
weekly housekeeping and flat linen service, social and recreational activities,
transportation to shopping and medical appointments, 24-hour security and
emergency call systems in each unit. The services for assisted-living residents
generally include those provided to independent-living residents, as
supplemented by assistance with ADLs including eating, bathing, dressing,
grooming, personal hygiene and ambulating; health monitoring; medication
management; personal laundry services; and daily housekeeping services.
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The Company focuses exclusively on "private-pay" residents, who pay for
housing or related services out of their own funds or through private insurance,
rather than relying on the few states that have enacted legislation enabling
assisted-living facilities to receive Medicare funding similar to funding
generally provided to skilled nursing facilities. The Company intends to
continue its "private-pay" focus as it believes this market segment is, and will
continue to be, the most profitable. This focus will enable the Company to
increase rental revenues as demographic pressure increases demand for adult
living communities and avoid potential financial difficulties it might encounter
if it were dependent on Medicare or other government reimbursement programs that
may suffer from health care reform, budget deficit reduction or other pending or
future government initiatives.
Partnership Offerings
The Company has arranged for the acquisition of the 37 adult living
communities and one nursing home that it manages by utilizing mortgage financing
and Syndications of the 41 Investing Partnerships formed to acquire investments
in the 37 Owning Partnerships that own the adult living communities and the
nursing home in its current portfolio. The Company is the managing general
partner of all but one of the Owning Partnerships that own such adult living
communities and one nursing home. The Company manages all of the adult living
communities and the one nursing home in its portfolio. The Company is also the
general partner of 32 of the 41 Investing Partnerships. As a general partner of
such partnerships, the Company has a participation in the cash flow, sale
proceeds and refinancing proceeds of the properties after certain priority
payments to the limited partners. In a typical Syndication, an Owning
Partnership is organized by the Company to acquire a property which the Company
has identified and selected based on a broad range of factors. Generally, 99% to
100% of the partnership interests in an Owning Partnership initially are owned
by the Company. An Investing Partnership is formed as a limited partnership for
the purpose of acquiring all or substantially all of the total partnership
interests owned by the Company. Limited partnership interests in the Investing
Partnership are sold to investors in exchange for (i) all cash or (ii) a cash
down payment and full recourse promissory notes (an "Investor Note"). In the
case of an investor that does not purchase a limited partnership interest for
all cash, the investor's limited partnership interest (a "Limited Partnership
Interest") serves as collateral security for that investor's Investor Note.
Under the terms of an agreement (a "Purchase Agreement"), the Investing
Partnership purchases from the Company the partnership interests in the Owning
Partnership partially with cash raised from the cash down payment made by its
investors and the balance by the delivery of the Investing Partnership's
promissory note (a "Purchase Note"). The Purchase Notes executed by Investing
Partnerships prior to 1986 have balloon payments of principal due on maturity.
The Purchase Notes executed since January 1, 1987 are self-liquidating (without
balloon payments). The Investing Partnership, as collateral security for its
Purchase Note, pledges to the Company the Investor Notes received from its
investors, its interest in the Limited Partnership Interests securing the
Investor Notes, as well as the entire partnership interest it holds in the
Owning Partnership which it purchased from the Company. In addition, each
Purchase Agreement provides that the Investing Partnership shall pay the Company
an amount equal to a specified percentage of the Investing Partnership's share
of the net proceeds from capital transactions (such as the sale or refinancing
of the underlying property) in excess of certain amounts.
The limited partners purchase partnership interests in the Investing
Partnerships by agreeing to make capital contributions over approximately five
years to the Investing Partnership, which allows the Investing Partnership to
pay the purchase price for the Purchased Interest, including the Purchase Note.
Limited partners are typically permitted to pre-pay their scheduled capital
contributions. The limited partnership agreement of the Investing Partnership
provides that the limited partners are entitled to receive for a period not to
exceed five years distributions equal to between 11% and 12% per annum of their
then paid-in scheduled capital contributions. Pursuant to the management
contracts with the Owning Partnerships, the Company is required to pay the
Management Contract Obligations which support the property's operations and the
payment of such returns to the limited partners. During the fiscal year ended
January 31, 1997 and the nine months ended October 31, 1997, the Company paid
approximately $5.6 million and $5.2 million, respectively, with respect to its
Management Contract Obligations. The aggregate amount of such Management
Contract Obligations relating solely to returns to limited partners for the last
quarter of fiscal 1997 and for each of the fiscal years 1998 through 2002 based
on existing management contracts is $3.9 million, $15.4 million, $17.4 million,
$16.4 million, $11.2 million and $2.4 million, respectively. Such amounts of
Management Contract Obligations are calculated based upon paid-in scheduled
capital contributions of limited partners as of October 31, 1997 with respect to
fiscal 1997 and remaining scheduled capital contributions with respect to fiscal
years 1998 through 2002. Actual amounts of Management Contract Obligations in
respect of such contracts will vary based upon the timing and amount of such
capital contributions. Furthermore, such amounts of Management Contract
Obligations are calculated without regard to any cash flow the related
properties may generate, which
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cash flow would reduce such obligations, and are calculated without regard to
the Management Contract Obligations relating to future Syndications.
The Company anticipates that for at least the next two years, the
aggregate Management Contract Obligations with respect to existing and future
Syndications will exceed the aggregate cash flow generated by the related
properties, which will result in the need to utilize cash generated by the
Company from sources other than the operations of the Syndicated adult living
communities to meet its Management Contract Obligations (including payment of
required returns for distribution to limited partners) for these periods. In
general, the payment of expenses arising from obligations of the Company,
including Management Contract Obligations, have priority over earnings that
might otherwise be available for distribution to stockholders.
The initial five-year term of the management contracts and the related
Management Contract Obligations have expired for 10 Owning Partnerships which
Management Contract Obligations relate to fourteen Investing Partnerships.
Although the Company has no obligation to fund operating shortfalls after the
five-year term of the management contract, as of October 31, 1997, the Company
advanced an aggregate of approximately $400,000 to two Owning Partnerships to
fund operating shortfalls . In both cases, the Company had arranged for
Syndications involving multi-family properties that the Company acquired from
third parties and believed could be successfully converted to adult living
communities. The Company experienced difficulties in obtaining a sufficient
number of adult living tenants in these converted properties. One of these
conversion attempts was unsuccessful and the property is now being operated as a
multi-family property by a third-party managing agent. The other property has
experienced difficulties in its conversion to an adult living community, but the
conversion process is continuing. These advances are recorded as "Other
Partnership Receivables" on the Company's Consolidated Balance Sheet. The
Company has no present intention to attempt other conversions of multi-family
properties to adult living properties. The Company intends to structure future
Syndications to minimize the likelihood that it will be required to utilize the
cash it generates to make payments pursuant to the management contracts.
In the past, limited partners have been allowed to prepay capital
contributions. Prepayments of capital contributions do not result in the
prepayment of the related Purchase Notes. Instead, such amounts are loaned to
the Company by the Investing Partnership. Loans made prior to the reorganization
of the Company in 1996 were made to J&B Management Company and, as part of the
reorganization, were assumed by the Company. The purchase agreements provide
that, should any failure to repay any such loan occur, the Company must credit
to the Investing Partnership the amounts loaned at the time such amount would be
required to be paid by the Investing Partnership to meet its obligations then
due under the Purchase Note. As a result of such loans and such provisions of
the purchase agreements, the Company records the notes receivable corresponding
to the Purchase Notes net of such loans. Therefore, these prepayments act to
reduce the recorded value of the Company's notes receivable and reduce interest
income received by the Company. Pursuant to the terms of its Syndications, the
Company has the option not to accept future prepayments by limited partners of
capital contributions. The Company has not determined whether it will continue
to accept prepayments by limited partners of capital contributions.
After the initial five-year period, the limited partners are still
entitled to the same specified rate of return on their investment, but only to
the extent there are sufficient cash flows from the related adult living
communities. To the extent property cash flows are not sufficient to pay the
limited partners their specified return, the right to receive this shortfall
accrues until proceeds are available from a sale or refinancing of the property.
Under the management contracts, during the initial five-year period, the Company
is entitled to retain all cash flows in excess of the Management Contract
Obligations as an incentive management fee. Thereafter, the Company's incentive
management fee is 40% of the excess of cash flow over the amount necessary to
make the specified rate of return to the limited partners.. The remaining 60% of
cash flows are to be distributed by the Owning Partnerships to the Investing
Partnerships for distribution to limited partners.
All of the Syndicated adult living communities and the nursing home are
managed by the Company pursuant to written management contracts, which generally
have a five year term coterminous with the Company's Management Contract
Obligations. These five-year obligations have terminated for 10 of the 37 Owning
Partnerships which Management Contract Obligations relate to fourteen Investing
Partnerships. After the initial five-year term, the Management Contract
Obligations terminate and the management contracts are automatically renewed
each year, but are cancelable on 30 to 60 days notice at the election of either
the Company or the related Owning Partnership. The termination of any management
contracts would result in the loss of fee income, if any, under those contracts.
The Company is the managing general partner of 36 of the 37 Owning Partnerships
that own the Syndicated adult living communities and the nursing home managed by
the Company. The Company also is the general partner of 32 of the 41 adult
living Investing Partnerships formed to acquire
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equity interests in 37 of said Owning Partnerships. In general, under the terms
of the Investing Partnerships' partnership agreements, limited partners have
only limited rights to take part in the conduct or operation of the
partnerships. The partnership agreements for the 32 Investing Partnerships for
which the Company is the general partner provide that a majority in ownership
interests of the limited partners can remove the Company as the general partner
at any time. It is anticipated that all future Investing Partnership agreements
will contain the same right to remove the Company as a general partner. In
addition, the consent of a majority in ownership interests of limited partners
in such Investing Partnerships is required to be obtained in connection with any
sale or disposition of the underlying property.
The Company intends to continue to arrange for acquisitions of existing
adult living communities by utilizing mortgage financing and by arranging
Syndications. The Company plans to acquire between six and twelve existing adult
living communities over the next two years. However, competition to acquire such
communities has intensified, and there can be no assurance that the Company will
be able to acquire such communities on terms favorable enough to offset the
start-up losses associated with newly developed communities and the costs and
cash requirements arising from the Company's overhead and existing debt and
Management Contract Obligations. The Company is, and will continue to be, the
managing general partner of the partnerships that own acquired communities. The
Company does not intend to Syndicate any of its newly-developed adult living
communities.
In addition, the Company arranged for the sale of limited partnership
interests in two partnerships organized to make second mortgage loans to the
Company to fund approximately 20% of the costs of developing three new adult
living communities.
The Long-Term Care Market
The long-term care services industry encompasses a broad range of
accommodations and healthcare services that are provided primarily to seniors.
Independent-living communities attract seniors who desire to be freed from the
burdens and expense of home ownership, food shopping and meal preparation and
who are interested in the companionship and social and recreational
opportunities offered by such communities. As a senior's need for assistance
increases, the provision of assisted-living services in a community setting is
more cost-effective than care in a nursing home. A community which offers its
residents assisted-living services can provide assistance with various ADLs
(such as bathing, dressing, personal hygiene, grooming, ambulating and eating),
support services (such as housekeeping and laundry services) and health-related
services (such as medication supervision and health monitoring), while allowing
seniors to preserve a high degree of autonomy. Generally, residents of
assisted-living communities require higher levels of care than residents of
independent-living facilities, but require lower levels of care than residents
of skilled-nursing facilities.
Industry Trends
The Company believes its business benefits from significant trends
affecting the long-term care industry. The first is an increase in the demand
for elder care resulting from the continued aging of the U.S. population. U.S.
Bureau of Census shows that the average age of the Company's residents (83 years
old) places them within one of the fastest growing segments of the U.S.
population. While increasing numbers of Americans are living longer and
healthier lives, many choose community living as a cost-effective method of
obtaining the services and life-style they desire. Adult living facilities that
offer both independent and assisted-living services give seniors the comfort of
knowing that they will be able to "age in place" -- something they are
increasingly unable to do at home.
The primary consumers of long-term care services are persons over the
age of 65. This group represents one of the fastest growing segments of the
population. According to U.S. Bureau of the Census data, the number of people in
the U.S. age 65 and older increased by more than 27% from 1981 to 1994, growing
from 26.2 million to 33.2 million. Such census data also shows that the segment
of the population over 85 years of age, which comprises the largest percentage
of residents at long-term care facilities, is projected to increase by more than
37% between the years 1990 and 2000, growing from 3.0 million to 4.1 million.
The Company believes that these trends depicted in the graph below will
contribute to continued strong demand for adult living communities.
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Projected Percentage Change in the Elderly Population of the U.S.
1981 1990 1995 2000 2005 2010
---- ---- ---- ---- ---- ----
65-84 0 17.5% 25.2% 26.2% 27.3% 34.6%
85+ 0 28.4% 54.3% 76.3% 94.1% 112.7%
SOURCE: U.S. BUREAU OF THE CENSUS
A trend benefiting the Company, and especially its provision of
independent-living services, is that as the population of seniors swells, the
percentage of seniors that are disabled and need assistance with ADLs has
steadily declined. According to the National Long Term Care Surveys, a federal
study, disability rates for persons aged 65 and older have declined by 1 to 2
percent each year since 1982, the year the study was commenced. In 1982,
approximately 21% of the 65 and over population was disabled and in 1995 only
10% was disabled. This trend suggests that demand for independent living
services will increase in the future.
Other trends benefiting the Company include the increased financial net
worth of the elderly population, the changing role of women and the increase in
the population of individuals living alone. As the number of elderly in need of
assistance has increased, so too has the number of the elderly able to afford
residences in communities which offer independent and/or assisted-living
services. According to U.S. Bureau of the Census data, the median net worth of
householders age 75 or older has increased from $55,178 in 1984 and $61,491 in
1988 to $76,541 in 1991. Furthermore, according to the same source, the
percentage of people 65 years and older below the poverty line has decreased
from 24.6% in 1970 to 15.7% in 1980 to 12.2% in 1990. Historically, unpaid women
(mostly daughters or daughters-in-law) represented a large portion of the care
givers of the non-institutionalized elderly. The increased number of women in
the labor force, however, has reduced the supply of care givers, and led many
seniors to choose adult living communities as an alternative. Since 1970, the
population of individuals living alone has increased significantly as a
percentage of the total elderly population. This increase has been the result of
an aging population in which women outlive men by an average of 6.9 years,
rising divorce rates, and an increase in the number of unmarried individuals.
The increase in the number of the elderly living alone has also led many seniors
to choose to live in adult living communities.
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The increased financial net worth of the elderly population is
illustrated by the following chart:
Median Net Worth
1988 1991
---- ----
45-54 57,466 56,250
55-64 80,032 83,041
65+ 73,471 88,192
SOURCE: U.S. BUREAU OF THE CENSUS
Another trend benefiting the Company, and especially its provision of
assisted-living services, is the effort by the government, private insurers and
managed care organizations to contain health care costs by limiting lengths of
stay, services, and reimbursement amounts. This has resulted in hospitals
discharging patients earlier and referring them to nursing homes. At the same
time, nursing home operators continue to focus on providing services to
sub-acute patients requiring significantly higher levels of skilled nursing
care. The Company believes that this "push down" effect has and will continue to
increase demand for assisted-living facilities that offer the appropriate levels
of care in a non-institutional setting in a more cost-effective manner. The
Company believes that all of these trends have, and will continue to, result in
an increasing demand for adult living facilities which provide both independent
and assisted-living services.
Strategy
Growth. The Company's growth strategy focuses on the development of
communities offering both independent and assisted-living apartment units and on
continued intensive communities management. The Company believes that there are
numerous markets that are not served or are underserved by existing adult living
communities and intends to take advantage of these circumstances, plus the
present availability of construction financing on favorable terms, to develop
new communities of its own design in desirable markets. Historically, the
Company has expanded by acquisition of existing communities. The Company has
taken advantage of the inexperience and operating inefficiencies of the previous
owners of these communities and has improved the financial performance of these
properties by implementing its own management and marketing techniques. The
Company's sophistication in management and marketing is evidenced by its
approximate 93% occupancy rate at January 31, 1998 at the existing adult living
communities managed by the Company.
