FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number: 0-21249
GRAND COURT LIFESTYLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3423087
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2650 North Military Trail, Suite 350, Boca Raton, Florida 33431
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (561) 997-0323
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- ----
At December 14, 1998, the Company had 17,800,000 shares of
Common Stock, $.01 par value, outstanding.
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GRAND COURT LIFESTYLES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBER 31, 1998
PAGE
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements and Supplementary Data . . . 2
Consolidated Balance Sheets as of January 31,
1998 and October 31, 1998
Consolidated Statements of Operations for the
three and nine months ended October 31, 1997
and 1998
Consolidated Statements of Cash Flows for the
nine months ended October 31, 1997 and 1998
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 8
Item 3: Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . . 23
PART II - OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds . . . . 23
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . 24
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
-----------------------------------------------------------------
October 31,
January 31, (unaudited)
----------- -----------
1998 1998
---------- -----------
ASSETS
Cash and cash equivalents . . . $ 11,964 $ 27,369
Notes and receivables - net . . 231,140 242,372
Investments in partnerships . . 3,924 4,706
Construction in progress . . . 26,241 9,231
Buildings, furniture and
equipment - net . . . . . . . . -- 33,979
Other assets - net . . . . . . 22,530 17,660
-------- --------
Total assets . . . . . . . . . $295,799 $335,317
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans and accrued interest
payable . . . . . . . . . . . . $161,850 $174,810
Construction loan payable . . . 22,595 32,488
Notes and commissions payable . 5,299 5,658
Other liabilities . . . . . . . 3,531 7,318
Deferred income . . . . . . . . 76,112 77,346
-------- --------
Total liabilities . . . . . . . 269,387 297,620
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.001 par value
- authorized, 15,000,000 shares;
none issued and outstanding . . -- --
Common Stock, $.01 par value -
shares authorized, 40,000,000;
shares issued and outstanding,
15,000,000 and 17,800,000,
respectively . . . . . . . . . 150 178
Paid-in capital 51,189 73,450
Accumulated deficit (24,927) (35,931)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . 26,412 37,697
-------- --------
Total liabilities and
stockholders' equity . . . . . $295,799 $335,317
======== ========
See Notes to Consolidated Financial Statements.
2
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
-----------------------------------------------------------------
Three months ended Nine months ended
October 31, October 31,
(unaudited) (unaudited)
------------------ -----------------
1997 1998 1997 1998
------- ------- ------ ------
Revenues:
Sales . . . . . . . . 10,483 9,113 31,401 27,074
Syndication fee income 1,886 1,868 6,529 5,955
Deferred income earned 3,785 207 4,246 622
Interest income . . . 2,467 2,623 8,081 10,110
Property management
fees from related
parties . . . . . . . 2,073 650 3,250 2,362
Equity in earnings from
partnerships . . . . 125 166 357 488
Adult living rental
revenues . . . . . . -- 1,478 -- 3,067
Other income -- -- 283 1,350
------ ------ ------ ------
20,819 16,105 54,147 51,028
------ ------ ------ ------
Cost and Expenses:
Cost of sales . . . . 10,879 5,380 25,947 23,956
Selling . . . . . . . 1,803 1,457 6,186 5,089
Interest . . . . . . 5,203 5,691 13,991 16,441
General and
administrative . . . 2,352 2,397 6,415 7,478
Write off of
registration costs . -- -- 3,107 --
Adult living operating
expenses . . . . . . -- 1,941 -- 4,106
Officers' compensation 300 300 900 900
Depreciation and
amortization . . . . 1,054 1,536 2,650 3,924
------ ------ ------ ------
21,591 18,702 59,196 61,894
------ ------ ------ ------
Net loss before
provision for taxes . . (772) (2,597) (5,049) (10,866)
Provision for taxes . . -- 45 -- 138
------ ------ ------ ------
Net loss . . . . . . . (772) (2,642) (5,049) (11,004)
====== ====== ====== ======
Loss per common share
(basic and diluted) . . (0.05) (0.15) (0.34) (0.63)
====== ====== ====== ======
Weighted average common
shares . . . . . . . . 15,000 17,800 15,000 17,337
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
-----------------------------------------------------------------
Nine months ended
October 31,
(unaudited)
----------------------
1997 1998
--------- ----------
Cash flows used from operating
activities:
Net loss . . . . . . . . . . . . $ (5,049) $ (11,004)
--------- ----------
Adjustments to reconcile net
income to net cash used by
operating activities:
Depreciation and amortization . 2,650 3,924
Deferred income earned . . . . . (4,246) (622)
Write off of uncollected notes
receivables . . . . . . . . . . -- 367
Write off of registration costs 3,107 --
Changes in operating assets and
liabilities:
Accrued interest on notes and
receivables . . . . . . . . . . (2,981) 307
Notes and receivables . . . . . (12,748) (11,906)
Commissions payable . . . . . . 427 237
Other liabilities . . . . . . . 2,292 3,787
Deferred income . . . . . . . . 2,603 1,856
--------- ----------
(8,896) (2,050)
--------- ----------
Net cash used by operating
activities . . . . . . . . . . (13,945) (13,054)
--------- ----------
Cash flows used from investing
activities:
Increase in investments . . . . . (644) (782)
Building, furniture and equipment -- (9,437)
Construction in progress . . . . (13,121) (7,744)
--------- ----------
Net cash used by investing
activities . . . . . . . . . . . (13,765) (17,963)
--------- ----------
Cash flows provided by financing
activities:
Payments on loans payable . . . . (21,778) (27,439)
Proceeds from loans payable . . 36,290 40,399
Proceeds from construction loan
payable . . . . . . . . . . . . . 14,005 9,893
(Increase) decrease in other
assets . . . . . . . . . . . . . (7,108) 1,158
Payments of notes payable . . . . (131) (207)
Proceeds from notes payable 2,000 329
Net proceeds from initial public
offering . . . . . . . . . . . . -- 22,289
--------- ----------
Net cash provided by financing
activities . . . . . . . . . . . 23,278 46,422
--------- ----------
(Decrease) increase in cash and cash
equivalents . . . . . . . . . . . . (4,432) 15,405
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . 14,111 11,964
--------- ----------
Cash and cash equivalents, end of
period . . . . . . . . . . . . . 9,679 27,369
========= ==========
Supplemental information:
Interest paid . . . . . . . . . . . $9,015 $15,995
========= ==========
See Notes to Consolidated Financial Statements.
4
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GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
-----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying consolidated financial statements of Grand
Court Lifestyles, Inc. and its wholly owned subsidiaries (the
"Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. The consolidated financial statements as of
and for the periods ended October 31, 1997 and 1998 are
unaudited. The results of operations for the interim periods are
not necessarily indicative of the results of operations to be
expected for the fiscal year. Certain amounts in the prior
period have been reclassified to conform with current year
presentation. These consolidated financial statements should be
read in connection with the financial statements and notes
included thereto in the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1998.
Unless the context otherwise requires, (i) all references
herein to a "Fiscal" year refer to the fiscal year beginning on
February 1 of that year (for example, "Fiscal 1997" refers to the
fiscal year beginning on February 1, 1997) and (ii) all
references to the Company, include the Company, its subsidiaries
and its predecessors taken as a whole.
1. NEWLY DEVELOPED COMMUNITIES
The Company has completed construction of seven of its newly
developed adult living communities, all of which are in
their initial lease-up phase. Four of these newly
constructed adult living communities were developed as part
of its development financing arrangement with Capstone
Capital Corporation ("Capstone") and are leased to and
operated by the Company pursuant to operating leases.
These four communities, which are located in El Paso, San
Angelo, Abilene and Witchita Falls, Texas, respectively,
contain a total of 552 apartment units offering both
independent and assisted living services. Three of these
newly constructed adult living communities, which are
located in Corpus Christi, Temple, and Round Rock, Texas,
contain a total of 410 apartment units offering both
independent and assisted living services and are owned and
operated by the Company. In addition, the Company has
commenced construction on three additional adult living
communities in Tyler, League City and Fort Bend County,
Texas.
2. CAPITALIZATION
In March 1998, in an initial public offering of its common
stock, the Company sold 2,800,000 shares of its common stock
at a price of $9.50 per share. The net proceeds, after
deducting for all offering expenses, that the Company
received as a result of this offering was $22,300. The
Company intends to use approximately $19,300 of the net
proceeds to finance the development of new adult living
communities and the remaining $3,000 for working capital.
