<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1996
REGISTRATION NO. 33-80812
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
UNITED VANGUARD HOMES, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 8052 11-2032899
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
4 CEDAR SWAMP ROAD
GLEN COVE, NEW YORK 11542
(516) 759-1188
(Address and Telephone Number of Principal Executive Offices)
4 CEDAR SWAMP ROAD
GLEN COVE, NEW YORK 11542
(Address of Principal Place of Business or Intended Principal Place of Business)
CARL G. PAFFENDORF, ESQ.
UNITED VANGUARD HOMES, INC.
4 CEDAR SWAMP ROAD
GLEN COVE, NEW YORK 11542
(516) 759-1188
(Name, Address and Telephone Number of Agent For Service)
COPIES TO:
<TABLE>
<S> <C>
ROBERT H. FRIEDMAN, ESQ. LAWRENCE B. FISHER, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP ORRICK, HERRINGTON & SUTCLIFFE
505 PARK AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10103
(212) 753-7200 (212) 506-5000
(212) 755-1467 (TELECOPIER) (212) 506-5151 (TELECOPIER)
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities of an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value(2) $16,560,000 $5,711
Common Stock Purchase Warrants(3) $103,500 $36
Common Stock, $.01 par value, underlying Common Stock
Purchase Warrants $11,426,400 $3,940
Representative's Warrants $18 $1
Common Stock Purchase Warrants underlying Representative's
Warrants(4) $10,800 $4
Common Stock, $.01 par value, underlying Representative's
Warrants(4) $1,728,000 $596
Common Stock, $.01 par value, underlying Common Stock
Purchase Warrants underlying Representative's
Warrants(4)............................................... $993,600 $343
Total $30,822,318 $10,631(5)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(2) Includes 270,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(3) Includes 270,000 Common Stock Purchase Warrants issuable upon exercise of
the Underwriters' over-allotment option.
(4) Pursuant to Rule 416, this Registration Statement also relates to an
indeterminate number of additional shares of Common Stock and Common Stock
Purchase Warrants issuable upon the exercise of the Representative's
Warrants pursuant to anti-dilution provisions contained therein, which
shares of Common Stock and Common Stock Purchase Warrants are registered
hereunder.
(5) $3,793 was paid in connection with the initial filing of the Registration
Statement in June 1994.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
UNITED VANGUARD HOMES, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM SB-2 REGISTRATION STATEMENT CAPTION OR LOCATION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Available Information
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting
6. Dilution............................................. Dilution
7. Selling Security-Holders............................. Principal and Selling Stockholders
8. Plan of Distribution................................. Outside Front and Inside Front Cover Pages of
Prospectus; Underwriting
9. Legal Proceedings.................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal and Selling Stockholders
12. Description of Securities............................ Description of Capital Stock
13. Interests of Named Experts and Counsel............... Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Indemnification For Securities Act Liabilities;
Underwriting
15. Organization Within Last Five Years.................. *
16. Description of Business.............................. Business
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Business
19. Certain Relationships and Related Transactions....... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters............................................. *
21. Executive Compensation............................... Management
22. Financial Statements................................. Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................. Change in Accountants
</TABLE>
- ------------
* Not applicable
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 22, 1996
PROSPECTUS
UNITED VANGUARD HOMES, INC.
1,800,000 SHARES OF COMMON STOCK AND
1,800,000 COMMON STOCK PURCHASE WARRANTS
---------------------
United Vanguard Homes, Inc., a Delaware corporation (the "Company"), hereby
offers 1,800,000 shares (the "Shares") of common stock, $.01 par value per share
(the "Common Stock"), and 1,800,000 Common Stock Purchase Warrants (the
"Warrants"). The Shares and Warrants are sometimes hereinafter collectively
referred to as the "Securities." Until the completion of the offering, the
Shares and Warrants may only be purchased together on the basis of one Share and
one Warrant. One Warrant entitles the registered holder thereof to purchase
one-half share of Common Stock at an exercise price of $ per share [120% of
the initial public offering price per share] at any time during the period
commencing on the date of this Prospectus until , 1998 [eighteen
(18) months from the date of this Prospectus] and $ per share [138% of the
initial public offering price per share] at any time during the period
commencing , 1998 [eighteen (18) months from the date of this
Prospectus] until , 1999 [three (3) years from the date of this
Prospectus]. The Warrant exercise price is subject to adjustment under certain
circumstances.
Prior to the offering, there has been no public market for the Common Stock
or the Warrants and there can be no assurance that such a market will develop
after completion of the offering, or if developed, that it will be sustained. It
is currently anticipated that the initial public offering price of the Common
Stock will be between $6.50 and $8.00 per Share and $0.05 per Warrant. For
information regarding the factors considered in determining the initial public
offering prices of the Shares and Warrants and the terms of the Warrants, see
"Risk Factors" and "Underwriting." It is anticipated that upon consummation of
the offering, the Shares and Warrants will be included for quotation on the
Nasdaq National Market and will trade separately immediately after the offering
under the symbols "UVHI" and "UVHIW," respectively.
Concurrently with the offering of the Common Stock, the Company is offering
for sale, by means of a separate prospectus, $12,500,000 aggregate principal
amount of its % Convertible Senior Secured Notes due 2006 (the "Notes").
The Common Stock offering is conditioned upon, and is a condition to the
consummation of, the Notes offering (the "Concurrent Notes Offering" and,
collectively with this offering, the "Offerings"). See "Prospectus Summary --
Concurrent Notes Offering."
--------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 9 AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................. $ $ $
Per Warrant............................................... $ $ $
Total(3).................................................. $ $ $
</TABLE>
(1) Does not include additional compensation payable to Janney Montgomery Scott
Inc., the representative of the several Underwriters (the "Representative")
in the form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with the Underwriters and other compensation payable to the
Representative.
(2) Before deducting estimated expenses of $ (inclusive of expenses of
Vanguard Ventures, Inc., the Company's principal stockholder ("Vanguard"))
payable by the Company, excluding the Representative's non-accountable
expense allowance.
(3) Vanguard has granted to the Underwriters an option, exercisable within
forty-five (45) days after the effective date of the Registration Statement,
to purchase up to 270,000 additional Shares and the Company has granted to
the Underwriters an option, exercisable within forty-five (45) days after
the effective date of the Registration Statement, to purchase up to 270,000
additional Warrants, each upon the same terms and conditions as set forth
above, solely to cover over-allotments, if any (the "Over-Allotment
Option"). If such Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Proceeds to Company will be
$ , $ and $ , respectively and proceeds to Vanguard
will be $ . See "Underwriting."
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this offering and to reject any order in whole or in part. It is expected that
delivery of the Securities will be made against payment, at the offices of
Janney Montgomery Scott Inc., New York, New York, on or about
, 1996.
JANNEY MONTGOMERY SCOTT INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[pictures]
1. The Whitcomb, St. Joseph, MI (Owned and Managed)
2. Olds Manor, Grand Rapids, MI (Owned and Managed)
3. Cottage Grove Place, Cedar Rapids, IA (Development and Management Agreements)
4. Harvest Village, Atco, NJ (To be Owned and Managed)
5. Hillside Terrace, Ann Arbor, MI (Owned and Managed)
6. Presidential Place, Hollywood, FL (Development and Management Agreements)
7. The Whittier, Detroit, MI (Managed)
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND WARRANTS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
------------------------
The Company intends to furnish its stockholders with quarterly and annual
reports containing financial statements audited and reported upon by its
independent certified public accountants after the end of each fiscal year, and
make available such other periodic reports as the Company may deem to be
appropriate or as may be required by law.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL SUCH
FINANCIAL INFORMATION AND SHARE AND PER SHARE DATA IN THIS PROSPECTUS HAVE BEEN
ADJUSTED TO GIVE EFFECT TO A 1-FOR-1.6667 REVERSE SPLIT OF THE COMMON STOCK
WHICH IS EXPECTED TO OCCUR PRIOR TO THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART. IN ADDITION, UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. SEE "UNDERWRITING." UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER
TO UNITED VANGUARD HOMES, INC. AND ITS CONSOLIDATED SUBSIDIARIES.
THE COMPANY
United Vanguard Homes, Inc. (the "Company") is an owner, manager and
developer of senior living facilities which provide housing and various levels
of care and services for the elderly. For the fiscal year ended March 31, 1996,
the Company, assuming the consummation of the Offerings and the application of a
portion of the net proceeds therefrom, had net income of approximately
$1,016,000. Upon completion of the Offerings, the Company will own and/or manage
five senior living facilities containing 1,069 apartments and nursing units (the
"Initial Properties"). Additionally, it is in the process of developing,
acquiring or leasing nine facilities expected to contain approximately 1,128
apartments and nursing units. One of these facilities (containing 201 apartment
and nursing units) is currently under construction, and two others (containing
168 apartment units) have received zoning approval; two proposed facilities are
in the zoning process and four are subject to acquisition or lease agreements.
The purchase and acquisition of a number of other properties for senior living
facilities are currently being negotiated.
Senior living facilities provide a combination of housing, personalized
support and healthcare services generally identified as INDEPENDENT LIVING,
ASSISTED LIVING and SKILLED NURSING. INDEPENDENT LIVING facilities are designed
to enable residents to live independently yet remain free from the chores of
home ownership and concerns of daily life, such as transportation, meal
preparation, personal security and housekeeping. ASSISTED LIVING facilities
offer a combination of housing and personal care and healthcare services
designed to respond to the individual needs of those who require help with the
activities of daily living but are not sick or bedridden. SKILLED NURSING
facilities are for those residents who require extensive care. A continuing care
retirement community ("CCRC") provides all three levels of services (independent
living, assisted living and skilled nursing) in the same facility, whereas other
facilities, known as congregate care facilities, provide only independent living
and assisted living services.
Two of the Company's Initial Properties are congregate care facilities and
three of the Initial Properties are CCRCs. As residents of senior living
facilities "age-in-place," they generally require more assistance. In each of
the Company's currently owned and/or managed senior living facilities, a
significant shift in the needs of residents from independent living services to
assisted living services has taken place, and to accommodate residents, the
Company is in the initial stages of converting a number of its independent
living apartments in each of the Initial Properties to assisted living units. Of
the nine properties being developed or acquired, two are CCRCs and six are
assisted living facilities. The Company's three-year expansion objective is to
develop at least 24 senior living facilities, consisting of 20 assisted living
facilities and four CCRCs with an estimated aggregate capacity of approximately
3,000 residents.
The Company's growth objective is to capitalize on the experience of its
management team in the senior living industry and on the growing demand for
senior living facilities as an increasingly
3
<PAGE>
preferred lifestyle for the elderly by (i) providing a full range of
high-quality personalized resident care and services; (ii) pursuing development
opportunities; and (iii) acquiring properties in the open market or through the
exercise of purchase options obtained in the development process.
The Company believes that its business will benefit in the foreseeable
future from significant trends affecting the long-term care industry, including
an increase in the demand for senior care resulting from the aging of the U.S.
population, efforts to contain healthcare costs by both the public and private
sector and the increasing financial net worth of the senior population which
makes the senior living facility an available option to a broader market. The
Company believes that these trends will result in increasing demand for senior
living facilities that generally offer a more secure, trouble-free environment
and improved quality of life.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
Securities Offered........................... 1,800,000 Shares of Common Stock and
1,800,000 Warrants. The Shares and the
Warrants will be separately transferable
immediately following the completion of the
Offerings.
<S> <C>
Exercise Price of Warrants................... One Warrant entitles the registered holder
thereof to purchase one-half share of Common
Stock at an exercise price of $ per share
[120% of the initial public offering price
per share] at any time during the period
commencing on the date of this Prospectus
until , 1998 [eighteen (18) months
from the date of this Prospectus] and $
per share [138% of the initial public
offering price per share] at any time during
the period commencing , 1998
[eighteen months from the date of this
Prospectus] until , 1999 [three (3)
years from the date of this Prospectus]. The
Warrant exercise price is subject to
adjustment under certain circumstances. See
"Description of Capital Stock."
Common Stock outstanding prior to the
offering.................................... 2,234,233 shares(1)
Common Stock to be outstanding after the
offering.................................... 4,034,233 shares(1)
Use of Proceeds.............................. The net proceeds to be received by the
Company from this offering, together with the
net proceeds from the sale of the Notes in
the Concurrent Notes Offering, will be used
for the acquisition of Harvest Village, for
capital improvements at the Initial
Properties and for working capital and
general corporate purposes. See "Use of
Proceeds."
Risk Factors................................. The Common Stock offered hereby involves a
high degree of risk and immediate
substantial dilution. See "Risk Factors" and
"Dilution."
Proposed Nasdaq National Market Symbol:......
Common Stock............................. UVHI
Warrants................................. UVHIW
</TABLE>
- ------------------------
(1) Excludes (i) 127,380 shares of Common Stock issuable upon exercise of stock
options with a weighted average exercise price of $3.87 per share
outstanding under the Company's 1991 Incentive Stock Option Plan, (ii) 9,000
shares of Common Stock issuable upon exercise of stock options with an
exercise price of $6.00 per share outstanding under the Company's 1996
Outside Directors' Stock Option Plan, (iii) 197,338 shares of Common Stock
issuable upon conversion of convertible securities with a weighted average
conversion price of $7.07 per share, (iv) 1,436,782 shares of Common Stock
issuable upon conversion of the Notes (at an assumed initial conversion
price of $8.70 per share based upon an assumed initial public offering price
of $7.25 per Share), (v) 270,000 shares of Common Stock issuable upon
exercise of the Representative's Warrants, and
5
<PAGE>
upon exercise of the Warrants underlying the Representative's Warrants, (vi)
143,678 shares of Common Stock issuable upon exercise of the
Representative's warrants issued to the Representative in the Concurrent
Notes Offering and (vii) 900,000 shares of Common Stock issuable upon
exercise of the Warrants. Under the treasury stock method of computation,
outstanding options and warrants represent 27,031 Common Stock equivalents.
See "Description of Capital Stock" and "Shares Eligible for Future Sale."
CONCURRENT NOTES OFFERING
Concurrently with the Common Stock offering, the Company is offering, by
separate prospectus, $12,500,000 aggregate principal amount of its Notes. The
consummation of the offering of Common Stock made hereby is conditioned upon,
and is a condition to, the consummation of the Concurrent Notes Offering. See
"Description of Notes."
The Notes will mature on , 2006, bear interest at a rate of %
per annum and will be convertible into Common Stock at a conversion price of
$ [120% of the initial public offering price of the Common Stock]. The
Notes will be redeemable, at the Company's option, at any time after
, 1999, at redemption prices beginning at 106% of principal amount
and declining to 103% beginning , 2002 under certain circumstances.
In addition, the Company will be required to redeem $3,125,000 principal amount
of Notes on , 2003 and on each thereafter through
maturity at 100% of the principal amount thereof. The Notes will be secured by a
first mortgage on Harvest Village.
6
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share amounts and Operating Data)
The following summary should be read in conjunction with the Consolidated
Financial Statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA (1)
-------------
HISTORICAL
---------------------------------- FISCAL YEAR
ENDED
FISCAL YEAR ENDED MARCH 31, MARCH 31,
---------------------------------- -------------
1994 1995 1996 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and healthcare services........................... $ 7,229 $ 7,378 $ 7,521 $ 7,521
Development fees........................................... 150 700 1,004 1,004
Rental income.............................................. -- -- -- 2,550
---------- ---------- ---------- -------------
Total revenues............................................. 7,379 8,078 8,525 11,075
---------- ---------- ---------- -------------
Expenses:
Residence operating expenses............................... 5,372 5,595 5,913 5,913
General and administrative expenses........................ 606 503 414 418
Depreciation and amortization.............................. 549 565 378 1,074
---------- ---------- ---------- -------------
Total expenses............................................. 6,527 6,663 6,705 7,405
---------- ---------- ---------- -------------
Income from operations..................................... 852 1,415 1,820 3,670
---------- ---------- ---------- -------------
Other income (expense):
Interest (expense) net..................................... (750) (623) (601) (1,778)
Other income............................................... 145 232 109 109
---------- ---------- ---------- -------------
(605) (391) (492) (1,669)
Provision for loss on advances to affiliates................ (829) (1,651) (296) (296)
---------- ---------- ---------- -------------
Income (loss) before income taxes.......................... (582) (627) 1,032 1,705
Income taxes............................................ -- -- 420 689
---------- ---------- ---------- -------------
Net income (loss).......................................... $ (582) $ (627) $ 612 $ 1,016
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Earnings (loss) per share (2).............................. $ (.19) $ (.22) $ .35 $ .29
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Common shares and equivalents
outstanding (2)........................................... 2,984,658 2,895,761 1,759,023 3,559,023
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL PRO FORMA (1)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................................................................. $ (100) $ 9,151
Total assets............................................................................... 6,088 33,889
Long-term debt, excluding current portion:
Convertible mortgages and notes......................................................... 2,616 15,116
Other debt.............................................................................. 4,557 4,557
Stockholders' (deficiency) equity.......................................................... (3,328) 11,973
</TABLE>
- ---------------
(1) On April 19, 1996, the Company entered into an agreement to purchase Harvest
Village from an affiliate of Vanguard. The purchase is contingent upon
certain events, including the consummation of the Offerings. The pro forma
statement of operations data present the results of operations as if the
acquisition of Harvest Village and the Offerings had occurred at the
beginning of the period presented and the pro forma balance sheet data
present such balance sheet data as if the acquisition of Harvest Village and
the Offerings had occurred as of March 31, 1996. See "Selected Financial
Data" and Note L to Consolidated Financial Statements.
(2) The number of shares of Common Stock and equivalents outstanding at March
31, 1996 gives effect to the cancellation by the Company, in March 1995, of
1,200,000 shares of Common Stock held by Vanguard. See "Certain
Transactions" and Note I to Consolidated Financial Statements. Fully diluted
earnings per share and Common Stock and equivalents outstanding are not
presented for periods in which the effect would be anti-dilutive.
7
<PAGE>
OPERATING DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PROPERTIES OWNED: HILLSIDE TERRACE, OLDS MANOR AND
THE WHITCOMB
Number of independent living apartments (end of period)............ 270 270 270 270
Average occupancy percentage....................................... 93% 94% 94% 93%
Number of assisted living units (end of period).................... 91 91 91 91
Average occupancy percentage....................................... 91% 92% 92% 88%
Number of skilled nursing beds (end of period)..................... 67 67 67 67
Average occupancy percentage....................................... 100% 99% 100% 99%
PROPERTY TO BE ACQUIRED: HARVEST VILLAGE (1)
Number of independent living apartments
(end of period)................................................... 300 300 300 300
Average occupancy percentage....................................... 48% 51% 50% 52%
Number of skilled nursing beds (end of period)..................... 60 60 60 60
Average occupancy percentage....................................... 93% 95% 92% 91%
MANAGED PROPERTY: THE WHITTIER (2)
Number of independent living apartments (end of period)............ 229 229 229 229
Average occupancy percentage....................................... 60% 55% 46% 39%
Number of assisted living units (end of period).................... 52 52 52 52
Average occupancy percentage....................................... 77% 77% 81% 92%
</TABLE>
- ------------
(1) See "Use of Proceeds" and "Business -- The Initial Properties."
(2) The Company may terminate the management agreement for The Whittier upon 30
days' written notice to Vanguard. See "Business -- The Initial Properties."
8
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK AND WARRANTS OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
STOCKHOLDERS' DEFICIENCY AND WORKING CAPITAL DEFICIT; HISTORICAL LOSSES AT
CERTAIN SENIOR LIVING FACILITIES
At March 31, 1996, the Company had a total stockholders' deficiency of
approximately $3,328,000 and a working capital deficit of approximately
$100,000. Certain of the Initial Properties have historically recorded losses.
The Whittier (owned by a subsidiary of Vanguard and managed by the Company),
which did not account for any of the Company's revenues for the fiscal year
ended March 31, 1996, has recorded historical net losses in each of the five
fiscal years ended March 31, 1996. Harvest Village (which is being acquired with
a portion of the net proceeds of the Offerings), which will account, on a pro
forma basis, for approximately 46% of the Company's owned units and beds
immediately upon consummation of the Offerings, has recorded historical net
losses in each of the five fiscal years ended March 31, 1996. There can be no
assurance that the Company's proposed turnaround strategies for these senior
living facilities or any other senior living facilities will be successful. In
addition, the failure of Gateway Communities, Inc., a Michigan not-for-profit
corporation and the lessee of Harvest Village, to make rental payments to the
Company will have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"The Company-Proposed Acquisition."
MORTGAGE INDEBTEDNESS; UNCERTAINTY OF AVAILABILITY OF REFINANCING; VARIABLE
INTEREST RATES
Upon the consummation of the Offerings, the Company will have outstanding
approximately $19.7 million of mortgage indebtedness secured by the Initial
Properties. Of such amount, approximately $5.0 million is due on or before May
31, 1997. Although the Company is attempting to refinance its current
outstanding indebtedness, no assurance can be given that the Company will be
successful. In addition, the Company expects that as it finances the acquisition
of additional senior living facilities, the aggregate amount of its mortgage
indebtedness will increase. An inability to make such payments when due or to
refinance such indebtedness could cause the mortgage lender to foreclose on the
Company's senior living facilities securing such indebtedness, which would have
a material adverse effect on the Company. In addition, interest rates on any
debt issued to refinance such mortgage debt may be higher than the rates on
current mortgages. A portion of the Company's current mortgage indebtedness
bears interest at a variable rate. Increases in interest rates will increase the
Company's interest costs and could have a material adverse effect on the
Company's financial condition and results of operations. See "Description of
Mortgage Loans."
POSSIBILITY OF CROSS DEFAULT
As of March 31, 1996, Vanguard, the owner of The Whittier, one of the
Initial Properties which is managed by the Company, was indebted to Great-West
Life & Annuity Insurance Company in the aggregate principal amount of
$4,087,346. Such indebtedness is secured by a first mortgage loan on The
Whittier. The mortgage securing The Whittier provides that a default under such
loan is a default under each of the Company's loans securing Hillside Terrace
and The Whitcomb, two of the Initial Properties owned by the Company. Therefore,
a default by Vanguard under the loan securing The Whittier could result in the
foreclosure of Hillside Terrace and The Whitcomb. In addition, a default under
certain of the Company's outstanding indebtedness, including the loans secured
by Hillside Terrace and The Whitcomb, would be an event of default under the
Notes. See "Certain Transactions," "Description of Mortgage Loans" and
"Description of Notes."
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RISKS ASSOCIATED WITH SPONSORED DEVELOPMENT PROJECTS
The Company intends to increase the number of senior living facilities it
owns and manages in part through a strategy whereby the Company may enter into
an agreement with an unaffiliated not-for-profit organization exempt from
federal income taxes under Section501(c)(3) of the Internal Revenue Code of
1986, as amended (the "Code") (a "501(c)(3) organization") to develop a senior
living facility for such entity. In connection with such development projects,
the Company may attempt to obtain a management agreement to operate the senior
living facility upon its completion as well as a fair market value purchase
option for such facility. Through this type of transaction the Company would not
incur the start-up development costs and operating losses typically associated
with the development and initial operation of a senior living facility because
the Company would not be its owner. The Company would, however, earn a
development fee for the development of the senior living facility and a
management fee for its operation and might exercise its purchase option, if any,
for the senior living facility. The Company first used this form of transaction
at Cottage Grove Place, a 201-unit senior living facility under construction in
Cedar Rapids, Iowa. As part of this transaction, the Company advanced funds to
the owner of Cottage Grove Place, all of which funds have been repaid. The
Company has advanced funds on a non-recourse basis to the owner of a facility
currently under development in Hollywood, Florida and intends to advance funds
on a non-recourse basis in the future for the development of additional senior
living facilities in an amount up to $1.5 million for any one senior living
facility. Although the Company anticipates that any future advances will be
secured by the assets of the entity to which the Company has advanced funds
(principally the land for the proposed facility), there can be no assurance that
advances of this type will ever be repaid or will be repaid on a timely basis.
There can be no assurance that a 501(c)(3) organization will be willing to enter
into such a contractual arrangement, and moreover, there can be no assurance
that this form of transaction for a 501(c)(3) organization will withstand
regulatory challenge. See, "--Regulatory Challenge Regarding Tax Exempt
Not-For-Profit Organizations," and "Business -- Business Strategy."
REGULATORY CHALLENGE REGARDING TAX EXEMPT NOT-FOR-PROFIT ORGANIZATIONS
A number of the Company's transactions in connection with the Company's
development and/or management of senior living facilities involve contractual
arrangements (e.g., development contracts, management contracts, purchase
options) with 501(c)(3) organizations which are governed by state laws
applicable to not-for-profit organizations. The Company believes that (i) the
development and operation of senior living facilities is a permissible activity
under current laws and regulations for a 501(c)(3) organization and
not-for-profit entities operating in those states in which the Company presently
operates or plans to operate, (ii) the contractual arrangements between the
Company and/ or its affiliates and such 501(c)(3) organizations are in
furtherance of the 501(c)(3) organization's charitable purposes and (iii) the
contractual arrangements between the Company and/or its affiliates and such
501(c)(3) organizations are fair and reasonable to such 501(c)(3) organizations,
are negotiated at arm's length and do not result in private inurement or more
than incidental private benefit to the Company, its affiliates or its
shareholders. However, notwithstanding the Company's belief, there can be no
assurance that the Internal Revenue Service or a state regulator such as a
state's Attorney General will not challenge the Company's contractual
arrangements with such 501(c)(3) organizations under existing laws and
regulations, so as to cause such 501(c)(3) organizations to lose their tax
exempt status under Section501(c)(3) of the Code or otherwise preclude them from
entering into such contractual arrangements with the Company and/or its
affiliates. Furthermore, there can be no assurance that legislative or
administrative amendments to existing law, or changes in the administrative or
judicial interpretations thereof, will not occur so as to limit or prohibit the
participation of 501(c)(3) organizations in these transactions with the Company.
In the event that such 501(c)(3) organizations lose their tax-exempt status or
are otherwise precluded from entering into such contractual arrangements with
the Company and/or its affiliates, and the Company assumes ownership of such
properties, the Company's net income may be reduced by a significant amount
which could have a material adverse affect on the Company's financial condition
and results of operation. Additionally, if such 501(c)(3) organizations lose
their tax-exempt status under Section501(c)(3) of the Code or if the
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management contracts are determined not to comply with certain requirements
imposed thereon by the Internal Revenue Service, any tax-exempt bonds issued in
connection with such entities would have to be redeemed.
ABILITY TO DEVELOP OR ACQUIRE ADDITIONAL SENIOR LIVING FACILITIES
Initially, the Company's operations will be limited to the Initial
Properties. Therefore, the Company's prospects for growth are directly affected
by its ability to develop senior living facilities primarily for unaffiliated
third party entities in conjunction, in certain cases, with purchase options for
such facilities, and to a significantly lesser extent acquire additional senior
living facilities in the open market. The Company's ability to achieve its
development plans will depend upon a variety of factors, many of which are
beyond the Company's control. The development of senior living facilities will
also involve a number of risks, including the risk that the Company or
third-party owners will be unable to locate suitable sites, risks relating to
the inability to obtain, or delays in obtaining, necessary zoning, land use,
building, occupancy and other required governmental permits and authorizations,
risks that financing may not be available on satisfactory terms, environmental
risks, risks that construction costs may exceed original estimates, risks that
construction and lease-up may not be completed on schedule, risks that occupancy
rates at a newly completed senior living facility may not be achieved on
schedule, risks that occupancy rates at a newly completed senior living facility
may not be realized or be sustained at expected levels and risks relating to the
competitive environment for development. There can be no assurance that the
Company will achieve its development plans, that it will be successful in
developing any particular senior living facility, that the Company's planned
expansion will not adversely affect its operations or that any senior living
facilities developed by the Company will be successful. The various risks
associated with the Company's development or acquisition of senior living
facilities and uncertainties regarding the profitability of such operations
could have a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Business Strategy."