The Company will continue to acquire existing communities and intends
to arrange for these acquisitions, in part, by Syndications. The Company
believes that its continuing the practice of arranging for the acquisition of
adult living communities through Syndications will provide additional cash flow
to help the Company pursue its development program. Competition to acquire
existing adult living communities has intensified, and the Company anticipates
that, for at least the next year, it will not be able to acquire such
communities on terms favorable enough to offset the startup losses associated
with newly developed communities and the costs and cash requirements arising
from the Company's overhead and existing debt and Management Contract
Obligations. The Company also believes its established ability to privately
place equity and debt securities could enhance its ability to pursue its
development plan.
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New Development. While the acquisition of existing adult living
communities utilizing Syndications will continue to play a significant role in
the Company's expansion program, the primary focus of the expansion program is
the development of new adult living communities. The Company's development plan
emphasizes a "prototype" adult living community that it has designed. The
Company designed the prototype based upon its experience operating its existing
portfolio of communities. Because each of its adult living communities has a
different design, and due to the Company's experience in operating such
communities, the Company believes it has been able to identify certain
characteristics of the communities it operates which are beneficial. In addition
to incorporating the characteristics which the Company believes are beneficial,
the Company has incorporated the following features into the prototype which it
believes are innovative and make the prototype a "state of the art" community.
The prototype contains 142 adult living apartment units and will be
located on sites of up to seven acres. The Company believes that its development
prototype is larger than many independent-living and most assisted-living
communities, which typically range from 40 to 80 units. The Company believes
that the greater number of units will allow the Company to achieve economies of
scale in operations, resulting in lower operating costs per unit, without
sacrificing quality of service. These savings primarily are achieved through
lower staffing, maintenance and food preparation costs per unit, without
sacrificing quality of service. In that the time and effort required to develop
a community (including site selection, land acquisition, zoning approvals,
financing, and construction) do not vary materially for a larger community than
for a smaller one, developmental economies of scale also are realized in that
more apartment units are being produced for each community that is developed.
Common areas will include recreation areas, dining rooms, a kitchen,
administrative offices, an arts and crafts room, a multi-purpose room, laundry
rooms for each floor, a beauty salon/barber shop, a library reading area, card
rooms, a billiards room, a health center to monitor residents' medical needs and
assigned parking. The Company believes that the common areas and amenities
offered by its prototype represent the state of the art for independent-living
communities and are superior to those offered by smaller independent-living
communities or by most communities that offer only assisted living services. The
Company believes that such substantial common areas, which would often be
unaffordable in smaller communities, will provide the Company's prototype
communities with a competitive advantage over smaller communities. The Company
believes that these common areas will attract residents and promote continued
stable occupancy of its prototype communities. Unit sizes range from 368 square
feet for a studio to 871 square feet for a two bedroom/two bath unit. The
Company's prototype contains 46 studio apartments, 92 one bedroom/one bathroom
apartments and 4 two bedroom/two bathroom apartments, encompassing approximately
108,000 square feet. Each apartment unit will be a full apartment, including a
kitchen or kitchenette.
The Company anticipates that it will rent apartment units in its
prototype communities pursuant to annual leases on a strictly "private pay"
basis. The Company believes this "private pay" focus will allow it to increase
rental revenues as demographic pressure increases demand for adult living
communities and avoid potential financial difficulties it might encounter if it
were dependent on Medicare or other government reimbursement programs that may
suffer from health care reform, budget deficit reduction or other pending or
future government initiatives. The prototype community is targeted to the
"middle to upper-middle income" segment of the elderly population, which is the
broadest segment of the elderly population, and will allow the Company to
provide a high-quality level of service.
Each community will offer residents a choice between independent-living
and assisted-living services. As a result, the market for each community will be
broader than for communities that offer only either independent-living or
assisted-living services. Although the licensing requirements and the expense
and difficulty of converting between existing independent-living units and
assisted-living units typically make it impractical to accomplish such
conversions, the Company's prototype is designed to allow, at any time, for
conversion of units, at minimum expense, for use as either independent-living or
assisted-living units. Each community therefore may adjust its mix of
independent-living and assisted-living units as the market or existing residents
demand. The Company believes that this innovative feature distinguishes its
prototype community. The Company believes that part of the appeal of this type
of community is that residents will be able to "age in place" with the knowledge
that they need not move to another community if they require assistance with
ADLs. The Company believes that the ability to retain residents by offering them
higher levels of services will result in stable occupancy with enhanced revenue
streams.
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The Company's prototype also incorporates two interior courtyards, from
which the Company's "Grand Court"(R) name originates. These courtyards allow
residents to enjoy the outdoors while remaining in a secure environment. The
Company believes that this feature distinguishes its prototype community.
In summary, the Company believes that the size, design and target
markets of its prototype and the convertibility of its apartments to either
independent or assisted-living units will result in "state of the art"
communities that will provide an excellent vehicle for economic growth.
Market Selection Process. In selecting geographic markets for potential
expansion, the Company considers such factors as a potential market's
population, demographics and income levels, including the existing and
anticipated future population of seniors who may benefit from the Company's
services, the number of existing and anticipated long-term care communities in
the market area and the income level of the target population. While the Company
does not apply its market selection criteria mechanically or inflexibly, it
generally seeks to select adult living community locations that are non-urban
with populations of no more than 100,000 people and containing 3,000 elderly
households within a 20-mile radius with an annual income of at least $35,000,
and have a regulatory climate that the Company considers favorable toward
development. Communities with these characteristics are referred to as secondary
markets as opposed to primary markets, which are major urban centers, or
tertiary markets, which are smaller rural communities. The Company has found
that secondary markets generally have a receptive population of seniors who
desire and can afford the services offered in the Company's adult living
communities. The Company believes that it can obtain zoning and other necessary
approvals in secondary markets more quickly and easily than would be the case in
primary markets. In focusing on secondary markets, the Company believes it will
avoid overdevelopment to which primary markets are prone and obtain the benefit
of demographic concentrations that do not exist in yet smaller markets. The
Company believes that high-quality, affordable employees are easier to attract
and retain in secondary markets than in primary markets.
Centralized Management. The adult living business is highly management
intensive. While the location of a community and its physical layout are
extremely important, another key to the success of an adult living community
lies in the ability to maximize its financial potential through sophisticated,
experienced management. Such success requires the establishment and supervision
of programs involving the numerous facets of an adult living community,
including menu planning, food and supply purchasing, meal preparation and
service, assistance with "activities of daily living," recreational activities,
social events, health care services, housekeeping, maintenance and security. The
Company's strategy emphasizes centralized management in order to achieve
operational efficiencies and ensure consistent quality of services. The Company
has established standardized policies and procedures governing, among other
things, social activities, maintenance and housekeeping, health care services,
and food services. An annual budget is established by the Company for each
community against which performance is tested each month.
Marketing. Marketing is critical to the rent up and continued high
occupancy of a community. The Company's marketing strategy focuses on enhancing
the reputation of the Company's communities and creating awareness of the
Company and its services among potential referral sources. The Company's
experience is that satisfied residents and their families are an important
source of referrals for the Company. In addition, the Company plans to use its
common community design and its "The Grand Court"(R) trademarked name to promote
national brand-name recognition. The Company has adopted the trademarked name.
Historically, adult living communities have generally been independently owned
and operated and there has been little national brand-name recognition. The
Company believes that national recognition will be increasingly important in the
adult living business. The Company intends to continuously use its trademarked
name in its business activities, and the life of this trademark will extend for
the duration of its use. The Company considers this trademark to be a valuable
intangible intellectual property asset.
Services
It is important to identify the specific tastes and needs of the
residents of an adult living community, which can vary from region to region and
from one age group to the next. Residents who are 70 years old have different
needs than those who are 85. The Company has retained a gerontologist to insure
that programs and activities are suitable for all of the residents in a
community and that they are adjusted as these residents "age in place". Both
independent and assisted-living services will be offered at all of the Company's
newly, developed communities.
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Basic Service and Care Package. The Company provides three levels of
service at its adult-living communities:
Level I, Independent Living, includes three meals per day, weekly
housekeeping, activities program, 24-hour security and transportation for
shopping and medical appointments.
Level II, Catered Living, offers all of the amenities of Level I in
addition to all utilities, personal laundry and daily housekeeping.
Level III, Assisted Living, provides three meals per day, daily
housekeeping, 24-hour security, all utilities, medication management, activities
and nurse's aides to assist the residents with any ADLs which they might
require. Rehabilitative services such as physical and speech therapy are also
provided by licensed third party home health care providers. Each resident can
design a package of services that will be monitored by his or her own physician.
Several of the Company's Syndicated communities are designed to meet the needs
of assisted living residents who suffer from the early stages of alzheimer's or
dementia.
The Company charges an average fee of $1,400 per month for Level I
services, $1,700 per month for Level II services, and $2,000 per month for Level
III services, but the fee levels vary from community to community. Residents at
the communities which offer services for early stages of Alzheimer's or dementia
pay an average of an additional $500 per month for such services. As the
residents of the communities managed by the Company continue to age, the Company
expects that an increasing number of residents will utilize Level III services.
The Company's internal growth plan is focused on increasing revenue by
continuing to expand the number and diversity of its tiered additional
assisted-living services and the number of residents using these services.
Communities
The Company currently manages 37 adult living communities containing
5,265 adult living apartment units and one nursing home containing 57 beds. One
of the Company's adult living communities contains 70 nursing home beds. The
following chart sets forth information regarding the communities managed by the
Company:
<TABLE>
<CAPTION>
Average
Number of Year Occupancy %
Community(1) State Units Acquired(2) for fiscal 1997(8)
- ---------------------------------- ------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
The Grand Court Mesa Arizona 174 1997 99%
The Grand Court Phoenix Arizona 136 1991 99%
The Grand Court Fort Myers Florida 184 1989 94%
The Grand Court Lakeland Florida 126 1996 73%
The Grand Court Lake Worth Florida 170 1992 85%
The Grand Court North Miami Florida 189 1995 68%
The Grand Court Pensacola Florida 60 1993 97%
The Grand Court I Pompano Florida 72 1994 94%
Beach(3)
The Grand Court II Pompano Florida 42 1994 73%(7)
Beach(3)
The Grand Court Tampa Florida 164 1997 99%
The Grand Court Tavares Florida 94 1995 98%
The Grand Court Winterhaven Florida 133 1997 92%
The Grand Court Belleville Illinois 76 1993 100%
</TABLE>
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<TABLE>
<CAPTION>
Average
Number of Year Occupancy %
Community(1) State Units Acquired(2) for fiscal 1997(8)
- ---------------------------------- ------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
The Grand Court II Kansas City Kansas 127 1994 99%
The Grand Court Overland Park Kansas 275 1997 100%(7)
The Grand Court Adrian Michigan 73 1998 100%
The Grand Court Farmington Michigan 164 1993 100%
Hills
The Grand Court Novi Michigan 114 1994 99%
The Grand Court Westland Michigan 153 1997 100%
The Grand Court I Kansas City Missouri 173 1989 100%
The Grand Court III Kansas Missouri 217 1989 80%(7)
City(4)
The Grand Court Las Vegas Nevada 152 1991 97%
The Grand Court Albuquerque New Mexico 140 1997 91%
The Grand Court Columbus Ohio 120 1994 97%
The Grand Court Dayton Ohio 185 1994 100%
The Grand Court Findlay Ohio 73 1992 89%
The Grand Court Springfield Ohio 77 1992 90%
The Grand Court I Chattanooga Tennessee 143(5) 1995 82%
The Grand Court II Chattanooga Tennessee 146 1995 100%
The Grand Court Memphis Tennessee 197 1992 96%
The Grand Court Morristown Tennessee 197 1996 65%(7)
The Grand Court Bryan Texas 180 1992 94%
The Grand Court Garland Texas 112 1997 84%(7)
The Grand Court Longview Texas 132 1990 96%
The Grand Court Lubbock Texas 139 1991 94%
The Grand Court I San Antonio Texas 198 1993 97%
The Grand Court II San Antonio Texas 57(6) 1995 86%
The Grand Court Weatherford Texas 60 1996 84%
The Grand Court Bristol Virginia 98 1995 100%
</TABLE>
- ------------------
(1) In certain cases, more than one Investing Partnership owns an interest in
one Owning Partnership. There are therefore, more Investing Partnerships
than there are Owning Partnership. One of the Owning Partnerships owns two
adult living communities and another Owning Partnership owns one adult
living community and one nursing home. In addition, the Company's
communities in Pompano Beach, Florida are adjacent to one another and are
counted as one property. As a result, there are 39 properties listed, but
only 37 Owning Partnerships. In addition,
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this chart does not include the three recently completed adult living
communities that have been developed by the Company in that such
communities are in the early stages of their initial lease-up period.
(2) Represents year in which the Company or an affiliate of the Company
acquired the community.
(3) These are adjacent properties and are counted as one adult living
community.
(4) A portion of the units at The Grand Court III Kansas City are currently
rented as residential apartment units.
(5) Grand Court I Chattanooga's unit count includes a 70-bed nursing wing.
(6) Grand Court II San Antonio is a 57-bed licensed nursing facility.
(7) Occupancy percentage includes 1-2 units occupied by staff.
(8) The average occupancy percentage of each individual community was
determined by adding the average occupancy percentages as of the end of
each month in which the individual community was operated by the Company
and dividing that number by the total number of months the community was
operated by the Company in fiscal 1997. The average monthly occupancy
percentage for each individual community was determined by dividing the
number of occupied units in the individual community as of the end of the
month by the total number of apartment units in the individual community.
All 37 Syndicated adult living communities and the nursing home are
managed by the Company in its capacity as property manager and, for all but one
of the related Owning Partnerships, as managing general partner. Because the
Company serves as both the managing general partner and the property manager, it
receives partnership administration fees and property management fees. As the
managing general partner of these partnerships, the Company generally has full
authority and power to act for the partnerships as if it were the sole general
partner. The Company has fiduciary responsibility for the management and
administration of these partnerships and, subject to certain matters requiring
the consent of the other partners such as a sale of the related property, may
generally, on behalf of the partnerships, borrow money, execute contracts,
employ persons and services, compromise and settle claims, determine and pay
distributions, prepare and distribute reports, and take such other actions which
are necessary or desirable with respect to matters affecting the partnerships or
individual partners.
Operations
Corporate. Over the past ten years the Company has developed extensive
policies, procedures and systems for the operation of its adult-living
communities. The Company also has adopted a formal quality assurance program. In
connection with this program the Company conducts a minimum of two full-day
annual quality assurance reviews at each community. The entire regional staff
team participates in the review which thoroughly examines all aspects of the
long-term care community from the provision of services to the maintenance of
the physical buildings. The reports generated from these quality assurance
reviews are then implemented by the community administrator. Corporate
headquarters also provides human resources services, a licensing facilitator,
and in-house accounting and legal support systems.
Regional. The Company has nine regional administrators: three
responsible for nine Florida communities, and one community in Texas; one
responsible for three communities in Tennessee; one responsible for two
communities in Arizona, and one community in each of Nevada, and New Mexico; one
responsible for two communities in Kansas, two communities in Missouri, and
three communities in Michigan; one responsible for four communities in Ohio and
one community in Illinois and one community in Virginia; one responsible for one
community in Tennessee and six communities in Texas, including the nursing home
operated by the company. The Company also has a regional administrator and a
registered dietician who oversee the food division. Each regional administrator
is reported to by the manager of those communities he oversees.
Community. The management team at each community consists of an
administrator, who has overall responsibility for the operation of the
community, an activity director, a marketing director and, at certain larger
communities, one or two assistant administrators. Each community which offers
assisted-living services has a staff responsible for the assisted-living
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care giving services. This staff consists of a lead resident aide, a medication
room aide, certified nurse aides and trained aides, and, in those states which
so require, registered nurses. At least one staff member is on duty 24 hours per
day to respond to the emergency or scheduled 24-hour assisted-living services
available to the residents. Each community has a kitchen staff, a housekeeping
staff and a maintenance staff. The average community currently operated by the
Company has 40 to 50 full-time employees depending on the size of the community
and the extent of services provided in that community. Based upon its experience
in operating adult living communities in both primary and secondary markets, the
Company believes that its secondary market focus will make it easier for the
Company to attract and retain high-quality, affordable staff.