As of October 31, 1998, $6,900 has been used to finance the
development of new adult living communities and $100 has
been used for working capital. The Company has purchased a
series of treasury bills with the remaining net proceeds
pending application of such funds to the intended uses.
5
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3. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring
February 2000. Annual base rent under such lease is
approximately $197. The Company entered into a ten year
lease for additional office space, commencing September 1,
1991. The annual base rent is approximately $150 and will
increase 5% each year for ten years.
On November 14, 1997, an investor in a limited partnership
(the "First Partnership") which was formed to invest in a
second partnership which was formed to develop and own an
adult living community (the "Second Partnership"), filed a
lawsuit, Palmer v. Country Estates Associates Limited
--------------------------------------------
Partnership, et.al., in the United States District Court,
-------------------
District of New Jersey against multiple parties including
the Company and a predecessor of the Company. The parties
have entered into a stipulation dismissing this lawsuit,
with prejudice, without payment of any kind by the Company
or any related entity.
The Company is involved in other legal proceedings which
have arisen in the ordinary course of business. The Company
intends to vigorously defend itself in these matters and
does not believe that the outcome of these matters will have
a material effect on its financial statements.
The Company's revenues have been, and are expected to
continue to be, primarily derived from the sales of
partnership interests ("Syndications") of partnerships it
organizes to acquire existing adult living communities
(each, an "Owning Partnership"). In a typical Syndication,
the Company identifies an adult living community suitable
for acquisition and forms an Owning Partnership (in which it
is the managing general partner and initially owns all of
the partnership interests) to acquire the property. Another
partnership (the "Investing Partnership") is also formed
(in which the Company is also the general partner with a 1%
interest) to purchase from the Company a 99% partnership
interest in the Owning Partnership (the "Purchased
Interest"), leaving the Company with a 1% interest in the
Owning Partnership and a 1% interest in the Investing
Partnership. In addition, three of the Syndications have
involved the construction of additional apartment units and
common space at the existing adult living communities. The
Owning Partnerships hire independent third party contractors
to do the construction pursuant to maximum price contracts.
The new construction generates additional risks, such as
increased costs due to change orders, which the Company
believes are not material. 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
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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.
The Company has arranged for the acquisition of the 40
Syndicated adult living communities and one nursing home
that it manages by utilizing mortgage financing and by
arranging for Syndications of 44 Investing Partnerships
formed to acquire interests in the 40 Owning Partnerships
that own the adult living communities and the nursing home.
The 40 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 35 of the 44 Investing
Partnerships. The mortgage financing of the Syndicated
adult living communities and nursing home are generally
without recourse to the general credit or assets of the
Company except with respect to certain specified
obligations, including, for example, costs incurred for the
correction of hazardous environmental conditions. However,
except for such non-recourse obligations, as a general
partner, the Company, or a wholly-owned entity formed solely
to be the general partner, is fully liable for all
partnership obligations, including those presently unknown
or unobserved, and unknown or future environmental
liabilities. The cost of any such obligations or claims, if
partially or wholly borne by the Company, could adversely
affect the Company's business, operating results and
financial condition. Although most of the mortgage loans
are non-recourse, (i) the Company is liable as a general
partner for approximately $12.9 million in principal amount
of mortgage debt relating to six Syndicated adult living
communities and (ii) wholly-owned entities are liable as
general partners for approximately $35.7 million in
principal amount of mortgage debt relating to seven
Syndicated adult living communities and the one Syndicated
nursing home managed by the Company as of October 31, 1998.
In the case of the general partner liabilities of the
wholly-owned entities, the only assets of the Company at
risk of loss are the general partner interests in the
specific properties. In addition, the Company is currently
the guarantor of $4.0 million of the non-recourse debt
described in (ii) of the previous sentence.
As part of the Company's development program, on September
18, 1996 the Company entered into a master development
agreement with Capstone pursuant to which Capstone will fund
100% of the development cost of four adult living
communities. The maximum amount Capstone will fund per such
agreement is approximately $37,764 of which $35,030 has been
funded as of October 31, 1998.
The Capstone financing arrangement provides that the Company
will operate these four adult living communities pursuant to
long-term operating leases with Capstone, which leases were
entered into upon the completion of construction and the
satisfaction of certain other conditions. The initial term
of each lease is 15 years with three five-year extension
options. The cumulative annual base rent which the Company
is obligated to pay to Capstone for the four properties
placed in service during the nine months ended October 31,
1998 is $3,682 with 3% per annum annual increases.
4. NEW ACCOUNTING PRONOUNCEMENTS
Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards
for the way that public business enterprises report
information about operating segments in annual financial
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statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also
establishes standards for related disclosures about products
and services, geographic areas, and major customers. In
accordance with Statement No. 131, the Company has elected
not to apply this statement to its interim financial
statements in Fiscal 1998; however, comparative information
for interim periods in Fiscal 1998 will be reported in
financial statements for interim periods in Fiscal 1999.
In February 1998, the Financial Accounting Standards Board
("FASB") issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits".
Statement No. 132 is effective for fiscal years beginning
after December 15, 1997. Statement No. 132 revises
employers' disclosure requirements concerning pension and
other postretirement benefit plans by standardizing such
disclosure requirements to the extent practicable, requires
additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when FASB Statements
No. 87, "Employers' Accounting for Pensions", No. 88,
"Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits",
and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", were issued. Statement No.
132 suggests combined formats for presentation of pension
and other postretirement benefit disclosures and permits
reduced disclosures for nonpublic entities. Statement No.
132 will not have any material effect on disclosures
presented by the Company.
In June of 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts,
and for hedging activities. It is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The
Company's use of derivative instruments has consisted of a
treasury bill lock related to a specific debt financing
which has closed but has not yet funded. While the Company
has not completed its analysis of Statement No. 133 and has
not made a decision regarding the timing of adoption, it
does not believe that adoption will have a material effect
on its financial position and results of operations based on
its current use of derivative instruments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, (i) all references
herein to a "Fiscal" year refer to the fiscal year beginning on
February 1 of that year (for example, "Fiscal 1997" refers to the
fiscal year beginning on February 1, 1997) and (ii) all
references to the Company, include the Company, its subsidiaries
and its predecessors taken as a whole.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statements
to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995 for any forward-looking statements made by, or on behalf, of
the Company in this Quarterly Report on Form 10-Q. Forward-
looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance and
underlying assumptions and other statements which are other than
statements of historical facts. Such forward-looking statements
may be identified, without limitation, by the use of the words
"anticipates", "estimates", "expects", "intends", "believes" and
similar expressions. From time to time, the Company or one of
its subsidiaries individually may publish or otherwise make
available forward-looking statements of this nature. All such
forward-looking statements, whether written or oral, and whether
made by or on behalf of the Company or its subsidiaries, are
expressly qualified by these cautionary statements and any other
cautionary statements which may accompany the forward-looking
statements. In addition, the Company disclaims any obligation to
update any forward-looking statements to reflect events or
circumstances after the date hereof.
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Forward-looking statements made by the Company are subject
to risks and uncertainties that could cause actual results or
events to differ materially from those expressed in, or implied
by, the forward-looking statements. These forward-looking
statements include, among others, statements concerning the
Company's revenue and cost and expense, trends, the number and
economic impact of anticipated acquisitions and new developments,
planned capital expenditures and financing needs and
availability. Investors or other users of the forward-looking
statements are cautioned that such statements are not a guarantee
of future performance by the Company and that such forward-
looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those
expressed in, or implied by, such statements. In addition to
other factors and matters discussed elsewhere herein, the
following are some, but not all, of the important factors that,
in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking
statements:
1. The potential impact of recent net losses and
anticipated operating losses.
2. The ability of the Company to service its substantial
debt obligations.
3. The ability of the Company to pay Management Contract
Obligations from the cash flow generated by the
Syndicated adult living communities and the terms of
future Syndications.
4. The need for the Company to utilize cash from
operations and obtain additional financing to pursue
its new development program and effectuate its business
plan.
5. The Company's ability to identify and Syndicate
suitable acquisition opportunities.
6. The Company's ability to identify suitable development
opportunities, pursue such opportunities, complete
development, lease-up and effectively operate the adult
living communities.
7. Changes in anticipated construction costs, operating
expenses and start-up losses relating to the Company's
new development program.