POSSIBLE NEED FOR ADDITIONAL FINANCING
While the Company estimates that the net proceeds of the Offerings will
provide adequate capital to fund the Company's development and the acquisition
program for at least the 12 months following the date of this Prospectus,
additional financing may be necessary in order to meet the Company's growth and
development program to the extent such plan is modified or certain assumptions
of the plan prove inaccurate. Even if such funds are sufficient to fund the
Company's activities during such period, there can be no assurance that the
Company will generate sufficient cash flow after such time to fund its future
working capital requirements and growth. In such event, the Company would also
have to seek additional borrowings, effect debt or equity offerings or otherwise
raise capital. Furthermore, the Company has historically depended upon Vanguard
to raise capital for senior living facility development projects, however, there
can be no assurance that Vanguard will continue to provide such services. There
can be no assurance that any such financing will be available to the Company, or
if available, that the terms will be acceptable to the Company. The Notes to be
sold in the Concurrent Notes Offering will include a number of restrictive and
financial covenants including restrictions on the ability of the Company to
incur additional indebtedness. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Notes."
UNCERTAIN ABILITY TO MANAGE GROWTH
The Company's ability to achieve its planned growth is dependent upon a
number of factors, including its ability to hire, train and assimilate
management and other employees, the adequacy of the Company's financial
resources, the Company's ability to identify new markets in which it can
successfully compete and its ability to adapt its purchasing, marketing,
management information and other systems to accommodate its expanded operations.
In addition, there can be no assurance that the Company will be able to achieve
its planned expansion or that it will be able to manage successfully
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its expanded operations. In particular, the Company has experience managing only
the Initial Properties and does not have the depth of experience managing the
significantly larger number of senior living facilities that the Company plans
to develop and operate pursuant to its business strategy. There is also no
assurance that any of the Company's additional senior living facilities will
achieve anticipated occupancy levels necessary for profitability. Failure to
manage growth effectively could have a material adverse effect on the Company.
See "Business -- Business Strategy."
GEOGRAPHIC EXPANSION INTO NEW MARKETS
The Company has not operated a senior living facility outside of Michigan
and New Jersey (where it operated Harvest Village from 1990 to 1994). Adverse
changes in general economic factors affecting the healthcare industry or laws
and regulatory environments in the states in which the Company plans to operate
could have a material adverse effect on the Company's growth strategy, financial
condition and results of operations.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY; REIMBURSEMENT
BY THIRD-PARTY PAYORS
The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's fees from their own or
familial financial resources. Generally, only seniors with income or assets
exceeding the comparable median in the region where the Company's senior living
facilities are located can afford the Company's fees. Inflation or other
circumstances that adversely affect the ability of seniors to pay for the
Company's services could have an adverse effect on the Company. If the Company
encounters difficulty in attracting seniors with adequate resources to pay for
its services, its operating results and financial condition could be adversely
affected. A portion of the Company's revenues is dependent upon reimbursement
from third-party payors, including state Medicaid programs and private insurers.
Approximately $1,320,500, or 15%, of the Company's revenues were received under
Medicaid for the fiscal year ended March 31, 1996. In addition, approximately
$433,400, or 5%, of the Company's revenues for the fiscal year ended March 31,
1996 were derived from residents who are recipients of Supplemental Security
Income ("SSI") payments. The revenues and profitability of the Company could be
affected by the continuing efforts of governmental and private third-party
payors to contain or reduce the costs of healthcare by attempting to lower
reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing.
BENEFITS TO RELATED PARTIES
Carl G. Paffendorf, the Company's Chairman of the Board and Chief Executive
Officer, guaranteed the repayment by Vanguard of certain indebtedness relating
to Harvest Village. That indebtedness will be repaid as a result of the
application of the net proceeds of the Offerings. In addition, certain amounts
due the Company from Vanguard will be cancelled as a result of the acquisition
by the Company of Harvest Village. See "Certain Transactions."
DILUTION
Based upon the pro forma net tangible book value of the Company at March 31,
1996, and based upon an assumed initial public offering price of $7.25 per
share, investors in this offering will suffer an immediate and substantial
dilution of their investment of approximately $5.30 per share. See "Dilution."
CONFLICTS OF INTEREST
Certain officers and Directors of the Company are also officers and
directors of affiliates of the Company, either directly or indirectly. For
example, the Company manages The Whittier, which is owned by Vanguard, and the
management fee for The Whittier is set by agreement between the Company and
Vanguard, which have substantially identical officers and directors. In
connection with the Offerings, the Company has adopted a policy whereby all
future transactions between the Company and its officers, Directors, principal
stockholders or affiliates, will be approved by a majority of the Board of
Directors, including all of the independent and disinterested members of the
Board of
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Directors or, if required by law, a majority of disinterested stockholders, and
will be on terms no less favorable to the Company than could be obtained in
arm's length transactions from unaffiliated third parties. In addition, the
Notes will contain certain restrictions on the Company involving transactions
with affiliates. See "Certain Transactions."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends, and will continue to depend, upon the services of Carl
G. Paffendorf, its Chairman of the Board and Chief Executive Officer, and Larry
L. Laird, its President and Chief Operating Officer. The Company has entered
into employment agreements with each of Messrs. Paffendorf and Laird and has
agreed to obtain prior to the consummation of the Offerings a key employee
insurance policy, with the Company as the sole beneficiary, covering the life of
each of them in the amount of $2,000,000. The Company is also dependent upon its
ability to attract and retain management personnel who will be responsible for
the day-to-day operations of each senior living facility. The loss of the
services of either or both of such officers or the Company's inability to
attract additional management personnel in the future could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management -- Employment Agreements."
GOVERNMENT REGULATION
Healthcare and senior living facilities are areas of extensive regulation
and frequent regulatory change. Changes in the laws or new interpretations of
existing laws can have a significant effect on methods of doing business, costs
of doing business and amounts of reimbursement from governmental and other
payors. The Company and the facilities owned and/or managed by the Company are
subject to varying degrees of regulation and licensing by health or social
service agencies and other regulatory authorities in the states and localities
in which they operate or intend to operate, as well as to cost and other
reporting requirements and reimbursement limitations imposed by the Medicaid
program and other government payors. The Company and the facilities owned and/or
managed by the Company are also subject to federal and state fraud and abuse
laws, such as the Medicare/Medicaid anti-kickback and state self-referral laws,
which govern certain financial arrangements among healthcare providers and
others who may be in a position to refer or recommend patients to such
providers. These laws prohibit, among other things, certain referrals by
physicians and other licensed providers for certain services to providers with
which they have a financial relationship, and certain direct and indirect
payments that are intended to induce the referral of patients to, the arranging
for services by, or the recommending of, a particular provider of healthcare
items or services. The federal fraud and abuse laws have been broadly
interpreted to apply to certain financial and contractual relationships between
healthcare providers and sources of patient referral. Most states have similar
laws which, vary from state to state, are sometimes vague and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can result
in loss of licensure, civil and criminal penalties, and exclusion of healthcare
providers from the Medicare and Medicaid programs. The Company at all times
attempts to comply with all such applicable licensing, fraud and abuse and other
laws, regulations and policies; however, there can be no assurance that
administrative or judicial interpretation of existing laws, regulations or
policies will not have a material adverse effect on the Company's operations or
financial condition.
The success of the Company will be dependent in part upon its ability to
satisfy the applicable laws, regulations and requirements and to procure and
maintain required licenses and certifications. In New York, for example, a
public for-profit corporation is not eligible for a license to operate a skilled
nursing or assisted living facility. Regulation of the senior living industry is
evolving and the Company's operations could also be adversely affected by, among
other things, future regulatory developments such as mandatory increases in the
scope and quality of care to be afforded residents and revisions in licensing
and certification standards. Currently, no federal rules explicitly define or
regulate assisted living. A majority of states have adopted certificate of need
("CON") or similar statutes that generally require a state agency to determine
that a need exists for new beds or assisted living units and that certain other
criteria are also satisfied before construction of new skilled nursing beds or
assisted living units commences, new services are provided or certain
expenditures are made,
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particularly where the cost of which would be reimbursable either in whole or in
part by one or more state-funded programs. In most states, senior living
facilities are also subject to state or local building code, fire code and food
service licensure or certification requirements. Like other healthcare
facilities, facilities providing nursing care and assisted living services are
subject to periodic survey or inspection by governmental authorities. From time
to time in the ordinary course of business, the Company and the facilities
managed by the Company receive deficiency reports. The Company reviews such
reports and seeks to take appropriate corrective action. Although most
inspection deficiencies are resolved through a plan of correction, the reviewing
agency typically is authorized to take action against a licensed facility where
deficiencies are noted in the inspection process. Such action may include
imposition of fines, imposition of a provisional or conditional license or
suspension or revocation of a license or other sanctions. Any failure by the
Company or the facilities managed by the Company to comply with applicable
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. Increased regulatory requirements
could increase costs of compliance with such requirements. There can be no
assurance that federal, state or local laws or regulatory procedures which might
adversely affect the Company will not be expanded or imposed. See "-- Regulatory
Challenge Regarding Tax Exempt Not-For-Profit Organizations" and "Business --
Government Regulation of Senior Living Facilities."
COMPETITION
The long-term care industry is highly competitive and the Company expects
that the assisted living business, in particular, will become more competitive
in the future. The Company competes with numerous other companies providing
similar long-term care alternatives, such as home health agencies, lifecare at
home, community-based service programs, retirement communities and convalescent
centers. The Company expects that as assisted living receives increased
attention and market acceptance, and if the number of states that include
assisted living in their Medicaid waiver programs increases, competition will
grow from new market entrants, including companies focusing primarily on
assisted living. Nursing facilities that provide long-term care services are
also a potential source of competition to the Company. Moreover, the Company
expects to face competition for development, acquisition and management of
senior living facilities. Some of the Company's present and potential
competitors are significantly larger and have, or may obtain, greater financial
resources than those of the Company. Further, in many instances, small, local
operators will represent competition in specific market areas. Consequently,
there can be no assurance that the Company will not encounter increased
competition in the future that could limit its ability to attract residents or
expand its business and could have a material adverse effect on the Company's
financial condition, results of operations and prospects. Moreover, if the
development of new assisted living facilities outpaces demand for those
facilities in certain markets, such markets may become saturated. Such an
oversupply of facilities could cause the Company to experience decreased
occupancy, depressed margins and lower profitability. See "Business --
Competition."
LIABILITY AND INSURANCE
The provision of assisted living and healthcare services 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,
negligence or related legal theories, many of which involve large claims and
significant defense costs. The Company currently maintains liability insurance
in amounts and with such coverage and deductibles as it deems appropriate, based
upon the nature and risks of the business, historical experience and industry
standards. Effective April 1, 1992, the Company began to self-insure for health
and medical liability costs for up to a maximum of $300,000 in claims. There can
be no assurance, however, that claims in excess of the Company's insurance
coverage or claims not covered by the Company's insurance coverage (e.g., claims
for punitive damages) will not arise. A successful claim against the Company not
covered by, or in excess of, the Company's insurance coverage could have a
material adverse effect upon the Company's financial condition and results of
operations. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the Company's ability to
attract residents or expand its business. In
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addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance
coverage in the future or that, if such coverage is available, it will be
available on acceptable terms.
RISKS COMMON TO THE COMPANY'S SENIOR LIVING OPERATIONS
STAFFING AND LABOR COSTS. The Company competes with other long-term care
providers with respect to attracting and retaining qualified personnel. The
Company also is dependent upon the available labor pool of employees. A shortage
of trained or other personnel may require the Company to enhance its wage and
benefits package in order to compete. No assurance can be given that the
Company's labor costs will not increase, or that if they do increase, they can
be matched by corresponding increases in rental or management revenue.
OBTAINING RESIDENTS AND MAINTAINING RENTAL RATES. There can be no assurance
that, at any time, any senior living facility will be substantially occupied at
assumed rents. In addition, lease-up and full occupancy may be achievable only
at rental rates below those assumed. If operating expenses increase, the local
rental market may limit the extent to which rents may be increased. Because rent
increases generally can only be implemented at the time of expiration of leases,
rental increases may lag behind increases in operating expenses.
REVENUE FROM MANAGEMENT CONTRACTS. Revenue from management contracts is
dependent upon the performance of the properties the Company manages. This
performance in turn is dependent in part upon the ability to attract and retain
tenants, the ability to control operating expenses, energy costs, governmental
regulations, local rent control or stabilization ordinances, various uninsurable
risks, prevailing financial conditions, the nature and extent of competitive
properties in the areas where such properties are located and the real estate
market generally.
GENERAL REAL ESTATE RISKS. The performance of the Company's senior living
facilities 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 apartment properties. Other factors
include the attractiveness of senior living facilities to tenants, zoning, rent
control, environmental quality regulations or other regulatory restrictions,
competition from other forms of housing and the ability of the Company to
provide adequate maintenance and insurance and to control operating costs,
including maintenance, insurance premiums and real estate taxes. Real estate
investments also are affected by such factors as applicable laws, including tax
laws, interest rates and the availability of financing. In addition, real estate
investments are relatively illiquid and, therefore, limit the ability of the
Company to vary its portfolio promptly in response to changes in economic or
other conditions.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be held liable for the costs of removal or
remediation of certain hazardous or toxic substances including, without
limitation, asbestos-containing materials ("ACMs"), which could be located on,
in or under such property. Such laws and regulations often impose liability
regardless of whether the owner or operator knew 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 owner's
liability as to any property is generally not limited under such laws and
regulations and could exceed the value of the property 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 ACMs, at a disposal
site may also be liable for the costs of any required remediation or removal of
the hazardous or toxic substances at the disposal site. In connection with the
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ownership or operation of the Initial Properties as well as the acquisition of
additional senior living facilities, the Company could be liable for these
costs, as well as certain other costs, including governmental fines and injuries
to persons or properties.
RESTRICTIONS IMPOSED BY LAWS BENEFITING DISABLED PERSONS. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its senior living facilities are substantially in
compliance with present requirements or are exempt therefrom, if required
changes involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated, additional costs would be incurred by the
Company. Further legislation may impose additional burdens or restrictions with
respect to access by disabled persons, the costs of compliance with which could
be substantial.
CONSTRUCTION RISKS. Certain construction risks are beyond the Company's
control, including strikes, adverse weather, natural disasters, supply of
materials and labor, and other unknown contingencies which could cause the cost
of construction and the time required to complete construction to exceed
estimates. If construction is not commenced or completed, or if there are unpaid
subcontractors or suppliers, or if required occupancy permits are not issued in
a timely manner, cash flow could be significantly reduced. In addition, any
property in construction carries with it its own risks such as construction
defects, cost overruns, the discovery of geological or environmental hazards on
the property and changes in zoning restrictions.
ABSENCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF STOCK PRICE
There is currently no public market for the Securities and there can be no
assurance that an active trading market will develop in any of the Securities
or, if developed, be sustained after this offering. The initial public offering
prices of the Securities and the exercise price and terms of the Warrants will
be determined by negotiation between the Company and the Representative and do
not necessarily relate to or reflect the Company's assets or book value, results
of operations or any other established criteria of value. For factors that may
be considered in determining the initial public offering prices, see
"Underwriting." After completion of the Offerings, the market prices of the
Securities could be subject to significant fluctuations in response to various
factors and events, including the liquidity of the market for the Securities,
variations in the Company's operating results, new statutes or regulations or
changes in the interpretation of existing statutes or regulations affecting the
healthcare industry or assisted living residence businesses in particular. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuations also may adversely affect the
market price of the Securities.
LEGAL RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company has agreed to keep a
registration statement covering the shares of Common Stock issuable upon the
exercise of the Warrants effective for the term of the Warrants, if it fails to
do so for any reason, the Warrants may be deprived of value.
The Shares and Warrants are separately transferable immediately upon
issuance. Purchasers may buy Warrants in the aftermarket in, or may move to,
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their
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Warrants, and holders of Warrants would have no choice but to attempt to sell
the Warrants in a jurisdiction where such sale is permissible or allow them to
expire unexercised. See "Description of Capital Stock."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of this offering, Vanguard will beneficially own or have
voting control over 1,636,058 shares of Common Stock, or approximately 40.6%
(33.9% if the Over-Allotment Option is exercised in full) of the then
outstanding shares of Common Stock. Vanguard will therefore be in a position to
effectively control the outcome of matters submitted for stockholder approval,
including election of the Company's directors, and could thereby affect the
selection of management and direct policies of the Company. Carl G. Paffendorf,
the Company's Chairman of the Board and Chief Executive Officer, currently
beneficially owns approximately 63.1% of the outstanding shares of Vanguard. See
"Principal and Selling Stockholders."
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION AND DELAWARE LAW
The Company's Certificate of Incorporation and the Delaware General
Corporation Law contain provisions that may have the effect of making more
difficult or delaying attempts by others to obtain control of the Company. One
of these provisions classifies the Company's Board of Directors into three
classes, each of which serves for a staggered three-year term. The Company's
Board of Directors has the authority to issue up to 1,000,000 shares of
preferred stock, $.001 par value per share (the "Preferred Stock") and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. While the
Company has no present intent to issue shares of Preferred Stock after the
closing of the Offerings, such issuance, while providing desirable flexibility
in connection with possible acquisitions and other corporation purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law ("Section 203"), which prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change in control of the Company, including a
possible change of control that could result in stockholders receiving a premium
over the then current market value of their shares of Common Stock. The Notes
will contain certain restrictions upon the ability of the Company to amend its
Certificate of Incorporation or Bylaws and issue Preferred Stock. See
"Management," "Description of Capital Stock" and "Description of Notes."
RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has never paid cash dividends and it does not anticipate that it
will pay cash dividends in the foreseeable future. The payment of cash dividends
by the Company will depend on its earnings and financial condition and such
other factors as the Board of Directors of the Company may consider relevant. In
addition, certain of the Company's mortgage loans as well as the terms of the
Notes limit the payment of dividends. The Company currently plans to retain any
earnings to provide for the development and growth of the Company. See
"Description of Mortgage Loans," "Dividend Policy" and "Description of Notes."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offerings, the Company will have 4,034,233
shares of Common Stock outstanding, 1,436,782 shares issuable upon conversion of
the Notes at an initial conversion price of $8.70 per share (based upon an
assumed initial public offering price of $7.25 per share) and 197,338 shares of
Common Stock issuable upon conversion of convertible securities. All of the
1,800,000 Shares offered hereby and the shares issuable upon the conversion of
the Notes will be
17
<PAGE>
freely tradeable unless acquired by "affiliates" of the Company as defined in
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 2,431,571 shares will be "restricted"
securities as defined in Rule 144 and may not be sold unless they are registered
under the Securities Act or are sold pursuant to an exemption from registration,
including an exemption contained in Rule 144. Of these restricted shares,
1,698,836 shares are currently eligible for sale under Rule 144, subject,
however, to any restrictions of Rule 144. Vanguard and each of the directors and
officers of the Company has agreed not to offer, sell or otherwise dispose of
any shares of Common Stock without the prior written consent of the
Representative of the Underwriters for a period of nine months after the date of
this Prospectus. In addition, each of the directors and officers of the Company
and Vanguard, has agreed that for a period of 24 months from the date of this
Prospectus all sales of shares of Common Stock owned by them will be effected
through the Representative. Sales of substantial amounts of Common Stock, or the
perception that such sales could occur, may adversely affect the market price of
the Common Stock prevailing from time to time. See "Shares Eligible for Future
Sale."
18
<PAGE>
THE COMPANY
GENERAL
The Company is a Delaware corporation. The Company's executive offices are
located at 4 Cedar Swamp Road, Glen Cove, New York 11542, and its telephone
number is (516) 759-1188. The Company was originally organized on September 26,
1988 ("Old UVH") in order to combine various activities relating to the
development, ownership and management of senior living facilities organized and
operated by Vanguard and its principals beginning in 1980. On March 30, 1993,
Old UVH merged into Coap Systems Inc. ("Coap"), a relatively inactive,
publicly-owned subsidiary of Vanguard, and simultaneously Coap changed its name
to United Vanguard Homes, Inc. Although the Company is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), there are less than 6,000 shares in the public float and
there is no public market for the Common Stock.
[LOGO]
PROPOSED ACQUISITION
On April 19, 1996, the Company entered into an agreement, as amended, to
purchase Harvest Village, a 360-unit senior living facility located in Atco, New
Jersey ("Harvest Village") from Harvest Village Partners, L.P., a Delaware
limited partnership ("Harvest Partners") and an affiliate of Vanguard. The
purchase by the Company of Harvest Village is contingent upon certain events,
including the consummation of the Offerings and the satisfaction of the Harvest
Village construction loan mortgage. The purchase price for Harvest Village is
$17,400,000, consisting of (i) $13,500,000 cash and (ii) the assignment to
Vanguard of a promissory note in the amount of $7,481,953 due to the Company
from Gateway Communities, Inc., a 501(c)(3) organization organized under
Michigan not-for-profit corporation law ("Gateway"), the lessee of Harvest
Village from Harvest Partners, and the cancellation of $6,094,000 of debt owed
to the Company by Vanguard, which the parties have deemed to collectively have a
stipulated value of $3,900,000. In addition, Harvest Partners will assign the
lease with Gateway to the Company. The Company will enter into a management
contract with Gateway to operate and manage Harvest Village, subject to the
consummation of the Offerings. The Company will have an option to terminate
Gateway's lease in exchange for a sum equal to the fair value of the lease. The
Company does not anticipate exercising this option until Harvest Village has
attained a stabilized occupancy rate in excess of 90%. Vanguard has agreed to
lend Gateway $1.5 million for working capital purposes after the consummation of
the Offerings. See "Certain Transactions."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,800,000 shares of Common Stock and 1,800,000 Warrants offered hereby are
estimated to be approximately $11.4 million, after deduction of underwriting
discounts and commissions and the estimated offering expenses payable by the
Company based upon an assumed initial public offering price at $7.25 per Share
and $0.05 per Warrant. The net proceeds to be received by the Company from the
sale of the Notes offered in the Concurrent Notes Offering are estimated to be
approximately $11.35 million, after deduction of placement agent discounts and
the estimated offering expenses payable by the Company. The following table sets
forth the sources and uses of the cash proceeds from the Offerings:
<TABLE>
<S> <C>
SOURCES:
Net proceeds from this offering of Common Stock and Warrants................ $11,401,000
Net proceeds from the Concurrent Notes Offering............................. $11,350,000
USES:
Cash portion of purchase price of Harvest Village (1)....................... $13,500,000
Capital improvements to Initial Properties (2).............................. $ 1,750,000
Working capital and general corporate purposes (which may include short-term
advances associated with development projects)............................. $ 7,501,000
</TABLE>
- ------------------------
(1) See "The Company -- Proposed Acquisition" and "Certain Transactions."
(2) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Pending such uses, the net proceeds will be invested in short-term,
investment-grade, interest-bearing securities.
The Company does not presently have any written agreements or commitments
concerning any specific acquisition of senior living facilities, other than the
acquisition of Harvest Village and purchase option agreements on one currently
managed senior living facility and three senior living facilities under
development. The Company believes that the net proceeds to be realized from the
Offerings, together with existing cash balances, cash flow from operations and
available lines of credit, will be sufficient to meet its liquidity and capital
spending requirements for at least 12 months, including the acquisition of
Harvest Village. See "The Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Company Projects."
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, (i) on an actual basis and (ii) on a pro forma, as adjusted basis to
reflect (a) the estimated net proceeds from the sale by the Company of 1,800,000
shares of Common Stock and 1,800,000 Warrants pursuant to this offering (at an
assumed initial public offering price of $7.25 per Share and $0.05 per Warrant)
(b) the estimated net proceeds from the Concurrent Notes Offering and (c) the
initial application of the net proceeds of the Offerings as described under "Use
of Proceeds," including the acquisition of Harvest Village. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------
PRO FORMA,
ACTUAL AS ADJUSTED (1)
-------------- ---------------
<S> <C> <C>
Current portion of long-term debt............................ $ 626,043 $ 626,043
Long-term debt, less current maturities:.....................
% Convertible Senior Secured Notes due 2006............... -- 12,500,000
Mortgages payable.......................................... 6,374,205 6,374,205
Notes payable.............................................. 798,777 798,777
Stockholders' equity (deficiency) (2):
Preferred stock, $.001 per share, 1,000,000 shares
authorized, no shares issued and outstanding.............. -- --
Common stock, $.01 per share, 14,000,000 shares authorized,
1,827,778 shares issued and outstanding; 3,627,778 shares
issued and outstanding pro forma as adjusted.............. 18,278 36,278
Additional paid in capital................................. 5,619,905 20,902,905
Accumulated deficit........................................ (8,966,258) (8,966,258)
-------------- ---------------
Total capitalization......................................... $ 4,470,950 $ 32,271,950
-------------- ---------------
-------------- ---------------
</TABLE>
- ------------------------
(1) See "Selected Financial Data" and Note L to Consolidated Financial
Statements.
(2) Excludes (i) 300,000 shares of Common Stock reserved for issuance pursuant
to the Company's 1991 Incentive Stock Option Plan, under which options to
purchase 127,380 shares have been granted, (ii) 90,000 shares of Common
Stock reserved for issuance pursuant to the Company's 1996 Outside
Directors' Stock Option Plan, under which options to purchase 9,000 shares
have been granted, (iii) 51,873 shares of Common Stock issuable upon
conversion of the Olds Manor Note, (iv) 117,729 shares of Common Stock
issuable upon conversion of The Whitcomb Tower Note, (v) 27,736 shares of
Common Stock issuable upon conversion of the 7% Notes, (vi) 1,436,782 shares
of Common Stock into which the Notes are initially convertible, (vii)
270,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants and upon exercise of the Warrants underlying the
Representative's Warrants, (viii) 143,678 shares of Common Stock issuable
upon exercise of the Representative's warrants issued to the Representative
in the Concurrent Notes Offering and (ix) 900,000 shares of Common Stock
issuable upon exercise of the Warrants. Under the treasury stock method of
computation, outstanding options and warrants represent 27,031 Common Stock
equivalents. See "Management-Stock Option Plans," "Description of Mortgage
Loans," "Certain Transactions," "Description of Notes" and "Underwriting."
21
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock since its
inception and the Board of Directors does not anticipate declaring any cash
dividends on the Common Stock in the foreseeable future. The Company currently
intends to utilize any earnings it may achieve for the development of its
business (including the acquisition or development of other senior living
facilities) and working capital purposes. In addition, certain provisions of
existing indebtedness of the Company limit, and the terms of the Notes will
limit, future indebtedness of the Company as well as the Company's ability to
pay cash dividends. See "Description of Mortgage Loans," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Description of Notes."
DILUTION
The negative net tangible book value of the Company as of March 31, 1996 was
$(4,309,075), or $(2.36) per share of Common Stock. Negative net tangible book
value per share represents the Company's net tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the 1,800,000 shares of Common Stock and 1,800,000
Warrants offered hereby at an assumed initial public offering price of $7.25 per
Share and $0.05 per Warrant, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the Company's as adjusted net tangible book value at March 31, 1996
would have been $7,091,925 or $1.95 per share. This represents an immediate
increase in net tangible book value of $4.31 per share to existing stockholders
and an immediate dilution of $5.30 per Share to new investors purchasing the
Shares in this offering. The following table illustrates this pro forma
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Share............................ $ 7.25
Negative net tangible book value per Share before offering................. $ (2.36)
Increase in net tangible book value per share attributable to new
investors................................................................. 4.31
--------- ---------
As adjusted net tangible book value per Share after offering............... 1.95
---------
Dilution per Share to new investors........................................ $ 5.30
---------
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and the new investors purchasing shares of Common Stock from the Company in this
offering (before deducting estimated underwriting discounts and offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------------- ----------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 1,827,778 50.4% $ 5,638,183 30.2% $ 3.08
New investors........................ 1,800,000 49.6 13,050,000 69.8 $ 7.25
------------- ------------- -------------- ------------- -------------
Total.......................... 3,627,778 100.0% $ 18,688,183 100.0%
</TABLE>
22
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share amounts and Operating Data)
The following table summarizes certain selected consolidated financial
information relating to the Company for each of the five years in the period
ended March 31, 1996 and is derived from the audited consolidated financial
statements of the Company which have been audited by the Company's independent
certified public accountants. This data should be read in conjunction with the
Company's consolidated financial statements including the related notes
appearing elsewhere herein.