The Company places emphasis on diet and nutrition, as well as preparing
attractively presented healthy meals which can be enjoyed by the residents. The
Company's in-house food service program is led by a regional administrator who
reviews all menus and recipes for each community. The menus and recipes are
reviewed and changed based on consultation with the food director and input from
the residents. The Company provides special meals for residents who require
special diets.
Employees. The Company emphasizes maximizing each employee's potential
through support and training. The Company's training program is conducted on
three levels. Approximately six times per year, corporate headquarters staff
conduct training sessions for the management staff in the areas of supervision
and management skills, and caring for the needs of an aging population. At the
regional level, regional staff train the community staff on issues such as
policies, procedures and systems, activities for the elderly, the administration
and provision of specific services, food service, maintenance, reporting systems
and other operational areas of the business. At the community level, the
administrators of each community conduct training sessions on at least a monthly
basis relating to various practical areas of care-giving at the community. These
monthly sessions cover, on an annual basis, all phases of the community's
operations, including special areas such as safety, fire and disaster
procedures, resident care, and policies and procedures.
Competition
The senior housing and health care industries are highly competitive
and the Company expects that both the independent-living business, and
assisted-living businesses in particular, will become more competitive in the
future. The Company will continue to face competition from numerous local,
regional and national providers of long-term care whose communities and services
are on either end of the senior care continuum. The Company will compete in
providing independent-living services with home health care providers and other
providers of independent-living services, primarily on the basis of quality and
cost of communities and services offered. The Company will compete in providing
assisted-living with other providers of assisted-living services, skilled
nursing communities and acute care hospitals primarily on the bases of cost,
quality of care, array of services provided and physician referrals. The Company
also will compete with companies providing home based health care, and even
family members, based on those factors as well as the reputation, geographic
location, physical appearance of communities and family preferences. In
addition, the Company expects that as the provision of long-term care receives
increased attention, competition from new market entrants, including, in
particular, companies focused on independent and assisted-living, will grow.
Some of the Company's competitors operate on a not-for-profit basis or as
charitable organizations, while others have, or may obtain, greater financial
resources than those of the Company. However, the Company anticipates that its
most significant competition will come from other adult living communities
within the same geographic area as the Company's communities because
management's experience indicates that senior citizens frequently elect to move
into communities near their homes.
Moreover, in the implementation of the Company's expansion program, the
Company expects to face competition for the development of adult living
communities. Some of the Company's present and potential competitors are
significantly larger or have, or may obtain, greater financial resources than
those of the Company. Consequently, there can be no assurance that the Company
will not encounter increased competition in the future which could limit its
ability to attract residents or expand its business and could have a material
adverse effect on the Company's financial condition, results of operations and
prospects. In addition, if the development of new adult living communities
outpaces demand for those communities in certain markets, such markets may
become saturated. Such an oversupply of facilities could cause the Company to
experience decreased occupancy, depressed margins and lower operating results.
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Company History
In April, 1996, the Principal Stockholders reorganized their businesses
by consolidating them into the Company. Pursuant to the reorganization,
substantially all of the assets and liabilities of such businesses were
transferred to the Company in exchange for shares of the Company's Common Stock.
See "Certain Transactions". The primary predecessors of Grand Court Lifestyles,
Inc. are J&B Management Company, and Leisure Centers, Inc. J&B Management
Company is a private partnership founded in 1969 with a successful history in
the development and management of multi-family real estate and adult living
communities. J&B is located at the Company's offices in Fort Lee, New Jersey.
Prior to the formation of the Company in April, 1996, the Company's property
development and management operations were conducted through its affiliate,
Leisure Centers, Inc., located in Boca Raton, Florida. Leisure Centers, Inc. was
merged with and into the Company. Grand Court Lifestyles, Inc., its
subsidiaries, J&B Management Company and Leisure Centers, Inc. and their
affiliates are collectively referred to as the "Company".
Through the 1970's and early 1980's, the Company's primary focus was on
the acquisition, development, and management of multi-family properties. Senior
management, collectively, has over 80 years of experience in multi-family
housing, having had interests in 170 properties containing approximately 20,000
apartment units located in 22 states, primarily in the sun-belt. Beginning in
the mid-1980's, the Company's sole focus has been on the acquisition, and
management of adult living communities building one of the largest operating
portfolios of adult living communities in the nation, encompassing the entire
spectrum of the long-term care industry, from independent-living to
assisted-living, with a limited involvement in nursing homes. Senior management,
collectively, has over 40 years of experience in the adult living field. The
Company is one of the largest operators of adult living properties in the United
States. The Company currently has ownership interests in and manages properties
in 12 states including 37 adult living communities containing 5,265 adult living
apartment units (including 70 skilled nursing beds) and one nursing home
containing 57 skilled nursing beds.
Government Regulation
Regulations applicable to the Company's operations vary among the types
of communities operated by the Company and from state to state.
Independent-living communities generally do not have any licensing requirements.
Assisted-living communities are subject to less regulation than other licensed
health care providers but more regulation than independent-living communities.
However, the Company anticipates that additional regulations and licensing
requirements will likely be imposed by the states and the federal government.
Currently, California, New Jersey, Ohio, Massachusetts, Texas and Florida
require licenses to provide the assisted-living services provided by the
Company. The licensing statutes typically establish physical plant
specifications, resident care policies and services, administration and staffing
requirements, financial requirements and emergency service procedures. The
licensing process can take from two months to one year. New Jersey requires
Certificates of Need for assisted-living communities. The Company's communities
also must comply with the requirements of the ADA and are subject to various
local building codes and other ordinances, including fire safety codes. While
the Company relies almost exclusively on private pay residents, the Company
operates a nursing home containing 57 beds and one adult living community
operated by the Company contains 70 nursing home beds in which some residents
rely on Medicare. As a provider of services under the Medicare program, the
Company is subject to Medicare regulations designed to limit fraud and abuse,
violations of which could result in civil and criminal penalties and exclusion
from participation in the Medicare program. Revenues derived from Medicare
comprise less than 1% of the revenues of the communities operated by the
Company. The Company does not intend to expand its nursing home activities and
intends to pursue an exclusively "private-pay" clientele. The Company believes
it is in substantial compliance with all applicable regulatory requirements. No
actions are pending against the Company for non-compliance with any regulatory
requirement.
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose liability whether or not the owner or operator knows of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations, and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
any entity who arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may
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also be liable for these costs, as well as certain other costs, including
governmental fines and injuries to persons or properties. As a result, the
presence, with or without the Company's knowledge, of hazardous or toxic
substances at any property held or operated by the Company could have an adverse
effect on the Company's business, operating results and financial condition.
Although the Company has not incurred any material costs for removal or
remediation of hazardous or toxic substances, there can be no assurance that
this will remain the case in the future.
Under the ADA, all places of public accommodation are required to meet
certain federal requirements related to access and use by disabled persons. A
number of additional federal, state and local laws exist which also may require
modifications to existing and planned properties to create access to the
properties by disabled persons. While the Company believes that its properties
are substantially in compliance with present requirements or are exempt
therefrom, if required changes involve a greater expenditure than anticipated or
must be made on a more accelerated basis than anticipated, additional costs
would be incurred by the Company. Further legislation may impose additional
burdens or restrictions with respect to access by disabled persons, the costs of
compliance with which could be substantial.
Employees
As of the date hereof, the Company employs approximately 1,600 persons,
including 38 in the Company's principal executive offices. None of the Company's
employees is covered by collective bargaining agreements. The Company believes
its employee relations are good.
Legal Proceedings
J&B Management Company, a predecessor of the Company ("J&B Management
Company") that managed certain multi-family properties for which the United
States Department of Housing and Urban Development ("HUD") provided mortgage
insurance, was the subject of an audit and investigation by HUD during 1990 and
1991. Pending the conclusion of the inquiry, J&B Management Company, its
partners and key employees were suspended by HUD from the management of such
multi-family properties. On April 10, 1991, HUD and J&B Management Company
entered into a Settlement Agreement which provided, among other things, that HUD
vacate the suspension retroactively. Certain conditions were imposed in the
Settlement Agreement, including that J&B Management Company and such principals
and employees not engage in the management of HUD-insured properties for an
indefinite period of time. Pursuant to a letter agreement dated January 11,
1994, (i) J & B Management Company agreed to reimburse various properties for
certain expenses, aggregating approximately $445,000, deemed not eligible by
HUD, (ii) J & B Management Company agreed to pay HUD's costs for the audit, and
to reimburse HUD for certain subsidy overpayments, aggregating approximately
$861,000, and (iii) all issues relating to the audit and investigation were
concluded and fully resolved.
On November 14, 1997, an investor in a limited partnership (the "First
Partnership") which was formed to invest in a second partnership which was
formed to develop and own an adult living community (the "Second Partnership"),
filed a lawsuit, Palmer v. Country Estates Associates Limited Partnership,
et.al., in the United States District Court, District of New Jersey. The Company
has never managed the property owned by the Second Partnership and is not a
general partner in the Second Partnership or the First Partnership. A
predecessor of the Company was a general partner of the Second Partnership. The
Company has never been a general partner of the First Partnership. The
defendants in the suits are the First Partnership, the general partners of the
First Partnership, the Second Partnership, two affiliates of the Company, and
the Company (collectively the "Defendants"). The Plaintiff is alleging a breach
of the First Partnership's partnership agreement, negligent misrepresentation,
fraud, negligence, breach of guarantee and mail fraud. The plaintiff is seeking
(i) the return of his original investment ($100,000), (ii) market interest on
such investment for the period 1987-1997 and (iii) unspecified damages. The
Company believes the lawsuit is without merit and intends to vigorously contest
the case.
The Company is involved in various lawsuits and other matters arising
in the normal course of business, including employment-related claims. In the
opinion of management of the Company, although the outcomes of these claims and
suits are uncertain, in the aggregate they should not have a material adverse
effect on the Company's financial position or results of operations. The Company
business entails an inherent risk of liability. In recent years, participants in
the long-term care industry have become subject to an increasing number of
lawsuits alleging malpractice or related legal claims, many of which seek large
amounts and result in significant legal costs. The Company expects that from
time to time it may be subject to such suits as a result of the nature of its
business. The Company currently maintains insurance policies in amounts and with
such coverage and deductibles as it deems appropriate, based on the nature and
risks of its business, historical experience and industry standards. There can
be no assurance, however, that claims in excess of the Company's insurance
coverage or
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claims not covered by the Company's insurance coverage will not arise. A
successful claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect on the Company's
operating results and financial condition. Claims against the Company,
regardless of their merit or eventual outcome, may also have a material adverse
effect on the Company's ability to attract residents or expand its business and
would require management to devote time to matters unrelated to the operation of
the Company's business. In addition, the Company's insurance policies must be
renewed annually, and there can be no assurance that the Company will be able to
obtain liability insurance coverage in the future or, if available, that such
coverage will be on acceptable terms.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John Luciani(1) 65 Chairman of the Board and Chief Executive Officer
Bernard M. Rodin(2) 67 Chief Operating Officer, President and Director
John W. Luciani III 45 Executive Vice President and Director
Paul Jawin 42 General Counsel and Senior Vice President
Dorian Luciani 42 Senior Vice President - Acquisition and Construction
Deborah Luciani 41 Vice President - New Business Development and Acquisitions
Catherine V. Merlino 32 Chief Financial Officer and Vice President
Edward J. Glatz 55 Vice President - Construction
Keith Marlowe 35 Secretary
Walter Feldesman(1)(2) 80 Director
Leslie E. Goodman(1)(2) 53 Director
</TABLE>
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN LUCIANI, Chief Executive Officer and Chairman of the Board of
Directors, founded the earliest predecessor of the Company in 1969 and has been
engaged in a number of business activities and investments since 1952.
Commencing in 1960, he entered into the real estate development and construction
business, concentrating initially on the development, construction and sale of
residential high-rise apartment buildings and single-family homes and
subsequently on the acquisition and development of multi-family rental housing
complexes. Since 1986, he has concentrated on the acquisition, development and
financing of adult living communities for the elderly. Mr. Luciani founded the
earliest predecessor of the Company with Bernard M. Rodin in 1969. Mr. Luciani
was a general partner of three Protected Partnerships, but withdrew as a general
partner prior to their filing the respective Chapter 11 Petitions.
BERNARD M. RODIN, Chief Operating Officer, President and Director, has
been engaged, since the formation of the earliest predecessor of the Company in
1969, in the financing of property acquisitions by arranging for the sale of
partnership interests and in property management. This activity initially
focused on the Company's multi-family housing portfolio and, since 1986, on the
Company's adult living communities. Mr. Rodin has a bachelor of science degree
from the City University of New York. Mr. Rodin is a certified public accountant
and was actively engaged in the practice of public accounting prior to founding
the earliest predecessor of the Company with John Luciani in 1969. Mr. Rodin was
a general partner of three Protected Partnerships, but withdrew as a general
partner prior to their filing the respective Chapter 11 Petitions.
JOHN W. LUCIANI III, Executive Vice President and Director, a son of
John Luciani, joined the Company in 1975 and has since been actively involved in
the management and operation of the Company's property portfolios, initially
focusing on multi-family housing and later on the Company's adult-living
communities. Mr. Luciani graduated from Fairleigh Dickinson University with both
a bachelor of science and a master of business administration degree.
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PAUL JAWIN, General Counsel and Senior Vice President, a son-in-law of
Bernard M. Rodin, joined the Company in May 1991. His activities primarily
involve the various legal and financial aspects of the Company's business
including its debt financing and matters involving the Company's equity and debt
securities. Mr. Jawin is an attorney and was actively engaged in a real
estate/corporate practice prior to joining the Company. Mr. Jawin graduated from
Ithaca College with a bachelor of science degree in history and earned a juris
doctor degree from Syracuse University School of Law.
DORIAN LUCIANI, Senior Vice President - Acquisition and Construction, a
son of John Luciani, joined the Company in 1977 and was initially involved in
the acquisition, development and management of the Company's multi-family
housing portfolio. Later, Mr. Luciani focused exclusively on the acquisition and
development of the Company's adult living communities. Mr. Luciani graduated
from Fairleigh Dickinson University with a bachelor of science degree in
business.
DEBORAH LUCIANI, Vice President - New Business Development and
Acquisitions, a daughter of John Luciani, joined the Company in January 1992.
Ms. Luciani is primarily involved in new business development, acquisitions,
obtaining financing and various marketing responsibilities for the Company's
existing and new adult living communities. Prior to joining the Company, Ms.
Luciani worked for Prudential Bache Securities as an oil futures trader from
November 1988 to December 1991. Ms. Luciani graduated from Boston University
with a bachelor of science degree, a master of political science degree and a
master of economics degree.
CATHERINE V. MERLINO, Chief Financial Officer and Vice President,
joined the Company in September 1993, and has since been actively involved in
the financial reporting and analysis needs of the Company. Prior to joining the
Company, Mrs. Merlino was a Senior Accountant from June 1989 through June 1993
and a Supervisor from June 1993 through September 1993 at Feldman Radin & Co.,
P.C., a public accounting firm located in New York City. Mrs. Merlino graduated
from Long Island University in May 1987 with a bachelor of science degree in
Accounting and became a certified public accountant in February 1992.
EDWARD J. GLATZ, Vice President - Construction, joined the Company in
September 1992 and has been actively involved in the design, site selection and
construction for the new "Grand Court" adult living communities. Additionally,
Mr. Glatz supervises the capital improvements of the Company's real estate
holdings. Prior to joining the Company, Mr. Glatz performed asset management
duties for Kovens Enterprises, a real estate development company, from June 1988
until September 1992.
KEITH MARLOWE, Secretary of the Company, joined the Company in August
1994. From 1987 through August 1994, Mr. Marlowe, an attorney, was an associate
in the tax department at the law firm of Reid & Priest LLP where he was involved
in a general transactional tax practice. His activities primarily involve the
various legal and financial aspects of the Company's business. Mr. Marlowe
graduated from the University of Virginia with a bachelor of science degree in
economics. Mr. Marlowe earned a juris doctor degree from University of
California Los Angeles School of Law and an LLM in Taxation from New York
University School of Law.
