Filed Pursuant to Rule 424(b)(3)
Registration No. 333-88685
PROSPECTUS
GRAND COURT LIFESTYLES, INC.
EXCHANGE OFFER
GRAND COURT IS OFFERING TO ISSUE ITS
11% SERIES A EXCHANGE NOTES DUE DECEMBER 15, 2005
IN EXCHANGE FOR ALL OF ITS OUTSTANDING
11% SERIES A NOTES DUE DECEMBER 15, 2005
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, JANUARY 28, 2000 UNLESS EXTENDED
. The new notes will
. bear interest at 11% per annum,
. mature on December 15, 2005 and
. be redeemable, at the option of Grand Court, as described in this
prospectus.
These terms are the same as the terms of the old notes. The new notes,
however, will not be subject to any restrictions on transfer.
. Grand Court will accept all notes that noteholders properly tender and do
not withdraw before the expiration of the exchange offer.
. You will not recognize any income, gain or loss for U.S. federal income tax
purposes as a result of the exchange.
. Like the old notes, the new notes will be unsecured obligations of Grand
Court.
. Grand Court has not imposed any conditions on the exchange offer.
. There will likely be no public market for the new notes.
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WE URGE YOU TO READ AND CONSIDER THE INFORMATION WE PROVIDE TO YOU IN THIS
PROSPECTUS ABOUT GRAND COURT AND THE NEW NOTES. IN ADDITION, WE ASK THAT YOU
CONSIDER THE RISK FACTORS NOTED ON PAGES 5 THROUGH 15 IN LIGHT OF YOUR
INVESTMENT OBJECTIVES AND THE FACT THAT AN INVESTMENT IN THE NEW NOTES INVOLVES
A HIGH DEGREE OF RISK.
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THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SEC OR ANY STATE SECURITIES
COMMISSION, NOR HAVE THOSE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION OTHERWISE IS A CRIMINAL OFFENSE.
November 15, 1999
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TABLE OF CONTENTS
PAGE
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SUMMARY.......................................................................3
RISK FACTORS..................................................................5
USE OF PROCEEDS..............................................................15
GRAND COURT..................................................................15
PROPERTIES...................................................................26
LEGAL PROCEEDINGS............................................................29
SELECTED CONSOLIDATED FINANCIAL DATA.........................................29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................32
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................53
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................53
DIRECTORS AND EXECUTIVE OFFICERS.............................................54
EXECUTIVE COMPENSATION.......................................................56
OPTION GRANTS IN LAST FISCAL YEAR............................................59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................59
THE EXCHANGE OFFER...........................................................61
DESCRIPTION OF THE NEW NOTES.................................................67
DESCRIPTION OF THE INDENTURE.................................................69
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS...............................75
PLAN OF DISTRIBUTION.........................................................78
ADDITIONAL INFORMATION.......................................................79
EXPERTS......................................................................79
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
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SUMMARY
Grand Court offers this summary solely to furnish limited information about
the exchange offer and the new notes. This summary does not contain all the
information you should consider. You should read the entire prospectus, before
making an investment decision.
GRAND COURT LIFESTYLES, INC.
Grand Court acquires, develops and manages senior living communities. Grand
Court's revenues are primarily derived from sales of partnership interests in
partnerships it organizes to acquire senior living communities. By managing
these communities, it also provides accommodations and services for the
residents of those communities.
THE EXCHANGE OFFER
GENERAL Grand Court is offering to exchange $1,000 in principal
amount of new notes for each $1,000 in principal amount of
old notes that noteholders properly tender and do not
withdraw before the expiration date. Grand Court will issue
the new notes on or promptly after the expiration date.
There are $15,000,000 aggregate principal amount of old
notes outstanding. See "The Exchange Offer."
EXPIRATION DATE The exchange offer will expire at 5:00 p.m., New York
City time, on January 28, 2000 unless extended. If extended,
the term "expiration date" will mean the latest date and
time to which the exchange offer is extended. Grand Court
will accept for exchange any and all old notes which are
properly tendered in the exchange offer and not withdrawn
before 5:00 p.m., New York City time, on the expiration
date.
RESALE OF
NEW NOTES Based on interpretive letters written by the staff of the
SEC to other companies, Grand Court believes that, subject
to certain exceptions, the new notes may generally be
offered for resale, resold and transferred by any holder
thereof without compliance with the registration and
prospectus delivery provisions of the Securities Act.
However, any holder who is an "affiliate" of Grand Court, as
that term is defined in Rule 405 under the Securities Act,
would have to comply with these provisions unless an
exemption was available.
If Grand Court's belief is inaccurate, holders of new notes
who offer, resell or otherwise transfer new notes in
violation of the Securities Act may incur liability under
that act. Grand Court will not assume or indemnify holders
against this liability.
CONDITIONS TO THE
EXCHANGE OFFER Grand Court may terminate the exchange offer before the
expiration date if it determines that its ability to proceed
with the exchange offer could be materially impaired due to:
. any legal or governmental action;
. any new law, statute, rule or regulation; or
. any interpretation by the staff of the SEC of any
existing law, statute, rule or regulation.
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TENDER PROCEDURES -
REGISTERED
HOLDERS If you are a registered holder of old notes and you wish to
participate in the exchange offer, you must complete, sign
and date the letter of transmittal delivered with this
prospectus, or a facsimile thereof. You should mail or
otherwise transmit the letter of transmittal or facsimile,
together with your old notes and any other required
documentation to The Bank of New York, as exchange agent.
TENDER PROCEDURES -
BENEFICIAL
OWNERS If you are a beneficial holder and wish to tender old notes
that are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee, you should
(i) contact the registered holder promptly and instruct the
registered holder to tender on your behalf, and (ii) follow
the instructions received from the registered holder with
respect to tendering procedures.
WITHDRAWAL RIGHTS You may withdraw tenders of old notes at any time
before 5:00 p.m., New York City time, on the expiration
date.
CERTAIN FEDERAL
INCOME TAX
CONSIDERATIONS The exchange of new notes for old notes will not be a
taxable event for U.S. federal income tax purposes. As a
result, you will not recognize any income, gain or loss with
respect to the exchange.
EXCHANGE AGENT The Bank of New York is the exchange agent. Its telephone
number is (212) 815-6337. Its address is 101 Barclay Street,
New York, New York 10286.
THE NEW NOTES
OFFERED SECURITIES $15,000,000 principal amount of 11% Series A Exchange Notes
Due December 15, 2005
MATURITY DATE December 15, 2005
INTEREST PAYMENT
DATES The 15th day of each month and at maturity.
OPTIONAL
REDEMPTION Grand Court will have the option to redeem the new notes,
in whole at any time or in part from time to time, without
any penalty or premium, as described under "Description of
the New Notes - Redemption at the Option of Grand Court" on
page 70.
SECURITY; RANKING The new notes will be unsecured obligations of Grand Court,
will rank equally with all existing and future unsecured and
unsubordinated indebtedness of Grand Court.
PRINCIPAL EXECUTIVE
OFFICE 2650 North Military Trail
Suite 350
Boca Raton, Florida 33431
(561) 997-0323
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RISK FACTORS
Prospective participants in the exchange offer should consider carefully the
factors set forth below, as well as other information contained in this
Prospectus, before making a decision to exchange the old notes for the new notes
offered hereby.
The following risks relate generally to the new notes and the old notes.
THE NEW NOTES WILL BE UNSECURED. IN BANKRUPTCY, HOLDERS OF UNSECURED OBLIGATIONS
BEAR A GREATER RISK OF NON-PAYMENT THAN HOLDERS OF GRAND COURT'S SECURED
OBLIGATIONS.
The new notes will be unsecured obligations of Grand Court and holders of
the new notes will have no preference over holders of Grand Court's existing and
future unsecured indebtedness. The new notes will be senior in right of payment
to all of Grand Court's future subordinated indebtedness. Grand Court has
granted, and expects to continue to grant, security interests in its assets in
connection with additional borrowings. Therefore, the new notes will be
effectively subordinated to those loans to the extent of such security
interests. In the event of bankruptcy, the holder of a security interest with
respect to any of Grand Court's assets would be entitled to have the proceeds of
those assets applied to the payment of that holder's claim(s) before the
remaining proceeds, if any, would be applied to the claims of unsecured
creditors, including holders of the new notes.
GRAND COURT HAS INCURRED NET LOSSES IN RECENT YEARS. SHOULD GRAND COURT CONTINUE
TO EXPERIENCE LOSSES, IT COULD ADVERSELY AFFECT GRAND COURT'S ABILITY TO OPERATE
ITS BUSINESS AND REPAY THE NEW NOTES.
Although Grand Court recognized a profit of $3.1 million in the first six
months of 1999, it incurred net losses of approximately $23.3 million, $2.5
million and $13.0 million for the fiscal years ended January 31, 1997, 1998 and
1999, respectively. Any future losses could adversely affect Grand Court's
business, financial condition, ability to obtain financing and ability to repay
the new notes.
GRAND COURT HAS A SUBSTANTIAL AMOUNT OF DEBT OBLIGATIONS. THERE IS A RISK THAT
GRAND COURT MAY NOT BE ABLE TO MEET ITS DEBT OBLIGATIONS AND THAT RESTRICTIVE
COVENANTS IN SUCH OBLIGATIONS COULD GIVE RISE TO DEFAULTS.
At July 31, 1999, Grand Court had $176.8 million of debt excluding:
(1) accrued interest of $900,000; and (2) construction and mortgage indebtedness
of $7.3 million. As of July 31, 1999, this debt included $15.0 million of old
notes. There is a risk that Grand Court may not be able to meet its substantial
debt obligations.
At July 31, 1999, the average interest rate of the $176.8 million of debt
was 11.56% per annum. This debt matures as follows:
. $10.7 million in the remaining portion of the fiscal year ending
January 31, 2000;
. $32.6 million in the fiscal year ending January 31, 2001;
. $38.3 million in the fiscal year ending January 31, 2002;
. $21.8 million in the fiscal year ending January 31, 2003;
. $10.3 million in the fiscal year ending January 31, 2004; and
. the balance of $63.1 million becomes due thereafter.
Grand Court intends to incur additional secured debt and/or unsecured debt.
This debt would be used for (1) refinancing existing debt; (2) financing a
portion of the costs associated with the plan to develop senior living
communities, and/or (3) working capital. Any additional debt issuances will be
subject to market conditions, the availability of funds generated by Grand
Court's operations and covenants under existing lending agreements.
Grand Court's debt obligations contain various covenants and default
provisions. Covenants and default provisions are also in debt obligations of the
partnerships in which Grand Court is a general partner. Pursuant to one
obligation, Grand Court is required to maintain a net worth of no less than
$35.3 million. Grand Court has experienced the following fluctuations in its net
worth over the last several years and the six months ended July 31, 1999:
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. at January 31, 1996, Grand Court had a net worth of $34.8 million;
. at January 31, 1997, Grand Court had a net worth of $32.0 million;
. at January 31, 1998, Grand Court had a net worth of $26.4 million;
. at January 31, 1999, Grand Court had a net worth of $35.7 million; and
. at July 31, 1999, Grand Court had a net worth of $38.6 million.
Certain obligations of Grand Court contain covenants requiring Grand Court
to maintain maximum ratios of Grand Court's liabilities to its net worth. The
most restrictive covenant requires that Grand Court maintain a ratio of
liabilities to consolidated net worth of no more than 10 to 1. At January 31,
1999, Grand Court's liabilities to consolidated net worth ratio was 8.2 to 1. At
July 31, 1999, Grand Court's liabilities to consolidated net worth ratio was 7.0
to 1. In addition, certain obligations of Grand Court provide that an event of
default will arise upon the occurrence of a material adverse change in the
financial condition of Grand Court or upon a default in other obligations of
Grand Court.
If Grand Court defaults in its debt obligations, Grand Court's business,
operating results and financial condition could be adversely affected.
EVEN THOUGH GRAND COURT DOES NOT OWN THE SYNDICATED SENIOR LIVING COMMUNITIES,
THE MANAGEMENT AGREEMENTS RELATING TO THESE COMMUNITIES PROVIDE THAT GRAND COURT
BEARS THE RISK OF OPERATIONS AND FINANCIAL LIABILITY OF THESE COMMUNITIES FOR
APPROXIMATELY THE FIVE-YEAR TERM OF EACH CONTRACT.
As a result of its obligations under the management contracts relating to
the syndicated senior living communities it operates, Grand Court and its
stockholders bear the risk of operations and financial liability of each of
these communities for approximately the five-year term of each contract. See
"Grand Court -- Syndications." These obligations require Grand Court to pay all
community operating expenses and amounts necessary to pay specified returns to
limited partners if the cash flow of the syndicated community is insufficient to
do so. Each management contract, however, rewards Grand Court for successful
management of the property by allowing Grand Court to retain any cash flow
generated by the syndicated community in excess of the amount needed to satisfy
the management contract obligations.
To the extent that Grand Court must expend funds to meet these obligations,
Grand Court will have fewer funds available to utilize for other purposes,
including funds for application to its development plan, interest and/or
principal payments on its debt obligations, distributions to stockholders, and
to meet other liquidity and capital resource commitments.
As of July 31, 1999, the total current amount of management contract
obligations relating solely to specified investment returns to limited partners
is:
. $10.0 million for the remainder of fiscal 1999;
. $21.0 million in fiscal 2000;
. $17.5 million in fiscal 2001;
. $10.2 million in fiscal 2002;
. $ 4.7 million in fiscal 2003; and
. $ 1.0 million in fiscal 2004.
These management contract obligations are calculated based upon all
remaining scheduled capital contributions with respect to fiscal years 1999
through 2004. Furthermore, the management contract obligations are calculated
without regard to: (1) any cash flow the related communities may generate, which
would reduce such obligations; and (2) the management contract obligations and
property cash flows relating to future syndications.
Grand Court anticipates that for at least the next two years, the aggregate
management contract obligations with respect to existing and future syndications
will exceed the net aggregate cash flow generated by the related properties.
Therefore, Grand Court will have to use cash generated from sources other than
the operations of the related syndicated communities to meet its management
contract obligations. Grand Court will attempt to structure future syndications
to minimize the likelihood that it will be required to utilize the cash it
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generates to pay the management contract obligations, but there can be no
assurance that this will be the case.
GRAND COURT NEEDS ADDITIONAL FINANCING TO PURSUE ITS DEVELOPMENT PLAN. IF GRAND
COURT IS UNABLE TO OBTAIN FINANCING FOR NEW PROJECTS, ITS STRATEGY TO EXPAND ITS
BUSINESS COULD BE DELAYED.
Grand Court has instituted its development plan pursuant to which:
. it has completed construction of eight senior living communities;
. has commenced construction on three additional senior living
communities; and
. intends to commence construction of between eight to twelve additional
senior living communities over the next two years.
Grand Court anticipates that it has sufficient funds to pursue its
development plan for at least six months at the projected rate of development.
Grand Court will use the proceeds of its initial public offering of common
stock, funds generated by its business operations and construction mortgage
financing during this period. Grand Court will use the proceeds of:
(1) anticipated joint venture arrangements of newly developed communities,
(2) refinancings or sale-leasebacks of stabilized newly developed communities at
higher principal amounts than the original construction financings,
(3) additional long-term leases or similar forms of financing which require the
investment of little or no capital on the part of Grand Count, and/or (4) funds
raised through the issuance of securities, to continue with its development plan
for more than the next six 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 its development plan. A lack of available
funds may require Grand Court to delay, scale back or eliminate some of the
development communities that are currently contemplated in its development plan.
In addition, there are a number of circumstances beyond Grand Court's control
and which Grand Court cannot predict that may result in Grand Court's financial
resources being inadequate to meet its needs.
DELAYS AND COST OVERRUNS IN DEVELOPING NEW COMMUNITIES ARE POSSIBLE.
DIFFICULTIES IN COMPLETING PENDING AND FUTURE PROJECTS COULD PREVENT OR DELAY
GRAND COURT'S STRATEGY TO EXPAND ITS BUSINESS.
The newly developed communities already completed or currently under
construction have been, or are being, completed according to their respective
construction schedules. Grand Court cannot assure investors, however, that it
will not suffer development delays in the future. Development can be delayed or
precluded by various zoning, healthcare licensing and other applicable
governmental regulations and restrictions. Real estate development projects
generally are subject to various risks, including permitting, licensing and
construction delays, that may result in construction cost overruns and longer
periods of operating losses. Grand Court relies upon third-party general
contractors to construct the newly developed communities. There can be no
assurance that Grand Court will not experience difficulties in working with
general contractors and subcontractors. These difficulties could result in
increased construction costs and delays. Furthermore, project development is
subject to a number of contingencies over which Grand Court will have little
control. The occurrence of any of the following events could adversely affect
project cost and completion time:
. inability to obtain financing;
. shortages of or the inability to obtain labor or materials;
. the inability of the general contractors or subcontractors to perform
under their contracts;
. strikes;
. adverse weather conditions; and
. changes in applicable laws or regulations or in the method of applying
such laws and regulations.
If Grand Court's development schedule is delayed or scaled back, Grand Court's
business, operating results and financial condition could be adversely affected.
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THE SENIOR LIVING FACILITIES MANAGED BY GRAND COURT ARE ENCUMBERED WITH MORTGAGE
AND LEASE FINANCING. THE USE OF LEASE AND MORTGAGE FINANCING FOR ITS PROJECTS
CONSUMES A SUBSTANTIAL PORTION OF THE CASH GENERATED BY SUCH COMMUNITIES.
The syndicated senior living communities currently managed by Grand Court
are generally encumbered with mortgage financing. While the mortgage loans
encumbering these syndicated communities are obligations of the owning
partnerships rather than direct obligations of Grand Court, Grand Court
typically provides a guaranty of certain obligations under the mortgages. For
example, Grand Court generally guarantees any costs incurred for the correction
of hazardous environmental conditions. As of October 4, 1999, Grand Court has
incurred no material costs or expenses relating to the correction of hazardous
environmental conditions. Although most of the mortgage loans are non-recourse,
as of July 31, 1999 (i) Grand Court was liable as a general partner for
approximately $12.7 million in principal amount of mortgage debt relating to six
syndicated senior living communities, and (ii) Grand Court's wholly owned
subsidiaries are liable as general partners for approximately $44.7 million in
principal amount of mortgage debt relating to eleven syndicated communities
managed by Grand Court. In the case of the general partner liabilities of
wholly-owned subsidiaries (whose only assets are the related general partner
interests), the only assets of Grand Court at risk of loss are the general
partner interests in the specific properties. As of July 31, 1999, Grand Court
fully guaranteed the mortgage debt relating to four syndicated communities in
the amount of $13.4 million.
As of July 31, 1999, the aggregate principal amount of the mortgage debt
encumbering the syndicated senior living communities was approximately $226.7
million and the aggregate annual debt service obligations, excluding any balloon
amounts payable at maturity, was approximately $21.5 million. Through
January 31, 2004, approximately $215.6 million of balloon payments under the
mortgages will become due and payable. Grand Court anticipates that these
balloon payments will be made by refinancing the mortgages on the respective
properties. The debt service payments on this debt reduce the cash flow
available for distribution to limited partners. This reduction in cash flow may
increase the payments required to be made by Grand Court to meet its management
contact obligations. Grand Court anticipates that it will continue to arrange
for future acquisitions of existing senior living communities through mortgage
financing and syndications.
Grand Court anticipates that most of its newly developed senior living
communities will be financed with a combination of mortgage financing and the
contribution of capital by Grand Court. Grand Court may, however, use long-term
leases or similar arrangements, and may issue additional debt or equity
securities to finance its development plan. The financing for this development
plan will be direct obligations of Grand Court. As the development plan
progresses, the amount of mortgage indebtedness is expected to increase. Grand
Court expects to have substantial debt service, and may have substantial annual
lease payment requirements in the future as it pursues its growth strategy.
There can be no assurance that Grand Court will generate sufficient revenues to
pay its debt service or lease payment obligations.
GRAND COURT HAS A SUBSTANTIAL AMOUNT OF RECEIVABLES RELATING TO MULTI-FAMILY
PROPERTIES. GRAND COURT'S BUSINESS AND FINANCIAL CONDITION COULD BE AFFECTED BY
NON-CASH LOSSES ARISING FROM DEFAULTS AND BANKRUPTCIES OF SUCH PROPERTIES.
Grand Court holds 157 promissory notes which are secured by interests in
partnerships that own 118 multi-family properties. These properties are
generally encumbered by HUD-insured mortgages. Grand Court does not own or
operate any multi-family properties, nor is it the general partner of the
partnerships which own these properties. Although it had no obligation to do so,
Grand Court has made advances to various multi-family properties to support
their operations. These advances are included in the "notes and receivables"
recorded on Grand Court's Consolidated Balance Sheet.
Any mortgage defaults by such multi-family properties could, and, any
future filings of bankruptcy proceedings or losses of any such property through
foreclosure would, cause Grand Court to realize non-cash losses. The loss would
be equal to the recorded value of the applicable multi-family note plus any
related advances, net of: (1) any deferred income recorded for such multi-family
note; and (2) any reserves for such note previously established by Grand Court.
In addition, Grand Court could be required to realize a non-cash loss even in
the absence of mortgage defaults, bankruptcy proceedings or the loss of any such
property through foreclosure if a multi-family note is considered impaired. An
impairment would be measured under applicable accounting rules. Such a loss
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could result in a default by Grand Court on its covenants under various debt
obligations to maintain a specified net worth or debt-to-net worth ratio and
could adversely affect Grand Court's business, operating results and financial
condition. Grand Court: (1) has no liability in connection with defaults on
multi-family mortgages; and (2) would face no general partner liability relating
to the bankruptcy proceeding of a multi-family partnership or the foreclosure on
a multi-family property.
As of July 31, 1999, the recorded value, net of deferred income, of the
multi-family notes was $100.9 million. All but approximately $4.5 million of the
$63.4 million of advances included in the "notes and receivables" recorded on
Grand Court's Consolidated Balance Sheet as of July 31, 1999 relate to advances
to multi-family properties. Based upon its ownership of the multi-family notes
and the related advances, Grand Court is entitled to all cash flow and net sale
or refinancing proceeds after payment of the underlying mortgages generated by
the respective multi-family properties until the multi-family notes and related
advances are satisfied. Grand Court is not the sole payee with regard to 24 of
the 157 multi-family notes. It typically holds a 50% interest in these 24
multi-family notes. Therefore, the values reflected on Grand Court's
Consolidated Financial Statements only relate to Grand Court's proportionate
interests in these 24 multi-family notes. Grand Court will not have sole
discretion as to certain actions taken with regard to 20 of these 24 notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." At July 31, 1999, the recorded
value, net of deferred income, of these 20 notes was $2.9 million.
At July 31, 1999, fourteen of the multi-family owning partnerships were in
default on their respective mortgages. In July 1999, Grand Court learned that
one of these partnerships will lose its property through foreclosure. As a
result, Grand Court realized a non-cash loss in the second quarter of fiscal
1999 of $700,000, which represents the recorded value of the related note and
receivables net of deferred income, less previously established reserves. John
Luciani, Bernard M. Rodin and an entity controlled by them contributed
additional assets to Grand Court to provide additional collateral for this note
and the related receivables. As a result of this contribution of additional
assets, Grand Court recorded a capital contribution of $900,000, based upon the
fair value of the additional assets, and believes that this foreclosure will not
effect its ability to collect the new note. In the past, six mortgage defaults
on multi-family properties were cured by refinancing the defaulted mortgage and
Grand Court believes that other defaults will be cured by refinancings.
In the third quarter of fiscal 1999, the multi-family owning partnership
described in the previous paragraph which was expecting to lose its property
through foreclosure, did lose its property through foreclosure. Also, an
additional multi-family owning partnership learned that it will lose its
property through foreclosure. As a result, Grand Court realized a non-cash loss
of $708,000 in the third quarter of fiscal year 1999, which represents the
recorded value of the note and receivables, net of established reserves. John
Luciani, Bernard M. Rodin and an entity controlled by them contributed
additional collateral for the new note and the related receivables. As a result
of this contribution of additional assets, Grand Court recorded a capital
contribution of $719,000, based upon the fair value of such additional
contributed assets, and believes that this foreclosure will not effect its
ability to collect the new note. This additional Owning Partnership lost its
property through foreclosure during the fourth quarter of 1999.
HUD has introduced various initiatives to restructure its housing subsidy
programs. These initiatives include:
. increasing reliance on prevailing market rents;
. reducing spending on future rental assistance payment contracts by,
among other things, not renewing rental assistance payments contracts,
most of which expire over the next few years; and
. restructuring mortgage debt on those properties where a decline in
rental revenues is anticipated.
It is uncertain what final policies will result from these initiatives. In
addition there are numerous other factors that affect each property (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).
These factors also change over time. Therefore, Grand Court cannot determine
whether these initiatives and factors will have an impact on the multi-family
properties and, if there is an impact, whether the impact will be positive or
negative.
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In view of the foregoing, there can be no assurance that other multi-family
partnerships will not default on their mortgages, file bankruptcy petitions,
and/or lose their properties through foreclosure.
Eighty-four of the 157 Multi-Family Notes have reached their final maturity
dates. As of July 31, 1999, the recorded value, net of deferred income, of these
84 notes was $42.6 million. These final maturity dates have been extended by
Grand Court. The maturities were extended due to the inability, in view of the
current cash flows of the properties, to maximize the value of the underlying
properties at such maturity dates through either a sale or refinancing of the
properties. During the period these notes are extended, Grand Court will
continue to receive the cash flow and sale or refinancing proceeds, if any,
generated by the underlying properties. Grand Court expects that it may need to
extend maturities of other multi-family notes. Two multi-family properties
relating to two extended multi-family notes were refinanced and five
multi-family properties relating to eight previously extended multi-family notes
were sold in fiscal 1998.
BECAUSE GRAND COURT IS A GENERAL PARTNER OF MANY PARTNERSHIPS, IT BEARS
ASSOCIATED LEGAL, CONTRACTUAL AND OTHER RISKS RELATING TO SUCH PARTNERSHIPS.
Grand Court is a general partner of most of the partnerships involved in
the syndicated senior living communities. The potential exists for claims by
limited partners for violations of: (1) the terms of the partnership agreements;
and (2) applicable federal and state securities laws and regulations. Prior to
the consolidation of Grand Court's predecessors into Grand Court in April 1996,
certain of Grand Court's predecessors had been general partners of the
partnerships involved in many of the syndicated multi-family properties. As a
result, Grand Court, as a successor, could face claims arising with respect to
events occurring prior to April 1996.
GRAND COURT DEPENDS, AND WILL CONTINUE TO DEPEND, ON THE SERVICES OF ITS
PRINCIPAL EXECUTIVE OFFICERS AND OTHER SKILLED PERSONNEL. THE LOSS OF THE
SERVICES OF ONE OR MORE OF THEM COULD HAVE A MATERIAL ADVERSE EFFECT ON GRAND
COURT'S OPERATING RESULTS AND FINANCIAL CONDITION.
Bernard M. Rodin, who co-founded Grand Court with John Luciani, died on
October 25, 1999. At the time of his death, Mr. Rodin was the President, Chief
Financial Officer and Chief Operating Officer of Grand Court, as well as a
director and holder of approximately 39% of the outstanding shares of Grand
Court's common stock. Grand Court cannot predict the effect, if any, of Mr.
Rodin's death on its operating results or financial condition.
In addition, certain of Grand Court's officers or entities controlled by
them are general partners of partnerships that own or invest in real property
and they may be required to devote time to such partnerships. Grand Court also
depends on its ability to attract and retain management personnel who will be
responsible for the day-to-day operations of each of its senior living
communities. Grand Court competes with other employers to operate such
communities. If Grand Court is unable to hire qualified management personnel to
operate such communities, Grand Court's business, operating results and
financial condition could be adversely affected. See "Certain Relationships and
Related Transactions."
GRAND COURT'S RAPID EXPANSION PROGRAM HAS PLACED A SIGNIFICANT BURDEN ON GRAND
COURT'S MANAGEMENT AND STAFF. IF GRAND COURT IS UNABLE TO MANAGE ITS GROWTH
EFFECTIVELY, ITS BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION COULD BE
ADVERSELY AFFECTED.
Grand Court is pursuing an aggressive expansion program. Grand Court
expects that its rate of growth will increase as it continues to implement its
development plan.
Grand Court's success will depend in large part on:
. identifying suitable development opportunities;
. its ability to pursue such opportunities;
. its ability to complete development; and
. its ability to lease up and effectively operate its newly developed
communities.
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Grand Court's growth has placed a significant burden on Grand Court's
management and operating personnel. Grand Court's ability to manage its growth
effectively will require it to continue to attract, train, motivate, manage and
retain key employees. If Grand Court is unable to manage its growth effectively,
its business, operating results and financial condition could be adversely
affected.
THE COST TO GRAND COURT OF SERVICING ITS VARIABLE RATE DEBT COULD INCREASE AND
ADVERSELY AFFECT ITS OPERATING RESULTS AND FINANCIAL CONDITION.
At July 31, 1999, Grand Court had $54.4 million of variable rate debt which
bears interest at variable rates determined by reference to either the prime
rate of the lending banks or LIBOR. Of that amount, $27.1 million is reflected
on Grand Court's Consolidated Balance Sheet. Each 1% increase or decrease of the
interest rate on such debt would result in an increase or decrease in the annual
debt service obligation of Grand Court of $544,000. Therefore, increases in
interest rates could adversely affect the operating results and financial
condition of Grand Court.
MANAGEMENT CONTRACTS FOR SENIOR LIVING COMMUNITIES ARE TERMINABLE. SHOULD A
MANAGEMENT CONTRACT NOT BE RENEWED OR BE TERMINATED, GRAND COURT WOULD LOSE THE
FEE INCOME GENERATED BY THAT CONTRACT.
Grand Court manages (1) all of the syndicated senior living communities;
and (2) the four senior living communities developed as part of the development
plan and owned by joint ventures pursuant to written management contracts. The
termination of any management contracts would result in the loss of any fee
income under those contracts.
The contracts relating to the syndicated communities generally have
five-year terms coterminous with Grand Court's management contract obligations
under such contracts. The five-year management contract obligations period has
expired for some of the owning partnerships. After the initial five-year term,
the management contract obligations terminate and the management contracts are
automatically renewed each year, but are cancelable on 30 to 60 days' notice at
the election of either Grand Court or the owning partnership. In general,
limited partners have only limited rights to take part in the conduct or
operation of the partnership. The joint venturer in the four joint ventures has
the right to terminate Grand Court's management of such communities upon 30
days' written notice.
THE LIMITED PARTNERSHIPS MAY REMOVE GRAND COURT AS THE GENERAL PARTNER AT ANY
TIME. SUCH REMOVAL COULD ADVERSELY AFFECT GRAND COURT'S BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION.
The partnership agreements of the syndicated senior living communities
where Grand Court is the general partner provide that a majority in ownership
interests of the limited partners can remove Grand Court as the general partner
at any time. It is anticipated that all future partnership agreements will
contain the same right to remove Grand Court as the general partner. The removal
of Grand Court as the general partner of such partnerships could have adverse
effects on the business, operating results and financial condition of Grand
Court.
THE RELATIONSHIPS AMONG GRAND COURT, ITS PRINCIPAL STOCKHOLDERS AND THE VARIOUS
PARTNERSHIPS MAY POSE CONFLICTS OF INTEREST.
John Luciani, the Chairman of the Board of Grand Court owns approximately
39% of Grand Court's common stock. The Estate of Bernard M. Rodin, former
President of Grand Court, also owns approximately 39% of Grand Court's common
stock. As such, they are Grand Court's principal stockholders. Mr. Luciani and
entities controlled by the principal stockholders serve as general partners of
certain partnerships directly and indirectly owning multi-family properties. As
a result, Mr. Luciani and Mr. Rodin's Estate have liability for recourse
partnership obligations and own small equity ownership interests in such
partnerships. At July 31, 1999, Grand Court held: (i) notes aggregating $100.9
million, net of deferred income that were secured by the limited partnership
interests in such partnerships; and (ii) advances of $58.9 million from such
partnerships. At July 31, 1999, Messrs. Luciani and Rodin had provided personal
guarantees for certain of Grand Court's debt and the obligations thereunder may
continue. The aggregate amount of such debt personally guaranteed by each of
Messrs. Luciani and Rodin is approximately $14.3 million. In addition, Mr.
Luciani and certain employees will devote a limited portion of their time, and
the time of three Grand Court employees is exclusively devoted, to overseeing
the third-party managers of multi-family properties in which Grand Court has
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financial interests in that it holds the related multi-family notes, but in
which the principal stockholders have equity interests and Grand Court does not.
Grand Court is the managing general partner for most of the partnerships
involved in the syndicated senior living communities. In addition, Grand Court
is the managing agent for the syndicated communities. By serving in all of these
capacities, Grand Court may have conflicts of interest in that it has both a
duty to act in the best interests of partners of various partnerships and the
desire to maximize earnings for Grand Court's stockholders in the operation of
such syndicated communities and other properties. See "Grand Court -
Syndications" and Note 14 to Grand Court's Consolidated Financial Statements
(Annual) and Note 13 to Grand Court's Consolidated Financial Statements
(Quarterly).
Grand Court also may have a conflict of interest in that certain of the
syndicated senior living communities managed by Grand Court may face direct
competition from other communities managed by Grand Court. Decisions made by
Grand Court to benefit one such community may not be beneficial to the other,
thus exposing Grand Court to a claim of a breach of fiduciary duty.
THE HIGHLY COMPETITIVE NATURE OF THE SENIOR LIVING AND HEALTH CARE INDUSTRIES
EXPOSES GRAND COURT TO THE RISK OF LOSS OF A PORTION OF THE MARKET TO ITS
COMPETITORS.
The senior housing and health care industries are highly competitive. Grand
Court expects that both the independent-living business, and assisted-living
businesses in particular, will become more competitive in the future. Grand
Court will continue to face competition from numerous local, regional and
national providers of long-term care whose communities and services are on
either end of the senior care continuum. Grand Court will compete in providing
independent-living services with home health care providers and other providers
of independent-living services, primarily on the basis of quality and cost of
services offered. Grand Court will compete in providing assisted-living with
other providers of assisted-living services, skilled nursing communities and
acute care hospitals primarily on the basis of cost, quality of care, array of
services provided and physician referrals. Grand Court also will compete with
companies providing home based health care, and even family members, based on
those factors as well as the reputation, geographic location, physical
appearance of communities and family preferences. In addition, Grand Court
expects that as the provision of long-term care receives increased attention,
competition from new market entrants, including, in particular, companies
focused on independent and assisted-living, will grow. Some of Grand Court's
competitors operate on a not-for-profit basis or as charitable organizations,
while others have, or may obtain, greater financial resources than those of
Grand Court. However, Grand Court anticipates that its most significant
competition will come from other senior living communities within the same
geographic area as Grand Court communities because management's experience
indicates that senior citizens frequently elect to move into communities near
their homes.
Moreover, in the implementation of Grand Court's expansion program, Grand
Court expects to face competition for the development of senior living
communities. Some of Grand Court's present and potential competitors are
significantly larger or have, or may obtain, greater financial resources than
those of Grand Court. Consequently, Grand Court can not assure investors that it
will not encounter increased competition in the future which could limit its
ability to attract residents or expand its business and could have a material
adverse effect on Grand Court's financial condition, results of operations and
prospects. In addition, if the development of new senior living communities
outpaces demand for those communities in certain markets, such markets may
become saturated. Such an oversupply of facilities could cause Grand Court to
experience decreased occupancy, depressed margins and lower operating results.
SHOULD GRAND COURT EXPERIENCE DIFFICULTY IN ATTRACTING SENIORS WITH THE
FINANCIAL ABILITY TO PAY FOR ACCOMMODATIONS AND SERVICES THAT GRAND COURT
OFFERS, GRAND COURT'S BUSINESS WOULD BE ADVERSELY AFFECTED.
Grand Court currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay Grand Court's fees from the
residents' own or familial financial resources. Inflation or other circumstances
that adversely affect the ability of seniors to pay for Grand Court's services
could have an adverse effect on Grand Court. If Grand Court encounters
difficulty in attracting seniors with adequate resources to pay for its
services, its business, operating results and financial condition could be
adversely affected. See "Grand Court -- Strategy."
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HEALTHCARE IS HEAVILY REGULATED. FAILURE TO SATISFY FEDERAL, STATE AND LOCAL
REGULATIONS WOULD ADVERSELY AFFECT GRAND COURT'S OPERATIONS.
Healthcare is heavily regulated at the federal, state and local levels. It
also represents an area of extensive and frequent regulatory change. Grand
Court's success will depend in part on its ability to satisfy such regulations
and requirements and to acquire and maintain any required licenses.
Currently no federal rules explicitly define or regulate independent- or
assisted-living communities. Legislative and regulatory initiatives relating to
long-term care are proposed or under study at both the federal and state levels.
A number of those initiatives if enacted or adopted, could have an adverse
effect on Grand Court's business and operating results. Grand Court cannot
predict whether and to what extent any such legislative or regulatory initiative
will be enacted or adopted. Therefore, Grand Court cannot assess what effect any
current or future initiative would have on its business and operating results.
Changes in applicable laws and new interpretations of existing laws can
significantly affect Grand Court's operations, as well as its revenues and
expenses.
Grand Court's senior living communities are subject to varying degrees of
regulation and licensing by local and state health and social service agencies
and other regulatory authorities specific to their location. While regulations
and licensing requirements often vary significantly from state to state, they
typically relate to:
. fire safety;
. sanitation;
. staff training;
. staffing levels and living accommodations such as room size, number of
bathrooms and ventilation; and
. regulatory requirements relating specifically to certain of Grand
Court's health-related services.
Federal, state and local governments occasionally conduct unannounced
investigations, audits and reviews to determine whether violations of applicable
rules and regulations exist. Devoting management and staff time and legal
resources to such investigations, as well as any material violation by Grand
Court that is discovered in any such investigation, audit or review, could have
a material adverse effect on Grand Court's business and operating results.
GRAND COURT MAY HAVE TO BEAR THE COST OF REMOVAL OR REMEDIATION OF HAZARDOUS
SUBSTANCES FROM PROPERTIES ON WHICH ITS COMMUNITIES ARE LOCATED.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances located on, in or under such property. One example of such
hazardous or toxic substance is asbestos-containing materials. These laws and
regulations often impose liability whether or not the owner or operator knows
of, or was responsible for, the presence of the hazardous or toxic substances.
The costs of any required remediation or removal of these substances could be
substantial. The liability of an owner or operator as to any property is
generally not limited under such laws and regulations. Such costs could exceed
the property's value and the aggregate assets of the owner or operator. The
presence of these substances or failure to remediate such substances properly
may also adversely affect the owner's ability to sell or rent the property, or
to borrow using the property as collateral. Under these laws and regulations, an
owner, operator or any entity who arranges for the disposal of hazardous or
toxic substances, such as asbestos-containing materials, at a disposal site may
also be liable for these costs, as well as certain other costs, including
governmental fines and injuries to persons or properties. To date, Grand Court
has not incurred any material costs of removal or remediation of such hazardous
or toxic substances. However, the presence, with or without Grand Court's
knowledge, of hazardous or toxic substances at any property held or operated by
Grand Court could have an adverse effect on Grand Court's business, operating
results and financial condition.
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THE PERFORMANCE OF THE SENIOR LIVING COMMUNITIES OPERATED BY GRAND COURT IS
SUBJECT TO MANY FACTORS AFFECTING REAL ESTATE INVESTMENTS.
The performance of the senior living communities operated by Grand Court is
influenced by factors affecting real estate investments, including the general
economic climate and local conditions, such as an oversupply of, or a reduction
in demand for, senior living communities. Other factors include:
. the attractiveness of properties to tenants;
. zoning;
. rent control;
. environmental quality regulations or other regulatory restrictions;
. competition from other forms of housing;
. the ability of Grand Court to provide adequate maintenance and
insurance; and
. the ability of Grand Court to control operating costs, including
maintenance, insurance premiums and real estate taxes.
Real estate investments also are affected by such factors as applicable
laws, including tax laws, interest rates, the availability of financing and
defects in title with respect to which the title companies insuring fee title
have taken exception. To date, Grand Court has not incurred any material costs
of removal or remediation with respect to such exceptions to title. The
performance of the senior living communities also may be adversely affected by:
. energy shortages and the costs attributable thereto;
. strikes and other work stoppages by employees of the senior living
communities;
. damage to or destruction of the senior living communities;
. various catastrophic or other uninsurable losses; and
. defaults by a substantial number of tenants under their leases.