The information set forth below is qualified by reference to and should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO
FORMA(1)
----------
HISTORICAL FISCAL
---------------------------------------------------------- YEAR
ENDED
FISCAL YEAR ENDED MARCH 31, MARCH 31,
---------------------------------------------------------- ----------
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident services.............................. $ 4,589 $ 4,698 $ 4,765 $ 4,887 $ 4,966 $ 4,966
Healthcare services............................ 2,184 2,252 2,464 2,491 2,555 2,555
Management fees................................ 202 -- -- -- -- --
Development fees............................... -- -- 150 700 1,004 1,004
Rental income.................................. -- -- -- -- -- 2,550
---------- ---------- ---------- ---------- ---------- ----------
Total revenues............................... 6,975 6,950 7,379 8,078 8,525 11,075
---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Residence operating expenses................... 4,791 5,064 5,372 5,595 5,913 5,913
General and administrative expenses............ 579 585 606 503 414 418
Depreciation and amortization.................. 529 551 549 565 378 1,074
---------- ---------- ---------- ---------- ---------- ----------
Total expenses............................... 5,899 6,200 6,527 6,663 6,705 7,405
Income from operations........................... 1,076 750 852 1,415 1,820 3,670
Other income (expense):
Interest (expense) net........................... (622) (613) (750) (623) (601) (1,778)
Other income..................................... 255 251 145 232 109 109
---------- ---------- ---------- ---------- ---------- ----------
(367) (362) (605) (391) (492) (1,669)
Provision for loss on advances to affiliates....... (1,715) (1,662) (829) (1,651) (296) (296)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................. (1,006) (1,274) (582) (627) 1,032 1,705
income taxes..................................... -- -- -- -- 420 689
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................................ $ (1,006) $ (1,274) $ (582) $ (627) $ 612 $ 1,016
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) per share (2).................... $ (.34) $ (.44) $ (.19) $ (.22) $ .35 $ .29
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Common shares and equivalents outstanding (2).... 2,999,609 2,880,217 2,984,658 2,895,761 1,759,023 3,559,023
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL PRO FORMA (1)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................................................... $ (100) $ 9,151
Total assets........................................................................ 6,088 33,889
Long-term debt, excluding current portion:
Convertible mortgages and notes................................................... 2,616 15,116
Other debt........................................................................ 4,557 4,557
Stockholders' (deficiency) equity................................................... (3,328) 11,973
</TABLE>
- ------------------------------
(1) On April 19, 1996, the Company entered into an agreement to purchase Harvest
Village from an affiliate of Vanguard. The purchase is contingent upon
certain events, including the consummation of the Offerings. The pro forma
consolidated financial data is based on the audited historical financial
statements of the Company and the adjustments described below and in the
notes to the pro forma consolidated financial data appearing elsewhere in
this Prospectus. The pro forma financial data includes adjustments prepared
from data currently available and in some cases based on estimates or
approximations. It is possible that the actual amounts to be recorded may
have an impact on the results of operations and
23
<PAGE>
the balance sheet different from that reflected in the accompanying pro
forma financial data. It is therefore possible that the entries presented
herein will not be the amounts actually recorded at the closing date.
Deferred income taxes have not been considered in the pro forma balance
sheet because they are not expected to be material at the time of the
consummation of the acquisitions.The pro forma statement of operations for
the fiscal year ended March 31, 1996 presents such results of operations as
if the acquisition of Harvest Village and the Offerings had occurred at the
beginning of the period presented and has been adjusted to record (i)
interest expense on the $12,500,000 aggregate principal amount of the Notes
issued in the Concurrent Notes Offering and (ii) rental income,
depreciation, miscellaneous expenses and income taxes of Harvest Village.
The pro forma balance sheet as of March 31, 1996 presents such balance sheet
data as if the acquisition of Harvest Village and the Offerings had occurred
as of March 31, 1996 and has been adjusted to reflect the sale of the
Securities offered hereby and the issuance of the Notes in the Concurrent
Notes Offering and the initial application of the net proceeds therefrom,
including the acquisition of Harvest Village.
(2) The number of shares of Common Stock and equivalents outstanding at March
31, 1996 gives effect to the cancellation by the Company in March 1995 of
1,200,000 shares of Common Stock held by Vanguard. See "Certain
Transactions" and Note I of Notes to Consolidated Financial Statements.
Fully diluted earnings per share and Common Stock and equivalents
outstanding are not presented for periods in which the effect would be
anti-dilutive.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company is a long-term care provider that owns, manages and develops
senior living facilities. For the fiscal year ended March 31, 1996, the Company
had revenues of approximately $8.5 million and income from operations of
approximately $1.8 million. Upon consummation of the Offerings and giving effect
to the acquisition of Harvest Village, the Company will own and/or manage five
senior living facilities containing an aggregate of 799 independent living
apartments, 143 assisted living units and 127 nursing beds in Michigan and New
Jersey. On a pro forma basis, for the fiscal year ended March 31, 1996, the
Company would have had revenues of approximately $11.1 million and income from
operations of approximately $3.7 million. The Company is in the process of
developing, acquiring or leasing nine facilities expected to contain
approximately 800 apartments and nursing units. One of these facilities
(containing 201 apartment and nursing units) is currently under construction,
and two others (containing 168 apartment units) have received zoning approval;
two proposed facilities are in the zoning process and four are subject to
acquisition or lease agreements. The purchase and acquisition of a number of
other properties for senior living facilities are currently being negotiated.
Three of the Initial Properties, Hillside Terrace, Olds Manor and The
Whitcomb, presently have a high average occupancy rate and are profitable
operations. The fourth Initial Property, known as The Whittier, which is owned
by Vanguard and managed by the Company, is located in Detroit and has
experienced a decline in its occupancy over the last several years as a result
of local demographic changes. However, the Company has instituted a number of
changes consisting of, among other things, shifting the operational focus to
assisted living and changing the target market, which now targets the upper
middle income, retired, African-American community, which has resulted in a
significant improvement in The Whittier's occupancy during the last eight
months, increasing from a low of 130 apartments as of October 31, 1995 to 160 as
of June 30, 1996, representing an eight-month increase of 23 percent. The
Company believes that at an occupancy level of 180 residents The Whittier will
generate sufficient revenues to cover operating expenses and debt service. The
Company's approach in this and other underperforming senior living facilities is
to obtain a management contract, without incurring the corresponding losses and
risks inherent in turnaround situations but, nevertheless, obtaining a fair
market value purchase option to acquire the property at some future date.
With respect to the acquisition of Harvest Village, the Company believes
that Harvest Village's occupancy and its profitability can be improved as a
result of several significant factors, including: (i) the removal of the present
risk of foreclosure of the construction loan (due September 1996), which has
negatively impacted sales over the past three years because prospective
residents have been reluctant to commit resources to a potentially unstable
situation, and (ii) the conversion of an independent living wing to a 51-unit
assisted living facility. The Company has reason to believe based upon inquiries
and market analysis that a market for the rental of assisted living units exists
in the market area. The Company believes that removing the financial uncertainty
and the assisted living conversion will improve Harvest Village's occupancy
level. The Company believes that the cash purchase price at which it has been
able to acquire Harvest Village is substantially lower than its current fair
market value based upon a recent appraisal.
25
<PAGE>
The Company's two primary sources of revenue are: (i) operating revenue and
management fees from senior living facilities owned by the Company and managed
by the Company, respectively, and (ii) development fees from unaffiliated third
parties for senior living facilities in development.
INCOME FROM OWNED PROPERTIES. When a facility managed by the Company attains
a level of profitability after the payment of debt service and management fees
and the Company has a purchase option, the exercise of the Company's option, if
any, will generally be considered. The Company's income from facilities that
have attained a level of profitability, usually after stabilized occupancy in
excess of 90 percent and at times lower depending upon the level of debt
service, will generally increase at an increasing rate as occupancy increases
above the breakeven point. The Company expects that the operating income of a
typical facility, once it has attained a 90 percent average occupancy rate, is
approximately 40 percent of gross revenue.
MANAGEMENT FEES. The Company's typical management agreement calls for a
management fee between four and five percent of the facility's gross revenue. In
addition, where the Company provides data processing services, an additional one
percent fee would be charged. These fees are paid on a monthly basis.
DEVELOPMENT FEES. The Company's project development agreements generally
call for a development fee of 7.5 percent of the project's hard and soft
construction cost. This fee is generally paid over a three-year period in the
case of assisted living projects and a four-year period for CCRCs with
installments triggered by various benchmark events during the course of
development, construction and occupancy fill-up. With the number of development
projects expected to increase to 15 projects per year by the third year,
development fee revenue can be expected to represent a major component of the
future revenue and profitability of the Company. While the profit margins on
development fee revenue are high, the nature of this revenue is more episodic
and less reliable than operational and management fee revenue due to external
factors beyond the control of the Company such as market factors relating to
site acquisition and regulatory factors impacting zoning and licensing
approvals. The recognition by the Company of development fees may be contingent
upon the completion of construction financing.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statement of operations.
There can be no assurance that trends in sales growth or operating results will
continue in the future.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PERCENTAGE
MARCH 31, CHANGE
-------------------- INCREASE
1995 1996 (DECREASE)
--------- --------- -----------
<S> <C> <C> <C>
Net revenues, as a percentage of total revenues:
Resident services......................................................... 60.5% 58.3% (2.2)%
Healthcare services....................................................... 30.8 30.0 (.8)
Development fees.......................................................... 8.7 11.7 3.0
--------- --------- -----
Total revenues.............................................................. 100.0% 100.0% --
--------- --------- -----
--------- --------- -----
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PERCENTAGE
MARCH 31, CHANGE
-------------------- INCREASE
1995 1996 (DECREASE)
--------- --------- -----------
Expenses as a percentage of total revenues
<S> <C> <C> <C>
Residence operating expenses.............................................. 69.3% 69.4% .1%
General and administrative expenses....................................... 6.2 4.9 (1.3)
Depreciation and amortization............................................. 7.0 4.4 (2.6)
--------- --------- -----
Total expenses............................................................ 82.5 78.7 (3.8)
--------- --------- -----
Income from operations.................................................... 17.5 21.3 3.8
Other income (expense)
Interest (expense) net.................................................... 7.7 7.1 .6
Other income.............................................................. (2.9) (1.3) (1.6)
--------- --------- -----
4.8 5.8 1.0
--------- --------- -----
Provision for loss on advances to affiliates................................ 20.4 3.5 (16.9)
--------- --------- -----
Income (loss) before income taxes........................................... (7.7) 12.0 19.7
Income taxes.............................................................. -- 5.0 5.0
--------- --------- -----
Net income (loss)........................................................... (7.7)% 7.0% 14.7%
--------- --------- -----
--------- --------- -----
</TABLE>
REVENUES
Net revenues of the Company represent gross consolidated revenues of the
Company, less charitable and SSI discounts. Net revenues increased by $699,000,
or 9%, in 1995, and by $447,000, or 6%, in 1996. The growth in net revenues in
1995 and 1996 was largely attributable to a further increase in development fees
in the amount of $550,000 and $304,000 respectively. Resident and healthcare
services increased $149,000 in 1995 and $143,000 in 1996. Resident and
healthcare revenues increased as a result of higher rates, while occupancy rates
remained relatively constant from 1994 through 1996.
RESIDENCE OPERATING EXPENSES
Residence operating expenses include all retirement and healthcare center
operating expenses, including, among other things, payroll and employment costs,
food, utilities, repairs and maintenance, insurance and property taxes.
Residence operating expenses have increased for each period presented,
primarily due to normal inflationary cost increases. Said expenses increased by
$223,000, or 4%, in 1995, and by $318,000, or 6%, in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include all marketing costs, as well as
the general and administrative expenses incurred at the Company's principal
executive offices. General and administrative expenses include, among other
things, administrative salaries, rent, utilities, insurance and related
expenses. General and administrative expenses decreased by approximately
$103,000, or 17%, in 1995 and $89,000 or 18% in 1996, primarily due to the
closing of the Company's Florida office in 1995.
INTEREST EXPENSE, NET
Interest expense, net, also fluctuated during the reporting period. In 1995,
interest expense, net, decreased by $127,000, or 17%, which is directly
attributable to a 3% interest rate decrease on two of the Company's three
mortgages on the Initial Properties in Michigan, and in 1996, interest decreased
by 4%, or $22,000.
27
<PAGE>
PROVISION FOR LOSS ON ADVANCES TO AFFILIATES
The provision for loss on advances to affiliates represents the net expense
pertaining to amounts advanced to the Company's parent and its affiliates. Said
advances have been made to fund, among other things, operating losses of these
affiliates. As their ultimate repayment is uncertain, a reserve has been
provided for doubtful collection. Any net reimbursements are recorded as income
in the period received. For the two fiscal years ended March 31, 1996 and 1995,
the Company recorded losses in the amount of $296,000 and $1,651,000,
respectively, net of recoveries.
INCOME TAXES
The income tax expense was zero and $420,000 for the years ended March 31,
1995 and 1996, respectively. Under generally accepted accounting principles,
future tax benefits can be recognized for financial reporting purposes if it is
more likely than not that such benefits will ultimately result in the reduction
of a future tax liability. The Company has net operating loss carryforwards for
Federal income tax purposes as of March 31, 1996 of approximately $2,464,000.
Such net operating loss carryforwards are subject to several statutory
limitations which limit their current and future utilization, and, accordingly,
no benefit from such utilization has been provided for. The net operating loss
carryforwards expire during fiscal 1997 through 2005; $2,083,000 of which expire
in fiscal 1998. See Note F to the Consolidated Financial Statements.
This offering or subsequent equity transactions may trigger an ownership
change which could serve to limit the use of some or all of the net operating
loss carryforwards. See Note F to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was approximately $589,000 for the year ended
March 31, 1996 as compared with a negative cash flow of approximately $2,010,000
for the year ended March 31, 1995. Cash flows from operations were negative in
the fiscal year ended March 31, 1995 primarily due to the cash advances made to
development projects and fees earned but not collected. For the fiscal year
ended March 31, 1995, such net cash advances were approximately $495,000. In
addition, for the fiscal year ended March 31, 1995, the Company earned
development fees of approximately $700,000, that were not collected until the
subsequent year. The Company's primary source of funds for these advances have
been through the private placement of convertible notes secured in certain
instances by subordinate mortgages. These obligations are intended to be repaid
if not converted from the proceeds of construction and/or permanent financing on
a project by project basis. During the fiscal year ended March 31, 1995, the
Company generated cash flow of approximately $1,400,000 by issuing promissory
notes to private investors. Said notes were paid in their entirety by December
31, 1995 from the proceeds of a tax exempt bond issue arranged for the
construction of one of the Company's senior living facilities. The funds from
this private placement represented the major portion of the cash used in
financing activities during 1996.
The Company intends to use the net proceeds of the Offerings and available
lines of credit, together with cash flows from operations and private
placements, to finance its operations and future development projects.
Accordingly, the Company believes that the net proceeds to be realized from the
Offerings, together with existing cash balances, cash flow from operations and
available lines of credit, will be sufficient to meet its liquidity and capital
spending requirements for at least 12 months, including the acquisition of
Harvest Village. The Company intends to use approximately $1,750,000 of the net
proceeds of the Offerings for capital improvements at the Initial Properties.
See "Use of Proceeds."
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from assisted living facilities and congregate care
facilities operated by the Company are the primary sources of revenue earned by
the Company. These properties are affected by rental rates which are highly
dependent upon market conditions and the competitive environments where the
facilities are located. Employee compensation is the principal cost element of
property operations. Although there can be no assurance it will be able to
continue to do so, the Company has been able historically to offset the effects
of inflation on salaries and other operating expenses by increasing rental and
assisted living rates.
28
<PAGE>
BUSINESS
The Company is an owner, manager and developer of senior living facilities
which provide housing and various levels of care and services for the elderly.
For the fiscal year ended March 31, 1996, the Company, assuming the consummation
of the Offerings and the application of a portion of the net proceeds therefrom,
had net income of approximately $1,016,000. Upon completion of the Offerings,
the Company will own and/or manage five senior living facilities containing
1,069 apartments and nursing units (the "Initial Properties"). Additionally, it
is in the process of developing, acquiring or leasing nine facilities expected
to contain approximately 1,128 apartments and nursing units. One of these
facilities (containing 201 apartment and nursing units) is currently under
construction, and two others (containing 168 apartment units) have received
zoning approval; two proposed facilities are in the zoning process and four are
subject to acquisition or lease agreements. The purchase and acquisition of a
number of other properties for senior living facilities are currently being
negotiated.
Senior living facilities provide a combination of housing, personalized
support and healthcare services generally identified as INDEPENDENT LIVING,
ASSISTED LIVING and SKILLED NURSING. INDEPENDENT LIVING facilities are designed
to enable residents to live independently yet remain free from the chores of
home ownership and concerns of daily life, such as transportation, meal
preparation, personal security and housekeeping. ASSISTED LIVING facilities
offer a combination of housing and personal care and healthcare services
designed to respond to the individual needs of those who require help with the
activities of daily living but are not sick or bedridden. SKILLED NURSING
facilities are for those residents who require extensive care. A CCRC provides
all three levels of services (independent living, assisted living and skilled
nursing) in the same facility, whereas other facilities, known as congregate
care facilities, provide only independent living and assisted living services.
Two of the Company's Initial Properties are congregate care facilities and
three of the Initial Properties are CCRCs. As residents of senior living
facilities "age-in-place," they generally require more assistance. In each of
the Company's currently owned and/or managed senior living facilities, a
significant shift in the needs of residents from independent living services to
assisted living services has taken place, and to accommodate residents, the
Company is in the initial stages of converting a number of its independent
living apartments in each of the Initial Properties to assisted living units. Of
the nine properties being developed or acquired, two are CCRCs and six are
assisted living facilities. The Company's three-year expansion objective is to
develop principally for others at least 24 senior living facilities, consisting
of 20 assisted living facilities and four CCRCs with an estimated aggregate
capacity of approximately 3,000 residents.
The Company's growth objective is to capitalize on the experience of its
management team in the senior living industry and on the growing demand for
senior living facilities as an increasingly preferred lifestyle for the elderly
by (i) providing a full range of high-quality personalized resident care and
services; (ii) pursuing development opportunities; and (iii) acquiring
properties in the open market or through the exercise of purchase options
obtained in the development process.
The Company believes that its business will benefit in the foreseeable
future from significant trends affecting the long-term care industry, including
an increase in the demand for senior care resulting from the aging of the U.S.
population, efforts to contain healthcare costs by both the public and private
sector and the increasing financial net worth of the senior population which
makes the senior living facility an available option to a broader market. The
Company believes that these trends will result in increasing demand for senior
living facilities that generally offer a more secure, trouble-free environment
and improved quality of life.
INDUSTRY BACKGROUND
Senior living facilities comprise a combination of housing, personalized
support and healthcare services generally identified as INDEPENDENT LIVING,
ASSISTED LIVING, and SKILLED NURSING. INDEPENDENT LIVING facilities are designed
to enable residents to live independently yet remain free from the chores of
home ownership and concerns of daily life, such as transportation, meal
preparation, personal
29
<PAGE>
security and housekeeping. ASSISTED LIVING facilities are a combination of
housing, and personal care and healthcare services designed to respond to the
individual needs of those who require help with the activities of daily living
but are not sick or bedridden. SKILLED NURSING facilities are for those
residents who require extensive care. A CCRC provides all three levels of
services, (independent living, assisted living and skilled nursing) in the same
facility whereas a congregate care facility provides only independent living and
assisted living services. Stand-alone assisted living facilities and skilled
nursing homes are also options available to the elderly. The Company intends to
focus its attention on the development, management and ownership of assisted
living facilities and, to a lesser degree, on CCRCs. It believes that the
following demographic factors are increasing the demand for senior living
facilities in general and assisted living facilities and CCRCs in particular.
INCREASED AGING POPULATION: As illustrated below, the number of seniors 85
years of age and older, the primary target market for assisted living
facilities, is estimated to increase by approximately 42% during the 1990s from
3.1 million seniors in 1990 to approximately 4.3 million seniors in 2000. It is
estimated that the total U.S. population will increase by approximately 11%
during the same period. It is further estimated that approximately 57% of the
population of seniors over 85 years of age need assistance with activities of
daily living such as bathing and dressing ("ADLs"), and more than one-half of
such seniors develop Alzheimer's disease or other forms of dementia.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EIGHTY-FIVE YEARS AND OLDER
<S> <C> <C>
Fastest growing population in U.S.
85 YEARS AND OVER TOTAL POPULATION
1990 0% 0%
2000 42% 11%
</TABLE>
OTHER DEMOGRAPHIC TRENDS. Other trends benefiting the Company include the
increased financial net worth of the elderly population, the changing role of
women and the increase in the population of individuals living alone. As the
ratio of elderly in need of assistance has increased, so too has the number of
elderly able to afford assisted living. According to U.S. Bureau of the Census
data, the median net worth of householders 75 years of age or older has
increased from $55,178 in 1984 and $61,491 in 1988 to $77,654 in 1993.
Furthermore, according to the same source, the percentage of people 65 years of
age and older below the poverty line has decreased from 27.3% in 1970 to 14.8%
in 1980 to 11.9% in 1994. The increased number of women in the labor force has
reduced the supply of care givers. Historically, unpaid women (mostly daughters
or daughters-in-law) represented a large portion of the care givers of the
non-institutionalized elderly. Since 1960, 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 6.8 years, rising divorce rates and an
increase in the number of unmarried individuals.
30
<PAGE>
The increased financial net worth of the elderly population is illustrated
by the following chart:
[LOGO]
REGULATORY TRENDS. While demographic trends are increasing demand for
long-term care for elderly people, other trends are limiting the supply of such
care. Some of these regulatory trends include:
SUPPLY/DEMAND IMBALANCE: As illustrated below, the supply of skilled
nursing home beds per 1,000 seniors 85 years of age and older is declining.
This decline may be attributed to several factors, including the aging of
the population and the implementation of moratoria on the granting of CONs
for new skilled nursing facilities. The Company also believes that high
construction costs, limitations on governmental reimbursement and the costs
of construction and start-up expenses also constrain growth in the supply of
such facilities and beds. In addition, many skilled nursing facilities are
focusing on higher acuity patients with higher reimbursement profiles. As a
result, fewer skilled nursing beds are available for the increasing number
of elderly who need assistance with ADLs but do not require significant
medical attention. The Company also believes that the age and income
qualified will choose the residential assisted living facility model over
the institutionalized medical model skilled nursing facility when given the
choice.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BEDS PER THOUSAND
<S> <C>
1967 540
1976 690
1980 650
1986 540
1990 500
2000E 350
</TABLE>
HEALTHCARE COST CONTAINMENT. Both government and private pay sources
have responded to increasing healthcare costs with a range of
cost-containment measures. Some of these measures have created a "push-down"
effect that affects senior citizens and encourages demand for, and creates
opportunities for, assisted living facilities. In the effort to cut costs,
healthcare payors
31
<PAGE>
have tried to reduce the length of hospital visits. As a result, seniors
requiring acute care who might have been hospitalized in the past are more
likely to be cared for in a skilled nursing facility. At the same time, the
limited number of skilled nursing facilities are also focusing their efforts
on higher margin subacute care patients, leaving little excess capacity for
senior citizens seeking a lower level of care. The Company therefore
believes that healthcare cost containment has encouraged seniors to seek new
residential options, such as assisted living facilities and CCRC's.
As a result of the conflict between the demographic trends, which are
increasing the demand for long-term care, and the regulatory trends, which are
limiting the availability of, and access to, such care, together with the desire
to avoid institutionalization, the Company believes a significant opportunity is
being created for CCRCs and assisted living facilities.
BUSINESS STRATEGY
GENERAL. The Company's business strategy is based upon the experience of
its management team in the senior living industry and on the growing demand for
senior living facilities as an increasingly preferred life style for the
elderly. The Company intends to capitalize on these two factors by (i) providing
a full range of high-quality personalized resident care and services; (ii)
pursuing development opportunities; and (iii) acquiring properties in the open
market or through the exercise of purchase options obtained in the development
process.
PERSONALIZED RESIDENT CARE AND SERVICES. The Company believes that income
qualified elderly would choose residential CCRCs and assisted living facilities
over skilled nursing facilities when given the choice. The Company believes that
the elderly would choose the residential assisted living facility alternative
because of the significant quality of life advantages which they offer.
Consequently, providing a high quality of life for its residents in a safe,
healthy and secure environment is the foundation of the Company's business
strategy.
In furtherance of this strategy, the Company has structured its senior
living facilities to offer residents a supportive, "home-like" setting and
assistance with ADLs. Its facilities are, in many respects, similar to
conventional apartment living with enhanced services allowing residents a more
independent and social lifestyle than they would receive in a skilled nursing
facility or, in most cases, at home. At the same time, support is provided in a
manner sufficient to meet residents' requirements. General services in the
Company's residences include the provision of three meals per day, laundry,
housekeeping and maintenance. Available support services include personal and
routine nursing care, social and recreational services and transportation.
Personal care includes assistance with activities such as bathing, dressing,
personal hygiene, grooming, and eating and ambulating. The Company also provides
routine nursing services (in addition to its skilled nursing facility services)
entertainment, banking and shopping. Generally, however, the Company is able to
tailor the changing needs of its residents through the use of individual service
contracts and flexible staffing patterns.
DEVELOPMENT OPPORTUNITIES. Operating revenues and management fees are
generally stable once a facility is fully occupied. At that point, growth in
revenue of the Company becomes dependent upon development and management fees
received through the development and management of additional senior living
facilities. Consequently, the second part of the Company's business strategy is
to increase the number of senior living facilities it develops and manages, in
part through a strategy whereby the Company may enter into an agreement with an
unaffiliated third party entity, which may be a 501(c)(3) organization, to
develop a senior living facility for such entity. The Company would generally
obtain a management agreement to operate the facility upon its completion as
well as an option to purchase the facility at a future time. Through this type
of transaction, the Company would not incur the start-up development costs and
operating losses typically associated with the development and initial operation
of a senior living facility because the Company would not be the owner, however
prior to entering into such agreement, the Company may incur certain initial
expenses associated with its site selection process. The Company would earn a
development fee for the development of the senior living facility and a
management fee for its operation and might exercise its option, if any, to
purchase
32
<PAGE>
the senior living facility. The unaffiliated third party entity (which would
often be a not-for-profit entity) would benefit through the attainment of a
turnkey senior living facility. There can be no assurance that a 501(c)(3)
organization will be willing to enter into such a contractual arrangement, and
moreover, there can be no assurance that this form of transaction for a
501(c)(3) organization will withstand regulatory challenge. See "Risk Factors --
Risks Associated with Sponsored Development Projects" and "-- Regulatory
Challenge Regarding Tax-Exempt Not-For-Profit Organizations."