WALTER FELDESMAN, Director, has been Of Counsel to the law firm of Baer
Marks & Upham LLP since March 1993 and for more than five years prior thereto
was a partner of Summit, Rovins and Feldesman. Mr. Feldesman is currently a
Director and Chairman of the Audit Committee of Sterling Bancorp and a Director
of its subsidiary, Sterling National Bank & Trust Co. Mr. Feldesman is a member
of the Board of Advisors of the National Institute on Financial Services for
Elders, the National Academy of Elder Law Attorneys, the American Association of
Homes for the Aging, the National Council on the Aging and American Society on
Aging. Mr. Feldesman is also special counsel on elderlaw to United Senior Health
Cooperative. He has authored an article entitled "Long-Term Care Insurance Helps
Preserve an Estate," and a recently published work entitled the Eldercare Primer
Series. Mr. Feldesman has also authored a recently published book entitled
"Dictionary of Eldercare Terminology". He has written another book
"Medicare-Medicaid-Medicap under the Balanced Budget Act of 1997" which is
expected to be published in February, 1998. Mr. Feldesman has a bachelor's
degree in economics from New York University. Mr. Feldesman earned an LLB from
Harvard Law School.
LESLIE E. GOODMAN, Director, has been the Chairman of CREOL Inc.,
Commercial Real Estate On-line, which provides information over the Internet to
real estate professionals, since January 1997. Until December 1996 Mr. Goodman
was the Area President for the North Jersey Region for First Union National Bank
and a Senior Executive Vice President of First Union Corporation. From September
1990 through January 1994, he served as President and Chief Executive Officer
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<PAGE>
of First Fidelity Bank, N.A., New Jersey. From January 1994 to December 1995,
Mr. Goodman served as a Senior Executive Vice President and a Director of First
Fidelity Bank, National Association until it was merged into First Union. From
January 1990 until December 1995, he also served as Senior Executive Vice
President, member of the Office of the Chairman and a Director of First Fidelity
Bancorporation. Mr. Goodman served as the Chairman of the New Jersey Bankers
Association from March 1995 to March 1996. He is a member of the Board of
Directors and Chairman of the Audit Committee of Wawa Inc. and a member of the
Board of Directors of Tear Drop Golf Company, Inc.
Director Compensation
The Company will pay each Director who is not an employee of the
Company $1,000 per Board meeting attended and $500 per Committee meeting
attended. All Directors are reimbursed by the Company for their out-of-pocket
expenses incurred in connection with attendance at meetings of, and other
activities related to service on, the Board of Directors or any Board Committee.
Audit Committee
The Board of Directors established an Audit Committee in June 1996. The
Audit Committee is currently composed of Messrs. Rodin, Feldesman and Goodman.
The Audit Committee's duties include reviewing internal financial information,
monitoring cash flow, budget variances and credit arrangements, reviewing the
audit program of the Company, reviewing with the Company's independent
accountants the results of all audits upon their completion, annually selecting
and recommending independent accountants, overseeing the quarterly unaudited
reporting process and taking such other action as may be necessary to assure the
adequacy and integrity of all financial information distributed by the Company.
Compensation Committee
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee is currently composed of Messrs. John Luciani,
Feldesman and Goodman. The Compensation Committee recommends compensation levels
of senior management and works with senior management on benefit and
compensation programs for Company employees.
Executive Compensation
The following table shows, as to the Chief Executive Officer and each
of the four other most highly compensated executive officers information
concerning compensation accrued for services to the Company in all capacities
during fiscal 1996 and fiscal 1997, respectively.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Other All
Annual Other
Name and Principal Position Year Salary Bonus($) Compensation($) Compensation($)
- ------------------------------------------------ ---------- ----------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
John Luciani, Chairman of the Board and Chief fiscal
Executive Officer(1)............................. 1996 $500,000 -- -- $497,000
fiscal
1997 $600,000 -- -- --
Bernard M. Rodin, Chief Operating Officer, fiscal
President and Director(1)........................ 1996 $500,000 -- -- $497,000
fiscal
1997 $600,000 -- -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Other All
Annual Other
Name and Principal Position Year Salary Bonus($) Compensation($) Compensation($)
- ------------------------------------------------ ---------- ----------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
John W. Luciani, III, Executive Vice President and fiscal
Director......................................... 1996 $350,000 -- -- --
fiscal
1997 $353,846 -- -- --
fiscal
Dorian Luciani, Senior Vice President............ 1996 $350,000 -- -- --
fiscal
1997 $353,846 -- -- --
Paul Jawin, General Counsel and Senior Vice fiscal
President........................................ 1996 $325,000 -- -- --
fiscal
1997 $344,327 -- -- --
</TABLE>
- ------------------------------
(1) Messrs. Luciani and Rodin received dividends and distributions from the
Company's predecessors but did not receive salaries. As of April 1,
1996 a salary for each of Messrs. Luciani and Rodin was established at
the rate of $600,000 per year. In fiscal 1996 such officers also
received $397,000 each as a dividend and $100,000 each for the period
from February 1, 1996 until April 1, 1996, which was in the form of a
dividend but which is classified as officers' compensation for
financial statement purposes.
Compensation Committee Interlocks and Insider Participation
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee currently consists of Messrs. John Luciani,
Feldesman and Goodman. None of the executive officers of the Company currently
serves on the compensation committee of another entity or on any other committee
of the board of directors of another entity performing similar functions. For a
description of transactions between the Company and members of the Compensation
Committee or their affiliates, see "Certain Transactions."
Stock Plans
1996 Stock Option and Performance Award Plan
The Company has adopted the 1996 Stock Option and Performance Award
Plan (the "Plan"), which authorizes the grant to officers, key employees and
directors of the Company and any parent or subsidiary of the Company of
incentive or non-qualified stock options, stock appreciation rights, performance
shares, restricted shares and performance units. Under the Plan, directors who
are not employees of the Company may not be granted incentive stock options. The
Company plans to reserve 2,500,000 shares of Common Stock for issuance pursuant
to the Plan. Shares issued pursuant to the Plan will be subject to the Transfer
Restrictions. As of the date hereof, no options had been granted under the Plan.
The Plan will be administered by the Board of Directors. The Board of
Directors will determine the prices and terms at which options may be granted.
Options may be exercisable in installments over the option period, but no
options may be exercised after ten years from the date of grant. Stock
appreciation rights may be granted in tandem with options or separately.
The exercise price of any incentive stock option granted to an eligible
employee may not be less than 100% of the fair market value of the shares
underlying such option on the date of grant, unless such employee owns more than
10% of
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<PAGE>
the outstanding Common Stock or stock of any subsidiary or parent of the
Company, in which case the exercise price of any incentive stock option may not
be less than 110% of such fair market value. No option may be exercisable more
than ten years after the date of grant and, in the case of an incentive stock
option granted to an eligible employee owning more than 10% of the outstanding
Common Stock or stock of any subsidiary or parent of the Company, no more than
five years from its date of grant. Incentive stock options are not transferable,
except upon the death of the optionee. In general, upon termination of
employment of an optionee (other than due to death or disability), all options
granted to such person which are not exercisable on the date of such termination
immediately expire, and any options that are so exercisable will expire three
months following termination of employment in the case of incentive stock
options, but not until the date the options otherwise would expire in the case
of non-qualified stock options. However, all options will be forfeited
immediately upon an optionee's termination of employment for good cause and upon
an optionee's voluntary termination of employment without the consent of the
Board of Directors.
Upon an optionee's death or termination of employment due to
disability, all options will become 100% vested and will be exercisable (i) in
the case of death, by the estate or other beneficiary of the optionee at any
time prior to the date the option otherwise would expire and (ii) in the case of
the disability of the optionee, by the optionee within one year of the date of
such termination of employment in the case of incentive stock options, or at any
time prior to the date the option otherwise would expire in the case of
non-qualified stock options.
At the time each grant of restricted shares or performance shares or
units or stock appreciation rights is made, the Board of Directors will
determine the duration of the performance or restriction period, if any, the
performance targets, if any, for earning performance shares or units, and the
times at which restrictions placed on restricted shares shall lapse.
CERTAIN TRANSACTIONS
In the first quarter of fiscal 1996, the Principal Stockholders
reorganized their businesses by consolidating them into the Company. The
Principal Stockholders transferred all of the issued and outstanding stock of
each of 16 Sub-chapter S corporations along with various other assets and
liabilities to the Company in exchange for 3,252,380 shares of the Company's
Common Stock. A partnership in which the Principal Stockholders are the sole
partners transferred to the Company substantially all of its assets, subject to
substantially all of its liabilities, in exchange for 1,626,190 shares of the
Company's Common Stock. The partnership distributed the shares received to the
Principal Stockholders. Six Sub-chapter S corporations which were wholly-owned
by the Principal Stockholders were merged into the Company. Pursuant to the
mergers the shares of the six merged companies were converted into an aggregate
of 10,121,430 shares of the Company's Common Stock. After the reorganization was
complete, the Principal Stockholders owned an aggregate of 15,000,000 shares of
the Company's Common Stock.
Prior to the reorganization discussed above, the business of the
Principal Stockholders was conducted through a partnership and various
Sub-chapter S corporations. These entities and the Company paid dividends and
other distributions to each of the Principal Stockholders of $943,000, $850,000
and $397,000 in fiscal 1994, 1995 and 1996, respectively, exclusive of amounts
reflected as officers' compensation.
Messrs. Luciani and Rodin, the Chairman of the Board and President of
the Company, respectively, and entities controlled by them serve as general
partners (with interests ranging between 1% and 2%) of partnerships directly and
indirectly owning Multi-Family Properties and on account of such general partner
status have personal liability for recourse partnership obligations and own
small equity ownership interests in the partnerships. The Company holds (i)
notes, aggregating $107.1 million, net of deferred income, as of October 31,
1997, that are secured by the limited partnership interests in such partnerships
and (ii) other partnership receivables aggregating $54.8 million from such
partnerships at October 31, 1997. Messrs. Luciani and Rodin have provided
personal guarantees in certain circumstances to obtain mortgage financing for
certain adult living communities operated by the Company and for certain of the
Company's Investor Note Debt and Unsecured Debt, and the obligations thereunder
may continue. The aggregate amount of such debt personally guaranteed by each of
Messrs. Luciani and Rodin is approximately $47.2 million. In addition, Messrs.
Luciani and Rodin and certain employees will devote a limited portion of their
time to overseeing the third-party managers of Multi-Family Properties and one
adult living community in which the Company has financial interests in that it
holds the related Multi-Family Notes, but in which Messrs. Luciani and Rodin
have equity interests and the Company does not.
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<PAGE>
Subsequent to the reorganization, the Principal Stockholders and one of
their affiliates transferred the Assigned Interests to the Investing
Partnerships that own interests in the Protected Partnerships. The Assigned
Interests were owned personally by the Principal Stockholders and their
affiliate and provide additional assets at the Investing Partnership level and,
as a result, additional security for the related Multi-Family Notes. Two
Investing Partnerships related to these Protected Partnerships have agreed to
transfer the respective Assigned Interests back to the Principal Stockholders
and their affiliate if the applicable Protected Partnership emerges from its
bankruptcy proceeding with possession of its real property and improvements
which it owned at the time of its Chapter 11 Petition. In that the Principal
Stockholders transferred the Assigned Interests in July 1996, the Company
recorded a $21.3 million capital contribution in fiscal 1996. The bankruptcy
petitions and risk of loss faced by the Protected Partnerships resulted in the
Company recording a non-cash loss for fiscal 1996 in the amount of $18.4 million
(representing the recorded value of these Multi-Family Notes, net of deferred
income and net of any previously established reserves) due to the deemed full
impairment of the Multi-Family Notes. Each of the Principal Stockholders was a
general partner of three of the Protected Partnerships, but withdrew as a
general partner prior to such partnerships' filings of the respective Chapter 11
Petitions.
During Fiscal 1996 and the nine months ended October 31,1997 the
Company paid to Francine Rodin, the wife of Bernard M. Rodin, the Company's
Chief Operating Officer, President and a Director, $154,875 and $79,000,
respectively, as fees for introducing to the Company broker/dealers that have
assisted the Company in its Syndications of partnership interests and in placing
other securities offered by the Company. Mrs. Rodin will receive a fee with
respect to any future sales through such broker/dealers of such Syndicated
partnership interests and other securities offered by the Company, excluding
shares of Common Stock offered hereby. During Fiscal 1996, Mrs. Rodin received
consulting fees of $49,435 in connection with coordinating the Company's
marketing efforts and travel arrangements. Mrs. Rodin has been an employee of
the Company for the nine months ended October 31, 1997 and performs similar
services.
Walter Feldesman, a Director of the Company, is Of Counsel to the law
firm of Baer Marks & Upham LLP, which acts as counsel to the Company from time
to time. In addition, Mr. Feldesman is a director of Sterling National Bank &
Trust Co. which has entered into a revolving credit agreement with the Company
which permits the Company to borrow up to $8,000,000, of which $4,898,023 was
outstanding at October 31, 1997.
Michele R. Jawin, the daughter of Mr. Rodin and wife of Paul Jawin, the
Company's General Counsel and a Senior Vice President, is Of Counsel to Reid &
Priest LLP, which acts as securities counsel to the Company, including in
connection with this Offering.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of October 31,
1997, before and after giving effect to the Offering, regarding the beneficial
ownership of the Company's Common Stock by (i) each executive officer and
director of the Company, (ii) each stockholder known by the Company to
beneficially own 5% or more of such Common Stock, (iii) each Principal
Stockholder and (iv) all directors and officers as a group. Except as otherwise
indicated, the address of each beneficial holder of 5% or more of such Common
Stock is the same as the Company.
<TABLE>
<CAPTION>
Before Offering After Offering
----------------------- ------------------------
Shares
Beneficial Owner Number % Offered(1) Number %(1)
- ---------------- ------ ----- ---------- ------ ----
<S> <C> <C> <C> <C> <C>
John Luciani....................... 7,500,000 50 0 7,500,000 42.135
Bernard M. Rodin................... 7,500,000 50 0 7,500,000 42.135
All directors and officers
as a group...................... 15,000,000 100 0 15,000,000 84.27
</TABLE>
- ----------------
(1) Excluding any additional shares of Common Stock sold pursuant to the
Over-allotment Option. Each of the Principal Stockholders has granted to the
Underwriters an Over-allotment Option exercisable within 45 days after the
date of this Prospectus to purchase up to 210,000 shares of Common Stock.
Assuming the full exercise of the Over-allotment Option, the Principal
Stockholders would beneficially own collectively 14,580,000 shares or 81.91%
of the Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate provides for 40,000,000 authorized shares of
Common Stock. The Certificate also provides for 15,000,000 authorized shares of
Preferred Stock, par value $.0001 per share (the "Preferred Stock"). Upon
completion of the Offering (excluding any Common Stock sold pursuant to the
Over-allotment Option or the exercise of the Representative's Warrants or any
Common Stock issued pursuant to the Plan), there will be outstanding: (a)
17,800,000 shares of Common Stock, consisting of (i) 15,000,000 shares currently
owned by the Principal Stockholders and not offered hereby; and (ii) 2,800,000
shares to be sold by the Company hereby.
The following summary description relating to the Common Stock, and the
Preferred Stock does not purport to be complete. A description of the Company's
capital stock is contained in the Certificate, which is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. Reference is
made to such exhibit for a detailed description of the provisions thereof
summarized below.
Common Stock
Holders of the Common Stock are entitled to one vote per share and,
subject to the rights of the holders of the Preferred Stock (discussed below),
to receive dividends when and as declared by the Board of Directors, and to
share ratably in the assets of the Company legally available for distribution in
the event of the liquidation, dissolution or winding up of the Company. Holders
of the Common Stock do not have subscription, redemption or conversion rights,
nor do they have any preemptive rights. In the event the Company were to elect
to sell additional shares of its Common Stock following this Offering, investors
in this Offering would have no right to purchase such additional shares. As a
result, their percentage equity interest in the Company would be diluted. The
shares of Common Stock offered hereby will be, when issued and paid for,
fully-paid and not liable for further call or assessment. Holders of the Common
Stock do not have cumulative voting rights, which means that the holders of more
than half of the outstanding shares of Common Stock (subject to the rights of
the holders of the Preferred Stock) can elect all of the Company's directors, if
they choose to do so. In such event, the holders of the remaining shares would
not be able to elect any directors. The Board is empowered to fill any vacancies
on the Board. Except as otherwise required by the Delaware Law, all stockholder
action is taken by vote of a majority of the outstanding shares of Common Stock
voting as a single class present at a meeting of stockholders at which a quorum
(consisting of a majority of the outstanding shares of the Company's Common
Stock) is present in person or by proxy.