The potential for operating losses and the risk of development delays and cost
overruns have been previously described. In addition, real estate investments
are relatively illiquid and, therefore, limit the ability of Grand Court to vary
its portfolio promptly in response to changes in economic or other conditions.
YEAR 2000 RISKS
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. Thus, those systems are
unable to distinguish between the years 1900 and 2000. 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. Grand Court believes that all
material Year 2000 problems which are within its control have been corrected.
Such problems therefore are not anticipated to have a material adverse affect on
Grand Court's financial position and results of operations. Grand Court can be
materially and adversely affected by failures of third parties to remediate
their own Year 2000 issues. Grand Court believes that the most reasonably likely
worst case scenario is the loss of utility service (telecommunications and
power) at Grand Court's corporate offices, and all or some of the senior living
communities it operates. Based upon (1) procedures which are currently in place;
and (2) 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
Grand Court's financial position and results of operations.
GRAND COURT BEARS DIRECT AND INDIRECT COSTS OF MAINTAINING ITS COMMUNITIES IN
COMPLIANCE WITH FEDERAL, STATE AND LOCAL REGULATIONS BENEFITTING RESIDENTS AND
THEIR GUESTS WITH DISABILITIES. CHANGES IN REGULATION COULD REQUIRE GRAND COURT
TO INCUR ADDITIONAL EXPENSES TO REMAIN IN COMPLIANCE.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places
of public accommodation are required to meet certain federal requirements
related to access and use by disabled persons. A number of additional federal,
state and local laws exist which also may require modifications to existing and
planned properties to create access to the properties by disabled persons. Grand
Court believes that its existing properties and its prototype for new
development are substantially in compliance with present requirements or are
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exempt therefrom. If required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by Grand Court. Further legislation may
impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.
GRAND COURT MAINTAINS LIABILITY INSURANCE. SHOULD, HOWEVER, A CLAIM AGAINST
GRAND COURT BE SUCCESSFUL AND EITHER EXCEED THE AMOUNT OF INSURANCE COVERAGE OR
NOT BE COVERED AT ALL, GRAND COURT WOULD HAVE TO EXPEND FUNDS THAT WOULD
OTHERWISE BE USED IN FURTHERANCE OF BUSINESS PURPOSES.
Grand Court's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry have become subject to an
increasing number of lawsuits alleging malpractice or related legal claims. Many
of these suits seek large amounts and result in significant legal costs. Grand
Court expects that from time to time it may be subject to such suits as a result
of the nature of its business. Grand Court currently maintains insurance
policies in amounts and with such coverage and deductibles as it deems
appropriate. These decisions are based on the nature and risks of its business,
historical experience and industry standards. There can be no assurance,
however, that claims in excess of Grand Court's insurance coverage or claims not
covered by Grand Court's insurance coverage will not arise. A successful claim
against Grand Court which is not covered by, or which is in excess of, Grand
Court's insurance could have a material adverse effect on Grand Court's
operating results and financial condition. Claims against Grand Court,
regardless of their merit or eventual outcome, may also have a material adverse
effect on Grand Court's ability to attract residents or expand its business.
These claims would require management to devote time to matters unrelated to the
operation of Grand Court's business. In addition, Grand Court's insurance
policies must be renewed annually, and there can be no assurance that Grand
Court will be able to obtain liability insurance coverage in the future or, if
available, that such coverage will be on acceptable terms.
SINCE NO ACTIVE TRADING MARKET IS EXPECTED TO DEVELOP FOR THE NEW NOTES, A
HOLDER MAY EXPERIENCE DIFFICULTIES RESELLING THE NEW NOTES OR SELLING THEM AT
OTHER THAN A DISCOUNT.
As with the old notes, the new notes will constitute a new issue of
securities with no established trading market. There will likely be no active
trading market for the new notes. If a trading market develops, there is no
assurance as to the liquidity or sustainability of such market. If a trading
market does not develop or is not maintained, holders of the new notes may
experience difficulty in reselling the new notes or may be unable to sell them
at all. If a market for the new notes develops, any such market may be
discontinued at any time. If a public trading market develops for the new notes,
future trading prices of the new notes will depend on many factors, including,
among other things, prevailing interest rates, Grand Court's results of
operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition of Grand Court, the new notes may trade at a discount
from their principal amount. The size of this offering may have a negative
impact on all of the above risks.
USE OF PROCEEDS
Grand Court will not receive any cash proceeds from the issuance of the
new notes.
GRAND COURT
GENERAL
In April, 1996, John Luciani and Bernard M. Rodin reorganized their
businesses by consolidating them into Grand Court Lifestyles, Inc., a Delaware
Corporation. Pursuant to the reorganization, substantially all of the assets and
liabilities of these businesses were transferred to Grand Court in exchange for
shares of Grand Court's Common Stock. See "Certain Relationships and Related
Transactions." The primary predecessors of Grand Court are J&B Management
Company, and Leisure Centers, Inc. J&B Management Company is a private
partnership founded in 1969 which specialized in the development and management
of multi-family real estate and senior living communities. Unless the context
otherwise requires, Grand Court Lifestyles, Inc., its subsidiaries, J&B
Management Company and Leisure Centers, Inc. and their affiliates are
collectively referred to as "Grand Court." Grand Court is a fully-integrated
provider of senior living accommodations and services. It acquires, develops and
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manages senior living communities which offer independent- and assisted-living
services. Grand Court is one of the largest managers of senior living
communities in the United States, operating communities offering both
independent- and assisted-living services. Grand Court's operating objective is
to provide high-quality, personalized living services to senior residents,
primarily persons over the age of 75.
Grand Court's revenues are primarily derived from sales of partnership
interests ("Syndications") of partnerships it organizes to acquire existing
senior living communities ("Syndicated Communities"). Grand Court established a
plan (the "Development Plan") by which it is building new senior living
communities which offer independent- and assisted-living services ("Development
Communities"). Grand Court manages both the Syndicated Communities and the
Development Communities. Generally, the Development Communities are either
wholly-owned by Grand Court, partially owned pursuant to joint venture
arrangements or operated by Grand Court as lessee under long-term leases. Grand
Court currently has three Development Communities under construction. One of
these three communities under construction will be Syndicated on terms
substantially the same as those for the recently Syndicated Communities, and
therefore will be treated as a Syndicated Community for accounting purposes.
Grand Court does not currently intend to Syndicate (i) the other two Development
Communities which are under construction or (ii) any additional Development
Communities constructed pursuant to the Plan. To the extent the Development Plan
succeeds, Grand Court anticipates that the percentage of its revenues from
Syndications will decrease and the percentage of revenues from Development
Communities will increase to the point where they are Grand Court's primary
sources of revenues.
Grand Court manages 45 Syndicated Communities. These communities contain
approximately 6,179 apartment units in 17 states in the Sun Belt and the
Midwest. In addition, Grand Court manages (i) four Development Communities
containing 536 units which it owns pursuant to joint venture arrangements with a
third party and (ii) four Development Communities containing 550 units which it
operates under long-term leases. All of these Development Communities were
developed and constructed pursuant to Grand Court's Development Plan. Grand
Court entered into joint venture arrangements with a third party pursuant to
which it sold a 50% interest in four Development Communities which were
previously wholly-owned by Grand Court. Grand Court intends to enter into
similar joint venture arrangements regarding other Development Communities
constructed pursuant to its Development Plan. Grand Court has started
construction on three additional Development Communities.
Grand Court has approximately 2,300 employees and conducts the daily
operations of the senior living communities it manages.
Prior to 1986, Grand Court acquired, developed, arranged for the
Syndication of, and in most cases managed, 170 multi-family properties
containing approximately 20,000 apartment units located in 22 states, primarily
in the Sun Belt and the Midwest. Today, Grand Court's only involvement with
multi-family properties is as a holder of notes and receivables from the
partnerships that own 118 multi-family properties containing 12,691 apartment
units (the "Multi-Family Properties"). The notes and receivables can only be
repaid from the cash flow and sale or refinancing proceeds these properties
generate. See "Risk Factors." As of July 31, 1999, the recorded value, net of
deferred income, of the notes was $100.9 million and the recorded amount of
these receivables was $58.9 million.
STRATEGY
Grand Court's growth strategy focuses on Development Communities offering
both independent- and assisted-living apartment units and on continued intensive
communities management. Grand Court believes that there are numerous markets
that are not served or are underserved by existing senior living communities and
intends to take advantage of these circumstances and the present availability of
construction financing on favorable terms, to develop Development Communities of
its own design in desirable markets. Historically, Grand Court has expanded by
the acquisition and Syndication of existing senior living communities. Grand
Court has taken advantage of the inexperience and operating inefficiencies of
the previous owners of these communities and has improved the financial
performance of these properties by implementing its own management and marketing
techniques.
Grand Court will continue to acquire existing senior living communities and
intends to arrange for these acquisitions, in part, by Syndications. Grand Court
believes that its continuing practice of arranging for the acquisition of senior
living communities through Syndications and privately placing debt securities
will provide additional cash flow to help Grand Court pursue its Development
Plan.
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Grand Court's senior living communities offer personalized assistance,
supportive services and selected health care services in a professionally
managed group living environment. Residents may receive individualized
assistance which is available 24 hours a day, and is designed to meet their
scheduled and unscheduled needs. Independent-living services include three
restaurant-style meals per day served in a common dining room, weekly
housekeeping and flat linen service, social and recreational activities,
transportation to shopping and medical appointments, 24-hour security and
emergency call systems in each unit. Assisted-living services include those
provided to independent-living residents, as supplemented by assistance with
ADLs including eating, bathing, dressing, grooming, personal hygiene and
ambulating, health monitoring, medication management, personal laundry services,
and daily housekeeping services.
Grand Court rents apartment units in the senior living communities which it
operates pursuant to annual leases. Grand Court focuses exclusively on
"private-pay" residents, who pay for housing or related services out of their
own funds or through private insurance, rather than relying on the few states
that have enacted legislation enabling assisted-living facilities to receive
Medicare funding similar to funding generally provided to skilled nursing
facilities. Grand Court intends to continue its "private-pay" focus as it
believes this market segment is, and will continue to be, the most profitable.
Grand Court believes this "private pay" focus will allow it to increase rental
revenues as demographic pressure increases demand for senior living communities
and to avoid potential financial difficulties it might encounter if it were
dependent on Medicare or other government reimbursement programs that may suffer
from health care reform, budget deficit reduction or other pending or future
government initiatives.
SYNDICATIONS
Historically, Grand Court arranged to acquire Syndicated Communities by
using mortgage financing and by arranging Syndications of limited partnerships
("Investing Partnerships") formed to acquire interests in the partnerships that
own the underlying properties ("Owning Partnerships"). These Syndicated
Communities are owned by the respective Owning Partnerships and not by Grand
Court. Grand Court is the managing general partner of all but one of the Owning
Partnerships which own the Syndicated Communities. Grand Court is also the
general partner of most of the Investing Partnerships which have the interests
in the Syndicated Communities. Grand Court manages all of the Syndicated
Communities. Grand Court retains a participation in the cash flow, sale proceeds
and refinancing proceeds of the Syndicated Communities after certain priority
payments to the limited partners.
In a typical Syndication, Grand Court identifies a senior living community
to acquire and forms an Owning Partnership (of which it is the managing general
partner and initially owns all of the partnership interests). An Investing
Partnership is also formed (of which Grand Court is the general partner with a
1% interest) to purchase from Grand Court a 99% partnership interest in the
Owning Partnership (the "Purchased Interest"), leaving Grand Court with a 1%
interest in each of the Owning Partnership and the Investing Partnership. Grand
Court accounts for these general partnership interests using the equity method
of accounting. 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"). Investors purchase limited
partnership interests in the Investing Partnership by agreeing to make capital
contributions over approximately five years. These capital contributions permit
the Investing Partnership to pay the purchase price for the Purchased Interest.
Limited partners are typically permitted to pre-pay their scheduled capital
contributions. The limited partnership agreement of an 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 Grand Court incurs costs
when it acquires the community and arranges for the Syndication, Grand Court
makes a profit on the sale of the Purchased Interest. In addition, as part of
the purchase price paid by the Investing Partnership for the Purchased Interest,
Grand Court receives a 40% interest in sale and refinancing proceeds after
certain priority payments to the limited partners.
Limited partnership interests in the Investing Partnership are sold to
investors in exchange for (i) all cash or (ii) a cash down payment and full
recourse promissory notes ("Investor Notes"). In the case of an investor that
does not purchase a limited partnership interest for all cash, the investor's
limited partnership interest (a "Limited Partnership Interest") serves as
collateral security for that investor's Investor Notes. Under the terms of an
agreement (a "Purchase Agreement"), the Investing Partnership purchases from
Grand Court the Purchased Interest partially with cash raised from the cash down
payment made by its investors and the balance by the delivery of the Investing
Partnership's Purchase Note. The Purchase Notes executed by Investing
Partnerships prior to 1986 (relating to Grand Court's pre-1986 Syndication of
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Multi-Family Properties) have balloon payments of principal due on maturity. The
Purchase Notes executed since January 1, 1987 (relating to Grand Court's
post-1986 Syndication of senior living communities) are self-liquidating
(without balloon payments). The Investing Partnership, as collateral security
for its Purchase Note, pledges to Grand Court the Investor Notes received from
its investors, its interest in the Limited Partnership Interests securing the
Investor Notes, as well as the entire Purchased Interest it holds in the Owning
Partnership which it purchased from Grand Court.
In the past, limited partners have been allowed to prepay capital
contributions. Prepayments of capital contributions do not result in the
prepayment of the related Purchase Notes. Instead, such amounts are loaned to
Grand Court by the Investing Partnership. The purchase agreements provide that,
should any failure to repay any such loan occur, Grand Court must credit to the
Investing Partnership the amounts loaned at the time such amount would be
required to be paid by the Investing Partnership to meet its obligations then
due under the Purchase Note. As a result of such loans and such provisions of
the purchase agreements, Grand Court records the notes receivable corresponding
to the Purchase Notes net of such loans. Therefore, these prepayments act to
reduce the recorded value of Grand Court's notes receivable and reduce interest
income received by Grand Court. Pursuant to the terms of its Syndications, Grand
Court has the option not to accept future prepayments by limited partners of
capital contributions. Grand Court has not determined to what extent it will
continue to accept prepayments by limited partners of capital contributions.
Grand Court enters into a written management contract with the Owning
Partnership to manage the Syndicated Community. The contract requires Grand
Court, for a period not to exceed five years, to pay to the Owning Partnership
amounts sufficient to fund (i) any operating cash deficiencies of the Owning
Partnership and (ii) any part of the specified rate of return to limited
partners not paid from cash flow from the Syndicated Community (which the Owning
Partnership distributes to the Investing Partnership for distribution to limited
partners) (collectively, the "Management Contract Obligations"). As a result of
the Management Contract Obligations, Grand Court bears the risks of operations
and financial viability of the related property for a five-year period. The
management contract, however, rewards Grand Court for successful management of
the property by allowing Grand Court to retain any cash flow generated by the
Syndicated Community in excess of the amount needed to satisfy the Management
Contract Obligations. After the initial five-year period, the limited partners
are entitled to the same specified rate of return, but only to the extent there
is sufficient cash flow from the Syndicated Community. To the extent property
cash flows are not sufficient to pay the limited partners their specified
return, the right to receive this shortfall accrues until proceeds are available
from a sale or refinancing of the property. After the initial five-year period,
Grand Court's incentive management fee is 40% of the excess of cash flow over
the amount necessary to make the specified rate of return to the limited
partners. The remaining 60% of cash flows are to be distributed by the Owning
Partnerships to the Investing Partnerships for distribution to limited partners.
In recent Syndications, Grand Court has been selling 50% partnership interests
rather than 99% partnership interests. In view of the fact that Grand Court
retains all excess cash flow above its Management Contract Obligations, this
change in the percentage of partnership interests sold does not affect the
economic relationship between the parties for the first five years of the
Syndication transaction. After the first five years, Grand Court's share of the
excess of cash flow over the amount necessary to make the specified rate of
return to the limited partners and its share of any sale or refinancing proceeds
increases to 50% rather than 40% and the limited partners are entitled to a
reduced specified rate of return to the extent there is sufficient cash flow
from the Syndicated Community. Grand Court anticipates that future Syndications
will involve a 50% share of such excess cash flow. Grand Court consolidates the
Owning Partnerships in which it retains a 50% interest into its consolidated
financial statements.
After the initial five-year term, the Management Contract Obligations
terminate and the management contracts are automatically renewed each year, but
are cancelable on 30 to 60 days' notice at the election of either Grand Court or
the related Owning Partnership. The termination of any management contracts
would result in the loss of fee income, if any, under those contracts. In
general, under the terms of the Investing Partnerships' partnership agreements,
limited partners have only limited rights to take part in the conduct or
operation of the partnerships. The partnership agreements for the Investing
Partnerships for which Grand Court is the general partner provide that a
majority in ownership interests of the limited partners can remove Grand Court
as the general partner at any time. It is anticipated that all future Investing
Partnership agreements will contain the same right to remove Grand Court as a
general partner. In addition, the consent of a majority in ownership interests
of limited partners in such Investing Partnerships is required to be obtained in
connection with any sale or disposition of the underlying property.
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The initial five-year term of the management contracts and the related
Management Contract Obligations have expired for a portion of the Owning
Partnerships and their related Investing Partnerships. Although Grand Court has
no obligation to fund operating shortfalls after the five-year term of the
management contract, as of July 31, 1999, Grand Court advanced an aggregate of
approximately $3.2 million to these Owning Partnerships to fund such operating
shortfalls, of which $954,000 was advanced during the six months ended July 31,
1999. All such advances are recorded as "Other Partnership Receivables" on Grand
Court's Consolidated Balance Sheet.
The management contract with each Owning Partnership requires that Grand
Court manage and operate the daily operations of the Syndicated Community. Under
these contracts, Grand Court acts as an independent contractor and provides
customary management services to each Syndicated Community. Except as required
by the management contracts, the costs of these services are funded by the cash
flow of the properties. These services include: marketing and advertising;
renting apartment units and collecting rents and charges; providing independent-
and assisted-living services (including providing meals, activities,
transportation and, for assisted-living residents, assistance with activities of
daily living ("ADLs")); hiring, paying and supervising the on-site employees;
property maintenance; purchasing supplies; and preparing operating budgets and
reports. Although Grand Court has the right to sub-contract for such services,
Grand Court directly performs such services using Grand Court employees.
In addition to its role as manager of the Syndicated Communities, Grand
Court is the managing general partner for all but one of the related Owning
Partnerships. Because Grand Court serves as both the managing general partner
and the property manager, it receives partnership administration fees and
property management fees. As the managing general partner of these partnerships,
Grand Court generally has authority to act for the partnerships. Grand Court has
a fiduciary responsibility for the management and administration of these
partnerships and, other than when the consent of the other partners is required,
may act for the partnerships.
Grand Court intends to continue to arrange for acquisitions of existing
senior living communities by using mortgage financing and by arranging
Syndications. Grand Court anticipates acquiring between six and twelve
communities during the next two years. Grand Court is, and will continue to be,
the managing general partner of the partnerships that own Syndicated
Communities.
DEVELOPMENT PLAN
While the acquisition and Syndication of existing senior living communities
will continue to play a significant role in Grand Court's expansion program, the
primary focus of the expansion program is the development of Development
Communities. Grand Court's Development Plan emphasizes a "prototype" senior
living community that it designed. Grand Court designed the prototype based upon
its experience operating its portfolio of acquired Syndicated Communities.
Because each of its Syndicated Communities has a different design, and due to
Grand Court's experience in operating such communities, Grand Court believes its
Development Community prototype incorporates the most beneficial characteristics
of the various communities in the industry and represents an innovative and
"state of the art" community.
The Prototype Development Community. The prototype Development Community
has been developed in two sizes, 126 apartment units and 142 apartment units.
Both prototypes are located on sites of up to seven acres. Grand Court currently
intends to build primarily 126 apartment unit Development Communities. Grand
Court believes that its development prototype is larger than many
independent-living and most assisted-living communities, which typically range
from 40 to 80 units. Grand Court believes that the greater number of units will
allow it to achieve economies of scale in operations, resulting in lower
operating costs per unit, without sacrificing quality of service. These savings
primarily are achieved through lower staffing, maintenance and food preparation
costs per unit, without sacrificing quality of service. Because the time and
effort required to develop a community (including site selection, land
acquisition, zoning approvals, financing, and construction) do not vary
materially for a larger community than for a smaller one, developmental
economies of scale also are realized in that more apartment units are being
produced for each Development Community that is developed. The prototype
Development Community is targeted to the "middle to upper income" segment of the
elderly population, which is the broadest segment of the elderly population and
allows Grand Court to provide a high quality level of service.
Common areas include recreation areas, dining rooms, a kitchen,
administrative offices, an arts and crafts room, a multi-purpose room, laundry
rooms for each floor, a beauty salon/barber shop, a library reading area, card
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rooms, a billiards room, a health center to monitor residents' medical needs and
assigned parking. Grand Court believes that the common areas and amenities
offered by its prototype Development Community represent the state of the art
for independent-living communities and are superior to those offered by smaller
independent-living communities or by most communities that offer only assisted
living services. Grand Court believes that such substantial common areas, which
would often be unaffordable in smaller communities, will provide its prototype
Development Communities with a competitive advantage over smaller communities.
Grand Court believes that these common areas will attract residents and promote
continued stable occupancy of its prototype communities. Unit sizes range from
400 square feet for a studio to 850 square feet for a two bedroom/two bath unit.
A typical Development Community contains 8 studio apartments, 112 one
bedroom/one bathroom apartments and 6 two bedroom/two bathroom apartments,
encompassing approximately 110,000 square feet. Each Development Community
apartment unit is a full apartment, including a kitchen or kitchenette.
Each Development Community offers residents a choice between
independent-living and assisted-living services. As a result, the market for
each community is broader than for communities that offer only either
independent-living or assisted-living services. Although the licensing
requirements and the expense and difficulty of converting between existing
independent-living units and assisted-living units typically make it impractical
to accomplish such conversions, Grand Court's Development Community prototype is
designed to allow, at any time, for conversion of units, at minimum expense, for
use as either independent-living or assisted-living units. Each Development
Community therefore may adjust its mix of independent-living and assisted-living
units as the market or existing residents demand. Grand Court believes that this
innovative feature distinguishes its prototype Development Community. Grand
Court believes that part of the appeal of this type of community is that
residents will be able to "age in place" with the knowledge that they need not
move to another community if they require assistance with ADLs. Grand Court
believes that the ability to retain residents by offering them higher levels of
services will result in stable occupancy with enhanced revenue streams.
Grand Court's prototype Development Community also incorporates two
interior courtyards, from which its "Grand Court"(R) name originates. These
courtyards allow residents to enjoy the outdoors while remaining in a secure
environment. Grand Court believes that this feature distinguishes its prototype
Development Community.
In summary, Grand Court believes that the size, design and target markets
of its prototype Development Community and the convertibility of its apartments
to either independent or assisted-living units results in "state of the art"
senior living communities that provide an excellent vehicle for economic growth.
Market Selection Process. In selecting geographic markets for potential
expansion, Grand Court considers such factors as a potential market's
population, demographics and income levels, including the existing and
anticipated future population of seniors who may benefit from its services, the
number of existing and anticipated long-term care communities in the market area
and the income level of the target population. While Grand Court does not apply
its market selection criteria mechanically or inflexibly, it generally seeks to
select Development Community locations that are non-urban with populations of no
more than 100,000 people and containing 3,000 elderly households within a
20-mile radius with an annual income of at least $35,000, and have a regulatory
climate that it considers favorable toward development. Communities with these
characteristics are referred to as secondary markets as opposed to primary
markets, which are major urban centers, or tertiary markets, which are smaller
rural communities. Grand Court has found that secondary markets generally have a
receptive population of seniors who desire and can afford the services offered
in Grand Court's Development Communities. Grand Court believes that it can
obtain zoning and other necessary approvals in secondary markets more quickly
and easily than would be the case in primary markets. In focusing on secondary
markets, Grand Court believes it will avoid overdevelopment to which primary
markets are prone and obtain the benefit of demographic concentrations that do
not exist in yet smaller markets. Grand Court believes that high-quality,
affordable employees are easier to attract and retain in secondary markets than
in primary markets.
Implementation Of The Development Plan. Pursuant to Grand Court's
Development Plan, it has completed construction and is operating eight
Development Communities, commenced construction on three additional Development
Communities and intends to commence construction on between 8 to 12 additional
Development Communities over the next two years. Grand Court plans to own
(pursuant to joint venture arrangements with third parties or operate pursuant
to long-term operating leases or similar arrangements) the Development
Communities that will be developed under the Development Plan. Grand Court will
manage and operate each of the Development Communities. Grand Court expects to
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complete the construction of the Development Communities under construction by
the end of Fiscal 1999. These three Development Communities, along with the
eight Development Communities whose construction is already completed, contain
an aggregate of approximately 1,490 senior living apartment units. The 8 to 12
additional Development Communities which Grand Court intends to commence
construction on over the next two years will contain between 1,008 and 1,512
additional senior living apartment units. Each new Development Community
developed by Grand Court offers both independent- and assisted-living services.
The first Development Communities constructed pursuant to Grand Court's
Development Plan are in Texas. Grand Court has obtained development financing
from Capstone Capital Corporation ("Capstone") pursuant to which Capstone
provided $37.7 million for development of four Development Communities. Grand
Court also completed construction on these communities which it operates
pursuant to long-term leases with Capstone. Grand Court completed construction
with mortgage financing on four Development Communities in Texas. Grand Court
commenced construction on three additional Development Communities in Texas.
Grand Court has acquired a site in Jackson, Tennessee. Grand Court holds options
to acquire sites in Knoxville, Tennessee, Evansville, Indiana and Montgomery,
Alabama and is actively negotiating to obtain control over additional sites in
the Southeast and Midwest. Grand Court is negotiating with several additional
lenders to obtain financing to develop these sites.
Grand Court anticipates that most of its Development Communities will be
financed with a combination of mortgage financing and capital contributed by
Grand Court. Grand Court estimates that the cost of developing each new
Development Community (including reserves necessary to carry the community
through its lease-up period) will be approximately $10.5 million. Subsequent to
Fiscal 1998, Grand Court entered into joint venture arrangements regarding the
four completed Development Communities financed with mortgage financing.
Pursuant to each joint venture arrangement, Grand Court sold a 50% interest in
the Development Community to a third party. See "Certain Relationships and
Related Transactions." Grand Court realized a profit from each of the sales and
earns a management fee for managing the communities. The third party has the
right to terminate Grand Court's management of the community upon 30 days'
written notice. The third party receives a cumulative priority return on each
investment from all cash flow generated by the community and any excess cash
flow is shared 50% by Grand Court and 50% by the third party. Grand Court
believes that such joint venture arrangements are beneficial because they
generate revenues upon the sale, reward Grand Court for its continued management
of the Development Community, provide Grand Court with capital to continue to
pursue its Development Plan and allocate 50% of the start-up losses incurred
during the community's lease up period to the joint venturer rather than Grand
Court. However, Grand Court remains fully liable on the mortgage financing for
such Development Communities. Except for one Development Community currently
under construction which Grand Court intends to Syndicate, Grand Court presently
expects to enter into similar joint venture arrangements for the other
Development Communities that it will develop. Grand Court can not assure
investors that sufficient joint venture capital will be available to Grand Court
on favorable terms. Grand Court may also use other types of financings including
sale/leaseback or similar arrangements which require little or no capital on the
part of Grand Court to finance its Development Plan.
Upon the completion of construction of each of the Development Communities
developed pursuant to the Development Agreement with Capstone, and upon the
satisfaction of certain other conditions, Grand Court became the lessee under
long-term lease arrangements with Capstone. The initial term of each lease,
which began upon the completion of a facility and meeting other criteria, is
15 years with three five-year extension options. Under the terms of each lease,
Grand Court has the option to acquire the community after operating the
community for four years. The option price is equal to the sum of 100% of the
cost incurred to develop the community and an additional 20% of such cost (which
declines by 2 percentage points per year but in no event declines below 10%).
The initial lease rate is 350 basis points in excess of the ten-year Treasury
Bill yield (but in no event less than 9.75% per annum). The lease rate has an
annual upward adjustment equal to 3% of the previous year's rent. The four
leases have cross-default provisions. Each lease is a triple net lease, as Grand
Court is responsible for all costs, including but not limited to maintenance,
repair, insurance, taxes, utilities, and compliance with legal and regulatory
requirements. If a community is damaged or destroyed, Grand Court is required to
restore the community to substantially the same condition it was in immediately
before such damage or destruction, or acquire the facility for the option price
described above.
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THE LONG-TERM CARE MARKET
The long-term care services industry encompasses a broad range of
accommodations and healthcare services that are provided primarily to seniors.
Independent-living communities attract seniors who desire to be freed from the
burdens and expense of home ownership, food shopping and meal preparation and
who are interested in the companionship and social and recreational
opportunities offered by such communities. As a senior's need for assistance
increases, the provision of assisted-living services in a community setting is
more cost-effective than care in a nursing home. A community which offers its
residents assisted-living services can provide assistance with various ADLs
(such as bathing, dressing, personal hygiene, grooming, ambulating and eating),
support services (such as housekeeping and laundry services) and health-related
services (such as medication supervision and health monitoring), while allowing
seniors to preserve a high degree of autonomy. Generally, residents of
assisted-living communities require higher levels of care than residents of
independent-living facilities, but require lower levels of care than residents
of skilled-nursing facilities.
INDUSTRY TRENDS
Grand Court believes its business benefits from significant trends
affecting the long-term care industry. The first is an increase in the demand
for elder care resulting from the continued aging of the U.S. population. U.S.
Bureau of Census shows that the average age of Grand Court's residents (83 years
old) places them within one of the fastest growing segments of the U.S.
population. While increasing numbers of Americans are living longer and
healthier lives, many choose senior living communities as a cost-effective
method of obtaining the services and lifestyle they desire. Senior living
communities that offer both independent and assisted-living services give
seniors the comfort of knowing that they will be able to "age in place" --
something they are increasingly unable to do at home.
The primary consumers of long-term care services are persons over the age
of 65. This group represents one of the fastest growing segments of the
population. According to U.S. Bureau of the Census data, the number of people in
the U.S. age 65 and older increased by more than 27% from 1981 to 1994, growing
from 26.2 million to 33.2 million. Such census data also shows that the segment
of the population over 85 years of age, which comprises the largest percentage
of residents at long-term care facilities, is projected to increase by more than
37% between the years 1990 and 2000, growing from 3.0 million to 4.1 million.
Grand Court believes that these trends depicted in the graph below will
contribute to continued strong demand for senior living communities.
Projected Percentage Change in the Elderly Population of the U.S.
1981 1990 1995 2000 2005 2010
65-84 0 17.5% 25.2% 26.2% 27.3% 34.6%
85+ 0 28.4% 54.3% 76.3% 94.1% 112.7%
Source: U.S. Bureau of the Census
A trend benefiting Grand Court, and especially its provision of
independent-living services, is that as the population of seniors swells, the
percentage of seniors that are disabled and need assistance with ADLs has
steadily declined. According to the National Long Term Care Surveys, a federal
study, disability rates for persons aged 65 and older have declined by 1 to 2
percent each year since 1982, the year the study was commenced. In 1982,
approximately 21% of the 65 and over population was disabled and in 1995 only
10% was disabled. This trend suggests that demand for independent living
services will increase in the future.
Other trends benefiting Grand Court include the increased financial net
worth of the elderly population, the changing role of women and the increase in
the population of individuals living alone. As the number of elderly in need of
assistance has increased, so too has the number of the elderly able to afford
residences in communities which offer independent and/or assisted-living
services. According to U.S. Bureau of the Census data, the median net worth of
householders age 75 or older has increased from $55,178 in 1984 and $61,491 in
1988 to $76,541 in 1991. Furthermore, according to the same source, the
percentage of people 65 years and older below the poverty line has decreased
from 24.6% in 1970 to 15.7% in 1980 to 12.2% in 1990. Historically, unpaid women
(mostly daughters or daughters-in-law) represented a large portion of the care
givers of the non-institutionalized elderly. The increased number of women in
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the labor force, however, has reduced the supply of care givers, and led many
seniors to choose senior living communities as an alternative. Since 1970, the
population of individuals living alone has increased significantly as a
percentage of the total elderly population. This increase has been the result of
an aging population in which women outlive men by an average of 6.9 years,
rising divorce rates, and an increase in the number of unmarried individuals.
The increase in the number of the elderly living alone has also led many seniors
to choose to live in senior living communities.
The increased financial net worth of the elderly population is illustrated
by the following chart:
Median Net Worth
1988 1991
---- ----
45-54 57,466 58,250
55-64 80,032 83,041
65+ 73,471 88,192
Source: U.S. Bureau of the Census
Another trend benefiting Grand Court, and especially its provision of
assisted-living services, is the effort by the government, private insurers and
managed care organizations to contain health care costs by limiting lengths of
stay, services, and reimbursement amounts. This resulted in hospitals
discharging patients earlier and referring them to nursing homes. At the same
time, nursing home operators continue to focus on providing services to
sub-acute patients requiring significantly higher levels of skilled nursing
care. Grand Court believes that this "push down" effect has and will continue to
increase demand for assisted-living facilities that offer the appropriate levels
of care in a non-institutional setting in a more cost-effective manner. Grand
Court believes that all of these trends have, and will continue, to result in an
increasing demand for senior living facilities which provide both independent-
and assisted-living services.
SERVICES
It is important to identify the specific tastes and needs of the residents
of a senior living community, which can vary from region to region and from one
age group to the next. Residents who are 70 years old have different needs than
those who are 85. Grand Court retained a gerontologist to insure that programs
and activities are suitable for all of the residents in a community and that
they are adjusted as these residents "age in place". Both independent- and
assisted-living services will be offered at all of Grand Court's Development
Communities.
Basic Service and Care Package. Grand Court provides three levels of
service at its senior living communities:
Level I: Independent Living, includes three meals per day, weekly
-------
housekeeping, activities program, 24-hour security and transportation for
shopping and medical appointments.
Level II: Catered Living, offers all of the amenities of Level I in
--------
addition to all utilities, personal laundry and daily housekeeping.
Level III: Assisted Living, provides three meals per day, daily
---------
housekeeping, 24-hour security, all utilities, medication management, activities
and nurse's aides to assist the residents with any ADLs which they might
require. Rehabilitative services such as physical and speech therapy are also
provided by licensed third party home health care providers. Each resident can
design a package of services that will be monitored by his or her own physician.
Several of Grand Court's Syndicated Communities are designed to meet the needs
of assisted-living residents who suffer from the early stages of Alzheimer's
disease or dementia.
Grand Court charges an average fee of $1,400 per month for Level I
services, $1,700 per month for Level II services, and $2,000 per month for Level
III services, but the fee levels vary from community to community. Residents at
the communities which offer services for early stages of Alzheimer's disease or
dementia pay an average of an additional $500 per month for such services. As
the residents of the communities managed by Grand Court continue to age, Grand
Court expects that an increasing number of residents will utilize Level III
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services. Grand Court's internal growth plan is focused on increasing revenue by
continuing to expand the number and diversity of its tiered additional
assisted-living services and the number of residents using these services.
OPERATIONS
Centralized Management. The senior living business is highly management
intensive. While the location of a community and its physical layout are
extremely important, another key to the success of a senior living community
lies in the ability to maximize its financial potential through sophisticated,
experienced management. Such success requires the establishment and supervision
of programs involving the numerous facets of a senior living community,
including menu planning, food and supply purchasing, meal preparation and
service, assistance with ADLs, recreational activities, social events, health
care services, housekeeping, maintenance and security. Grand Court's strategy
emphasizes centralized management in order to achieve operational efficiencies
and ensure consistent quality of services. Grand Court established standardized
policies and procedures governing, among other things, social activities,
maintenance and housekeeping, health care services, and food services. An annual
budget is established by Grand Court for each community against which
performance is tested each month.
Marketing. Marketing is critical to the rent up and continued high
occupancy of a community. Grand Court's marketing strategy focuses on enhancing
the reputation of it's senior living communities and creating awareness of Grand
Court and its services among potential referral sources. Grand Court's
experience is that satisfied residents and their families are an important
source of referrals for Grand Court. In addition, Grand Court plans to use its
common Development Community design and its "The Grand Court"(R) trademarked
name to promote national brand-name recognition. Grand Court adopted the
trademarked name. Historically, senior living communities have been
independently owned and operated and there has been little national brand-name
recognition. Grand Court believes that national recognition will be increasingly
important in the senior living business. Grand Court intends to continuously use
its trademarked name in its business activities, and the life of this trademark
will extend for the duration of its use. Grand Court considers this trademark to
be a valuable intangible intellectual property asset.
Corporate. Over the past ten years Grand Court has developed extensive
policies, procedures and systems for the operation of its senior living
communities. Grand Court also has adopted a formal quality assurance program. In
connection with this program Grand Court conducts a minimum of two full-day
annual quality assurance reviews at each community. The entire regional staff
team participates in the review which thoroughly examines all aspects of the
senior living community from the provision of services to the maintenance of the
physical buildings. The reports generated from these quality assurance reviews
are then implemented by the community administrator. Corporate headquarters also
provides human resources services, a licensing facilitator, and in-house
accounting and legal support systems.
Regional. Grand Court has nine regional administrators. Each administrator
is responsible for three to six communities. Grand Court also has a regional
administrator and a registered dietician who oversees the food division. Each
regional administrator is reported to by the manager of those communities he
oversees.
Community. The management team at each senior living community consists of
an administrator, who has overall responsibility for the operation of the
community, an activity director, a marketing director and, at certain larger
communities, one or two assistant administrators. Each senior living community
which offers assisted-living services has a staff responsible for the
assisted-living care giving services. This staff consists of a lead resident
aide, a medication room aide, certified nurse aides and trained aides, and, in
those states which so require, registered nurses. At least one staff member is
on duty 24 hours per day to respond to the emergency or scheduled 24-hour
assisted-living services available to the residents. Each community has a
kitchen staff, a housekeeping staff and a maintenance staff. The average
community currently operated by Grand Court has 40 to 50 full-time employees
depending on the size of the community and the extent of services provided in
that community. Based upon its experience in operating senior living communities
in both primary and secondary markets, Grand Court believes that its secondary
market focus will make it easier for it to attract and retain high-quality,
affordable staff.
Grand Court places emphasis on diet and nutrition, as well as preparing
attractively presented healthy meals which can be enjoyed by the residents.
Grand Court's in-house food service program is led by a regional administrator
who reviews all menus and recipes for each community. The menus and recipes are
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reviewed and changed based on consultation with the food director and input from
the residents. Grand Court provides special meals for residents who require
special diets.
Employees. Grand Court emphasizes maximizing each employee's potential
through support and training. Grand Court's training program is conducted on
three levels. Approximately six times per year, corporate headquarters staff
conduct training sessions for the management staff in the areas of supervision
and management skills, and caring for the needs of an aging population. At the
regional level, regional staff train the community staff on issues such as
policies, procedures and systems, activities for the elderly, the administration
and provision of specific services, food service, maintenance, reporting systems
and other operational areas of the business. At the community level, the
administrators of each community conduct training sessions on at least a monthly
basis relating to various practical areas of care-giving at the community. These
monthly sessions cover, on an annual basis, all phases of the community's
operations, including special areas such as safety, fire and disaster
procedures, resident care, and policies and procedures.
GOVERNMENT REGULATION
Regulations applicable to Grand Court's operations vary among the types of
senior living communities operated by it and from state to state.
Independent-living communities generally do not have any licensing requirements.
Assisted-living communities are subject to less regulation than other licensed
health care providers but more regulation than independent-living communities.
However, Grand Court anticipates that additional regulations and licensing
requirements will likely be imposed by the states and the federal government.
Currently, all states except South Dakota require licenses to provide
assisted-living services. The licensing statutes typically establish physical
plant specifications, resident care policies and services, administration and
staffing requirements, financial requirements and emergency service procedures.