The Company's development program will initially focus on site selection and
residence size, both of which the Company believes are essential to the success
of its development projects. In evaluating a prospective development site, the
Company will consider primarily the strength of the market demand and the
ability to maximize the efficiency of its management resources in a specific
market or "cluster". Accordingly, the Company intends to select sites so that it
can strategically place three to five senior living facilities within a 200-mile
radius, creating a regional cluster of senior living facilities. The Company
believes that the clustering concept will allow it to reduce costs by sharing
certain management, marketing and operational resources within the regional
cluster. The Company intends to locate its assisted living facilities in
well-established residential neighborhoods in communities where the population
typically ranges from 40,000 to 100,000 people. The size of a typical community
for a CCRC would generally be somewhat larger, ranging between 100,000 and
500,000 people. The Company intends to pursue the development of senior living
facilities in communities that show a strong need for senior living services and
a higher than average percentage of middle-aged or elderly individuals. Other
factors that are considered in the site selection process include the level of
competition, the local labor market, the state and local legislative and
regulatory environment and the presence of strong community support for senior
living facilities.
Once a site is selected, the Company would either advance funds to the
unaffiliated third party owner of the facility, which funds would be secured by
the assets of the unaffiliated third party entity, including the land for the
proposed facility or expend funds itself. The Company would be limited pursuant
to the terms of the Notes to advance no more than $1.5 million for any one
senior living facility. While these advances may at times consist of the
Company's working capital (including the proceeds from the Offerings), the
Company may also seek to arrange, through Vanguard or another placement agent,
short term financing to satisfy the project's initial funding requirements. The
Company may set up a special purpose wholly-owned subsidiary which would issue
the debt, which debt may then be convertible into the Company's Common Stock. It
is intended that these advances would be repaid from the proceeds of either
mezzanine or construction financing arranged for or by the Company on behalf of
the unaffiliated third party entity. The Company may be restricted from
recording as a receivable any advances to the unaffiliated third party entity
under certain circumstances. The Company would then, pursuant to project
development agreements, act as the project developer for what would typically be
a development fee of 7.5 percent of the project's soft and hard costs. Once the
project is completed, the Company may act as the manager of the facility
pursuant to a management agreement, which would provide for a management fee of
between four and five percent of the facility's gross revenue.
ACQUISITION OF PROPERTIES. In addition to the development and management of
senior living facilities for third parties, the Company may also, in selected
circumstances and on an opportunistic basis, acquire existing senior living
facilities. These acquisitions may be effected either through the exercise of a
purchase option obtained on properties which the Company had developed for third
parties or through acquisitions in the open market. While the Company believes
that opportunities to acquire existing senior living facilities which fit its
criteria are limited, the Company will consider such acquisitions if the
opportunities arise.
When a facility managed by the Company attains a level of profitability
after the payment of debt service and management fees (usually after stabilized
occupancy in excess of 90% and at times lower depending on the level of debt
service) and the Company has a purchase option, the exercise of the
33
<PAGE>
Company's option, would generally be considered. The Company's income from
facilities that have attained a level of profitability, will generally increase
at an increasing rate as occupancy increases after the break-even point.
SERVICES AND AMENITIES
GENERAL. The Company's senior living facilities offer residents a
supportive, "home-like" setting and assistance with activities of daily living.
The independent and assisted living community is very similar in many respects
to conventional apartment living with enhanced services allowing the residents
to live independently but yet socialize in a safe environment. Residents are
individuals who, for a variety of reasons, cannot live alone but do not
typically need the 24-hour skilled medical care provided in skilled nursing
facilities. Services provided to these residents are designed to respond to
their individual needs and to improve their quality of life. This individualized
assistance is available 24 hours a day, to meet both anticipated and
unanticipated needs. General services in the Company's residences include the
provision of three meals per day, laundry, housekeeping and maintenance.
Available support services include personal and routine nursing care, social and
recreational services, transportation and special services needed by the
resident. Personal care includes assistance with activities such as bathing,
dressing, personal hygiene, grooming, as well as eating and ambulating
assistance. Routine nursing services, which are made available and are provided
according to the resident's individual need and state regulatory requirements,
include assistance with taking medication, skin care and injections. Organized
activities are available for social interaction and entertainment. Special
services available include banking, grocery shopping and pet care. Although a
typical package of basic services provided to a resident includes meals,
housekeeping, laundry and personal care, the Company does not have a standard
service package for all residents. Instead, it is able to accommodate the
changing needs of its residents through the use of individual service contracts
and flexible staffing patterns.
As the Company's residents age, the level of care required by particular
residents is expected to increase. The Company's multi-tiered rate structure for
the services it provides is based upon the acuity of, or level of services
needed by, each resident. Supplemental and specialized health and personal care
services for those residents requiring 24-hour supervision or more extensive
assistance with activities of daily living is provided to the residents by
third-party providers who are reimbursed directly by the resident or a
third-party payor (such as Medicaid or Medicare). In the event that a resident's
acuity reaches a level such that the Company is unable to meet such resident's
needs, the Company maintains relationships with local hospitals and skilled
nursing facilities to facilitate a transfer of the resident. A resident of the
Company's CCRCs would be transferred to the skilled nursing component at the
facility.
Amenities common to the Initial Properties include convenience stores,
barber shops and beauty parlors, exercise and/or physical therapy rooms, pools,
clubrooms, music rooms, card rooms mail facilities, communal kitchen and dining
areas, extensive recreational programs,including arts and crafts, day trips,
parties, dinner dances, lectures, cards, pool tables, exercise classes, nature
walks, movies, and other group activities, church services and healthcare
monitoring. In addition, The Whittier has a swimming pool.
Special design features for independent and assisted living facilities
include large bathrooms with easy-to-operate fixtures and roll-in showers, wide,
barrier-free, well-lighted corridors, handicap access to all building interiors
and exteriors, large storage spaces, emergency call systems, ramps and elevators
(in addition to stairs), extensive signage, easy-to-operate kitchen appliances,
abundant common areas with appropriate seating and centralized service areas.
All of the Initial Properties have the features listed above, except only
Hillside Terrace and Harvest Village have an emergency call system for all
units; The Whitcomb, The Whittier and Olds Manor have emergency call systems for
selective units only.
34
<PAGE>
Three of the Initial Properties have skilled nursing units. At the Company's
other senior living facilities arrangements are made with home healthcare
providers to fill most of the needs of those residents who require skilled
nursing assistance when and if they become ill. Phoenix Lifecare Corp.
("Phoenix"), a not-for-profit entity, provides home healthcare services to two
of the Initial Properties (The Whitcomb and The Whittier) that do not have
licenses to provide such services pursuant to a CON.
THE INITIAL PROPERTIES
The Company will own and/or manage five senior living facilities containing
1,069 apartments and nursing units upon consummation of the Offerings. Two of
the Company's Initial Properties are congregate care facilities and three of the
Initial Properties are CCRCs. As residents of senior living facilities
"age-in-place," they generally require more assistance. In each of the Company's
currently owned and/or managed senior living facilities, a significant shift in
the needs of residents from independent living services to assisted living
services has taken place, and to accommodate residents, the Company is in the
initial stages of converting a number of its independent living apartments in
each of the Initial Properties to assisted living units.
OPERATING DATA. The table below sets forth certain information regarding
the Initial Properties.
<TABLE>
<CAPTION>
UNITS
-----------------------------------------
YEAR YEARS INDEPENDENT ASSISTED SKILLED
NAME AND LOCATION BUILT RENOVATED LIVING LIVING NURSING
- ------------------------------------------ ----------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PROPERTIES OWNED:
Hillside Terrace, Ann Arbor, MI........... 1969 1994 66 9 23
Olds Manor, Grand Rapids, MI.............. 1920s 1964, 1970 102 48 44
The Whitcomb, St. Joseph, MI.............. 1928 1973, 1989 102 34 --
TO BE ACQUIRED:
Harvest Village, Atco, NJ(1).............. 1989 300 -- 60
MANAGED ONLY PROPERTY:
The Whittier, Detroit, MI(2).............. 1920s 1972, 1989 229 52 --
--- --- ---
799 143 127
<CAPTION>
OCCUPANCY RATE(%)
NAME AND LOCATION MARCH 31, 1996
- ------------------------------------------ ---------------------
<S> <C>
PROPERTIES OWNED:
Hillside Terrace, Ann Arbor, MI........... 98.6
Olds Manor, Grand Rapids, MI.............. 95
The Whitcomb, St. Joseph, MI.............. 94
TO BE ACQUIRED:
Harvest Village, Atco, NJ(1).............. 52
MANAGED ONLY PROPERTY:
The Whittier, Detroit, MI(2).............. 54.8
</TABLE>
- ------------------------
(1) In connection with the Company's purchase of Harvest Village, Gateway, the
current lessee of Harvest Village, will enter into a management agreement
with the Company for the management of Harvest Village. The Company will
have the right to terminate Gateway's lease for Harvest Village upon the
payment to Gateway of the fair market value of the lease at the time of
termination.
(2) Owned by Vanguard and managed by the Company. The Company has an option to
purchase The Whittier at the lesser of (i) its appraised fair market value
and (ii) the amount of its current mortgage less accrued management fees
payable. See "Description of Notes."
35
<PAGE>
HILLSIDE TERRACE. Hillside Terrace is a CCRC located in Ann Arbor, Michgan,
approximately 30 miles from Detroit. The facility is located 1.5 miles from
downtown Ann Arbor, the main business district and home to the University of
Michigan, which enables residents to attend nearby cultural and athletic events.
Hillside Terrace was built in 1969 and was renovated in 1994. The facility
currently has 75 apartment units and 23 nursing beds, and a 64-unit expansion
has been approved by the city of Ann Arbor. This will facilitate the conversion
of a majority of the existing independent living apartment units to assisted
living units.
THE WHITCOMB. The Whitcomb is a CCRC located in downtown St. Joseph,
Michigan, which is on Lake Michigan at the mouth of the St. Joseph River. St.
Joseph's population, approximately 80,000 residents, and proximity to four
cosmopolitan cities, make The Whitcomb accessible to a large population and
secondary market. St. Joseph is 85 miles from Chicago, 195 miles from Detroit,
80 miles from Grand Rapids, Michigan and 35 miles from South Bend, Indiana. The
Whitcomb, formerly a hotel, was built in 1928. It was renovated in 1973 and in
1989 and has 136 apartments.
OLDS MANOR. Olds Manor is a CCRC located in Grand Rapids, Michigan. Olds
Manor was built as a hotel in the 1920s, but was renovated in the 1960s for use
as a retirement center and nursing facility. Olds Manor borders the central
business district of Grand Rapids, adjacent to the Post Office and across the
street from city and county administrative offices. It has 102 apartment units,
48 assisted living units and 44 skilled nursing beds.
THE WHITTIER. The Whittier is a congregate care facility located in Detroit
and has experienced a decline in its occupancy over the last several years as a
result of local demographic changes. However, the Company has instituted a
number of changes consisting of, among other things, shifting the operational
focus to assisted living and changing the target market, which now targets the
upper middle income, retired, African-American community. These changes have
resulted in a significant improvement in The Whittier's occupancy during the
last eight months, increasing from a low of 130 apartments as of October 31,
1995 to the current level of 160 in June 1996, which represents an eight-month
increase of 23 percent. The Company has reason to believe that The Whittier will
break even after operating expenses and debt service upon attaining an occupancy
level of 180 residents. Thereafter, profitability can be expected to increase at
an increasing rate as The Whittier's occupancy expands, after which the
Company's option to purchase the facility pursuant to the terms of its purchase
option can be exercised, subject to the terms of the Notes, which limit the
Company's ability to exercise its option.
HARVEST VILLAGE. Harvest Village is a congregate care facility located in
Atco, New Jersey. With respect to the Company's proposed acquisition of Harvest
Village, the Company believes that Harvest Village's occupancy and its
profitability can be improved as a result of several significant factors,
including: (i) the removal of the present risk of foreclosure of the
construction loan (due October 1, 1996), which has negatively impacted sales
over the past three years because prospective residents have been reluctant to
commit resources to a potentially unstable situation, and (ii) the conversion of
an independent living wing to a 51 unit assisted living facility. The Company
believes based upon inquiries and market analysis that a strong market for the
rental of assisted living units exists in the market area. The Company believes
that removing the financial uncertainty and the assisted living conversion will
accelerate the increase of Harvest Village's occupancy level and improve its
operating net income and cash flow. In any event, the Company believes that the
purchase price at which it will acquire Harvest Village is substantially lower
than its current fair market value based upon a recent appraisal. The purchase
price ($17.4 million) breaks down to an average per unit cost of $48,333 for the
360 apartments and licensed nursing beds located at the facility. This is
significantly under the national average for a CCRC and approximately 50 percent
of the cost of developing and constructuring the facility. Moreover, after the
conversion of one of the 36 apartment unit wings to 51 assisted living apartment
units, Harvest Village will still have 100 remaining saleable apartment units at
an average cost of approximately $100,000 per unit ($10 million), or
approximately $60,000 per unit ($6 million) if all units are sold pursuant to a
Traditional Residency Agreement (See "-- Paying for
36
<PAGE>
Senior Living Care"), which can be used to augment the facility's cash flow.
Finally, when Harvest Village was originally constructed during the late 1980s,
the population density in its primary market area was significantly lower than
the present population density.
Claritas, Inc., an independent demographic data company, has estimated that
the population within a 10-mile radius of Harvest Village has increased from
approximately 200,000 to 280,000, a 40 percent increase from 1980 through 1996.
Moreover, the median household income for that same area over that period
increased over 140 percent from $20,586 to $49,710. Commercial development
including office and retail building construction has increased dramatically
along the Route 73 corridor which borders the Harvest Village property and, in
the Company's opinion, indicates the positive demographic trend applicable to
the facility's primary market area.
The Company's revenues will be conditioned upon receipt of rental payments
from Gateway which, in turn, will be dependent upon the success of the
operations of Harvest Village.
In connection with the Company's purchase of Harvest Village, Gateway, the
current lessee of Harvest Village, will enter into a management agreement with
the Company for the management of Harvest Village. The Company will have the
right to terminate Gateway's lease for Harvest Village upon the payment to
Gateway of the fair market value of the lease at the time of termination. In
addition, Vanguard has agreed to lend Gateway $1.5 million for working capital
purposes after the consummation of the Offerings.
COMPANY PROJECTS
To provide the appropriate level of personal care efficiently and
economically, the Company intends to develop or acquire assisted living
facilities generally ranging in size from 80 to 120 units. The Company has
developed a prototype assisted living facility. It is anticipated that the
prototype assisted living facility will be built on its Hollywood, Florida,
Huntington, New York and Stroudsburg, Pennsylvania sites as well as on other
qualified sites presently being negotiated. Each assisted living facility will
generally be built on a parcel of land ranging in size from 3 to 10 acres and
will contain approximately 70,000 to 105,000 square feet. Approximately 40
percent of the building will be devoted to common areas and amenities, including
reading rooms, family or living rooms and other areas designed to promote social
interaction among residents. These areas will be located primarily in a basic
central core structure which is essentially repeatable in all of the Company's
proposed facilities. Modular wings of similar design are added to the central
core, depending upon the size of the facility. The building is usually two or
three stories and of either steel frame or masonry construction built to
institutional healthcare standards but strongly residential in appearance. The
interior layout is designed to promote a "home-like" environment, efficient
delivery of resident care and resident independence. Each residential unit will
be between approximately 375 to 550 square feet and is expected to cost
approximately $60,000 to $90,000 to construct, depending upon construction costs
which vary from state to state.
Resident units in the Company's prototype assisted living facility are
functionally arranged in eight to twelve apartment clusters surrounding a
"neighborhood" living area in order to foster social interaction between
residents. The Company's prototype may be configured with several different
types of resident units, including a mix of one- and two-bedroom suites and
large studio or alcove apartments. All units have a small kitchen and roll-in
showers for easy wheelchair access. The ground level typically contains a
kitchen and common dining area, administrative offices, exercise or physical
therapy room, arts and crafts, beauty salon, laundry room, a private dining
room, library, living room, and TV room. Typically, one floor or one or two
wings of a facility contain resident units and common areas, including separate
dining facilities, specifically designed to serve residents with cognitive
impairments (E.G., Alzheimer's disease) or other special needs.
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<PAGE>
CCRCs will generally be built on a parcel of land ranging from 10 to 30
acres and will contain from 150 to 200 units with an average size independent
living unit of between 900 and 1,000 square feet. The cost will average between
$100,000 and $200,000 per independent living unit. Each CCRC will be tailored to
the specific needs of each site selected.
The Company's three-year expansion objective is to develop principally for
others at least 24 senior living facilities consisting of 20 assisted living
facilities and four CCRCs with an estimated aggregate capacity of approximately
3,000 residents.
The following table sets forth certain information regarding sites and
facilities that are either owned, under construction or are subject to purchase,
development or management contracts:
<TABLE>
<CAPTION>
NUMBER OF UNITS
-------------------------------------------
INDEPENDENT ASSISTED SKILLED
NAME LIVING LIVING NURSING
- ------------------------------------------------------------- --------------- ----------- -------------
<S> <C> <C> <C>
Cottage Grove Place,
Cedar Rapids, IA(a) 135 50 16
Presidential Place,
Hollywood, FL(b)(c) -- 104 --
Camelot Village,
Huntington, NY(b)(d) -- 120 --
Orchard Terrace,
Ann Arbor, MI(c)(e) 64 -- --
Camelot Village,
Stroudsburg, PA(b)(d) -- 80 --
Colonie, NY(b)(d)(f) 200 90 60
Camelot Village,
Columbus, IN(g) -- 80 --
Home Place, Indianapolis, IN(h) -- 60 --
Sanders Glen, Westfield, IN(h) -- 69 --
</TABLE>
- ------------------------
(a) A 201-unit CCRC being developed by the Company pursuant to development and
management agreements with an unaffiliated not-for-profit entity. The
project is expected to be completed in the fall of 1996.
(b) The Company has entered into development and management agreements and has a
purchase option on this senior living facility.
(c) Zoning approval has been obtained, and the Company is awaiting Federal
Housing Administration financing approval.
(d) Zoning approval is in the process of being obtained.
(e) This site is owned by the Company and is being used to expand Hillside
Terrace by 64 independent living units. Upon completion, the Company will
convert 66 of Hillside Terrace's independent living units into assisted
living units.
(f) The Company has an agreement in principle to purchase this presently
undeveloped site. This senior living facility is not yet named.
(g) The Company has entered into a letter of intent to develop a senior living
facility on this site.
(h) The Company intends to lease this existing senior living facility following
its proposed acquisition by an unaffiliated third party.
38
<PAGE>
COMPANY OPERATIONS
MANAGEMENT. The day-to-day operations of each senior living facility are
managed by an on-site administrator who is responsible for the overall operation
of the senior living facility, including quality of care, marketing, social
services and financial performance. The administrator is assisted by
professional and non-professional personnel, some of whom may be independent
providers or part-time personnel, including nurses, personal service assistants,
maintenance and dietary personnel. The routine nursing services are provided by
a nurse who is typically employed by the Company, subject to state regulatory
requirements. The nursing hours vary depending on the residents needs. The
Company consults with outside providers, such as pharmacists and dieticians, for
purposes of medication review, menu planning and responding to any special
dietary needs of its residents. Personal care, dietary services, housekeeping
and laundry services are performed primarily by personal service assistants who
are full-time employees of the Company. Maintenance services are performed by
full-time employees, while landscaping services are sometimes performed by
third-party contractors.
The Company provides management services to each of its senior living
facilities which include the development of operating standards and the
provision of recruiting, training and accounting services. It is anticipated
that, as the Company grows, it will establish regional offices that will include
a regional manager to oversee six to ten senior living facilities. The regional
manager will be responsible for monitoring and supervising all aspects of
operations in the region, including reviewing and monitoring compliance with
corporate policies and procedures and acting as a liaison between the senior
living facilities and corporate headquarters.
Presently, senior living facility personnel are supported by a corporate
staff based at the Company's headquarters. Corporate personnel work with the
on-site administrator with respect to the establishment of senior living
facility goals and strategies, quality assurance oversight, development of
Company policies and procedures, development and implementation of new programs,
cash management and treasury functions, human resource management and
development.
The Company's executive team has been carefully selected based upon his or
her knowledge and experience in the senior living field and related areas. The
Company has sought talented, self-starters who are capable of handling many
aspects of the senior living business. The Company believes that a successful
senior living facility is operationally related to the hotel/hospitality field
and programmatically related to the residential/social model of healthcare.
MARKETING. The Company's senior living facilities provide affordably priced
housing, personalized support and healthcare services and primarily target
private-pay residents. By targeting senior living facility development projects
primarily in upper middle income communities and by maintaining competitive
pricing, the Company believes it will be able to achieve high occupancy levels.
The Company has found an effective niche in the upper middle income market
between the high income prospect who can afford to obtain services at home and
the low income prospect who cannot afford to live in the Company's senior living
facilities.
For its assisted living facilities, the Company targets senior citizens who,
although generally ambulatory, need help with the activities of daily living.
For instance, a typical prospective resident for the Company's assisted living
facilities may not be eating properly, may not be taking medication properly or
may be forgetful and need assistance with activities such as bathing, dressing,
medication monitoring, transportation and diet monitoring. The Company's target
market also includes senior citizens who are socially isolated or unable to
perform housework, such as cooking, yardwork or home repairs or maintenance. The
Company's strategy is to develop in each assisted living facility a setting with
a wide range of related services provided to serve primarily those individuals
whose care requirements fall between a typical nursing facility and the
independent living provided in a private home or a congregate care facility. The
Company assesses the level of need of each resident regularly.
39
<PAGE>
The marketing of independent living facilities is done through a combination
of media and direct mail advertising, referrals from residents and various
centers of influence (e.g., hospital administrators, religious leaders, service
clubs, attorneys, accountants, bankers, etc.) and various types of social
functions at a senior living facility. Marketing assisted living facilities is
better accomplished through networking with major referral sources. During the
rent-up stage of a project, the marketing staff would consist of a Director of
Marketing, two sales persons, and a secretary. The senior living facility's
administrator would also assist with special events and market-oriented social
affairs. After the senior living facility is substantially rented, the staff can
be reduced to a single or part-time Marketing Director and secretary.
PAYING FOR SENIOR LIVING CARE
The residents of CCRCs and assisted living facilities or their families
generally pay the cost of care from their own financial resources. Depending on
the nature of an individual's health insurance program or long-term care
insurance policy, the individual may receive reimbursement for the costs of
care.
Government payments for assisted living outside of a skilled nursing
facility have been limited. Some state or local governments offer subsidies for
rent or services for low income elderly. Others may provide subsidies in the
form of additional payment for those who receive SSI payments. Medicaid provides
reimbursement for certain financially or medically needy persons, regardless of
age, and is funded jointly by federal, state and local governments. Medicaid
reimbursement varies from state to state. According to the Report on Long-Term
Care published in February 1994, only 11 states have Medicaid Waiver programs
that allow them to pay for assisted living care. Without a Medicaid Waiver
Program, states can only use federal Medicaid funds for care in skilled nursing
facilities.
Potential residents of the Company's CCRCs, Cottage Grove Place and Harvest
Village, are required to pay an application fee upon submission of each
application. At Harvest Village, for example, applicants are required to pay an
application fee of $500 per residency agreement. Additionally, new residents are
required to pay an entrance fee that ranges from $40,000 to $147,000. The
specific amount is determined by (i) the type of residency agreement signed by
each resident and (ii) the size of the apartment that is chosen by the resident.
Harvest Village has two different types of residency agreements. One is called
the Return of Capital Residency Agreement the other is entitled Traditional
Residency Agreement.
The Return of Capital Residency Agreement allows the resident to be eligible
for a partial reimbursement of up to 90% of the entrance fee, and upon the
resident's death, the estate may be eligible for partial reimbursement of up to
90% of the entrance fee. Partial resident reimbursement is subject to deductions
specified in the agreement and will be paid only after receipt of the proceeds
paid by a new resident. Under the Return of Capital Residency Agreement, if a
resident is permanently assigned to the healthcare center, the resident will pay
a healthcare fee each month and 90% of the entrance fee will be amortized at 2%
for each full or partial month the resident receives care in the healthcare
center.
Under the Traditional Residency Agreement admission payments are lower than
under the Return of Capital Residency Agreement. Any refund of the entrance fee
is determined by length of residency; amortization of the entrance fee for care
in the healthcare center does not apply. If the resident is permanently assigned
to the healthcare center the resident will pay the healthcare fee for each month
or partial month. Amortization of the entrance fee does not apply. The resident
is responsible for the cost of two additional meals or medical treatment,
prescription drugs, prescribed therapy, nursing supplies and other medical
miscellaneous supplies and services associated with medical treatment. The
healthcare fee includes semi-private room, one meal per day and basic nursing
care. There is an additional service fee when a second person shares a living
unit.
40
<PAGE>
COMPETITION
The long-term care industry generally is highly competitive and the Company
expects that the assisted living business in particular will become more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health
agencies, lifecare at home, community-based service programs, congregate care
communities and convalescent centers. While there presently are few assisted
living facilities existing in the markets the Company intends to serve, the
Company expects that, as assisted living receives increased attention and the
number of states which include assisted living in their Medicaid Waiver Program
increases, competition will grow from new market entrants, including companies
focusing primarily on assisted living. Nursing facilities that provide long-term
care services are also a potential source of competition for the Company.
Providers of senior living facilities compete for residents primarily on the
basis of quality of care, price, reputation, physical appearance of the
facilities, services offered, family preferences, physician referrals and
location. Some of the Company's competitors are significantly larger than the
Company and have, or may obtain, greater resources than those of the Company.
The Company believes that the rate at which competition will grow in the
CCRC industry market will be slower than assisted living facilities because of
the increased difficulty of locating larger sites, obtaining financing for this
type of project and the longer rent-up periods for CCRCs. The Company expects
that its major competitors will be other long-term care facilities within the
same geographic area as the Company's facilities because management's experience
indicates that senior citizens who move into senior living facilities frequently
choose communities near their homes.
GOVERNMENT REGULATION OF SENIOR LIVING FACILITIES
In general, senior living facilities and healthcare services are subject to
extensive government regulation. The senior living facilities owned and managed
by the Company are subject to state regulation and licensing requirements and to
CON or similar statutes under which a proposed operator must demonstrate public
need for skilled nursing beds or assisted living units and satisfy other
criteria. The operators of those facilities must also comply with any cost
reporting or other reporting requirements imposed by the Medicaid program as
well as any reimbursement limitations on amounts that may be charged to the
program or to program beneficiaries. In order to qualify as a state licensed
facility and, where applicable, qualify for Medicaid reimbursement and/or
resident SSI supplemental payments, the senior living facilities owned and
managed by the Company must comply with regulations that address, among other
things, staffing, physical design, required services and resident
characteristics. Such facilities are also subject to various local building
codes and similar ordinances, including fire safety codes. These requirements
vary from state to state and are monitored by varying state and local agencies.
Currently, assisted living facilities are not regulated as such by the
federal government. Current state requirements for assisted living providers in
many states are typically less stringent than the requirements for skilled
nursing facilities. Management anticipates that states that regulate assisted
living facilities, to the extent they do not already do so, will require
licensure as an assisted living facility and will establish varying requirments
with respect to such licensure. The facilities that the Company intends to
develop and manage in New York and Florida will apply for appropriate licensure.
In addition, the Company expects that it, or the facilities that the Company
manages, will obtain licenses in other states as required, although under
current New York law, a public for-profit corporation such as the Company is not
eligible to be the licensed operator of a nursing facility or as an "adult
home", which is the New York regulatory designation for an assisted living
facility.
The facilities owned and managed by the Company are subject to periodic
survey or inspection by governmental authorities. From time to time, in the
ordinary course of business a facility may be cited for one or more deficiencies
which are typically addressed in a plan of correction by the facility. None of
the Initial Properties is subject to any proceedings to revoke any of its
licenses nor is the Company
41
<PAGE>
aware of any conditions that could reasonably lead to such proceedings. The
Company believes that the Initial Properties are in substantial compliance with
all applicable licensing, reimbursement and similar regulatory requirements.