8. Unanticipated delays in the Company's new development
program, including without limitation, permitting,
licensing and construction delays.
9. The potential recourse and guarantee obligations of the
Company, including, but not limited to the correction
of hazardous environmental conditions, relating to the
mortgage financing of the adult living communities.
10. The impact of mortgage defaults and/or foreclosures
relating to Multi-Family Properties (as defined below)
on the Company's ability to collect on its Multi-Family
Notes (as defined below).
11. The potential liabilities arising from the Company's
status as the general partner of Syndicated adult
living communities.
12. The Company's ability to attract and retain qualified
personnel.
13. Competitive factors affecting the long-term care
services industry.
14. Changes in operating costs of adult living communities,
including without limitation, staffing and labor costs.
15. The ability to attract seniors with sufficient
resources to pay for the Company's services.
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16. Governmental regulatory actions and initiatives,
including without limitation, those relating to
healthcare laws, benefitting disabled persons,
government mortgage insurance and subsidy programs,
environmental requirements and safety requirements.
17. Changes in general economic conditions, including, but
not limited to, factors particularly affecting real
estate and the capital markets.
18. The potential impact of computer and embedded
technology related Year 2000 problems on the Company's
operations, including the ability of the Company and
material third parties to identify and/or address all
material Year 2000 issues and implement contingency
plans.
OVERVIEW
The Company is a fully integrated provider of adult living
accommodations and services which acquires, develops and manages
adult living communities. The Company's revenues have been, and
are expected to continue to be, primarily derived from the
Syndication of partnerships it organizes to acquire existing
adult living communities. To the extent that the Company's
development plan to construct new adult living communities is
successfully implemented, the Company anticipates that the
percentage of its revenues derived from Syndications would
decrease and the percentage of its revenues derived from newly
constructed adult living communities would increase and, the
Company believes, over time, become the primary source of the
Company's revenues. Due, in part, to anticipated start-up losses
during the lease- up phase of newly constructed adult living
communities developed pursuant to the Company's development plan,
the Company anticipates that it will continue to incur losses
during the initial phase of its development plan.
Future revenues, if any, of the Company relating to
previously Syndicated adult living communities would primarily
arise in the form of (i) deferred income earned on sales of the
Purchased Interest in the related Owning Partnership,
(ii) management fees, (iii) interest income on purchase notes
receivable, (iv) earnings derived from the Company's equity
interests in Owning Partnerships and Investing Partnerships, and
(v) amounts payable by the Investing Partnerships to the Company
in the event of the subsequent sale or refinancing of such
communities. Future revenues, if any, of the Company relating to
future Syndications of adult living communities would primarily
arise from any initial profit recognized upon completion of the
Syndication and from the same items listed in the previous
sentence.
The Company intends to continue to arrange for future
acquisitions of existing adult living communities by utilizing
mortgage financing and Syndications, and anticipates that between
six and twelve communities will be acquired in this manner during
the next two years. Future Syndications will require the
allocation of funds generated by the Company to cover the
Company's initial costs relating to the Syndication transactions
(primarily any funds required to acquire the property above the
amounts received from the mortgage financing obtained, the costs
of any improvements to the property deemed necessary and the
costs associated with arranging for the sale of the partnership
interests). The Company typically pays these costs from the
proceeds it receives from its sale of the Purchased Interests to
the Investing Partnership. In addition, future Syndications may
require the allocation of the Company's funds to satisfy any
associated Management Contract Obligations (including payment of
required returns for distribution to limited partners) that are
not funded from the respective property's operations.
The Company continually seeks adult living communities which
it deems are good acquisition prospects. In deciding which
properties it has and will acquire, the Company's senior
management exercises its business judgement to determine which
properties are good acquisition candidates and what constitutes
an acceptable purchase price. There are no fixed criteria for
these decisions, but rather, a number of factors are considered,
including the size, location, occupancy history, physical
condition, current income and expenses, quality of current
management, local demographic and market conditions, existing
competition and proposed entrants to the market.
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The Company has instituted a development plan pursuant to
which it has completed construction of seven adult living
communities as of December 1, 1998, and has commenced construction
on three additional communities. During the next two years of the
plan, the Company intends to commence construction on between 30
and 34 additional new adult living communities. The Company plans
to own or lease pursuant to long-term operating leases or similar
arrangements the adult living communities that are being developed
under the plan. The Company will manage and operate each of the
newly developed communities. The Company estimates that the cost
of developing each new adult living community (including reserves
necessary to carry the community through its lease-up period)
utilizing mortgage financing will be approximately $10.5 million
and utilizing long-term lease financing will be approximately $11
million. The Company expects to complete the construction of one
of the three communities currently under construction by the end
of the first quarter of Fiscal 1999, expects to complete the
construction of the second community under construction by the
end of the third quarter of Fiscal 1999 and expects to complete
construction of the remaining community under construction by the
end of the fourth quarter of Fiscal 1999. These three adult
living communities, along with the seven communities already
completed pursuant to the development plan, contain an aggregate
of 1,356 adult living apartment units. The 30 to 34 additional
new communities which the Company intends to commence
construction on over the next two years will contain between
4,020 and 4,556 additional adult living apartment units. The
Company will use a substantial portion of the proceeds of the
Company's initial public offering which occurred in March, 1998,
funds generated by its business operations, mortgage construction
financing, the proceeds of anticipated refinancings of
construction financing on, and/or sale-leasebacks of, stabilized,
newly constructed communities, and may complete additional
issuances of debt or equity securities to finance the
development, construction and initial operating costs of
additional new adult living communities. Four of the completed
adult living communities are being operated by the Company
pursuant to long-term leases. The Company may use additional
long-term leases or similar arrangements which require the
investment of little or no capital on the part of the Company, to
the extent necessary to proceed with this development plan.
EARNINGS
The Company recorded a net loss of $2.6 million and $11.0
million for the three and nine months ended October 31, 1998,
respectively, compared to a net loss of $800,000 and $5.0 million
for the three and nine months ended October 31, 1997,
respectively.
RESULTS OF OPERATION
Revenues
Total revenues for the three months ended October 31, 1998
was $16.1 million as compared to $20.8 million for the three
months ended October 31, 1997, representing a decrease of $4.7
million or 22.6%. Total revenues for the nine months ended
October 31, 1998 was $51.0 million as compared to $54.1 million
for the nine months ended October 31, 1997, representing a
decrease of $3.1 million or 5.7%.
Sales income for the three months ended October 31, 1998 was
$9.1 million as compared to $10.5 million for the three months
ended October 31, 1997, representing a decrease of $1.4 million
or 13.3%. Sales income for the nine months ended October 31, 1998
was $27.1 million as compared to $31.4 million for the nine
months ended October 31, 1997, representing a decrease of $4.3
million or 13.7%. The decreases are primarily attributable to the
sale of fewer partnership units sold in the three and nine months
ended October 31, 1998 as compared to the number of partnership
units sold in the three and nine months ended October 31, 1997.
The primary factors that affect the number of partnership
units available for sale are (i) the availability of properties
for Syndications, (ii) the terms of the Syndications and (iii)
the initial cash flow of the properties being Syndicated. More
favorable Syndication terms along with a greater initial cash
flow of the properties will yield a greater number of units
available to be sold. Syndication terms become more favorable
for the Company if there is an increase in the ratio of (a) the
purchase price paid to the Company by the Investing Partnership
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for its interest in the Operating Partnership, to (b) the initial
cash flow of the property. In the three months ended October 31,
1998, the properties Syndicated had lower initial cashflows as
offset by more favorable Syndication terms than the properties
Syndicated in the three months ended October 31, 1997. In the
nine months ended October 31, 1998, the properties Syndicated had
equivalent initial cash flows but had less favorable Syndication
terms than the properties Syndicated in the nine months ended
October 31, 1997.
Syndication fee income for the three months ended October
31, 1998 was $1.9 million as compared to $1.9 million for the
three months ended October 31, 1997, representing no change.
Syndication fee income for the nine months ended October 31, 1998
was $6.0 million as compared to $6.5 million in the nine months
ended October 31, 1997, representing a decrease of $500,000 or
7.7%. The decrease is attributable to less commissions and
professional fees paid on a lower sales volume in the nine
months ended October 31, 1998 as compared to the nine months
ended October 31, 1997.