The licensing process can take from two months to one year. New Jersey requires
Certificates of Need for assisted-living communities. Grand Court's communities
also must comply with the requirements of the Americans with Disabilities Act
("ADA") and are subject to various local building codes and other ordinances,
including fire safety codes. While Grand Court relies almost exclusively on
private pay residents, it operates a Syndicated nursing home in which some
residents rely on Medicare. As a provider of services under the Medicare
program, Grand Court is subject to Medicare regulations designed to limit fraud
and abuse, violations of which could result in civil and criminal penalties and
exclusion from participation in the Medicare program. Revenues derived from
Medicare comprise less than 1% of the revenues of the communities operated by
Grand Court. Grand Court does not intend to expand its nursing home activities
and intends to pursue an exclusively "private-pay" clientele. Grand Court
believes it is in substantial compliance with all applicable regulatory
requirements. No actions are pending against Grand Court for non-compliance with
any regulatory requirement.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose liability whether or not the owner or operator knows of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations, and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
any entity who arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for
these costs, as well as certain other costs, including governmental fines and
injuries to persons or properties. As a result, the presence, with or without
Grand Court's knowledge, of hazardous or toxic substances at any senior living
communities owned or operated by Grand Court could have an adverse effect on
Grand Court's business, operating results and financial condition. Although
Grand Court has not incurred any material costs for removal or remediation of
hazardous or toxic substances, there can be no assurance that this will remain
the case in the future.
Under the ADA, all places of public accommodation are required to meet
certain federal requirements related to access and use by disabled persons. A
number of additional federal, state and local laws exist which also may require
modifications to existing and planned properties to create access to the
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<PAGE>
properties by disabled persons. While Grand Court believes that its senior
living communities are substantially in compliance with present requirements or
are exempt therefrom, if required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by Grand Court. Further legislation may
impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.
EMPLOYEES
As of November 10, 1999, Grand Court employed approximately 2,300 persons,
including 58 in its principal executive offices. None of Grand Court's employees
are covered by collective bargaining agreements. Grand Court believes its
employee relations are good.
FINANCIAL INFORMATION ABOUT SEGMENTS
See "Segment Reporting Information" at Note 16 to the Consolidated
Financial Statements for the period ended January 31, 1999 included in this
prospectus.
PROPERTIES
SYNDICATED COMMUNITIES
Grand Court currently manages 45 Syndicated Communities containing
approximately 6,179 senior living apartment units and one Syndicated nursing
home containing 57 beds. Such communities are owned by Owning Partnerships and
not by Grand Court. Grand Court generally has a 1% interest in the Owning
Partnerships and a 1% interest in the Investing Partnerships which are formed to
purchase a 99% partnership interest in the Owning Partnership. The following
chart sets forth information regarding the Syndicated Communities managed by
Grand Court:
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF YEAR OCCUPANCY % AS
COMMUNITY(1) STATE UNITS ACQUIRED(2) OF AUGUST 31, 1999(8)
- ------------------------------------- ---------- --------- -------- ------------------
<S> <C> <C> <C> <C>
The Grand Court Mesa Arizona 174 1997 95%
The Grand Court Phoenix Arizona 136 1991 94%
The Grand Court Sacramento California 122 1998 79%
The Grand Court Denver Colorado 149 1999 89%
The Grand Court Fort Myers Florida 184 1989 91%
The Grand Court Lakeland Florida 126 1996 87%(6)
The Grand Court Lake Worth Florida 170 1992 77%
The Grand Court North Miami Florida 189 1995 72%
The Grand Court Pensacola Florida 60 1993 88%
The Grand Court I and II Pompano Beach Florida 114 1994 70%(6)
The Grand Court South Miami Florida 96 1998 45%(6)
The Grand Court Tampa Florida 165 1997 98%
The Grand Court Tavares Florida 94 1995 98%
The Grand Court Winterhaven Florida 130 1997 91%
The Grand Court Carrolton Georgia 68 1998 97%
The Grand Court Belleville Illinois 76 1993 95%
The Grand Court II Kansas City Kansas 127 1994 89%
The Grand Court Overland Park Kansas 275 1997 99%(6)
The Grand Court Radcliff Kentucky 102 1999 56%
The Grand Court Adrian Michigan 103 1998 93%
The Grand Court Farmington Hills Michigan 164 1993 97%
The Grand Court Novi Michigan 114 1994 94%
The Grand Court Westland Michigan 153 1997 98%
The Grand Court I Kansas City Missouri 173 1989 91%
-26-
<PAGE>
AVERAGE
NUMBER OF YEAR OCCUPANCY % AS
COMMUNITY(1) STATE UNITS ACQUIRED(2) OF AUGUST 31, 1999(8)
- ------------------------------------- ---------- --------- -------- ------------------
The Grand Court III Kansas City(3) Missouri 217 1989 82%(6)
The Grand Court Seward Nebraska 65 1999 95%
The Grand Court Las Vegas Nevada 152 1991 93%
The Grand Court II Las Vegas Nevada 111 1999 79%(6)
The Grand Court Albuquerque New Mexico 200(7) 1997 75%
The Grand Court Columbus Ohio 120 1994 94%
The Grand Court Dayton Ohio 185 1994 97%
The Grand Court Findlay Ohio 73 1992 95%
The Grand Court Springfield Ohio 77 1992 97%
The Grand Court I Chattanooga Tennessee 128(4) 1995 62%
The Grand Court II Chattanooga Tennessee 146 1995 90%
The Grand Court Memphis Tennessee 197 1992 89%
The Grand Court Morristown Tennessee 185 1996 89%
The Grand Court Bryan Texas 180 1992 90%
The Grand Court Fort Worth Texas 140 1999 91%
The Grand Court Garland Texas 112 1997 97%(6)
The Grand Court Longview Texas 132 1990 73%(6)
The Grand Court Lubbock Texas 139 1991 80%
The Grand Court I San Antonio Texas 198 1993 92%
The Grand Court II San Antonio Texas 57(5) 1995 77%
The Grand Court Weatherford Texas 60 1996 87%
The Grand Court Bristol Virginia 98 1995 100%
</TABLE>
- -------------------
(1) In certain cases, more than one Investing Partnership owns an interest in
one Owning Partnership. There are therefore, more Investing Partnerships
than there are Owning Partnerships. One of the Owning Partnerships owns two
Syndicated Communities and another Owning Partnership owns one Syndicated
Community and one Syndicated nursing home. As a result, there are 46
properties listed, which relate to 44 Owning Partnerships. In addition, the
Syndicated Community to be owned by one Owning Partnership is currently
under construction.
(2) Represents year in which the Owning Partnership acquired the community.
(3) A portion of the units at The Grand Court III Kansas City are currently
rented as residential apartment units.
(4) Grand Court I Chattanooga's unit count includes a 70-bed nursing wing which
Grand Court is in the process of converting to assisted-living units. Such
units will be available for rental as assisted-living units by January
2000.
(5) Grand Court II San Antonio is a 57-bed licensed nursing facility.
(6) Occupancy percentage includes 1-6 units occupied by staff.
(7) Sixty (60) additional units were constructed during Fiscal 1998. Such
construction was substantially completed by October 1, 1998. Grand Court is
in the process of renting these additional units.
(8) The average occupancy percentage of each individual community was
determined by adding the average occupancy percentages as of the end of
each month in which the individual community was managed by Grand Court and
dividing that number by the total number of months the community was
managed by Grand Court during the periods September 1998 through August
1999. The average monthly occupancy percentage for each individual
community was determined by dividing the number of occupied units in the
individual community as of the end of the month by the total number of
apartment units in the individual community.
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<PAGE>
The Syndicated Communities currently operated by Grand Court are generally
encumbered with mortgage financing. While these mortgage loans are obligations
of the Owning Partnerships rather than direct obligations of Grand Court, Grand
Court typically provides a guaranty of certain obligations under the mortgages
including, for example, any costs incurred for the correction of hazardous
environmental conditions. As of October 4, 1999, Grand Court has incurred no
material costs or expenses relating to the correction of hazardous environmental
conditions. Although most of the mortgage loans are non-recourse, as of July 31,
1999, (i) Grand Court is liable as a general partner for approximately
$12.7 million in principal amount of mortgage debt relating to six Syndicated
Communities and (ii) wholly-owned entities (whose only asset is a specific
general partner interest) are liable as general partners for approximately
$44.7 million in principal amount of mortgage debt relating to eleven Syndicated
Communities and one Syndicated nursing home managed by Grand Court. In the case
of the general partner liabilities of the wholly-owned entities (whose only
asset is a specific general partner interest), the only assets of Grand Court at
risk of loss are the general partnership interests owned by the wholly-owned
entities. As of July 31, 1999, the aggregate principal amount of the mortgage
debt of the Owning Partnerships was approximately $226.7 million and the
aggregate annual debt service obligations, excluding any balloon amounts payable
at maturity, was approximately $21.5 million. Most of this debt contains
provisions which limit the ability of the respective Owning Partnerships to
further encumber the property. Through January 31, 2004, approximately
$215.6 million of balloon payments under the mortgages will become due and
payable. Grand Court anticipates that it will continue to arrange for future
acquisitions of existing senior living communities through mortgage financing
and Syndications. As of July 31, 1999, Grand Court fully guaranteed the mortgage
debt relating to four syndicated communities in the amount of $13.4 million.
DEVELOPMENT COMMUNITIES
Grand Court completed construction of and currently operates eight
Development Communities containing 1,086 senior living apartment units which
were constructed pursuant to its Development Plan. These eight Development
Communities are in their initial lease-up periods. Grand Court entered into
joint venture arrangements with a third party pursuant to which it sold 50%
interests in four of these eight Development Communities. The other four
completed Development Communities are operated by Grand Court pursuant to
long-term leases. The following chart sets forth information regarding the eight
completed Development Communities.
<TABLE>
<CAPTION>
NUMBER OF YEAR OCCUPANCY
COMMUNITY STATE UNITS BUILT(1) OCTOBER 1, 1999(2)
- ----------------------------------- ----- --------- ----- --------------
<S> <C> <C> <C> <C>
The Grand Court Abilene(4) Texas 126 1998 68%
The Grand Court Corpus Christi(3) Texas 142 1998 89%
The Grand Court El Paso(4) Texas 142 1998 85%
The Grand Court San Angelo(4) Texas 140 1998 65%
The Grand Court Temple(3) Texas 126 1998 76%
The Grand Court Tyler(3) Texas 126 1999 27%
The Grand Court Wichita Falls(4) Texas 142 1998 73%
The Grand Court Round Rock(3) Texas 142 1998 89%
</TABLE>
- -------------------
(1) Represents the year in which the property was placed into service.
(2) The average occupancy percentage for each particular community was
determined by dividing the number of occupied apartment units in the
particular community at October 1, 1999 by the total number of apartment
units in the particular community.
(3) Represents Development Communities which are owned by Grand Court pursuant
to joint venture arrangements.
(4) Represents Development Communities which are operated by Grand Court
pursuant to long-term leases.
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<PAGE>
The Development Communities which were wholly-owned by Grand Court as of
January 31, 1999 and currently owned by it pursuant to joint venture
arrangements were developed with mortgage financing. Except for the one
Development Community currently under construction which Grand Court intends to
Syndicate, Grand Court intends to finance its future development of Development
Communities primarily through mortgage financing and other types of financing,
including joint venture arrangements. In addition, Grand Court may enter into
long-term operating leases arising through sale/leaseback transactions or
similar transactions and may issue additional debt or equity securities, to the
extent necessary. The mortgage financing of Development Communities will be
direct obligations of Grand Court and, accordingly, the amount of its mortgage
indebtedness is expected to increase and Grand Court expects to have substantial
debt service, and may have substantial annual lease payment, requirements in the
future as Grand Court pursues its growth strategy.
LEGAL PROCEEDINGS
Grand Court is involved in various lawsuits and other matters arising in
the normal course of business, including employment-related claims. In the
opinion of the management of Grand Court, although the outcomes of these claims
and suits are uncertain, in the aggregate they should not have a material
adverse effect on Grand Court's financial position or results of operations.
Grand Court's business entails an inherent risk of liability. In recent years,
participants in the long-term care industry have become subject to an increasing
number of lawsuits alleging malpractice or related legal claims, many of which
seek large amounts and result in significant legal costs. Grand Court expects
that from time to time it may be subject to such suits as a result of the nature
of its business. Grand Court currently maintains insurance policies in amounts
and with such coverage and deductibles as it deems appropriate, based on the
nature and risks of its business, historical experience and industry standards.
Grand Court cannot assure investors that claims in excess of Grand Court's
insurance coverage or claims not covered by its insurance coverage will not
arise. A successful claim against Grand Court not covered by, or in excess of,
its insurance could have a material adverse effect on its operating results and
financial condition. Claims against Grand Court, regardless of their merit or
eventual outcome, may also have a material adverse effect on its ability to
attract residents or expand its business and would require management to devote
time to matters unrelated to the operation of its business. In addition, Grand
Court's insurance policies must be renewed annually, and there can be no
assurance that it will be able to obtain liability insurance coverage in the
future or, if available, that such coverage will be on acceptable terms.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial statement of operations and
balance sheet data have been derived from the Grand Court's consolidated
financial statements and regarding the years ended January 31, 1997, January 31,
1998 and January 31, 1999, respectively, should be read in conjunction with the
consolidated financial statements and the related notes thereto included
elsewhere in this prospectus. The results of operations for an interim period
have been prepared on the same basis as the year-end financial statements, and,
in the opinion of management, contain all adjustments, consisting of only
normally recurring adjustments, necessary for a fair presentation of the results
for the full year. The results of operations for the six months ended July 31,
1998 and 1999 may not give a true indication of results for the full year. All
references to a "fiscal" year refer to the fiscal year beginning on February 1
of that year (for example, "fiscal 1995" refers to the fiscal year beginning on
February 1, 1995). You should read the information provided below along with the
consolidated financial statement of Grand Court and the notes to those financial
statements.
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<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales............................................ $ 22,532,000 $ 1,973,000 $ 36,021,000 $ 38,135,000 $ 58,010,000
Syndication fee income........................... 5,587,000 8,603,000 7,690,000 7,923,000 7,283,000
Deferred income earned........................... ,399,000 9,971,000 5,037,000 7,254,000 3,701,000
Interest income.................................. 9,503,000 12,689,000 13,773,000 12,051,000 12,349,000
Property management fees from related parties ... 351,000 4,057,000 2,093,000 3,684,000 3,219,000
Equity in earnings (losses) in affiliated
entities........................................ 276,000 356,000 423,000 541,000 685,000
Senior living revenues........................... -- -- -- -- 5,093,000
Other income..................................... -- 1,013,000 -- 4,683,000 1,350,000
-------------
Total Revenues................................... 46,648,000 68,662,000 65,037,000 74,271,000 91,690,000
============= ------------ ------------- ------------ ------------
Costs and expenses:
Cost of sales.................................... 21,743,000 27,688,000 34,019,000 33,635,000 53,547,000
Selling.......................................... 6,002,000 7,664,000 7,176,000 7,602,000 6,335,000
Interest......................................... 13,610,000 15,808,000 16,394,000 19,409,000 22,066,000
General and administrative....................... 6,450,000 7,871,000 7,796,000 8,437,000 10,388,000
Loss on impairment of notes and receivables...... -- -- 18,442,000 -- --
Write-off of registration costs.................. -- -- -- 3,107,000 --
Senior living operating expenses................. -- -- -- -- 6,098,000
Officers' compensation(1)........................ 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Depreciation and amortization.................... 2,290,000 2,620,000 3,331,000 3,340,000 5,032,000
------------- ------------ ------------- ------------ ------------
Total Costs and Expenses......................... 51,295,000 62,851,000 88,358,000 76,730,000 104,666,000
============ ============ ============= ============ ===========
Net income (loss)................................ (4,647,000) 5,811,000 (23,321,000) (2,459,000) (12,976,000)
Pro-forma income tax provision (benefit)(2)...... (1,859,000) 2,324,000 -- -- --
Pro-forma net income (loss)(2)..................... $ (2,788,000) $3,487,000 $ (23,321,000) $ (2,459,000) $ (12,976,000)
============= ============ =========== ============ =============
Pro-forma earnings (loss) per
Common share (basic and diluted)(2).............. $ (.19) $.23 $ (1.55) $ (.16) $ (.74)
============ ========= ============= ============ ============
Pro-forma weighted average Common shares used...... 15,000,000 15,000,000 15,000,000 15,000,000 17,455,000
============ ============ ============= ============ ============
Ratio of earnings to combined fixed charges(3)..... -- 1.32 -- -- --
Deficiency in combined fixed charges............... $ 4,647,000 $ -- $ 24,533,000 $ 4,010,000 $ 14,825,000
============ ============ ============= ============ ============
OTHER DATA:
Syndicated Senior living communities operated (end
of period)....................................... 24 28 31 37 40
============ ============ ============= ============ ============
Number of units at Syndicated Communities
(end of period).................................. 3,683 4,164 4,480 5,261 5,629
============ ============ ============= ============ ============
Average occupancy percentage (4)................... 89.3% 94.7% 91.3% 93.3% 89.1%
============ ============ ============= ============ ============
Development Communities in Initial
Lease-Up Period (end of period).................. -- -- -- -- 7
============ ============ ============= ============ ============
Number of units at Development Communities
(end of period).................................. -- -- -- -- 960
============ ============ ============= ============ ============
Average occupancy percentage(4).................... -- -- -- -- 55.0%
============ ============ ============= ============ ============
</TABLE>
SIX MONTHS ENDED
JULY 31,
---------------------------
1998 1999
---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales........................................... $ 17,961,000 $ 36,853,000
Syndication fee income.......................... 4,087,000 3,478,000
Deferred income earned.......................... 415,000 311,000
Interest income................................. 7,487,000 4,652,000
Property management fees from related
parties ..................................... 1,712,000 1,924,000
Equity in earnings (losses) in affiliated
entities....................................... 322,000 137,000
Senior living revenues.......................... 1,589,000 3,892,000
Other income.................................... 1,350,000 --
Total Revenues.................................. 34,923,000 51,247,000
------------ ------------
Costs and expenses:
Cost of sales................................... 18,576,000 19,188,000
Selling......................................... 3,632,000 2,854,000
Interest........................................ 10,750,000 10,740,000
General and administrative...................... 5,174,000 6,167,000
Loss on impairment of notes and receivables..... -- 713,000
Write-off of registration costs................. -- --
Senior living operating expenses................ 2,165,000 5,095,000
Officers' compensation(1)....................... 600,000 600,000
Depreciation and amortization................... 2,388,000 2,785,000
------------ ------------
Total Costs and Expenses........................ 43,285,000 48,142,000
============ ============
Net income (loss)............................... (8,362,000) 3,105,000
Pro-forma income tax provision (benefit)(2)..... -- --
Pro-forma net income (loss)(2).................... $ (8,362,000) $ 3,105,000
============ ============
Pro-forma earnings (loss) per
Common share (basic and diluted)(2)............. $ (.49) $ .18
============ ============
Pro-forma weighted average Common shares used..... 17,104,000 17,733,000
============ ============
Ratio of earnings to combined fixed charges(3).... -- 1.22
Deficiency in combined fixed charges.............. $ 9,051,000 $ --
============ ============
OTHER DATA:
Syndicated Senior living communities operated
(end of period)................................. 38 44
============ ============
Number of units at Syndicated Communities
(end of period)................................. 5,344 6,030
============ ============
Average occupancy percentage (4).................. 90.7% 87.3%
============ ============
Development Communities in Initial
Lease-Up Period (end of period)................. 7 8
============ ============
Number of units at Development Communities
(end of period)................................. 960 1,086
============
Average occupancy percentage(4)................... 25.9% 65.0%
============ ============
<TABLE>
<CAPTION>
AS OF JANUARY 31, AS OF JULY 31,
----------------------------------------------------------------------------- --------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 10,950,000 $ 17,961,000 $ 14,111,000 $ 11,964,000 $ 22,784,000 $ 8,372,000
Notes and receivables-net....... 220,482,000 224,204,000 222,399,000 231,140,000 227,104,000 238,598,000
Total assets.................... 248,553,000 260,023,000 261,661,000 295,799,000 319,314,000 307,653,000
Total liabilities............... 217,879,000 225,238,000 229,658,000 269,387,000 283,588,000 268,011,000
Stockholders' equity............ 30,674,000 34,785,000 32,003,000 26,412,000 35,726,000 38,572,000
</TABLE>
- -------------------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and the former
President, respectively, of Grand Court received dividends and
distributions from the Company's predecessors but did not receive
compensation. Officers' Compensation is based upon the aggregate
compensation currently received by such officers, $600,000 a year for each
such officer. Amounts received by such officers in excess of such amounts
are treated as distributions for purposes of Grand Court's financial
statements. In fiscal 1994 through fiscal 1997, such officers also received
$943,000; $850,000, $397,000 and $1,566,000 each respectively as a
distribution. See "Executive Compensation."
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(2) Grand Court's predecessors were Sub-chapter S corporations and a
partnership. The pro-forma statement of operations data reflects provisions
for federal and state income taxes as if Grand Court had been subject to
federal and state income taxation as a C corporation during the years ended
January 31, 1995 and January 31, 1996.
(3) For purposes of calculating the ratio of earnings to combined fixed charges
and deficiency in combined fixed charges, "Earnings" represents income
(loss) before income taxes plus combined fixed charges and "combined fixed
charges" consist of interest expense, including amounts capitalized,
amortization of deferred financing costs and one-third of rental expenses
that is representative of that portion of rental expenses attributable to
interest.
(4) Average occupancy percentages were determined by adding all of the
occupancy percentages of the individual communities and dividing that
number by the total number of communities. The average occupancy percentage
for each particular community was determined by dividing the number of
occupied apartment units in the particular community on the given date by
the total number of apartment units in the particular community. All the
Development Communities are still in their initial lease-up period.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, all references in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" (i) to
a "Fiscal" year refer to the fiscal year beginning on February 1 of that year
(for example, "Fiscal 1998" refers to the fiscal year beginning on February 1,
1998) and (ii) to Grand Court include Grand Court, its subsidiaries and its
predecessors taken as a whole.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Grand Court 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 Grand Court in this Registration Statement on Form S-4.
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, Grand Court 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 Grand Court or its subsidiaries, are
expressly qualified by these cautionary statements and any other cautionary
statements which may accompany the forward-looking statements. In addition,
Grand Court disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.
Forward-looking statements made by Grand Court 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 Grand
Court'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 Grand Court 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 Grand Court, could cause actual results to differ materially from those
discussed in the forward looking statements:
1. The ability of Grand Court to service its substantial debt
obligations.
2. The ability of Grand Court to pay Management Contract Obligations from
the cash flow generated by the Syndicated Communities and the impact
of the terms of future Syndications.
3. The need for Grand Court to utilize cash from operations and obtain
additional financing to pursue its Development Plan.
4. Grand Court's ability to identify and Syndicate suitable acquisition
opportunities, a significant source of revenues for Grand Court.
5. Grand Court's ability to identify suitable development opportunities,
pursue such opportunities, complete development, lease-up and
effectively operate the Development Communities.
6. The ability of Grand Court to obtain sufficient joint venture capital
for its Development Program on favorable terms, anticipated to be a
significant source of revenues for Grand Court.
7. The impact of mortgage defaults and/or foreclosures relating to
Multi-Family Properties (as defined below) on Grand Court's ability to
collect on its Multi-Family Notes (as defined below).
-32-
<PAGE>
8. Governmental regulatory actions and initiatives, including without
limitation, those relating to healthcare laws, benefiting disabled
persons, government mortgage insurance and subsidy programs,
environmental requirements and safety requirements.
9. The ability to attract seniors with sufficient resources to pay for
Grand Court's services.
10. Changes in anticipated construction costs, operating expenses and
start-up losses relating to Grand Court's Development Plan.
11. Unanticipated delays in Grand Court's Development Plan including,
without limitation, permitting, licensing and construction delays.
12. Changes in general economic conditions, including, but not limited to,
factors particularly affecting real estate and the capital markets
including, but not limited to, changes in interest rates.
13. Changes in operating costs of senior living communities, including
without limitation, staffing and labor costs.
14. Grand Court's ability to attract and retain qualified personnel.
15. Competitive factors affecting the long-term care services industry.
16. The potential recourse and guarantee obligations of Grand Court,
including, without limitation, the correction of hazardous
environmental conditions relating to the mortgage financing of the
senior living communities.
17. The potential liabilities arising from Grand Court's status as the
general partner of Syndicated Communities.
18. The potential impact of recent net losses.
19. The potential impact of computer related Year 2000 problems on Grand
Court's operations, including the ability of Grand Court and material
third parties to identify and/or address all material Year 2000 issues
and implement contingency plans.
OVERVIEW
Grand Court is a fully integrated provider of senior living accommodations
and services which acquires, develops and manages senior living communities
which provide independent and assisted-living services. Grand Court'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 real properties. Since 1986, Grand Court has focused on the
acquisition and Syndication of existing senior living communities ("Syndicated
Communities"). Grand Court has established a development program (the
"Development Plan") pursuant to which it is building new senior living
communities which offer independent and assisted living services ("Development
Communities"). Grand Court currently owns the Development Communities pursuant
to joint venture arrangements or operates such communities pursuant to long-term
leases. To the extent that Grand Court's Development Plan is successfully
implemented, Grand Court anticipates that the percentage of its revenues derived
from Syndications would decrease and the percentage of its revenues derived from
the Development Communities would increase and, Grand Court believes, over time,
become the primary source of Grand Court's revenues. Although Grand Court
recognized a profit in the first half of fiscal 1999, it has experienced
operating losses in the last three fiscal years.
Historically, Grand Court has arranged for the acquisition and development
of senior living communities and multi-family properties by utilizing mortgage
financing and Syndications. The properties, whether senior living communities or
multi-family properties, are owned by a partnership (an "Owning partnership").
The multi-family properties, which were Syndicated by Grand Court prior to 1986,
are not owned or managed by Grand Court. Such properties are owned by their
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<PAGE>
respective Owning Partnerships and are managed by third party managing agents.
The senior living communities Syndicated by Grand Court since 1986 are managed
by Grand Court but are owned by the respective Owning Partnerships and not by
Grand Court.
Future revenues, if any, of Grand Court relating to previously Syndicated
Communities would primarily arise in the form of (i) deferred income earned on
the sale of the purchased interests in the related Owning Partnerships, (ii)
management fees, (iii) amounts payable by the partnerships formed to acquire
interests in the Owning Partnerships ("Investing Partnerships") to Grand Court
in the event of the subsequent sale or refinancing of such communities, (iv)
interest income on purchase notes receivable, and (v) earnings derived from
Grand Court's equity interests in Owning Partnerships and Investing
Partnerships. Future revenues, if any, of Grand Court relating to future
Syndicated Communities would primarily arise from any initial profit recognized
upon completion of the Syndication and from the same items listed in the
previous sentence.
Grand Court intends to continue to arrange for future acquisitions of
existing senior living communities by utilizing mortgage financing and by
arranging Syndications, and anticipates that between six and twelve communities
will be acquired and Syndicated in this manner during the next two years. Future
Syndications will require the allocation of funds generated by Grand Court to
cover Grand Court'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). Grand Court 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
Grand Court's funds to satisfy any associated Management Contract Obligations,
as defined herein, (including payment of required returns for distribution to
limited partners) that are not funded from the respective property's operations.
Grand Court continually seeks senior living communities which it deems are
good acquisition prospects. In deciding which properties it has and will
acquire, Grand Court'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.
Grand Court has instituted a Development Plan pursuant to which it has
currently completed construction of eight Development Communities and has
commenced construction on three additional communities. During the next two
years of the plan, Grand Court intends to commence construction on between eight
and twelve additional new Development Communities. One of the three communities
under construction will be Syndicated on terms substantially the same as those
for the recently Syndicated Communities (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview - Deferred
Income Earned") and therefore will be treated as a Syndicated Community for
accounting purposes. Grand Court does not currently intend to Syndicate (i) the
other two Development Communities which are under construction or (ii) any
additional Development Communities constructed pursuant to the Plan. Generally,
Grand Court plans to own, pursuant to joint venture arrangements with third
parties, or lease, pursuant to long-term operating leases or similar
arrangements, the Development Communities that are being developed under the
Plan. Grand Court will manage and operate each of the Development Communities.
Grand Court estimates that the cost of developing each of the new Development
Communities (including reserves necessary to carry the community through its
lease-up period) utilizing mortgage financing will be approximately $10.5
million. Grand Court expects to complete construction of the remaining three
Development Communities under construction by the end of fiscal 1999. These
three Development Communities, along with the eight communities already
completed pursuant to the Development Plan, contain an aggregate of 1,488 senior
living apartment units. The eight to twelve additional new communities which
Grand Court intends to commence construction on over the next two years will
contain between 1,008 and 1,512 additional senior living apartment units. Grand
Court will use a substantial portion of the proceeds of its initial public
offering which occurred in March, 1998, funds generated by its business
operations, mortgage construction financing, the proceeds of joint venture
arrangements for, anticipated refinancings of construction financing on, and/or
sale-leasebacks of, completed Development Communities, and may complete
additional new issuances of debt or equity securities to finance the
development, construction and initial operating costs of additional Development
Communities. Four of the completed Development Communities are being operated by
Grand Court pursuant to long-term leases. Grand Court may use additional
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long-term leases or similar arrangements which require the investment of little
or no capital on the part of Grand Court, to the extent necessary to proceed
with this Development Plan. In April 1999, Grand Court entered into joint
venture arrangements regarding four Development Communities, two of such joint
venture arrangements being effective as of April 1, 1999 and the other two being
effective May 1, 1999. Pursuant to each joint venture arrangement, Grand Court
sold a 50% interest in a Development Community to a third party. Grand Court
realized a profit from each of the sales and earns management fees for managing
each of the communities. The third party has the right to terminate Grand
Court's management upon thirty days' written notice. The third party receives a
cumulative priority return on its investment from all cash flow generated by the
community and any excess cash flow is shared 50% by Grand Court and 50% by the
third party. Grand Court no longer consolidates these Development Communities
into its consolidated financial statements but recognizes its investment in
these Development Communities under the equity basis of accounting.
. Sales.
Income from sales of general partnership interests in Owning Partnerships
is recognized when the profit on the transaction is determinable, that is, the
collectibility of the sales price is reasonably assured and the earnings process
is virtually complete. Grand Court determines the collectibility of the sales
price by evidence supporting the buyers' substantial initial and continuing
investment in the purchased property as well as other factors such as age,
location and cash flow of the underlying property.
. Syndication Fee Income.
Grand Court earns Syndication fee income equal to the expenses of the
Syndication which include commissions.
. Deferred Income Earned.
Grand Court has deferred income on sales to Investing Partnerships of
interests in Owning Partnerships. Grand Court has arranged for the Syndications
of Investing Partnerships which were formed to acquire controlling interests in
Owning Partnerships which own senior living communities ("Senior Living Owning
Partnerships"). In a typical Syndication, Grand Court enters into a management
contract with the Senior Living Owning Partnership, pursuant to which Grand
Court is required to pay, for a five-year period, (i) any operating cash
deficiencies of such Senior Living Owning Partnership and (ii) any part of such
11% to 12% return not paid from cash flow from the related property (which the
Senior Living Owning Partnerships distribute to the Investing Partnerships for
distribution to limited partners) (collectively, "Management Contract
Obligations"). The amount of deferred income for each property is calculated in
a multi-step process. First, based on the property's cash flow in the previous
fiscal year, the probable cash flow for the property for the current fiscal year
is determined and that amount is initially assumed to be constant for each
remaining year of the Management Contract Obligations period (the "Initial Cash
Flow"). The Initial Cash Flow is then compared to the Management Contract
Obligations for the property for each remaining year of the five-year period. If
the Initial Cash Flow exceeds the Management Contract Obligations for any fiscal
year, the excess Initial Cash Flow is added to the assumed Initial Cash Flow for
the following fiscal year and this adjusted Initial Cash Flow is then compared
to the Management Contract Obligations for said following fiscal year. If the
Initial Cash Flow is less than the Management Contract Obligations for any
fiscal year, a deferred income liability is created in an amount equal to such
shortfall and no adjustment is made to the Initial Cash Flow for the following
year. As this process is performed for each property on a quarterly basis,
changes in a property's actual cash flow will result in changes to the assumed
Initial Cash Flow utilized in this process and will result in increases or
decreases to the deferred income liability for the property. Any deferred income
liability created during a period increases the cost of sales for that period.
The payment of the Management Contract Obligations, however, will generally not
result in the recognition of expense unless the property's actual Cash Flow for
the year is less than the Initial Cash Flow for the year, as adjusted, and as a
result thereof, the amount paid by Grand Court in respect of the Management
Contract Obligations is greater than the amount assumed in establishing the
deferred income liability (such excess amount expended during any period is
included as a component of cost of sales for that period). If, however, the
property's actual cash flow is greater than the Initial Cash Flow for the
period, as adjusted, Grand Court's earnings will be enhanced by the recognition
of deferred income earned and, to the extent cash flow exceeds Management
Contract Obligations, incentive management fees. Grand Court recognized such
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incentive management fees in the amount of $1.2 million, $2.8 million,
$2.2 million and $1.3 million for the years ended January 31, 1997, 1998 and
1999 and the six months ended July 31, 1999, respectively.
Grand Court accounts for the pre-1986 Syndication of Investing Partnerships
which were formed to acquire controlling interests in Owning Partnerships which
own multi-family properties ("Multi-Family Owning Partnerships") under the
installment method of accounting. Under the installment method the gross profit
was determined at the time of sale. The revenue recorded in any given year would
equal the cash collections multiplied by the gross profit percentage. At the
time of the sale, Grand Court deferred all future income to be recognized on
each of these transactions. Losses on these properties are recognized
immediately upon sale. Syndications relating to Multi-Family Owning Partnerships
account for 86% of Grand Court's deferred income.
The Syndication of a Development Community currently under construction
will generate more deferred income than with respect to the typical community
Syndicated during the last two years and will result in higher cost of sales.
. Interest Income.
Grand Court has notes receivable with respect to the post-1986 Syndication
of senior living communities ("Senior Living Notes"). Such Senior Living Notes
have stated interest rates ranging from 11% to 13.875% per annum and are due in
installments over five years from the date the Investing Partnership acquired
its interest in the Senior Living Owning Partnership. Each Senior Living Note
represents senior indebtedness of the related Investing Partnership and is
collateralized by the Investing Partnership's interest in the Senior Living
Owning Partnership that owns the related senior living community. These
properties generally are encumbered by mortgages. The mortgages generally bear
interest at rates ranging from 7.27% to 10.50% per annum. The mortgages
generally are collateralized by a mortgage lien on the related senior living
communities. Principal and interest payments on each Senior Living Note also are
collateralized by the investor notes payable to the Investing Partnership to
which the limited partners are admitted. Grand Court also recognizes interest
income relating to interest earned on cash and government securities.
Grand Court also has notes receivable with respect to the pre-1986
Syndication of multi-family properties (respectively, the "Multi-Family Notes"
and the "Multi-Family Properties"). Such Multi-Family Notes generally have
maturity dates ranging from ten to fifteen years from the date the partnership
interests were sold. Eighty-four of the 157 Multi-Family Notes have reached
their final maturity dates and, due to the inability, in view of the current
cash flows of the Multi-Family Properties, to maximize the value of the
underlying property at such maturity dates, either through a sale or
refinancing, these final maturity dates have been extended by Grand Court. The
underlying Multi-Family Properties relating to two extended Multi-Family Notes
were refinanced and the underlying properties relating to eight previously
extended Multi-Family Notes were sold as of July 31, 1999. During the period
such notes are extended, Grand Court will continue to receive the cash flow and
sale or refinancing proceeds, if any, generated by the underlying properties.
Grand Court expects that it may need to extend maturities of other Multi-Family
Notes. The notes represent senior indebtedness of the related Investing
Partnership and typically are collateralized by a 99% partnership interest in
the Multi-Family Owning Partnership that owns the related Multi-Family Property.
These properties are encumbered by mortgages, which generally bear interest at
rates ranging from 7% to 12% per annum. The mortgages are typically
collateralized by a mortgage lien on the related Multi-Family Property. Interest
payments on each Multi-Family Note also are collateralized by the related
investor notes.
. Property Management Fees.
Property management fees earned for services provided to related parties
are recognized as revenue when related services have been performed.
. Equity in Earnings from Affiliated Entities.
Generally, Grand Court accounts for its interests in limited partnerships
under the equity method of accounting. Under this method Grand Court records its
share of income and loss of the entity based upon its general partnership
interest. Fifty percent interests in four of the Development Communities owned
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by Grand Court on January 31, 1999, have subsequently been sold to a third party
pursuant to four joint venture arrangements. Two of such joint venture
arrangements were effective as of April 1, 1999 and the other two arrangements
were effective as of May 1, 1999. Grand Court intends to enter into similar
joint venture arrangements regarding the other Development Communities developed
pursuant to its Development Plan. As of January 31, 1999, all of Grand Court's
Development Communities were wholly-owned and consolidated into its consolidated
financial statements. To the extent that Grand Court enters into such joint
venture arrangements, the related Development Communities will no longer be so
consolidated. Instead, Grand Court's investment in such Development Communities
will be reflected under the equity basis of accounting.
. Senior Living Revenues.
Senior living revenues represent the income earned from consolidated or
leased Development Communities.
RESULTS OF OPERATION
. Revenues -- Overview
Total revenues for the three months ended July 31, 1999 were $24.4 million
as compared to $15.9 million for the three months ended July 31, 1998
representing an increase of $8.5 million or 53.5%. Total revenues for the six
months ended July 31, 1999 were $51.2 million as compared to $34.9 million for
the six months ended July 31, 1998 representing an increase of $16.3 million or
46.7%. Total revenues for the year ended January 31, 1999 ("Fiscal 1998") were
$91.7 million as compared to $74.3 million for the year ended January 31, 1998
("Fiscal 1997"), representing an increase of $17.4 million or 23.4%. Total
revenues for Fiscal 1997 were $74.3 million compared to $65.0 million for the
year ending January 31, 1997 ("Fiscal 1996"), representing an increase of
$9.3 million or 14.3%.
. Syndication Communities
Revenues from this segment are derived from sales of general partnership
interests in Senior Living Owning Partnerships to Investing Partnerships,
recognition of deferred income with respect to previous sales of general
partnership interests, interest on Senior Living Notes received by Grand Court
from such Investing Partnerships as part of the purchase price paid for such
general partnership interests, property management fees received by Grand Court
and Grand Court's share of income and loss of the entities based upon its
retained general partnership interests. Such general partnership interests were
historically 1% of the Owning Partnership and 1% of the Investing Partnership.
In recent Syndications, the Company has been selling 50% partnership interests
in the Owning Partnerships. Due to this increased percentage in ownership being
retained by Grand Court, Grand Court consolidates these Owning Partnerships into
its consolidated financial statements. As a result of this consolidation, senior
living revenues derived from these Owning Partnerships will also be a source of
revenues for this segment.