Preferred Stock
The Company is authorized by the Certificate to issue a maximum of
15,000,000 shares of Preferred Stock, in one or more series and containing such
rights, privileges and limitations, including voting rights, conversion
privileges and/or redemption rights, as may, from time to time, be determined by
the Board of Directors. Preferred Stock may be issued in the future in
connection with acquisitions, financings or such other matters as the Board of
Directors deems to be appropriate. In the event that any such shares of
Preferred Stock shall be issued, a Certificate of Designation, setting forth the
series of such Preferred Stock and the relative rights, privileges and
limitations with respect thereto, shall be filed with the Secretary of State of
the State of Delaware. The effect of such Preferred Stock is that the Company's
Board of Directors alone, within the bounds and subject to the federal
securities laws and the Delaware Law, may be able to authorize the issuance of
Preferred Stock which could have the effect of delaying, deferring or preventing
a change in control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may also
adversely affect the voting power of the holders of Common Stock, including the
loss of voting control to others.
Section 203 of Delaware Law
Section 203 of the Delaware Law prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the corporation; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date, the business combination is approved by the board of directors
and by the affirmative vote of at least 66-2/3%
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<PAGE>
of the outstanding voting stock that is not owned by the interested stockholder.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person, who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. Section 203 may
have a depressive effect on the market price of the Common Stock.
Anti-Takeover Effects of Provisions of the Company's Certificate of
Incorporation and By-Laws
Certain provisions of the Certificate and By-Laws of the Company
summarized in the following paragraphs will become operative immediately prior
to closing of this Offering and may be deemed to have an anti-takeover effect
and may delay or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including those attempts that might result
in a premium over the market price for the shares helddbrs. These provisions may
have a depressive effect on the market pric market price of the Common Stock.
Special Meeting of Stockholders. The Certificate provides that special
meetings of stockholders of the Company may be called only by the Board of
Directors. This provision will make it more difficult for stockholders to take
action opposed by the Board of Directors. This provision of the Certificate may
not be amended or repealed by the stockholders of the Company, except with the
approval of the holders of two-thirds of the Company's outstanding Common Stock.
No Stockholder Action by Written Consent. The Certificate provides that
no action required or permitted to be taken at any annual or special meeting of
the stockholders of the Company may be taken without a meeting, and the power of
stockholders of the Company to consent in writing, without a meeting, to the
taking of any action is specifically denied. Such provision limits the ability
of any stockholders to take action immediately and without prior notice to the
Board of Directors. Such a limitation on a majority stockholder's ability to act
might impact such person's or entity's decision to purchase voting securities of
the Company. This provision of the Certificate may not be amended or repealed by
the stockholders of the Company, except with the approval of the holders of
two-thirds of the Company's outstanding Common Stock.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-Laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company (a) in the case of an annual meeting that is called for a date that is
within 30 days before or after the anniversary date of the immediately preceding
annual meeting of stockholders, not fewer than 60 days nor more than 90 days
prior to such anniversary date and (b) in the case of the annual meeting to be
held during the first complete fiscal year following the date of this Prospectus
and in the case of an annual meeting that is called for a date that is not
within 30 days before or after the anniversary date of the immediately preceding
annual meeting, or in the case of a special meeting of stockholders called for
the purpose of electing directors, not later than the close of business on the
tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure of the date of the meeting was made, whichever
occurs first. The By-Laws also will specify certain requirements for a
stockholder's notice to be in proper written form. These provisions may preclude
some stockholders from bringing matters before the stockholders at an annual or
special meeting or from making nominations for directors at an annual or special
meeting. As set forth below, the By-Laws may not be amended or repealed by the
stockholders of the Company, except with the approval of holders of two-thirds
of the Company's outstanding Common Stock.
Adjournment of Meetings of Stockholders. The By-Laws provide that when
a meeting of stockholders of the Company is convened, the presiding officer, if
directed by the Board of Directors, may adjourn the meeting, if no quorum is
present for the transaction of business or if the Board of Directors determines
that adjournment is necessary or appropriate to enable the stockholders to
consider fully information the Board of Directors determines has not been made
sufficiently or timely available to stockholders or to otherwise effectively
exercise their voting rights. This provision will, under certain circumstances,
make more difficult or delay actions by the stockholders opposed by the Board of
Directors. The effect of such provision could be to delay the timing of a
stockholders' meeting, including in cases where stockholders have brought
proposals before the stockholders that are in opposition to those brought by the
Board of Directors and therefore may provide the Board of Directors with
additional flexibility in responding to such stockholder proposals. As set forth
below, the
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<PAGE>
By-Laws may not be amended or repealed by the stockholders of the Company,
except with the approval of holders of two-thirds of the Company's outstanding
Common Stock.
Amendment of the By-Laws. The Certificate provides that the By-Laws may
be amended or repealed by the Board of Directors and may not be amended or
repealed by the stockholders of the Company, except with the consent of holders
of two-thirds of the Company's outstanding Common Stock. This provision will
make it more difficult for stockholders to make changes to the By-Laws that are
opposed by the Board of Directors. This provision of the Certificate may not be
amended or repealed by the stockholders of the Company, except with the approval
of the holders of two-thirds of the Company's outstanding Common Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for Common
Stock of the Company. No prediction can be made as to the effect, if any, that
market sales of Common Stock or the availability of Common Stock for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock of the Company, or
the perception that such sales could occur, in the public market after the lapse
of the restrictions described below could adversely affect the prevailing market
price and the ability of the Company to raise equity capital in the future at a
time and price it deems appropriate.
Upon completion of the Offering, the Company will have outstanding
17,800,000 shares of Common Stock. Of these shares, 2,800,000 shares of Common
Stock, representing all of the shares sold in the Offering, will be freely
tradeable without restriction or limitation under the Securities Act, except for
shares, if any, purchased by an "affiliate" of the Company (as defined in the
rules and regulations of the Commission under the Securities Act) which shares
will be subject to the resale limitations of Rule 144 under the Securities Act.
The remaining 15,000,000 outstanding shares are "restricted" shares within the
meaning of Rule 144 (the "Restricted Shares"). The Restricted Shares outstanding
on the date hereof were issued and exchanged by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act and may be sold only if they are registered under the Securities Act or
unless an exemption from registration, such as the exemption provided by Rule
144 under the Securities Act, is available.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned Restricted Shares for at least a one-year period (as computed
under Rule 144) is entitled to sell within any three-month period a number of
such shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (approximately 178,000 shares after giving effect to the
Offering) and (ii) the average weekly trading volume in the Company's Common
Stock during the four calendar weeks immediately preceding such sale. Sales
under Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed an
affiliate of the Company at any time during the 90 days immediately preceding a
sale, and who has beneficially owned Restricted Shares for at least a two-year
period (as computed under Rule 144), would be entitled to sell such shares under
Rule 144(k) without regard to the volume limitation and other conditions
described above.
The Company, the Principal Stockholders and the Company's officers and
directors have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate or otherwise encumber any shares of Common Stock or
securities convertible into Common Stock, whether or not owned, or dispose of
any interest therein under Rule 144 or otherwise for a period of 13 months
following the date of this Prospectus, and may not do so for an additional six
month period without the prior written consent of the Representative (the
"Transfer Restrictions"). However, the issuances of shares of Common Stock,
whether directly or upon the exercise or conversion of exchangeable or
convertible securities (including options granted under the Plan), and the
transfers of shares of Common Stock by the Principal Stockholders to effectuate
estate planning, are allowed as long as the recipients of shares of Common Stock
in any such transactions agree to be bound by the Transfer Restrictions.
Notwithstanding the foregoing, the Transfer Restrictions do not apply to the
issuance of the Company's securities in connection with mergers or acquisitions,
the sale
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of Common Stock in connection with the exercise of the Over-allotment Option or
shares of Common Stock, or securities convertible or exchangeable for shares of
Common Stock, which are publically offered by the Company or which are privately
offered if the original offering price or conversion or exchange price are
specifically determined at the time of the closing of the private offering. The
Company intends to register approximately 2,500,000 shares of Common Stock
reserved for issuance pursuant to the Plan and has issued the Representative's
Warrants which entitles the holders to purchase up to 280,000 shares of Common
Stock. The Representative's Warrants are issuable for a period of four years
commencing one year from the date of this Prospectus. The sale or issuance, or
the potential for sale or issuance, of Common Stock during or after such
13-month or 19-month periods could have an adverse impact on the market price of
the Common Stock offered hereby. See "Underwriting".
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Royce
Investment Group, Inc. is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the
Company , and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the number of shares of Common Stock set forth opposite their
names:
Number of Shares
Underwriters of Common Stock
Royce Investment Group, Inc. ..................... 1,000,000
National Securities Corporation .................. 875,000
Joseph Stevens & Company, Inc. ................... 600,000
Continental Broker-Dealer Corp. .................. 325,000
---------
Total ............................................ 2,800,000
=========
The Underwriters are committed to purchase all the shares of Common
Stock offered hereby, if any of such Shares are purchased. Under certain
circumstances, the commitments of non-defaulting Underwriters may be increased.
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to conditions precedent specified therein.
The Company has been advised by the Representative that the
Underwriters propose initially to offer the Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less concessions of a minimum of $.285 per
share of Common Stock. Such dealers may allow a concession of $.10 per share of
Common Stock to certain other dealers. After the commencement of the Offering,
the public offering price, concession and reallowance may be changed by the
Representative. The Representative has informed the Company that it does not
expect sales to discretionary accounts by the Underwriters to exceed five
percent of the Common Stock offered hereby.
The Company and the Principal Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof. The Company has also agreed to pay to the
Representative a non-accountable expense allowance and a consulting fee equal to
3% and 1%, respectively, of the gross proceeds derived from the sale of the
Common Stock offered hereby, of which $50,000 has been paid to date. The
Principal Stockholders will pay the non-accountable expense allowance and
consulting fee with respect to shares sold by them if the Over-allotment Option
is exercised. The Company will pay all other expenses relating to the Offering
and the Over-allotment Option, if exercised, including reimbursement to the
Representative of approximately $10,000 for "Road Show" expense. The maximum
aggregate amount of the 1% consulting fee payable by the Company and the
Principal Shareholders is $305,900. The Company has also paid $50,000 to an
Underwriter in connection with such Underwriter's participation in a prior phase
of the Offering.
The Principal Stockholders have granted to the Underwriters the
Over-allotment Option, exercisable during the 45-day period from the date of
this Prospectus, to purchase up to an additional 420,000 shares of Common Stock
at the initial public offering price per share offered hereby, less underwriting
discounts and commissions set forth on the cover page of this Prospectus. Such
option may be exercised only for the purpose of covering over-allotments, if
any, incurred in the sale of the Common Stock offered hereby. To the extent such
option is exercised in whole or in part, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of the
additional shares of Common Stock
78
<PAGE>
proportionate to its initial commitment. The Company will not receive any of the
proceeds from such sale of shares of Common Stock by the Principal Stockholders.
The Company, the Principal Stockholders and the Company's officers and
directors have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate or otherwise encumber any shares of Common Stock or
securities convertible into Common Stock, whether or not owned, or dispose of
any interest therein under Rule 144 or otherwise for a period of 13 months
following the date of this Prospectus, and may not do so for an additional six
month period without the prior written consent of the Representative (the
"Transfer Restrictions"). However, the issuances of shares of Common Stock,
whether directly or upon the exercise or conversion of exchangeable or
convertible securities (including options granted under the Plan), and the
transfers of shares of Common Stock by the Principal Stockholders to effectuate
estate planning, are allowed as long as the recipients of shares of Common Stock
in any such transactions agree to be bound by the Transfer Restrictions.
Notwithstanding the foregoing, the Transfer Restrictions do not apply to the
issuance of the Company's securities in connection with mergers or acquisitions,
the sale of Common Stock in connection with the exercise of the Over-allotment
Option or shares of Common Stock, or securities convertible or exchangeable for
shares of Common Stock, which are publically offered by the Company or which are
privately offered if the original offering price or conversion or exchange price
are specifically determined at the time of the closing of the private offering.
An appropriate legend shall be marked on the face of certificates representing
all such securities.
In connection with this Offering, the Company has agreed to sell to the
Representative, at a price of $.0001 per warrant, the Representative's Warrants
to purchase from the Company up to 280,000 shares of Common Stock. The
Representative's Warrants are initially exercisable at a price of $15.675 per
share (165% of the initial public offering price per share of Common Stock) for
a period of four years, commencing one year after the date of this Prospectus
and are restricted from sale, transfer, assignment or hypothecation for a period
of 12 months from the date of this Prospectus, except to other underwriters or
to officers, directors and employees of the Representative or of such other
underwriters (subject to the rules of the National Association of Securities
Dealers, Inc.). The Representative's Warrants provide for adjustment in the
number of securities issuable upon the exercise thereof as a result of certain
subdivisions and combinations of the Common Stock. The Representative's Warrants
contain anti-dilution provisions providing for the adjustment of the exercise
price and the number of shares of Common Stock issuable upon exercise of the
Representative's Warrants upon the occurrence of certain events. The
Representative's Warrants grant to the holders thereof certain rights of
registration under the Securities Act with respect to the Representative's
Warrants and the securities issuable upon exercise thereof (which include (i)
one demand registration at the expense of the Company, and one demand
registration at the holder's expense, exercisable during the five-year period
commencing on the date of this Prospectus, and (ii) piggyback registration at
the expense of the Company exercisable during the seven-year period commencing
on the date of this Prospectus).
The Company will also enter into a five-year non-exclusive agreement
with the Representative which provides the Representative with payment of a
finder's fee if the Company enters into any transaction with a third party
introduced to the Company by the Representative. The finder's fee for
transactions involving the acquisition of other companies shall equal five
percent of the first $1,000,000 of value of such transaction, four percent of
the second $1,000,000 of value of such transaction, and three percent of the
remaining value of such transaction. The finder's fee for any other transactions
will be as mutually agreed to by the Company and the Representative.
<PAGE>
The Representative has been granted the right to select a designee
either to be a member of the Company's board of directors, or to be an observer
at all meetings of the Company's board of directors, at the Representative's
option.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the public offering prices of the Common Stock was
determined based upon negotiations between the Company and the Representative
and does not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in
determining the price include, but were not limited to, the history of, and the
prospects for, the Company and the industry in which it competes, its past and
present operations, its past and present earnings and the trend of such
earnings, the present state of the Company's development, the general condition
of the securities markets at the time of this Offering and the recent market
prices of publicly traded common stocks of comparable companies. There can be no
assurance that the Common Stock can be resold at its offering price, if at all.
Purchasers of the Common Stock will be exposed to a substantial risk of a
decline in the market prices of the Common Stock after the Offering, if a market
develops.
The Underwriters may engage in transactions that stabilize, maintain,
or otherwise affect the price of the Common Stock, including (i) syndicate
covering transactions, which consist of the placing of any bid or the effecting
of any purchase on behalf of the Underwriters to reduce a short position created
in connection with the Offering; (ii) penalty bids, which
79
<PAGE>
permit the Representative to reclaim from an Underwriter or selling group member
a selling concession accruing to such Underwriter or selling group member in
connection with the Offering when securities originally sold by such Underwriter
are purchased in syndicate covering transactions; and (iii) short sales, by
which the Underwriters sell securities which they do not own at the time that
the sale transaction becomes a binding obligation.
The foregoing is a summary of the principal terms of the Underwriting
Agreement described above. Reference is made to a copy of such agreement which
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part for a more complete description thereof. See "Available Information."
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by the law firm of Reid & Priest LLP, New York, New
York, as counsel to the Company in connection with this Offering. Certain legal
matters relating to the sale of the Common Stock will be passed upon for the
Underwriters by Greenberg Traurig Hoffman Lipoff Rosen & Quentel New York, New
York.