The Company and the facilities it manages are also subject to various state
and federal "fraud and abuse" laws, including "anti-kickback" and "physician
self-referral" laws. The federal "anti-kickback" law prohibits the knowing and
willful solicitation, receipt or offering of any direct or indirect remuneration
or consideration to induce or in exchange for referrals of patients or for the
ordering of services covered by Medicaid or Medicare and certain other state
healthcare programs. The federal "self-referral" law, known as the Stark II law,
imposes restrictions on physician (and other licensed provider) referrals of
patients for physical therapy, occupational therapy and certain other designated
healthcare services, to certain entities with which the provider or any
immediate family member has a financial relationship. Several states in which
the Company operates of proposes to operate have similar "anti-kickback" and
"self-referral" laws. In some cases, such state laws apply to a broader range of
services and a broader class of payors. Penalties for violating existing fraud
and abuse laws include civil monetary penalties, criminal sanctions and
exclusion from the Medicare and Medicaid programs.
The Company believes that its operations and those of the Initial Properties
that the Company manages are in material compliance with such laws and
regulations. The laws, rules and regulations which govern the Company, the
Initial Properties and other persons with whom the Company has relationships are
very broad and are subject to continuing change and interpretation. Thus, it is
possible that certain of the past of present contractual arrangements or
business practices of the Company or the Initial Properties might be challenged.
No assurance can be given that the Company or the facilities managed by the
Company will be able to obtain or maintain the CONs, licenses and approvals
necessary to conduct their current or proposed businesses. Further, no assurance
can be given that federal, state and local laws, rules and regulations will not
be amended or interpreted so as to require the Company or a facility managed by
the Company to change its contracts or practices or to obtain additional CONs,
approvals or licenses to conducted its business as now conducted or as proposed
to be conducted or that the Company or such facility will be able to obtain such
CONs, approvals or licenses. The failure to obtain or maintain requisite CONs,
licenses or approvals or to otherwise comply with existing or future laws, rules
and regulations or interpretations thereof could have a material adverse effect
on the Company's results of operations or financial condition.
OFFICES
The Company's corporate offices are located at 4 Cedar Swamp Road, Glen
Cove, New York 11542, where the Company rents 2,200 square feet from CBF
Building Company, a New York limited partnership of which Vanguard is the
general partner, under a lease expiring December 31, 2002. The Company subleases
25 percent of its space to Vanguard. See "Certain Transactions" and Note G to
Notes to Consolidated Financial Statements.
EMPLOYEES
As of March 31, 1996, the Company had approximately 240 full-time employees,
of whom 10 are executives and approximately 25 are in administrative and
clerical positions. In the opinion of the Company, employee relations are good.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. Effective April 1, 1992, the Company began to self-insure
for health and medical liability costs for up to a maximum of $300,000 in
claims. In the opinion of management of the Company, although the outcomes of
these suits and claims are uncertain in the aggregate they should not have a
material adverse effect on the Company's business, financial condition and
results of operations.
42
<PAGE>
On December 20, 1995, the law firm of Hannoch Weisman filed an action in New
Jersey against Harvest Partners, an affiliate of Vanguard and the owner of
Harvest Village, seeking recovery of uncollected attorney's fees in an amount of
$466,751, interest thereon and costs. The case is being vigorously defended.
DESCRIPTION OF MORTGAGE LOANS
Upon the consummation of the Offerings, the Company's indebtedness for
borrowed money will consist primarily of the mortgage loans described below (the
"Mortgage Loans") and the Notes. See Note E to Consolidated Financial
Statements. The Mortgage Loans encumber all of the Initial Properties. See
"Description of Notes."
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
As of March 31, 1996, Hillside Terrace, Inc., a wholly-owned subsidiary of
the Company and the owner of Hillside Terrace, was indebted to Great-West Life &
Annuity Insurance Company ("GWL") in the aggregate principal amount of
$2,251,049. Such indebtedness is secured by a first mortgage loan on Hillside
Terrace. As of March 31, 1996, Whitcomb Tower Corp., a wholly-owned subsidiary
of the Company and the owner of The Whitcomb, was indebted to GWL in the
aggregate principal amount of $2,100,813. Such indebtedness is secured by a
first mortgage lien on The Whitcomb. The payment of principal and interest on
each of the foregoing first mortgages has been guaranteed by Vanguard. In
addition, as of March 31, 1996, Whittier Towers, Inc., a wholly-owned subsidiary
of Vanguard and the owner of The Whittier, was indebted to GWL in the aggregate
principal amount of $4,087,346. Such indebtedness is secured by a first mortgage
loan on The Whittier. Each of the foregoing first mortgage loans bears interest
at 7.5% per annum and is due April 30, 1997. The first mortgage loan securing
The Whittier provides that a default under such loan is also a default under
both of the first mortgage loans securing Hillside Terrace and The Whitcomb.
Consequently, a default under the first mortgage loan securing The Whittier
could result in the foreclosure of Hillside Terrace and The Whitcomb. See
"Certain Transactions."
Under the Second Amendment to Mortgage and Security Agreements with GWL,
dated as of September 1, 1994, in the event that any of Whittier Towers, Inc.,
Whitcomb Tower Corp., or Hillside Terrace, Inc. sells, conveys, transfers,
pledges or further encumbers its property without the prior written consent of
GWL, then GWL has the right to declare due and payable the entire balance of the
unpaid principal with accrued and unpaid interest due thereon, plus the
prepayment premium provided in the promissory note related to its mortgage.
In the event that Olds Manor, Inc., a wholly-owned subsidiary of the Company
and the owner of Olds Manor sells, conveys, transfers, pledges or further
encumbers its property without the prior written consent of GWL, then GWL shall
have the right, at its option, to declare forthwith due and payable the entire
balance of the unpaid principal with accrued and unpaid interest thereon, plus
the prepayment premium provided in the promissory notes executed by Hillside
Terrace, Inc., Whittier Towers, Inc. and Whitcomb Tower Corp.
OLD KENT BANK
As of March 31, 1996, Olds Manor, Inc., a wholly-owned subsidiary of the
Company and the owner of Olds Manor, was indebted to Old Kent Bank ("Old Kent")
in the aggregate principal amount of $252,433. Such indebtedness is secured by a
first mortgage lien on Olds Manor. The foregoing loan bears interest at Old
Kent's prime rate plus one percent per annum (9 1/4% per annum as of March 31,
1996) and is due August 7, 2001.
Under a Negative Pledge Agreement dated as of September 1, 1994, between
Olds Manor, Inc. and GWL, Olds Manor, Inc. agreed that prior to the date on
which the loans of GWL to Whittier Towers, Inc., Whitcomb Tower Corp. and
Hillside Terrace, Inc. are repaid in full, Olds Manor, Inc. will not, without
the prior written consent of GWL, assign, transfer, sell, convey, mortgage,
pledge, hypothecate, or otherwise dispose of or encumber Olds Manor, any
interest therein or any portion thereof.
43
<PAGE>
OLDS MANOR MORTGAGE TRUST
As of March 31, 1996, Olds Manor, Inc. was indebted to Olds Manor Mortgage
Trust in the aggregate principal amount of $680,000. Such mortgage is secured by
a convertible mortgage note on Olds Manor that is subordinate to the first
mortgage lien on Olds Manor held by Old Kent to a maximum amount of $436,459 and
a second mortgage on Olds Manor held by Citibank, N.A. ("Citibank") and Lloyds
Bank Plc ("Lloyds") (to a maximum amount of $1,400,000. The foregoing loan bears
interest at prime rate of Citibank plus three percent per annum, is due May 31,
2000 and is convertible at any time prior to repayment into 51,873 shares of
Common Stock, subject to adjustment (the "Olds Manor Note"). The Company is the
guarantor of the Olds Manor Note.
WHITCOMB MORTGAGE TRUST
As of March 31, 1996, Whitcomb Tower Corp. was indebted to Whitcomb Mortgage
Trust in the aggregate principal amount of $1,200,000. Such mortgage is secured
by a convertible mortgage note on The Whitcomb that is subordinate to the first
mortgage loan on The Whitcomb held by GWL and prior and superior to a mortgage
on Whitcomb Tower held by Citibank and Lloyds. The foregoing loan bears interest
at prime rate of Citibank plus three percent per annum, is due March 31, 1999
and is convertible at any time prior to repayment into 117,729 shares of Common
Stock, subject to adjustment (the "Whitcomb Tower Note"). The Company is
guarantor of the Whitcomb Tower Note.
SEVEN PERCENT PROMISSORY NOTES
During 1993 and 1994, the Company issued and sold $795,000 aggregate
principal amount of Seven Percent Promissory Notes due December 31, 2000 (the
"7% Notes"). As of the date of this Prospectus, the 7% Notes are currently
convertible into 27,736 shares of Common Stock.
CITIBANK, N.A. AND LLOYDS BANK PLC
Citibank and Lloyds hold a second mortgage on Olds Manor in the amount of
$1,400,000 and a consolidated mortgage in the amount of $1,000,000 on The
Whittier, The Whitcomb and Hillside Terrace securing Vanguard's $6,350,000
guarantee of a construction loan in connection with Harvest Village. In
addition, Vanguard has pledged 1,340,573 shares of Common Stock it owns as
security for its guarantee. In connection with the consummation of the Offerings
and the Harvest Village Acquisition, the construction loan encumbering Harvest
Village will be repaid and the Citibank and Lloyds mortgages on Olds Manor, The
Whittier, The Whitcomb and Hillside Terrace will terminate.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Carl G. Paffendorf................................... 63 Chairman of the Board and Chief Executive Officer
Larry L. Laird....................................... 59 President, Chief Operating Officer and Director
Paul D'Andrea........................................ 63 Vice President--Finance
Theresa A. Govier.................................... 58 Vice President--Administration and Secretary
Craig M. Shields..................................... 54 Vice President and General Counsel
Alan Guttman......................................... 47 Treasurer
James E. Eden........................................ 56 Director
Benjamin Frank....................................... 62 Director
Francis S. Gabreski.................................. 77 Director
Robert S. Hoshino, Jr................................ 49 Director
Stanford J. Shuster.................................. 54 Director
</TABLE>
CARL G. PAFFENDORF has been Chairman of the Board and Chief Executive
Officer of the Company since 1988 as well as a director of the Company since
inception. Mr. Paffendorf has been involved in the development, management,
acquisition and/or financing of 12 retirement communities since 1979. Mr.
Paffendorf has been president of Vanguard since 1979 and Chairman of Vanguard
since 1972. Vanguard is a real estate holding company. Mr. Paffendorf is an
attorney and a member of the Florida and Ohio Bars and holds a Masters degree in
Tax Law (LL.M.)
LARRY L. LAIRD has been President and Chief Operating Officer of the
Company since 1994 and a Director of the Company since 1993. Mr. Laird has been
involved in the development and management of retirement communities since 1965.
Mr. Laird's experience encompasses the development of 42 retirement facilities
and the management of 51 retirement facilities in 25 states. He has served as an
industry leader and spokesman; an interstate lobbyist for stringent legislation
with regard to lifecare facilities; a founder, director and officer of both
state and national industry associations; and has lectured in numerous
industry-related forums. Mr. Laird received a B.A. from Central College, Pella,
Iowa and did graduate work at the University of Iowa in Iowa City. Mr. Laird
continues to serve as Executive Director of Friendship Village, Waterloo, Iowa,
a lifecare facility. From October 1986 until October 1992, Mr. Laird served as
president of Forum Lifecare, Inc., a wholly-owned subsidiary of Forum Group,
Inc., and as a vice president of Forum Group, Inc. From October 1992 until July
1996, Mr. Laird was also president of Laird Lifecare Ltd., a developer of senior
living facilities. Prior to 1986 he was a co-founder and executive vice
president and chief operating officer of Life Care Services Corporation in Des
Moines, Iowa.
PAUL D'ANDREA has been Vice President -- Finance of the Company since May
1994. From 1991 to 1994, Mr. D'Andrea was vice president/controller of ODA
Environetics International, Inc., a company engaged in architectural design, and
from 1975 through 1991 was vice president/treasurer of Apco Merchandising
Corporation, a jewelry manufacturer and retailer. Mr. D'Andrea received a B.S.
in accounting from New York University.
THERESA A. GOVIER has been Vice President -- Administration and Secretary
of the Company since 1991. Ms. Govier has also been employed by Vanguard since
1977 as executive assistant to the president and director of employee benefits.
Ms. Govier attended Nassau Community College from 1988 to 1992.
45
<PAGE>
CRAIG M. SHIELDS has been Vice President and General Counsel of the Company
since 1992. From 1992 through 1995 Mr. Shields was of counsel/partner of the law
firm of Quinn & Suhr, LLP, White Plains, New York. From 1983 through 1991 he was
founder/partner of the law firm of Collier, Cohen, Shields & Bock, New York, New
York. He was educated at Fordham University School of Law, New York, New York,
LL.B and Lafayette College, Easton, Pennsylvania, B.A.
ALAN GUTTMAN has been Treasurer of the Company since 1991 and Treasurer of
Vanguard since 1985. Prior to joining the Company, he was controller of Brittan
Corporation, a real estate property owner and management company. Mr. Guttman
has a B.A. degree in Accounting from the City University of New York.
JAMES E. EDEN has been a Director of the Company since June 1996. Mr. Eden
has been president of James E. Eden & Associates and Eden & Associates, Inc.
since 1993, consulting businesses active in both the senior living and the
long-term care industries. Since 1992, Mr. Eden has also been chairman of the
board and chief executive officer of Oakwood Living Centers, Inc., a long-term
care company which owns in excess of 1,000 geriatric and rehabilitative nursing
beds and centers throughout New England and Virginia. From 1988 to 1992, Mr.
Eden was employed by Marriott Corporation, first as vice president and general
manager, senior living services division, which acquired and/or developed all of
Marriott's senior living facilities and later as executive vice president, where
he was responsible for trade association and governmental relations for senior
markets. Mr. Eden is a director of Omega Healthcare Investors, Inc., Forum
Group, Inc. and Just Like Home, Inc., public companies serving the senior living
industry.
BENJAMIN FRANK has been a Director of the Company since 1991. Mr. Frank is
an attorney and real estate developer. He holds a J.D. degree from New York
University School of Law and a B.Sc. degree in Business Management from Boston
University. Prior to 1988 he was an executive with Allied Stores Corporation
("Allied") for 16 years. His last position with Allied was that of senior vice
president with overall responsibility for real estate, legal and governmental
affairs.
FRANCIS S. GABRESKI has been a Director of the Company since 1992. Mr.
Gabreski is retired. Mr. Gabreski has a B.S. degree from Columbia University.
Upon retirement from the Air Force in 1962, he accepted a position as Assistant
to the president of Grumman Aerospace Corporation, a position he held until 1978
when he was named president of the Long Island Railroad.
ROBERT S. HOSHINO, JR. has been a Director of the Company since June 1996.
Mr. Hoshino has been assistant general counsel, EBASCO Services Incorporated,
New York, New York, an international company engaged in engineering,
construction and environmental services, since 1981. Mr. Hoshino holds a J.D.
degree from Columbia University School of Law, a B.A. from Colgate University
and continued his education at the Wharton School of Business, University of
Pennsylvania, in its Advanced Management Program.
STANFORD J. SHUSTER has been a Director of the Company since June 1996. Mr.
Shuster is chief executive officer of Rosewood Estate USA, Inc. a development
and management firm of assisted living facilities based in St. Paul, Minnesota.
Mr. Shuster also serves as president and chief executive officer of Arthur
Shuster, Inc. ("ASI"). ASI is the nation's largest firm specializing in the
interior design and contract furnishings of long-term care and senior housing
facilities. In addition, he is a founding member, executive committee member and
current secretary-treasurer of the National Association of Senior Living
Industries (NASLI). Mr. Shuster has been a member of the American Association of
Homes and Services for the Aging (AAHA) since 1978 and a frequent speaker at
many national conventions and seminars regarding the provision of services to
the aging.
INFORMATION REGARDING THE BOARD OF DIRECTORS
The Bylaws of the Company provide for a Board of Directors divided into
three classes, each of which serves for a staggered three-year term. Messrs.
Frank and Gabreski have been elected to serve until the annual meeting of
stockholders in 1996, Messrs. Hoshino, Eden and Shuster have been elected to
serve until the annual meeting of stockholders in 1997 and Messrs. Paffendorf
and Laird
46
<PAGE>
have been elected to serve until the annual meeting of stockholders in 1998.
Outside Directors are expected to be compensated at the rate of $6,000 per year
plus $1,000 for each meeting attended. In addition, each non-employee Director
is eligible to participate in the Company's 1996 Outside Directors' Stock Option
Plan. All of the officers of the Company and all of its Directors, other than
Messrs. Laird, Hoshino, Eden and Shuster, are officers and directors of
Vanguard. The Company also has an Audit Committee composed of Messrs. Eden,
Frank and Hoshino.
The Representative of the Underwriters may designate for election one person
to the Company's Board of Directors for a period of five years. See
"Underwriting."
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for Carl G.
Paffendorf, the Company's Chief Executive Officer during the fiscal years ended
March 31, 1996, 1995 and 1994. No executive officer's salary and bonus exceeded
$100,000 for services rendered to the Company during such years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL YEAR ANNUAL COMPENSATION
ENDED --------------------
NAME AND PRINCIPAL POSITION MARCH 31, SALARY
- ------------------------------------------------------------------------------- ------------- --------------------
<S> <C> <C>
Carl G. Paffendorf............................................................. 1996 --(1)
Chief Executive Officer 1995 --(1)
1994 --(1)
</TABLE>
- ------------------------
(1) Mr. Paffendorf was paid $75,600 by Vanguard during the fiscal year ended
March 31, 1994, $75,600 by Vanguard during the fiscal year ended March 31,
1995 and $75,600 by Vanguard during the fiscal year ended March 31, 1996.
The Company estimates that Mr. Paffendorf devoted 60% of his time during the
fiscal year ended March 31, 1994 to the Company, 50% of his time during the
fiscal year ended March 31, 1995 to the Company and 40% of his time during
the fiscal year ended March 31, 1996 to the Company. The Company paid to
Vanguard administrative fees of $50,000 per year in each of the three fiscal
years ended March 31, 1996.
The following table sets forth certain information regarding stock option
grants made to the Chief Executive Officer during the fiscal year ended March
31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
% OF TOTAL OPTIONS
GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE
- -------------------------------------------------------------- ------------- ------------------- ----------- ----------
<S> <C> <C> <C> <C>
Carl G. Paffendorf............................................ 3,000 7.0% $ 6.10 01/01/01
7,000 16.3% $ 3.67 03/22/01
</TABLE>
The following table sets forth certain information regarding unexercised
stock options held by the Chief Executive Officer as of March 31, 1996. No
options were exercised by the Chief Executive Officer during the fiscal year
ended March 31, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT MARCH 31,
1996(#)
NAME EXERCISABLE/ UNEXERCISABLE
- ------------------------------------------------------------------------------------- ---------------------------
<S> <C>
Carl G. Paffendorf................................................................... 8,000/22,000
</TABLE>
47
<PAGE>
LONG-TERM INCENTIVE AND PENSION PLANS
The Company does not have any long-term incentive or defined benefit pension
plans.
EMPLOYMENT AGREEMENTS
Effective April 1, 1996, Mr. Paffendorf entered into a three-year employment
agreement with the Company, pursuant to which he serves as its Chief Executive
Officer. Mr. Paffendorf's annual cash compensation under the employment
agreement is $100,000 during the first year of the employment agreement. Mr.
Paffendorf has agreed not to compete with the Company during the term of his
employment and for a period of three years thereafter, and he will not, without
the Company's written consent, solicit the residents of facilities owned or
managed by the Company or any management contract owned or being negotiated by
the Company or its subsidiaries for a period of 24 months following the end of
the term of his employment agreement. The agreement automatically renews for
successive one-year terms unless either party terminates the agreement at least
45 days prior to the end of the initial term or any subsequent term. The Company
may terminate the agreement for cause upon 30 days' prior written notice to Mr.
Paffendorf.
Mr. Laird entered into a two-year employment agreement with the Company as
of April 1, 1996, pursuant to which he serves as the Company's President and
Chief Operating Officer. Mr. Laird's annual base salary under the employment
agreement is $100,000. In December 1995, Mr. Laird received a $25,000 cash bonus
and will receive 9,000 shares of Common Stock pursuant to the Company's December
29, 1995 letter agreement with Mr. Laird that survived Mr. Laird's April 1, 1996
employment agreement. Mr. Laird is to receive an additional bonus on June 30,
1996 of $25,000 cash and 3,000 shares of Common Stock. If Mr. Laird is employed
by the Company on March 31, 1998, Mr. Laird will receive a bonus of $25,000 cash
and 3,000 shares of Common Stock. If Mr. Laird dies prior to March 31, 1998,
while employed by the Company, Mr. Laird's estate will receive the full bonus
due on March 31, 1998.
Mr. Laird has agreed not to compete with the Company during the term of his
employment and for a period of three years thereafter, and, upon his termination
he will not, without the Company's written consent, solicit the residents of
facilities owned or managed by the Company, any management contract owned or
being negotiated by the Company or any employees of the Company for a period of
24 months following the end of the term of his employment agreement. The
agreement automatically renews for successive one-year terms unless either party
terminates the agreement at least 45 days prior to the end of the initial term
or any subsequent term. The Company may terminate the agreement for cause upon
30 days' prior written notice to Mr. Laird. In the event that Mr. Laird's
employment is terminated, the Company ceases to be manager of Cottage Grove
Place and Mr. Laird becomes its manager, the Company will receive one-half of
the Cottage Grove Place management fee. In the event that Mr. Laird's employment
is terminated, the Company ceases to be the developer of Cottage Grove Place and
Mr. Laird becomes its developer, the Company will receive 90% of the development
fee.
STOCK OPTION PLANS
1991 INCENTIVE STOCK OPTION PLAN. Under the Company's 1991 Incentive Stock
Option Plan (the "Incentive Plan"), 300,000 shares of Common Stock are reserved
for issuance upon the exercise of stock options. As of the date of this
Prospectus, options to purchase an aggregate of 127,380 shares of Common Stock
are outstanding under the Incentive Plan. The Incentive Plan is designed as a
means to attract, retain and motivate key employees. The Stock Option Plan
Committee administers and interprets the Plan.
The Incentive Plan provides for the granting of incentive stock options (as
defined in Section 422 of the Internal Revenue Code). Options are granted under
the Incentive Plan on such terms and at such prices as determined by the Stock
Option Plan Committee, except that the per share exercise price of options
cannot be less than the fair market value of the Common Stock on the date of
grant. Each option is exercisable after the period or periods specified in the
option agreement, but no option
48
<PAGE>
may be exercisable after the expiration of ten years from the date of grant.
Options granted under the Incentive Plan are not transferable other than by will
or by the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code or the Employee
Retirement Income Security Act.
1996 OUTSIDE DIRECTORS' STOCK OPTION PLAN. The Company's 1996 Outside
Directors' Stock Option Plan (the "Directors' Plan") provides for the grant of
options to purchase Common Stock of the Company to non-employee directors of the
Company. The Directors' Plan authorizes the issuance of a maximum of 90,000
shares of Common Stock. As of the date of this Prospectus, options to purchase
an aggregate of 9,000 shares of Common Stock are outstanding under the
Directors' Plan.
The Directors' Plan is administered by the Board of Directors. Under the
Directors' Plan each non-employee director elected after April 1, 1996 will
receive options for 3,000 shares of Common Stock upon election. To the extent
that shares of Common Stock remain available for the grant of options under the
Directors' Plan, each year on April 1, commencing April 1, 1997, each
non-employee director will be granted an option to purchase 1,800 shares of
Common Stock. The exercise price per share for all options granted under the
Directors' Plan will be equal to the fair market value of the Common Stock as of
the date preceding the date of grant. All options vest in three equal annual
installments beginning on the first anniversary of the date of grant. Each
option will be for a ten-year term, subject to earlier termination in the event
of death or permanent disability.
49
<PAGE>
CERTAIN TRANSACTIONS
DUE FROM AFFILIATES
The Company is owed by Vanguard and its affiliates cash advances, unpaid
management fees, interest and other revenues. These amounts consisted of the
following as of the dates indicated below:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 31,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Due from Vanguard................................................ $ 1,708,684 $ 2,829,998 $ 2,452,137
Due from Whittier Tower Corp..................................... 1,078,634 1,576,150 2,406,266
Due from Vanguard Affiliated Limited Partnerships (Vanguard is
General Partner)................................................ 951,201 1,107,467 1,235,661
Management fees and cash advances due from not-for-profit
entities........................................................ 913,873 1,422,746 1,088,208
-------------- -------------- --------------
$ 4,652,392 $ 6,936,361 $ 7,182,272
</TABLE>
The aggregate of $7,182,272 due from affiliates at March 31, 1996 was
reduced by $6,094,000 effective March 31, 1996 in connection with the
acquisition of Harvest Village. The balance due from affiliates of $1,088,208 is
not secured, however a portion of such amount will be secured by the escrow
agreement to be entered into among Vanguard, the Company and as escrow
agent. See "-- Escrow Agreement." In addition, the Company has a note receivable
collateralized by a third mortgage in the amount of $6,863,340 and $7,481,953 at
March 31, 1995 and 1996, respectively. The note is due from Gateway.
On February 28, 1994, through a series of transfers and assignments, the
debt due to the Company from affiliates was reduced by $6,711,253. Vanguard
owned certain receivables from Gateway which it assigned to the Company in
partial settlement of Vanguard's obligation to the Company. The assignments were
made by Vanguard and Harvest Partners in the amounts of $6,258,875 ("GCI Note")
and $452,378.
HARVEST VILLAGE
Under an agreement dated June 20, 1992, the Company purchased (for $275,000)
a five-year option from Vanguard to acquire a 50 percent equity interest in
Harvest Village for a purchase price of $2 million upon exercise of the option,
subject to the construction loan and other indebtedness on the property. The
Company's 1992 option to acquire Harvest Village was terminated in connection
with the acquisition of Harvest Village. At that time Harvest Village was owned
95 percent by Vanguard Homes of N.J., Inc. ("VHNJ"), a Vanguard subsidiary, and
5 percent by Rimco Associates, Inc., an unaffiliated corporation and the general
contractor of Harvest Village. On January 10, 1995, Rimco assigned one half of
its general partnership interest in Harvest Partners to VHNJ and on January 2,
1996 assigned the balance of its partnership interest in Harvest Partners to
Phoenix Resources, Inc., a Vanguard subsidiary. In the event of the sale of
Harvest Village, VHNJ agreed to use its best efforts to have the GCI Note
assumed by the buyer. In consideration for the assignment of Rimco's partnership
interest in Harvest Village, these subsidiaries of Vanguard have agreed that if,
as, and when and to the extent that GCI Note is paid, then they each will pay
Rimco the sum of $275,000 on September 10, 2005, with interest at the rate of 9
percent per annum, compounded annually. In consideration of Rimco's
unconditional consent to the assignment of the GCI Note to the Company, and
other consideration, the Company agreed that if, as and when the GCI Note is
paid that the Company will fund Phoenix Resources, Inc. and VHNJ out of said
proceeds with sums sufficient for them to pay Rimco sums due it. On July 12,
1996, the Company's obligation to fund Phoenix Resources, Inc. and VHNJ out of
the proceeds of the GCI Note was terminated.