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<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, THREE MONTHS ENDED JULY 31,
------------------------------------------------- ----------------------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales........................... $ 36,021,000 $ 38,135,000 $ 31,616,000 $ 7,481,000 $ 8,638,000
Syndication fee income.......... 7,690,000 7,923,000 7,283,000 1,912,000 1,674,000
Deferred income earned.......... 4,093,000 6,140,000 2,913,000 -- --
Interest income................. 7,054,000 4,768,000 4,204,000 827,000 807,000
Property management fees in
related parties.............. 2,093,000 3,684,000 3,219,000 724,000 841,000
Senior living revenues.......... -- -- -- -- 35,000
Equity in earnings (losses) in
affiliated entities.......... 423,000 541,000 685,000 164,000 235,000
------------- --------------- -------------- --------------- --------------
Total revenues.................. 57,374,000 61,191,000 49,920,000 11,108,000 12,180,000
============= =============== ============== =============== ==============
Cost of sales................... 34,019,000 33,635,000 31,019,000 10,210,000 5,661,000
Selling......................... 6,634,000 6,945,000 5,656,000 1,413,000 1,140,000
Interest expense................ 3,493,000 4,945,000 4,152,000 948,000 943,000
General and administrative...... 6,877,000 6,951,000 5,656,000 1,883,000 1,575,000
Officers' compensation.......... 1,059,000 989,000 653,000 213,000 149,000
Senior living operating expenses -- -- -- -- 15,000
Depreciation and amortization... 319,000 363,000 490,000 87,000 109,000
------------- --------------- -------------- --------------- --------------
Total costs and expenses........ 52,401,000 53,828,000 47,626,000 14,754,000 9,592,000
------------- --------------- -------------- --------------- --------------
Net income (loss)............... $ 4,973,000 $ 7,363,000 $ 2,294,000 $ (3,646,000) $ 2,588,000
============= =============== ============== =============== ==============
</TABLE>
SIX MONTHS ENDED JULY 31,
1998 1999
---- ----
Sales........................... $ 17,961,000 $ 16,853,000
Syndication fee income.......... 4,087,000 3,478,000
Deferred income earned.......... -- --
Interest income................. 2,515,000 2,173,000
Property management fees in
related parties.............. 1,712,000 1,924,000
Senior living revenues.......... -- 35,000
Equity in earnings (losses) in
affiliated entities.......... 322,000 406,000
-------------- ---------------
Total revenues.................. 26,597,000 24,869,000
============== ===============
Cost of sales................... 18,576,000 12,894,000
Selling......................... 3,214,000 2,586,000
Interest expense................ 2,231,000 1,839,000
General and administrative...... 3,940,000 2,993,000
Officers' compensation.......... 457,000 291,000
Senior living operating expenses -- 15,000
Depreciation and amortization... 207,000 282,000
-------------- ---------------
Total costs and expenses........ 28,675,000 20,900,000
-------------- ---------------
Net income (loss)............... $ (2,028,000) $ 3,969,000
============== ================
Sales for the three months ended July 31, 1999 were $8.6 million as
compared to $7.5 million for the three months ended July 31, 1998, representing
an increase of $1.1 million or 14.7%. The increase was attributable to the sale
of more partnership units in the three months ended July 31, 1999 as compared to
the three months ended July 31, 1998. Sales for the six months ended July 31,
1999 were $16.9 million as compared to $18.0 million for the six months ended
July 31, 1998, representing a decrease of $1.1 million or 6.1%. The decrease was
attributable to the sale of fewer partnership units in the six months ended
July 31, 1999 as compared to the six months ended July 31, 1998. Sales for
Fiscal 1998 were $31.6 million as compared to $38.1 million for Fiscal 1997,
representing a decrease of $6.5 million, or 17.1%. The decrease was attributable
to the sale of fewer partnership units in Fiscal 1998 as compared to Fiscal
1997. Sales for Fiscal 1997 was $38.1 million as compared to $36.0 million in
Fiscal 1996, representing an increase of $2.1 million, or 5.8%. The increase was
attributable to the sale of a greater number of partnership units in Fiscal 1997
as compared to Fiscal 1996.
The primary factors that affect the number of partnership units available
for sale are ( i) the availability of senior living communities for
Syndications, (ii) the terms of the Syndications and (iii) the initial cash flow
of the senior living communities being Syndicated. More favorable Syndication
terms along with a greater initial cash flow of the Syndicated Communities will
yield a greater number of units available to be sold. Syndication terms become
more favorable for Grand Court if there is an increase in the ratio of (a) the
purchase price paid to Grand Court by the Investing Partnership for its interest
in the Senior Living Owning Partnership, to (b) the initial cash flow of the
Syndicated Community. The Syndications completed in the three and six months
ended July 31, 1999 had more favorable Syndication terms as partially offset by
communities with lower initial cash flows than the Syndications completed in the
three and six months ended July 31, 1998. The Syndications completed in Fiscal
1998 had less favorable terms, as offset by greater initial cash flows of the
Syndicated Communities, than the Syndications completed in Fiscal 1997. The
Syndications completed in Fiscal 1997 had more favorable terms, as offset by
slightly less initial cash flows of the Syndicated Communities than the
Syndications completed in Fiscal 1996.
Syndication fee income for the three months ended July 31, 1999 was
$1.6 million as compared to $1.9 million for the three months ended July 31,
1998, representing a decrease of $300,000 or 15.8%. The decrease is primarily
attributable to a decrease in the average commission rate resulting in less
commissions paid on a greater sales volume in the three months ended July 31,
1999 as compared to the three months ended July 31, 1998. Syndication fee income
for the six months ended July 31, 1999 was $3.5 million as compared to
$4.1 million for the six months ended July 31, 1998, representing a decrease of
$600,000 or 14.6%. The decrease is primarily attributable to a decrease in the
average commission rate resulting in less commissions paid on a lower sales
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volume in the six months ended July 31, 1999 as compared to the six months ended
July 31, 1998. Syndication fee income for Fiscal 1998 was $7.3 million as
compared to $7.9 million for Fiscal 1997, representing a decrease of $600,000 or
7.6%. The decrease was attributable to less commissions and professional fees
paid on a lower sales volume in Fiscal 1998 as compared to Fiscal 1997.
Syndication fee income for Fiscal 1997 did not materially change as compared to
Fiscal 1996.
Deferred income earned in Fiscal 1998 was $2.9 million as compared to
$6.1 million in Fiscal 1997, representing a decrease of $3.2 million, or 52.5%.
The decrease is attributable to the cash flows generated by Syndicated
Communities during Fiscal 1998 exceeding the estimates used to establish
deferred income liabilities in Fiscal 1998 to a lesser degree than such cash
flows exceeded estimates in Fiscal 1997. Deferred income earned for Fiscal 1997
was $6.1 million as compared to $4.1 million for Fiscal 1996, representing an
increase of $2.0 million or 48.8%. The increase is attributable to the cash
flows generated by Syndicated Communities during Fiscal 1997 exceeding the
estimates used to establish deferred income liabilities in Fiscal 1997 to a
greater degree than such cash flow exceeded estimates in Fiscal 1996. There was
no deferred income earned in the three and six months ended July 31, 1999 and
1998.
Interest income did not materially change in the three months ended
July 31, 1999 as compared to the three months ended July 31, 1998. Interest
income was $2.2 million in the six months ended July 31, 1999 as compared to
$2.5 million in the six months ended July 31, 1998, representing a decrease of
$300,000 or 12.0%. The decrease is primarily attributable to less interest
recognized on Senior Living Notes in the six months ended July 31, 1999 as
compared to the six months ended July 31, 1998 due to the sale of fewer
partnership units during the last twelve months as compared to prior periods.
Interest income for Fiscal 1998 was $4.2 million as compared to $4.8 million in
Fiscal 1997, representing a decrease of $600,000, or 12.5%. The decrease is
attributable to less interest recognized on Senior Living Notes in Fiscal 1998
as compared to Fiscal 1997 due to (i) sale of fewer partnership units and
(ii) an increase in percentage of prepayments received from the purchasers of
limited partnership units. Interest income for Fiscal 1997 was $4.8 million as
compared to $7.1 million for Fiscal 1996, representing a decrease of
$2.3 million or 32.4%. The decrease is attributable to (i) the accelerated
receipt of interest payments on Senior Living Notes in Fiscal 1996 due to the
receipt of proceeds from the refinancing of a number of Syndicated Communities
(which includes the initial mortgage financing of certain Syndicated Communities
that had been previously acquired without a mortgage) in March 1996, which
reduced interest payments that otherwise would have been received in Fiscal
1997, and (ii) a reduction of interest income due to the refinancings of certain
Syndicated Communities which resulted in the prepayment of mortgages which were
previously assets of Grand Court.
Property management fees from related parties did not materially change in
the three and six months ended July 31, 1999 as compared to the three and six
months ended July 31, 1998. Property management fees from related parties for
Fiscal 1998 was $3.2 million as compared $3.7 million in Fiscal 1997,
representing a decrease of $500,000, or 13.5%. The decrease was attributable to
a reduction in the excess of (i) the cash flows from the Syndicated Communities
over (ii) the cash flow necessary to pay the specified rate of return to the
limited partners in Fiscal 1998 as compared to Fiscal 1997. Property management
fees from related parties for Fiscal 1997 was $3.7 million as compared to
$2.1 million for Fiscal 1996, representing an increase of $1.6 million or 76.2%.
The increase is primarily attributable to the cash flows from the Syndicated
Communities exceeding cash flow necessary to pay the specified rate of return to
the limited partners in Fiscal 1997 to a greater extent than in Fiscal 1996.
Senior living revenues and senior living operating expenses of $35,000 and
$15,000, respectively, are derived from the Syndicated Community which the
Company owns a 50% general partnership interest. Grand Court consolidates the
related Owning Partnership into its consolidated financial statements.
Cost of sales (which includes (i) the cash portion of the purchase price
for Syndicated 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
increases in deferred income liabilities established in the relevant periods)
for the three months ended July 31, 1999 was $5.7 million as compared to
$10.2 million for the three months ended July 31, 1998, representing a decrease
of $4.5 million or 44.1%. Cost of sales for the six months ended July 31, 1999
was $12.9 million as compared to $18.6 million in the six months ended July 31,
1998, representing a decrease of $5.7 million or 30.6%. The decrease is
primarily attributable to less funding of Management Contract Obligations and a
reduction in the aggregate cash portion of the purchase price plus related
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transaction costs and expenses for Syndicated Communities incurred by Grand
Court in the three month and six month periods ended July 31, 1999 as compared
to the three month and six month periods ended July 31, 1998. Due to Grand Court
selling a 50% partnership interest in the Owning Partnerships for those
communities Syndicated in the three months ended July 31, 1999, Grand Court
recognized a lesser aggregate cash portion of the purchase price as compared to
the prior period. The Communities Syndicated in the three month and six month
periods ended July 31, 1999 had less favorable acquisition terms (in view of the
relationship between the cumulative initial cash flows generated by the
properties and the cumulative purchase prices paid for such properties) as
offset by more favorable mortgage financing than the communities Syndicated in
the three and six months ended July 31, 1998. Cost of sales for Fiscal 1998 was
$31.0 million as compared to $33.6 million for Fiscal 1997, representing a
decrease of $2.6 million, or 7.7%. The decrease is attributable to a reduction
in the aggregate cash portion of the purchase price plus related transaction
costs and expenses paid for the Syndicated Communities due to more favorable
terms for the acquisition of the Syndicated Communities (in view of the
relationship between the cumulative initial cash flows generated by the
properties and the cumulative purchase prices paid for such properties) as
partially offset by increased funding of Management Contract Obligations in
Fiscal 1998 as compared to Fiscal 1997. Cost of sales for Fiscal 1997 did not
materially change as compared to Fiscal 1996. Cost of sales and selling expenses
(as described below) as a percentage of sales and syndication fee income for the
three months ended July 31, 1999 was 66.3% as compared to 123.7% for the three
months ended July 31, 1998. Cost of sales and selling expenses as a percentage
of sales and syndication fee income for the six months ended July 31, 1999 was
76.1% as compared to 98.8% for the six months ended July 31, 1998. The decreases
are attributable to cost of sales and selling expenses decreasing more than the
decrease in sales and syndication fee income. Cost of sales and selling expenses
as a percentage of sales and syndication fee income was 94.3% in Fiscal 1998 as
compared to 88.1% in Fiscal 1997. The increase is attributable to sales and
syndication fee income decreasing more 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 was 88.1% in Fiscal 1997 as compared to 93.0% in
Fiscal 1996. The decrease is attributable to sales and syndication fee income
increasing and cost of sales and selling expenses decreasing.
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 Grand
Court to acquire existing senior 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. Several
factors have contributed towards a trend to less favorable terms for
acquisitions of senior living communities, including a recovery in the market
for senior living communities and increased competition from other prospective
purchasers of senior living communities. Grand Court acquired senior living
communities on less favorable terms in the three months and six months ended
July 31, 1999 as compared to the three months and six months ended July 31, 1998
and although Grand Court acquired senior living communities on more favorable
terms in Fiscal 1998 as compared to Fiscal 1997, Grand Court acquired senior
living communities on less favorable terms in Fiscal 1997 as compared to Fiscal
1996 and Grand Court believes that the general trend towards less favorable
acquisition terms experienced in the years immediately prior to Fiscal 1998 will
continue in the future. In recent years, however, Grand Court has been able to
obtain mortgage financing for a greater percentage of the purchase price and
with more favorable terms (i.e., lower interest rates and longer amortization
periods) 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
Grand Court from acquiring and Syndicating senior living communities on terms
favorable enough to offset the start-up losses of the Development Communities as
well as Grand Court's debt service obligations, Management Contract Obligations
and overhead expenses.
Selling expenses for the three months ended July 31, 1999 were $1.1 million
as compared to $1.4 million for the three months ended July 31, 1998,
representing a decrease of $300,000 or 21.4%. The decrease is primarily
attributable to a decrease in the average commission rate resulting in less
commissions paid on a greater sales volume in the three months ended July 31,
1999 as compared to the three months ended July 31, 1998. Selling expenses for
the six months ended July 31, 1999 were $2.6 million as compared to $3.2 million
in the six months ended July 31, 1998, representing a decrease of $600,000 or
18.8%. The decrease is primarily attributable to a reduction in the average
commission rates resulting in less commissions paid on lower sales volume on the
Syndications completed in the six months ended July 31, 1999 as compared to the
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six months ended July 31, 1998. Selling expenses for Fiscal 1998 was
$5.7 million as compared to $6.9 million for Fiscal 1997, representing a
decrease of $1.2 million, or 17.3%. The decrease is attributable to lower
commissions paid on a lower sales volume for Syndications completed in Fiscal
1998 as compared to Fiscal 1997. Selling expenses for Fiscal 1997 did not
materially change as compared to Fiscal 1996.
. Multi-Family Properties
Revenues from this segment are comprised of sales of the underlying
Syndicated Multi-Family Properties or controlling interests therein, interest
income on the Multi-Family Notes and recognition of deferred income from such
Syndications, which income is being recognized on the installment method.
<TABLE>
<CAPTION>
JANUARY 31, THREE MONTHS ENDED JULY 31,
---------------------------------------------- -------------------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales............................ $ -- $ -- $ 26,394,000 $ -- $ --
Deferred income earned........... 944,000 1,114,000 788,000 207,000 156,000
Interest income.................. 6,719,000 7,283,000 7,317,000 2,723,000 942,000
Other income..................... -- 4,683,000 -- -- --
-------------- ------------- ------------- -------------- -------------
Total Revenues................... 7,663,000 13,080,000 34,449,000 2,930,000 1,098,000
============== ============= ============= ============== =============
Cost of Sales.................... -- -- 22,528,000 -- --
Selling.......................... 542,000 657,000 679,000 109,000 158,000
Interest Expense................. 12,752,000 13,778,000 14,887,000 3,712,000 4,053,000
General and administrative....... 919,000 1,486,000 3,908,000 463,000 146,000
Loss on impairment of notes and
receivables................... 18,442,000 -- -- -- 713,000
Officers' compensation........... 141,000 211,000 452,000 53,000 14,000
Depreciation and amortization.... 2,947,000 2,770,000 3,591,000 952,000 974,000
-------------- ------------- ------------- -------------- -------------
Total costs and expenses......... 35,743,000 18,902,000 46,045,000 5,289,000 6,058,000
============== ------------- ------------- -------------- -------------
Net loss......................... $ (28,080,000) $ (5,822,000) $ (11,546,000) $ (2,359,000) $ (4,960,000)
============== ============= ============= ============== =============
</TABLE>
SIX MONTHS ENDED JULY 31,
-------------------------------
1998 1999
---- ----
Sales............................ $ -- $ --
Deferred income earned........... 415,000 311,000
Interest income.................. 4,465,000 2,349,000
Other income..................... -- --
-------------- --------------
Total Revenues................... 4,880,000 2,660,000
============== ==============
Cost of Sales.................... -- --
Selling.......................... 418,000 268,000
Interest Expense................. 7,284,000 7,870,000
General and administrative....... 723,000 320,000
Loss on impairment of notes and
receivables................... -- 713,000
Officers' compensation........... 84,000 31,000
Depreciation and amortization.... 1,756,000 2,010,000
-------------- --------------
Total costs and expenses......... 10,265,000 11,212,000
-------------- --------------
Net loss......................... $ (5,385,000) $ (8,552,000)
============== ==============
In Fiscal 1998, one Multi-Family Property and controlling interests in
eight Multi-Family Owning Partnerships were sold to third parties, resulting in
Grand Court recognizing sales proceeds of $26.4 million. The costs associated
with these sales were $22.5 million. Grand Court succeeded to these interests by
acquiring the collateral securing the related Multi-Family Note upon such Notes
becoming due without being paid and concurrently selling such collateral to
third parties. A significant portion of the sales proceeds were generated from
the sales to a single third party. See "Certain Relationships and Related
Transactions." There were no such sales in Fiscal 1997, Fiscal 1996 or the three
months and six months ended July 31, 1999 or July 31, 1998.
Interest income in the three months ended July 31, 1999 was $900,000 as
compared to $2.7 million in the three months ended July 31, 1998, representing a
decrease of $1.8 million or 66.7%. Interest income in the six months ended
July 31, 1999 was $2.3 million as compared to $4.5 million in the six months
ended July 31, 1998, representing a decrease of $2.2 million or 48.9%. The
decreases are primarily attributable to (i) the decrease in the remaining amount
of investor notes, the payment of which generates interest on the related
Multi-Family Purchase Notes, in the three and six months ended July 31, 1999 as
compared to the three and six months ended July 31, 1998 and (ii) the receipt of
excess proceeds from the refinancing of the mortgage debt on six Multi-Family
Properties in the three and six months ended July 31, 1998 as compared to no
such refinancings in the three and six months ended July 31, 1999. Interest
income in Fiscal 1998 did not change as compared to Fiscal 1997. Interest income
in Fiscal 1997 was $7.3 million as compared to $6.7 million in Fiscal 1996,
representing an increase of $600,000, or 8.9%. The increase is primarily
attributable to increased interest payments received as a result of the receipt
of excess proceeds from the refinancing of the mortgage debt on four
Multi-Family Properties in Fiscal 1997 as compared to the interest payment
received as a result of excess proceeds received as a result of a mortgage debt
restructuring on one Multi-Family Property in Fiscal 1996.
Grand Court realized non-cash other income of $4.7 million in Fiscal 1997
as compared to no other income in Fiscal 1998, Fiscal 1996 or the three months
and six months ended July 31, 1999 or July 31, 1998. Two Protected Partnerships
(as defined below) successfully emerged from their bankruptcy proceedings in
Fiscal 1997 by paying off their mortgages at a discount with the proceeds of new
mortgage financings, resulting in these properties having current, fully
performing mortgages. This allowed Grand Court to recognize other income of
$3.1 million. Approximately $1.0 million of this non-cash income resulted from
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<PAGE>
the reduction of certain previously established reserves associated with Grand
Court's notes and receivables. The remaining $600,000 of this income resulted
from the write-off of liabilities which are no longer required.
In the three and six months ended July 31, 1999, a Multi-Family Owning
Partnership whose mortgage was previously in default became aware that it will
lose its property through a mortgage foreclosure. As a result, Grand Court
realized a non-cash loss on impairment of notes receivables of $700,000, which
represents the recorded value of the related note and receivables, net of
established reserves. John Luciani and Bernard M. Rodin contributed additional
assets to Grand Court to provide additional collateral for the new note and the
related receivables. As a result of this contribution of additional assets,
Grand Court recorded a capital contribution of $900,000, based upon the fair
value of the contributed assets, and believes that the foreclosure will not
effect its ability to collect this note. There was no loss on impairment of
notes and receivables in the three and six months ended July 31, 1998. Grand
Court realized a non-cash loss on impairment of notes and receivables of
$18.4 million in Fiscal 1996 as compared to no such loss for Fiscal 1998, Fiscal
1997. This loss is based upon a reduction in the recorded value, net of deferred
income and reserves, of the Multi-Family Notes and the "Other Partnership
Receivables" relating to the Protected Partnerships (as defined below). As a
result of the transfers by the John Luciani and Bernard M. Rodin and one of
their affiliates of additional assets to the Investing Partnerships which issued
such Multi-Family Notes, Grand Court recorded a contribution to capital of
$21.3 million in Fiscal 1996.
In Fiscal 1996, nine Multi-Family Owning Partnerships, which were in
default on their mortgages, filed petitions seeking protection from foreclosure
under Chapter 11 of the U.S. Bankruptcy Code. In addition, one Multi-Family
Owning Partnership surrendered its property pursuant to an uncontested
foreclosure sale of such property (this Multi-Family Owning Partnership, along
with the nine Multi-Family Owning Partnerships that filed bankruptcy petitions,
are referred to herein as the "Protected Partnerships"). Seven of the Chapter 11
petitions resulted in the respective Protected Partnerships losing their
properties through foreclosure or voluntary conveyances of their properties. The
remaining two Protected Partnerships successfully emerged from their bankruptcy
proceedings by paying off their mortgages at a discount with the proceeds of new
mortgage financings, resulting in these properties having current, fully
performing mortgages. Fourteen Multi-Family Owning Partnerships are currently in
default on their mortgages. Seven of these Owning Partnerships obtained workout
agreements with terms of from one to five years. HUD's policies regarding
workout agreements have become more restrictive in recent years and there can be
no assurance that HUD will renew these workout agreements or restructure the
related mortgage debt when these workout agreements expire. Within the past 12
months, HUD has taken steps to foreclose on six of the defaulted mortgages. Four
of the relevant Multi-Family Owning Partnerships are negotiating with HUD to
obtain mortgage restructurings to cure the defaults. The recorded value of the
receivables related to these four partnerships, net of estimated reserves, is
$5.8 million. Two of the relevant Multi-Family Owning Partnerships are
negotiating with mortgage lenders to cure their defaults by refinancing their
mortgages. The recorded value of the receivables related to these two
partnerships, net of established reserves, is $1.0 million. The seventh
Multi-Family Owning Partnership will lose its property through mortgage
foreclosure. As a result, Grand Court realized a non-cash loss of $700,000 in
the second quarter of Fiscal 1999, which represents the recorded value of the
related note and receivables, net of established reserves. John Luciani and
Bernard M. Rodin contributed additional assets to Grand Court to provide
additional collateral for this note and the related receivables. As a result of
this contribution of additional assets, Grand Court recorded a capital
contribution of $900,000 in the second quarter of Fiscal 1999 and believes that
this foreclosure will not effect its ability to collect the new note. It is
possible that the remaining thirteen Multi-Family Owning Partnerships currently
in default on their mortgages will also file Chapter 11 Petitions or lose their
properties through foreclosure. In addition, there can be no assurance that
other Multi-Family Owning Partnerships will not default on their mortgages, file
Chapter 11 Petitions, and/or lose their properties through foreclosure. As of
July 31, 1999, the recorded value, net of deferred income, of the Multi-Family
Notes and the related advances held by Grand Court relating to the remaining
thirteen Multi-Family Owning Partnerships still in default was $26.4 million.
Grand Court has established reserves of $7.3 million to address the possibility
that these Multi-Family Notes and related advances may not be collected in full.
It should be noted that in Fiscal 1998 and previous years, six Multi-Family
Owning Partnerships whose mortgages had been in default cured those defaults by
refinancing their mortgages with new mortgage financings and now have fully
performing mortgages. Other Multi-Family Owning Partnerships intend to cure
their mortgage defaults by refinancing or restructuring their mortgages in the
future, although there can be no assurance that this will be the case. Grand
Court neither owns nor manages the Multi-Family Properties, nor is it the
general partner of any Multi-Family Owning Partnerships but rather holds the
related Multi-Family Notes and other receivables relating to Multi-Family
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<PAGE>
Properties as receivables. Grand Court, therefore, has no liability in
connection with these mortgage defaults or bankruptcy proceedings.
In the third quarter of Fiscal 1999, the seventh Multi-Family Owning
Partnership described in the previous paragraph which was expecting to lose its
property through foreclosure, did lose its property through foreclosure. Also,
an additional Multi-Family Owning Partnership learned that it will lose its
property through foreclosure. As a result, Grand Court realized a non-cash loss
of $708,000 in the third quarter of fiscal year 1999, which represents the
recorded value of the note and receivables, net of established reserves. John
Luciani, Bernard M. Rodin and an entity controlled by them contributed
additional collateral for the new note and the related receivables. As a result
of this contribution of additional assets, Grand Court recorded a capital
contribution of $719,000, based upon the fair value of such additional
contributed assets, and believes that this foreclosure will not effect its
ability to collect the new note. This additional Owning Partnership lost its
property through foreclosure during the fourth quarter of 1999.
. Development Communities
Revenues from this segment are derived from senior living rental revenues
from the Development Communities operated by the Company pursuant to long term
leases and from sales, management fees and equity earnings (losses) from the
Development Communities subject to joint venture arrangements.
<TABLE>
<CAPTION>
JANUARY 31, THREE MONTHS ENDED JULY 31,
------------------------------------------------- -------------------------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales........................... $ -- $ -- $ -- $ -- $ 10,000,000
Senior living revenues.......... -- -- 5,093,000 1,171,000 1,295,000
Other income.................... -- -- 1,350,000 665,000 --
Equity in (losses) in
affiliated entities.......... -- -- -- -- (269,000)
Interest income................. -- -- 828,000 48,000 77,000
------------- ------------- ------------- ------------- -------------
Total revenues.................. -- -- 7,271,000 1,884,000 11,103,000
============= ============= ============= ============= =============
Cost of sales................... -- -- -- -- 3,383,000
Senior living operating expenses -- 6,098,000 1,219,000 2,137,000
Interest Expense................ 149,000 686,000 3,027,000 620,000 33,000
General and administrative...... -- 824,000 304,000 1,455,000
Write off of registration costs. -- 3,107,000 -- -- --
Officers' compensation.......... -- 95,000 34,000 137,000
Depreciation and amortization... 65,000 207,000 951,000 262,000 89,000
------------- ------------- ------------- ------------- -------------
Total costs and expenses........ $ 214,000 $ 4,000,000 $ 10,995,000) $ 2,439,000 $ 7,234,000
------------- ------------- ------------- ------------- -------------
Net (loss) income............... $ (214,000) $ (4,000,000) $ (3,724,000) $ (555,000) $ 3,869,000
============= ============= ============= ============= =============
</TABLE>
SIX MONTHS ENDED JULY 31,
------------------------------
1998 1999
---- ----
Sales........................... $ -- $ 20,000,000
Senior living revenues.......... 1,589,000 3,857,000
Other income.................... 1,350,000 --
Equity in (losses) in
affiliated entities.......... -- (269,000)
Interest income................. 507,000 130,000
------------- -------------
Total revenues.................. 3,446,000 23,718,000
============= =============
Cost of sales................... -- 6,294,000
Senior living operating expenses 2,165,000 5,080,000
Interest Expense................ 1,235,000 1,031,000
General and administrative...... 511,000 2,854,000
Write off of registration costs. -- --
Officers' compensation.......... 59,000 278,000
Depreciation and amortization... 425,000 493,000
------------- -------------
Total costs and expenses........ $ 4,395,000 $ 16,030,000
------------- -------------
Net (loss) income............... $ (949,000) $ 7,688,000
============= =============
In April 1999, the Company entered into joint venture arrangements
regarding four completed Development Communities, two of such joint venture
arrangements were effective as of April 1, 1999 and the other two arrangements
were effective as of May 1, 1999. Pursuant to each joint venture arrangement,
Grand Court sold a 50% interest in the Development Communities to George
Batchelor. As a result, Grand Court recognized sales of $10.0 million in the
three months ended July 31, 1999 and $20.0 million in the six months ended
July 31, 1999. The costs of such interests were $3.4 million in the three months
ended July 31, 1999 and $6.3 million in the six months ended July 31, 1999.
Grand Court no longer consolidates the Development Communities subject to the
joint venture arrangements into its consolidated financial statements but rather
reflects its share of the loss under the equity method of accounting. In the
three and six months ended July 31, 1999, Grand Court's share of the losses
amounted to $269,000. The average occupancy of the Development Communities
subject to joint venture arrangements was 71.1% for the six months ended
July 31, 1999.
Senior living revenues and operating expenses currently represent the
rental and ancillary revenues and expenses generated by the Development
Communities Grand Court operates pursuant to long-term leases. In the three and
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<PAGE>
six months ended July 31, 1998, these items also included the revenues and
expenses of the Development Communities owned by Grand Court prior to Grand
Court entering into joint venture arrangements effective in April and May of
1999. Grand Court realized senior living revenues of $1.3 million in the three
months ended July 31, 1999 as compared to $1.2 million in the three months ended
July 31, 1998, representing an increase of $100,000 or 8.3%. Grand Court
realized senior living revenues of $3.9 million in the six months ended July 31,
1999 as compared to $1.6 million in the six months ended July 31, 1998,
representing an increase of $2.3 million or 143.8%. The senior living operating
expenses were $2.1 million in the three months ended July 31, 1999 as compared
to $1.2 million in the three months ended July 31, 1998, representing an
increase of $900,000 or 75.0%. The senior living operating expenses for the six
months ended July 31, 1999 were $5.1 million as compared to $2.2 million in the
six months ended July 31, 1998, representing an increase of $2.9 million or
131.8%. The increases in senior living rental revenues and expenses are
primarily attributable to the Development Communities operated pursuant to
long-term leases being in service for all of the three and six months ended
July 31, 1999 as opposed to the same Development Communities being in service
for only part of the three and six months ended July 31, 1998, as partially
offset by the Development Communities that are now subject to joint venture
arrangements no longer being consolidated into Grand Court's financial
statements. The average occupancy of the Development Communities operated
pursuant to long-term leases was 62.1% for the six months ended July 31, 1999.
In Fiscal 1998, Grand Court recognized senior living revenues and operating
expenses of $5.1 million and $6.1 million, respectively. None of the Development
Communities had been completed in Fiscal 1997 or Fiscal 1996.
Other income was $665,000 and $1.4 million, respectively, in the three and
six months ended July 31, 1998. Grand Court earned developer's fees in
connection with the four Development Communities which the Company operates
pursuant to long-term leases. There was no other income in the three and six
months ended July 31, 1999. Other income was $1.4 million in Fiscal 1998. In
Fiscal 1998, Grand Court earned developer's fees in connection with the four
Development Communities which are owned by a third party and which Grand Court
operates pursuant to long-term leases. There was no other income in Fiscal 1997
or Fiscal 1996.
Interest income represents interest earned on Grand Court's net proceeds
from its initial public offering, which proceeds are being used primarily for
Grand Court's Development Plan. There was no interest income in Fiscal 1996 or
Fiscal 1997.
Grand Court expensed approximately $3.1 million of costs relating to a
proposed initial public offering of equity securities in Fiscal 1997. Such costs
were incurred prior to April 30, 1997.
EXPENSES -- OVERVIEW
The following expenses were allocated to each segment for reporting
purposes based upon gross revenues or gross assets based upon the particular
expense. Grand Court, however, does not view these expenses as segment related
but rather on a company wide basis.
General and administrative expenses were $3.2 million in the three months
ended July 31, 1999 as compared to $2.7 million in the three months ended
July 31, 1998, representing an increase of $500,000 or 18.5%. General and
administrative expenses were $6.2 million in the six months ended July 31, 1999
as compared to $5.2 million in the six months ended July 31, 1998, representing
an increase of $1.0 million or 19.2%. The increases are primarily attributable
to increases in salary costs, professional fees and other office costs in
arranging for the acquisition of Grand Court's portfolio of Syndicated
Communities, in managing Grand Court's portfolio of Syndicated Communities and
in developing and managing Grand Court's portfolio of Development Communities
which portfolios, in the aggregate, were larger in the three and six months
ended July 31, 1999 than in the three and six months ended July 31, 1998.
General and administrative expenses for Fiscal 1998 was $10.4 million as
compared to $8.4 million for Fiscal 1997, representing an increase of $2.0
million or 23.8%. The increase is primarily attributable to increases in salary
costs, professional fees and other office costs in arranging for the acquisition
of Grand Court's portfolio of Syndicated Communities, in managing Grand Court's
portfolio of Syndicated Communities and in developing and managing Grand Court's
portfolio of Development Communities which portfolios, in the aggregate, were
larger in Fiscal 1998 than in Fiscal 1997. General and administrative expenses
were $8.4 million in Fiscal 1997 as compared to $7.8 million for Fiscal 1996,
representing an increase of $600,000 or 7.6%. The increase is attributable to
increases in professional fees, salary costs and other office expenses in
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<PAGE>
managing and arranging for the acquisition of Grand Court's portfolio of
Syndicated Communities which increased in Fiscal 1997, as partially offset by
the capitalization of expenses relating to the implementation of Grand Court's
Development Plan.
Interest expense did not materially change in the three and six months
ended July 31, 1999 as compared to the three and six months ended July 31, 1998.
Interest expenses was $22.1 million in Fiscal 1998 as compared to $19.4 million
in Fiscal 1997, representing an increase of $2.7 million or 13.9% The increase
is primarily attributable to (i) the increase in principal amount of debt and
the interest rates related to such debt in Fiscal 1998 as compared to Fiscal
1997, and (ii) interest on construction loans payable on the three Development
Communities placed in service in Fiscal 1998 (which Grand Court owned directly
as of January 31, 1999, but which Grand Court now owns pursuant to joint venture
arrangements) which construction loan interest was capitalized in Fiscal 1997 as
these communities were under construction in Fiscal 1997. Interest expense for
Fiscal 1997 was $19.4 million as compared to $16.4 million in Fiscal 1996,
representing an increase of $3.0 million or 18.2%. The increase is attributable
to an increase in principal amount of debt and an increase in interest rates for
such debt during Fiscal 1997 as compared to Fiscal 1996, as partially offset by
the elimination of certain of Grand Court's mortgage debt due to the refinancing
of three Syndicated Communities in Fiscal 1996. Interest expense includes
interest on debentures ("Debenture Debt") which are secured by Multi-Family
Notes (the "Purchase Note Collateral"). During the six months ended July 31,
1999 and the six months ended July 31, 1998, the Debenture Debt had an average
interest rate of 11.8% and 12.05%, respectively. Interest expense with respect
to such debt for the six months ended July 31, 1999 and the six months ended
July 31, 1998 was $5.2 million and $3.9 million, respectively. During Fiscal
1998 and Fiscal 1997, the Debenture Debt had an average interest rate of 11.8%
and 12.05%, respectively. Interest expense with respect to such debt for Fiscal
1998 and Fiscal 1997 was $8.0 million and $8.4 million, respectively. During
Fiscal 1997 and Fiscal 1996, the Debenture Debt had an average interest rate of
12.05%. Interest expense with respect to such debt for Fiscal 1997 and Fiscal
1996 was $8.4 million and $9.2 million, respectively. When the Debenture Debt
was structured, the cash flow generated by the Purchase Note Collateral was not
expected to fully fund the amount necessary to pay interest on the Debenture
Debt. As expected, for the six months ended July 31, 1999 and the six months
ended July 31, 1998 and during Fiscal 1996 through Fiscal 1998, the cash flow
generated by the Purchase Note Collateral was less than the amount required to
pay interest on the Debenture Debt.
Depreciation and amortization consists of (i) amortization of deferred loan
costs incurred in connection with debt issuances, (ii) amortization of leasehold
costs incurred in connection with four Development Communities which Grand Court
operates pursuant to long-term leases, and (iii) depreciation of building,
furniture and equipment of Development Communities which Grand Court owned
previously and currently owns pursuant to joint venture arrangements.
Depreciation and amortization did not materially change in the three months
ended July 31, 1999 as compared to the three months ended July 31, 1998.
Depreciation and amortization were $2.8 million in the six months ended July 31,
1999 as compared to $2.4 million in the six months ended July 31, 1998,
representing an increase of $400,000 or 16.7%. The increase is attributable to
(i) the increase in amortization of deferred loan costs due to additional debt
incurred by the Company, (ii) the amortization of leasehold costs associated
with the four Development Communities operated by the Company pursuant to
long-term leases, and (iii) the depreciation of buildings, furniture and
equipment associated with the Development Communities owned by the Company prior
to the Company entering into joint venture arrangements. Depreciation and
amortization were $5.0 million in Fiscal 1998 as compared to $3.3 million in
Fiscal 1997, representing an increase of $1.7 million or 51.5%. The increase is
attributable to (i) the increase in amortization of deferred loan costs due to
additional Debenture Debt and unsecured debt incurred by Grand Court, (ii) the
amortization of leasehold costs associated with the four Development Communities
operated by Grand Court pursuant to long-term leases, and (iii) the depreciation
of buildings, furniture and equipment associated with the three Development
Communities owned directly by Grand Court as of January 31, 1999, but which
Grand Court now owns pursuant to joint venture arrangements, which communities
were not completed in Fiscal 1997. Depreciation and amortization for Fiscal 1997
did not change as compared to Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Grand Court historically has financed operations through cash flow
generated by operations, Syndications and borrowings. Grand Court's principal
liquidity requirements are for payment of operating expenses, costs associated
with development of Development Communities, debt service obligations, and
Management Contract Obligations.
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<PAGE>
Cash flows used by operating activities for the six months ended July 31,
1999 were $3.1 million and were comprised of (i) net income of $3.1 million plus
(ii) adjustments for non-cash items of $3.2 million less (iii) the net change in
operating assets and liabilities of $9.4 million. The adjustments for non-cash
items is comprised of non-cash loss on impairment of notes and receivables of
$700,000, depreciation and amortization of $2.8 million, offset by deferred
income earned of $300,000. Cash flows used by operating activities for the six
months ended July 31, 1998 were $6.8 million and were comprised of (i) net loss
of $8.4 million plus (ii) adjustments for non-cash items of $2.0 million less
(iii) the net change in operating assets and liabilities of $400,000. The
adjustments for non-cash items are comprised of depreciation and amortization of
$2.4 million, offset by deferred income earned of $400,000. Cash flows used by
operating activities for the three months ended April 30, 1998 were $5.0 million
and were comprised of (i) net loss of $1.8 million plus (ii) adjustments for
non-cash items of $900,000 less (iii) the net change in operating assets and
liabilities of $4.1 million. The adjustments for non-cash items is comprised of
depreciation and amortization of $1.1 million, offset by deferred income earned
of $200,000. Cash flow used by operating activities for Fiscal 1998 was
$9.1 million and were comprised of (i) net loss of $13.0 million, plus (i)
adjustments for non-cash items of $1.3 million plus (iii) the net change in
operating assets and liabilities of $2.6 million. The adjustments for non-cash
items is comprised of depreciation and amortization of $5.0 million offset by
deferred income earned of $3.7 million. Cash flows used by operating activities
for Fiscal 1997 were $11.3 million and were comprised of (i) net loss of
$2.5 million less (ii) adjustments for non-cash items of $5.0 million less
(iii) the net change in operating assets and liabilities of $3.8 million. The
adjustments for non-cash items is comprised of depreciation and amortization of
$3.3 million, plus write-off of registration costs of $3.1 million, offset by
deferred income earned of $7.3 million, the reduction of impairment reserves on
notes and receivables of $1.0 million and non-cash other income of $3.1 million.
Cash flows provided by operating activities for Fiscal 1996 were $2.5 million
and were comprised of: (i) net loss of $23.3 million plus (ii) adjustments for
non-cash items of $16.7 million plus (iii) the net change in operating assets
and liabilities of $9.1 million. The adjustments for non-cash items is comprised
of depreciation and amortization of $3.3 million and loss on impairment of
receivables of $18.4 million less deferred income earned of $5.0 million.
Net cash used by investing activities for the six months ended July 31,
1999 of $15.1 million was comprised of an increase of building, furniture and
equipment of $9.3 million, an increase in the cost of the Development
Communities of $10.6 million, an increase in investments in general partner
interests in senior living communities of $600,000 less the recovery on cost of
investment of $5.4 million. Net cash used by investing activities for the six
months ended July 31, 1998 of $12.9 million was comprised of an increase in
building, furniture and equipment of $7.7 million, an increase in the cost of
the senior living communities Grand Court is constructing of $4.7 million, and
an increase in investments in general partner interests in senior living
communities of $500,000. Net cash used by investing activities for Fiscal 1998
of $22.0 million was comprised of an increase of building, furniture and
equipment of $10.8 million, an increase in the cost of the Development
Communities Grand Court is constructing of $10.2 million and the increase in
investments in general partner interests in Syndicated Communities of
$1.0 million. Net cash used by investing activities for Fiscal 1997 of
$20.4 million was comprised of the increase in the cost of Development
Communities Grand Court is currently constructing of $19.5 million and the
increase in investments in general partner interests in Syndicated Communities
of $900,000. Net cash used by investing activities for Fiscal 1996 of
$7.2 million was comprised of the increase in the cost of the Development
Communities Grand Court is currently constructing of $6.7 million and the
increase in investments in general partner interests in Syndicated Communities
for the period offset by a decrease in investments due to the receipt of
distributions of refinancing proceeds by Grand Court based upon its general
partner interests in Syndicated Communities.