Deferred income earned in the three months ended October 31,
1998 was $200,000 as compared to $3.8 million in the three months
ended October 31, 1997, representing a decrease of $3.6 million
or 94.7%. Deferred income earned for the nine months ended
October 31, 1998 was $600,000 as compared to $4.2 million in the
nine months ended October 31, 1997, representing a decrease of
$3.6 million or 85.7%. The decreases are attributable to the
cashflows generated by the properties in the three and nine
months ended October 31, 1998 exceeding the estimates used to
establish deferred income to a lesser degree than the cashflows
exceeded estimates used to determine deferred income in the three
and nine months ended October 31, 1997.
Interest income for the three months ended October 31, 1998
was $2.6 million as compared to $2.5 million in the three months
ended October 31, 1997, representing an increase of $100,000 or
4%. The increase is primarily attributable to interest earned on
the Company's net proceeds from its initial public offering.
Interest income for the nine months ended October 31, 1998 was
$10.1 million as compared to $8.1 million as of October 31, 1997,
representing an increase of $2.0 million or 24.7%. The increase
is primarily attributable to (i) interest income realized on
Multi-Family Notes as a result of excess proceeds received from
mortgage debt refinancings on six Multi-Family Properties and
(ii) interest earned on the Company's net proceeds from its
initial public offering in the nine months ended October 31,
1998.
Property management fees from related parties was $700,000
for the three months ended October 31, 1998 as compared to $2.1
million in the three months ended October 31, 1997, representing
a decrease of $1.4 million or $66.7%. Property management fees
from related parties was $2.4 million in the nine months ended
October 31, 1998 as compared to $3.3 million in the nine months
ended October 31, 1997, representing a decrease of $900,000 or
27.3%. The decreases are primarily attributable to the cashflows
from the underlying Owning Partnerships exceeding the specified
rate of return to the limited partners to a lesser degree in the
three and nine months ended October 31, 1998 as compared to the
three and nine months ended October 31, 1997.
Equity in earnings from partnerships was $200,000 in the
three months ended October 31, 1998 as compared to $100,000 in
the three months ended October 31, 1997, representing an
increase of $100,000 or 100%. Equity in earnings from
partnerships was $500,000 in the nine months ended October 31,
1998 as compared to $400,000 in the nine months ended October 31,
1997, representing an increase of $100,000 or 25%. The increases
are attributable to the Syndication of additional properties in
which the Company retains a partnership interest.
Adult living rental revenues were $1.5 million and $3.1
million in the three and nine months ended October 31, 1998,
respectively. There were no adult living rental revenues in the
three and nine months ended October 31, 1997 because none of the
Company's newly developed adult living rental communities had
been completed during such periods.
There was no other income in the three months ended October
31, 1998 and 1997, respectively. Other income was $1.4 million
in the nine months ended October 31, 1998, as compared to
$300,000 in the nine months ended October 31, 1997, representing
an increase of $1.1 million or 366.7%. The other income in the
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nine months ended October 31, 1998 represent developer's fees
the Company has earned in connection with the four newly
developed adult living communities the Company operates pursuant
to long-term leases, which were placed in service in the nine
months ended October 31, 1998. The other income in the nine
months ended October 31, 1997 is due to the write off of a
liability.
Cost of Sales
Cost of sales (which includes (i) the cash portion of the
purchase price for Syndicated adult living communities plus
related transaction costs and expenses, (ii) any payments with
respect to Management Contract Obligations other than payments
relating to previously established deferred income liabilities
and (iii) any increase in Management Contract Obligations
established in the relevant periods, which are recorded as
additional deferred income liabilities) for the three months
ended October 31, 1998 was $5.4 million as compared to $10.9
million for the three months ended October 31, 1997, representing
a decrease of $5.5 million or 50.5%. The decrease is
attributable to (i) a lower amount of deferred income
liabilities established, (ii) a lower aggregate purchase prices
plus related transactions costs and expenses for the adult
living communities acquired and Syndicated as partially offset by
less favorable terms for the adult living community acquisitions
(in view of the relationship between initial cashflow generated
by the properties and their purchase prices) and (iii) a decrease
in the funding of Management Contract Obligations in the three
months ended October 31, 1998 as compared to the three months
ended October 31, 1997. Cost of sales for the nine months ended
October 31, 1998 was $24.0 million as compared to $25.9 million
in the nine months ended October 31, 1997, representing a
decrease of $1.9 million or 7.3%. The decrease is attributable to
(i) the lower aggregate purchase price plus related transaction
costs and expenses of the adult living communities acquired and
Syndicated due to more favorable terms for the adult living
communitity acquisitions, and (ii) the decrease in funding of the
Management Contract Obligations as partially offset by the
establishment of greater deferred income liabilities in the nine
months ended October 31, 1998 as compared to the nine months
ended October 31, 1997. Cost of sales and selling expenses as a
percentage of sales and syndication fee income for the three
months ended October 31, 1998 was 62.3% as compared to 102.5% for
the three months ended October 31, 1997. The decrease is
attributable to sales and syndication fee income decreasing less
than the decrease in cost of sales and selling expenses. Cost of
sales and selling expenses as a percentage of sales and
syndication fee income for the nine months ended October 31, 1998
was 87.9% as compared to 84.7% for the nine months ended October
31, 1997. The increase is attributable to sales and syndication
fee income decreasing more than the decrease in cost of sales and
selling expenses.
Several factors, including the decline of the real estate
market in the late 1980's and early 1990's, which resulted in a
number of distressed property sales and limited competition from
other prospective purchasers, allowed the Company to acquire
existing adult living communities at such time on relatively
favorable terms. Mortgage financing, however, was generally
either not available or available only on relatively unattractive
terms during this period, which made acquisitions more difficult
because they either required large outlays of cash or the use of
mortgage financing on relatively unfavorable terms. During the
last several years, several factors have contributed towards a
trend to less favorable terms for acquisitions of adult living
communities, including a recovery in the market for adult living
communities and increased competition from other prospective
purchasers of adult living communities. Although the Company
acquired adult living communities on more favorable terms in the
nine months ended October 31, 1998 as compared to the nine months
ended October 31, 1997, the Company acquired adult living
communities on less favorable terms in the three months ended
October 31, 1998 as compared to the three months ended October
31, 1997 and the Company believes that the general trend towards
less favorable acquisition terms experienced during the last
several years will continue in the future. In recent years,
however, the Company has been able to obtain mortgage financing
for a greater percentage of the purchase price than in previous
years. This factor, combined with an overall reduction of
interest rates, has partially offset the factors that have led to
more unfavorable acquisition terms. A significant change in
these or other factors (including, in particular, a significant
rise in interest rates) could prevent the Company from acquiring
communities on terms favorable enough to offset the start-up
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losses of newly-developed communities as well as the Company's
debt service obligations, Management Contract Obligations and the
Company's selling, and general and administrative expenses.
Selling Expenses
Selling expense for the three months ended October 31, 1998
was $1.5 million as compared to $1.8 million for the three months
ended October 31, 1997, representing a decrease of $300,000 or
16.7%. Selling expense for the nine months ended October 31,
1998 was $5.1 million as compared to $6.2 million for the nine
months ended October 31, 1997, representing a decrease of $1.1
million or 17.7%. The decreases are attributable to a lower
commission rate paid on a lower sales volume in the three and
nine months ended October 31, 1998 as compared to the three and
nine months ended October 31, 1997.
Interest Expense
Interest expense for the three months ended October 31, 1998
was $5.7 million as compared to $5.2 million in the three months
ended October 31, 1997, representing an increase of $500,000 or
9.6%. Interest expense for the nine months ended October 31,
1998 was $16.4 million as compared to $14.0 million for the nine
months ended October 31, 1997, representing an increase of $2.4
million or 17.1%. The increases are primarily attributable to
(i) an increase in the principal amount of debt and an increase
in interest rates for such debt during the three and nine months
ended October 31, 1998 as compared to the three and nine months
ended October 31, 1997, and (ii) interest on construction loans
payable on the three newly developed adult living communities
which the Company owns, which were placed in service in the three
and nine months ended October 31, 1998, which construction loan
interest was not expensed in the three and nine months ended
October 31, 1997 because such interest was capitalized as these
communities were under construction during such periods. Interest
expense included interest on debentures ("Debenture Debt") which
had an average interest rate of 12.05% and 12.04% per annum in
the nine months ended October 31, 1997 and 1998, respectively,
and was secured by the Purchase Notes the Company holds as a
result of its Syndication of multi-family properties prior to
1986 (the "Purchase Note Collateral"). During the nine months
ended October 31, 1998 and 1997, total interest expense with
respect to Debenture Debt was approximately $6.0 million and $6.2
million, respectively and the Purchase Note Collateral produced
approximately $2.9 million and $1.5 million, respectively, of
interest and related payments to the Company, which was $3.1
million and $4.7 million, respectively, less than the amount
required to pay interest on the Debenture Debt.
