FORM 10-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: JANUARY 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-21249
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GRAND COURT LIFESTYLES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3423087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2650 North Military Trail, Suite 350
Boca Raton, Florida 33431
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (561) 997-0323
-------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by nonaffiliates of the
registrant was $22,022,420 at April 26, 1999.
On April 26, 1999, the Company had 17,800,000 shares of common stock
outstanding.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
PAGE
Independent Auditors' Report 2
Consolidated Balance Sheets as of January 31, 1998 and 1999 3
Consolidated Statements of Operations for the Years Ended January 31,
1997, 1998 and 1999 4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended January 31, 1997, 1998 and 1999 5
Consolidated Statements of Cash Flows for the Years Ended January 31,
1997, 1998 and 1999 6
Notes to Consolidated Financial Statements 7
1
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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
2
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GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 11,964 $ 22,784
Notes and receivables - net ................................. 231,140 227,104
Investments in partnerships ................................. 3,924 4,945
Construction-in-progress .................................... 26,241 11,617
Property, buildings and equipment - net ..................... -- 35,294
Other assets - net .......................................... 22,530 17,570
--------- ---------
Total assets ....................................... $ 295,799 $ 319,314
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans and accrued interest payable .......................... $ 161,850 $ 169,781
Construction and mortgage loans payable ..................... 22,595 35,286
Notes and commissions payable ............................... 5,299 4,158
Other liabilities ........................................... 3,531 5,767
Deferred income ............................................. 76,112 68,596
--------- ---------
Total liabilities .................................. 269,387 283,588
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value - authorized 15,000
shares; none issued and outstanding ................ -- --
Common Stock, $.01 par value - authorized 40,000
shares; issued and outstanding 15,000 and
17,800 shares, respectively ........................ 150 178
Paid-in capital ............................................. 51,189 73,451
Accumulated deficit ......................................... (24,927) (37,903)
--------- ---------
Total Stockholders' Equity .................................. 26,412 35,726
--------- ---------
Total liabilities and stockholders' equity ......... $ 295,799 $ 319,314
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
- --------------------------------------------------------------------------------
YEARS ENDED JANUARY 31,
------------------------------------------
1997 1998 1999
---- ---- ----
Revenues:
Sales ......................... $ 36,021 $ 38,135 $ 58,010
Syndication fee income ........ 7,690 7,923 7,283
Deferred income earned ........ 5,037 7,254 3,701
Interest income ............... 13,773 12,051 12,349
Property management fees
from related parties ....... 2,093 3,684 3,219
Equity in earnings from
partnerships ............... 423 541 685
Senior living revenues ........ -- -- 5,093
Other income .................. -- 4,683 1,350
--------- -------- --------
65,037 74,271 91,690
--------- -------- --------
Costs and Expenses:
Cost of sales ................. 34,019 33,635 53,547
Selling ....................... 7,176 7,602 6,335
Interest ...................... 16,394 19,409 22,066
General and administrative .... 7,796 8,437 10,388
Loss on impairment of
notes and receivables ...... 18,442 -- --
Write-off of registration costs -- 3,107 --
Officers' compensation ........ 1,200 1,200 1,200
Senior living operating
expenses ................... -- -- 6,098
Depreciation and
amortization ............... 3,331 3,340 5,032
--------- -------- --------
88,358 76,730 104,666
--------- --------- ---------
Net loss .......................... $ (23,321) $ (2,459) $ (12,976)
========= ========= =========
Loss per common share (basic and
diluted) ................... $ (1.55) $ (0.16) $ (0.74)
17,455 -- --
Weighted average .................. -- -- --
common shares used ......... 15,000 15,000 17,455
========= ========= =========
See Notes to Consolidated Financial Statements.