EXPERTS
The consolidated financial statements of the Company as of January 31,
1996 and 1997 and for each of the three years in the period ended January 31,
1997, included in this Prospectus and Registration Statement have been audited
by Deloitte & Touche LLP, independent accountants, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington D.C., a Registration Statement under the Securities
Act with respect to the Securities offered hereby. This prospectus, filed as a
part of the Registration Statement, does not contain certain information set
forth in or annexed as exhibits to the Registration Statement. For further
information regarding the Company and the Common Stock offered hereby, reference
is made to the Registration Statement and to the exhibits filed as a part
thereof, which may be inspected at the office of the Commission without charge
or copies of which may be obtained therefrom upon request to the Commission and
payment of the prescribed fee. With respect to each contract, agreement or other
document referred to in this Prospectus and filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matter involved.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance
therewith, will file reports and other information with the Commission. Reports,
proxy statements and other information filed by the Company, including the
Registration Statement and the exhibits filed as a part thereof, can be
inspected and copied at the public reference facilities of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549, at the
following regional offices: New York Regional Office, Seven World Trade Center,
Suite 1300, New York, New York 10048, and Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy statements and other information filed electronically by the Company,
including the Registration Statement.
80
<PAGE>
GRAND COURT LIFESTYLES, INC. and SUBSIDIARIES
----------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 1996 and 1997 and (unaudited) October 31, 1997 (as restated) F-3
Consolidated Statements of Operations for the Years Ended January 31, 1995, 1996
and 1997, (unaudited) the Three Months Ended October 31, 1996 and 1997 (as restated) and
(unaudited) the Nine Months Ended October 31, 1996 and 1997 (as restated) F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended January 31,
1995, 1996 and 1997 and (unaudited) the Nine Months Ended October 31, 1997 (as restated) F-5
Consolidated Statements of Cash Flows for the Years Ended January 31, 1995, 1996 and 1997
and (unaudited) the Nine Months ended October 31, 1996 and 1997 (as restated). F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Grand Court Lifestyles, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 13, the accompanying consolidated financial statements have
been restated.
DELOITTE & TOUCHE LLP
New York, New York
April 28, 1997, except for Note 13,
as to which the date is
February 27, 1998
F-2
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (as restated, see Note 13)
(In Thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, (as restated October 31
-- see Noter 13) (unaudited)
------------------------------ ------------
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents ............................................ $ 17,961 $ 14,111 $ 9,679
Notes and receivables - net .......................................... 224,204 222,399 238,128
Investments in partnerships .......................................... 2,607 3,056 3,700
Other assets - net ................................................... 15,251 22,095 36,567
--------- --------- ---------
Total assets ......................................................... $ 260,023 $ 261,661 $ 288,074
========= ========= =========
Liabilities and Stockholders' Equity
Loans and accrued interest payable ................................... $ 140,094 $ 142,628 $ 157,140
Construction loan payable ............................................ -- 2,750 16,755
Notes and commissions payable ........................................ 1,684 1,716 4,012
Other liabilities .................................................... 4,018 4,393 6,685
Deferred income ...................................................... 79,442 78,171 76,528
--------- --------- ---------
Total liabilities .................................................... 225,238 229,658 261,120
--------- --------- ---------
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.001 par value -
authorized, 15,000,000 shares; none issued
and outstanding ...................................................... -- -- --
Common Stock, $.01 par value - authorized,
40,000,000 shares; issued and outstanding,
15,000,000 shares .................................................... 150 150 150
Paid-in capital 34,635 54,321 54,321
Accumulated deficit -- (22,468) (27,517)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY ........................................... 34,785 32,003 26,954
--------- --------- ---------
Total liabilities and stockholders' equity ........................... $ 260,023 $ 261,661 $ 288,074
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(as restated for periods ended October 31, 1997, see Note 13)
(In Thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
Years ended October 31, October 31,
January 31, (unaudited) (unaudited)
------------------------------------- --------------------- ----------------------
1995 1996 1997 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales ........................... $ 22,532 $ 31,973 $ 36,021 $ 6,897 $ 10,483 $ 21,524 $ 31,401
Syndication fee income .......... 5,587 8,603 7,690 1,494 1,886 4,976 6,529
Deferred income earned .......... 4,399 9,971 5,037 236 3,785 708 4,246
Interest income ................. 9,503 12,689 13,773 3,157 2,467 11,043 8,081
Property management fees from
related parties ............. 4,351 4,057 2,093 755 2,073 1,604 3,250
Equity in earnings from
partnerships .................. 276 356 423 136 125 250 357
Other income .................... -- 1,013 -- -- -- -- 283
-------- -------- -------- -------- -------- -------- --------
46,648 68,662 65,037 12,675 20,819 40,105 54,147
-------- -------- -------- -------- -------- -------- --------
Cost and Expenses:
Cost of sales ................... 21,743 27,688 34,019 8,688 10,879 19,468 25,947
Selling ......................... 6,002 7,664 7,176 1,114 1,803 4,603 6,186
Interest ........................ 13,610 15,808 16,394 4,215 5,203 12,017 13,991
General and administrative ...... 6,450 7,871 7,796 1,998 2,352 5,687 6,415
Loss on impairment of
notes and receivables ......... -- -- 18,442 1,589 -- 18,442 --
Write-off of registration costs . -- -- -- -- -- -- 3,107
Officers' compensation .......... 1,200 1,200 1,200 300 300 900 900
Depreciation and
amortization .................. 2,290 2,620 3,331 809 1,054 2,539 2,650
-------- -------- -------- -------- -------- -------- --------
51,295 62,851 88,358 18,713 21,591 63,656 59,196
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes .................... (4,647) 5,811 (23,321) (6,038) (772) (23,551) (5,049)
Provision (benefit) for
income taxes .................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................. (4,647) 5,811 (23,321) (6,038) (772) (23,551) (5,049)
Pro forma income tax
provision (benefit) ............. (1,859) 2,324 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Pro forma net income (loss) ....... $ (2,788) $ 3,487 $(23,321) $ (6,038) $ (772) $(23,551) $ (5,049)
======== ======== ======== ======== ======== ======== ========
Pro forma earnings (loss)
per common share ................ $ (0.19) $ 0.23 $ (1.55) $ (0.40) $ (0.05) $ (1.57) $ (0.34)
======== ======== ======== ======== ======== ======== ========
Pro forma weighted average
common shares used .............. 15,000 15,000 15,000 15,000 15,000 15,000 15,000
======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1995, 1996 AND 1997 AND (UNAUDITED)
NINE MONTHS ENDED OCTOBER 31, 1997 (AS RESTATED, SEE NOTE 13)
(In Thousands)
- --------------------------------------------------------------------------------
Stockholders' equity, February 1, 1994 (as restated)...... $37,207
Net loss ............................................... (4,647)
Dividends............................................... (1,886)
---------
Stockholders' equity, January 31, 1995 (as restated)...... 30,674
Net income.............................................. 5,811
Dividends............................................... (1,700)
---------
Stockholders' equity, January 31, 1996 (as restated)...... 34,785
Net loss ............................................... (23,321)
Capital Contribution ................................... 21,333
Dividends .............................................. (794)
---------
Stockholders' equity, January 31, 1997 (as restated)....... 32,003
Net loss (unaudited) (as restated)....................... (5,049)
---------
Stockholders' equity, October 31, 1997 (unaudited)
(as restated)............................................. $26,954
=========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(as restated for the nine months ended October 31, 1997, see Note 13)
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months ended
Years ended January 31, October 31, (unaudited)
-------------------------------- -----------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash flows provided (used) from operating activities:
Net income (loss) .......................................... $ (4,647) $ 5,811 $(23,321) $(23,551) $ (5,049)
-------- -------- -------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ............................ 2,290 2,620 3,331 2,539 2,650
Loss on impairment of notes and
receivables .............................................. -- -- 18,442 18,442 --
Deferred income earned ................................... (4,399) (9,971) (5,037) (708) (4,246)
Write-off of registration costs .......................... -- -- -- -- 3,107
Adjustment for changes in assets and liabilities:
(Increase) decrease in accrued interest
on notes and receivables ............................... 174 (2,560) 715 (762) (2,981)
(Increase) decrease in notes and
receivables ............................................. 7,223 (1,162) 3,981 3,012 (12,748)
Increase (decrease) in commissions
payable ................................................. (501) (244) 211 574 427
Increase (decrease) in other liabilities ................. (506) 2,018 375 346 2,292
Increase (decrease) in deferred income ................... 1,513 4,458 3,766 (70) 2,603
-------- -------- -------- -------- --------
5,794 (4,841) 25,784 23,373 (8,896)
-------- -------- -------- -------- --------
Net cash provided (used) by operating
activities ........................................... 1,147 970 2,463 (178) (13,945)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Increase in investments .................................... (591) (567) (449) (36) (644)
Increase in Construction in Progress ....................... -- -- (6,742) (5,653) (13,121)
Net cash used by investing
activities ............................................ (591) (567) (7,191) (5,689) (13,765)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Payments on loans payable .................................. (31,311) (39,326) (55,340) (39,450) (21,778)
Increase in loans .......................................... 44,014 52,065 57,874 38,204 36,290
Increase in construction loan payable ...................... -- -- 2,750 -- 14,005
Increase in other assets ................................... (7,180) (2,790) (3,433) (1,070) (7,108)
Payments of notes payable .................................. (2,578) (1,641) (179) (124) (131)
Proceeds from notes payable ................................ -- -- -- -- 2,000
Dividends .................................................. (1,886) (1,700) (794) (794) --
-------- -------- -------- -------- --------
Net cash provided (used) in financing
activities ............................................ 1,059 6,608 878 (3,234) 23,278
-------- -------- -------- -------- --------
</TABLE>
F-6
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents ................................... 1,615 7,011 (3,850) (9,101) (4,432)
Cash and cash equivalents, beginning of
period ........................................ 9,335 10,950 17,961 17,961 14,111
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period ........ $ 10,950 $ 17,961 $ 14,111 $ 8,860 $ 9,679
======== ======== ======== ======== ========
Supplemental information:
Interest paid ................................. $ 12,914 $ 16,922 $ 16,739 $ 11,587 $ 9,015
======== ======== ======== ======== ========
Non cash capital contribution ................. -- -- $ 21,333 $ 21,333 --
======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1995, 1996, and 1997
(In Thousands)
- --------------------------------------------------------------------------------
(Information as of and for the nine months ended October 31, 1997 is unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Grand Court Lifestyles, Inc. (the "Company") was formed pursuant to the
merger of various Sub-chapter S corporations which were wholly-owned by
certain principal stockholders of the Company (the "Principal
Stockholders") and the transfer of certain assets by and assumption of
certain liabilities of (i) a partnership that was wholly-owned by the
Principal Stockholders and (ii) the Principal Stockholders
individually. In exchange for the transfer of such stock, assets and
liabilities, the Principal Stockholders received shares of the
Company's common stock. These transactions are collectively called the
"reorganization". All of the assets and liabilities were transferred at
historical cost. The reorganization was effective as of April 1, 1996
and accordingly, accumulated deficit represents results of operations
subsequent to that date. Prior to the reorganization, the various
Sub-chapter S corporations and the partnership, which were wholly-owned
by the Principal Stockholders, were historically reported on a combined
basis.
The Company (i) filed a Restated Certificate of Incorporation on March
13, 1997 that provides for, among other things, the authorization of
40,000,000 shares of Common Stock and 15,000,000 shares of Preferred
Stock, (ii) on March 13, 1997 effected an approximate 1,626.19-for-1
stock split of the issued and outstanding Common Stock (all shares have
been restated for prior periods) and (iii) adopted a Stock Option Plan
reserving for issuance up to 2,500,000 shares of Common Stock pursuant
to stock options and other stock awards. No stock options have been
granted to date.
Line of Business - The Company, a fully integrated provider of adult
living accommodations and services, acquires, develops and manages
adult living communities. The Company's revenues have been and are
expected to continue to be primarily derived from sales of partnership
interests in partnerships it organizes to acquire existing adult living
communities. As a result of the Company's activities, limited
partnerships ("Investing Partnerships") are formed whereby the Company
retains a 1% to 1.5% general partnership interest. Investing
Partnerships generally own a 98.5% to 99% interest in partnerships that
own adult living communities ("Owning Partnerships"). The Company also
arranges for the mortgage financing of the adult living communities and
is involved in the development and management of adult living
communities. Another source of income is interest income on notes
receivable.
Unaudited Interim Financial Statements - The results of operations for
an interim period have been prepared on the same basis as the year end
financial statements and, in the opinion of management contain all
adjustments, consisting of only normally recurring adjustments,
necessary for a fair presentation of the results for the full year. The
results of operations for an interim period may not give a true
indication of results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - The Company considers cash and cash
equivalents to include cash on hand, demand deposits and highly liquid
investments with maturities of three months or less.
Revenue Recognition - Revenue from sales of interests in partnerships,
is recognized under the full accrual method of accounting when the
profit on the transaction is determinable, that is, the collectibility
of the sales price is reasonably assured and the earnings process is
virtually complete. The profit recognized has been reduced by the
estimated maximum reasonably possible exposure to loss. Revenue from
sales of interests in partnerships includes any syndication fees earned
by the Company. The Company determines the collectibility of the sales
price by evidence supporting the buyers' substantial initial and
continuing investment in the adult living communities as well as other
factors such as age, location and cash flow of the underlying property.
F-8
<PAGE>
The Company has deferred income on sales to Investing Partnerships of
interests in Owning Partnerships. The Company has arranged for the
private placement of limited partnership interests in Investing
Partnerships. Offerings of interests in Investing Partnerships which
were formed to acquire controlling interests in Owning Partnerships
which own adult living properties ("Adult Living Owning Partnerships")
provide that the limited partners are entitled to receive for a period
not to exceed five years distributions equal to between 11% and 12% of
their then paid-in scheduled capital contributions. Pursuant to
management contracts with the Adult Living Owning Partnerships, for
such five-year period, the Company is required to pay to the Adult
Living Owning Partnerships, amounts sufficient to fund (i) any
operating cash deficiencies of such adult living Owning Partnership and
(ii) any part of such 11% and 12% return not paid from cash flow from
the related property (which the Adult Living Owning Partnerships
distribute to the Investing Partnerships for distribution to limited
partners) (collectively, "Management Contract Obligations"). The amount
of deferred income for each property is calculated in a multi-step
process. First, based on the property's cash flow in the previous
fiscal year, the probable cash flow for the property for the current
fiscal year is determined and that amount is initially assumed to be
constant for each remaining year of the Management Contract Obligations
period (the "Initial Cash Flow"). The Initial Cash Flow is then
compared to the Management Contract Obligations for the property for
each remaining year of the five-year period. If the Initial Cash Flow
exceeds the Management Contract Obligations for any fiscal year, the
excess Initial Cash Flow is added to the assumed Initial Cash Flow for
the following fiscal year and this adjusted Initial Cash Flow is then
compared to the Management Contract Obligations for said following
fiscal year. If the Initial Cash Flow is less than the Management
Contract Obligations for any fiscal year, a deferred income liability
is created in an amount equal to such shortfall and no adjustment is
made to the Initial Cash Flow for the following year. Such deferred
income liability represents the estimated maximum reasonably possible
exposure to loss as discussed above. As this process is performed for
each property on a quarterly basis, changes in a property's actual cash
flow will result in changes to the assumed Initial Cash Flow utilized
in this process and will result in increases or decreases to the
deferred income liability for an individual property. Any deferred
income liability created in the year the interest in the Owning
Partnership is sold reduces revenues relating to the sale. The payment
of the Management Contract Obligations, however, will generally not
result in the recognition of expense unless the property's actual cash
flow for the year is less than the expected Initial Cash Flow for that
year, as adjusted, and as a result thereof, the amount paid by the
Company in respect of the Management Contract Obligations is greater
than the amount assumed in establishing the deferred income liability.
Such expense amounted to $229,000, $282,000, $2.5 million and $4.6
million for the years ended January 31, 1995, 1996, 1997 and the nine
months ended October 31, 1997, respectively, and such expense is
included as a component of cost of sales. If, however, the property's
actual cash flow is greater than the Initial Cash Flow for the year, as
adjusted, the Company's earnings will be enhanced by the recognition of
deferred income earned and, to the extent cash flow exceeds Management
Contract Obligations, incentive management fees. The Company recognized
such incentive management fees in the amount of $3.9 million, $3.3
million, $1.2 million and $2.6 million for the years ended January 31,
1995, 1996 and 1997 and the nine months ended October 31, 1997,
respectively.