General and Administrative Expenses
General and administrative expenses were $2.4 million for
the three months ended October 31, 1998 and October 31, 1997
representing no change. General and administrative expenses for
the nine months ended October 31, 1998 were $7.5 million as
compared to $6.4 million for the nine months ended October 31,
1997, representing an increase of $1.1 million or 17.2%. The
increase is primarily attributable to (i) increases in
professional fees, salary costs and other office expenses in
arranging for the acquisition of the Company's portfolio of
Syndicated adult living communities, and in managing the
Company's portfolio of Syndicated and newly developed adult
living communities, which portfolio, in the aggregate, was larger
in the nine months ended October 31, 1998 than the Company's
portfolio in the nine months ended October 31, 1997, and (ii) an
increase in development-related overhead due to the completion of
seven newly developed adult living communities, which expenses
were previously capitalized.
Write-off of Registration Costs
The Company expensed approximately $3.1 million of costs
relating to its proposed initial public offering of equity
securities in Fiscal 1997. Such costs were incurred prior to
April 30, 1997.
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Adult living operating expenses
Adult living operating expenses consist of operating
expenses of the newly developed adult living communities which
the Company either owns or operates pursuant to long-term leases.
Adult living operating expenses were $1.9 million and $4.1
million in the three and nine months ended October 31, 1998,
respectively. In that no newly developed adult living
communities were completed in fiscal 1997, there was no adult
living operating expenses in the three and nine months ended
October 31, 1997.
Depreciation and Amortization
Depreciation and amortization consists of (i) amortization
of deferred debt expense incurred in connection with debt
issuance, (ii) amortization of leasehold costs incurred in
connection with four of the newly developed adult living
communities which the Company operates pursuant to long-term
leases, and (iii) depreciation of buildings, furniture and
equipment on three of the newly developed adult living
communities the Company owns directly. Depreciation and
amortization for the three months ended October 31, 1998 was $1.5
million as compared to $1.1 million for the three months ended
October 31, 1997, representing an increase of $400,000 or 36.4%.
Depreciation and amortization for the nine months ended October
31, 1998 was $3.9 million as compared to $2.7 million in the
nine months ended October 31, 1997, representing an increase of
$1.2 million or 44.4%. The increases are primarily attributable
to (i) the increase in amortization of deferred loan costs due to
the additional Debenture Debt and unsecured debt incurred by the
Company in the three and nine months ended October 31, 1998, as
compared to the three and nine months ended October 31, 1997,
(ii) the amortization of leasehold costs associated with the four
newly developed communities operated by the Company pursuant to
long-term leases and (iii) the depreciation of buildings,
furniture and equipment associated with the three newly developed
adult living communities owned by the Company, which communities
described in (ii) and (iii) were not completed in Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed operations through
cash flow generated by operations, Syndications and borrowings
consisting of debt secured by promissory notes from limited
partners of the Syndicated partnerships ("Investor Note Debt"),
unsecured debt ("Unsecured Debt"), mortgage debt ("Mortgage
Debt") and Debenture Debt. Now that the Company has completed
development of seven newly-developed adult living communities,
the ownership and/or operation of these communities will be an
additional source of cash flow. The Company, however,
anticipates that each newly developed adult living community will
incur operating losses until it completes its initial lease-up.
The Company's principal liquidity requirements are for payment of
operating expenses, costs associated with development of new
adult living communities, debt service obligations, and
Management Contract Obligations.
Cash flows used by operating activities for the nine months
ended October 31, 1998 were $13.1 million and were comprised of
(i) net loss of $11.0 million plus (ii) adjustments for non-cash
items of $3.7 million less (iii) the net change in operating
assets and liabilities of $5.8 million. The adjustments for non-
cash items is comprised of depreciation and amortization of $3.9
million, the write-off of uncollected notes receivable of
$400,000 less deferred income earned of $600,000. The net change
in operating assets and liabilities of $5.8 million was primarily
attributable to an increase in notes and receivables and accrued
interest on notes and receivables of $11.6 million as offset by
an increase of other liabilities of $3.8 million. Approximately
72% of the increase in "notes and receivables" was attributable
to an increase in Purchase Notes arising from the Syndication of
adult living communities ("Adult Living Notes") due to new
Syndications, as offset by principal reductions on Adult Living
Notes relating to previous Syndications, and approximately 23% of
the increase in "notes and receivables" was primarily
attributable to an increase in advances made to Owning
Partnerships which own Syndicated multi-family properties
("Multi-Family Owning Partnerships"). 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 $1.5 million
less (iii) the net change in operating assets and liabilities of
$10.4 million. The adjustments for non-cash items is comprised
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of depreciation and amortization of $2.7 million, write-off of
registration costs of $3.1 million less deferred income earned
of $4.3 million.
Net cash used by investing activities for the nine months
ended October 31, 1998 of $18.0 million was comprised of an
increase of building, furniture and equipment of $9.4 million, an
increase in the cost of the adult living communities the Company
is constructing of $7.8 million, and an increase in investments
in general partner interests in adult living communities of
$800,000. Net cash used by investing activities in the nine
months ended October 31, 1997 of $13.8 million was comprised of
the increase in the cost of the adult living communities the
Company is constructing of $13.1 million and the increase in
investments in general partner interests in adult living
communities of $700,000.
Net cash provided by financing activities for the nine
months ended October 31, 1998 of $46.4 million was comprised of
(i) proceeds from the issuance of new debt of $40.4 million less
debt prepayments of $27.4 million plus (ii) proceeds from
construction mortgage financing of $9.9 million, less (iii)
payments of notes payable of $200,000 plus (iv) the proceeds of
notes payable of $300,000 plus (v) the decrease in other assets
of $1.1 million plus (vi) the net proceeds of the initial public
offering of $22.3 million. Net cash used 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 prepayments 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) proceeds of
notes payable of $2.0 million less (v) the increase in other
assets of $7.1 million.
At January 31, 1998, the Company had total indebtedness,
excluding accrued interest, of $160.9 million, consisting of
$65.5 million of Debenture Debt, $66.2 million of Unsecured Debt,
$5.0 million of Mortgage Debt and $24.2 million of Investor Note
Debt, and the Company had cash and cash equivalents at January
31, 1998 of $12.0 million. As of October 31, 1998, the Company
has increased Investor Note Debt from $24.2 million to $28.9
million, increased Unsecured Debt from $66.2 million to $68.6
million and increased debenture debt from $65.5 million to $71.2
million. As a result, total indebtedness, excluding accrued
interest, increased from $160.9 million to $173.7 million and the
Company had cash and cash equivalents at October 31, 1998 of
$27.4 million.
Of the principal amount of total indebtedness at January 31,
1998, $25.5 million becomes due in the fiscal year ending January
31, 1999; $38.6 million becomes due in the fiscal year ending
January 31, 2000; $25.6 million becomes due in the fiscal year
ending January 31, 2001; $32.4 million becomes due in the fiscal
year ending January 31, 2002; $15.1 million becomes due in the
fiscal year ending January 31, 2003, and the balance of $23.7
million becomes due thereafter. Of the amount maturing in the
fiscal year ending January 31, 1999, $2.3 million is Investor
Note Debt, all of which the Company repaid through the
collection of investor notes. The balance, approximately $23.2
million, includes $2.4 million of Debenture Debt and $20.8
million of Unsecured Debt, of which $18.0 million has been
repaid. The Company expects to repay the balance through funds
generated by the Company's business operations and/or to
refinance such debt by the issuance of new debt.
During the year ended January 31, 1998 and the nine months
ended October 31, 1998, pursuant to the Company's development
plan, first mortgage loans were obtained to finance approximately
80% of the cost of developing five new adult living communities.
The interest rate on four of the loans equals the 30 day LIBOR
plus 2 3/4% per annum. The fifth loan bears interest at the rate
of the prime rate plus 1.5% per annum. These loans mature between
November , 1999 and February, 2001. As of January 31, 1998 and
October 31, 1998, total funding under such first mortgage loans
amounted to $13.3 million and $23.2 million, respectively. The
Company intends to increase its construction loans payable as it
pursues its development plan.