4
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GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
(In Thousands except per share data)
- --------------------------------------------------------------------------------
COMMON COMMON
STOCK STOCK PAID-IN ACCUMULATED
(SHARES) (DOLLARS) CAPITAL DEFICIT TOTAL
------ -------- -------- -------- --------
Stockholders' equity
January 31, 1996 .... 15,000 $ 150 $ 34,635 $ -- $ 34,785
Net loss ................ -- -- (1,647) (21,674) (23,321)
Capital contribution .... -- -- 21,333 -- 21,333
Distributions ........... -- -- -- (794) (794)
------ -------- -------- -------- --------
Stockholders' equity
January 31, 1997 .... 15,000 150 54,321 (22,468) 32,003
Net loss ................ -- -- -- (2,459) (2,459)
Distributions ........... -- -- (3,132) -- (3,132)
------ -------- -------- -------- --------
Stockholders' equity,
January 31, 1998 .... 15,000 150 51,189 (24,927) 26,412
Net loss ................ -- -- -- (12,976) (12,976)
--------
Sale of 2,800 shares, net
of expenses of $4,310 2,800 28 22,262 -- 22,290
------ -------- -------- -------- --------
Stockholders' equity,
January 31, 1999 .... 17,800 $ 178 $ 73,451 $(37,903) $ 35,726
====== ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
5
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GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss .................................... $(23,321) $ (2,459) $(12,976)
-------- -------- --------
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization ............. 3,331 3,340 5,032
Loss on impairment of notes and
receivables ............................... 18,442 -- --
Reduction to allowance for uncollectible
notes receivable .......................... -- (1,023) --
Deferred income earned ...................... (5,037) (7,254) (3,701)
Write-off of registration costs ............. -- 3,107 --
Other income (non-cash) ..................... -- (3,132) --
Adjustments for changes in assets and
liabilities:
Accrued interest on notes and
receivables ............................. 715 (3,611) (1,780)
Notes and receivables ..................... 3,981 (4,107) 5,816
Commissions payable ....................... 211 (503) 62
Other liabilities ......................... 375 (862) 2,236
Deferred income ............................ 3,766 5,195 (3,815)
-------- -------- --------
25,784 (8,850) 3,850
-------- -------- --------
Net cash provided by (used in) operating
activities ................................ 2,463 (11,309) (9,126)
Cash flows from investing activities:
Increase in investments ........................ (449) (868) (1,021)
Property, buildings and equipment .............. -- -- (10,803)
Increase in construction-in-progress ........... (6,742) (19,499) (10,170)
-------- -------- --------
Net cash used in investing
activities ................................ (7,191) (20,367) (21,994)
-------- -------- --------
Cash flows from financing activities:
Payments on loans payable ...................... (55,340) (44,178) (41,290)
Proceeds from loans payable .................... 57,874 63,400 49,221
Proceeds from construction and mortgage
loans payable ............................... 2,750 19,845 12,691
Increase and decrease in other assets .......... (3,433) (13,624) 231
Payments of notes payable ...................... (179) (434) (1,521)
Proceeds from notes payable .................... -- 4,520 318
Net proceeds from initial public offering ...... -- -- 22,290
Distributions .................................. (794) -- --
-------- -------- --------
Net cash provided by financing
activities ................................ 878 29,529 41,940
-------- -------- --------
Increase (decrease) in cash and cash equivalents ... (3,850) (2,147) 10,820
Cash and cash equivalents, beginning of year 17,961 14,111 11,964
-------- -------- --------
Cash and cash equivalents, end of year $ 14,111 $ 11,964 $ 22,784
======== ======== ========
Supplemental Disclosures of Cash Flow
Information:
Interest paid $ 16,739 $ 19,396 $ 21,482
======== ======== ========
Non-cash capital contribution $ 21,333 $ -- $ --
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 shares of
Common Stock and 15,000 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 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
7
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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.
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, $5,900 and $8,300 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, $2,800 and $2,200 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.
8
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ALLOWANCE ON NOTES RECEIVABLE - In the event that the facts and circumstances
indicate that the collectibility of a note may be impaired, an evaluation of
recoverability is performed. If an evaluation is performed, the Company compares
the recorded value of the note and other partnership receivables, if any, to the
value of the underlying property less any encumbrances to determine if an
allowance is required for impairment. A significant portion of the interest
income on multi-family notes is recognized as cash is collected.
ACCOUNTING ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
significant estimates and assumptions that affect the reported amount of assets
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the 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 and $3,425 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.
9
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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.