Net cash provided by financing activities for the six months ended July 31,
1999 of $3.8 million was comprised of (i) proceeds from the issuance of new debt
of $32.7 million less debt repayments of $24.8 million plus (ii) proceeds from
construction mortgage financing of $12.9 million less repayments of
$9.2 million, less (iii) payments of notes payable of $1.7 million less (iv) the
increase in other assets of $5.0 million less (v) the purchase of treasury stock
of $1.1 million. Net cash provided by financing activities for the six months
ended July 31, 1998 of $35.3 million was comprised (i) of proceeds from the
issuance of new debt of $18.0 million less debt repayments of $11.7 million plus
(ii) proceeds from construction and mortgage financings of $6.4 million, less
(iii) payments of notes payable of $200,000 plus (iv) the decrease in other
assets of $500,000 plus (v) the net proceeds of the initial public offering of
$22.3 million. Net cash provided by financing activities for Fiscal 1998 of
$41.9 million was comprised of (i) proceeds from the issuance of new debt of
$49.2 million less debt repayments of $41.3 million, plus (ii) the proceeds from
construction mortgage financing of $12.7 million less (iii) payments of notes
payable of $1.5 million, plus (iv) the proceeds of notes payable of $300,000
plus (v) the decrease in other assets of $200,000 plus (vi) the net proceeds of
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the initial public offering of $22.3 million. Net cash provided by financing
activities for Fiscal 1997 of $29.5 million was comprised of (i) proceeds from
the issuance of new debt of $63.4 million less debt repayments of $44.2 million
plus (ii) proceeds from construction mortgage financing of $19.8 million less
(iii) payments of notes payable of $400,000 plus (iv) increase in notes payable
of $4.5 million less (v) the increase in other assets of $13.6 million. Net cash
used by financing activities for Fiscal 1996 of $900,000 was comprised of:
(i) proceeds from the issuance of new debt of $57.8 million less debt repayments
of $55.3 million plus (ii) proceeds from construction mortgage financing of
$2.8 million less (iii) payments of notes payable of $200,000 less
(iv) distributions paid of $800,000 and less (v) the increase in other assets of
$3.4 million due to the capitalization of costs relating to the development and
construction of new properties and the issuance of new debt offset by the
amortization of loan costs primarily in connection with Debenture Debt.
At July 31, 1999, Grand Court had total indebtedness, excluding accrued
interest and construction mortgage indebtedness on the Development Communities,
of $176.8 million, consisting of $88.4 million of Debenture Debt, $63.6 million
of unsecured debt, $5.0 million of mortgage debt and $19.7 million of debt
secured by promissory notes representing capital contributions of investors in
offerings of limited partnership interests ("Investor Note Debt"), and Grand
Court had cash and cash equivalents at July 31, 1999 of $8.4 million.
Of the principal amount of total indebtedness described above,
$10.7 million becomes due in the remaining portion of the fiscal year ending
January 31, 2000; $32.6 million becomes due in the fiscal year ending
January 31, 2001; $38.3 million becomes due in the fiscal year ending
January 31, 2002; $21.8 million becomes due in the fiscal year ending
January 31, 2003; $10.3 million becomes due in the fiscal year ending
January 31, 2004, and the balance of $63.1 million becomes due thereafter. Of
the amount maturing in the remaining portion of the fiscal year ending
January 31, 2000, $100,000 is expected to be repaid through the collection of
investor notes. Grand Court expects to repay a portion of the remaining debt
maturing in the current year with funds generated by its business operations and
the balance of the indebtedness through the issuance of new debt.
First mortgage loans were obtained to finance approximately 80% of the cost
of developing seven Development 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 lender's prime rate plus 1.5% per annum. The sixth and seventh
loans bear interest at the lender's prime rate for the first fifteen months and
then convert to LIBOR plus 2 3/4% per annum for the following twenty-four
months. These loans mature between November, 1999 and May 2002. As of July 31,
1999, total funding under such first mortgage loans amounted to $34.7 million.
In April, 1999, Grand Court entered into joint venture arrangements regarding
four Development Communities, two of such joint venture arrangements being
effective as of April 1, 1999 and the other two being effective as of May 1,
1999. As a result, Grand Court did not reflect the mortgages relating to these
Development Communities on its consolidated financial statements as of July 31,
1999. At July 31, 1999, the total mortgages reflected in Grand Court's
consolidated financial statements was $7.3 million. Grand Court has guaranteed
the mortgages on the Development Communities subject to joint venture
arrangements and such guarantees remain in effect. Grand Court intends to pursue
similar joint venture arrangements regarding the additional Development
Communities to be developed. Grand Court intends to increase its construction
loans payable as it pursues its Development Plan.
Pursuant to Grand Court's Development Plan, two limited partnerships, in
each of which Grand Court held a 1% general partnership interest, issued limited
partnership interests for aggregate capital contributions of $9.3 million, the
net proceeds of which were used to make second mortgage loans to Grand Court to
fund approximately 20% of the cost of developing three Development Communities.
Such second mortgage loans were entered into in 1996 and bore interest at the
rate of 13.125%. These second mortgage loans would have matured between November
2001 and March 2002. Grand Court repaid these second mortgage loans in May, 1999
from a portion of the proceeds from three of the four Development Community
joint venture arrangements.
Grand Court's debt obligations contain various covenants and default
provisions, including provisions relating to, in some obligations, certain
partnerships, Owning Partnerships or affiliates of Grand Court. Pursuant to one
obligation, Grand Court is required to maintain a net worth of no less than
$35.3 million. Certain obligations of Grand Court contain covenants requiring
Grand Court to maintain maximum ratios of Grand Court's liabilities to its net
worth. As of January 31, 1998 the most the most restrictive covenant requires
that Grand Court maintain a ratio of "loans and accrued interest payable" to
consolidated net worth of no more than 7 to 1. Grand Court has experienced
fluctuations in its net worth over the last several years. At January 31, 1996,
Grand Court had a net worth of $34.8 million, at January 31, 1997, Grand Court
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had a net worth of $32.0 million, at January 31, 1998, Grand Court had a net
worth of $26.4 million, at January 31, 1999, Grand Court had a net worth of
$35.7 million and at July 31, 1999, Grand Court had a net worth of
$38.6 million. As of January 31, 1999 and July 31, 1999, the most restrictive
covenant requires that Grand Court maintain a ratio of liabilities to
consolidated net worth of no more than 10 to 1. At January 31, 1998, January 31,
1999 and July 31, 1999, Grand Court's respective ratios were 6.1 to 1, 8.2 to 1
and 7.0 to 1. In addition, certain obligations of Grand Court provide that an
event of default will arise upon the occurrence of a material adverse change in
the financial condition of Grand Court or upon a default in other obligations of
Grand Court.
Grand Court has utilized mortgage financing and Syndications to arrange for
the acquisitions of the Syndicated Communities which it operates. It intends to
continue this practice for future acquisitions of Syndicated 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
Senior Living Owning Partnerships, for such five-year period, the Company has
Management Contract Obligations. During Fiscal 1998 and the six months ended
July 31, 1999, the Syndicated Communities with respect to which Grand Court had
such Management Contract Obligations distributed to Grand Court, after payment
of all operating expenses and debt service, an aggregate of $9.6 million and
$4.3 million, respectively, for application to the Company's Management Contract
Obligations. During such periods, Grand Court's Management Contract Obligations
exceeded such distributions by an aggregate of $9.3 million and $7.7 million,
respectively. The funding that was required in respect to Management Contract
Obligations in Fiscal 1998 and the six months ended July 31, 1999 was primarily
attributable to (i) an increase in the scheduled capital contributions by the
limited partners on which Grand Court is required to pay the specified rate of
return, (ii) a decrease in the average occupancy of certain Syndicated
Communities in Grand Court's portfolio, and (iii) an increase in operating
expenses of the same Syndicated Communities.
The refinancings of a number of Syndicated Communities in Fiscal 1996
resulted in over $43 million being returned to limited partners, which reduced
the amount of capital upon which Grand Court is obligated to make payments in
respect of the Management Contract Obligations. The amount paid by Grand Court
with respect to its Management Contract Obligations for Fiscal 1996 was
partially offset by an increase in interest income received by Grand Court for
Fiscal 1996, which was also the result of the refinancings. While the
refinancings increased Grand Court's funding of Management Contract Obligations
in the short term, the long term effect will be a reduction of Grand Court's
Management Contract Obligations relating to the refinanced Syndicated
Communities. The capital that was returned to the limited partners (which causes
the reduction in Grand Court's Management Contract Obligations) was applied
first to the later years in which their capital contributions are due and then
to the earlier years. The refinancings, therefore, reduce Grand Court's
Management Contract Obligations more in Fiscal 1999 and subsequent years than in
Fiscal 1996 through 1998. The aggregate gross amount (before considering the
cash flow from the properties) of Management Contract Obligations relating
solely to returns to limited partners based on existing management contracts is
$10.0 million for the remaining portion of Fiscal 1999, which will increase to
$21.0 million in Fiscal 2000, and decrease to $17.5 million in Fiscal 2001,
decrease to $10.2 million in Fiscal 2002, decrease to $4.7 million in Fiscal
2003 and decrease to $1.0 million in Fiscal 2004. Such amounts of Management
Contract Obligations are calculated based upon all remaining scheduled capital
contributions with respect to fiscal years 1999 through 2004. 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
Management Contract Obligations relating to future Syndications.
The amount of Grand Court'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 Syndicated
Communities and the terms of future Syndications. Grand Court anticipates that
for at least two years, the aggregate Management Contract Obligations with
respect to existing Syndications and Syndications to be completed during the two
years will exceed the cash flow generated by the related Syndicated Communities,
which will result in the need to utilize funds generated by Grand Court from
sources other than the operations of the Syndicated Communities to make
Management Contract Obligations payments. In general, the payment of expenses
arising from obligations of Grand Court, including Management Contract
Obligations, have priority over earnings that might otherwise be available for
distribution to shareholders. Grand Court intends to structure future
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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 term of the management contracts and the related
Management Contract Obligations have expired for 13 Senior Living Owning
Partnerships and their seventeen related Investing Partnerships. Although Grand
Court has no obligation to fund operating shortfalls after the five-year term of
the management contracts, as of July 31, 1999, Grand Court had advanced an
aggregate of approximately $3.2 million to nine of these Senior Living Owning
Partnerships to fund operating shortfalls, of which $954,000 was funded during
the six months ended July 31, 1999. All such advances are recorded as "Other
Partnership Receivables" on Grand Court's Consolidated Balance Sheet.
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
65.7% in Fiscal 1996, 78.8% in Fiscal 1997 and 75.4% for Fiscal 1998 and 67.7%
for the six months ended July 31, 1999. Prepayments of capital contributions do
not result in the prepayment of the related Senior Living Notes held by Grand
Court. Instead, such amounts are loaned to Grand Court by the Investing
Partnership. As a result of such loans and the crediting provisions of the
related purchase agreements, Grand Court records the Senior Living Notes net of
such loans. Therefore, these prepayments act to reduce the recorded value of
Grand Court's note receivables and reduce interest income received by Grand
Court. Pursuant to the terms of the Syndication offerings, Grand Court has the
option not to accept future prepayments by limited partners of capital
contributions. Grand Court has not determined to what extent it will continue to
accept prepayments by limited partners of capital contributions.
As of July 31, 1999, Grand Court holds 157 purchase notes ("Multi-Family
Notes") which are secured by controlling interests in Multi-Family Owning
Partnerships which own 118 Multi-Family Properties. Although it has no
obligation to do so, Grand Court 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 Grand Court's
Consolidated Balance Sheet. The Multi-Family Notes and related advances entitle
Grand Court to receive all cash flow and sale or refinancing proceeds generated
by the respective Multi-Family Property until the Multi-Family Note and related
advances are satisfied. As of July 31, 1999, the recorded value, net of deferred
income, of Multi-Family Notes was $100.9 million. All but approximately
$4.5 million of the $63.4 million of advances included in the "notes and
receivable" recorded on Grand Court's Consolidated Balance Sheet as of July 31,
1999 relate to advances to Multi-Family Owning Partnerships.
The Multi-Family Properties were typically built or acquired with the
assistance of programs administered by the United States Department of Housing
and Urban Development ("HUD") that provide mortgage insurance, favorable
financing terms and/or rental assistance payments to the owners. As a condition
to the receipt of assistance under these and other HUD programs, the properties
must comply with various HUD requirements, including limiting rents on these
properties to amounts approved by HUD. Most of the rental assistance payment
contracts relating to the Multi-Family Properties will expire over the next few
years. In view of the foregoing, there can be no assurance that one or more
Multi-Family Owning Partnerships will not default on their mortgages, file
bankruptcy petitions, and/or lose their properties through foreclosure. Grand
Court 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 Grand Court 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 Grand Court, which
would reduce such loss. In addition, Grand Court 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 Grand Court's business, operating results and financial condition.
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,
limiting the term and rent levels when renewing expiring contracts and by
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restructuring mortgage debt on those properties where a decline in rental
revenues is anticipated. Three Multi-Family Owning Partnerships have had their
HUD-insured mortgage debt restructured and other partnerships have applied for
restructurings. 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), Grand Court cannot 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 (i) refinance
their HUD-insured mortgages with conventional mortgage financing, and/or
(ii) sell their Multi-Family Properties. 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. Seventeen of
such Multi-Family Owning Partnerships have 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, Grand Court believes
that the ability of the Investing Partnerships relating to the Multi-Family
Properties (the "Multi-Family Investing Partnerships") to make payments to Grand
Court on their respective Multi-Family Notes will be enhanced and accelerated.
In Fiscal 1998, Grand Court received $2.6 million of excess refinancing proceeds
as holder of the related Multi-Family Notes and expects to receive excess
refinancing proceeds from the refinancing of other Multi-Family Properties in
Fiscal 1999. 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.
In addition, one Multi-Family Property and controlling interests in eight
Multi-Family Owning Partnerships were sold to third parties in Fiscal 1998.
Grand Court succeeded to these controlling interests by acquiring the collateral
securing the related Multi-Family Notes upon such Notes becoming due without
being paid and concurrently selling such collateral to third parties. Grand
Court recognized $26.4 million in sale proceeds as a result of these sales in
Fiscal 1998. A significant portion of sales proceeds were generated from sales
to a single third party. Two Multi-Family Owning Partnerships have entered into
contracts to sell their properties. Several additional Multi-Family Owning
Partnerships are currently negotiating the terms of offers to purchase their
properties. Grand Court expects to receive additional sale proceeds from any
such transactions which occur in Fiscal 1999. There can be no assurance,
however, that additional sale transactions will actually close.
The future growth of Grand Court will be based upon the continued
acquisition and Syndication of existing senior living communities and the
construction of Development Communities. Grand Court intends to own the
Development Communicates pursuant to joint venture arrangements. Grand Court
currently has three Development Communities under construction. One of these
three communities under construction will be Syndicated on terms substantially
the same as those for the recently Syndicated Communities, and therefore will be
treated as a Syndicated Community for accounting purposes. Grand Court does not
currently intend to Syndicate (i) the other two Development Communities which
are under construction or (ii) any additional Development Communities
constructed pursuant to the Plan. Grand Court anticipates that it will acquire
between six and twelve existing senior living communities over the next two
years. It is anticipated that acquisitions of existing senior living communities
will be arranged by utilizing a combination of mortgage financing and
Syndications. Grand Court 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, Grand Court
believes that it has sufficient ability to arrange for acquisitions of existing
senior 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. Grand
Court borrows against the notes delivered by limited partners to generate cash
when needed, including to pursue its Development Plan and to repay debt.
Grand Court anticipates that the proceeds of its 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 capital
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markets have generally been unaccessible to Grand Court and other assisted
living companies for the purpose of raising additional funds. Grand Court is
exploring additional sources of capital. Due to the fact that Grand Court
anticipates utilizing that portion of the capital raised in its initial public
offering and earmarked for new development within the next six months, Grand
Court has scaled back the projected number of Development Communities it expects
to begin construction on over the next two years. Grand Court may increase the
projected rate of construction of Development Communities in the future if it is
able to secure new sources of capital. Grand Court intends to use the proceeds
of (i) anticipated joint venture arrangements of Development Communities,
(ii) refinancings or sale-leasebacks of stabilized Development Communities at
higher principal amounts than the original construction financing,
(iii) additional long-term leases or similar forms of financing which require
the investment of little or no capital on the part of Grand Court, and/or
(iv) funds which may be raised through the issuance of securities, to continue
with its Development Plan for more than the next six 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 Grand Court's
Development Plan. In addition, there are a number of circumstances beyond Grand
Court's control and which Grand Court cannot predict that may result in Grand
Court's financial resources being inadequate to meet its needs. A lack of
available funds may require Grand Court to delay, scale back or eliminate some
of the Development Communities that are currently contemplated in its
Development Plan.
The first new Development Communities developed pursuant to Grand Court's
Development Plan are in Texas. Grand Court has completed construction on and
opened eight Development Communities in Texas. Four of these Development
Communities were financed with construction mortgages and Grand Court has
commenced construction with mortgage financing on three additional Development
Communities in Texas. Grand Court has acquired a site in Jackson, Tennessee and
has options to acquire sites in Knoxville, Tennessee, Evansville, Indiana, and
Montgomery, Alabama, and is actively negotiating to obtain control of additional
sites in the Southeast and Midwest. Grand Court is negotiating with several
lenders to obtain financing to develop these sites. Grand Court anticipates that
most of the construction mortgage loans it obtains to finance the development
and lease-up costs of new Development Communities will contain terms where the
lender will fund at least 80% of such costs, requiring Grand Court to contribute
approximately 20% of such costs. Grand Court has entered into joint venture
arrangements with a third party pursuant to which it has sold 50% interests in
four Development Communities located in Texas. Grand Court intends to enter into
similar joint venture arrangements with regard to future Development Communities
it develops with mortgage financing.
Grand Court has, and may in the future, utilize long-term lease financing
arrangements to develop and operate new Development Communities. Grand Court has
obtained financing of $37.7 million from Capstone for 100% of the development
cost of four completed Development Communities that are being operated by Grand
Court pursuant to long-term leases with Capstone.
STOCK BUYBACK
On March 22, 1999, the Board of Directors authorized Grand Court to
purchase up to 300,000 shares of its common stock. As of October 4, 1999, the
Company had purchased 295,200 shares at an average price of $5.43 per share.
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 Grand Court's liquidity.
YEAR 2000 UPDATE
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, Grand Court 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, Grand Court's Year 2000 Project was extended to include
software and hardware located at the Syndicated Communities and the Development
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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.
Grand Court 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 Communities or Development
Communities are part of a computer network. Grand Court 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 Grand Court's two offices and it has been completed at the
majority of the Syndicated Communities and Development Communities. The
remediation and testing of Grand Court's software and hardware have already been
completed at Grand Court's two offices. As of September 30, 1999, Grand Court
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, Grand Court has updated its
construction server and data base as well as the network software located in
Grand Court's two offices and replaced substantially all of the desk-top
personal computers located therein.
However, even if Grand Court is successful in becoming Year 2000 compliant,
Grand Court remains at risk from Year 2000 failures caused by key third parties.
Grand Court has therefore initiated efforts with key third parties to assess and
wherever possible remediate Year 2000 issues. In most cases, Grand Court 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, Grand
Court has not received sufficient information from such entities to complete its
assessment of their Year 2000 compliance. In addition, Grand Court 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 Grand Court's
financial position. Grand Court currently plans to complete the Year 2000
Project by September 30, 1999. The cost of Grand Court's total Year 2000 Project
is based on presently available information. Grand Court 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
$25,000. Substantially all of this $25,000 is related to the cost to replace
software and computers. As of September 30, 1999, Grand Court incurred
approximately $40,000 related to the Year 2000 Project. Substantially all of
this $40,000 is related to the cost to replace software and computers. The costs
of the project and the date on which Grand Court 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. Grand Court believes that all material Year 2000 problems which are
within its control were corrected by August 31, 1999 and therefore such problems
are not anticipated to have a material adverse effect on Grand Court's financial
position and results of operations. Even if Grand Court 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. Grand Court believes that
the most reasonably likely worst case scenario is the loss of utility service
(telecommunications and power) at Grand Court's corporate offices, and all or
some of the senior 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 effect on Grand Court's financial position and results of
operations.
Contingency Plans - Contingency plans are anticipated to be prepared so
that Grand Court's critical business processes can be expected to continue to
function on January 1, 2000 and beyond. Such plans, if necessary, are
anticipated to be developed by December 15, 1999. These plans will attempt to
mitigate both internal risks as well as potential risks due to business
relationships with third parties.
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NEW ACCOUNTING PRONOUNCEMENTS
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,
2000. Grand Court's use of derivative instruments has consisted of treasury bill
locks related to two specific mortgage debt financings. While Grand Court 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Grand Court is subject to market risk from fluctuations in interest rates
related to its borrowing activities. The majority of Grand Court's debt is fixed
rate debt. For fixed rate debt, changes in interest rates do not affect Grand
Court's earnings or cash flow. Since Grand Court does not have an obligation to
prepay fixed rate debt until maturity, interest rate risk should not have a
material affect on the fixed rate debt until Grand Court is required to
refinance such debt. The table below details the principal cash repayments and
the related weighted average interest rates of Grand Court's fixed rate and
variable rate debt as of January 31, 1999, based upon expected maturity dates
and principal balances as of the first day of each fiscal year. The weighted
average interest rate for the variable rate debt is based on the interest rates
in effect at January 31, 1999.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNTS BY
EXPECTED MATURITY DATES
1999 2000 2001 2002 2003 THEREAFTER TOTAL
-------- -------- -------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-Term Variable Rate Debt (millions) 16.2 19.8 6.1 4.2 1.1 0 47.5
Weighted Average Interest Rate 9.24% 9.58% 9.97% 9.97% 10.06
Long-Term Fixed Rate Debt (millions) 27.5 29.9 35.3 21.2 9.0 33.7 156.6
Weighted Average Interest Rate 12.51% 12.38% 12.38% 12.32% 12.03% 11.78%
43.8 49.7 41.4 25.4 10.1 33.7 204.1
------- ------- -------- ------- ------- ------- ------
</TABLE>
Grand Court's long term fixed rate debt was issued in private placements at
par and no public or secondary market exists for such debt. In Grand Court's
estimation, the fair value of its debt is equal to the outstanding principal
amount of such debt.
Except as described in this paragraph, Grand Court does not hedge its
interest rate risk. As of January 31, 1999, Grand Court has entered into a
treasury bill lock under the terms of one of the first mortgage loans incurred
as part of the Development Plan. The treasury bill lock was intended to reduce
the impact of interest rate risk on the ability of Grand Court to refinance the
relevant mortgage loan. As of January 31, 1999, the notional amount of such
financial instrument was $8.5 million and its market value as calculated by the
counterparty to the transaction was ($330,000). The maturity date of such
financial instrument is February 15, 2012. Grand Court does not enter into
financial instruments transactions for trading purposes.
As of July 31, 1999, there has been no subsequent material change to Grand
Court's exposure to market risk.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 6, 1998, based upon the recommendation of its audit committee,
the Board of Directors of Grand Court voted to appoint BDO Seidman, LLP its
independent accountants for the year ending January 31, 1999. Grand Court chose
not to continue the engagement of Deloitte & Touche LLP.
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<PAGE>
The reports of Deloitte & Touche LLP on Grand Court's financial statements
for each of the two most recent fiscal years ended January 31, 1998 did not
contain any adverse opinion or disclaimer of opinion, nor were the reports
qualified in any manner.
During fiscal 1996 and 1997 and the period from January 31, 1998 to
October 6, 1998, there were no disagreements with Deloitte & Touche LLP on any
matter of accounting principle or practice, financial statement disclosure or
auditing scope or procedure. During this period, there were no "reportable
events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Grand Court has requested and received from Deloitte & Touche LLP a letter
dated October 13, 1998 addressed to the Securities and Exchange Commission
stating that it agrees with the above statements for fiscal 1996 and 1997 and
the period from January 31, 1998 to October 6, 1998.
On October 9, 1998, Grand Court engaged BDO Seidman, LLP as its principal
accountants to audit its financial statements. During fiscal 1996 and 1997 and
the period from January 31, 1998 to October 9, 1998, Grand Court has not
consulted BDO Seidman, LLP on items which concerned the application of
accounting principles generally, or to a specific transaction or group of
transactions, either completed or proposed, or the type of audit opinion that
might be rendered on Grand Court's financial statements. Subsequent to its audit
of Grand Court's fiscal 1998 financial statements, BDO Seidman, LLP audited
Grand Court's fiscal 1996 and fiscal 1997 financial statements.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Grand Court are as follows:
NAME AGE POSITION
- ---- --- --------
John Luciani(1) 67 Chairman of the Board and Chief Executive
Officer
John W. Luciani III 46 President and Director
Paul Jawin 44 Chief Operating Officer and Director
Dorian Luciani 44 Senior Vice President - Acquisition and
Construction
Deborah Luciani 42 Senior Vice President - New Business
Development and Finance
Catherine V. Merlino 34 Chief Financial Officer and
Vice President
Edward J. Glatz 57 Vice President - Multi-Family Properties
Keith Marlowe 37 General Counsel, Vice President and
Secretary
Walter Feldesman(1)(2) 81 Director
Leslie E. Goodman(1)(2) 56 Director
Sidney Dworkin(1)(2) 78 Director
- -------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN LUCIANI, Chief Executive Officer and Chairman of the Board of
Directors since January 1996, founded the earliest predecessor of Grand Court in
1969 with Bernard M. Rodin and has been engaged in a number of business
activities and investments since 1952. Commencing in 1960, he entered into the
real estate development and construction business, concentrating initially on
the development, construction and sale of residential high-rise apartment
buildings and single-family homes and subsequently on the acquisition and
development of multi-family rental housing complexes. Since 1986, he has
concentrated on the acquisition, development and financing of senior living
communities for the elderly. Mr. Luciani was a general partner of three
Protected Partnerships, but withdrew as a general partner prior to their filing
in 1996 of their respective Chapter 11 Petitions.
-54-
JOHN W. LUCIANI III, President since November 1999 and Director since June
1996, a son of John Luciani, joined Grand Court in 1975 and initially was
involved in the management and operations of Grand Court's multi-family housing
portfolio. Mr. Luciani was Grand Court's Executive Vice President until November
1999. Mr. Luciani is presently involved in the acquisition of existing senior
living communities and the daily operation of Grand Court's senior living
portfolio. Mr. Luciani graduated from Fairleigh Dickinson University with a
bachelor of science degree in accounting and a master of business administration
degree in finance. He is an active member of the American Seniors Housing
Association (ASHA).
PAUL JAWIN, Chief Operating Officer and Director since November 1999, a
son-in-law of Bernard M. Rodin, joined Grand Court in May 1991. His activities
primarily involve the various legal and financial aspects of Grand Court's
business including its debt financing and matters involving Grand Court's equity
and debt securities. Until November 1999, Mr. Jawin was Grand Court's General
Counsel and Senior Vice President. Mr. Jawin is an attorney and was actively
engaged in a real estate/corporate practice prior to joining Grand Court. Mr.
Jawin graduated from Ithaca College with a bachelor of science degree in history
and earned a juris doctor degree from Syracuse University School of Law.
DORIAN LUCIANI, Senior Vice President -- Acquisitions and Construction
since June, 1996, a son of John Luciani, joined Grand Court in 1977 and was
initially involved in the acquisition, development and management of Grand
Court's multi-family housing portfolio. Later, Mr. Luciani focused exclusively
on the acquisition and development of Grand Court's senior living communities.
Mr. Luciani graduated from Fairleigh Dickinson University with a bachelor of
science degree in business.
DEBORAH LUCIANI, Senior Vice President -- New Business Development and
Finance since May, 1998, a daughter of John Luciani, joined Grand Court in
January 1992. Ms. Luciani is involved in all aspects of acquisitions, debt and
equity financing and new business development of Grand Court's senior housing
portfolio. Prior to joining Grand Court, Ms. Luciani worked for E.F. Hutton &
Company, New York and with Prudential Bache Securities, New York, as an Oil
Futures Hedger to institutional clients. Ms. Luciani graduated from Boston
University with a bachelor of science degree, a master of political science
degree and a master of economics degree.
CATHERINE V. MERLINO, Chief Financial Officer since November 1999 and Vice
President since June 1996, joined Grand Court in September 1993, and has since
been actively involved in the financial reporting and analysis needs of Grand
Court. Ms. Merlino was Grand Court's Chief Accounting Officer until November
1999. Prior to joining Grand Court, Mrs. Merlino was a Senior Accountant from
June 1989 through June 1993 and a Supervisor from June 1993 through September
1993 at Feldman Radin & Co., P.C., a public accounting firm located in New York
City. Mrs. Merlino graduated from Long Island University in May 1987 with a
bachelor of science degree in accounting and became a certified public
accountant in February 1992.
EDWARD J. GLATZ, Vice President -- Multi Family Properties since June,
1998, joined Grand Court in September 1992 and has been actively involved in the
oversight and supervision of the third-party managing agents that manage the
day-to-day operations of the Multi-Family Properties. Prior to joining Grand
Court, Mr. Glatz performed asset management duties for Kovens Enterprises, a
real estate development company, from June 1988 until September 1992.
KEITH MARLOWE, General Counsel and Vice President since November 1999 and
Secretary of Grand Court since June 1996, joined Grand Court in August 1994.
From 1987 through August 1994, Mr. Marlowe, an attorney, was an associate in the
tax department at the law firm of Reid & Priest LLP where he was involved in a
general transactional tax practice. His activities primarily involve the various
legal and financial aspects of Grand Court's business. Mr. Marlowe graduated
from the University of Virginia with a bachelor of science degree in economics.
Mr. Marlowe earned a juris doctor degree from University of California Los
Angeles School of Law and an LLM in Taxation from New York University School of
Law.
WALTER FELDESMAN, Director since June, 1996, has been Of Counsel to the law
firm of Baer Marks & Upham LLP since March 1993 and for more than five years
prior thereto was a partner of Summit, Rovins and Feldesman. Mr. Feldesman is
currently a Director and Chairman of the Audit Committee of Sterling Bancorp and
a Director of its subsidiary, Sterling National Bank & Trust Co. Mr. Feldesman
is a member of the National Institute on Financial Services for Elders, the
National Academy of Elder Law Attorneys, the American Association of Homes for
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the Aging, the National Council on the Aging and American Society on Aging.
Mr. Feldesman is also special counsel on elderlaw to United Senior Health
Cooperative. He has authored an article entitled "Long-Term Care Insurance Helps
Preserve an Estate," and a published work entitled the "Dictionary of Eldercare
Terminology". He has written two other books, "New Medicare Choices" which was
published in February, 1998 and "Home Care" which is expected to be published in
July, 1999. Mr. Feldesman has a bachelor's degree in economics from New York
University. Mr. Feldesman earned an LLB from Harvard Law School.
LESLIE E. GOODMAN, Director since June, 1996, has been Executive Vice
President of Eagle Group since January 1998. Until December 1996 Mr. Goodman was
the Area President for the North Jersey Region for First Union National Bank and
a Senior Executive Vice President of First Union Corporation. From September
1990 through January 1994, he served as President and Chief Executive Officer of
First Fidelity Bank, N.A., New Jersey. From January 1994 to December 1995,
Mr. Goodman served as a Senior Executive Vice President and a Director of First
Fidelity Bank, National Association until it was merged into First Union. From
January 1990 until December 1995, he also served as Senior Executive Vice
President, member of the Office of the Chairman and a Director of First Fidelity
Bancorporation. He is a member of the Board of Directors and Chairman of the
Audit Committee of Wawa Inc., a member of the Board of Directors of Tear Drop
Golf Company, Inc. and a director of Admiralty Bank Corporation. In addition,
Mr. Goodman is a member of the Board of Trustees of Rutgers University and
Hackensack University Medical Center.
SIDNEY DWORKIN, Director since June, 1998. Mr. Dworkin was one of the
founders and served as President for 25 years and Chairman of the Board of Revco
D.S., Inc. until October 1987. Mr. Dworkin currently serves as a member of the
Board of Directors of Crager Industries, Inc., Comtrex Systems, Inc., CCA
Industries, Northern Technologies International Inc., Viragen Inc. and Novapet
Inc. He is also the owner and Chairman of the Board of Advanced Modular Systems,
Inc., a privately-held manufacturer of modular buildings. His experience ranges
across a multitude of industries including, among others, pharmaceuticals,
computer hardware and software, modular housing and consumer products.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee in June 1996. The
Audit Committee is currently composed of Messrs. Feldesman, Goodman and Dworkin.
The Audit Committee's duties include reviewing internal financial information,
monitoring cash flow, budget variances and credit arrangements, reviewing the
audit program of Grand Court, reviewing with Grand Court's independent
accountants the results of all audits upon their completion, annually selecting
and recommending independent accountants, overseeing the quarterly unaudited
reporting process and taking such other actions as may be necessary to assure
the adequacy and integrity of all financial information distributed by Grand
Court.
COMPENSATION COMMITTEE
The Board of Directors established a Compensation Committee in June 1996.
The Compensation Committee is currently composed of Messrs. Luciani, Feldesman,
Goodman and Dworkin. The Compensation Committee recommends compensation levels
of senior management and works with senior management on benefit and
compensation programs for Grand Court employees.
EXECUTIVE COMPENSATION
The following table shows, as to the Chief Executive Officer and each of
the four other most highly compensated executive officers information concerning
compensation accrued for services to Grand Court in all capacities during fiscal
1996, 1997 and 1998, respectively.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS SECURITIES ALL OTHER
COMPENSATION SALARY UNDERLYING OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) (#) ($)
- --------------------------------------------------- ------ ------------------- ------------------ --------------
<S> <C> <C> <C> <C>
John Luciani, Chairman of the Board and Chief Fiscal
Executive Officer(1)............................... 1996 $500,000 -- $ 497,000
Fiscal
1997 $600,000 $1,566,000
Fiscal
1998 $600,000 -- --
Bernard M. Rodin, Chief Operating Officer, Chief Fiscal
Financial Officer, President and Director(1)(2).... 1996 $500,000 -- $ 497,000
Fiscal
1997 $600,000 -- $1,566,000
Fiscal
1998 $600,000 -- --
John W. Luciani, III, Executive Vice President and Fiscal
Director........................................... 1996 $350,000
Fiscal
1997 $353,846 -- --
Fiscal
1998 $375,000 50,000 --
Dorian Luciani, Senior Vice President - Acquisitions Fiscal
and Construction................................... 1996 $350,000 -- --
Fiscal
1997 $353,846 -- --
Fiscal
1998 $375,000 50,000 --
Fiscal
Paul Jawin, General Counsel and Senior Vice President 1996 $325,000 -- --
Fiscal
1997 $344,327 -- --
Fiscal
1998 $365,000 50,000 --
</TABLE>
- -------------------
(1) Messrs. Luciani and Rodin received dividends and distributions from Grand
Court's predecessors but did not receive salaries. As of April 1, 1996 a
salary for each of Messrs. Luciani and Rodin was established at the rate of
$600,000 per year. In fiscal 1996 such officers also received $397,000 each
as a dividend and $100,000 each for the period from February 1, 1996 until
April 1, 1996, which was in the form of a dividend but which is classified
as officers' compensation for financial statement purposes. In January
1998, such officers received a non-cash distribution for the release of
previously assigned collateral of $1,566,000 each.
(2) Mr. Rodin died on October 25, 1999.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee in June 1996.
The Compensation Committee currently consists of Messrs. Luciani, Feldesman,
Goodman and Dworkin. None of the executive officers of Grand Court currently
serves on the compensation committee of another entity or on any other committee
of the board of directors of another entity performing similar functions. For a
description of transactions between Grand Court and members of the Compensation
Committee or their affiliates, see "Certain Relationships and Related
Transactions."
DIRECTOR COMPENSATION
Grand Court pays each Director who is not an employee of Grand Court $500
per telephonic Board meeting attended and $1,000 per Board meeting personally
attended. All Directors are reimbursed by Grand Court for their out-of-pocket
expenses incurred in connection with attendance at meetings of, and other
activities related to service on, the Board of Directors or any Board Committee.
STOCK PLANS
1996 STOCK OPTION AND PERFORMANCE AWARD PLAN
Grand Court has adopted the 1996 Stock Option and Performance Award Plan
(the "Plan"), which authorizes the granting to officers, key employees and
directors of Grand Court and any parent or subsidiary of Grand Court of
incentive or non-qualified stock options, stock appreciation rights, performance
shares, restricted shares and performance units. Under the Plan, directors who
are not employees of Grand Court may not be granted incentive stock options.
Grand Court plans to reserve 2,500,000 shares of Common Stock for issuance
pursuant to the Plan. Shares issued pursuant to the Plan are subject to certain
transfer restrictions.
The Plan is administered by the Board of Directors. The Board of Directors
determines the prices and terms at which options may be granted. Options may be
exercisable in installments over the option period, but no options may be
exercised after ten years from the date of grant. Stock appreciation rights may
be granted in tandem with options or separately.
The exercise price of any incentive stock option granted to an eligible
employee may not be less than 100% of the fair market value of the shares
underlying such option on the date of grant, unless such employee owns more than
10% of the outstanding Common Stock or stock of any subsidiary or parent of
Grand Court, in which case the exercise price of any incentive stock option may
not be less than 110% of such fair market value. No option may be exercisable
more than ten years after the date of grant and, in the case of an incentive
stock option granted to an eligible employee owning more than 10% of the
outstanding Common Stock or stock of any subsidiary or parent of Grand Court, no
more than five years from its date of grant. Incentive stock options are not
transferable, except upon the death of the optionee. In general, upon
termination of employment of an optionee (other than due to death or
disability), all options granted to such person which are not exercisable on the
date of such termination immediately expire, and any options that are so
exercisable will expire three months following termination of employment in the
case of incentive stock options, but not until the date the options otherwise
would expire in the case of non-qualified stock options. However, all options
will be forfeited immediately upon an optionee's termination of employment for
good cause and upon an optionee's voluntary termination of employment without
the consent of the Board of Directors.
Upon an optionee's death or termination of employment due to disability,
all options will become 100% vested and will be exercisable (i) in the case of
death, by the estate or other beneficiary of the optionee at any time prior to
the date the option otherwise would expire and (ii) in the case of the
disability of the optionee, by the optionee within one year of the date of such
termination of employment in the case of incentive stock options, or at any time
prior to the date the option otherwise would expire in the case of non-qualified
stock options.
At the time each grant of restricted shares or performance shares or units
or stock appreciation rights is made, the Board of Directors will determine the
duration of the performance or restriction period, if any, the performance
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<PAGE>
targets, if any, for earning performance shares or units, and the times at which
restrictions placed on restricted shares shall lapse.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL POTENTIAL REALIZED VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM($)
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5%10%
- ------------------------- -------- -------------- --------- ---------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
John W. Luciani III 50,000 10.53% 8.50 11/18/08 267,280 677,341
Dorian Luciani 50,000 10.53% 8.50 11/18/08 267,280 677,341
Paul Jawin 50,000 10.53% 8.50 11/18/08 267,280 677,341
</TABLE>
- -------------------
(1) As of July 31, 1999, options to acquire 475,000 shares had been granted
under the plan with an exercise price of $8.50 per share. 20% of such
options vested immediately and 20% will vest each year thereafter for the
next four years. Such options expire November 18, 2008.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
EXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END
----------------------------------------------------------------- --------------------------------
SHARES ACQUIRED VALUE REALIZED
NAME ON EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Luciani III 0 0 10,000 40,000 0 0
Dorian Luciani 0 0 10,000 40,000 0 0
Paul Jawin 0 0 10,000 40,000 0 0
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the first quarter of fiscal 1996, John Luciani and Bernard M. Rodin (the
"Original Stockholders") reorganized their businesses by consolidating them into
Grand Court. The Original Stockholders transferred all of the issued and
outstanding stock of each of 16 Sub-chapter S corporations along with various
other assets and liabilities to Grand Court in exchange for 3,252,380 shares of
Grand Court's Common Stock. A partnership in which the Original Stockholders
were the sole partners transferred to Grand Court substantially all of its
assets, subject to substantially all of its liabilities, in exchange for
1,626,190 shares of Grand Court's Common Stock. The partnership distributed the
shares received to the Original Stockholders. Six Sub-chapter S corporations
which were wholly-owned by the Original Stockholders were merged into Grand
Court. Pursuant to the mergers the shares of the six merged companies were
converted into an aggregate of 10,121,430 shares of Grand Court's Common Stock.
After the reorganization was complete, the Original Stockholders owned an
aggregate of 15,000,000 shares of Grand Court's Common Stock.
Prior to the reorganization discussed above, the business of the Original
Stockholders was conducted through a partnership and various Sub-chapter S
corporations. These entities and Grand Court paid distributions and other
distributions to each of the Original Stockholders of $850,000 and $397,000 in
Fiscal 1995 and 1996, respectively, exclusive of amounts reflected as officers'
compensation.