Pursuant to the Company's development plan, two limited
partnerships, in each of which the Company holds a 1% general
partnership interest, have issued limited partnership interests
for aggregate capital contributions of $9.3 million, the net
proceeds of which have been used to make second mortgage loans to
the Company to fund approximately 20% of the cost of developing
three new adult living communities. Such second mortgage loans
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were entered into in 1996 and bear interest at the rate of
13.125% per annum. These second mortgage loans mature between
November 2001 and March 2002.
The Company's debt obligations contain various covenants and
default provisions, including provisions relating to, in some
obligations, certain Investing Partnerships, Owning Partnerships
or affiliates of the Company. The Company has experienced
fluctuations in its net worth over the last several years. At
January 31, 1995, the Company had a net worth of $30.7 million,
at January 31, 1996, the Company had a net worth of $34.8
million, at January 31, 1997, the Company had a net worth of
$32.0 million, at January 31, 1998, the Company had a net worth
of $26.4 million and at October 31, 1998 the Company had a net
worth of $37.7 million. Pursuant to one obligation, the Company
is required to maintain a net worth of no less than $35.3
million. Certain obligations of the Company contain covenants
requiring the Company to maintain maximum ratios of the Company's
liabilities to its net worth. As of January 31, 1998, the most
restrictive covenant required that the Company maintain a ratio
of "loans and accrued interest payable" to consolidated net worth
of no more than 7 to 1. As of October 31, 1998, the most
restrictive covenant requires that the Company maintain a ratio
of debt for borrowed money to consolidated net worth of no more
than 10 to 1. At January 31, 1998 and October 31, 1998, the
Company's respective ratios were 6.1 to 1 and 5.5 to 1. 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 limited
partnership agreements of the Investing Partnerships provide that
the limited partners are entitled to receive for a period not to
exceed five-years specified distributions equal to 11% to 12% per
annum of their then paid-in scheduled capital contributions.
Pursuant to the management contracts with the Owning
Partnerships, for such five-year period, the Company has
Management Contract Obligations. During the nine months ended
October 31, 1998, the adult living communities with respect to
which the Company had such Management Contract Obligations paid
to the Company, after payment of all operating expenses and debt
service, an aggregate of $7.2 million for application to the
Company's Management Contract Obligations. During such period,
the Company's Management Contract Obligations exceeded such
payments by an aggregate of $6.0 million. The $6.0 million of
funding that was required in respect to Management Contract
Obligations for the nine months ended October 31, 1998 was
primarily attributable to (i) an increase in the scheduled
capital contributions by the limited partners on which the
Company is required to pay the specified rate of return, (ii) a
slight decrease in the average occupancy of certain adult living
communities in the Company's portfolio, and (iii) an increase in
operating expenses of the same adult living communities.
The aggregate amount of Management Contract Obligations
relating solely to returns to limited partners based on existing
management contracts is $2.8 million for the remaining portion of
Fiscal 1998, which will increase to $19.6 in Fiscal 1999, and
decrease to $19.5 million in Fiscal 2000, decrease to $15.3
million in Fiscal 2001 and decrease to $7.4 million in Fiscal
2002, and decrease to $1.2 million in Fiscal 2003. Such amounts
of Management Contract Obligations are calculated based upon all
remaining scheduled capital contributions with respect to fiscal
years 1998 through 2003. Actual amounts of Management Contract
Obligations in respect of such contracts will vary based upon the
timing and amount of such capital contributions. Furthermore,
such amounts of Management Contract Obligations are calculated
without regard to any cash flow the related properties may
generate, which would reduce such obligations, and are calculated
without regard to the Management Contract Obligations and
property cash flows relating to future Syndications.
The aggregate amount of the Company's Management Contract
Obligations will depend upon a number of factors including, among
others, the expiration of such obligations for certain
partnerships, the cash flow generated by the properties and the
terms of future Syndications. The Company anticipates that for
at least the next two years, the aggregate Management Contract
Obligations with respect to existing and future Syndications will
exceed the aggregate cash flow generated by the related
properties, which will result in the need to utilize cash
generated by the Company from sources other than the operations
of the Syndicated adult living communities to meet its Management
17
<PAGE>
Contract Obligations (including payment of specified returns for
distribution to limited partners) for these periods. In general,
the payment of expenses arising from obligations of the Company,
including Management Contract Obligations, have priority over
earnings that might otherwise be available for distribution to
stockholders. The Company intends to structure future
Syndications to minimize the likelihood that it will be required
to utilize the cash it generates to pay Management Contract
Obligations, but there can be no assurance that this will be the
case.
The initial five-year terms of the management contracts and
the related Management Contract Obligations have expired for 10
Owning Partnerships. Although the Company has no obligation to
fund operating shortfalls after the five-year term of the
management contracts, during the nine months ended October 31,
1998, the Company had advanced an aggregate of approximately
$905,000 to six of these Owning Partnerships to fund operating
shortfalls. These advances are included in the "notes and
receivables" recorded on the Company's Consolidated Balance
Sheet. Although the Company does not intend to do so in the
future, from time to time, the Company has also made
discretionary advances to Owning Partnerships beyond the
Management Contract Obligations period for the purpose of making
distributions to limited partners.
In the past, limited partners have been allowed to prepay
capital contributions. The percentage of the prepayments
received upon the closings of the sales of limited partnership
interests in Investing Partnerships averaged 78.8% for Fiscal
1997 and 67.9% for the nine months ended October 31, 1998.
Prepayments of capital contributions do not result in the
prepayment of the related Purchase Notes held by the Company.
Instead, such amounts are loaned to the Company by the Investing
Partnership. As a result of such loans and crediting provisions
of the related purchase agreements, the Company records the
Purchase Notes net of such loans. Therefore, these prepayments
act to reduce the recorded value of the Company's note
receivables and reduce interest income received by the Company.
Pursuant to the terms of the offerings, the Company has the
option not to accept future prepayments by limited partners of
capital contributions. The Company presently intends to continue
to accept prepayments by limited partners of capital
contributions. In addition, by arranging for the acquisition of
Syndicated adult living communities through, and acting as the
general partner of, partnerships, the potential exists for claims
by limited partners for violations of the terms of the
partnership agreements, or management contracts and of applicable
federal and state securities and blue sky laws and regulations.
The Company holds 165 Purchase Notes ("Multi-Family Notes")
which are secured by controlling interests in Multi-Family Owning
Partnerships which own 125 multi-family properties that were
Syndicated by the Company prior to 1986 (the "Multi-Family
Properties"). Although it has no obligation to do so, the
Company has also made advances to various Multi-Family Owning
Partnerships to support the operation of their properties, which
advances are included in the "notes and receivables" recorded on
the Company's Consolidated Balance Sheet. The Multi-Family Notes
and the related advances entitle the Company to receive all cash
flow and sale or refinancing proceeds generated by the respective
Multi-Family Property until the Multi-Family Note and related
advances are satisfied. As of October 31, 1998, the recorded
value, net of deferred income, of Multi-Family Notes was $107.0
million. All but approximately $2.6 million of the $62.8 million
of advances included in the "notes and receivables" recorded on
the Company's Consolidated Balance Sheet as of October 31, 1998
relate to advances to Multi-Family Owning Partnerships.
Fourteen of the Multi-Family Owning Partnerships are in
default on their respective mortgages. The Company neither owns
nor manages these properties, nor is it the general partner of
any Multi-Family Owning Partnerships, but rather, merely holds
the related Multi-Family Notes and related advances as
receivables. The Company, therefore, has no liability in
connection with these mortgage defaults. In that these mortgages
were insured by the United States Department of Housing and Urban
Development ("HUD"), HUD became the holder of these mortgages
after they went into default. In the past, HUD has instituted
initiatives to deal with its portfolio of defaulted mortgages,
such as selling such mortgages at auction. Although HUD has
discontinued this auction program, these auctions resulted in two
of the fourteen defaulted mortgages being sold to third parties,
subject to existing workout agreements. The remaining twelve
defaulted mortgages are held by HUD, with workout agreements in
place regarding six of them with terms of from one to nine years.