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:
JANUARY 31,
-------------------
1998 1999
-------- --------
Notes receivable-- multi-family (a)(e).............. $173,598 $166,562
Notes and accrued interest receivable
-- senior living (b)............................... 6,503 6,776
Other partnership receivables (c)(e)................ 60,265 63,313
Accrued interest receivable......................... 883 562
-------- --------
241,249 237,213
Less allowance for uncollectible receivables (d).... 10,109 10,109
-------- --------
$231,140 $227,104
======== ========
At January 31, 1998 and 1999, the carrying value of impaired notes receivable,
net of related deferred income, was approximately $41,106 and $29,721,
respectively. Interest income on impaired notes is recognized on the cash basis.
Such income recognized was $1,261, $1,342 and $826 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
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syndication. At January 31, 1999, 84 of the 157 notes (approximate face value
$80,386) 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,
$7,481 and $7,449 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.
(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
Balance at Charged to Reductions Balance
Beginning Costs and to at End
of Year Expenses Allowance of Year
---------- ---------- ---------- -------
Year Ended January 31, 1997:
Allowance for notes
receivable ........ $14,023 $18,442 $21,333 $11,132
Year Ended January 31, 1998:
Allowance for notes
receivable ........ 11,132 -- 1,023 10,109
Year Ended January 31, 1999:
Allowance for notes
receivable ........ 10,109 -- -- 10,109
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
11
<PAGE>
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 capital contribution in fiscal 1996.
The bankruptcy petitions and risk of loss faced by the Protected Partnerships
resulted in the Company recording a non-cash loss of $18,400 in the year ending
January 31, 1997 (representing the recorded value of the notes receivable
relating to the Protected Partnerships, net of deferred income and net of any
previously established reserves) due to the deemed full impairment of these
notes receivable. Seven of the Chapter 11 petitions resulted in the respective
Protected Partnerships losing their properties through foreclosure or voluntary
conveyances of their properties. The remaining two Protected Partnerships
successfully emerged from their bankruptcy proceedings in January, 1998 by
paying off their mortgages at a discount with the proceeds of new mortgage
financings, resulting in these properties having current, fully performing
mortgages. This allowed the Company to recognize non-cash other income of $3,100
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. 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.
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.
The Company has established reserves of $10,100 to address the possibility that
these notes and receivables may not be collected in full.
12
<PAGE>
(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 and $1,849,
respectively.
6. PROPERTY, BUILDINGS AND EQUIPMENT-NET
Property, buildings and equipment -- net at January 31, 1999, are comprised as
follows:
Life Cost
---------- ---------
Land......................................... -- $4,774
Buildings.................................... 40 yrs 25,562
Equipment.................................... 4-7 yrs 1,244
Leasehold improvements ...................... life of lease 4,017
Accumulated depreciation and amortization.... (303)
-------
Net property, buildings and equipment........ $35,294
=======
7. OTHER ASSETS
Other assets are comprised as follows:
JANUARY 31,
----------------------
1998 1999
------- --------
Deferred loan costs (a)................................ $ 9,681 $11,642
Investment in cooperative apartment building (b)....... 1,782 1,782
Unsold subscription units (c).......................... 111 --
Deferred registration costs (d)........................ 397 --
Investment held for resale (e)......................... 7,140 --
Other assets........................................... 3,419 4,146
------- --------
$22,530 $17,570
======= =======
13
<PAGE>
(a) Financing costs of $5,325 and $6,501 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 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.
8. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
JANUARY 31,
------------------------------
1998 1999
---- ----
Banks (including mortgages)(a)(b) $ 35,706 $ 32,435
Other, principally debentures(c) 126,144 137,346
-------- --------
$161,850 $169,781
======== ========
(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. 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.
14
<PAGE>
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
2001............................................. 35,253
2002............................................. 38,266
2003............................................. 22,076
2004............................................. 10,058
Thereafter....................................... 33,725
-------
$168,784
Accrued interest................................. 997
--------
$169,781
========
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 and $26,036,
respectively.