In fiscal 1996, the Company agreed to purchase Harvest Village from Harvest
Partners. The purchase is contingent upon certain events, including the
consummation of a proposed $25 million
50
<PAGE>
public offering and the satisfaction of the Harvest Village construction loans
(or purchase by Vanguard or its designee). The purchase price is $17.4 million,
consisting of (i) $13,500,000 cash, (ii) the cancellation of $6,094,000 of
indebtedness due to the Company from Vanguard and (iii) the assignment to
Vanguard of the $7.5 million GCI Note. The intercompany debt and assignment of
the GCI Note have been valued by the parties at $3.9 million.
In connection with the restructuring of the construction loan for Harvest
Village, the construction lenders required Vanguard to make a $7 million loan
guaranty. This guaranty, currently $6,350,000, is secured by a subordinate
mortgage on Olds Manor in the amount of $1.4 million and a subordinate mortgage
on The Whittier in the amount of $1 million. The Whittier mortgage is cross-
collateralized with subordinate mortgages on Hillside Terrace and The Whitcomb.
The guaranty is also secured by 1,340,573 shares of the Company's stock owned by
Vanguard. The guaranty and security interests will be terminated upon the
completion of the Offerings and the purchase of Harvest Village by the Company
which will result in the repayment of the debt and a full release from the
current mortgages.
GUARANTEES
Vanguard has guaranteed to the Company the payment of the management fees
and other sums aggregating $2,406,269 at March 31, 1996 from Whittier Towers,
Inc., a Vanguard subsidiary which owns The Whittier, and $1,235,661 from two
partnerships of which Vanguard is general partner, Lake Fredrica, Ltd., which
then owned a 360-unit apartment complex in Orlando, Florida and Colony Court
Associates, Ltd., which owns a 104-unit apartment complex in Stuart, Florida.
All indebtedness with respect to such guarantees was cancelled in connection
with the acquisition of Harvest Village. In fiscal 1997, the Company assigned to
Vanguard the management agreements for Lake Fredrica and Colony Court, and Lake
Fredrica was sold.
Mr. Carl G. Paffendorf, Chief Executive Officer of the Company, and Vanguard
have guaranteed certain bank debt as follows:
<TABLE>
<CAPTION>
AMOUNT AS OF
GUARANTOR MAKER(S) LENDER MARCH 31, 1996
- --------------------------------- --------------------------------- --------------------------------- --------------
<S> <C> <C> <C>
The Company CBF Building Company Apple Savings Bank $ 116,000
The Company Vanguard State Bank of Long Island
West Hills Mortgage 450,000
- -- The Company and Vanguard State Bank of Long Island 191,667
Line of Credit
Vanguard Hillside Terrace, Inc. Great West Life 2,251,049
Vanguard Whitcomb Tower Corp. Great-West Life 2,100,813
</TABLE>
As of March 31, 1996, Vanguard's $6,350,000 guaranty of the Harvest Village
construction loan was secured by subordinate mortgages on Olds Manor
($1,400,000) and other collateral, discussed above under "Harvest Village." Carl
G. Paffendorf's $1.00 guarantee increases to $6,350,000 if Harvest Partners
files for bankruptcy. Upon the acquisition of Harvest Village by the Company,
Mr. Paffendorf's $1.00 guarantee will be cancelled.
The Great West Life mortgage on The Whittier, which is owned by Vanguard,
was $4,087,346 at March 31, 1996. A default under The Whittier mortgage is a
default under the Hillside Terrace and Whitcomb mortgages.
In fiscal 1996, Cedar Rapids CGP, L.C., a company unaffiliated with the
Company, granted to Cottage Grove Place (unaffiliated with the Company) an
option to purchase Lot 3 at the Cottage Grove retirement facility in Cedar
Rapids, Iowa for $450,000 plus certain interest and taxes. If Cottage Grove
Place fails to exercise this option and purchase Lot 3 on or before September
19, 2000, then the Company must do so, if requested by Cedar Rapids CGP, L.C.
Vanguard has guaranteed these obligations of the Company.
51
<PAGE>
OTHER
The Company leases its offices in Glen Cove, New York from CBF Building
Company, a limited partnership in which Vanguard is the general partner. The
Company has sublet 550 square feet of its space at 4 Cedar Swamp Road, Glen
Cove, New York 11542 to Vanguard on the same terms as the Company's lease with
CBF.
In fiscal 1996, certain officers/directors of the Company and its parent
company were officers and directors of Phoenix Lifecare Corp. ("Phoenix"), a
501(c)(3) organization which provides home healthcare services to residents of
The Whittier and The Whitcomb. Subsequent to the date of this Prospectus no
person employed by the Company or Vanguard or any officers, directors or
affiliates thereof will be an officer or director of Phoenix.
Phoenix provides healthcare services to residents of The Whitcomb and The
Whittier on behalf of the Company. The Company earns a management fee from
Phoenix for services rendered. At March 31, 1996, the amounts due from Phoenix,
$355,942, have been fully reserved and no management fees have been recognized
during fiscal 1995 and 1996.
In fiscal 1996, the Company assigned its option to acquire 3.2 acres of land
in Hollywood, Florida to Presidential, a 501(c)(3) organization of which Phoenix
is the sole member, in return for an agreement to develop an assisted living
facility on such property, manage the property, plus an option to acquire the
facility. The option is exercisable January 1, 2000 to December 31, 2005 at
appraised fair market value, provided that in no event shall the purchase price
be less than the sum of outstanding principal and interest, together with any
prepayment penalties of any mortgages on the property. Loans from the Company to
Phoenix and Presidential Care Corp. as of March 31, 1996 aggregated $867,614, of
which $350,000 was paid subsequent to March 31, 1996.
In fiscal 1996, in consideration of the issuance of 120,000 shares of Common
Stock to be issued by the Company to Vanguard, Vanguard released its right to
receive up to 1,200,000 shares of Common Stock at the rate of one share upon
each $5.73 received by the Company in payment or sale of the GCI Note. Effective
March 31, 1995, Vanguard had contributed 1,200,000 shares to the Company for
cancellation.
The Company has entered into agreements with a wholly-owned subsidiary of
Vanguard for the development and management of Camelot Village at Huntington, a
proposed 120-unit senior living facility to be located in Huntington, New York.
On July 12, 1996, all of the outstanding shares of the Common Stock of the
wholly-owned subsidiary of Vanguard were transferred to Phoenix Lifecare Corp.
The Company has an option, exercisable from January 2, 1997 until December 31,
2005, to purchase Camelot Village at Huntington at a purchase price equal to the
appraised fair market value, provided that in no event shall the purchase price
be less than the sum of outstanding principal and interest, together with any
prepayment penalties of any mortgage notes. As discussed above under
"Guarantees," in fiscal 1996, the Company, Vanguard and Carl G. Paffendorf
guaranteed a $450,000 bank loan to this Vanguard subsidiary, the proceeds of
which were used as part of the purchase price for the Huntington, New York
property.
The Company has an option, exercisable until December 31, 2001, to purchase
The Whittier from Whittier Towers, Inc., a wholly-owned subsidiary of Vanguard,
at a purchase price equal to the lesser of the appraised fair market value, or
the then amount of its mortgage debt less accrued management fees payable. See
"Description of Notes."
During the year ended December 31, 1994, Carl G. Paffendorf and a
partnership controlled by his spouse purchased $100,000 of the Company's 7%
Notes, and 10,000 warrants to purchase Common Stock on the same terms and
conditions offered to the other investors in a private placement. The notes and
warrants were converted and exercised in fiscal 1997.
The Company has adopted a policy whereby all future transactions between the
Company and its officers, Directors, principal stockholders or affiliates, will
be approved by a majority of the Board of
52
<PAGE>
Directors, including all of the independent and disinterested members of the
Board of Directors or, if required by law, a majority of disinterested
stockholders, and will be on terms no less favorable to the Company than could
be obtained in arm's length transactions from unaffiliated third parties. In
addition, the Notes will contain certain restrictions on the Company involving
transactions with affiliates. See "Description of Notes."
Vanguard and each of its subsidiaries have agreed to indemnify the Company
from any liabilities it may incur, including interest and penalties arising
from, among other things, (i) any unpaid taxes, assessments or similar changes
attributable to the operations of Vanguard, its subsidiaries and predecessors of
the Company prior to the effective date of the Offerings, (ii) any disallowance
of any operating loss carry-forward recorded by the Company in its income tax
returns for each year prior to and including the fiscal year ended March 31,
1996 and (iii) the cancellation of indebtedness income from the satisfaction of
a subordinate mortgage held by Gateway on Harvest Village, which is to be
acquired by the Company from a Vanguard affiliate (see "Harvest Village" above).
MANAGEMENT AGREEMENT
Under an agreement dated as of April 1, 1991, Whittier Towers Inc., a
Vanguard subsidiary, agreed to pay to the Company's subsidiary, UVH Management
Corp. ("UVHMC"), a management fee of 5% plus a 1% data processing fee for a
total of 6% of gross revenue collected or received from operation of the
facility. The term of the agreement is for a period of 60 months commencing on
April 1, 1991. UVHMC earned management fees of $151,474, $142,857 and $165,190
for the fiscal years ended March 31, 1996, 1995 and 1994, respectively.
Under an agreement dated April 1, 1996, Whittier Towers Inc. agreed to pay
to UVHMC a management fee of 5% of the gross operating income of The Whittier.
The term of the agreement is 60 months and will continue on a month-to-month
basis thereafter. The agreement may be terminated by either party upon 30 days'
prior written notice to the other party.
ESCROW AGREEMENT
In connection with the Offerings, Vanguard, the Company and
as escrow agent have entered into an escrow agreement
pursuant to which 827,586 shares of Common Stock (assuming a public offering
price of $7.25 per share) held by Vanguard will be held in escrow to secure for
the benefit of the Company certain outstanding obligations of Vanguard and
others aggregating $6,000,000. Subject to certain conditions and formulas
contained in the escrow agreement, shares will be released to Vanguard
as the obligations are repaid, the value of the escrowed shares increases or the
collateral is replaced. In the event the obligations are not repaid pursuant to
the terms of the escrow agreement, the shares will be forfeited and returned to
the Company.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus by (i)
each person who is known by the Company to be the beneficial owner of more than
5% of the Company's Common Stock, (ii) each director and each executive officer
named in the Summary Compensation Table and (iii) all directors and executive
officers as a group. Except as otherwise noted, each person maintains a business
address at c/o United Vanguard Homes, Inc., 4 Cedar Swamp Road, Glen Cove, New
York 11542, and has sole voting and investment power over the shares shown as
beneficially owned.
<TABLE>
<CAPTION>
SHARES TO
BE SHARES TO BE
SOLD IN BENEFICIALLY OWNED
EVENT OVER-
ALLOTMENT IN EVENT OVER-
SHARES SHARES TO BE OPTION IS ALLOTMENT OPTION IS
BENEFICIALLY OWNED BENEFICIALLY OWNED FULLY
BEFORE OFFERING SHARES OFFERED AFTER OFFERING EXERCISED FULLY EXERCISED
-------------------- ------------------- -------------------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vanguard Ventures, Inc....... 1,636,029(1) 73.2% -- 1,636,029(1) 40.6% 270,000 1,366,029(1) 33.9%
Carl G. Paffendorf........... 1,700,069(2) 74.0 -- 1,700,069(2) 41.5 270,000 1,430,069(2) 34.9
Larry L. Laird............... 22,680(3) 1.0 -- 22,680(3) * -- 22,680(3) *
Benjamin Frank............... 17,324(4) * -- 17,324(4) * -- 17,324(4) *
Francis S. Gabreski.......... 29,326(5) 1.3 -- 29,326(5) * -- 29,326(5) *
Robert S. Hoshino, Jr........ 17,817 * -- 17,817 * -- 17,817 *
James E. Eden................ -- -- -- -- * -- -- --
Stanford J. Shuster.......... -- -- -- -- -- -- -- --
Directors and Executive
Officers, as a Group
(11 Persons)................ 1,805,616 79.4% -- 1,805,616 44.3% 270,000 1,535,616 37.7%
</TABLE>
- ------------
* less than 1%.
(1) Vanguard has pledged 1,340,573 shares of Common Stock owned by Vanguard as
security for its guaranty in connection with construction loans to Harvest
Village. See "Certain Transactions."
(2) Mr. Paffendorf is an officer, director and controlling stockholder of
Vanguard. Consequently, Mr. Paffendorf may be deemed to be the beneficial
owner of all shares of Common Stock owned by Vanguard. Includes 7,200 shares
of Common Stock issuable upon exercise of options exercisable within 60 days
after the date of this Prospectus.
(3) Includes 4,680 shares of Common Stock issuable upon exercise of options
exercisable within 60 days after the date of this Prospectus.
(4) Includes 6,480 shares of Common Stock issuable upon exercise of options
exercisable within 60 days after the date of this Prospectus.
(5) Includes 20,326 shares of Common Stock issuable upon exercise of options and
convertible securities exercisable within 60 days after the date of this
Prospectus.
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<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Company will issue the Notes under an Indenture qualified under the
Trust Indenture Act of 1939 (the "Indenture") between the Company and
[ ], as Trustee (the "Trustee"). The following description of the
Notes does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. A copy of the form of
Indenture will be filed as an exhibit to the Registration Statement of which
this Prospectus is a part. In addition, the Indenture may be subject to change
if necessary to comply with law and is permitted to be amended pursuant to the
terms of the Indenture.
The Notes will be limited to $12,500,000 in aggregate principal amount and
will mature on October 1, 2006, with mandatory redemptions in principal amounts
of $3,125,000 on October 1, 2003, 2004 and 2005 and a final payment at maturity
of $3,125,000. Interest on the Notes shall accrue from the Closing Date. The
Company will pay interest on the Notes in arrears on each October 1 and April 1
(commencing April 1, 1997) at the rate of [ ]% per annum. The Notes may be
redeemed by the Company after October 1, 1999 if the Closing Price of the Common
Stock exceeds 150% of the conversion price (as defined in the Indenture) for 20
trading days within a period of 30 consecutive trading days ending not more than
five trading days prior to the notice of such redemption at a redemption price
(expressed as a percentage of principal amount) of 106% if redeemed before
September 30, 2000, of 105% if redeemed before September 30, 2001, of 104% if
redeemed before September 30, 2002, and of 103% if redeemed before September 30,
2003. Notes may be redeemed at the option of the Company after September 30,
2003 at 100% of the principal amount. The Notes will be secured by a mortgage
between the Company and the Trustee (the "Mortgage"), creating a lien on the
real property comprising Harvest Village and a security interest in certain
personal property owned by the Company and located at Harvest Village, and will
constitute direct obligations of the Company, ranking PARI PASSU with, or senior
in priority to, all other unsecured indebtedness of the Company.
CONVERSION RIGHTS
Upon compliance with certain requirements of the Indenture, Holders of the
Notes shall have the right to convert such Notes (in minimum aggregate principal
amount of $1,000 or multiple thereof) into the Common Stock of the Company at a
price per share of $ [ % of the Common Stock offering price]. The
Conversion Price shall be adjusted by the Company to preserve the relative
ownership percentages of the Holders upon: distributions of the Common Stock on
capital stock of the Company; the issuance of rights, options, or warrants to
holders entitling them to purchase Common Stock at a price per share less than
the current market price; subdivision or reclassification of the Common Stock
into a greater number of shares or combining existing shares into fewer shares;
changing the shares of Common Stock into the same or a different number of
shares of any class or classes of stock; or distributions of assets or evidence
of indebtedness to substantially all Holders. However, adjustment need not be
made if such event would result in an adjustment of less than $0.01 or for
distributions of stock pursuant to the authorized stock option plan of the
Company, as described in the Indenture.
OPTIONAL REPURCHASE ON CHANGE IN CONTROL
The Indenture provides that in the event of a Change of Control, each Holder
shall have the right, subject to certain terms and conditions set forth in the
Indenture, to require the Company to repurchase all or any part of such Holder's
Notes no later than 45 calendar days after the Company gives notice of such
Change of Control (the "Repurchase Date"), at a cash purchase price (the
"Repurchase Price") equal to the optional redemption price then in effect, plus
accrued and unpaid interest, if any, to and including the Repurchase Date.
"Change of Control" is defined in the Indenture to mean, except as described
below, the occurrence of either of the following events, whether or not approved
by the Board of Directors of the Company: (i) any person other than Vanguard, a
subsidiary of Vanguard or Carl G. Paffendorf is or becomes the beneficial owner,
directly or indirectly, of securities representing more than 50% of the
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<PAGE>
total number of votes that may be cast for the election of directors of the
Company or (ii) any person acquires from the Company more than 50% of the assets
or earning power of the Company and its subsidiaries. For the purposes of this
definition, "person" means a person or group (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), together with any affiliates or associates thereof, but does not
include any subsidiary of the Company and "beneficial ownership" shall be
determined pursuant to the provisions of Rules 13d-3 and 13d-5 under the
Exchange Act, whether or not applicable, except that a person shall have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time.
COVENANTS
The Indenture will contain affirmative and restrictive covenants. The
affirmative covenants require the Company to, subject to certain limitations
described therein, to: (i) pay the principal of, and interest on, the Notes when
the same shall be due and payable; (ii) maintain an office or agency where Notes
may be surrendered for payment or registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Notes and the
Indenture may be served; (iii) maintain its corporate existence; (iv) pay its
taxes when due except where such payments are being contested in good faith; (v)
maintain its property (and that of its subsidiaries) in good repair and to
maintain adequate insurance thereon; (vi) deliver to the Trustee copies of all
reports and information filed with the Commission (and, if the Company is not
subject to such filing requirements, the Company shall provide the Trustee and
each Holder with the reports and information specified in Section 13 or 15(d) of
the Exchange Act as if the Company were subject to such filing and reporting
requirements, and copies of such reports and information to any prospective
holder of the Notes promptly upon written request and payment of reasonable
costs of duplication and delivery); (vii) deliver to the Trustee an annual
certificate certifying compliance with all its obligations under the Indenture;
(viii) deliver to the Trustee and each Holder, within three days of becoming
aware of any Default or Event of Default under the Indenture or upon receipt of
notice of default or of any other action with respect to a claimed default from
any Holder or from any holder of any other evidence of Indebtedness of the
Company or any Subsidiary a certificate specifying such default and what action
the Company is taking or proposes to take with respect thereto, (ix) provide to
the Trustee and each Holder quarterly and annual consolidated financial
statements; and (x) not cause itself or any of its subsidiaries to become an
"investment company" (as that term is defined in the Investment Company Act of
1940. The Indenture also provides that the Company will comply with the other
provisions of Section 314(a) of the TIA.
The Indenture will also contain restrictive covenants which will restrict
the ability of the Company and its Subsidiaries from: (i) changing its line of
business; (ii) incurring additional indebtedness other than the Notes or
additional long-term indebtedness so long as such additional long-term
indebtedness does not exceed 200% of the sum of the outstanding principal amount
of the Notes and the consolidated net worth (calculated in accordance with GAAP)
of the Company and its Subsidiaries, and short-term indebtedness as otherwise
allowed by the Indenture; (iii) selling its assets (or those of any Subsidiary)
other than in the ordinary course of its business or to a wholly-owned
subsidiary or which sale would have allowed the Company to incur $1.00 of
additional long-term indebtedness as otherwise allowed by the Indenture, other
than certain sales in which the proceeds would be applied to the purchase of
additional properties; (iv) declaring any dividends or making other
distributions on, or redeeming the Company's equity securities, including the
Common Stock or making any investments other than property or inventory used in
the ordinary course of business of the Company or its Subsidiaries, investment
in an existing Subsidiary or acquisition of a new subsidiary, or certain
securities or deposits of or guaranteed by the United States government (to the
extent such investment or payment exceeds 25% of the consolidated net earnings
of the Company and its Subsidiaries for the fiscal quarter then ended); (v) the
maintenance of a ratio of consolidated net earnings (including amounts expended
for interest, income tax payments, and rentals for such period) to fixed charges
of to 1.0; (vi) maintaining consolidated net worth (calculated in accordance
with GAAP) of
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<PAGE>
the Company and its Subsidiaries at a level equal to the sum of 25% of
consolidated net earnings for each prior quarter subsequent to the Closing Date;
(vii) encumber any of its property except for "Permitted Liens" as defined in
the Indenture; or (viii) enter into any transaction with the Company or any
Subsidiary that is not in the ordinary course of its business and on
commercially reasonable terms, all as set forth in the Indenture. The Indenture
will also contain certain restrictive covenante limiting the Company's ability
to exercise its option to purchase The Whittier.
The Indenture also provides that the Company shall not, in a single
transaction or through a series of related transactions, consolidate with or
merge with or into any other Person, or, directly or indirectly, sell, lease,
assign, transfer or convey or otherwise dispose of all or substantially all of
its assets (computed on a consolidated basis), to another Person or group of
persons, unless (i) the Company shall be the surviving entity; (ii) immediately
after such transaction, no Event of Default or event which, after notice or
lapse of time or both, would become an Event of Default under the Indenture,
shall have happened and be continuing; (iii) immediately after giving effect to
such transaction, the Company shall be permitted to incur at least $1.00 of
additional debt under the other provisions of the Indenture; and (iv) the
Company has delivered to the Trustee an officers' certificate stating that such
consolidation, merger, sale, lease, assignment, transfer, conveyance or other
disposition and such supplemental indenture comply with Article V of the
Indenture and that all other conditions precedent provided in the Indenture
relating to such transaction have been satisfied. The Indenture further provides
that the sale, lease, assignment, transfer, conveyance, or other disposition of
all or substantially all of the properties and assets of one or more wholly
owned Subsidiaries of the Company, which properties and assets, if held by the
Company instead of such Subsidiaries, would constitute all or substantially all
of the properties and assets of the Company on a consolidated basis shall be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company. In addition, the Indenture will provide that the Company
may be required to repurchase securities in the event of defined changes in
control of the Company.
EVENTS OF DEFAULT
The following events, among others, constitute events of default under the
Notes: (i) the Company's nonpayment of interest or principal when due, if such
failure continues for more than 5 days; (ii) a breach, following any applicable
cure periods, of any covenant of the Company or its Subsidiaries contained in
the Indenture, (iii) failure of the Company to comply with the restrictions on
merger and consolidations described above; (iv) certain cross-defaults with
respect to other indebtedness of the Company or its Subsidiaries and events of
default under the Mortgage, (v) the Company's failure to pay or have discharged
certain judgments against the Company or a subsidiary; (vi) the lien created by
the Mortgage is no longer enforceable or no longer has priority over other
liens, or (vii) certain events of bankruptcy or insolvency.
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offerings, the Company's authorized capital stock
will consist of 14,000,000 shares of Common Stock, par value $.01 per share and
1,000,000 shares of Preferred Stock available for issuance. See "Description of
Notes" for a description of certain restrictive covenants relating to the
Company's ability to .
COMMON STOCK
Upon the closing of the Offerings there will be 4,034,233 shares of Common
Stock outstanding. Holders of shares of Common Stock are entitled to one vote
per share, without cumulative voting, on all matters to be voted on by
stockholders. Therefore, the holders of more than 50% of the shares voting for
the election of directors can elect all the directors elected by the holders of
Common Stock, and the remaining holders of Common Stock will not be able to
elect any directors. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation or dissolution of the
Company, holders of
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<PAGE>
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any outstanding Preferred
Stock. Holders of the Common Stock do not have preemptive rights to purchase any
future issues of securities. All of the shares of Common Stock presently
outstanding are fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the Offerings, the Company will have 1,000,000
authorized shares of Preferred Stock available for issuance, none of which will
be outstanding. The Company has no current plan to issue any shares of Preferred
Stock. The Preferred Stock may be issued from time to time in one or more series
or classes. The Board of Directors is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of Preferred Stock in
one or more series or classes, to establish from time to time the number of
shares to be included in each such series or class, to fix the rights,
preferences and privileges of the shares of each wholly unissued series or class
and qualifications, limitations or restrictions thereon, without any further
vote or action by the stockholders. The Board of Directors may authorize and
issue Preferred Stock with voting, dividend, liquidation, conversion or other
rights or preferences that could adversely affect the voting power or other
rights of the holders of Common Stock. For example, the terms of the Preferred
Stock that might be issued could prohibit the Company's consummation of any
merger, reorganization, sale of all or substantially all its assets, liquidation
or other extraordinary corporate transaction without approval of the outstanding
shares of Preferred Stock. Thus, the issuance of Preferred Stock might have the
effect of delaying, deferring or preventing a change in control of the Company.
The Board of Directors could also issue Preferred Stock with preferential
voting, conversion and/or dividend rights and thereby dilute the voting power
and equity of the holders of Common Stock and adversely affect the market price
for Common Stock.
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company, the
Representative and Continental Stock Transfer & Trust Company (the "Warrant
Agent"). A copy of the Warrant Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
EXERCISE PRICE AND TERMS. One Warrant entitles the registered holder
thereof to purchase one share of Common Stock at an exercise price of $ per
share [120% of the initial public offering price per share] at any time during
the eighteen (18) month period commencing on the date of this Prospectus and
$ per share [138% of the initial public offering price per share] at any time
during the period commencing on the date of this Prospectus until ,
1998 [eighteen (18) months from the date of this Prospectus] and $ per share
[138% of the initial public offering price per share] at any time during the
period commencing , 1998 [eighteen (18) months from the date of this
Prospectus until , 1999 [three (3) years from the date of this
Prospectus], subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Warrant
Agent, with the subscription form thereon properly completed and executed,
together with payment of the exercise price. The Warrants may be exercised at
any time in whole or in part at the applicable exercise price until expiration
of the Warrants. No fractional shares will be issued upon the exercise of the
Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the Company of
shares of its Common Stock or other securities convertible into Common Stock
(exclusive
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<PAGE>
of options and shares under the Incentive Plan and the Directors' Plan) at a
price below the market price of the Common Stock. Additionally, an adjustment
would be made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company in
order to enable warrantholders to acquire the kind and number of shares of stock
or other securities or property receivable in such event by a holder of the
number of shares of Common Stock that might otherwise have been purchased upon
the exercise of the Warrant.
TRANSFER EXCHANGE AND EXERCISE. The Warrants are in registered form and may
be presented to the Warrant Agent for transfer, exchange or exercise at any time
on or prior to their expiration date three (3) years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If a
market for the Warrants develops, the holder may sell the Warrants instead of
exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
WARRANTHOLDER NOT A STOCKHOLDER. The Warrants do not confer upon holders
any voting, dividend or other rights as stockholders of the Company.
MODIFICATION OF WARRANTS. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than thirty (30) days on not less than thirty (30) days' prior written
notice to the warrantholders and the Representative. Modification of the number
of securities purchasable upon the exercise of any Warrant, the exercise price
and the expiration date with respect to any Warrant requires the consent of
two-thirds of the warrantholders. No other modifications may be made to the
Warrants without the consent of two-thirds of the warrantholders.
A significant amount of the securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Representative. Although it has no obligation to do so, the Representative
currently intends to make a market in the Company's securities and may otherwise
effect transactions in such securities. If it participates in the market, the
Representative may exert a dominating influence on the market, if one develops,
for the securities described in this Prospectus. Such market-making activity may
be discontinued at any time. The price and liquidity of the Common Stock and the
Warrants may be significantly affected by the degree, if any, of the
Representative's participation in such market. See "Underwriting."
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.
The Warrants are separately transferable immediately upon issuance. Although
the Securities will not knowingly be sold to purchasers in jurisdictions in
which the Securities are not registered or otherwise qualified for sale,
purchasers may buy Warrants in the aftermarket in, or may move to, jurisdictions
in which the shares underlying the Warrants are not so registered or qualified
during the period that the Warrants are exercisable. In this event, the Company
would be unable to issue shares to those persons desiring to exercise their
Warrants, and holders of Warrants would have no choice but to attempt to sell
the Warrants in a jurisdiction where such sale is permissible or allow them to
expire unexercised.