HUD's policies regarding the granting of workout agreements have
become more restrictive in recent years and there can be no
assurance that HUD will renew these workout agreements or
18
<PAGE>
restructure the related mortgage debt when these workout
agreements expire. Similarly, there can be no assurance that the
related Multi-Family Owning Partnerships can obtain workout
agreements for the six defaulted mortgages without workout
agreements currently in place. HUD has recently taken steps to
foreclose on four of the defaulted mortgages without workouts.
The related Multi-Family Owning Partnerships are negotiating with
HUD to attempt to obtain workout agreements or mortgage
restructuring, which restructurings are now possible pursuant to
new HUD policies. As a result of such negotiations, HUD rescinded
the step towards foreclosure it took regarding one of these four
properties and has verbally agreed to delay any further action to
foreclose on the other three properties until negotiations on
workout agreements and mortgage restructurings are concluded.
Although these Multi-Family Owning Partnerships believe that all
of these negotiations will be successful, there can be no
assurance that this will be the case and that foreclosure can be
avoided. As of October 31, 1998, the recorded value, net of
deferred income, of the Multi-Family Notes and the related
advances held by the Company relating to these fourteen Multi-
Family Owning Partnerships was $33.0 million. The Company has
established reserves of $10.1 million to address the possibility
that these Multi-Family Notes and related advances may not be
collected in full. One of the Multi-Family Owning Partnerships
whose defaulted mortgage was sold at auction, subject to an
existing workout agreement, has reached an agreement with the new
mortgage holder to purchase the mortgage at a discount. Although,
this Multi-Family Owning Partnership anticipates that if it will
purchase the mortgage with the proceeds of new mortgage financing
from a third-party lender (from whom it has obtained a verbal
commitment) and a capital contribution from the related multi-
family Investing Partnership, there can be no assurance that the
purchase and refinancing of this defaulted mortgage will in fact
close. In view of the foregoing, it is possible that the fourteen
Multi-Family Owning Partnerships which are in default of their
mortgages will file bankruptcy petitions or take similar actions
seeking protection from their creditors and/or lose their
properties through foreclosure.
Many of the Multi-Family Properties are dependent to varying
degrees on housing assistance payment contracts with HUD, most of
which will expire over the next few years. In view of the
foregoing, there can be no assurance that other Multi-Family
Owning Partnerships will not default on their mortgages, file
bankruptcy petitions, and/or lose their properties through
foreclosure. The Company neither owns nor manages these
properties, nor is it the general partner of any Multi-Family
Owning Partnerships, but rather, holds the Multi-Family Notes and
related advances as receivables. Any such future mortgage
defaults could, and any such future filings of bankruptcy
petitions or the loss of any such property through foreclosure
would, cause the Company to realize a non-cash loss equal to the
recorded value of the applicable Multi-Family Note plus any
related advances, net of any deferred income recorded and any
reserves for such Multi-Family Note and advances previously
established by the Company, which would reduce such loss. In
addition, the Company could be required to realize such a non-
cash loss even in the absence of mortgage defaults, bankruptcy
petitions or the loss of any such property through foreclosure if
such note is considered impaired. Such impairment would be
measured under applicable accounting rules. Such losses, if any,
while non-cash in nature, could adversely affect the Company's
business, operating results and financial condition.
The Multi-Family Properties were typically built or acquired
with the assistance of programs administered by HUD that provide
mortgage insurance, favorable financing terms and/or rental
assistance payments to the owners. As a condition to the receipt
of assistance under these and other HUD programs, the properties
must comply with various HUD requirements, including limiting
rents on these properties to amounts approved by HUD. Most of
the rental assistance payment contracts relating to the Multi-
Family Properties will expire over the next few years. HUD has
introduced various initiatives to restructure its housing subsidy
programs by increasing reliance on prevailing market rents, and
by reducing spending on future rental assistance payment
contracts by, among other things, not renewing expiring contracts
and by restructuring mortgage debt on those properties where a
decline in rental revenues is anticipated. Due to uncertainty
regarding the final policies that will result from these
initiatives and numerous other factors that affect each property
which can change over time (including the local real estate
market, the provisions of the mortgage debt encumbering the
property, prevailing interest rates and the general state of the
economy) it is impossible for the Company to determine whether
these initiatives will have an impact on the Multi-Family
Properties and, if there is an impact, whether the impact will be
positive or negative.
Certain of the Multi-Family Owning Partnerships intend to
take advantage of the new HUD initiatives and/or improving market
conditions to either refinance their HUD-insured mortgages with
conventional mortgage financing or restructure their HUD-insured
19
<PAGE>
mortgage debt. In some cases, the Multi-Family Owning
Partnerships will make certain improvements to the properties and
may not renew rental assistance contracts as part of a strategy
to reposition those Multi-Family Properties as market-rate, non-
subsidized properties. Sixteen of such Multi-Family Owning
Partnerships refinanced their HUD-insured mortgages with
conventional mortgage financing and a number of others have
applications for commitments pending. To the extent that any of
these Multi-Family Owning Partnerships complete such actions, the
Company believes that the ability of the Investing Partnerships
relating to the Multi-Family Properties (the "Multi-Family
Investing Partnerships") to make payments to the Company on their
respective Multi-Family Notes will be enhanced and accelerated.
However, there can be no assurance that these additional Multi-
Family Owning Partnerships will be able to refinance their
mortgages or will be able to successfully reposition any of the
Multi-Family Properties.
The future growth of the Company will be based upon the
continued acquisition and Syndication of existing adult living
communities and the development of newly-constructed adult living
communities, which the Company does not intend to Syndicate. The
Company anticipates that it will acquire between six and twelve
existing adult living communities over the next two years. It is
anticipated that acquisitions of existing adult living
communities will be arranged by utilizing a combination of
mortgage financing and Syndications. The Company holds contracts
to acquire adult living communities in Seward, Nebraska,
Henderson, Kentucky and Radcliff, Kentucky, respectively. The
Company regularly obtains acquisition mortgage financing from two
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 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 new Investor
Note Debt lenders which the Company believes will have sufficient
lending capacity to meet all of the Company's foreseeable
Investor Note Debt borrowing requirements on acceptable terms.
The Company anticipates that the proceeds of the Company's
recently completed initial public offering, funds generated by
its business operations and construction mortgage financing will
provide sufficient funds to pursue its development plan (as
described above) for at least 6 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 6 months at its projected rate of development.
There can be no assurance that funds generated by these potential
sources will be available or sufficient to complete the Company's
development plan. In addition, there are a number of
circumstances beyond the Company's control and which the Company
cannot predict that may result in the Company's financial
resources being inadequate to meet its needs. A lack of
available funds may require the Company to delay, scale back or
eliminate some of the adult living communities that are currently
contemplated in its development plan.
The first new communities developed pursuant to the
Company's development plan are in Texas. The Company has
completed construction with mortgage financing on adult living
communities in Corpus Christi, Temple, and Round Rock, Texas,
respectively. The Company has commenced construction with
construction financing on adult living communities in Tyler,
League City, and Fort Bend County, Texas. The Company has
acquired an additional site in Amarillo, Texas. The Company has
options to acquire sites in Crestview Hills, Kentucky, Jackson,
Tennessee, Peachtree City, Georgia and Cool Springs, Tennessee
respectively and is negotiating with several lenders to obtain
financing to develop these sites.
20
<PAGE>
The Company has, and may in the future, utilize long-term
lease financing arrangements to develop and operate new
communities. The Company has obtained financing of up to $39
million, of which approximately $35 million has been funded, from
Capstone for 100% of the development cost of four adult living
communities that are being operated by the Company pursuant to
long-term leases with Capstone. The Company has completed
construction on all four of these communities in San Angelo, El
Paso, Wichita Falls and Abilene, Texas, respectively.
The Company is actively engaged in negotiations with other
mortgage and long-term lease lenders to provide additional
construction financing. The Company anticipates that most of the
construction mortgage loans it obtains to finance the development
and lease-up costs of new adult living communities will contain
terms where the lender will fund at least 80% of such costs,
requiring the Company to contribute approximately 20% of such
costs.
Other than as described herein, management is not aware of
any other trends, events, commitments or uncertainties that will,
or are likely to, materially impact the Company's liquidity.
YEAR 2000 UPDATE
The Company is providing the following Year 2000 information
in compliance with the new disclosure requirements of the
Securities and Exchange Commission.