The Company accounted for the sales of interests in Owning Partnerships
which own multi-family properties ("Multi-Family Owning Partnerships")
under the installment method. Under the installment method the gross
profit is determined at the time of sale. The revenue recorded in any
given year would equal the cash collections multiplied by the gross
profit percentage. At the time of sale, the Company deferred all future
income to be recognized on these transactions until cash is received.
Losses on these projects were recognized immediately upon sale.
Allowance on Notes Receivable - In the event that the facts and
circumstances indicate that the collectibility of a note may be
impaired, an evaluation of recoverability is performed. If an
evaluation is performed, the Company compares the recorded value of the
note and other partnership receivables, if any, to the value of the
underlying property less any encumbrances to determine if an allowance
is required for impairment. A significant portion of the interest
income on multi-family notes is recognized as cash is collected.
Accounting Estimates - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make significant estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements
include those of the Company and its subsidiaries. The effects of all
significant intercompany transactions have been eliminated.
F-9
<PAGE>
Deferred Loan Costs - Costs incurred in connection with obtaining
long-term financing have been deferred and are amortized over the term
of the financing.
Construction in Progress - Costs incurred in connection with the
construction and development of adult living communities the Company
intends to build are capitalized. Such costs include the capitalization
of interest during the construction period. If a project is
discontinued or capitalized costs are deemed not recoverable, the
applicable capitalized project costs are expensed.
Investments - The Company accounts for its interests in adult living
limited partnerships under the equity method of accounting. The Company
uses this method because as the general partner it can exercise
significant influence over the operating and financial policies of such
partnerships. Under this method the Company records its share of income
and loss of the entity as well as any distributions or contributions as
an increase or decrease to the investment account. The carrying amount
of the investments in limited partnerships differs from the Company's
underlying equity interest based upon its stated ownership percentages.
Such differences are attributable to the disproportionate amount of
money and notes invested in the entities by the Company for its equity
interest as compared to the other investors. This difference is being
amortized over the estimated life of the underlying partnership. The
unamortized portion of such difference is $1,382, $2,044 and $2,609 as
of January 31, 1996 and 1997 and October 31, 1997, respectively.
Property Management Fees - Property management fees earned for services
provided to related parties are recognized as revenue when related
services have been performed.
Pro Forma Income Taxes - Income tax provisions at a combined Federal
and state tax rate of 40% have been provided on a pro forma basis. The
various Sub-chapter S corporations which were either merged into or
acquired by the Company and the partnership which transferred assets to
the Company were not required to pay taxes because any taxes were the
responsibility of the Principal Stockholders who were the sole
shareholders and partners of those entities.
Earnings per Share - The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" in February 1997. This pronouncement establishes standards for
computing and presenting earnings per share and is effective for the
Company's Fiscal 1997 year-end financial statements. The Company's
management has determined that this standard will not have a
significant impact on the Company's computation or presentation of net
income per common share.
New Accounting Pronouncements - The Financial Accounting Standards
Board has recently issued several new accounting pronouncements.
Statement No. 129, "Disclosure of Information about Capital Structure"
establishes standards for disclosing information about an entity's
capital structure, and is effective for financial statements for
periods ending after December 15, 1997. Statement No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display
of comprehensive income and its components, and is effective for fiscal
years beginning after December 15, 1997. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers, and is effective for financial statements for periods
beginning after December 15, 1997. The Company believes that its future
adoption of these standards will not have a material effect on the
Company's financial position or results of operations.
Reclassification - Certain amounts in prior years have been
reclassified to conform with current period presentation.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is unable to determine the fair value of its notes and
receivables as such instruments do not have a ready market. Other
financial instruments are believed to be stated at approximately their
fair value.
F-10
<PAGE>
4. NOTES AND RECEIVABLES
Notes and other receivables are from related parties and consist of the
following:
<TABLE>
<CAPTION>
January 31, October 31,
--------------------------------- ---------------
1996 1997 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Notes receivable-- multi-family (a)(f).................. $174,025 $174,164 $173,911
Notes and accrued interest receivable
-- adult living (b).................................... 3,228 3,906 14,735
Other partnership receivables (c)(f).................... 52,763 53,622 56,029
Mortgages (d)........................................... 7,188 -- --
Accrued interest receivable............................. -- 816 3,562
-------- -------- --------
237,204 232,508 248,237
Less allowance for uncollectible receivables (e)........ 13,000 10,109 10,109
-------- -------- --------
$224,204 $222,399 $238,128
======== ======== ========
</TABLE>
At January 31, 1996 and 1997 and at October 31, 1997 the carrying value
of impaired notes receivable, net of related deferred income, were
approximately $48,900, $34,742 and $35,116, respectively. Interest
income on impaired notes is recognized on the cash basis. Such income
recognized was $2,272, $1,926 and $743 for the years ended January 31,
1996 and 1997 and for the nine months ended October 31, 1997,
respectively.
(a) The Company has notes receivable from the Investing
Partnerships which were formed to acquire controlling
interests in Owning Partnerships which own multi-family
properties. The notes have maturity dates ranging from ten to
fifteen years from the date of the acquisition of the
respective partnership interests. At October 31, 1997, 51 of
the 169 notes (approximate face value $29,600) have reached
their final maturity dates and these final maturity dates have
been extended by the Company. The underlying property relating
to one extended Multi- Family Note was refinanced in Fiscal
1996 and such refinancing generated an approximate $800
payment to the Company under such Multi-Family Note. In
addition, the Company anticipates that two more multi-family
properties relating to two other extended Multi-Family Notes
will be refinanced in the first quarter of Fiscal 1998. There
can be no assurance that such refinancings will actually
close. It is the Company's intention to collect the principal
and interest payments on the aforementioned notes from the
cash flows distributed by the related multi- family properties
and the proceeds in the event of a sale or refinancing. The
Company expects to extend maturities of other multi-family
notes. Interest income on all of the Multi-Family Notes
amounted to $6,764, $6,949, and $4,827 for the years ended
January 31, 1996 and 1997, and the nine months ended October
31, 1997, respectively.
(b) The Company has notes receivable from the Investing
Partnerships which were formed to acquire controlling
interests in Owning Partnerships which own adult living
communities. Such notes generally have interest rates ranging
from 11% to 13.875% and are due in installments over five
years from the date of acquisition of the respective
partnership interests. The notes represent senior indebtedness
of the related Investing Partnerships, and are collateralized
by the respective interests in the Owning Partnerships.
Principal and interest payments on each note are also
collateralized by the investor notes payable to the Investing
Partnerships to which the investors are admitted. Limited
Partners are allowed to prepay their capital contributions.
These prepayments of capital contributions do not result in
the prepayment of the related purchase notes held by the
Company. Instead, such amounts are loaned to the Company at a
rate of between 11% and 12% by the Investing Partnerships. As
a result of such loans and the crediting provisions of the
related purchase agreements, the Company records the notes
F-11
<PAGE>
receivable corresponding to the purchase notes net of such
loans. Therefore, these prepayments act to reduce the recorded
value of the Company's notes receivable.
(c) Other partnership receivables substantially represent
reimbursable expenses and advances made to the multi-family
partnerships. These amounts do not bear interest and have no
specific repayment date. It is the Company's intention to
collect these notes from the excess cash flows distributed by
the related multi-family properties and the proceeds in the
event of a sale or refinancing.
(d) The mortgages bore interest at rates ranging from 8% to 9%.
The mortgages were generally collateralized by a mortgage lien
on the related adult living communities. As of January 31,
1997 all mortgage receivables were paid in full.
(e) Allowance of Uncollectible Receivables:
<TABLE>
<CAPTION>
Balance at Charged to Costs Deductions to Balance at End of
Beginning of Period and Expenses Allowance Period
------------------- ------------ --------- ------------------
<S> <C> <C> <C> <C>
Year Ended January 31, 1996
Allowance for notes receivable $13,000 -- -- $13,000
Year Ended January 31, 1997
Allowance for notes receivable $13,000 18,442 21,333 $10,109
Nine Months Ended October 31, 1997
Allowance for notes receivable $10,109 -- -- $10,109
</TABLE>
The multi-family notes receivable relating to the nine Owning
Partnerships that filed petitions under Chapter 11 of the U.S.
Bankruptcy Code (the "Chapter 11 Petitions") and the one
Owning Partnership which lost its property pursuant to an
uncontested foreclosure sale of its property (said ten Owning
Partnerships are, collectively, the "Protected Partnerships")
were first deemed impaired when the mortgages on their
respective properties went into default, which defaults
occurred between August 1989 and June 1994. Once in default,
the holders of these mortgages assigned them to the United
States Department of Housing and Urban Development ("HUD").
The Protected Partnerships then attempted to negotiate, and in
some cases obtained, workout agreements with HUD. Although it
could temporarily lower or suspend debt service payments
during the term of a workout agreement, HUD, unlike a
conventional lender, did not have the legal authority to
restructure the defaulted mortgages it holds by permanently
lowering interest rates or reducing the principal amount of
such mortgages. HUD then sold the mortgages (subject to those
workout agreements which were in place) at auctions in
September 1995 and June 1996. Since the new mortgage holders
did not have HUD's legal constraints as to the restructuring
of mortgages they hold, the Protected Partnerships began
negotiations with the new holders to restructure their
mortgages or purchase them at a discount. The Protected
Partnerships could not reach an agreement with the new
mortgage holders and the new mortgage holders began to
threaten and institute foreclosure proceedings. The Principal
Stockholders and one of their affiliates transferred the
partnership interests they owned personally in various
partnerships that own multi-family properties (the "Assigned
Interests") to the Investing Partnerships that owned interests
in the Protected Partnerships in July 1996. Seven of the
Protected Partnerships filed Chapter 11 Petitions in August
1996, two of the Protected Partnerships filed Chapter 11
Petitions in February 1997, and one of the Protected
Partnerships did not file a Chapter 11 Petition and allowed
the holder of the mortgage to foreclose on its property due to
the unlikelihood of confirming a plan of reorganization. The
Company established appropriate reserves during these time
periods to reflect the varying extent of impairment of these
Multi-Family Notes in view of the state of facts at such time.
In that the Principal Stockholders transferred the Assigned
Interests in July 1996, the Company recorded a $21.3 million
capital contribution in Fiscal 1996. The bankruptcy petitions
and risk of loss faced by the Protected Partnerships resulted
in the Company recording a non-cash loss of $18.4 million in
the year ending January 31, 1997 (representing the recorded
value of the notes receivable relating to the Protected
Partnerships, net of deferred income and net of any previously
established reserves) due to the deemed full impairment of
these notes receivable. Seven of the Chapter 11 petitions
resulted in the respective Protected Partnerships losing their
properties through foreclosure or voluntary conveyances of
their properties. The remaining two Protected Partnerships
successfully emerged from their bankruptcy proceedings in
January, 1998 by paying off their mortgages at a discount with
the proceeds of new mortgage financings, resulting in these
properties having current, fully performing mortgages. The two
Investing Partnerships related to these Protected Partnerships
have transferred the respective Assigned Interests back to the
Principal Stockholders and their affiliate. The Company
neither owns nor manages these properties, nor is the general
partner of these Owning Partnerships, but, rather, holds the
related Multi-Family Notes as receivables. The Company,
therefore, has no liability in connection with these mortgage
defaults or bankruptcy proceedings.
F-12
<PAGE>
Fifteen of the Multi-Family Owning Partnerships remain in
default on their respective mortgages. These Multi-Family
Owning Partnerships have been negotiating with the respective
mortgage lenders and, in some cases, have obtained workout
agreements pursuant to which the lenders generally agree
during the term of the agreement not to take any action
regarding the mortgage default and to accept reduced debt
service payments for a period of time, with the goal of
increasing property cash flow to enable the property to fully
service its mortgage. As of October 31, 1997, the recorded
value, net of deferred income, of the MultiFamily Notes and
"Other Partnership Receivables" held by the Company relating
to these fifteen Multi-Family Owning Partnerships was $31.9
million. The Company has established reserves of $10.1 million
to address the possiblity that these notes and receivables may
not be collected in full.
(f) The Multi-Family properties were typically built or acquired
with the assistance of programs administered by HUD that
provide mortgage insurance, favorable financing terms and/or
rental assistance payments to the owners. As a condition to
the receipt of assistance under these and other HUD programs,
the properties must comply with various HUD requirements
including limiting rents on these properties to amounts
approved by HUD. Various proposals are pending before Congress
proposing reorganization of HUD and a restructuring of certain
of its housing assistance programs. It is too early in the
legislative process to predict which, if any, changes might be
implemented. Further, there can be no assurance that changes
in federal subsidies will not be more restrictive than those
currently proposed or that other changes in policy will not
occur. Any such changes could have an adverse effect on the
Company's ability to collect its receivables from the
partnerships owning multi-family properties.
5. OTHER ASSETS
Other assets are comprised as follows:
<TABLE>
<CAPTION>
January 31, October 31,
---------------------------- -------------
1996 1997 1997
------------- ---------- -------------
<S> <C> <C> <C>
Deferred loan costs (a)................................... $ 7,994 $ 7,452 $ 8,311
Investment in cooperative apartment building (b).......... 1,854 1,782 1,782
Unsold subscription units (c)............................. 595 1,176 1,530
Deferred registration costs (d)........................... 833 2,357 194
Construction in progress (e).............................. -- 6,742 19,863
Other assets.............................................. 3,975 2,586 4,887
------- ------- -------
$15,251 $22,095 $36,567
======= ======= =======
</TABLE>
<PAGE>
(a) Financing costs of $3,578, $2,588 and $3,330 were deferred during the
years ended January 31, 1996 and 1997 and the nine months ended October
31, 1997, respectively. These costs are being amortized over the term
of the related debt using the straight-line method over periods ranging
from one to ten years.
(b) The Company owns shares in a cooperative apartment building and owns
interests in a second mortgage collateralized by such cooperative
apartment building.
(c) The Company has deferred $595, $1,176 and $1,530 of remaining costs
associated with the financing of the acquisition of adult living
communities by arranging for the sale of partnership interests, which
were substantially sold at January 31, 1996 and 1997 and October 31,
1997, respectively. Upon completion of these transactions such costs
will be charged to cost of sales.
(d) The Company has capitalized costs relating to the initial public
offering. Upon the closing of the public offering, these costs will be
charged against additional paid-in capital. However, if it is unlikely
that an offering will occur within a period of time in which the costs
could be of benefit, they will be written off. The Company has expensed
approximately $3.1 million of registration costs which were incurred
prior to April 30, 1997 due to a previous postponement of the initial
public offering of equity securities by the Company.
F-13
<PAGE>
(e) The Company has capitalized costs which include interest associated
with its construction and development of properties it intends to
build. If a project is discontinued, all capitalized project costs are
expensed. Such interest capitalized for year ended January 31, 1997 and
the nine months ended October 31, 1997 was $1.2 million and $1.6
million, respectively.
6. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
<TABLE>
<CAPTION>
January 31, October 31,
----------------------------------- -------------
1996 1997 1997
------------- ---------- -------------
<S> <C> <C> <C>
Banks (including mortgages) (a) (b) (c)..... $ 41,361 $ 32,044 $ 40,123
Other, principally debentures (d)........... 98,733 110,584 117,017
-------- -------- --------
$140,094 $142,628 $157,140
======== ======== ========
</TABLE>
(a) The bank loans bear interest per annum at the banks' prime rate plus 1%
to 3%. The bank loans generally have terms of at least one year, but in
the event a particular bank elects not to renew or extend the credit,
the entire unpaid balance is converted to a term loan which is payable
in four to five years. Generally the bank loans are collateralized by
the Company's entitlement to the assigned limited partner investor
notes which serve as collateral for the respective purchase notes. The
prime interest rate at January 31, 1996 and 1997 and October 31, 1997
was 8.5%, 8.25% and 8.5%, respectively.
(b) In addition to the aforementioned bank loans, the Company had three
additional loans from banks. Each of the loans were collateralized by
an assignment of the first mortgage loans payable to the Company. Two
of the loans bore interest at rates varying from 8% to 9% per annum and
were scheduled to mature on various dates through 1996. In March 1996,
the partnerships that own these properties refinanced two of these
mortgages, which eliminated them as obligations of the Company. The
third loan bore interest at the rate of 9.5% per annum and was
scheduled to mature on March 31, 1997. The remaining loan has been paid
in full as of January 31, 1997.