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<PAGE>
CHANGE OF CONTROL PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of preventing, discouraging or delaying a change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. The authorization of undesignated Preferred Stock makes it
possible for the Board of Directors to issue Preferred Stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. In addition, the Company's Bylaws limit the
ability of stockholders of the Company to raise matters or nominate persons to
serve as members of the Company's Board of Directors at a meeting of
stockholders without giving advance notice. The Company's Bylaws provide the
Board of Directors be divided into three classes of directors with each class
serving a staggered three-year term. The classification system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company and may maintain the
incumbency of the Board of Directors, as the classification of the Board of
Directors generally increases the difficulty of replacing a majority of the
directors. The Certificate of Incorporation and Bylaws do not provide for
cumulative voting in the election of directors.
The Company is subject to the provisions of Section 203 regulating corporate
takeovers. Section 203 prevents certain Delaware corporations, including those
whose securities are listed on the Nasdaq National Market, from engaging, under
certain circumstances, in a "business combination" (which includes a merger or
sale of more than 10% of the corporation's assets) with any "interested
stockholder" (a stockholder who acquired 15% or more of the corporation's
outstanding voting stock without the prior approval of the corporation's Board
of Directors) for three years following the date that such stockholder became an
"interested stockholder." A Delaware corporation may "opt out" of Section 203
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of Section 203.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Warrants is Continental Stock Transfer & Trust Company, New York, New
York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offerings, the Company will have 4,034,233
shares of Common Stock outstanding, 1,436,782 shares issuable upon conversion of
the Notes (at an initial conversion price of $8.70 per share based upon an
initial public offering price of $7.25 per Share) and 197,338 shares of Common
Stock issuable upon conversion of convertible securities. All of the 1,800,000
shares offered hereby and the shares issuable upon conversion of the Notes will
be freely tradeable unless acquired by "affiliates" of the Company as defined in
Rule 144 promulgated under the Securities Act. The remaining 2,431,571 shares
will be "restricted" securities as defined in Rule 144 and may not be sold
unless they are registered under the Securities Act or are sold pursuant to an
exemption from registration, including an exemption contained in Rule 144. In
general, under Rule 144 a person (or group of persons who shares are aggregated)
who has beneficially owned restricted securities for at least two years,
including persons who may be deemed "affiliates" (as defined in Rule 144) of the
Company, will be entitled to sell, within any three month period, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Common Stock or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain manner of sale limitations, notice requirements and
the availability of current public information about the Company. A person who
has not been an "affiliate" of the Company for the 90 days preceding a sale and
who has beneficially owned restricted securities for at least three years will
be entitled to sell such shares in the public market without restriction.
Restricted securities properly sold in reliance upon Rule 144 are thereafter
freely tradeable without restrictions or registration under the Securities Act,
unless thereafter held by an
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"affiliate" of the Company. For purposes of Rule 144, 36,836 of the restricted
shares have been beneficially owned by its holder for more than two years but
less than three years and 1,662,000 of such shares have been beneficially owned
for three years or more (1,584,972 of these shares are held by affiliates). In
addition, on July 27, 1995, the Commission proposed to reduce the Rule 144(d)
holding period for resales of restricted securities from two years to one year
and to reduce the Rule 144(k) holding period from three years to two years. If
the Rule 144 changes are adopted, the reduced holding periods will apply to all
restricted securities.
Each of the directors and officers and certain shareholders of the Company
has agreed not to offer, sell or otherwise dispose of any shares of Common Stock
without the prior written consent of the Representative of the Underwriters for
a period of nine months after the date of this Prospectus. In addition, each of
the directors and officers of the Company, and Vanguard, has agreed that for a
period of 24 months from the date of the Prospectus all sales of shares of
Common Stock owned by them will be effected through the Representative. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, may adversely affect the market price of the Common Stock prevailing from
time to time.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Janney
Montgomery Scott Inc. is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement"), to purchase from the
Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of Securities set forth opposite their
names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SECURITIES
---------------------- -------------------
<S> <C>
Janney Montgomery Scott Inc........................................................
----------
Total...................................................................... 1,800,000
----------
----------
</TABLE>
The Underwriters are committed to purchase all the Securities offered
hereby, if any of such securities are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to the
conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per Share and
$ per Warrant. Such dealers may reallow a concession not in excess of
$ per Share and $ per Warrant to certain other dealers. After the
commencement of the offering, the public offering prices, concessions and
reallowances may be changed by the Representative.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
Vanguard has granted to the Underwriters an option, exercisable within
forty-five (45) days from the date of this Prospectus, to purchase from
Vanguard, at the offering price less underwriting discounts, all or part of an
additional 270,000 Shares on the same terms and conditions of this offering for
the sole purpose of covering overallotments, if any. To the extent such option
is exercised in whole or in part, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase the number of Shares proportionate to
its initial commitment.
The Company has granted to the Underwriters an option, exercisable within
forty-five (45) days from the date of this Prospectus, to purchase from the
Company, at the offering price less underwriting discounts, all or part of an
additional 270,000 Warrants on the same terms and conditions of this offering
for the sole purpose of covering overallotments, if any. To the extent such
option is exercised in whole or in part, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of Warrants
proportionate to its initial commitment.
The Company and Vanguard have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make. The
Company has agreed to pay to the Representative a non-accountable expense
allowance equal to two percent (2%) of the gross proceeds derived from the sale
of the Securities underwritten, $50,000 of which has been paid to date.
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase up to 180,000
shares of Common Stock and/or 180,000 Warrants (the "Representative's
Warrants"). The Representative's Warrants are initially exercisable for a period
of four (4) years commencing one year after the date of this Prospectus at a
price of $ per Share [107% of the initial public offering price per Share] for
the second year after the date of this Prospectus, $ per Share [114% of the
initial public offering price per Share] for the third year after the date of
this Prospectus, $ per Share [121% of the initial public offering price per
Share] for the
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fourth year after the date of this Prospectus and $ per Share [128% of the
initial public offering price per Share] for the fifth year after the date of
this Prospectus. The Representative's Warrants are restricted from sale,
transfer, assignment or hypothecation for a period of 12 months from the date of
this Prospectus, except to officers of the Representative. The Warrants
underlying the Representative's Warrants expire on , 1999 [3 years
from the date of the Prospectus]. The Representative's Warrants provide for
adjustment in the number of shares of Common Stock and Warrants issuable upon
the exercise thereof and in the exercise price of the Representative's Warrants
as a result of certain events, including subdivisions and combinations of the
Common Stock. The Representative's Warrants grant to the holders thereof certain
rights of registration of the securities underlying the Representative's
Warrants.
In connection with the Concurrent Notes Offering, the Company has agreed to
sell to the Representative, for nominal consideration, warrants to purchase up
to 143,678 shares of Common Stock (based upon an assumed initial public offering
price of $7.25 per Share). The Representative's warrants in the Concurrent Notes
Offering, are initially exercisable at a price of $ per share [120% of
initial public offering price per share] for a period of four (4) years
commencing one year after the date of this Prospectus and are restricted from
sale, transfer, assignment or hypothecation for a period of twelve (12) months
from the date of this Prospectus, except to officers of the Representative.
The Representative will also be acting as placement agent for the Company in
connection with the Concurrent Notes Offering, for which it will be receiving a
fee of $600,000 (6% of the aggregate amount of the Concurrent Notes Offering).
All officers, directors, and certain holders of shares of Common Stock, and
securities exercisable, convertible, or exchangeable for shares of Common Stock,
have agreed not to, directly or indirectly, offer, sell, transfer, pledge,
assign, hypothecate, or otherwise encumber or dispose of any shares of Common
Stock or convertible securities whether or not owned, or otherwise dispose of
any interest therein under Rule 144 or otherwise, for a period of not less than
nine months following the effective date of the Registration Statement, except
upon the consent of the Representative or if an offer is made to all of the
stockholders of the Company to sell their shares. An appropriate legend shall be
marked on the face of certificates representing all such securities. In
addition, the Company has granted the Representative a three year right of first
refusal with respect to the sale of any of the Company's securities.
The Company has agreed that for a period of five (5) years after the date of
this Prospectus, the Representative may designate one person for election to the
Company's Board of Directors (the "Designation Right"). In the event that the
Representative elects not to exercise such right, then it may designate one
person to attend all meetings of the Company's Board of Directors. The Company
has agreed to reimburse the Representative's designee for his out-of-pocket
expenses incurred in connection with his attendance at the Board of Directors
meetings.
Prior to this offering, there has been no public market for the Common Stock
or the Warrants. Consequently, the initial public offering prices of the
Securities will be determined by negotiation between the Company and the
Representative and will not necessarily bear any relationship to the Company's
asset value, net worth or other established criteria of value. The factors
considered in such negotiation, in addition to prevailing market conditions,
included the history of and the prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure, the market for initial public offerings and
certain other factors as were deemed relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration Statement
of which this Prospectus is a part. See "Additional Information."
63
<PAGE>
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Olshan Grundman Frome & Rosenzweig LLP, New York, New
York. Orrick, Herrington & Sutcliffe, New York, New York has acted as counsel to
the Underwriters.
EXPERTS
The financial statements of the Company as of March 31, 1996 and for the
fiscal year then ended have been audited by Grant Thornton LLP, independent
certified public accountants, as stated in their report thereon appearing
elsewhere herein, and are included in reliance upon the authority of such firm
as experts in accounting and auditing.
The financial statements of the Company as of March 31, 1995 and for the
fiscal year then ended have been included herein in reliance upon the report of
Farber, Blicht & Eyerman, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
CHANGE IN ACCOUNTANTS
On May 16, 1996, the Company dismissed Farber, Blicht & Eyerman, LLP. The
dismissal of Farber, Blicht & Eyerman, LLP was approved by the Board of
Directors. On May 16, 1996, the Company engaged Grant Thornton LLP to audit its
financial statements for the fiscal year ended March 31, 1996. For the fiscal
year ended March 31, 1995, the Company's financial statements were audited by
Farber, Blicht & Eyerman, LLP.
The Company believes, and has been advised by Farber, Blicht & Eyerman, LLP
that it concurs in such belief, that during the fiscal year ended March 31,
1995, the Company and Farber, Blicht & Eyerman, LLP did not have any
disagreement on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Farber, Blicht & Eyerman, LLP, would have caused
it to make reference in connection with its report on the Company's financial
statements to the subject matter of the disagreement.
No report of Farber, Blicht & Eyerman, LLP on the Company's financial
statements for either of the past two fiscal years contained an adverse opinion,
a disclaimer of opinion or a qualification, or was modified as to uncertainty,
audit scope or accounting principles. During such fiscal periods, there were no
"reportable events" within the meaning of Item 304(a)(1) of Regulation S-B
promulgated under the Securities Act.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Certificate of Incorporation of the Company provides that the Company
shall indemnify its officers and directors to the fullest extent permitted by
Delaware law.
The Company has also agreed to indemnify each director and executive officer
pursuant to an Indemnification Agreement with each such director and executive
officer from and against any and all expenses, losses, claims, damages and
liability incurred by such director or executive officer for or as a result of
action taken or not taken while such director or executive officer was acting in
his capacity as a director, officer, employee or agent of the Company, to the
fullest extent permitted under Delaware law.
The Company is seeking to obtain a directors and officers insurance policy
in the amount of $1,000,000. The policy will insure directors and officers
against unindemnified loss arising from certain wrongful acts in their
capacities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of
64
<PAGE>
expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (referred to herein, together with all amendments and exhibits, as the
"Registration Statement") under the Securities Act, with respect to the shares
of Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which have
been omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; with respect to each such contract,
agreement or other documents labeled as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Copies of the Registration Statement may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission, Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois upon payment of
the prescribed fees.
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at prescribed rates. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http:// www.sec.gov.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Reports of Independent Certified Public Accountants
Grant Thornton LLP....................................................................................... F-2
Farber, Blicht & Eyerman, LLP............................................................................ F-3
Financial Statements
Consolidated Balance Sheets.............................................................................. F-4
Consolidated Statements of Operations.................................................................... F-5
Consolidated Statement of Stockholders' Deficiency....................................................... F-6
Consolidated Statements of Cash Flows.................................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
</TABLE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditor's Report............................................................................. F-23
Statements of Assets, Liabilities and Partners' Deficit.................................................. F-24
Statements of Revenues and Expenses and Partners' Deficit................................................ F-25
Statements of Cash Flows................................................................................. F-26
Notes to Financial Statements............................................................................ F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
UNITED VANGUARD HOMES, INC.
We have audited the accompanying consolidated balance sheet of United
Vanguard Homes, Inc. and Subsidiaries as of March 31, 1996 and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United Vanguard
Homes, Inc. and Subsidiaries as of March 31, 1996, and the consolidated results
of their operations and their consolidated cash flows for the year then ended,
in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Melville, New York
July 15, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Board of Directors
UNITED VANGUARD HOMES, INC.
We have audited the accompanying statements of operations, stockholders'
deficiency and cash flows for the year ended March 31, 1995 of United Vanguard
Homes, Inc. and Subsidiaries. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of their operations and their cash flows
for the year ended March 31, 1995, in conformity with generally accepted
accounting principles.
FARBER, BLICHT & EYERMAN, LLP
Plainview, New York
February 29, 1996, except for Notes A7 and L,
the latest of which is dated June 25, 1996
F-3
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash............................................................ $ 210,245
Accounts receivable, less allowance for doubtful accounts of
$40,000........................................................ 413,539
Development fees and advances................................... 270,864
Due from affiliates, net........................................ 658,717
Prepaid expenses and other...................................... 274,654
-----------
Total current assets.......................................... $ 1,828,019
PROPERTY AND EQUIPMENT, NET....................................... 2,361,698
OTHER ASSETS
Development fees................................................ 575,017
Restricted assets............................................... 176,352
Deferred income taxes........................................... 981,000
Other assets.................................................... 165,453 1,897,822
----------- -----------
$ 6,087,539
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt............................... $ 626,043
Accounts payable................................................ 242,470
Accrued expenses................................................ 617,043
Income taxes payable............................................ 442,371
-----------
Total current liabilities..................................... $ 1,927,927
RESIDENT SECURITY DEPOSITS........................................ 314,705
LONG-TERM DEBT, less current portion.............................. 7,172,982
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock $.001 par value; 1,000,000 shares authorized;
none issued and outstanding.................................... --
Common stock $.01 par value; authorized, 14,000,000 shares;
issued and outstanding, 1,827,778 shares....................... 18,278
Additional paid-in capital...................................... 5,619,905
Accumulated deficit............................................. (8,966,258) (3,328,075)
----------- -----------
$ 6,087,539
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1995 1996
-------------- -------------
<S> <C> <C>
Operating revenues
Resident services................................................................ $ 4,887,231 $ 4,966,058
Health care services............................................................. 2,491,261 2,555,138
Development fees................................................................. 700,000 1,003,955
-------------- -------------
8,078,492 8,525,151
-------------- -------------
Operating expenses
Residence operating expenses..................................................... 5,594,826 5,912,624
General and administrative....................................................... 503,164 414,703
Depreciation and amortization.................................................... 565,067 378,215
-------------- -------------
6,663,057 6,705,542
-------------- -------------
Income from operations......................................................... 1,415,435 1,819,609
Other income (expense)
Interest expense, net............................................................ (623,224) (600,871)
Other income..................................................................... 231,910 109,022
-------------- -------------
(391,314) (491,849)
Provision for loss on advances to affiliates....................................... (1,650,772) (296,093)
-------------- -------------
Income (loss) before income taxes.............................................. (626,651) 1,031,667
Income taxes....................................................................... 420,000
-------------- -------------
NET INCOME (LOSS).............................................................. $ (626,651) $ 611,667
-------------- -------------
-------------- -------------
Earnings (loss) per share.......................................................... $(.22) $.35
Common shares and equivalents outstanding.......................................... 2,895,761 1,759,023
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ---------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1994...................... 2,898,778 $ 28,988 $ 4,477,245 $ (8,951,274) $ (4,445,041)
Shares contributed by parent and
simultaneously retired..................... (1,200,000) (12,000) 12,000
Contribution from parent.................... 311,000 311,000
Net loss.................................... (626,651) (626,651)
------------ ---------- ------------- -------------- --------------
Balance, March 31, 1995..................... 1,698,778 16,988 4,800,245 (9,577,925) (4,760,692)
Reissuance to parent........................ 120,000 1,200 (1,200)
Shares issued as compensation............... 9,000 90 49,860 49,950
Contribution from parent.................... 771,000 771,000
Net income.................................. 611,667 611,667
------------ ---------- ------------- -------------- --------------
Balance, March 31, 1996..................... 1,827,778 $ 18,278 $ 5,619,905 $ (8,966,258) $ (3,328,075)
------------ ---------- ------------- -------------- --------------
------------ ---------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)............................................................... $ (626,651) $ 611,667
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
Depreciation and amortization................................................. 565,067 378,215
Common stock issued for services.............................................. 49,950
Deferred income taxes......................................................... (400,000) (581,000)
Changes in operating assets and liabilities
Accounts receivable, advances and other receivables......................... 48,168 977,180
Prepaid expenses and other.................................................. (104,471) (84,746)
Development fees............................................................ (1,343,614) (575,017)
Other assets................................................................ (143,804) (34,232)
Accounts payable............................................................ (120,445) (32,238)
Accrued expenses............................................................ 15,355 (267,102)
Income taxes payable........................................................ (26,700) 310,621
Resident security deposits.................................................. (8,513) 12,731
Deferred revenue............................................................ 135,943 (177,221)
-------------- --------------
Net cash (used in) provided by operating activities........................... (2,009,665) 588,808
-------------- --------------
Cash flows used in investing activities
Purchases of property and equipment............................................. (169,565) (79,121)
-------------- --------------
Cash flows from financing activities
Proceeds from borrowings on mortgages and notes payable......................... 1,441,000 249,880
Principal repayments of mortgages and notes payable............................. (124,620) (1,543,131)
Decrease (increase) in restricted cash financing................................ 464,257 (26,752)
Increase in additional paid-in capital.......................................... 311,000 771,000
-------------- --------------
Net cash provided by (used in) financing activities........................... 2,091,637 (549,003)
-------------- --------------
NET DECREASE IN CASH.......................................................... (87,593) (39,316)
Cash at beginning of year......................................................... 337,154 249,561
-------------- --------------
Cash at end of year............................................................... $ 249,561 $ 210,245
-------------- --------------
-------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest...................................................................... $ 751,000 $ 619,000
-------------- --------------
-------------- --------------
Income taxes.................................................................. $ 41,000 $ 57,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BUSINESS
United Vanguard Homes, Inc. ("UVH") (the "Company") is a Delaware
corporation which was originally formed in New York in 1964 as Coap Systems Inc.
("Coap") and is a majority-owned subsidiary of Vanguard Ventures, Inc. ("VVI").
UVH owns and operates three residential retirement centers in the State of
Michigan, which provide living and extended care services for residents on a
month-to-month basis. The facilities are known as Olds Manor, Hillside Terrace
and Whitcomb Tower. In addition, UVH, through a wholly-owned subsidiary,
provides management and other services for companies affiliated with VVI and
partnerships which are located in Michigan and Florida (Note B). During the year
ended March 31, 1994, UVH commenced providing services, through a subsidiary, to
develop residential retirement centers.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UVH and its
wholly-owned subsidiary corporations. All significant intercompany balances and
transactions have been eliminated in consolidation.
3. RESTRICTED ASSETS
Restricted assets include cash of $99,600 that collateralizes an insurance
bond required by Michigan State law for resident security deposits. In addition,
restricted use cash accounts totalling approximately $76,000 have been
segregated pursuant to the terms of certain mortgage indebtedness, which
requires the net operating income of the Company's residential retirement
centers, as defined, to be used to fund capital improvements and the related
mortgage indebtedness.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, as follows:
<TABLE>
<S> <C>
Buildings and improvements.......................... 10 to 30 years
Equipment........................................... 12 1/2 years
Vehicles............................................ 3 years
Furniture and office equipment...................... 5 to 7 years
</TABLE>
5. DEBT
The fair value of the Company's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The carrying amounts of the
Company's borrowings are estimated to approximate fair value.
6. INCOME TAXES
The Company is included in the consolidated Federal income tax return of
VVI. It is the policy of VVI to allocate income taxes to the Company pro rata on
a separate return basis, charging or crediting the Company with its
proportionate share of expense or reduction in taxes.
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance has been established to reduce the deferred
tax assets, as it is more likely than not, a portion of such deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-8
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. PER SHARE INFORMATION
In June 1996, the Company approved a 1-for-1.6667 reverse stock split and,
accordingly, all share and per share amounts have been retroactively restated.
Earnings (loss) per common share are calculated by dividing net income
(loss) applicable to common stock by the weighted average number of common
shares outstanding during the year and common stock equivalents. On a
fully-diluted basis, both net income (loss) and shares outstanding are adjusted
to assume the conversion of mortgage indebtedness from the date of issuance.
Fully-diluted amounts are not presented as the effect would be immaterial or
antidilutive.
8. REVENUE RECOGNITION
Revenues from services provided to residents, including, among other things,
room and board and health care, are recognized contemporaneously with the
providing of said services and are shown in the accompanying consolidated
financial statements net of charitable and Supplemental Security Income
discounts.
Charitable discounts result from the reduction of occupancy charges for
qualified residents to an amount equal to their ability to pay. Supplemental
Security Income ("SSI") discounts result from the reduction of occupancy charges
for qualified residents to the net amount paid by the SSI program. The discount
amount is equal to the difference between the standard apartment rental fee
(including meal and housekeeping charges) and the amount that is paid by the SSI
program.
Management fee revenues are recognized monthly, based upon a contractual
rate of compensation.
Fee income to which the Company is entitled in connection with the
development of residential retirement centers it does not own is recognized on
the percentage-of-completion basis. The Company accrues in full, as soon as
determinable, any losses that arise from contracts for project development.
9. RECLASSIFICATIONS
Certain prior years amounts have been reclassified to conform with the
current year's presentation.
10. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
11. ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," is required to be adopted in 1997 and
allows for a choice of the method of accounting used for stock-based
compensation. Entities may use the "intrinsic value" method currently based on
APB No. 25 or the new "fair value" method contained in SFAS No. 123. The Company
intends to adopt SFAS No. 123 in 1997 by continuing to account for stock-based
compensation under APB No. 25. As required by SFAS No. 123, the pro forma
effects on net income and earnings per share will be determined as if the fair
value based method had been applied and disclosed in the notes to the financial
statements.
F-9
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 1996:
<TABLE>
<S> <C>
Land........................................................... $ 632,408
Buildings and improvements..................................... 4,405,417
Equipment...................................................... 850,969
----------
5,888,794
Less accumulated depreciation and amortization................. 3,527,096
----------
Property and equipment, net.................................... $2,361,698
----------
----------
</TABLE>
NOTE C -- RELATED PARTY TRANSACTIONS
1. DUE FROM AFFILIATES, NET
Amounts due from affiliates consist of cash advances, unpaid management
fees, interest income and other revenue items. Most of the affiliated companies
have been operating at a loss and their respective ability to repay the cash
advances and earned fees due to the Company is uncertain. Accordingly, a reserve
for such amounts has been provided for by the Company, reducing revenues, fees
and interest income and providing for losses on cash advances to affiliates. In
the event such advances or fees are remitted by the affiliates, the reserve is
reduced and income is recorded. At March 31, 1996, the amounts due from
affiliates consisted of the following:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Due from VVI................................................................... $ 2,452,137
Due from VVI affiliated companies.............................................. 2,406,266
Due from VVI affiliated limited partnerships (VVI is general partner).......... 1,235,661
Management fees and cash advances due from affiliated not-for-profit
companies..................................................................... 1,088,208
-------------
7,182,272
Less reserve for losses........................................................ 6,523,555
-------------
Due from affiliates, net....................................................... $ 658,717
-------------
-------------
</TABLE>
At March 31, 1996, the unreserved amounts due from affiliates represent
development fees of $143,200 and advances of $515,517 from Presidential Care
Corp. ("Presidential"), a Florida not-for-profit corporation affiliated with
VVI. The Company entered into a development agreement on March 24, 1995 to plan,
design, develop and construct an assisted living retirement home in Hollywood,
Florida, and to arrange for permanent and interim financing. The development
agreement provides for compensation to the Company for locating the land, zoning
application work and other services of 7 1/2% of the overall project cost (as
defined), payable upon commencement of construction. The Company recognizes
development fees on a percentage-of-completion basis and has recognized $43,200
in fiscal 1996. The initial $100,000 fee earned in fiscal 1995 had not been
recognized in fiscal 1995, as the underlying project was in the initial stages.
During fiscal 1996, the Company reassessed the collectibility of such fee and a
recovery of $100,000 was recognized. The advances of $515,517, net of repayments
during 1996 of $359,000, primarily relate to the purchase of land. Subsequent to
March 31, 1996, $350,000 was collected. Presidential received interim financing
of approximately $500,000 through a private placement and is awaiting approval
on its construction financing. Management believes all amounts due from
Presidential will be collected currently upon the securing of construction
financing.
F-10
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE C -- RELATED PARTY TRANSACTIONS (CONTINUED)
Phoenix Lifecare Corp. ("Phoenix"), a not-for-profit corporation affiliated
to the Company, provides health care services to residents of the Whitcomb Tower
and the Whittier (an affiliate of VVI) on behalf of the Company. The Company
earns a management fee from Phoenix for services rendered. At March 31, 1996,
the amounts due from Phoenix, $355,942, have been fully reserved and no
management fees have been recognized during fiscal 1995 and 1996.
During fiscal 1996, the Company advanced $73,449 to Camelot Retirement
Homes, Inc. ("Camelot"), a corporation affiliated with the Company. The Company
has entered into a development agreement with Camelot and has obtained an option
to purchase the underlying property. In addition, the Company has guaranteed
$450,000 of mortgage indebtedness relating to the property. At March 31, 1996,
the above-mentioned advance has been fully reserved.
2 Receivables from Gateway
a. NOTE RECEIVABLE
The Company has a note receivable including accrued interest at 9% per
annum, collateralized by a third mortgage in the amount of $7,481,953 at March
31, 1996. The note is due from Gateway Communities, Inc. ("Gateway"), a
not-for-profit company formerly affiliated to the Company and the lessee and
operator of Harvest Village, a continuing care retirement community, that the
Company intends to acquire from an entity indirectly owned by VVI (Note L). This
note and accrued interest have been fully reserved by the Company, as Gateway
has historically suffered losses and does not have the financial resources to
pay this obligation.
b. OTHER RECEIVABLES
Other receivables consist of prior years' management fees and cash advances
to Gateway aggregating $1,066,197 at March 31, 1996, which have been fully
reserved.
NOTE D -- DEVELOPMENT FEES AND ADVANCES
During 1995, the Company began developing a residential retirement center in
the State of Iowa known as Cottage Grove Place, an unaffiliated entity. Pursuant
to the development agreement, the Company is obligated to plan, design, develop
and construct the property, arrange financing and supervise occupancy
development for a total fee of $2,270,000. During 1996 and 1995, the Company
recognized $1,003,955 (net of financing discount of $144,500) and $700,000,
respectively, of such development fee. The initial installment of $750,000 was
paid upon the bond closing, which provided Cottage Grove Place with its
construction financing in 1995. An additional $385,005 will be paid in monthly
installments during construction provided construction is on time and on budget,
and the remaining $1,135,000 will be paid upon the later of: (i) 90% occupancy
achieved by the project or (ii) the payment in full of the short-term bonds of
Cottage Grove Place, which mature on or before July 1, 2001, and the
satisfaction of the Debt Service Coverage Ratio and the Reserve Ratio (as
defined) after giving effect to the repayment of such short-term bonds. While
the Company has earned and recognized a majority of the development fee, the
terms of the agreement defer payment. A portion of the fee has been discounted
at 10% to give effect to the estimated payment during the first quarter of
fiscal 1999. In addition, the Company advanced certain amounts in connection
with developing the project, which are currently reimbursable by Cottage Grove
Place.