Mr. Luciani, the Chairman of the Board of Grand Court and entities
controlled by Mr. Luciani and the Estate of Bernard M. Rodin serve as general
partners (with interests ranging between 1% and 2%) of partnerships directly and
indirectly owning Multi-Family Properties and on account of such general partner
status have personal liability for recourse partnership obligations and own
small equity ownership interests in the partnerships. Grand Court holds
(i) notes, aggregating $100.9 million, net of deferred income, as of July 31,
1999, that are secured by the limited partnership interests in such partnerships
and (ii) other partnership receivables aggregating $58.9 million from such
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<PAGE>
partnerships at July 31, 1999. Messrs. Luciani and Rodin had provided personal
guarantees for certain of Grand Court's debt, and the obligations thereunder may
continue. The aggregate amount of such debt personally guaranteed by each of
Messrs. Luciani and Rodin is approximately $14.3 million at July 31, 1999. In
addition, Mr. Luciani and certain employees will devote a limited portion of
their time to overseeing the third-party managers of Multi-Family Properties in
which Grand Court has financial interests in that it holds the related Purchase
Notes, but in which Mr. Luciani and the Estate of Bernard M. Rodin have equity
interests and Grand Court does not.
In Fiscal 1996, the Original Stockholders and one of their affiliates
transferred additional assets (the "Assigned Interests") to the Investing
Partnerships that own interests in the Protected Partnerships. The Assigned
Interests were owned personally by the Original Stockholders and their affiliate
and provided additional assets at the Investing Partnership level and, as a
result, additional security for the related Multi-Family Notes. Two Investing
Partnerships related to these Protected Partnerships transferred the respective
Assigned Interests back to the Original Stockholders and their affiliate after
these Protected Partnerships successfully emerged from their bankruptcy
proceedings. In that the Original Stockholders transferred the Assigned
Interests in July 1996, Grand Court recorded a $21.3 million capital
contribution in Fiscal 1996. The bankruptcy petitions and risk of loss faced by
the Protected Partnerships resulted in Grand Court recording a non-cash loss for
Fiscal 1996 in the amount of $18.4 million (representing the recorded value of
these Multi-Family Notes, net of deferred income and net of any previously
established reserves) due to the deemed full impairment of the Multi-Family
Notes. The transfer of the Assigned Interest back to the Original Stockholders
caused Grand Court to recognize non-cash other income of $3.1 million and to
record a non-cash dividend to the Original Stockholders for the release of the
previously assigned interest of $3.1 million in Fiscal 1997. Each of the
Original Stockholders was a general partner of three of the Protected
Partnerships, but withdrew as a general partner prior to such partnerships'
filings of the respective Chapter 11 Petitions. One Multi-Family Owning
Partnership whose mortgage is currently in default expects to lose its property
through foreclosure. As a result, Grand Court realized a non-cash loss of
$700,000 in the second quarter of Fiscal 1999, which represents the recorded
value of the related note and receivables, net of established reserves. The
Original Stockholders contributed additional assets to Grand Court to provide
additional collateral for the new note and the related receivables. As a result,
Grand Court recorded a capital contribution of $900,000, based upon the fair
value of the contributed assets, and believes this foreclosure will not affect
its ability to collect the new note.
In the third quarter of Fiscal 1999, the Multi-Family Owning Partnership
described in the previous paragraph which was expecting to lose its property
through foreclosure, did lose its property through foreclosure. Also, an
additional Multi-Family Owning Partnership learned that it will lose its
property through foreclosure. As a result, Grand Court realized a non-cash loss
of $708,000 in the third quarter of fiscal year 1999, which represents the
recorded value of the note and receivables, net of established reserves. The
Original Stockholders and an entity controlled by them contributed additional
collateral for the new note and the related receivables. As a result of this
contribution of additional assets, Grand Court recorded a capital contribution
of $719,000, based upon the fair value of such additional contributed assets,
and believes that this foreclosure will not effect its ability to collect the
new note. This additional Owning Partnership lost its property through
foreclosure during the fourth quarter of 1999.
Since February 1, 1997 through July 31, 1999, Grand Court paid to Francine
Rodin, the widow of Bernard M. Rodin, Grand Court's former Chief Operating
Officer, Chief Financial Officer, President and a Director, $329,533 as fees for
introducing to Grand Court broker/dealers that have assisted Grand Court in its
Syndications of partnership interests and in placing other securities offered by
Grand Court. Mrs. Rodin will receive a fee with respect to any future sales
through such broker/dealers of such Syndicated partnership interests and other
securities offered by Grand Court. Mrs. Rodin has been an employee of Grand
Court for the entire fiscal years ended January 31, 1998 and 1999.
Walter Feldesman, a Director of Grand Court, is Of Counsel to the law firm
of Baer Marks & Upham LLP, which acts as counsel to Grand Court from time to
time. In addition, Mr. Feldesman is a director of Sterling National Bank & Trust
Co. which has entered into a revolving credit agreement with Grand Court which
permits Grand Court to borrow up to $8,000,000, of which $2,438,085 was
outstanding at July 31, 1999.
Michele R. Jawin, the wife of Paul Jawin, a member of Grand Court's Board
of Directors and its Chief Operating Officer, is Of Counsel to Thelen Reid &
Priest LLP, which acts as securities counsel to Grand Court.
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<PAGE>
Since June 1999, George Batchelor is a beneficial owner of more than 5% of
Grand Court's Common Stock. Since February 1, 1997 and through July 31, 1999,
the following transactions occurred between Mr. Batchelor and Grand Court:
(i) Grand Court borrowed $58.8 million (at stated interest rates ranging from
12% to 15%) from Mr. Batchelor and repaid $42.8 million of principal amounts of
loans and paid $15.4 million of interest and other loan fees to Mr. Batchelor,
(ii) Grand Court sold to Mr. Batchelor controlling interests in eight
Multi-Family Owning Partnerships for an aggregate consideration of $12.0 million
of which $5.0 million was in cash and the remaining $7.0 million was in the form
of a note on which note Grand Court has received principal and interest in the
amount of $393,839, (iii) Grand Court entered into four joint venture agreements
regarding four Development Communities in which it sold a 50% interest in each
of the four Development Communities to Mr. Batchelor for an aggregate
consideration of $20.0 million, and (iv) Grand Court sold to Mr. Batchelor
investments in multi-family Syndications for an aggregate consideration of
$239,425.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Grand Court is offering to issue its 11% Series A Exchange Notes Due
December 15, 2005 (the "New Notes") in exchange for its 11% Series A Notes due
December 15, 2005 (the "Old Notes") as described herein (the "Exchange Offer").
The Old Notes were sold through registered broker-dealers selected by Grand
Court.
Pursuant to a Registration Rights Agreement of Grand Court, in favor of the
holders of the Old Notes (the "Registration Rights Agreement"), Grand Court is
required, among other things:
(a) to file with the SEC a registration statement under the
Securities Act with respect to New Notes identical in all material
respects to the Old Notes and use its reasonable effort to cause such
registration statement to be declared effective under the Securities
Act; or
(b) to register the Old Notes under the Securities Act.
Grand Court is further obligated, upon the effectiveness of that registration
statement, to offer the holders of the Old Notes the opportunity to exchange
their Old Notes for a like principal amount of New Notes which will be issued
without a restrictive legend and may be reoffered and resold by the holder
without restrictions or limitations under the Securities Act. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this prospectus is a part. The Exchange Offer is being made
pursuant to the Registration Rights Agreement to satisfy Grand Court's
obligations under that agreement. The term "Holder" with respect to the Exchange
Offer means any person in whose name Old Notes are registered on Grand Court's
books or any other person who has obtained a properly completed assignment from
the registered holder.
In participating in the Exchange Offer, a Holder is deemed to represent to
Grand Court, among other things, that
(a) the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the Holder,
(b) neither the Holder nor any such other person is engaging in
or intends to engage in a distribution of such New Notes,
(c) neither the Holder nor any such other person has an
arrangement or understanding with any person to participate in the
distribution of such New Notes, and
(d) neither the Holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of Grand
Court.
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Based on a previous interpretation by the staff of the Commission set forth
in no-action letters issued to other parties, including "Exxon Capital Holdings
Corporation" (available May 13, 1988), "Morgan Stanley & Co. Incorporated"
(available June 5, 1991), "Mary Kay Cosmetics, Inc." (available June 5, 1991),
"Warnaco, Inc." (available October 11, 1991) and "K-III Communications Corp."
(available May 14, 1993), Grand Court believes that the New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by any Holder of such New Notes (other than any such Holder which is
an "affiliate" of Grand Court within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and such Holder has no arrangement
or understanding with any person to participate in the distribution of such New
Notes. Any Holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes cannot rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a resale transaction. Under no circumstances may this prospectus
be used for an offer to resell, resale or other retransfer of the New Notes. In
the event that Grand Court's belief is inaccurate, Holders of the New Notes who
transfer New Notes in violation of the prospectus delivery provisions of the
Securities Act and without an exemption from registration thereunder may incur
liability thereunder. Grand Court does not assume or indemnify Holders against
such liability. The Exchange Offer is not being made to, nor will Grand Court
accept tenders for exchange from, Holders of Old Notes in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. Grand Court has not
entered into any arrangement or understanding with any person to distribute the
New Notes to be received in the Exchange Offer. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, Grand Court will accept any and all Old Notes
properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. Grand Court will issue $1,000 in principal amount of New
Notes in exchange for each $1,000 in principal amount of outstanding Old Notes
surrendered in the Exchange Offer. Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except that the New Notes will be registered under the
Securities Act and, therefore, will not be subject to restrictions on transfer.
The New Notes will evidence the same debt as the Old Notes. The New Notes will
be issued under and entitled to the benefits of the Indenture which authorized
the issuance of the Old Notes.
As of the date of this prospectus, $15,000,000 in aggregate principal
amount of the Old Notes is outstanding. This prospectus, together with the
letter of transmittal, is being sent to all registered Holders of the Old Notes.
Grand Court will be deemed to have accepted validly tendered Old Notes
when, as and if Grand Court shall have given written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purposes of receiving the New Notes from Grand Court.
Old Notes that are not tendered for exchange in the Exchange Offer will
remain outstanding and subject to the existing restrictions on transfer and will
be entitled to the rights and benefits such Holders have under the Indenture. If
any tendered Old Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange pursuant to the
Exchange Offer. Grand Court will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the Exchange Offer.
See "-- Fees and Expenses."
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS TO THE EXCHANGE OFFER
The term "Expiration Date," shall mean 5:00 p.m., New York City time on
January 28, 2000, unless Grand Court, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, Grand Court will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
Holders an announcement thereof, prior to 9:00 a.m., New York City time, on the
next business day after the then Expiration Date.
Grand Court reserves the right, in its sole discretion,
(a) to delay accepting any Old Notes, to extend the Exchange
Offer or to terminate the Exchange Offer if any of the conditions set
forth below under "--Conditions to the Exchange Offer" shall not have
been satisfied by giving written notice of such delay, extension or
termination to the Exchange Agent or
(b) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptances, extension, termination or amendment will be
followed as promptly as practicable by written notice thereof to the registered
Holders. If the Exchange Offer is amended in a manner determined by Grand Court
to constitute a material change, Grand Court will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered Holders of the Old Notes, and Grand Court will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the amendment and the manner of disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
Without limiting the manner in which Grand Court may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, Grand Court will have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
Grand Court will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly as practicable after
acceptance of the Old Notes. See "-- Conditions to the Exchange Offer." For
purposes of the Exchange Offer, Grand Court will be deemed to have accepted
properly tendered Old Notes for exchange when, as and if Grand Court shall have
given written notice thereof to the Exchange Agent.
In all cases, issuance of the New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a properly completed and duly executed letter of
transmittal and all other required documents; provided, however, that Grand
Court reserves the absolute right to waive any defects or irregularities in the
tender or conditions of the Exchange Offer. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount or a greater
principal amount, respectively, than the Holder desires to exchange, then such
unaccepted or non-exchanged Old Notes evidencing the unaccepted portion, as
appropriate, will be returned without expense to the tendering Holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, Grand Court will not
be required to exchange any New Notes for any Old Notes and may terminate the
Exchange Offer before the acceptance of any Old Notes for exchange, if:
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(a) any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to the
Exchange Offer which, in Grand Court's reasonable judgment, might
materially impair the ability of Grand Court to proceed with the
Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is
interpreted by the staff of the SEC, which, in Grand Court's
reasonable judgment, might materially impair the ability of Grand
Court to proceed with the Exchange Offer.
If Grand Court determines in its sole discretion that any of these
conditions are not satisfied, Grand Court may:
(a) refuse to accept any Old Notes and return all tendered Old
Notes to the tendering Holders;
(b) extend the Exchange Offer and retain all Old Notes tendered
prior to the expiration of the Exchange Offer, subject, however, to
the rights of Holders who tendered such Old Notes to withdraw their
tendered Old Notes; or
(c) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Old Notes which have
not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, Grand Court will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the
registered Holders, and Grand Court will extend the Exchange Offer for
a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered Holders,
if the Exchange Offer would otherwise expire during such five to ten
business day period.
PROCEDURES FOR TENDERING -- REGISTERED HOLDERS
Registered Holders of Old Notes who desire to participate in the Exchange
Offer should follow the directions set forth below and in the letter of
transmittal.
All beneficial owners should follow the instructions received from their
broker or nominee and should contact their broker or nominee directly. The
instructions set forth below and in the letter of transmittal DO NOT APPLY to
such beneficial owners.
To tender in the Exchange Offer, a Holder must complete, sign and date the
letter of transmittal, or facsimile thereof, have the signatures thereon
guaranteed if required by the letter of transmittal, and mail or otherwise
deliver such letter of transmittal or such facsimile to the Exchange Agent prior
to the Expiration Date together with certificates for the Holder's Old Notes.
To be tendered effectively, the letter of transmittal and other required
documents must be received by the Exchange Agent at the address set forth below
under "--Exchange Agent" prior to the Expiration Date.
The tender by a Holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such Holder and Grand Court in accordance
with the terms and subject to the conditions set forth herein and in the letter
of transmittal.
The method of delivery of Old Notes and the letter of transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Holder. Instead of delivery by mail, it is recommended that Holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date. No
letter of transmittal or Old Notes should be sent to Grand Court. Holders may
request their respective brokers, dealers, commercial banks, trust companies or
nominees to effect the above transactions for such Holders.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto is tendered:
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(a) by a registered Holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
(b) for the account of an Eligible Institution (as defined
below).
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantor
must be a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "Eligible Institution").
If the letter of transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power signed by such
registered Holder as such registered Holder's name appears on such Old Notes.
If the letter of transmittal or any Old Notes or bond or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
Grand Court, evidence satisfactory to Grand Court of their authority to so act
must be submitted with the letter of transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by Grand Court in its sole discretion, which determination
will be final and binding. Grand Court reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the acceptance of which
would, in the opinion of counsel for Grand Court, be unlawful. Grand Court also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. Grand Court's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the letter of
transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as Grand Court shall determine. Although Grand Court intends to
notify Holders of defects or irregularities with respect to tenders of Old
Notes, none of Grand Court, the Exchange Agent, or any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the Expiration Date.
By tendering, each Holder or the Person receiving the New Notes, as the
case may be will be deemed to represent to Grand Court that, among other things:
. the New Notes acquired pursuant to the Exchange Offer are being obtained in
the ordinary course of business of the Person receiving such New Notes,
whether or not such person is the Holder;
. neither the Holder nor any such other person is engaging in or intends to
engage in a distribution of such New Notes;
. neither the Holder nor any such other person has an arrangement or
understanding with any Person to participate in the distribution of such
New Notes; and
. neither the Holder nor any such other Person is an "affiliate," as defined
in Rule 405 of the Securities Act, of Grand Court.
In all cases, issuance of New Notes that are accepted for exchange pursuant
to the Exchange Offer will be made only after timely receipt by the Exchange
Agent of certificates for such Old Notes, a properly completed and duly executed
letter of transmittal and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Old Notes are submitted for a greater principal amount
than the Holder desires to exchange, such unaccepted or non-exchanged Old Notes
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will be returned without expense to the tendering Holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Grand Court reserves the right in its sole discretion to purchase or make
offers for any Old Notes that remain outstanding subsequent to the Expiration
Date or, as set forth above under "--Conditions," to terminate the Exchange
Offer and, to the extent permitted by applicable law, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
WITHDRAWAL OF TENDERS OF OLD NOTES
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must:
(a) specify the name of the person having deposited the Old Notes
to be withdrawn (the "Depositor");
(b) identify the Old Notes to be withdrawn (including the
certificate number);
(c) be signed by the Holder in the same manner as the original
signature on the letter of transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee
with respect to the Old Notes register the transfer of such Old Notes
in the name of the person withdrawing the tender; and
(d) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by Grand Court, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
will be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal; and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "-- Procedures for Tendering" at any time prior to the
Expiration Date.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance and requests for additional copies
of this prospectus or the letter of transmittal should be directed to the
Exchange Agent addressed as follows:
BY HAND OR OVERNIGHT COURIER BY REGISTERED OR CERTIFIED MAIL
- ---------------------------- -------------------------------
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street - 7 East
Corporate Trust Services Window New York, NY 10286
Ground Level Attn: Odell Romeo
New York, NY 10286 Reorganization Section
Attn: Odell Romeo
Reorganization Section
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BY FACSIMILE:
-------------
(212) 815-6339
CONFIRM BY TELEPHONE TO:
-------------------------
(212) 815-6337
FEES AND EXPENSES
The expenses of soliciting tenders will be paid by Grand Court. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopier, telephone or in person by officers and regular
employees of Grand Court and its affiliates.
Grand Court has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers-dealers or others
soliciting acceptances of the Exchange Offer. Grand Court, however, will pay the
Exchange Agent reasonable and customary fees for their services and will
reimburse them for their reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Grand Court and are estimated in the aggregate to be approximately
$75,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent accounting and legal fees and printing costs, among others.
Grand Court will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes for principal amounts or number of shares not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of Old Notes tendered, or when
tendered, the Old Notes are registered in the name of, any person other than the
person signing the letter of transmittal, or if a transfer tax is imposed for
any reason other than the exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
DESCRIPTION OF THE NEW NOTES
The following summary of certain terms and provisions of the New Notes and
the Indenture (as hereinafter defined) does not purport to be complete and is
qualified in its entirety by reference to the actual provisions of the New Notes
and the Indenture. Capitalized terms used but not defined herein shall have the
meanings given to them in the "Description of the Indenture", the New Notes or
the Indenture, as the case may be.
GENERAL
The New Notes will be issued as a series of debt securities, limited in
aggregate principal amount to $15,000,000, issued under the Indenture, between
The Bank of New York, as trustee (the "Trustee") and Grand Court, as issuer,
dated as of October 1, 1998 and amended by the First Supplemental Indenture,
dated as of May 3, 1999 (as further supplemented or amended from time to time,
the "Indenture"), which is more fully described in "Description of the
Indenture". Grand Court may, from time to time, without the consent of the
Holders (as hereinafter defined) of the New Notes, provide for the issuance of
other debt securities under the Indenture in addition to the New Notes offered
hereby. See "Description of the Indenture -- General."
The New Notes will be unsecured obligations of Grand Court.
Each New Note will mature on December 15, 2005 (the "Stated Maturity
Date"), unless the principal thereof becomes due and payable prior to the Stated
Maturity Date, whether by the declaration of acceleration of maturity, notice of
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redemption at the option of Grand Court or otherwise (the Stated Maturity Date
or such prior date, as the case may be, is herein referred to as the
"Maturity").
Each New Note will be issued as a fully registered certificated note. The
authorized denominations of each New Note will be $1,000 and integral multiples
thereof.
New Notes will be exchangeable for other New Notes of any authorized
denominations and of a like aggregate principal amount and tenor, and may be
presented for registration of transfer, in each case, as described under
"Description of the Indenture -- Payment of New Notes; Transfer; Exchanges."
PAYMENT OF INTEREST AND PRINCIPAL
Payments of interest on the New Notes, other than interest payable at
Maturity, will be made by check mailed to the address of the Holders of such New
Notes as of the Regular Record Date (as hereinafter defined) for each Interest
Payment Date (as hereinafter defined); provided, however, that (a) if and to the
extent Grand Court defaults in the payment of the interest due on any New Note
on any Interest Payment Date, such defaulted interest will be paid as described
under "Description of the Indenture -- Payment of New Notes; Transfers;
Exchanges"; and (b) a Holder of $1,000,000 or more in aggregate principal amount
of New Notes will be entitled to receive interest payments, if any, on any
Interest Payment Date other than at Maturity by wire transfer of immediately
available funds if appropriate wire transfer instructions have been received in
writing by the Trustee not less than 15 days prior to such Interest Payment
Date. Any such wire transfer instructions received by the Trustee shall remain
in effect until revoked by such Holder.
Payment of principal due on the New Notes will be made upon presentation
thereof at the office of The Bank of New York in New York, New York, as
described under "Description of the Indenture -- Payment of New Notes;
Transfers; Exchanges".
Payment of interest, if any, due on the New Notes at Maturity will be made
to the person to whom payment of the principal is made.
INTEREST
General
Each New Note will bear interest from the last date to which interest has
been paid on the Old Notes at the rate per annum set forth on the cover page of
the Memorandum until the principal thereof is paid or made available for
payment.
Interest on the New Notes will be payable on the 15th day of each month
(each, an "Interest Payment Date") and at Maturity.
Interest Payment Dates
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. If any Interest Payment Date or the Maturity falls on a day that is not
a Business Day, the required payment of principal and/or interest will be made
on the next succeeding Business Day as if made on the date such payment was due,
and no interest will accrue on such payment for the period from and after such
Interest Payment Date or the Maturity, as the case may be, to the date of such
payment on the next succeeding Business Day.
"Business Day" means any day, other than a Saturday or Sunday, that is not
a day on which banking institutions or trust companies are generally authorized
or required by law, regulation or executive order to close in The City of New
York or other city in which any Paying Agent for the New Notes is located.
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REDEMPTION AT THE OPTION OF GRAND COURT
The New Notes will be redeemable at the option of Grand Court, in whole at
any time or in part from time to time, without penalty or premium, at a
redemption price of 100% of the principal amount of the New Notes to be
redeemed, together with accrued interest to the date of redemption.
New Notes will be redeemable only upon notice by mail not less than 20 nor
more than 60 days prior to the date fixed for redemption and, if less than all
of the New Notes are to be redeemed, the particular New Notes will be selected
by the Trustee by such method of random selection as the Trustee deems fair and
appropriate.
Any notice of redemption at the option of Grand Court may state that such
redemption shall be conditional upon the receipt by the Paying Agent, on or
prior to the date fixed for such redemption, of money sufficient to pay the
principal of and interest on such New Notes and that if such money has not been
so received, such notice will be of no force or effect and Grand Court will not
be required to redeem such New Notes.
The New Notes will not be subject to any sinking fund or other mandatory
redemption provisions.
In addition to the foregoing, Grand Court may at any time purchase New
Notes at any price or prices in the open market or otherwise. New Notes so
purchased by Grand Court may, at the discretion of Grand Court, be held, resold
or surrendered to the Trustee for cancellation.
DESCRIPTION OF THE INDENTURE
The following summaries of certain provisions of the New Notes and the
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by express reference to, all the provisions of the Indenture,
including the definitions therein of certain terms. Wherever particular
provisions or defined terms of the Indenture are referred to herein, such
provisions or defined terms are incorporated by reference herein or therein, as
the case may be. References to article and section numbers used herein are to
articles and sections in the Indenture. Certain capitalized terms used herein
are defined in the Indenture.
GENERAL
The Indenture does not limit the aggregate principal amount of debt, which
may be issued thereunder and provides that debt securities may be issued
thereunder, from time to time, in one or more series, in addition to the New
Notes. The New Notes and all other debt securities hereafter issued under the
Indenture are collectively referred to herein as the "Indenture Securities."
PAYMENT OF NEW NOTES; TRANSFERS; EXCHANGES
Except as otherwise described "Description of the New Notes -- Payment of
Interest and Principal", interest, if any, on each New Note on each Interest
Payment Date will be paid by check mailed to the person in whose name such New
Note is registered (the registered holder of any Indenture Security being herein
called a "Holder") as of the close of business on the Regular Record Date
relating to such Interest Payment Date; provided, however, that interest payable
at Maturity will be paid to the person to whom principal is paid. However, if
there has been a default in the payment of interest on any New Note, such
defaulted interest will be payable to the Holder of such New Note as of the
close of business on a date selected by the Trustee for the payment of such
interest not more than 15 days and not less than 10 days prior to the date
proposed by Grand Court for payment of such defaulted interest or in any other
lawful manner, if the Trustee deems such manner of payment practicable. (See
Section 307.)
Principal of and interest, if any, on the New Notes at Maturity will be
payable upon presentation of the New Notes at the office of The Bank of New York
in New York, New York, as Paying Agent for Grand Court. Grand Court may change
the place of payment on the New Notes, and may remove any Paying Agent and may
appoint one or more additional Paying Agents (including Grand Court or any
affiliate of either of them), all in their discretion. (See Section 602.)
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The transfer of New Notes may be registered, and New Notes may be exchanged
for other New Notes of authorized denominations and of like tenor and aggregate
principal amount, at the office of The Bank of New York, as Security Registrar
for the New Notes. Grand Court may change the place for registration of transfer
of the New Notes, and may remove any Security Registrar and appoint one or more
additional Security Registrars (including Grand Court or any affiliate of either
of them), all in its discretion. (See Sections 305 and 602.). No service charge
will be made for any transfer or exchange of the New Notes, but Grand Court may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. Grand Court will not be required to
execute or provide for the registration of transfer of or the exchange of (a)
New Notes during a period of 15 days prior to giving any notice of redemption or
(b) any New Note selected for redemption in whole or in part, except the
unredeemed portion of any New Note being redeemed in part. (See Section 305.)
EVENTS OF DEFAULT
Each of the following events constitutes an "Event of Default" under the
Indenture with respect to each series of Indenture Securities thereunder:
(a) default in the payment of principal of or premium, if any, or interest
on any Indenture Security of such series when it becomes due and payable and
continuance of such default for a period of 30 days;
(b) default in the performance of, or breach of, any covenant or warranty
of Grand Court in the Indenture (other than a covenant or warranty a default in
the performance of which or breach of which is dealt with elsewhere under this
paragraph or which has been expressly included in the Indenture solely for the
benefit of one or more series of Indenture Securities other than such Indenture
Securities), and the continuance of such default or breach for a period of 90
days after written notice to Grand Court by the Trustee, or to Grand Court and
the Trustee by the Holders of a majority in principal amount of the Indenture
Securities of such series Outstanding under the Indenture as provided in the
Indenture specifying such default or breach and requiring it to be remedied,
unless the Trustee, or the Trustee and the Holders of a principal amount of
Indenture Securities of such series not less than the principal amount of
Indenture Securities the Holders of which gave such notice, as the case may be,
agree in writing to an extension of such period prior to its expiration;
provided, however, that the Trustee, or the Trustee and such Holders, as the
case may be, will be deemed to have agreed to an extension of such period if
corrective action is initiated by Grand Court within such period and is being
diligently pursued;
(c) any other Event of Default specified with respect to Indenture
Securities of such series. (See Section 801.)
No Event of Default with respect to the New Notes necessarily constitutes an
Event of Default with respect to the Indenture Securities of any other series
issued under the Indenture.
REMEDIES
If an Event of Default occurs and is continuing with respect to any series
of Indenture Securities, then the Holders of a majority in principal amount of
the Outstanding Indenture Securities of such series may declare the principal
amount (or if the Indenture Securities of such series are discount securities,
such portion of the principal amount as may be specified in connection with such
series) of all of the Indenture Securities of such series to be due and payable
immediately; provided, however, that if an Event of Default occurs and is
continuing with respect to more than one series of Indenture Securities, the
Holders of a majority in aggregate principal amount of the Outstanding Indenture
Securities of all such series, considered as one class, may make such
declaration of acceleration, and not the Holders of the Indenture Securities of
any one of such series.
At any time after the declaration of acceleration with respect to the
Indenture Securities of any series has been made and before a judgment or decree
for payment of the money due has been obtained by the Trustee as provided in the
Indenture, such declaration and its consequences will, without further act, be
deemed to have been rescinded and annulled, if
(a) Grand Court has paid or deposited with the Trustee a sum
sufficient to pay
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(1) all overdue interest on all Indenture Securities of such
series then Outstanding;
(2) the principal of and premium, if any, on any Indenture
Securities of such series which have become due otherwise than by
such declaration of acceleration and interest thereon at the rate
or rates prescribed therefor in such Indenture Securities;
(3) interest upon overdue interest at the rate or rates
prescribed therefor in such Indenture Securities, to the extent
that payment of such interest is lawful; and
(4) all amounts due to the Trustee under the Indenture;
and
(b) all Events of Default with respect to the Indenture
Securities of such series, other than the nonpayment of the principal
of the Indenture Securities of such series which has become due solely
by such declaration of acceleration, have been cured or waived as
provided in the Indenture. (See Section 802.) For more information as
to waiver of defaults, see "--Waiver."
If an Event of Default with respect to the Indenture Securities of any
series occurs and is continuing, the Holders of a majority in principal amount
of the Outstanding Indenture Securities of such series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee, with respect to the Indenture Securities of such series; provided,
however, that if an Event of Default occurs and is continuing with respect to
more than one series of Indenture Securities, the Holders of a majority in
aggregate principal amount of the Outstanding Indenture Securities of all such
series, considered as one class, will have the right to make such direction, and
not the Holders of the Indenture Securities of any one of such series; and
provided, further, that (a) such direction will not be in conflict with any rule
of law or with the Indenture and could not involve the Trustee in personal
liability in circumstances where indemnity would not, in the Trustee's sole
discretion, be adequate and (b) the Trustee may take any other action it deems
proper which is not inconsistent with such direction. (See Sections 812 and
903.) The Indenture provides that no Holder of any Indenture Security will have
any right to institute any proceeding, judicial or otherwise, with respect to
the Indenture for the appointment of a receiver or for any other remedy
thereunder unless (a) such Holder has previously given to the Trustee written
notice of a continuing Event of Default; (b) the Holders of a majority in
aggregate principal amount of the Outstanding Indenture Securities of all series
in respect of which an Event of Default has occurred and is continuing,
considered as one class, have made written request to the Trustee to institute
proceedings in respect of such Event of Default and have offered the Trustee
reasonable indemnity against costs and liabilities incurred in complying with
such request; and (c) for sixty days after receipt of such notice, the Trustee
has failed to institute any such proceeding and no direction inconsistent with
such request has been given to the Trustee during such sixty-day period by the
Holders of a majority in aggregate principal amount of Outstanding Indenture
Securities of all series in respect of which an Event of Default has occurred
and is continuing, considered as one class. Furthermore, no Holder will be
entitled to institute any such action if and to the extent that such action
would disturb or prejudice the rights of other Holders. (See Sections 807 and
903.) Notwithstanding that the right of a Holder to institute a proceeding with
respect to the Indenture is subject to certain conditions precedent, each Holder
has an absolute and unconditional right to receive payment of principal and
premium, if any, and interest when due and to institute suit for the enforcement
of any such payment and such rights may not be impaired without the consent of
such Holder. (See Sections 807 and 808.) The Indenture provides that the Trustee
is required to give the Holders of the Indenture Securities notice of any
default under the Indenture to the extent required by the Trust Indenture Act,
unless such default has been cured or waived; except that in the case of an
Event of Default of the character specified above in clause (c) under "Events of
Default," no such notice shall be given to such Holders until at least 75 days
after the occurrence thereof. (See Section 902.) The Trust Indenture Act
currently permits the Trustee to withhold notices of default (except for certain
payment defaults) if the Trustee in good faith determines the withholding of
such notice to be in the interests of the Holders.
Grand Court will be required to furnish annually to the Trustee a statement
as to the compliance by Grand Court with all conditions and covenants under the
Indenture. (See Section 605.)
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WAIVER
The Holders of a majority in aggregate principal amount of the Outstanding
Indenture Securities of any series may waive on behalf of the Holders of all
Indenture Securities of such series any past default under the Indenture, except
a default in the payment of principal, premium, if any, or interest or with
respect to compliance with certain covenants and provisions of the Indenture
which cannot be amended without the consent of the Holder of each Outstanding
Indenture Security of such series affected. (See Section 813.)
Compliance with certain covenants in the Indenture or otherwise provided
with respect to Indenture Securities may be waived by the Holders of a majority
in aggregate principal amount of the Outstanding Indenture Securities affected,
considered as one class. (See Section 606.)
COVENANTS; CONSOLIDATION, MERGER, ETC.
Subject to the provisions described in the next paragraph, Grand Court will
do or cause to be done all things necessary to preserve and keep in full force
and effect its corporate existence. (See Section 604.)
Grand Court will not consolidate with or merge into any other Person (which
term includes, for purposes of the Indenture, any corporation, partnership,
limited liability company, joint venture, trust or other unincorporated
organization) or convey, transfer or lease its properties and assets
substantially as an entirety to any Person unless (a) the Person formed by such
consolidation or into which Grand Court is merged or the Person which acquires
by conveyance or transfer, or which leases, the property and assets of Grand
Court substantially as an entirety is a Person organized and existing under the
laws of the United States of America or any State thereof or the District of
Columbia, and expressly assumes, by supplemental indenture, the due and punctual
payment of the principal of and premium, if any, and interest, if any, on all
the Outstanding Indenture Securities and the performance of all of the covenants
of Grand Court under the Indenture, and (b) immediately after giving effect to
such transactions, no Event of Default, and no event which after notice or lapse
of time or both would become an Event of Default, will have occurred and be
continuing. (See Section 1101.)
The Indenture does not contain any financial or other similar restrictive
covenants.
MODIFICATION OF INDENTURE
Without the consent of any Holders of Indenture Securities, Grand Court and
the Trustee may enter into one or more supplemental indentures for any of the
following purposes:
(a) to evidence the succession of another Person to Grand Court and
the assumption by any such successor of the covenants of Grand Court in the
Indenture and the Indenture Securities; or
(b) to add one or more covenants of Grand Court or other provisions
for the benefit of the Holders of all or any series of Indenture Securities
or any tranche thereof, or to surrender any right or power conferred upon
Grand Court (and if such covenants are to be for the benefit of less than
all series of Indenture Securities, stating that such covenants are
expressly being included solely for the benefit of such series); or
(c) to add any additional Events of Default with respect to all or any
series of Outstanding Indenture Securities (and if such additional Events
of Default are to be for the benefit of less than all series of Indenture
Securities, stating that such additional Events of Default are expressly
being included solely for the benefit of such series); or
(d) to change or eliminate any provision of the Indenture or to add
any new provision to the Indenture; provided that if such change,
elimination or addition will adversely affect the interests of the Holders
of Indenture Securities of any series or tranche Outstanding on the date of
such supplemental indenture in any material respect, such change,
elimination or addition will become effective with respect to such series
or tranche only with the consent of the Holders of the Indenture Securities
of such series or tranche pursuant to the applicable provisions of the
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Indenture or when there is no Indenture Security of such series or tranche
remaining Outstanding under the Indenture; or
(e) to provide collateral security for the Indenture Securities; or
(f) to establish the form or terms of Indenture Securities of any
series or as permitted by the Indenture; or
(g) to provide for the authentication and delivery of bearer
securities and coupons appertaining thereto representing interest, if any,
thereon and for the registration, exchange and replacement thereof and for
the giving of notice to, and the solicitation of the vote or consent of,
the holders thereof, and any matters incidental thereto;
(h) to evidence and provide for the acceptance of appointment of a
separate or successor Trustee under the Indenture with respect to the
Indenture Securities of one or more series and to add to or change any of
the provisions of the Indenture as shall be necessary to provide for or
facilitate the administration of the trusts under the Indenture by more
than one trustee; or
(i) to provide for the procedures required to permit the utilization
of a noncertificated system of registration for any series or tranche of
Indenture Securities; or
(j) to change any place or places where (1) the principal of and
premium, if any, and interest, if any, on Indenture Securities of any
series, or any tranche thereof, shall be payable, (2) Indenture Securities
of any series, or any tranche thereof, may be surrendered for registration
of transfer, (3) Indenture Securities of any series, or any tranche
thereof, may be surrendered for exchange and (4) notices and demands to or
upon Grand Court in respect of the Indenture Securities of any series, or
any tranche thereof, and the Indenture may be served; or
(k) to cure any ambiguity, defect or inconsistency or to make any
other changes or to add other provisions with respect to matters and
questions arising under the Indenture, provided such other changes shall
not adversely affect the interests of the Holders of Indenture Securities
of any series or tranche in any material respect. (See Section 1201.)
Without limiting the generality of the foregoing, if the Trust Indenture
Act is amended after the date the Indenture was originally executed in such a
way as to require changes to the Indenture or the incorporation therein of
additional provisions or so as to permit changes to, or the elimination of,
provisions which, at the date the Indenture was originally executed or at any
time thereafter, were required by the Trust Indenture Act to be contained in the
Indenture, the Indenture will be deemed to have been amended so as to conform to
such amendment or to effect such changes or elimination, and Grand Court and the
Trustee may, without the consent of any Holders, enter into one or more
supplemental indentures to effect or evidence such amendment.
Except as provided above, the consent of the Holders of not less than a
majority in aggregate principal amount of the Indenture Securities of all series
then Outstanding under the Indenture, considered as one class, is required for
the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, the Indenture pursuant to an indenture or
supplemental indenture; provided, however, that if less than all of the series
of Outstanding Indenture Securities are directly affected by a proposed
supplemental indenture, then the consent only of the Holders of a majority in
aggregate principal amount of the Outstanding Indenture Securities of all series
so directly affected, considered as one class, will be required; and provided,
further, that if the Indenture Securities of any series have been issued in more
than one tranche and if the proposed supplemental indenture directly affects the
rights of the Holders of Indenture Securities of one or more, but less than all,
of such tranches, then the consent only of the Holders of a majority in
aggregate principal amount of the Outstanding Indenture Securities of all
tranches so directly affected, considered as one class, will be required; and
provided, further, that no such amendment or modification may, without the
consent of the Holder of each Outstanding Indenture Security directly affected
thereby, (a) change the stated maturity of the principal of, or any installment
of principal of or interest on, any Indenture Security (other than pursuant to
the terms thereof), or reduce the principal amount thereof or the rate of
interest thereon (or the amount of any installment of interest thereon) or
change the method of calculating such rate or reduce any premium payable upon
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the redemption thereof, or reduce the amount of the principal of a discount
security that would be due and payable upon a declaration of acceleration or
maturity or change the coin or currency (or other property) in which any
Indenture Security or any premium or the interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment on or after
the stated maturity thereof (or, in the case of redemption, on or after the
redemption date), (b) reduce the percentage in principal amount of the
Outstanding Indenture Securities of any series or tranche the consent of the
Holders of which is required for any supplemental indenture or waiver of
compliance with any provision of the Indenture or any default thereunder and its
consequences or to reduce the requirements for quorum and voting under the
Indenture or (c) modify certain of the provisions in the Indenture relating to
supplemental indentures, waivers of certain covenants and waivers of past
defaults.
A supplemental indenture which changes or eliminates any covenant or other
provision of the Indenture which has expressly been included solely for the
benefit of Holders of, or which is to remain in effect only so long as there
shall be Outstanding, Indenture Securities of one or more particular series or
one or more tranches thereof, or which modifies the rights of the Holders of
Indenture Securities of such series or tranches with respect to such covenant or
other provision, will be deemed not to affect the rights under the Indenture of
the Holders of Indenture Securities of any other series or tranche. (See
Section 1202.)
The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Indenture Securities have given or
taken any request, demand, authorization, direction, notice, consent, waiver or
other action under the Indenture as of any date or are present at a meeting of
Holders for quorum purposes, certain Indenture Securities, including those for
whose payment or redemption money has been deposited or set aside in trust for
the Holders as described under "Satisfaction and Discharge" below, will not be
deemed to be Outstanding for purposes of the Indenture (See Section 101.)
Grand Court will be entitled to set any day as a record date for the
purpose of determining the Holders of Outstanding Indenture Securities of any
series entitled to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action under the Indenture, in the manner and
subject to the limitations provided in the Indenture. In certain circumstances,
the Trustee also will be entitled to set a record date for action by Holders. If
a record date is set for any action to be taken by Holders of particular
Indenture Securities, such action may be taken only by persons who are Holders
of such Indenture Securities on the record date. (See Section 104.)