(c) The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in the case of certain of
such obligations, certain Investing Partnerships, Owning Partnerships
or affiliates of the Company. The Company has recently renegotiated
certain of its most restrictive covenants. Certain obligations contain
provisions requiring the Company to maintain a net worth of, in the
most restrictive case, $26,250,000, except that, under the Capstone
agreements the Company will be required to maintain a net worth in an
amount no less than 75% of the net worth of the Company immediately
after the closing of the public offering. Certain obligations of the
Company contain covenants requiring the Company to maintain a debt for
borrowed money to consolidated net worth ratio of, in the most
restrictive case, no more than 6 to 1.
(d) Debentures are collateralized by various purchase notes and investor
notes related to multi-family property financing. All loans mature in
1997 through 2004 and bear interest rates of 11% to 15% per annum.
Future annual maturities, excluding interest, over the next five years
and thereafter, are as follows:
Year Ending
January 31
- ------------
1998............................................. $21,372
1999............................................. 33,602
2000............................................. 20,872
2001............................................. 21,110
2002............................................. 25,612
Thereafter....................................... 19,221
-------
141,789
Accrued interest................................. 839
-------
$142,628
=======
F-14
<PAGE>
7. CONSTRUCTION LOAN PAYABLE
During the nine month period ended October 31, 1997, pursuant to the
Company's development program, first mortgage loans were obtained to
finance approximately 80% of the costs of developing three new adult
living communities. The interest rate on two of the loans equals the 30
day LIBOR plus 2 3/4% per annum. The third loan bears interest at the
rate of the prime rate plus 1.5% per annum. These loans mature between
November, 1999 and June, 2000. As of October 31, 1997, total funding
under such first mortgage loans amounted to $7,505.
Pursuant to the Company's development program, two limited partnerships
have issued limited partnership interests for aggregate capital
contributions of $9,250, the net proceeds of which have been used to
make second mortgage loans to the Company to fund approximately 20% of
the costs of developing three new adult living communities. Such second
mortgage loans bear interest at the rate of 13.125% per annum. These
second mortgage loans mature between November 2001 and March 2002.
8. OTHER LIABILITIES
Other liabilities include unearned income of $963, $1,888 and $3,196
was recorded for the amount of unsubscribed partnership interests in
adult living communities financed during the year ended January 31,
1996 and 1997 and October 31, 1997, respectively. Upon full
subscription these amounts will be recognized as income.
9. DEFERRED INCOME
Deferred income is comprised of:
<TABLE>
<CAPTION>
January 31, October 31,
---------------------------- -------------
1996 1997 1997
------------- ---------- -------------
<S> <C> <C> <C>
Multi-family................................. $ 68,447 $ 67,453 $ 66,763
Adult living(a).............................. 10,995 10,718 9,765
-------- -------- --------
$ 79,442 $ 78,171 $ 76,528
======== ======== ========
</TABLE>
a. The aggregate amount of Management Contract Obligations
relating solely to returns to limited partners for the
remaining portion of fiscal 1997 and for each of the fiscal
years 1998 through 2002 based on existing management contracts
is $3.9 million, $15.4 million, $17.4 million, $16.4 million,
$11.2 million and $2.4 million, respectively. Such amounts of
Management Contract Obligations are calculated based upon
paid-in scheduled capital contributions of limited partners as
of October 31, 1997 with respect to fiscal 1997 and remaining
scheduled capital contributions with respect to fiscal years
1998 through 2002. Actual amounts of Management Contract
Obligations in respect of such contracts will vary based upon
the timing and amount of such capital contributions.
Furthermore, such amounts of Management Contract Obligations
are calculated without regard to the cash flow the related
properties will generate, which will reduce such obligations.
<PAGE>
10. INCOME TAXES
The Company became a taxable entity as of April 1, 1996, therefore the
prior years tax provisions (benefit) is presented on a pro forma basis
at an effective tax rate of approximately 40%. The Company has
increased the valuation allowance from $3,214 to $4,540, because it was
more likely than not that such deferred tax assets in excess of
deferred tax liabilities would be realizable in future years. Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amount used for income taxes purposes. The
tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
January 31,
-----------------------------
Deferred tax assets: 1996 1997
------- -------
Notes and receivables...................... $ 8,920 $ 8,904
Accrued expenses and other liabilities..... 1,257 89
Investment in partnerships................. 89 1,337
Net operating loss carryforward............ -- 1,339
------ ------
Total gross deferred tax assets............ 10,266 11,669
F-15
<PAGE>
3,214 4,540
----- -----
Less valuation allowance..........................
Deferred tax assets net of valuation allowance.... 7,052 7,129
----- -----
Deferred tax liabilities:
Deferred income................................. 4,560 4,272
Other assets.................................... 2,492 2,857
----- -----
Total gross deferred tax liabilities.............. 7,052 7,129
----- -----
Net deferred tax assets (liabilities)............. $ -- $ --
===== =====
The net operating loss carry forward as of January 31, 1997 was $8,777.
Such loss carryforward expires January 31, 2012.
11. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring February 2000.
Annual base rent under such lease is approximately $197. The Company
entered into a ten year lease for additional office space, commencing
September 1, 1991. The annual base rent is approximately $150 and will
increase 5% each year for ten years.
The litigation of February 16, 1995 in which the Company was a
defendant, due to the alleged actions of a sales representative of a
broker/dealer unaffiliated with the Company, has been settled for an
immaterial amount. The plaintiffs in such suit had not alleged that the
Company, or its officers, directors or employees engaged in any
improper practices or made any misrepresentations.
On November 14, 1997, an investor in a limited partnership (the "First
Partnership") which was formed to invest in a second partnership which
was formed to develop and own an adult living community (the "Second
Partnership"), filed a lawsuit, Palmer v. Country Estates Associates
Limited Partnership, et.al., in the United States District Court,
District of New Jersey. The Company has never managed the property
owned by the Second Partnership and is not a general partner in the
Second Partnership or the First Partnership. A predecessor of the
Company was a general partner of the Second Partnership. The Company
has never been a general partner of the First Partnership. The
defendants in the suits are the First Partnership, the general partners
of the First Partnership, the Second Partnership, two affiliates of the
Company, and the Company (collectively the "Defendants"). The Plaintiff
is alleging a breach of the First Partnership's partnership agreement,
negligent misrepresentation, fraud, negligence, breach of guarantee and
mail fraud. The plaintiff is seeking (i) the return of his original
investment ($100,000), (ii) market interest on such investment for the
period 1987-1997 and (iii) unspecified damages. The Company believes
the lawsuit is without merit and intends to vigorously contest the
case. It is anticipated that the outcome of the lawsuit will not have a
material effect on the Financial Statements.
The Company is involved in other legal proceedings which have arisen in
the ordinary course of business. The Company intends to vigorously
defend itself in these matters and does not believe that the outcome of
these matters will have a material effect on its financial statements.
The Company is a general partner of all but one of the Adult Living
Owning Partnerships and the general partner of 32 of 41 adult living
Investing Partnerships. The mortgage financing of the Syndicated adult
living communities and other Syndicated properties are generally
without recourse to the general credit or assets of the Company except
with respect to certain specified obligations, including, for example,
costs incurred for the correction of hazardous environmental
conditions. However, except for such non-recourse obligations, as a
general partner, the Company is fully liable for all partnership
obligations, including those presently unknown or unobserved, and
unknown or future environmental liabilities. The cost of any such
obligations or claims, if partially or wholly borne by the Company,
could adversely affect the Company's business, operating results and
financial condition. Although most of the mortgage loans are
non-recourse, the Company is liable as a general partner for
approximately $36.7 million in principal amount of mortgage debt
relating to ten adult living communities and the one nursing home
managed by the Company as of October 31, 1997.
<PAGE>
Pursuant to the Company's development program, on September 18, 1996
the Company entered into a master development agreement with Capstone
for 100% of the development cost of four adult living communities. The
maximum amount Capstone will fund per such agreement is approximately
$37,764 of which $20,208 has been funded as of October 31, 1997. The
interest rate during the construction period is 1% above the prime
rate. Pursuant to the terms of the development agreement, the Company
was responsible for identifying up to four proposed adult living
community sites and submitting a plan which includes plans,
specifications, drawings, details and pro forma budgets necessary for
the acquisition of such site, and the construction, and operation of an
assisted and independent living community. Upon the acquisition of a
site by Capstone, the Company was required to enter into an agreement
relating specifically to the development
F-16
<PAGE>
of such site. The dates of the four site specific development
agreements are December 5, 1996, January 7, 1997, January 28, 1997 and
January 29, 1997. Pursuant to each site specific agreement, the Company
(i) agreed to develop and construct the community for an agreed upon
cost, (ii) was required to obtain or execute a construction contract
for such community, (iii) commence construction and (iv) complete
construction within 15 months after the commencement of construction.
The Company is in compliance with its responsibilities under the master
development agreement and the four site specific agreements.
Upon the completion of construction of each adult living community, and
upon the satisfaction of certain other conditions, the Company will be
the lessee under long-term lease arrangements with Capstone which
provide financing for development of four of the newly developed adult
living communities. The initial term of each lease, which begins upon
the completion of a facility and meeting of other criteria, is 15 years
with three five-year extension options. Under the terms of each lease,
the Company has the option to acquire the community after operating the
community for four years. The option price is equal to the sum of 100%
of the cost incurred to develop the property and an additional 20% of
such cost (which declines by 2 percentage points per year but in no
event declines below 10%). The initial lease rate is 350 basis points
in excess of the ten-year Treasury Bill yield (but in no event less
than 9.75% per annum). The lease rate has an annual upward adjustment
equal to 3% of the previous year's rent. The four leases have
cross-default provisions. Each lease is a triple net lease, as the
Company is responsible for all costs, including but not limited to
maintenance, repair, insurance, taxes, utilities, and compliance with
legal and regulatory requirements. If a community is damaged or
destroyed, the Company is required to restore the community to
substantially the same condition it was in immediately before such
damage or destruction, or acquire the facility for the option price
described above.
12. RELATED PARTY TRANSACTIONS
The Company has transactions with related parties that are
unconsolidated affiliates of the Company. The Company provides
management, accounting and bookkeeping services to such affiliates. The
Company receives a monthly fee in return for such management services
rendered on behalf of its affiliates for each of their adult living
communities.
In addition, the Company has amounts due from unconsolidated affiliates
of $248, $262 and $1.2 million as of January 31, 1996 and 1997, and
October 31, 1997, respectively.
The Chairman of the Board and President of the Company and entities
controlled by them serve as general partners of partnerships directly
and indirectly owning multi-family properties and on account of such
general partner status have personal liability for recourse partnership
obligations and own small equity ownership interests in the
partnerships. The Company held notes receivable, aggregating $107.1
million net of deferred income, at October 31, 1997 that were
collateralized by the equity interests in such partnerships. These
individuals have provided personal guarantees in certain circumstances
to obtain mortgage financing for certain adult living properties
operated by the Company and for certain of the Company's Investor Note
Debt, and the obligations thereunder may continue. In addition, such
officers and certain employees will devote a portion of their time to
overseeing the third-party managers of multi-family properties and one
adult living community in which the Company has financial interests in
that it holds the related Multi-Family Notes, but in which such
officers have equity interests and the Company does not. These
activities, ownership interests and general partner interests create
actual or potential conflicts of interest on the part of these
officers.
The Company is the managing general partner for 36 of the 37 Owning
Partnerships which own the 37 adult living communities and one nursing
home managed by the Company. The Company also is the general partner
for 32 of the 41 adult living Investing Partnerships that own equity
interests in these 37 Owning Partnerships. In addition, the Company was
the managing agent for all of the 37 adult living communities and one
nursing home in the Company's portfolio. The Company has arranged for
the acquisition of adult living communities and other properties
through the sales of limited partnership interests in the Investing
Partnerships. By serving in all of these capacities, the Company may
have conflicts of interest in that it has both a duty to act in the
best interests of partners of various partnerships, including the
limited partners of the Investing Partnerships, and the desire to
maximize earnings for the Company's stockholders in the operation of
such adult living communities and one nursing home.
During Fiscal 1996 and the nine months ended October 31, 1997, the
Company paid to Francine Rodin, the wife of Bernard M. Rodin, the
Company's Chief Operating Officer, President and a Director, $154 and
$79, respectively, as fees for introducing to the Company
broker/dealers that have assisted the Company in its Syndications of
partnership interests and in placing other securities offered by the
Company. Mrs. Rodin will receive a fee with respect to any future sales
through such broker/dealers of such Syndicated partnership interests
and other securities offered by the Company, excluding shares of Common
Stock offered hereby. During Fiscal 1996, Mrs. Rodin received
consulting fees of $49 in connection with coordinating the Company's
marketing efforts and travel arrangements. Mrs. Rodin has been an
employee of the Company for the nine months ended October 31, 1997 and
performs similar services.
F-17
<PAGE>
13. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's audited fiscal 1996
consolidated financial statements, and unaudited consolidated financial
statements for the three and nine month periods ended October 31, 1997,
the Company determined that (1) $468 in payments made by the Company on
behalf of an affiliated entity, prior to fiscal 1993, which were
incorrectly recorded as expenses of the Company instead of as
receivables from the affiliated entity as they were incurred, and which
were discovered and recorded by the Company as other income and
receivables in three and nine month periods ended October 31, 1997,
should have been recorded as a receivable via a prior period
adjustment, and (2) deferred registration costs associated with a
fiscal 1997 aborted initial public offering of equity securities by the
Company should have been written off in the Company's unaudited
consolidated financial statements as of the date that the offering was
aborted. As a result, the Company's financial statements have been
restated to record the above transactions in the appropriate periods.
A summary of the significant effects of the restatement is as follows:
As previously
reported As restated
------------- -----------
As of January 31, 1996:
Notes and receivables - net .................... $223,736 $224,204
Paid-in capital ................................ 34,167 34,635
As of January 31, 1997:
Notes and receivables - net .................... 221,931 222,399
Paid-in capital ................................ 53,853 54,321
As of October 31, 1997:
Other asset - net .............................. 39,306 36,567
Paid-in capital ................................ 53,853 54,321
Accumulated Deficit ............................ (24,310) (27,517)
For the three months ended October 31, 1997:
Other income ................................... 468 --
Net (loss) ..................................... (304) (772)
(Loss) pecommon share .......................... (0.04) (0.05)
For the nine months ended October 31, 1997:
Other income ................................... 751 283
General and Administrative ..................... 6,783 6,415
Write off of registration costs ................ -- 3,107
Net (loss) ..................................... (1,842) (5,049)
(Loss) per common share ........................ (0.12) (0.34)
F-18
<PAGE>
================================================================================
Until April 10, 1998 (25 days after the commencement of this offering),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obliga tion of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allot ments or
subscriptions.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUMMARY......................................................... 1
RISK FACTORS............................................................... 13
USE OF PROCEEDS............................................................ 28
DIVIDEND POLICY............................................................ 28
CAPITALIZATION............................................................. 29
DILUTION................................................................... 30
SELECTED CONSOLIDATED FINANCIAL
DATA................................................................. 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 33
BUSINESS................................................................... 50
MANAGEMENT................................................................. 66
CERTAIN TRANSACTIONS....................................................... 70
PRINCIPAL AND SELLING STOCKHOLDERS......................................... 72
DESCRIPTION OF CAPITAL STOCK............................................... 73
SHARES ELIGIBLE FOR FUTURE SALE............................................ 75
UNDERWRITING............................................................... 76
LEGAL MATTERS.............................................................. 78
EXPERTS.................................................................... 78
AVAILABLE INFORMATION...................................................... 78
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................................................... F-1
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No dealer, salesperson or other person has been authorized to give any
information or to make any rep resentations other than those contained in this
Prospec tus, and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company or any of the
Principal Stockholders. This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy the shares by anyone in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making the offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such offer or solicitation. Under no circumstances
shall the delivery of this Prospectus, or any sale made pursuant to this
Prospectus, create any implication that the information contained in this
Prospectus is correct as of any time subsequent to the date of this Prospectus.
================================================================================
<PAGE>
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GRAND COURT
LIFESTYLE, INC.
2,800,000 Shares of
Common Stock
-----------------------
PROSPECTUS
-----------------------
ROYCE INVESTMENT
GROUP, INC.
March 13, 1998
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