Pursuant to the Company's development program, two limited partnerships, in each
of which the Company holds a 1% general partnership interest, have issued
limited partnership interests for aggregate capital contributions of $9,250, the
net proceeds of which have been used to make second mortgage loans to the
Company to fund approximately 20% of the costs of developing three 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 $58,760
Senior living(a)............ 9,770 9,836
-------- --------
$76,112 $68,596
======== ========
(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, $19,881, $15,790, $8,045 and $1,971,
15
<PAGE>
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 shares of its Common Stock at a price of $9.50 per share. The
net proceeds, after deducting for all offering expenses, that the Company
received as a result of this offering was $22,300. The Company intends to use
approximately $19,300 of the net proceeds to finance the development of new
senior living communities and the remaining $3,000 for working capital. As of
January 31, 1999, $9,400 had been used to finance the development of new senior
living communities and $1,600 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 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 to $13,850. 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:
JANUARY 31,
----------------------
Deferred tax assets: 1998 1999
---------- --------
Notes and receivables......................... $ 6,092 $6,260
Loans payable................................. 2,000 2,000
Investment in partnerships.................... 5,045 6,974
Net operating loss carryforward............... 3,847 7,441
Other ........................................ 147 136
-------- ---------
Total gross deferred tax assets...... 17,131 22,811
Less valuation allowance............. (11,340) (13,850)
-------- ---------
Deferred tax assets net of
valuation allowance.................. 5,791 8,961
-------- ---------
Deferred tax liabilities:
Fixed assets -- 313
Deferred income............................... 4,562 7,016
Other ........................................ 1,229 1,632
-------- ---------
Total gross deferred tax
liabilities.......................... 5,791 8,961
-------- ---------
Net deferred tax assets (liabilities) $ -- $ --
======== =========
16
<PAGE>
The net operating loss carryforward as of January 31, 1999 was approximately
$19,000. 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. The Company entered into a
ten-year lease for additional office space, commencing September 1, 1991. The
annual rent is approximately $330.
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 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 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, of which $35,864 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 with 3% per annum annual increases.
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 and $3,400 as of January 31, 1998 and 1999, respectively.
17
<PAGE>
The Chairman of the Board and President of the Company and entities controlled
by them serve as general partners of partnerships directly and indirectly owning
multi-family properties and, on account of such general partner status, have
personal liability for recourse partnership obligations. These two individuals
also own small equity ownership interests in the partnerships. The Company held
notes receivable, aggregating $100,838, net of deferred income, and receivables
of $59,900 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. 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, $133 and $153, 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 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 and $190 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 shares of Common Stock for issuance pursuant to
the Plan.
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
18
<PAGE>
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 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 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.
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.
19
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
------------------------------- ------------------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
Revenues Interest Expense
- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Syndication (a) $ 50,320 $ 56,423 $45,716 Syndication $ 3,493 $ 4,945 $ 4,152
Multi-family (b) 944 5,797 27,182 Multi-family 12,752 13,778 14,887
New Development - - 6,443 New Development 149 686 3,027
--------- -------- ------- -------- ------- -------
Combined Segments $ 51,264 $ 62,220 $79,341 Combined Segments $16,394 $19,409 $22,066
========= ======== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Interest Income Depreciation and Amortization
- --------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Syndication $ 7,054 $ 4,768 $ 4,204 Syndication $ 319 $ 363 $ 490
Multi-family 6,719 7,283 7,317 Multi-family 2,947 2,770 3,591
New Development - - 828 New Development 65 207 951
--------- -------- ------- -------- ------- -------
Combined Segments $ 13,773 $ 12,051 $ 12,349 Combined Segments $ 3,331 $ 3,340 $ 5,032
</TABLE>
<TABLE>
<CAPTION>
Operating Profit (Loss)(c) Capital Expenditures
- -------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Syndication $ 4,973 $ 7,363 $ 2,294 Syndication $ - $ - $ -
Multi-family (28,080)(d) (5,822) (11,546) Multi-family - - -
New Development (214) (4,000) (3,724) New Development 6,742 19,499 20,973
--------- -------- ------- -------- ------- -------
Combined Segments $(23,321)$ (2,459) $(12,976) Combined Segments $ 6,742 $19,499 $20,973
========= ======== ======= ======== ======= ========
</TABLE>
Gross Assets
- ------------
Syndication $ 21,997 $ 27,719 $ 23,548
Multi-family 229,236 236,326 229,794
New Development 10,428 31,754 65,972
--------- -------- -------
Combined Segments $261,661 $295,799 $319,314
========= ======== =======
(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.
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.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAND COURT LIFESTYLES, INC.
/s/ Bernard M. Rodin
------------------------
Bernard M. Rodin
Chief Financial Officer and Vice President
Dated: July 13, 1999
21