SATISFACTION AND DISCHARGE
Any Indenture Securities or any portion of the principal amount thereof
will be deemed to have been paid for purposes of the Indenture, and at Grand
Court's election, the entire indebtedness of Grand Court in respect thereof will
be satisfied and discharged, if there shall have been irrevocably deposited with
the Trustee or any Paying Agent (other than Grand Court), in trust: (a) money in
the amount which will be sufficient, or (b) in the case of a deposit made prior
to the maturity of such Indenture Securities, Government Obligations (as defined
below), which do not contain provisions permitting the redemption or other
prepayment thereof at the option of the issuer thereof, the principal of and the
interest on which when due, without any regard to reinvestment thereof, will
provide monies which, together with the money, if any, deposited with or held by
the Trustee or such Paying Agent, will be sufficient, or (c) a combination of
(a) and (b) which will be sufficient, to pay when due the principal of and
premium, if any, and interest due and to become due on such Indenture Securities
or portions thereof on and prior to the maturity thereof. (See Section 701.) For
this purpose, Government Obligations include (a) direct obligations of the
United States of America or of an agency or instrumentality of the United States
of America where the payments thereunder are unconditionally guaranteed as a
full faith and credit obligation by the United States of America or (b)
depository receipts issued by a bank with respect to any such obligations or in
any specific interest or principal payments due in respect thereof.
The Indenture will be deemed to have been satisfied and discharged when no
Indenture Securities remain Outstanding thereunder and Grand Court has paid or
caused to be paid all other sums payable by Grand Court under the Indenture.
(See Section 702.)
All moneys paid by Grand Court to the Trustee or any Paying Agent for the
payment of the principal of or any premium or interest on any Indenture Security
which remain unclaimed at the end of two years after such principal, premium or
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interest has become due and payable will be paid to or upon the order of Grand
Court, and the Holder of such Indenture Security thereafter may look only to
Grand Court for payment thereof. (See Section 603.)
RESIGNATION OF THE TRUSTEE
The Trustee may resign at any time by giving written notice thereof to
Grand Court or may be removed at any time by Act of the Holders of a majority in
principal amount of the then Outstanding Indenture Securities of any series
delivered to the Trustee and Grand Court. No resignation or removal of the
Trustee and no appointment of a successor trustee will become effective until
the acceptance of appointment by a successor trustee in accordance with the
requirements of the Indenture. So long as no Event of Default or event which,
after notice or lapse of time, or both, would become an Event of Default has
occurred and is continuing and except with respect to a Trustee appointed by Act
of the Holders, if Grand Court has delivered to the Trustee a resolution of its
Board of Directors appointing a successor trustee and such successor has
accepted such appointment in accordance with the terms of the Indenture, the
Trustee will be deemed to have resigned and the successor will be deemed to have
been appointed as trustee in accordance with the Indenture. (Section 910).
THE TRUSTEE
In addition to acting as Trustee under the Indenture, The Bank of New York
acts as escrow agent, registrar and paying agent with respect to various secured
and unsecured debt securities of Grand Court.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain United States income tax
considerations of the acquisition, ownership and disposition of the New Notes,
and is based on the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed Treasury regulations promulgated thereunder
("Regulations"), administrative rulings and judicial decisions, all as in effect
as of the date of this prospectus. Such authorities may be repealed, revoked or
modified with possible retroactive effect so as to result in federal income tax
consequences different from those discussed below. Except where otherwise noted,
this discussion deals only with New Notes held as capital assets (within the
meaning of Code section 1221) by holders that acquired the new notes by
exchanging under the terms of this exchange offer, old notes acquired at
original issuance, and not with special classes of holders such as banks,
insurance companies, dealers in securities or currencies, traders in securities
that elect to mark to market, tax-exempt organizations, persons holding the New
Notes as part of a straddle, hedging or conversion transaction, or persons whose
functional currency is not the U.S. dollar. All persons considering the purchase
of the New Notes are advised to consult their own tax advisors concerning the
consequences, in their particular circumstances, under the Code and the laws of
any other taxing jurisdiction, of the acquisition, ownership and disposition of
the New Notes.
TAX CONSEQUENCES TO U.S. HOLDERS
As used herein, the term "U.S. Holder" means a beneficial owner of a New
Note that is for United States federal income tax purposes (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (c) an estate the income of which is subject to United
States federal income tax without regard to its source, or (d) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. A "Non-U.S. Holder"
is a beneficial owner of the New Notes that is not a U.S. Holder.
Exchange of Old Notes for New Notes
An exchange of Old Notes for New Notes should not constitute a taxable
event for federal income tax purposes because the New Notes should not be
considered to differ materially in kind or extent from the Old Notes. Rather,
the New Notes should be treated as a continuation of the Old Notes in the hands
of a U.S. Holder. As a result, U.S. Holders who exchange their Old Notes for New
Notes should not recognize any income, gain or loss for federal income tax
purposes with respect to such exchange, and a U.S. Holder will have the same tax
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basis in the New Notes as such U.S. Holder had in the Old Notes. A U.S. Holder
must include the holding period of the Old Note in determining the holding
period of the New Note.
Payments of Interest on the New Notes
For U.S. federal income tax purposes, the New Notes will be treated as
indebtedness of Grand Court. Stated interest on a New Note will generally be
taxable to a U.S. Holder as ordinary income at the time it is paid or accrued in
accordance with the U.S. Holder's method of accounting for tax purposes.
Sale, Exchange, or Redemption of the New Notes
Upon the sale, exchange or redemption of a New Note, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange, or redemption (other than amounts attributable to accrued
but unpaid interest), and such U.S. Holder's adjusted tax basis in the New Note.
A U.S. Holder's adjusted tax basis in a New Note will be, in general, the issue
price of the Old Note. Such gain or loss will be capital gain or loss, and will
be long term capital gain or loss if at the time of the sale, exchange or
redemption, the New Notes have been held for more than one year. The net capital
gains of individuals are taxed, under certain circumstances, at lower rates than
ordinary income. The deductibility of capital losses is subject to limitations.
Information Reporting and Backup Withholding
In general, information reporting will apply to certain payments of
principal and interest on the New Notes, and to payments of the proceeds upon
the sale of the New Notes to U.S. Holders other than certain exempt recipients
(such as corporations). A 31% backup withholding tax will apply to such payments
if the U.S. Holder:
(a) fails to provide a taxpayer identification number ("TIN"),
(b) furnishes an incorrect TIN,
(c) is notified by the Internal Revenue Service ("IRS") that it has
failed to properly report payments of interest and dividends, or
(d) under certain circumstances, fails to certify, under penalty of
perjury, that it has furnished a correct TIN and has not been notified by
the IRS that it is subject to backup withholding.
In the case of interest paid after December 31, 2000, a U.S. Holder
generally will be subject to backup withholding at a 31% rate unless certain IRS
certification procedures are complied with directly or through an intermediary.
Grand Court will furnish annually to the IRS and to record holders of the New
Notes (other than with respect to certain exempt holders) information relating
to interest paid during the calendar year.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such U.S. Holder's U.S. federal income tax
liability provided the required information is furnished to the IRS.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Payments of Interest on the New Notes
Subject to the discussion below concerning backup withholding, no
withholding of United States federal income tax will be required with respect to
the payment by Grand Court or any paying agent of principal or interest on a New
Note held by a Non-U.S. Holder, provided that the beneficial owner:
(a) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of Grand Court entitled to
vote within the meaning of Section 871(h)(3) of the Code and the
regulations thereunder,
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(b) is not a controlled foreign corporation related, directly or
indirectly, to Grand Court through stock ownership,
(c) is not a bank whose receipt of interest on a new note is described
in Section 881(c)(3)(A) of the Code and
(d) satisfies the statement requirement (described generally below)
set forth in Section 871(h) and Section 881(c) of the Code and the
Regulations thereunder.
To satisfy the requirement referred to in (d) above, the beneficial owner
of a New Note, or a financial institution holding the New Note on behalf of such
owner, must provide, in accordance with specified procedures, Grand Court or its
paying agent with a statement to the effect that the beneficial owner is not a
U.S. person. These requirements will be met if (x) the beneficial owner provides
his name and address, and certifies, under penalties of perjury, that he is not
a U.S. person (which certification may be made on an IRS Form W-8 (or successor
form) or (y) a financial institution holding the New Note on behalf of the
beneficial owner certifies, under penalties of perjury, that such statement has
been received by it and furnishes a paying agent with a copy thereof.
In the event that any of the above requirements are not satisfied, Grand
Court will nonetheless not withhold federal income tax on interest paid to a
Non-U.S. Holder if it receives IRS Form 4224 (or, after December 31, 2000, a
Form W-8) from that Non-U.S. Holder, establishing that such income is
effectively connected with the conduct of a trade or business in the United
States, unless Grand Court has knowledge to the contrary. Interest paid to a
Non-U.S. Holder (other than a partnership) that is effectively connected with
the conduct by the holder of a trade or business in the United States is
generally taxed at the graduated rates that are applicable to United States
persons. In the case of a Non-U.S. Holder that is a corporation, such
effectively connected income may also be subject to the United States federal
branch profits tax (which is generally imposed on a foreign corporation on the
deemed repatriation from the United States of effectively connected earnings and
profits) at a 30% rate (unless the rate is reduced or eliminated by an
applicable income tax treaty and the Non-U.S. Holder is a qualified resident of
the treaty country).
Sale, Exchange or Redemption of the New Notes
A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale, exchange or redemption of
New Notes unless:
(a) the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the United States,
(b) in the case of a Non-U.S. Holder who is an individual and hold the
New Notes as capital assets, such holder is present in the United States
for 183 or more days in the taxable year of the sale or other disposition
and certain other conditions are met, or
(c) the Non-U.S. Holder is subject to tax pursuant to certain
provisions of the Code applicable to United States expatriates.
Gains derived by a Non-U.S. Holder (other than a partnership) from the sale
or other disposition of New Notes that are effectively connected with the
conduct by the Holder of a trade or business in the United States are generally
taxed at the graduated rates that are applicable to United States persons. In
the case of a Non-U.S. Holder that is a corporation, such effectively connected
income may also be subject to the United States branch profits tax. If any
individual Non-U.S. Holder falls under clause (b) in the preceding paragraph,
such holder will be subject to a flat 30% tax on the gain derived from the sale
or other disposition, which may be offset by United States source capital losses
recognized within the same taxable year as such sale or other disposition
(notwithstanding the fact that he is not considered a resident of the United
States).
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Information Reporting and Backup Withholding
No information reporting or backup withholding will be required with
respect to payments made by Grand Court or any paying agent to Non-U.S. Holders
if a statement described in (d) in the first paragraph under "Payments of
Interest on the New Notes" on page 83 has been received and the payor does not
have actual knowledge that the beneficial owner is a United States person.
Information reporting and backup withholding will not apply to interest on
a New Note paid or collected by a custodian, nominee, or agent on behalf of the
beneficial owner of such New Note if such custodian, nominee, or agent has
documentary evidence in its records that the beneficial owner is not a U.S.
person and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption.
Payments on the sale, exchange or other disposition of a New Note made to
or through a foreign office of a broker generally will not be subject to backup
withholding. However, payments made by a broker that is a United States person,
a controlled foreign corporation for United States federal income tax purposes,
a foreign person 50 percent or more of whose gross income is effectively
connected with a United States trade or business for a specified three year
period, or (with respect to payments after December 31, 2000) a foreign
partnership with certain connections to the United States, will be subject to
information reporting unless the broker has in its records documentary evidence
that the beneficial owner is not a United States person and certain other
conditions are met, or the beneficial owner otherwise establishes an exemption.
Backup withholding may apply to any payment that such broker is required to
report if the broker has actual knowledge that the payee is a United States
person. Payments to or through the United States office of a broker will be
subject to information reporting and backup withholding unless the Holder
certifies, under penalties of perjury, that it is not a United States person or
otherwise establishes an exemption.
For payments made after December 1, 2000, with respect to New Notes held by
foreign partnerships, IRS regulations require that the certification described
in (d) in the first paragraph under "Payments of Interest on the New Notes" on
page 83 be provided by the partners, rather than by the foreign partnership, and
that the partnership provide certain information, including a United States
taxpayer identification number. A look-through rule will apply in the case of
tiered partnerships.
Non-U.S. Holders should consult their tax advisors regarding the
application of information reporting and backup withholding in their particular
situations, the availability of an exemption therefrom, and the procedures for
obtaining such an exemption, if available. Any amounts withheld under the backup
withholding rules will be allowed as a refund or credit against the Non-U.S.
Holder's U.S. federal income tax liability and may entitle such Holder to a
refund, provided the required information is furnished to the IRS.
PLAN OF DISTRIBUTION
Except as described below, a broker-dealer may not participate in the
Exchange Offer in connection with a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account in the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities.
Grand Court will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account in
the Exchange Offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Notes. Any broker-dealer that resells New Notes that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such New Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of New Notes and any commissions or concessions
-78-
<PAGE>
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
Grand Court has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and expenses of
counsel for the holders of the New Notes.
ADDITIONAL INFORMATION
Grand Court is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and files annual,
quarterly and other reports with the Securities and Exchange Commission (the
"SEC"). You may read and copy these reports at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, and the Regional Offices of
the SEC located at 500 West Madison Street, 14th Floor, Chicago, Illinois
60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. You
may obtain information on the operation of the SEC's public reference rooms by
calling the SEC at 1-800-SEC-0330. You may obtain copies of such documents from
the Public Reference Section of the SEC at prescribed rates by writing to it at
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains an Internet
site (http://www.sec.gov.) that contains Grand Court's reports and other
information filed with the SEC.
EXPERTS
The financial statements included in this prospectus and in the
registration statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein and in the registration statement, and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting.
-79-
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
PAGE
AUDITED FINANCIAL STATEMENTS
- ----------------------------
Independent Auditors' Report ..............................................F-2
Consolidated Balance Sheets as of January 31, 1998 and 1999 ...............F-3
Consolidated Statements of Operations for the Years Ended
January 31, 1997, 1998 and 1999 ...........................................F-4
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended January 31, 1997, 1998 and 1999 ...........................F-5
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1997, 1998 and 1999 ...........................................F-6
Notes to Consolidated Financial Statements ................................F-7
UNAUDITED FINANCIAL STATEMENTS
- ------------------------------
Consolidated Balance Sheets as of January 31, 1999 and July 31, 1999 ......F-20
Consolidated Statements of Operations for the three and six months
ended July 31, 1998 and 1999 ..............................................F-21
Consolidated Statements of Cash Flows for the six months
ended July 31, 1998 and 1999 ..............................................F-22
Notes to Consolidated Financial Statements ................................F-23
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Grand Court Lifestyles, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1999, in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
June 25, 1999
F-2
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------
<S> <C> <C>
1998 1999
---- ----
ASSETS
Cash and cash equivalents....................................$ 11,964,000 $ 22,784,000
Notes and receivables - net.................................. 231,140,000 227,104,000
Investments in partnerships.................................. 3,924,000 4,945,000
Construction-in-progress..................................... 26,241,000 11,617,000
Property, buildings and equipment - net . . . -- 35,294,000
Other assets - net........................................... 22,530,000 17,570,000
------------------- -------------------
Total assets...........................................$ 295,799,000 $ 319,314,000
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans and accrued interest payable...........................$ 161,850,000 $ 169,781,000
Construction and mortgage loans payable...................... 22,595,000 35,286,000
Notes and commissions payable................................ 5,299,000 4,158,000
Other liabilities............................................ 3,531,000 5,767,000
Deferred income.............................................. 76,112,000 68,596,000
------------------- -------------------
Total liabilities...................................... 269,387,000 283,588,000
------------------- -------------------
Commitments and contingencies................................
Stockholders' equity:
Preferred Stock, $.001 par value - authorized 15,000,000
shares; none issued and outstanding ...................... -- --
Common Stock, $.01 par value - authorized 40,000,000
shares; issued and outstanding 15,000,000 and
17,800,000 shares, respectively .......................... 150,000 178,000
Paid-in capital.............................................. 51,189,000 73,451,000
Accumulated deficit.......................................... (24,927,000) (37,903,000)
------------------- -------------------
Total Stockholders' Equity................................... 26,412,000 35,726,000
------------------- -------------------
Total liabilities and stockholders' equity.............$ 295,799,000 $ 319,314,000
=================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------------------------------------
<S> <C> <C> <C>
1997 1998 1999
---- ---- ----
Revenues:
Sales..................................................$ 36,021,000 $ 38,135,000 $ 58,010,000
Syndication fee income................................. 7,690,000 7,923,000 7,283,000
Deferred income earned................................. 5,037,000 7,254,000 3,701,000
Interest income........................................ 13,773,000 12,051,000 12,349,000
Property management fees
from related parties................................ 2,093,000 3,684,000 3,219,000
Equity in earnings from partnerships................... 423,000 541,000 685,000
Senior living revenues................................. -- -- 5,093,000
Other income........................................... -- 4,683,000 1,350,000
------------------ ----------------- ------------------
65,037,000 74,271,000 91,690,000
------------------ ----------------- ------------------
Costs and Expenses:
Cost of sales.......................................... 34,019,000 33,635,000 53,547,000
Selling................................................ 7,176,000 7,602,000 6,335,000
Interest............................................... 16,394,000 19,409,000 22,066,000
General and administrative............................. 7,796,000 8,437,000 10,388,000
Loss on impairment of
notes and receivables............................... 18,442,000 -- --
Write-off of registration costs........................ -- 3,107,000 --
Officers' compensation................................. 1,200,000 1,200,000 1,200,000
Senior living operating Expenses....................... -- -- 6,098,000
Depreciation and Amortization.......................... 3,331,000 3,340,000 5,032,000
------------------ ----------------- ------------------
88,358,000 76,730,000 104,666,000
------------------ ----------------- ------------------
Net loss $ (23,321,000) $ (2,459,000) $ (12,976,000)
================== ================= ==================
Loss per common share (basic and diluted) .............$ (1.55) $ (0.16) $ (0.74)
================== ================= ==================
Weighted average
common shares used.................................. 15,000,000 15,000,000 17,455,000
================== ================= ==================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
COMMON COMMON STOCK ACCUMULATED
STOCK (SHARES) (DOLLARS) PAID-IN CAPITAL DEFICIT TOTAL
--------------------- --------- --------------- -------------- -----
Stockholders' equity
January 31, 1996................... 15,000,000 $ 150,000 $ 34,635,000 $ -- $ 34,785,000
Net loss.............................. -- -- (1,647,000) (21,674,000) (23,321,000)
Capital contribution.................. -- -- 21,333,000 -- 21,333,000
Distributions......................... -- -- -- (794,000) (794,000)
-------------- ----------- --------------- ------------ -------------
Stockholders' equity
January 31, 1997................... 15,000,000 150,000 54,321,000 (22,468,000) 32,003,000
Net loss.............................. -- -- -- (2,459,000) (2,459,000)
Distributions......................... -- -- (3,132,000) -- (3,132,000)
-------------- ----------- --------------- ------------ -------------
Stockholders' equity,
January 31, 1998................... 15,000,000 150,000 51,189,000 (24,927,000) 26,412,000
Net loss.............................. -- -- -- (12,976,000) (12,976,000)
------------
Sale of 2,800 shares, net
of expenses of $4,310.............. 2,800,000 28,000 22,262,000 -- 22,290,000
-------------- ----------- --------------- ------------ -------------
Stockholders' equity,
January 31, 1999................... 17,800,000 $ 178,000 $ 73,451,000 $ (37,903,000) $ 35,726,000
============== =========== =============== ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------------------
<S> <C> <C> <C>
1997 1998 1999
---- ---- ----
Cash flows from operating activities:
Net loss............................................................ $ (23,321,000) $ (2,459,000) $ (12,976,000)
-------------- -------------- ----------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 3,331,000 3,340,000 5,032,000
Loss on impairment of notes and Receivables......................... 18,442,000 -- --
Reduction to allowance for uncollectible notes receivable........... -- (1,023,000) --
Deferred income earned.............................................. (5,037,000) (7,254,000) (3,701,000)
Write-off of registration costs..................................... -- 3,107,000 --
Other income (non-cash)............................................. -- (3,132,000) --
Adjustments for changes in assets and liabilities:
Accrued interest on notes and receivables .......................... 715,000 (3,611,000) (1,780,000)
Notes and receivables............................................... 3,981,000 (4,107,000) 5,816,000
Commissions payable................................................. 211,000 (503,000) 62,000
Other liabilities................................................... 375,000 (862,000) 2,236,000
Deferred income..................................................... 3,766,000 5,195,000 (3,815,000)
-------------- -------------- ----------------
25,784,000 (8,850,000) 3,850,000
-------------- -------------- ----------------
Net cash provided by (used in) operating activities.................... 2,463,000 (11,309,000) (9,126,000)
-------------- -------------- ----------------
Cash flows from investing activities:
Increase in investments................................................ (449,000) (868,000) (1,021,000)
Property, buildings and equipment ..................................... -- -- (10,803,000)
Increase in construction-in-progress................................... (6,742,000) (19,499,000) (10,170,000)
-------------- --------------
Net cash used in investing Activities............................... (7,191,000) (20,367,000) (21,994,000)
-------------- -------------- ----------------
Cash flows from financing activities:
Payments on loans payable.............................................. (55,340,000) (44,178,000) (41,290,000)
Proceeds from loans payable ........................................... 57,874,000 63,400,000 49,221,000
Proceeds from construction and mortgage loans payable.................. 2,750,000 19,845,000 12,691,000
Increase and decrease in other assets.................................. (3,433,000) (13,624,000) 231,000
Payments of notes payable.............................................. (179,000) (434,000) (1,521,000)
Proceeds from notes payable ........................................... -- 4,520,000 318,000
Net proceeds from initial public offering.............................. -- -- 22,290,000
Distributions.......................................................... (794,000) -- --
-------------- -------------- ----------------
Net cash provided by financing activities........................... 878,000 29,529,000 41,940,000
-------------- -------------- ----------------
Increase (decrease) in cash and cash equivalents.......................... (3,850,000) (2,147,000) 10,820,000
Cash and cash equivalents, beginning of year.............................. 17,961,000 14,111,000 11,964,000
-------------- -------------- ----------------
Cash and cash equivalents, end of year.................................... $ 14,111,000 $ 11,964,000 $ 22,784,000
============== ============== ================
Supplemental Disclosures of Cash Flow Information:
Interest paid.......................................................... $ 16,739,000 $ 19,396,000 $ 21,482,000
============== ============== ================
Non-cash capital contribution.......................................... $ 21,333,000 $ -- $ --
============== ============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
Grand Court Lifestyles, Inc. and subsidiaries (the "Company") was formed
pursuant to the merger of various Sub-chapter S corporations which were wholly
owned by certain principal stockholders of the Company (the "Principal
Stockholders") and the transfer of certain assets by and assumption of certain
liabilities of (i) a partnership that was wholly owned by the Principal
Stockholders and (ii) the Principal Stockholders individually. In exchange for
the transfer of such stock, assets and liabilities, the Principal Stockholders
received shares of the Company's common stock. These transactions are
collectively called the "reorganization". All of the assets and liabilities were
transferred at historical cost. The reorganization was effective as of April 1,
1996 and, accordingly, accumulated deficit represents results of operations
subsequent to that date. Prior to the reorganization, the various Sub-chapter S
corporations and the partnership, which were wholly owned by the Principal
Stockholders, were historically reported on a combined basis.
The Company (i) filed a Restated Certificate of Incorporation on March 13, 1997
that provides for, among other things, the authorization of 40,000,000 shares of
Common Stock and 15,000,000 shares of Preferred Stock, (ii) on March 13, 1997
effected an approximate 1,626.19-for-1 stock split of the issued and outstanding
Common Stock (all shares have been restated for prior periods) and (iii) adopted
a Stock Option Plan reserving for issuance up to 2,500,000 shares of Common
Stock pursuant to stock options and other stock awards. (See Footnote 15).
LINES OF BUSINESS - The Company, a fully integrated provider of senior living
accommodations and services, acquires, develops and manages senior living
communities in 15 states in the Sun Belt and the Midwest. The Company's revenues
have been and are expected to continue to be primarily derived from sales of
partnership interests ("Syndications") in partnerships it organizes to acquire
existing senior living communities ("Syndicated Communities"). As a result of
the Company's Syndication activities, limited partnerships ("Senior Living
Investing Partnerships") are formed whereby the Company retains a 1% to 1.5%
general partnership interest. Investing Partnerships generally own a 98.5% to
99% interest in partnerships that own senior living communities ("Senior Living
Owning Partnerships"). The Company also arranges for the mortgage financing of
the Syndicated Communities and is involved in the development and management of
senior living communities. The Company has established a development program
(the "Development Plan") pursuant to which it (i) is building new senior living
communities ("Development Communities") of which seven are complete and in their
initial lease up phase (individually a "Development Community" and cumulatively
the "Development Communities") and (ii) has commenced construction on four
additional Development Communities, all of which are in Texas. The Company owns
the completed Development Communities or operates them pursuant to long-term
leases. Another source of income is interest income on notes receivable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers cash and cash equivalents to
include cash on hand, demand deposits and highly liquid investments with
maturities of three months or less.
REVENUE RECOGNITION - Revenue from Syndications is recognized under the full
accrual method of accounting when the profit on the transaction is determinable,
that is, the collectibility of the sales price is reasonably assured and the
earnings process is virtually complete. The profit recognized has been reduced
by the estimated maximum reasonably possible exposure to loss. Revenue from
Syndications includes any syndication fees earned by the Company. The Company
determines the collectibility of the sales price by evidence supporting the
buyers' substantial initial and continuing investment in the Syndicated
Communities, as well as other factors such as age, location and cash flow of the
underlying property. In addition, three of the Syndications have involved the
construction of additional apartment units and common space at the acquired
Syndicated Communities. The Senior Living 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.
F-7
<PAGE>
The Company has deferred income on sales to Senior Living Investing
Partnerships of interests in Senior Living Owning Partnerships. The Company has
arranged for the private placement of limited partnership interests in Senior
Living Investing Partnerships. Offerings of interests in Senior Living Investing
Partnerships which were formed to acquire controlling interests in Senior Living
Owning Partnerships provide that the limited partners are entitled to receive
for a period not to exceed five years distributions equal to between 11% and 12%
of their then paid-in scheduled capital contributions. Pursuant to management
contracts with the Senior Living Owning Partnerships, for such five-year period,
the Company is required to pay to the Senior Living Owning Partnerships, amounts
sufficient to fund (i) any operating cash deficiencies of such Senior Living
Owning Partnerships and (ii) any part of such 11% and 12% return not paid from
cash flow from the related property (which the Senior Living Owning Partnerships
distribute to the Senior Living Investing Partnerships for distribution to
limited partners) (collectively, "Management Contract Obligations"). The amount
of deferred income for each property is calculated in a multi-step process.
First, based on the property's cash flow in the previous fiscal year, the
probable cash flow for the property for the current fiscal year is determined
and that amount is initially assumed to be constant for each remaining year of
the Management Contract Obligations period (the "Initial Cash Flow"). The
Initial Cash Flow is then compared to the Management Contract Obligations for
the property for each remaining year of the five-year period. If the Initial
Cash Flow exceeds the Management Contract Obligations for any fiscal year, the
excess Initial Cash Flow is added to the assumed Initial Cash Flow for the
following fiscal year and this adjusted Initial Cash Flow is then compared to
the Management Contract Obligations for said following fiscal year. If the
Initial Cash Flow is less than the Management Contract Obligations for any
fiscal year, a deferred income liability is created in an amount equal to such
shortfall and no adjustment is made to the Initial Cash Flow for the following
year. Such deferred income liability represents the estimated maximum reasonably
possible exposure to loss as discussed above. As this process is performed for
each property on a quarterly basis, changes in a property's actual cash flow
will result in changes to the assumed Initial Cash Flow utilized in this process
and will result in increases or decreases to the deferred income liability for
an individual property. Any increase in deferred income liabilities increases
the cost of sales relating to the sale. The payment of the Management Contract
Obligations, however, will generally not result in the recognition of expense
unless the property's actual cash flow for the year is less than the expected
Initial Cash Flow for that year, as adjusted, and, as a result thereof, the
amount paid by the Company in respect of the Management Contract Obligations is
greater than the amount assumed in establishing the deferred income liability.
Such expense amounted to $2,500,000, $5,900,000 and $8,300,000 for the years
ended January 31, 1997, 1998 and 1999, respectively, and such expense is
included as a component of cost of sales. Although the Company does not intend
to do so in the future, from time to time, the Company has made discretionary
payments to Senior Living Owning Partnerships beyond the Management Contract
Obligations period for the purpose of making distributions to limited partners.
If, however, the property's actual cash flow is greater than the Initial Cash
Flow for the year, as adjusted, the Company's earnings will be enhanced by the
recognition of deferred income earned and, to the extent cash flow exceeds
Management Contract Obligations, incentive management fees. The Company
recognized such incentive management fees in the amount of $1,200,000,
$2,800,000 and $2,200,000 for the years ended January 31, 1997, 1998 and 1999,
respectively.
The Company accounted for the sales of interests in owning partnerships
which own multi-family properties ("Multi-Family Owning Partnerships") under the
installment method. Under the installment method the gross profit is determined
at the time of sale. The revenue recorded in any given year would equal the cash
collections multiplied by the gross profit percentage. At the time of sale, the
Company deferred all future income to be recognized on these transactions until
cash is received.
ALLOWANCE ON NOTES RECEIVABLE - In the event that the facts and circumstances
indicate that the collectibility of a note may be impaired, an evaluation of
recoverability is performed. If an evaluation is performed, the Company compares
the recorded value of the note and other partnership receivables, if any, to the
value of the underlying property less any encumbrances to determine if an
allowance is required for impairment. A significant portion of the interest
income on multi-family notes is recognized as cash is collected.
F-8
<PAGE>
ACCOUNTING ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
significant estimates and assumptions that affect the reported amount of assets
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
those of the Company and its subsidiaries. The effects of all significant
intercompany transactions have been eliminated.
DEFERRED LOAN COSTS - Costs incurred in connection with obtaining long-term
financing have been deferred and are amortized over the term of the financing.
CONSTRUCTION-IN-PROGRESS - Costs incurred in connection with the construction
and development of Development Communities prior to the completion of
construction are capitalized. Such costs include the capitalization of interest
during the construction period. If a project is discontinued or capitalized
costs are deemed not recoverable, the applicable capitalized project costs are
expensed.
INITIAL LEASE-UP COSTS - The Company has capitalized the initial lease-up costs
associated with the Development Communities placed in service based upon units
unavailable for rental.
DEPRECIATION AND AMORTIZATION - The Company depreciates and/or amortizes the
costs associated with its Development Communities using the straight-line method
over the life of the applicable asset.
INVESTMENTS - The Company accounts for its interests in Syndicated senior living
limited partnerships under the equity method of accounting. The Company uses
this method because as the general partner it can exercise significant influence
over the operating and financial policies of such partnerships. Under this
method, the Company records its share of income and loss of the entity as well
as any distributions or contributions as an increase or decrease to the
investment account. The carrying amount of the investments in limited
partnerships differs from the Company's underlying equity interest based upon
its stated ownership percentages. Such differences are attributable to the
disproportionate amount of money and notes invested in the entities by the
Company for its equity interest as compared to the other investors. This
difference is being amortized over the estimated life of the underlying
partnership. The unamortized portion of such difference is $2,515,000 and
$3,425,000 as of January 31, 1998 and 1999, respectively.
PROPERTY MANAGEMENT FEES - Property management fees earned for services provided
to related parties are recognized as revenue when related services have been
performed.
RECLASSIFICATIONS - Certain amounts in prior years have been reclassified to
conform with current year presentation.
EARNINGS PER SHARE - Earnings per share on a basic and diluted basis, as
required by Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share", is calculated based upon the average shares outstanding
during the periods. The effect of stock options outstanding during fiscal 1998
is anti-dilutive.
COMPREHENSIVE INCOME - SFAS No. 130, "Reporting Comprehensive Income", requires
the reporting of all items which are required to be recognized under generally
accepted accounting principles as components of comprehensive income in the
financial statements. The Company has no items of comprehensive income.
STOCK OPTIONS AND COMPENSATION - Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation". The Company applies the
intrinsic value-based methodology permitted by SFAS No. 123 in accounting for
stock options issued to employees. Under the intrinsic value-based methodology,
stock-based compensation cost is the excess of the quoted market price of the
Company's common stock at the grant date over the amount the employee must pay
for the stock (exercise price). The Company generally grants stock options with
an exercise price equal to the stock price at the date of grant and,
accordingly, no compensation cost is recognized.
F-9
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS - In June of 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement established 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 two specific debt financings. While the Company has not
completed its analysis of SFAS 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.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is unable to determine the fair value of its notes and
receivables as such instruments do not have a ready market. Other financial
instruments are believed to be stated at approximately their fair value.
4. NOTES AND RECEIVABLES
Notes and other receivables are from related parties, primarily Syndicated
partnerships, and consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------------------------
<S> <C> <C>
1998 1999
Notes receivable-- multi-family (a)(e)................................. $ 173,598,000 $ 166,562,000
Notes and accrued interest receivable
--senior living (b).................................................. 6,503,000 6,776,000
Other partnership receivables (c)(e)................................... 60,265,000 63,313,000
Accrued interest receivable............................................ 883,000 562,000
------------------- -------------------
241,249,000 237,213,000
Less allowance for uncollectible receivables (d)....................... 10,109,000 10,109,000
$ 231,140,000 $ 227,104,000
=================== ===================
</TABLE>
At January 31, 1998 and 1999, the carrying value of impaired notes receivable,
net of related deferred income, was approximately $41,106,000 and $29,721,000,
respectively. Interest income on impaired notes is recognized on the cash basis.
Such income recognized was $1,261,000, $1,342,000 and $826,000 for the years
ended January 31, 1997, 1998 and 1999, respectively.
(a) The Company has notes receivable from the partnerships which were
formed to acquire controlling interests in Multi-Family Owning Partnerships
which own multi-family properties ("Multi-Family Notes"). The Multi-Family Notes
generally have maturity dates ranging from ten to fifteen years from the year of
syndication. At January 31, 1999, 84 of the 157 notes (approximate face value
$80,386,000) have reached their final maturity dates and these final maturity
dates have been extended by the Company. Two multi-family properties relating to
two extended Multi-Family Notes were refinanced, five multi-family properties
relating to eight previously extended Multi-Family Notes were sold in fiscal
1998 and a contract to sell one multi-family property and letters of intent to
sell two multi-family properties whose notes have been extended have been
executed. It is the Company's intention to collect the principal and interest
payments on the Multi-Family Notes from the cash flows distributed by the
related multi-family properties and the proceeds in the event of a sale or
refinancing. The Company expects to extend maturities of other Multi-Family
Notes. Interest income on all of the Multi-Family Notes amounted to $6,949,000,
$7,481,000 and $7,449,000 for the years ended January 31, 1997, 1998 and 1999,
respectively.
(b) The Company has notes receivable from the partnerships which were
formed to acquire controlling interests in Senior Living Owning Partnerships.
Such notes generally have interest rates ranging from 11% to 13.875% and are due
in installments over five years from the date of acquisition of the respective
partnership interests. The notes represent senior indebtedness of the related
Senior Living Investing Partnerships, and are collateralized by the respective
interests in the Senior Living Owning Partnerships. Principal and interest
payments on each note are also collateralized by the investor notes payable to
the Senior Living Investing Partnerships to which the investors are admitted.
Limited Partners are allowed to prepay their capital contributions. These
prepayments of capital contributions do not result in the prepayment of the
related purchase notes held by the Company. Instead, such amounts are loaned to
the Company at a rate of between 11% and 12% by the Senior Living Investing
Partnerships. As a result of such loans and the crediting provisions of the
related purchase agreements, the Company records the notes receivable
corresponding to the purchase notes net of such loans. Therefore, these
prepayments act to reduce the recorded value of the Company's notes receivable.
F-10
<PAGE>
(c) Other partnership receivables substantially represent reimbursable
expenses and advances made to the multi-family partnerships. These amounts do
not bear interest and have no specific repayment date. It is the Company's
intention to collect these receivables from the excess cash flows distributed by
the related multi-family properties and the proceeds in the event of a sale or
refinancing.
(d) Allowance for Uncollectible Notes Receivable
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at Beginning Charged to Costs and Reductions to
of Year Expenses Allowance Balance at End of Year
------- -------- --------- ----------------------
Year Ended January 31, 1997:
Allowance for notes receivable $14,023,000 $18,442,000 $21,333,000 $11,132,000
Year Ended January 31, 1998:
Allowance for notes receivable 11,132,000 -- 1,023,000 10,109,000
Year Ended January 31, 1999:
Allowance for notes receivable 10,109,000 -- -- 10,109,000
</TABLE>
The Multi-Family Notes relating to nine Multi-Family Owning Partnerships that
filed petitions under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11
Petitions") and the one Multi-Family Owning Partnership which lost its property
pursuant to an uncontested foreclosure sale of its property (said ten
Multi-Family Owning Partnerships are, collectively, the "Protected
Partnerships") were first deemed impaired when the mortgages on their respective
properties went into default, which defaults occurred between August 1989 and
June 1994. Once in default, the holders of these mortgages assigned them to the
United States Department of Housing and Urban Development ("HUD"). The Protected
Partnerships then attempted to negotiate, and in some cases obtained, workout
agreements with HUD. Although it could temporarily lower or suspend debt service
payments during the term of a workout agreement, HUD, unlike a conventional
lender, did not have the legal authority to restructure the defaulted mortgages
it holds by permanently lowering interest rates or reducing the principal amount
of such mortgages. HUD then sold the mortgages (subject to those workout
agreements which were in place) at auctions in September 1995 and June 1996.
Since the new mortgage holders did not have HUD's legal constraints as to the
restructuring of mortgages they hold, the Protected Partnerships began
negotiations with the new holders to restructure their mortgages or purchase
them at a discount. The Protected Partnerships could not reach an agreement with
the new mortgage holders and the new mortgage holders began to threaten and
institute foreclosure proceedings. The Principal Stockholders and one of their
affiliates transferred the partnership interests they owned personally in
various partnerships that own multi-family properties (the "Assigned Interests")
to the partnerships that owned interests in the Protected Partnerships in July
1996. Seven of the Protected Partnerships filed Chapter 11 Petitions in August
1996, two of the Protected Partnerships filed Chapter 11 Petitions in February
1997, and one of the Protected Partnerships did not file a Chapter 11 Petition
and allowed the holder of the mortgage to foreclose on its property due to the
unlikelihood of confirming a plan of reorganization. The Company established
appropriate reserves during these time periods to reflect the varying extent of
impairment of these Multi-Family Notes in view of the state of facts at such
time. In that the Principal Stockholders transferred the Assigned Interests in
July 1996, the Company recorded a $21,300,000 capital contribution in fiscal
1996. The bankruptcy petitions and risk of loss faced by the Protected
Partnerships resulted in the Company recording a non-cash loss of $18,400,000 in
the year ending January 31, 1997 (representing the recorded value of the notes
receivable relating to the Protected Partnerships, net of deferred income and
net of any previously established reserves) due to the deemed full impairment of
these notes receivable. Seven of the Chapter 11 petitions resulted in the
respective Protected Partnerships losing their properties through foreclosure or
voluntary conveyances of their properties. The remaining two Protected
Partnerships successfully emerged from their bankruptcy proceedings in January,
1998 by paying off their mortgages at a discount with the proceeds of new
mortgage financings, resulting in these properties having current, fully
performing mortgages. This allowed the Company to recognize non-cash other
income of $3,100,000 in fiscal 1997. The two partnerships related to these
Protected Partnerships have transferred the respective Assigned Interests back
to the Principal Stockholders and their affiliate. This transfer is recorded as
a non-cash distribution to the Principal Stockholders for the release of the
previously assigned collateral of $3,100,000. The Company neither owns nor
manages these properties, nor is the general partner of these Multi-Family
Owning Partnerships, but, rather, holds the related Multi-Family Notes as
receivables. The Company, therefore, has no liability in connection with these
mortgage defaults or bankruptcy proceedings.