Year 2000 Overview - The Year 2000 issue is the result of
many computer systems and non-information technology systems
which rely upon embedded computer technology using only the last
two digits to refer to a year and therefore being unable to
distinguish between the years 1900 and 2000. If not corrected,
many computer applications that are date sensitive could fail or
create erroneous results. As part of the process of upgrading
its internal computer hardware and software and in anticipation
of the Year 2000 issue, the Company began to audit, inventory,
modify and replace its mission critical software and hardware
(including personal computers, spread sheets, and word
processing) in its Fort Lee, New Jersey and Boca Raton, Florida
corporate offices in 1997 ("Year 2000 Project"). During 1998,
the Company's Year 2000 Project was extended to include software
and hardware located at the Syndicated adult living communities
and the newly constructed adult living communities, "embedded
technology" (such as telephones, fax machines, copiers and
postage machines), property and corporate facilities (such as
security/fire systems, emergency call systems, elevators, and
HVAC systems) and business relationships with governmental
agencies, utilities and material third party vendors, and service
providers.
The Company has separate computer hardware and software
systems at each of its Fort Lee, New Jersey and Boca Raton,
Florida offices. Each office has an intra-office network. None
of the Syndicated adult living properties or newly constructed
adult living properties are part of a computer network. The
Company is using a multi-step approach in conducting its Year
2000 Project. These steps are: inventory, assessment,
remediation and testing, and contingency planning. The first
step, an inventory of all systems and devices with potential year
2000 problems has been completed. The next step, an assessment
of such inventory to determine the state of year 2000 readiness
for material systems and devices has also been completed for the
Company's two offices and it has been completed at the majority
of the Syndicated adult living properties and newly constructed
adult living properties. A majority of the remediation and
testing of the Company's software and hardware has already been
completed and full completion is anticipated to occur by July 31,
1999. To date, the Company has updated or replaced the
following financial and accounting systems with Year 2000
compliant systems: accounting servers and related hardware,
accounts payable systems, accounts receivable systems, general
ledgers, cash management programs and payroll systems. In
addition, the Company has updated the network software located in
the Company's two offices and replaced substantially all of the
desk-top personal computers located therein. The construction
server and data base are expected to be upgraded by the end of
March 1999.
However, even if the Company is successful in becoming year
2000 compliant, the Company remains at risk from year 2000
failures caused by key third parties. The Company has therefore
initiated efforts with key third parties to assess and wherever
possible remediate Year 2000 issues. In most cases, the Company
21
<PAGE>
will be relying upon statements from such entities as to the Year
2000 readiness of their systems and will not attempt any
independent verification. To date, the Company has not received
sufficient information from such entities to complete its
assessment of their year 2000 compliance. In addition, the
Company cannot predict the outcome of other companies'
remediation efforts.
Year 2000 Costs - The total cost associated with the Year
2000 Project to become Year 2000 compliant is not expected to be
material to the Company's financial position. The Company
currently plans to complete the Year 2000 Project by July 31,
1999. The cost of the Company's total Year 2000 Project is
based on presently available information. The Company does not
separately track the internal costs incurred for the Year 2000
Project. Such costs are principally the related payroll costs
for its information systems group. The total remaining cost of
the year 2000 Project is estimated at approximately $50,000.
Substantially all of this $50,000 is related to the cost to
replace software and computers. To date, the Company incurred
approximately $10,000 related to the Year 2000 Project.
Substantially all of this $10,000 is related to the cost to
replace software and computers. The costs of the project and the
date on which the Company plans to complete the Year 2000
modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third
parties' Year 2000 preparedness and other factors.
Risks - The failure to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain
normal business activities or operations. The Company believes
that all material Year 2000 problems which are within its control
will be corrected by July 31, 1999 and therefore such problems
are not anticipated to have a material adverse affect on the
Company's financial position and results of operations. Even if
the Company successfully remediates its year 2000 issues, it can
be materially and adversely affected by failures of third parties
to remediate their own Year 2000 issues. The Company believes
that the most reasonably likely worst case scenario is the loss
of utility service (telecommunications and power) at the
Company's corporate offices, and all or some of the adult living
communities it operates. Based upon procedures which are
currently in place and the contingency plans which are being
prepared and anticipated to be put in place, such a scenario is
not expected to have a material adverse affect on the Company's
financial position and results of operations.
Contingency Plans - Contingency plans are anticipated to be
prepared so that the Company's critical business processes can be
expected to continue to function on January 1, 2000 and beyond.
Such plans are anticipated to be developed by July 31, 1999.
These plans will attempt to mitigate both internal risks as well
as potential risks due to business relationships with third
parties.
NEW ACCOUNTING PRONOUNCEMENTS
Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. In accordance with Statement No. 131, the
Company has elected not to apply this statement to its interim
financial statements in Fiscal 1998; however, comparative
information for interim periods in Fiscal 1998 will be reported
in financial statements for interim periods in Fiscal 1999.
Segment information will be provided based upon the Company's
primary revenue sources.
In February 1998, the FASB issued Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits". Statement No. 132 is effective for fiscal years
beginning after December 15, 1997. Statement No. 132 revises
employers' disclosure requirements concerning pension and other
postretirement benefit plans by standardizing such disclosure
requirements to the extent practicable, requires additional
information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful as
they were when Statements No. 87, "Employers' Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
22
<PAGE>
Benefits", and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", were issued. Statement No. 132
suggests combined formats for presentation of pension and other
postretirement benefit disclosures and permits reduced
disclosures for nonpublic entities. Statement No. 132 will not
have any material effect on disclosures presented by the Company.
In June of 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company's use of derivative instruments has
consisted of a treasury bill lock related to a specific debt
financing. While the Company has not completed its analysis of
Statement No. 133 and has not made a decision regarding the
timing of adoption, it does not believe that adoption will have a
material effect on its financial position and results of
operations based on its current use of derivative instruments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
NOT APPLICABLE
PART II - OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the registration statements (Nos. 333-05955
and 333-43331) for the Company's initial public offering of its
common stock, $.01 par value, was March 13, 1998. The offering
commenced on March 16, 1998. The managing underwriter of the
offering was Royce Investment Group, Inc. ("Royce"). Pursuant to
the offering, the Company sold to the public 2,800,000 shares of
its common stock at an initial offering price of $9.50 per share.
The aggregate price of the offering registered by the Company was
$26.6 million. On April 29, 1998, pursuant to an over-allotment
option granted to the underwriters, John Luciani and Bernard M.
Rodin (the "Selling Shareholders") each sold 173,030 shares of
the Company's common stock to the public at a price of $9.50 per
share. The aggregate price of the shares offered by and
registered on behalf of the Selling Shareholders was $3,287,600.
Under the terms of the offering, the Company incurred
underwriting discounts of $1.6 million, and the Selling
Shareholders incurred aggregate underwriting discounts of
$197,250. The Company incurred the following expenses in
connection with the offering: (i) a non-accountable expense
allowance paid to Royce in the amount of $798,000, (ii) a
consulting fee paid to Royce in the amount of $266,000, and (iii)
other expenses related to the offering in the amount of $1.5
million.
The net proceeds that the Company received as a result of the
offering were 22.3 million. As of October 31, 1998, the
Company's net proceeds have been used as follows: $15.3 million
has been used to purchase a series of treasury bills pending
application of the funds, $6.9 million has been used for the
purchase of land and towards the construction of plant, building
and facilities and $100,000 has been used for working capital.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
(27) Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on October 13, 1998. Under Item
4--Change in Registrant's Certifying Accountant, the
Company announced the appointment of BDO Seidman, LLP
as the Company's independent accountants and the
Company's decision not to continue the engagement of
Deloitte & Touche LLP.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GRAND COURT LIFESTYLES, INC.
(Registrant)
/s/ Bernard M. Rodin
--------------------
Bernard M. Rodin
Chief Financial Officer
and Principal Financial Officer
Dated: December 15, 1998
25
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule.
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS, STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY AND STATEMENTS OF CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 27,369
<SECURITIES> 0
<RECEIVABLES> 252,481
<ALLOWANCES> 10,109
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 34,191
<DEPRECIATION> 212
<TOTAL-ASSETS> 335,317
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 178
<OTHER-SE> 37,519
<TOTAL-LIABILITY-AND-EQUITY> 335,317
<SALES> 27,074
<TOTAL-REVENUES> 51,028
<CGS> 23,956
<TOTAL-COSTS> 5,089
<OTHER-EXPENSES> 16,408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,441
<INCOME-PRETAX> (10,866)
<INCOME-TAX> (138)
<INCOME-CONTINUING> (11,004)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,004)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