F-11
<PAGE>
Fourteen of the Multi-Family Owning Partnerships remain in default on their
respective mortgages. These Multi-Family Owning Partnerships have been
negotiating with the respective mortgage lenders and, in some cases, have
obtained workout agreements with terms of from one to nine years, pursuant to
which the lenders generally agree during the term of the agreement not to take
any action regarding the mortgage default and to accept reduced debt service
payments for a period of time, with the goal of increasing property cash flow to
enable the property to fully service its mortgage. One of these fourteen
remaining Multi-Family Owning Partnerships whose mortgage is in default has had
its application to refinance its mortgage loan accepted and believes that the
refinancing will close. Other Multi-Family Owning Partnerships intend to cure
their mortgage defaults by refinancing their mortgages in the future, although
there can be no assurance that this will be the case. Furthermore, it should be
noted that in fiscal 1998 and previous years, six Multi-Family Owning
Partnerships whose mortgages had been in default, cured these defaults by
refinancing their mortgage debt with new mortgages and now have fully performing
mortgages. As of January 31, 1999, the recorded value, net of deferred income,
of the Multi-Family Notes and "Other Partnership Receivables" held by the
Company relating to these fourteen Multi-Family Owning Partnerships was
$29,721,000. The Company has established reserves of $10,100,000 to address the
possibility that these notes and receivables may not be collected in full.
(e) The multi-family properties were typically built or acquired with the
assistance of programs administered by HUD that provide mortgage insurance,
favorable financing terms and/or rental assistance payments to the owners. As a
condition to the receipt of assistance under these and other HUD programs, the
properties must comply with various HUD requirements including limiting rents on
these properties to amounts approved by HUD. Various initiatives have been
instituted by HUD, including a program to restructure its housing assistance
programs. 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), the Company cannot 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. Further, there can
be no assurance that changes in federal subsidies will not be more restrictive
than those currently proposed or that other changes in policy will not occur.
Any such changes could have an adverse effect on the Company's ability to
collect its receivables relating to the multi-family properties.
5. CONSTRUCTION-IN-PROGRESS
The Company has capitalized costs which include interest associated with
its construction and development of properties it is building. If a project is
discontinued, all capitalized project costs are expensed. Such interest
capitalized for the years ended January 31, 1998 and 1999 was $1,551,000 and
$1,849,000, respectively.
F-12
<PAGE>
6. PROPERTY, BUILDINGS AND EQUIPMENT - NET
Property, buildings and equipment -- net at January 31, 1999, are comprised
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Life Cost
---- ----
Land....................................................... __ $ 4,774,000
Buildings.................................................. 40 yrs 25,562,000
Equipment.................................................. 4-7 yrs 1,244,000
Leasehold improvements .................................... life of lease 4,017,000
Accumulated depreciation and amortization.................. (303,000)
----------------
Net property, buildings and equipment...................... $ 35,294,000
================
</TABLE>
7. OTHER ASSETS
Other assets are comprised as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------
<S> <C> <C>
1998 1999
---- ----
Deferred loan costs (a)....................................$ 9,681,000 $ 11,642,000
Investment in cooperative apartment building (b)........... 1,782,000 1,782,000
Unsold subscription units (c).............................. 111,000 --
Deferred registration costs (d)............................ 397,000 --
Investment held for resale (e)............................. 7,140,000 --
Other assets............................................... 3,419,000 4,146,000
---------------- ----------
$ 22,530,000 $ 17,570,000
================ ============
</TABLE>
(a) Financing costs of $5,325,000 and $6,501,000 were deferred during the
years ended January 31, 1998 and 1999, respectively. These costs are being
amortized over the term of the related debt using the straight-line method over
periods ranging from one to ten years.
(b) The Company owns shares in a cooperative apartment building and owns
interests in a second mortgage collateralized by such cooperative apartment
building.
(c) The Company had deferred $111,000 of remaining costs associated with
the financing of the acquisition of senior living communities by arranging for
the sale of partnership interests, which were substantially sold at January 31,
1998. Upon completion of these transactions, such costs were charged to cost of
sales.
(d) The Company had capitalized costs relating to the initial public
offering. These costs were charged against additional paid-in capital upon the
close of the initial public offering in March, 1998.
(e) The Company purchased a senior living community in December 1997 for
Syndication and syndicated such property in the first and second quarters of
fiscal 1998.
F-13
<PAGE>
8. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
JANUARY 31,
-------------------------------
1998 1999
---- ----
Banks (including mortgages) (a) (b) $ 35,706,000 $ 32,435,000
Other, principally debentures (c) 126,144,000 137,346,000
----------- -----------
$161,850,000 $169,781,000
=========== ===========
(a) The bank loans bear interest per annum at the banks' prime rates plus
1% to 3%. The bank loans generally have terms of at least one year, but in the
event a particular bank elects not to renew or extend the credit, the entire
unpaid balance is converted to a term loan which is payable in four to five
years. Generally, the bank loans are collateralized by the Company's interests
in the assigned limited partner investor notes which serve as collateral for the
respective purchase notes. The prime rate of interest at January 31, 1998 and
1999 was 8.5% and 7.75%, respectively.
(b) The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in the case of certain of such
obligations, certain Investing Partnerships, Owning Partnerships or affiliates
of the Company. Pursuant to one obligation, the Company is required to maintain
a net worth of no less than $35,300,000. Certain obligations of the Company
contain covenants requiring the Company to maintain maximum ratios of the
Company's liabilities to its net worth. As of January 31, 1999, the most
restrictive covenant requires that the Company maintain a ratio of liabilities
to consolidated net worth of no more than 10 to 1. In addition, certain
obligations of the Company provide that an event of default will arise upon the
occurrence of a material adverse change in the financial condition of the
Company or upon default in other obligations of the Company.
(c) Debentures are collateralized by various purchase notes and investor
notes related to pre-1986 Syndication of multi-family properties. All loans
mature in 1999 through 2005 and bear interest rates of 11% to 12% per annum.
Future annual maturities of all of the Company's loans payable, excluding
interest, over the next five years and thereafter, are as follows:
2000........................................$ 29,406,000
2001........................................ 35,253,000
2002........................................ 38,266,000
2003........................................ 22,076,000
2004........................................ 10,058,000
Thereafter.................................. 33,725,000
------------------
168,784,000
Accrued interest............................ 997,000
------------------
$ 169,781,000
9. CONSTRUCTION AND MORTGAGE LOANS PAYABLE
During the years ended January 31, 1998 and 1999, pursuant to the Company's
development plan, first mortgage loans were obtained to finance approximately
80% of the costs of developing six new senior living communities. The interest
rate on four of the loans equals the 30-day LIBOR plus 2.75% per annum. The
30-day LIBOR rate was 5.63% at January 31, 1999. The fifth loan bears interest
at the rate of the prime rate plus 1.5% per annum. The sixth loan bears interest
at the bank's prime rate for fifteen months then converts to LIBOR plus 2.75%
per annum for the following twenty four months. These loans mature between
November, 1999 and February, 2001. As of January 31, 1998 and 1999, total
funding under such first mortgage loans amounted to $13,345,000 and $26,036,000,
respectively.
F-14
<PAGE>
Pursuant to the Company's development program, two limited partnerships, in
each of which the Company holds a 1% general partnership interest, have issued
limited partnership interests for aggregate capital contributions of $9,250,000,
the net proceeds of which have been used to make second mortgage loans to the
Company to fund approximately 20% of the costs of developing three Development
Communities. Such second mortgage loans bear interest at the rate of 13.125% per
annum. These second mortgage loans mature between November, 2001 and March,
2002.
10. DEFERRED INCOME
Deferred income is comprised of:
JANUARY 31,
1998 1999
Multi-family $ 66,342,000 $ 58,760,000
Senior living(a) 9,770,000 9,836,000
----------------- -----------------
$ 76,112,000 $ 68,596,000
================= =================
(a) The aggregate gross amount (before considering the cash flow from the
properties) of Management Contract Obligations relating solely to returns to
limited partners for each of the fiscal years 1999 through 2003 based on
existing management contracts is $19,776,000, $19,881,000, $15,790,000,
$8,045,000 and $1,971,000, respectively. Such amounts of Management Contract
Obligations are calculated based upon scheduled capital contributions with
respect to fiscal years 1999 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. The cash flow generated by the related
properties is applied against the total Management Contract Obligations and any
remaining balance is established as deferred income at year-end.
11. STOCKHOLDERS' EQUITY
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 $22,300,000. The Company intends to
use approximately $19,300,000 of the net proceeds to finance the development of
new senior living communities and the remaining $3,000,000 for working capital.
As of January 31, 1999, $9,400,000 had been used to finance the development of
new senior living communities and $1,600,000 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.
In March 1999, the Board of Directors authorized the Company to purchase up
to 300,000 shares of the Company's Common Stock at prevailing market rates.
12. INCOME TAXES
The Company became a taxable entity as of April 1, 1996, and has incurred
losses since that date. The Company believes it is more likely than not that
deferred tax assets in excess of deferred tax liabilities may not be realizable
in future years. Accordingly, the Company has increased the valuation allowance
from $11,340,000 to $13,850,000. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amount used for income tax
purposes. The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
F-15
<PAGE>
JANUARY 31,
-----------------------------
Deferred tax assets: 1998 1999
---- ----
Notes and receivables $ 6,092,000 $ 6,260,000
Loans payable 2,000,000 2,000,000
Investment in partnerships 5,045,000 6,974,000
Net operating loss carryforward 3,847,000 7,441,000
Other 147,000 136,000
Total gross deferred tax assets 17,131,000 22,811,000
Less valuation allowance (11,340,000) (13,850,000)
------------ ----------
Deferred tax assets net of valuation
allowance 5,791,000 8,961,000
------------ ----------
Deferred tax liabilities:
Fixed assets -- 313,000
Deferred income 4,562,000 7,016,000
Other 1,229,000 1,632,000
------------
Total gross deferred tax liabilities 5,791,000 8,961,000
------------
Net deferred tax assets (liabilities) $ -- $ --
============ ==========
The net operating loss carryforward as of January 31, 1999 was approximately
$19,000,000. A substantial portion of such loss carryforward will expire January
31, 2013 and the remainder thereof will expire through January 31, 2019.
13. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring February, 2000.
Annual rent under such lease is approximately $206,000. The Company entered into
a ten-year lease for additional office space, commencing September 1, 1991. The
annual rent is approximately $330,000.
The Company is a general partner of all but one of the Senior Living Owning
Partnerships and the general partner of 37 of 46 Senior Living Investing
Partnerships. The mortgage financing of the Syndicated Communities and
Syndicated multi-family properties are generally without recourse to the general
credit or assets of the Company except with respect to certain specified
obligations, including, for example, costs incurred for the correction of
hazardous environmental conditions. However, except for such non-recourse
obligations, as a general partner, the Company, 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 $12,808,000 in principal amount of mortgage debt relating to
six Syndicated Communities and (ii) wholly-owned entities (whose only asset is a
specific general partner interest) are liable as general partners for
approximately $35,580,000 in principal amount of mortgage debt relating to seven
Syndicated Communities managed by the Company as of January 31, 1999. In the
case of the general partner liabilities of the wholly-owned entities (whose only
asset is a specific general partner interest), the only assets of the Company at
risk of loss are the interests in the wholly-owned entities.
As part of the Company's development program, on September 18, 1996 the
Company entered into a master development agreement with Capstone Capital
Corporation ("Capstone") pursuant to which Capstone will fund 100% of the
development cost of four Development Communities. The maximum amount Capstone
will fund per such agreement is approximately $37,764,000, of which $35,864,000
had been funded as of January 31, 1999.
The Capstone arrangement provides that the Company will operate these four
Development 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 five-year extension options. The cumulative annual base rent which
the Company is obligated to pay to Capstone for the four Development Communities
placed in service is $3,682,000 with 3% per annum annual increases.
F-16
<PAGE>
The Company is involved in 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.
14. RELATED PARTY TRANSACTIONS
The Company has transactions with related parties, primarily Syndicated
partnerships that are unconsolidated affiliates of the Company. The Company
provides management, accounting and bookkeeping services to such affiliates. The
Company receives a monthly fee in return for such management services rendered
on behalf of its affiliates for each of their senior living communities.
In addition, the Company has amounts due from unconsolidated affiliates of
$1,600,000 and $3,400,000 as of January 31, 1998 and 1999, respectively.
The Chairman of the Board and President of the Company and entities
controlled by them serve as general partners of partnerships directly and
indirectly owning multi-family properties and, on account of such general
partner status, have personal liability for recourse partnership obligations.
These two individuals also own small equity ownership interests in the
partnerships. The Company held notes receivable, aggregating $100,838,000, net
of deferred income, and receivables of $59,900,000 at January 31, 1999 that were
collateralized by the equity interests in such partnerships. These individuals
have provided personal guarantees for certain of the Company's investor note
debt and unsecured debt, and the obligations thereunder may continue. The
aggregate amount of such debt personally guaranteed by each is approximately
$32,493,000. In addition, such officers and certain employees will devote a
portion of their time to overseeing the third-party managers of multi-family
properties in which the Company has financial interests in that it holds the
related Multi-Family Notes, but in which such officers have equity interests and
the Company does not. These activities, ownership interests and general partner
interests create actual or potential conflicts of interest on the part of these
officers.
The Company is the managing general partner for most of the Senior Living
Owning Partnerships which own the Syndicated Communities managed by the Company.
The Company also is the general partner for most of the Senior Living Investing
Partnerships that own equity interests in these Senior Living Owning
Partnerships. In addition, the Company is the managing agent for all of the
Syndicated Communities in the Company's portfolio. The Company has arranged for
the acquisition of Syndicated Communities and other properties through the sales
of limited partnership interests in the Senior Living Investing Partnerships. By
serving in all of these capacities, the Company may have conflicts of interest
in that it has both a duty to act in the best interests of partners of various
partnerships, including the limited partners of the Investing Partnerships, and
the desire to maximize earnings for the Company's stockholders in the operation
of such Syndicated Communities.
During fiscal 1996, 1997 and 1998, the Company paid to Francine Rodin, the
wife of Bernard M. Rodin, the Company's Chief Operating Officer, President,
Chief Financial Officer and a Director, $204,000, $133,000 and $153,000,
respectively, as fees for introducing to the Company certain broker/dealers that
have assisted the Company in its Syndications of partnership interests and in
placing other securities offered by the Company. Mrs. Rodin will receive a fee
with respect to any future sales through such broker/dealers of Syndicated
partnership interests and other securities offered by the Company. During fiscal
1996, Mrs. Rodin received consulting fees of $49,000 in connection with
coordinating the Company's marketing efforts and travel arrangements. Mrs. Rodin
was an employee of the Company for the fiscal years 1997 and 1998, respectively,
and performed similar services.
The Company had loans receivable of $464,000 and $190,000 from the Chairman
of the Board and the President of the Company as of the end of fiscal 1997 and
1998, respectively.
15. 1996 STOCK OPTIONS AND PERFORMANCE AWARD PLAN
The Company has adopted the 1996 Stock Option and Performance Award Plan
(the "Plan"), which authorizes the granting to officers, key employees and
directors of the Company and any parent or subsidiary of the Company, of
incentive or non-qualified stock options, stock appreciation rights, performance
shares, restricted shares and performance units. Under the Plan, directors who
are not employees of the Company may not be granted incentive stock options. The
Company plans to reserve 2,500,000 shares of Common Stock for issuance pursuant
to the Plan.
F-17
<PAGE>
The Plan is administered by the Board of Directors. The Board of Directors
determines the prices and terms at which options may be granted. Options may be
exercisable in installments over the options period, but no options may be
exercised after ten years from the date of grant. Stock appreciation rights may
be granted in tandem with options or separately.
The exercise price of any incentive stock option granted to an eligible
employee may not be less than 100% of the fair market value of the shares
underlying such option on the date of grant, unless such employee owns more than
10% of the outstanding Common Stock or stock of any subsidiary or parent of the
Company, in which case the exercise price of any incentive stock option may not
be less than 110% of such fair market value. No option may be exercisable more
than ten years after the date of grant and, in the case of an incentive stock
option granted to an eligible employee owning more than 10% of the outstanding
Common Stock or stock of any subsidiary or parent of the Company, no more than
five years from its date of grant. Incentive stock options are not transferable,
except upon the death of the optionee. In general, upon termination of
employment of an optionee (other than death or disability) , all options granted
to such persons which are not exercisable on the date of such termination
immediately expire, and any options that are so exercisable will expire three
months following termination of employment in the case of non-qualified stock
options. However, all options will be forfeited immediately upon an optionee's
termination of employment for good cause and upon an optionee's voluntary
termination of employment without the consent of the Board of Directors.
Upon an optionee's death or termination of employment due to disability,
all options will become 100% vested and will be exercisable (i) in the case of
death, by the estate or other beneficiary of the optionee at any time prior to
the date the option otherwise would expire and (ii) in the case of the
disability of the optionee, by the optionee within one year of the date of such
termination of employment in the case of incentive stock options, or at any time
prior to the date the option otherwise would expire in the case of non-qualified
stock options.
At the time each grant of restricted shares or performance shares or units
or stock appreciation rights is made, the Board of Directors determines the
duration of the performance or restriction period, if any, the performance
targets, if any, for earning performance shares or units, and the times at which
restrictions placed on restricted shares shall lapse.
As of January 31, 1999, options to acquire 475,000 shares have been
granted, each with an exercise price of $8.50 per share. 20% of such options
vest immediately and 20% will vest each year thereafter for the next four years.
Such options will expire November 18, 2008.
Under the provisions of SFAS 123, the Company accounts for stock-based
compensation using the intrinsic value method prescribed by APB 25. On a
pro-forma basis, net loss would have been $13,493,000 or $0.77 per share in
fiscal 1998. For purposes of this pro-forma disclosure under SFAS 123, the
estimated fair value of the options is amortized over the vesting period.
The fair value of the options was estimated at the grant date using a
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1998; risk-free interest rate of 4.85%, volatility of
46%, dividend of 0% and a weighted average expected life of the options of 10
years.
The Black-Scholes model requires the input of highly subjective assumptions
and does not necessarily provide a reliable measure of fair value.
16. SEGMENT REPORTING INFORMATION
The Company views its business in the following three segments:
1. Syndication - Revenues are comprised of sales, syndication fee income,
property management fees, deferred income earned and equity in earnings from
partnerships relating to the Syndicated Communities.
F-18
<PAGE>
2. Multi-Family - Revenues are comprised of sales of the underlying
Syndicated multi-family properties or controlling interests therein, and
recognition of deferred income from such Syndications, which income is being
recognized on the installment method.
3. New Development - Revenues are derived from senior living rental
revenues from the Development Communities.
JANUARY 31,
1997 1998 1999
---- ---- ----
Revenues
- --------
Syndication (a) $ 50,320,000 $ 56,423,000 $ 45,716,000
Multi-family (b) 944,000 5,797,000 27,182,000
New Development - - 6,443,000
--------------- --------------- --------------
Combined Segments $ 51,264,000 $ 62,220,000 $ 79,341,000
=============== =============== ==============
Interest Income
- ---------------
Syndication $ 7,054,000 $ 4,768,000 $ 4,204,000
Multi-family 6,719,000 7,283,000 7,317,000
New Development - - 828,000
--------------- --------------- --------------
Combined Segments $ 13,773,000 $ 12,051,000 $ 12,349,000
=============== =============== ==============
Operating Profit (Loss)(c)
- --------------------------
Syndication $ 4,973,000 $ 7,363,000 $ 2,294,000
Multi-family (28,080,000)(d) (5,822,000) (11,546,000)
New Development (214,000) (4,000,000) (3,724,000)
--------------- --------------- --------------
Combined Segments $ (23,321,000) $ (2,459,000) $ (12,976,000)
=============== =============== ==============
JANUARY 31,
1997 1998 1999
---- ---- ----
Interest Expense
----------------
Syndication $ 3,493,000 $ 4,945,000 $ 4,152,000
Multi-family 12,752,000 13,778,000 14,887,000
New Development 149,000 686,000 3,027,000
-------------- ------------- -------------
Combined Segments $ 16,394,000 $ 19,409,000 $ 22,066,000
============== ============ =============
Depreciation and
Amortization
------------
Syndication $ 319,000 $ 363,000 $ 490,000
Multi-family 2,947,000 2,770,000 3,591,000
New Development 65,000 207,000 951,000
-------------- ------------- -------------
Combined Segments $ 3,331,000 $ 3,340,000 $ 5,032,000
============== ============= =============
Capital Expenditures
--------------------
Syndication $ - $ - $ -
Multi-family - - -
New Development 6,742,000 19,499,000 20,973,000
-------------- ------------- -------------
Combined Segments $ 6,742,000 $ 19,499,000 $ 20,973,000
============== ============= =============
JANUARY 31,
1997 1998 1999
---- ---- ----
Gross Assets
- ------------
Syndication $ 21,997,000 $ 27,719,000 $ 23,548,000
Multi-family 229,236,000 236,326,000 229,794,000
New Development 10,428,000 31,754,000 65,972,000
--------------- --------------- --------------
Combined Segments $ 261,661,000 $ 295,799,000 $ 319,314,000
=============== =============== ==============
(a) Includes non-cash income of deferred income and equity in earnings from
unconsolidated affiliates.
(b) Includes non-cash income comprised of deferred income earned.
(c) Includes the allocation of certain expenses based upon either gross
revenues or gross assets to the individual segments.
(d) Includes a non-cash loss of $18,442,000.
17. SUBSEQUENT EVENT
In April 1999, the Company entered into joint venture arrangements
regarding three completed and one substantially completed Development Community.
Pursuant to each joint venture arrangement, the Company sold a 50% interest in
the Development Communities to a third party. The Company realized a profit from
each of the sales and earns management fees for managing each of the
communities. The third party has the right to terminate the Company's management
upon thirty days written notice. The third party receives a cumulative priority
return on its investment from all cash flow generated by the community and any
excess cash flow is shared 50% by the Company and 50% by the third party. For
future periods, the Company will no longer consolidate these Development
Communities into its consolidated financial statements but will recognize its
investment in these Development Communities under the equity basis of
accounting.
F-19
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
July
January 31, (unaudited)
----------- -----------
1991 1991
---- ----
ASSETS
Cash and cash equivalents ..............................$ 22,784,000 $ 8,372,000
Notes and receivables - net ............................ 227,104,000 238,598,000
Investments in affiliated entities ..................... 4,945,000 11,533,000
Construction-in-progress ............................... 11,617,000 15,712,000
Property, buildings and equipment - net ................ 35,294,000 13,308,000
Other assets - net ..................................... 17,570,000 20,130,000
------------------ ------------------
Total assets .....................................$ 319,314,000 $ 307,653,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans and accrued interest payable .....................$ 169,781,000 $ 177,742,000
Construction and mortgage loans payable ................ 35,286,000 12,917,000
Notes and commissions payable .......................... 4,158,000 2,910,000
Other liabilities ...................................... 5,767,000 6,269,000
Deferred income ........................................ 68,596,000 68,173,000
------------------ ------------------
Total liabilities ................................ 283,588,000 268,011,000
------------------ ------------------
Commitments and contingencies ................................
Minority interest ............................................ -- 1,070,000
Stockholders' equity .........................................
Preferred Stock, $.001 par value - authorized,
15,000,000 shares; none issued and outstanding ......... -- --
Common Stock, $.01 par value - shares authorized
40,000,000; shares issued 17,800,000 ................... 178,000 178,000
Paid-in capital ........................................ 73,451,000 74,335,000
Treasury stock - 200,000 shares at cost -- (1,143,000)
Accumulated deficit .................................... (37,903,000) (34,798,000)
------------------ ------------------
Total stockholders' equity ....................... 35,726,000 38,572,000
------------------ ------------------
Total liabilities and stockholders' equity .......$ 319,314,000 $ 307,653,000
================== ==================
See Notes to Consolidated Financial Statements.
</TABLE>
F-20
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
(unaudited) (unaudited)
----------- -----------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
---- ---- ---- ----
Revenues:
Sales......................................................$ 7,481,000 $ 18,638,000 $ 17,961,000 $ 36,853,000
Syndication fee income..................................... 912,000 1,624,000 4,087,000 3,478,000
Deferred income earned..................................... 207,000 156,000 415,000 311,000
Interest income............................................ 3,598,000 1,826,000 7,487,000 4,652,000
Property management fees from related Parties.............. 724,000 841,000 1,712,000 1,924,000
Equity in earnings (losses) in affiliated Entities......... 164,000 (34,000) 322,000 137,000
Senior living revenues..................................... 1,171,000 1,330,000 1,589,000 3,892,000
Other income............................................... 665,000 -- 1,350,000 --
------------ ------------- ------------- ------------
15,922,000 24,381,000 34,923,000 51,247,000
------------ ------------- ------------- ------------
Cost and Expenses:
Cost of sales.............................................. 10,210,000 9,044,000 18,576,000 19,188,000
Selling.................................................... 1,522,000 1,298,000 3,632,000 2,854,000
Interest................................................... 5,280,000 5,029,000 10,750,000 10,740,000
General and administrative................................. 2,650,000 3,176,000 5,174,000 6,167,000
Loss on impairment of notes and receivables................ -- 713,000 -- 713,000
Senior living operating expenses........................... 1,219,000 2,152,000 2,165,000 5,095,000
Officers' compensation..................................... 300,000 300,000 600,000 600,000
Depreciation and amortization.............................. 1,301,000 1,172,000 2,388,000 2,785,000
22,482,000 22,884,000 43,285,000 48,142,000
------------ ------------- ------------- ------------
Net (loss) income.............................................$ (6,560,000) $ 1,497,000 $ (8,362,000) $ 3,105,000
============ ============= ============= ============
(Loss) income per common share (basic and diluted) ...........$ (.37) $ .08 $ (.49) $ .18
============ ============= ============= ============
Weighted average common shares................................ 17,800,000 17,674,000 17,104,000 17,733,000
============ ============= ============= ============
See Notes to Consolidated Financial Statements.
</TABLE>
F-21
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended July 31, (unaudited)
-------------------------------------
<S> <C> <C>
1998 1999
---- ----
Cash flows used from operating activities:
Net (loss) income........................................................... $ (8,362,000) $ 3,105,000
Adjustments to reconcile net (loss) income to net cash used by operating
activities:
Loss on impairment of notes and receivables................................. -- 713,000
Depreciation and amortization............................................... 2,388,000 2,785,000
Deferred income earned...................................................... (415,000) (311,000)
Changes in operating assets and liabilities:
Accrued interest on notes and receivables .................................. 4,695,000 8,163,000
Notes and receivables....................................................... (12,272,000) (19,486,000)
Commissions payable......................................................... 49,000 456,000
Other liabilities........................................................... 3,627,000 502,000
Minority interest........................................................... -- 1,070,000
Deferred income............................................................. 3,521,000 (112,000)
------------- -------------
1,593,000 (6,220,000)
------------- -------------
Net cash used by operating activities....................................... (6,769,000) (3,115,000)
------------- -------------
Cash flows used from investing activities:
Increase in investments..................................................... (535,000) (565,000)
Cost of investment sold..................................................... -- 5,365,000
Building, furniture and equipment........................................... (7,725,000) (9,274,000)
Construction in progress.................................................... (4,706,000) (10,579,000)
------------- -------------
Net cash used by investing activities....................................... (12,966,000) (15,053,000)
------------- -------------
Cash flows provided by financing activities:
Payments on loans payable................................................... (11,712,000) (24,780,000)
Proceeds from loans payable ................................................ 17,973,000 32,741,000
Proceeds from construction and mortgage loans payable....................... 6,373,000 12,917,000
Payments on construction and mortgage loans payable......................... -- (9,250,000)
Decrease (increase) in other assets......................................... 522,000 (5,025,000)
Payments of notes payable................................................... (161,000) (1,704,000)
Purchase of treasury stock.................................................. -- (1,143,000)
Net proceeds from initial public offering .................................. 22,292,000 --
------------- -------------
Net cash provided by financing activities................................... 35,287,000 3,756,000
------------- -------------
(Decrease) increase in cash and cash equivalents............................ 15,552,000 (14,412,000)
Cash and cash equivalents, beginning of period.............................. 11,964,000 22,784,000
------------- -------------
Cash and cash equivalents, end of period.................................... $ 27,516,000 $ 8,372,000
============= =============
Supplemental information:
Interest paid............................................................... $ 10,508,000 $ 10,720,000
============= =============
Non-cash capital contribution............................................... $ -- $ 883,000
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
F-22
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 1998 and 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying consolidated financial statements of Grand Court
Lifestyles, Inc. and its wholly-owned subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The consolidated financial statements as of and for the periods
ended July 31, 1998 and 1999 are unaudited. The results of operations for the
interim periods are not necessarily indicative of the results of operations for
the fiscal year. Certain amounts in the prior period have been reclassified to
conform with current year presentation. These consolidated financial statements
should be read in connection with the financial statements and notes included
thereto in the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1999. Capitalized terms used but not defined herein shall have the
same meanings as set forth in the Company's annual report on Form 10-K for the
fiscal year ended January 31, 1999. The Company has no items of comprehensive
income.
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 1998" refers to the fiscal year beginning on February 1, 1998)
and (ii) all references to the Company include the Company, its subsidiaries and
its predecessors taken as a whole.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS--Historically, the Company retained a 1% general partnership
interest in the Owning Partnership and a 1% general partnership interest in the
Investing Partnership of the Syndicated senior living communities under the
equity method of accounting. Under this method, the Company records its share of
income and loss of the entity as well as any distributions or contributions as
an increase or decrease to its investment account. In recent Syndications, the
Company has been retaining a 50% partnership interest in the Syndicated senior
living communities. The Company consolidates these Owning Partnerships into its
consolidated financial statements.
2. NEWLY DEVELOPED COMMUNITIES
The Company has completed construction of eight senior living communities
(each a "Development Community"). Each Development Community is in its
initial lease-up phase. Four of these Development Communities were
developed as part of its development financing arrangement with Capstone
Capital Corporation ("Capstone") and are leased to and operated by the
Company. These four communities contain a total of 550 apartment units
offering both independent and assisted living services. The four remaining
completed Development Communities contain a total of 536 apartment units
offering both independent and assisted living services.
In April 1999, the Company entered into joint venture arrangements
regarding four completed Development Communities, two of such joint venture
arrangements being effective as of April 1, 1999 and the other two being
effective as of May 1, 1999. Pursuant to each joint venture arrangement,
the Company sold a 50% interest in the Development Communities to George
Batchelor. The Company realized a profit from each of the sales and earns
management fees for managing each of the communities. Mr. Batchelor has the
right to terminate the Company's management upon thirty days written
notice. Mr. Batchelor receives a cumulative priority return on its
investment from all cash flow generated by the community and any excess
cash flow is shared 50% by the Company and 50% by Mr. Batchelor. The
Development Communities that are subject to joint venture arrangements are
not consolidated into the Company's consolidated financial statements.
Instead, the Company recognizes its investment in these Development
Communities under the equity basis of accounting.
F-23
<PAGE>
In addition, the Company has commenced construction on three additional
Development Communities.
3. 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 $22,300,000. The
Company intends to use approximately $19,300,000 of the net proceeds to
finance the development of new senior living communities and the remaining
$3,000,000 for working capital. As of July 31, 1999, $11,500,000 has been
used to finance the development of new senior living communities and
$3,000,000 has been used for working capital. The Company purchased a
series of treasury bills with the remaining net proceeds pending
application of such funds to the intended uses.
In March 1999, the Board of Directors authorized the Company to purchase up
to 300,000 shares of the Company's common stock at prevailing rates. As of
July 31, 1999, the Company purchased 200,000 of such shares.
4. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring February 2000. Annual
rent under such lease is approximately $206,000. The Company entered into a
ten-year lease for additional office space, commencing September 1, 1991.
The annual rent is approximately $330,000.
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 senior living communities
(each, an "Owning Partnership"). In a typical Syndication, the Company
identifies a senior living community suitable for acquisition and forms an
Owning Partnership (in which it is the managing general partner and
initially owns all of the partnership interests) to acquire the property.
Another partnership (the "Investing Partnership") is also formed (in which
the Company is also the general partner with a 1% interest) to purchase
from the Company a 99% partnership interest in the Owning Partnership (the
"Purchased Interest"), leaving the Company with a 1% interest in the Owning
Partnership and a 1% interest in the Investing Partnership. The Company
accounts for these general partnership interests using the equity method of
accounting. 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 to the Investing Partnership over approximately five
years. These capital contributions enable the Investing Partnership to pay
the purchase price for the Purchased Interest, including the Purchase Note.
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. In recent Syndications, the
Company has been selling 50% partnership interests in the Owning
Partnerships. Based upon this change, the Company receives a 50% rather
than a 40% interest in sale and refinancing proceeds after certain priority
payments to the limited partners. The Company anticipates that future
Syndications will involve the sale of 50% interests in the Owning
Partnerships. Due to this increased percentage in ownership being retained
by the Company, the Company consolidates these Owning Partnerships into its
consolidated financial statements. The Company also enters into a
management contract with the Owning Partnership pursuant to which the
Company agrees to manage the senior 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
F-24
<PAGE>
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 (collectively, the "Management
Contract Obligations"). The Company, therefore, has no direct obligation to
pay specified returns to limited partners. Rather, the Company is obligated
pursuant to the management contract to pay to the Owning Partnership
amounts sufficient to make the specified returns to the limited partners,
to the extent the cash flows generated by the property are insufficient to
do so. The Owning Partnership then distributes these amounts to the
Investing Partnership which, in turn, distributes these amounts to the
limited partners. As a result of the Management Contract Obligations, the
Company bears the risks of operations and financial viability of the
related property for such five-year period. The management contract,
however, rewards the Company for successful management of the property by
allowing the Company to retain any cash flow generated by the property in
excess of the amount needed to satisfy the Management Contract Obligations
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. In recent
Syndications, any amounts of cash flow available after payment of the
specified return to limited partners are shared 50% to the Company and 50%
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 Syndicated senior living communities that it manages by
utilizing mortgage financing and by arranging for Syndications of Investing
Partnerships formed to acquire interests in the Owning Partnerships that
own the senior living communities. The Syndicated senior living communities
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 senior living
communities in its portfolio. The Company is the general partner of most of
the senior living Investing Partnerships. The mortgage financing of the
Syndicated Communities and Syndicated Multi-Family Properties are generally
without recourse to the general credit or assets of the Company except with
respect to certain specified obligations, including, for example, costs
incurred for the correction of hazardous environmental conditions. However,
except for such non-recourse obligations, as a general partner, the
Company, 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 $12,667,000 in principal amount of mortgage debt relating to
six Syndicated Communities and (ii) wholly-owned entities (whose only asset
is a specific general partnership interest) are liable as general partners
for approximately $44,745,000 in principal amount of mortgage debt relating
to eleven Syndicated Communities managed by the Company as of July 31,
1999. In the case of the general partner liabilities of the wholly-owned
entities (whose only asset is a specific general partnership interest), the
only assets of the Company at risk of loss are the general partnership
interests in the wholly-owned entities. The Company fully guarantees the
mortgage debt relating to four Syndicated Communities in the amount of
$13,400,000.
In addition, six of the Syndications have involved the construction of
additional apartment units and/or common space at the existing senior
living communities. The Owning Partnerships hire independent third party
contractors to do the construction pursuant to guaranteed maximum price
contracts. The new construction generates additional risks, such as
increased costs due to change orders, which the Company believes are not
material.
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 funded 100% of the development cost of four Development
Communities. The Capstone arrangement provides that the Company will
operate these four Development 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 five-year extension options. The
cumulative annual rent which the Company is obligated to pay to Capstone
for the four Development Communities placed in service is $3,792,000.
F-25
<PAGE>
The Company has guaranteed the mortgages on the Development Communities
subject to joint venture arrangements and such guarantees remain in effect.
The Company is involved in legal proceedings which have arisen in the
ordinary course of business. The Company intends vigorously to defend
itself in these matters and does not believe that the outcome of these
matters will have a material effect on its financial statements.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement established 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, 2000. The
Company's use of derivative instruments has consisted of a treasury bill
lock related to two specific debt financings. 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.
6. SEGMENT REPORTING
The Company views its business in the following three segments:
1. Syndication - Revenues are comprised of sales, syndication fee income,
property management fees, interest income, deferred income earned and
equity in earnings from partnerships relating to the Syndicated
Communities.
2. Multi-Family - Revenues are comprised of interest income and
recognition of deferred income from Syndicated Multi-Family
properties, which income is being recognized on the installment
method.
3. New Development - Revenues are derived from senior living rental
revenues from the Development Communities and from sales, management
fees and equity in earnings (losses) from Development Communities
subject to joint venture arrangements.
F-26
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
-----------------------------------------------------------------------------------
REVENUES
Syndication (a) $ 10,281,000 $ 11,373,000 $ 24,082,000 $ 22,696,000
Multi-family (b) 207,000 156,000 415,000 311,000
New Development (a) 1,836,000 11,026,000 2,939,000 23,588,000
--------------- --------------- --------------- ---------------
Combined Segments $ 12,324,000 $ 22,555,000 $ 27,436,000 $ 46,595,000
=============== =============== =============== ===============
INTEREST INCOME
Syndication $ 827,000 $ 807,000 $ 2,515,000 $ 2,173,000
Multi-family 2,723,000 942,000 4,465,000 2,349,000
New Development 48,000 77,000 507,000 130,000
--------------- --------------- --------------- ---------------
Combined Segments $ 3,598,000 $ 1,826,000 $ 7,487,000 $ 4,652,000
=============== =============== =============== ===============
OPERATING PROFIT (LOSS) (c)
Syndication $ (3,646,000) $ 2,588,000 $ (2,028,000) $ 3,969,000
Multi-family (2,359,000) (4,960,000) (5,385,000) (8,552,000)
New Development (555,000) 3,869,000 (949,000) 7,688,000
--------------- --------------- --------------- ---------------
Combined
Segments $ (6,560,000) $ 1,497,000 $ (8,362,000) $ 3,105,000
=============== =============== =============== ===============
GROSS ASSETS
Syndication $ 26,938,000 $ 33,758,000 $ 26,938,000 $ 33,758,000
Multi-family 238,297,000 233,240,000 238,297,000 233,240,000
New Development 63,749,000 40,655,000 63,749,000 40,655,000
--------------- --------------- --------------- ---------------
Combined Segments $ 328,984,000 $ 307,653,000 $ 328,984,000 $ 307,653,000
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1999 1998 1999
-------------------------------------------------------------------------
INTEREST EXPENSE
Syndication $ 948,000 $ 943,000 $ 2,231,000 $ 1,839,000
Multi-family 3,712,000 4,053,000 7,284,000 7,870,000
New Development 620,000 33,000 1,235,000 1,031,000
-------------- --------------- --------------- ---------------
Combined Segments $ 5,280,000 $ 5,029,000 $ 10,750,000 $ 10,740,000
============== =============== =============== ===============
DEPRECIATION AND AMORTIZATION
Syndication $ 87,000 $ 109,000 $ 207,000 $ 282,000
Multi-family 952,000 974,000 1,756,000 2,010,000
New
Development 262,000 89,000 425,000 493,000
-------------- --------------- --------------- ---------------
Combined Segments $ 1,301,000 $ 1,172,000 $ 2,388,000 $ 2,785,000
============== =============== =============== ===============
CAPITAL EXPENDITURES
Syndication $ ___ $ ___ $ ___ $ ___
Multi-family ___ ___ ___ ___
New Development 8,374,000 15,305,000 12,431,000 19,853,000
-------------- -------------- -------------- --------------
Combined Segments
$ 8,374,000 $ 15,305,000 $ 12,431,000 $ 19,853,000
============== ============== ============== ==============
</TABLE>
(a) Includes non-cash income comprised of equity in earnings from
unconsolidated affiliates.
(b) Includes non-cash income comprised of deferred income earned.
(c) Includes the allocation of certain expenses based upon either gross
revenues or gross assets to the individual segments.
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<PAGE>
7. SUMMARY INFORMATION
The Company has entered into four joint venture arrangements regarding four
completed Development Communities. Two of such joint venture arrangements were
effective on April 1, 1999 and the other two arrangements were effective as of
May 1, 1999. Pursuant to the joint venture arrangements, the Company sold 50%
interests in the Development Communities. The Company has recorded its retained
interest in the joint venture arrangements under the equity method of
accounting. The following sets forth the combined financial information of the
joint ventures as of and for the six months ended July 31, 1999.
ASSETS
Cash $ 982,000
Property, building and equipment - net 39,038,000
Other assets 151,000
------------------
$ 40,171,000
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Construction and mortgage loans payable $ 27,336,000
Notes payable 127,000
Other liabilities 677,000
Stockholders' equity 12,031,000
------------------
$ 40,171,000
==================
REVENUES
Senior living revenues $ 2,613,000
------------------
EXPENSES
Senior living operating expenses $ 2,197,000
Interest 1,112,000
Depreciation 380,000
------------------
3,689,000
Net loss $ (1,076,000)
==================
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