F-11
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE D -- DEVELOPMENT FEES AND ADVANCES (CONTINUED)
The components of fees and advances receivable from Cottage Grove Place are
as follows at March 31, 1996:
<TABLE>
<S> <C>
Advances......................................................... $ 39,861
Development fees, net............................................ 806,020
---------
845,881
Less long-term portion, net...................................... 575,017
---------
$ 270,864
---------
---------
</TABLE>
NOTE E -- MORTGAGES AND NOTES PAYABLE
1. MORTGAGES PAYABLE
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Mortgages, guaranteed by VVI, bearing interest at 7.5% payable in monthly
interest only installments through April 1996; monthly installments of
principal and interest of $30,429 are payable beginning June 1996; maturity --
April 30, 1997; restricted use cash accounts have been pledged as additional
collateral (Note A)........................................................... $ 4,351,862
Convertible mortgages with interest at prime, plus 3% (11.25% at March 31,
1996), payable in interest only installments quarterly, maturity dates are
March 1999 and August 2000, net of original issue discount of $59,356 and
$75,922, respectively. Convertible into 264,074 shares of UVH common stock
subject to adjustment, as defined............................................. 1,820,643
Mortgage with interest at prime plus 1% (9.25% at March 31, 1996) payable in
monthly installments of $6,400; including interest balance due August 2001.... 252,433
-------------
$ 6,424,938
-------------
</TABLE>
F-12
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE E -- MORTGAGES AND NOTES PAYABLE (CONTINUED)
2. NOTES PAYABLE
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Note payable bearing interest at 8.25% at March 31, 1996, payable monthly. The
note is pursuant to a line of credit of $500,000 which expires October 3,
1996.......................................................................... $ 356,000
Convertible 7% promissory notes, interest payable quarterly, compounded
annually, maturity no later than July 15, 2001; convertible into 105,999
shares of the Company's common stock at $7.50 per share. Notes include
warrants for issuance of 47,690 shares of common stock at $3.33 per share..... 795,000
Equipment notes payable, with interest ranging from 8.25% to 12% payable in
monthly installments of principal and interest of $21,620 until July 1999..... 199,754
Promissory note payable, with interest at prime plus 1% (9.25% at March 31,
1996) payable in monthly principal installments of $2,917, plus interest until
December 1996................................................................. 23,333
-------------
1,374,087
-------------
$ 7,799,025
-------------
-------------
</TABLE>
The aggregate maturities of mortgages and notes payable are as follows:
<TABLE>
<CAPTION>
Fiscal year ending March 31,
<S> <C>
1997......................................................... $ 626,043
1998......................................................... 4,409,983
1999......................................................... 1,229,492
2000......................................................... 56,735
2001......................................................... 1,476,772
----------
$7,799,025
----------
----------
</TABLE>
NOTE F -- INCOME TAXES
The consolidated provision for income taxes consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1995 1996
----------- -------------
<S> <C> <C>
Current
Federal......................................................... $ 311,000 $ 771,000
State and local................................................. 89,000 230,000
----------- -------------
400,000 1,001,000
----------- -------------
Deferred
Federal......................................................... (311,000) (449,000)
State and local................................................. (89,000) (132,000)
----------- -------------
(400,000) (581,000)
----------- -------------
$ -- $ 420,000
----------- -------------
----------- -------------
</TABLE>
F-13
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE F -- INCOME TAXES (CONTINUED)
The Company files its Federal consolidated tax return with its parent, VVI.
During fiscal 1995 and 1996, VVI incurred tax losses which were used to offset
the Company's taxable income. The resulting tax benefits associated with the
utilization of VVI's losses of $311,000 and $771,000 in fiscal 1995 and 1996,
respectively, have been recorded as a contribution of capital from VVI.
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1996
---------- ---------
<S> <C> <C>
Statutory Federal tax rate........................................... (34.0)% 34.0%
State income taxes, net of Federal income tax benefit................ (5.94) 6.23
Other................................................................ .48
Losses for which no future tax benefit has been recorded............. 39.94
---------- ---------
Effective tax rate................................................... 00.00% 40.71%
---------- ---------
---------- ---------
</TABLE>
Temporary differences which give rise to deferred tax assets at March 31,
1996 are as follows:
<TABLE>
<S> <C>
Net operating loss carryover................................... $ 838,000
Due from affiliate............................................. 5,274,000
Fixed assets................................................... 902,000
Other.......................................................... 57,000
----------
7,071,000
Valuation allowance............................................ 6,090,000
----------
Net deferred tax asset......................................... $ 981,000
----------
----------
</TABLE>
The Company has net operating loss carryforwards for Federal income tax
purposes as of March 31, 1996 of approximately $2,464,000. Such net operating
loss carryforwards are subject to several statutory limitations which limit
their current and future utilization, and, accordingly, no benefit from such
utilization has been provided for. The net operating loss carryfowards expire
during fiscal 1997 through 2005; $2,083,000 of which expire in fiscal 1998. The
proposed public offering or subsequent equity transactions may trigger an
ownership change which could serve to limit the use of some or all of the net
operating loss carryfowards.
F-14
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE G -- COMMITMENTS AND CONTINGENCIES
1. OPERATING LEASES
Aggregate rental expense under operating leases was approximately $29,100
and $35,000 for fiscal 1995 and 1996, respectively. UVH rents its administrative
office facilities from CBF Building Company, an affiliate of VVI, under a lease
expiring December 31, 2002, at an annual rental as follows:
<TABLE>
<CAPTION>
Fiscal year ending March 31,
<S> <C>
1997................................................... $ 35,163
1998................................................... 36,921
1999................................................... 38,767
2000................................................... 40,705
2001................................................... 42,740
Thereafter............................................. 79,781
---------
$ 274,077
---------
---------
</TABLE>
2. PURCHASE COMMITMENT
The Company may be required to purchase a parcel of land at the Cottage
Grove Place retirement facility in Cedar Rapids, Iowa, for $450,000 plus
interest and taxes if Cottage Grove Place fails to exercise its option to the
property.
3. COLLATERAL
Under an amended and restated loan agreement of an affiliate of VVI, the
lenders hold a second mortgage on the Olds Manor retirement center (net book
value of $286,000 at March 31, 1996) and a consolidated mortgage in the amount
of $1,000,000 on the Whitcomb Tower and Hillside Terrace (net book value of
$1,716,000 at March 31, 1996) collateralizing VVI's $6,750,000 guarantee of a
construction loan in connection with Harvest Village Partners L.P., an affiliate
of VVI. In addition, VVI has pledged 1,340,573 shares of the Company's common
stock owned by VVI as additional collateral for the guarantee.
4. GUARANTEES
The Company guaranteed a bank loan to CBF Building Company. The balance
outstanding on this loan was $122,832 at March 31, 1996.
The Company guaranteed a bank loan to an affiliate of VVI with a balance of
$450,000 at March 31, 1996. (Note C)
The Company is a co-borrower on a line of credit given to VVI in the
original amount of $300,000. The balance outstanding at March 31, 1996 was
approximately $192,000.
5. SELF-INSURANCE
Effective April 1, 1992, the Company began to partially self-insure for
health and medical liability costs for up to a maximum of $300,000 in claims.
The Company has insurance coverage for claims above the aforementioned limit.
The self-insurance claim liability ($192,224 at March 31, 1996) is determined on
a nondiscounted basis based on claims filed and an estimate of claims incurred
but not yet reported. The amount of said liability accrued at March 31, 1996 was
$192,244.
6. CONCENTRATIONS OF CREDIT RISK AND REVENUES
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and receivables.
F-15
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE G -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company maintains its cash in highly rated financial institutions and
limits the amount of credit exposure to any one institution. At March 31, 1996,
the Company had no bank deposits exceeding federally insured limits.
A concentration of credit risk exists with respect to development fees and
advances and amounts due from affiliates.
7. EMPLOYMENT AGREEMENTS
Effective April 1, 1996, the Company entered into a three-year employment
agreement with the Company's Chief Executive Officer, pursuant to which annual
cash compensation under the agreement is $100,000 during the first year of
employment.
In addition, as of April 1, 1996, the Company entered into an employment
agreement with the Company's President and Chief Operating Officer pursuant to
which an annual base salary under the employment agreement is $100,000. In
December 1995, the President received a $25,000 cash bonus and the Company
agreed to issue 9,000 shares of the Company's common stock valued at $5.55 per
share. Additional bonuses of $25,000 and 3,000 shares of the Company's common
stock are payable on June 30, 1996 and March 31, 1998, subject to continued
employment.
8. POSSIBILITY OF CROSS DEFAULT
An affiliate of VVI was indebted under a first mortgage in the principal
amount of $4,087,000. The mortgage securing this loan provides that a default
under such loan is a default under each of the Company's Hillside Terrace and
Whitcomb Tower Mortgages. Therefore, a potential VVI default on this affiliate's
loan could result in the foreclosure of Hillside Terrace and Whitcomb Tower.
9. GOVERNMENT REGULATION
Health care and senior living facilities are areas of extensive and frequent
regulatory change. Changes in the laws or new interpretations of existing laws
can have a significant effect on methods of doing business, costs of doing
business and amounts of reimbursement from governmental and other payors. The
Company at all times attempts to comply with all applicable fraud and abuse
laws; however, there can be no assurance that administrative or judicial
interpretation of existing laws or regulations will not have a material adverse
effect on the Company's operations or financial condition.
NOTE H -- ACCRUED EXPENSES
Accrued expenses consist of the following at March 31, 1996:
<TABLE>
<S> <C>
Interest......................................................... $ 95,551
Real estate taxes................................................ 1,814
Payroll and related taxes........................................ 220,234
Insurance........................................................ 192,244
Professional fees................................................ 107,200
---------
$ 617,043
---------
---------
</TABLE>
NOTE I -- STOCKHOLDERS' EQUITY
1. COMMON STOCK
On March 31, 1995, VVI contributed 1,200,000 shares of the Company's common
stock to the Company, which the Company then simultaneously retired. As
consideration for such contribution,
F-16
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE I -- STOCKHOLDERS' EQUITY (CONTINUED)
VVI was entitled to be issued one share of common stock for each $5.73 received
by the Company in payment of amounts due from Gateway. In 1996, VVI received
120,000 shares as consideration for relinquishing the right to receive such
shares upon collection.
In March 1996, the expiration date on outstanding warrants was extended from
March 31, 1996 to April 30, 1996 and the exercise price was adjusted from $6.66
to $3.33 per share. In April 1996, 62,122 shares were issued in connection with
the exercise of these warrants.
In March 1996, the Company offered the convertible mortgageholders and
noteholders the option to convert, through April 30, 1996, to common shares at a
price of $3.75 instead of prices ranging from $6.67 through $7.22. In April
1996, 341,330 common shares were issued in connection with this conversion. Had
the conversion of this debt and exercise of warrants taken place at the
beginning of 1996, earnings per share would have been $.32 as compared to
historical earnings per share of $.35.
2. INCENTIVE STOCK OPTION PLAN
The Company has reserved 300,000 shares of common stock for issue to key
employees and/or directors under the Company's Incentive Stock Option Plan (the
"1991 Plan"), as amended. A summary of the activity within the 1991 Plan is as
follows:
<TABLE>
<CAPTION>
OPTION PRICE
PER SHARE GRANTED AVAILABLE
----------------- --------- ---------
<S> <C> <C> <C>
Balance, April 1, 1994............................. $1.33 to $6.10 111,600 188,400
Terminated......................................... $1.33 to $5.55 (35,400) 35,400
--------- ---------
Balance, March 31, 1995............................ $1.33 to $6.10 76,200 223,800
Terminated......................................... $1.33 (2,700) 2,700
Granted............................................ $1.33 to $6.10 53,880 (53,880)
--------- ---------
Balance, March 31, 1996............................ $1.33 to $6.10 127,380 172,620
--------- ---------
--------- ---------
</TABLE>
Under the plan, options exercise prices must be at least 100% of the
estimated fair market value of the common stock at the time of the grant.
Exercise periods are for ten years, but terminate at a stipulated period of time
after an employee's death or termination of employment for causes other than
disability or retirement. No options have been exercised since inception of the
plan. The options become exercisable at the rate of 20% per year. Accordingly,
as of March 31, 1996, options for an aggregate of 35,220 shares were
exercisable.
In June 1996, the Company adopted the 1996 Outside Directors' Stock Option
Plan (the "Directors Plan"), which provides for the grant of options to purchase
common stock of the Company to nonemployee directors of the Company. The
Directors' Plan authorizes the issuance of a maximum of 90,000 shares of common
stock.
The Directors' Plan is administered by the Board of Directors. Under the
Directors' Plan, each nonemployee director elected after April 1, 1996 will
receive options for 3,000 shares of common stock upon election. To the extent
that shares of common stock remain available for the grant of options under the
Directors' Plan, each year on April 1, commencing April 1, 1997, each
nonemployee director will be granted an option to purchase 1,800 shares of
common stock. The exercise price per share for all options granted under the
Directors' Plan will be equal to the fair market value of the common stock as of
the date preceding the date of grant. All options vest in three equal annual
installments beginning on the first anniversary of the date of grant. Each
option will be for a ten-year term, subject to earlier termination in the event
of death or permanent disability.
F-17
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE J -- BUSINESS SEGMENTS
The Company owns and operates its three residential retirement centers in
Michigan to provide living and extended care services to the elderly. In
addition to a room, the Company provides significant personal services,
including, among other things, meal preparation and health care. The Company's
management provides the requisite day-to-day supervision and administration
services to various affiliates and nonaffiliated companies.
Intersegment revenues are not significant. Operating profit is defined as
sales and other income directly related to a segment's operations, less
operating expenses.
The following summaries set forth certain financial information for the
years ended March 31, 1995 and 1996, classified as described above:
<TABLE>
<CAPTION>
1995 1996
-------------- -------------
<S> <C> <C>
Revenues
Resident centers............................................. $ 7,378,492 $ 7,521,196
Management and development companies......................... 700,000 1,003,955
-------------- -------------
$ 8,078,492 $ 8,525,151
-------------- -------------
-------------- -------------
Operating profits
Resident centers............................................. $ 1,275,106 $ 1,268,361
Management and development companies......................... 140,329 551,248
-------------- -------------
Income from operations..................................... $ 1,415,435 $ 1,819,609
-------------- -------------
-------------- -------------
</TABLE>
Corporate assets are principally cash, and corporate office equipment,
furnishings and related assets.
<TABLE>
<S> <C>
Identifiable assets at March 31, 1996 are as follows:
Retirement centers........................................... $3,656,272
Management and development companies......................... 2,250,917
Corporate.................................................... 180,350
----------
$6,087,539
----------
----------
</TABLE>
NOTE K -- PRIOR PERIOD ADJUSTMENTS
The Company has restated its previously issued financial statements for the
fiscal year ended March 31, 1995 to reflect adjustments related to the
receivables due the Company from related parties and the associated income
reported during those years and in prior periods. The adjustments are necessary
as it has been determined that, in part, an entity previously treated as an
unrelated and unaffiliated organization can be construed as a related party.
Additionally, transactions with other related entities should have been treated
as special purpose entities. Accordingly, advances made to said entities and
previously recorded management fees and interest income earned on the
receivables were erroneously accounted for.
The results of these adjustments reduced the previously reported net assets
by $13,809,701 at March 31, 1995. Therefore, the retained earnings as originally
reported in the amount of $3,453,112
F-18
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE K -- PRIOR PERIOD ADJUSTMENTS (CONTINUED)
have been adjusted so that, as restated, the Company reflects an accumulated
deficit of $9,577,925. The adjustments had the following changes on previously
reported results of 1995 operations and financial position:
<TABLE>
<S> <C>
Net income (loss)
As previously reported........................... $ 1,284,177
As restated...................................... (626,651)
Net income (loss) per common share
As previously reported........................... $ .26
As restated...................................... (.22)
Retained earnings (deficit)
As previously reported........................... $ 3,453,112
As restated...................................... (9,577,925)
</TABLE>
NOTE L -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
On April 19, 1996, the Company entered into an agreement to purchase the
Harvest Village facility, a 360 unit senior living facility located in Atco, New
Jersey ("Harvest Village"). The purchase is contingent upon certain events,
including the consummation of a proposed public offering. The purchase price is
$17,400,000 consisting: (i) $13,500,000 in cash or the assumption of a first
mortgage in such amount, (ii) the assignment to seller of a promissory note in
the amount of $7,491,953 as of March 31, 1996 due to the Company from Gateway
and (iii) the cancellation of $6,094,000 due from VVI and an affiliate of VVI
which, in the aggregate have a stipulated value between buyer and seller of
$3,900,000.
F-19
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE L -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
Had the contemplated acquisition taken place at March 31, 1996, the balance
sheet would have been as follows:
ASSETS
<TABLE>
<CAPTION>
ASSUMING ACQUISITION
AS OF
MARCH 31, 1996 PRO PRO FORMA
UVH ACTUAL FORMA ADJUSTMENTS AMOUNTS
-------------- -------------------- --------------
<S> <C> <C> <C>
Current assets
Cash............................................ $ 210,245 (A) $(22,751,000) $ 9,461,245
(B) 13,500,000
Accounts receivable, net........................ 413,539 413,539
Development project fees and advances........... 270,864 270,864
Due from affiliates, net........................ 658,717 658,717
Prepaid expenses and other...................... 274,654 274,654
-------------- --------------
Total current assets.......................... 1,828,019 11,079,019
Property and equipment, net....................... 2,361,698 (B) 17,400,000 19,761,698
Other Assets
Development fees.............................. 575,017 575,017
Restricted assets............................. 176,352 176,352
Deferred income taxes......................... 981,000 981,000
Other assets.................................. 165,453 (A) 1,150,000 1,315,453
-------------- -------------------- --------------
$ 6,087,539 $27,801,000 $ 33,888,539
-------------- -------------------- --------------
-------------- -------------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Current portion of long-term debt............... $ 626,043 $ 626,043
Accounts payable................................ 242,470 242,470
Accrued expenses................................ 617,043 617,043
Income taxes payable............................ 442,371 442,371
-------------- --------------
Total current liabilities..................... 1,927,927 1,927,927
Resident security deposits........................ 314,705 314,705
Long-term debt, less current portion.............. 7,172,982 (A) $12,500,000 19,672,982
Stockholders' deficiency
Common stock.................................... 18,278 (A) 18,000 36,278
Additional paid-in capital...................... 5,619,905 (B) 3,900,000 20,902,905
(A) 11,383,000
Accumulated deficit............................. (8,966,258) (8,966,258)
-------------- --------------
(3,328,075) 11,972,925
-------------- -------------------- --------------
$ 6,087,539 $27,801,000 $ 33,888,539
-------------- -------------------- --------------
-------------- -------------------- --------------
</TABLE>
F-20
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE L -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
The pro forma results of operations for the year ended March 31, 1996 of the
Company, assuming the acquisition had taken place of April 1, 1995, would have
been as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
UVH ACTUAL ADJUSTMENTS AMOUNTS
------------- ------------------- -------------
<S> <C> <C> <C>
Operating revenues
Residents services................................. $ 4,966,058 $ $ 4,966,058
Health care services............................... 2,555,138 2,555,138
Development fees................................... 1,003,955 1,003,955
Rental Income...................................... (C) $2,550,000 2,550,000
------------- -------------
8,525,151 11,075,151
------------- -------------
Operating expenses
Residence operating expenses....................... 5,912,624 5,912,624
General and administrative......................... 414,703 (C) 3,200 417,903
Depreciation and amortization...................... 378,215 (C) 696,000 1,074,215
------------- -------------
6,705,542 7,404,742
------------- -------------
Income from operations........................... 1,819,609 3,670,409
------------- -------------
Other income (expense)
Interest expense, net.............................. (600,871) (D) (1,177,500) (1,778,371)
Other income....................................... 109,022 109,022
------------- -------------
(491,849) (1,669,349)
Provision for loss on advances to affiliates....... (296,093) (296,093)
------------- -------------
Income (loss) before income taxes................ 1,031,667 1,704,967
Income taxes......................................... 420,000 (C) 269,000 689,000
------------- ------------------- -------------
NET INCOME (LOSS)................................ $ 611,667 $404,300 $ 1,015,967
------------- ------------------- -------------
------------- ------------------- -------------
Earnings (loss) per share............................ $.35 $.29
Common shares and equivalents outstanding............ 1,759,023 3,559,023
------------- -------------
------------- -------------
</TABLE>
F-21
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996
NOTE L -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
The adjustments below were prepared from data currently available and in
some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts actually
recorded at the closing date. Deferred income taxes have not been considered in
the pro forma balance sheet because they are not expected to be material at the
time of the consummation of the acquisitions.
BALANCE SHEET AT MARCH 31, 1996
(A) To record the proceeds of the issuance of 1,800,000 shares of the Company's
common stock, 1,800,000 warrants to purchase common stock and the issuance
of convertible notes aggregating $12,500,000 net of underwriting discounts
and expenses.
(B) To record the acquisition of the Harvest Village facility at founder's cost.
The purchase consideration consisting of $13,500,000 cash and the
forgiveness of amounts due the Company valued at $3,900,000.
STATEMENT OF OPERATION FOR THE YEAR ENDED MARCH 31, 1996
(C) To record rental income, depreciation, miscellaneous expenses, and income
taxes of Harvest Village.
(D) To record interest expense pertaining to $12,500,000 of convertible senior
secured notes.
F-22
<PAGE>
FARBER, BLICHT & EYERMAN, LLP
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 255 EXECUTIVE DRIVE, SUITE 215 TELEPHONE: (516)
576-7040
PLAINVIEW, NY 11803-1715 FACSIMILE: (516)
576-1232
INDEPENDENT AUDITOR'S REPORT
To the Partners
Harvest Village Partners, L.P.
(A Limited Partnership)
We have audited the accompanying statements of assets, liabilities and
partners' deficit of Harvest Village Partners, L.P. (a limited partnership) as
of December 31, 1995 and 1994 and the related statements of revenues and
expenses and partners' deficit, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Harvest Village Partners,
L.P. as of December 31, 1995 and 1994 and the results of its operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred net losses since inception, and,
as of December 31, 1995, had a partners' capital deficit of $23,226,912. As more
fully described in Note 4 to the financial statements, the Company has long-term
debt in excess of $40,000,000. The Company is not aware of any alternate sources
of capital to meet such obligations. Those conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Plainview, New York
April 16, 1996
F-23
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1995 1994
-------------- --------------
ASSETS
Residential real estate:
Property and equipment at cost, net of accumulated depreciation (Note 5)........ $ 17,399,200 $ 18,246,600
Cash............................................................................ 60 88
Due from lessee (Note 7)........................................................ 920,615 368,907
Capitalized costs, net of accumulated amortization (Note 6)..................... 583,862 852,342
-------------- --------------
$ 18,903,737 $ 19,467,937
-------------- --------------
-------------- --------------
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Construction loan payable (Note 4).............................................. $ 22,349,309 $ 21,432,362
Loan payable--Gateway Communities, Inc. (Note 4)................................ 17,058,400 15,499,000
Notes payable--Presbyterian Home at Winslow, Inc. (Note 4)...................... 1,191,720 1,112,532
Notes payable--other (Note 4)................................................... 168,663 158,790
Accrued interest (Note 4)....................................................... 197,264 121,390
Accrued expenses................................................................ 552,903 323,199
Due to affiliates (Note 8)...................................................... 612,390 564,174
-------------- --------------
Total liabilities.......................................................... 42,130,649 39,211,447
Partners' deficit............................................................... (23,226,912) (19,743,510)
-------------- --------------
$ 18,903,737 $ 19,467,937
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF REVENUES AND EXPENSES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
<S> <C> <C>
1995 1994
--------------- ---------------
<CAPTION>
Revenues:
<S> <C> <C>
Rental (Notes 2b, 4 and 10).................................................. $ 1,689,372 $ 1,393,236
Interest..................................................................... 66,446 94,885
--------------- ---------------
1,755,818 1,488,121
--------------- ---------------
Expenses:
Interest expense............................................................. 3,961,283 2,962,255
Depreciation and amortization................................................ 1,115,881 1,034,973
Professional fees............................................................ 161,829 4,500
Miscellaneous expense........................................................ 227 867
--------------- ---------------
5,239,220 4,002,595
--------------- ---------------
Net loss....................................................................... (3,483,402) (2,514,474)
Partners' deficit, beginning of year........................................... (19,743,510) (11,230,161)
Capital contribution........................................................... -- 260,000
Distribution (Note 8).......................................................... -- (6,258,875)
--------------- ---------------
Partners' deficit, end of year................................................. $ (23,226,912) $ (19,743,510)
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
<S> <C> <C>
1995 1994
-------------- --------------
<CAPTION>
Cash flows from operating activities:
<S> <C> <C>
Net loss........................................................................ $ (3,483,402) $ (2,514,474)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 1,115,881 1,034,973
Accrued interest income....................................................... (66,446) (94,885)
Changes in assets and liabilities:
Increase in accrued interest.................................................. 2,375,385 1,569,091
Increase in accrued expenses.................................................. 229,704 2,500
-------------- --------------
Net cash (used in) provided by operating activities............................... 171,122 (2,795)
-------------- --------------
Cash flows from financing activities:
Proceeds from construction loan................................................. 485,262 341,599
Proceeds from loan from Gateway................................................. 1,559,400 310,150
Payments on construction loan................................................... (1,778,766) (310,150)
Advances from affiliates........................................................ 48,216 2,867
Advances to affiliates.......................................................... (485,262) (366,518)
Partners capital contribution................................................... -- 260,000
Payments for capitalized loan costs............................................. -- (235,140)
-------------- --------------
Net cash provided by (used in) financing activities............................... (171,150) 2,808
-------------- --------------
Net change in cash................................................................ (28) 13
Cash -- beginning of year......................................................... 88 75
-------------- --------------
Cash -- end of year............................................................... $ 60 $ 88
-------------- --------------
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.......................................... $ 1,481,688 $ 1,393,163
-------------- --------------
-------------- --------------
Non-cash financing activities:
Reduction of accrued interest payable........................................... $ (6,926,013)
--------------
--------------
Increase in notes payable....................................................... $ 6,926,013
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND OPERATIONS
Harvest Village Partners, L.P. (a Limited Partnership) (the "Partnership")
was organized on December 1, 1986 under the Uniform Limited Partnership Act of
Delaware to construct and own a 300 unit residential lifecare retirement center
(the "Retirement Center") in Winslow Township, New Jersey.
The Partnership had entered into a lease agreement with Presbyterian Home at
Winslow, Inc. ("PHW"), a New Jersey not-for-profit corporation, pursuant to
which PHW leased the entire facility. Effective December 14, 1990, Gateway
Communities, Inc. ("Gateway"), a company that had been a wholly owned subsidiary
of an affiliate of the general partner, assumed the lease agreement and began
operating the retirement center (see Note 10). On September 18, 1992, said
affiliate spun off its ownership in Gateway to an unaffiliated owner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
a) Depreciation is being provided for on a straight-line basis over the
estimated useful lives of the assets which range from 7 to 27.5 years.
Amortization of capitalized acquisition fees and marketing costs is being
provided for on a straight-line basis over a ten year period, which represents
the initial term of the lease. Amortization of capitalized mortgage costs, loan
costs, consulting fees and refinancing fees is being provided for on a
straight-line basis over a three year period, which represents the time between
the date of the refinancing of bank loans and the extended due date of the debt.
b) Rental income is being recorded pursuant to its lease agreement with
Gateway, as amended, as it is collected. Said lease initially requires Gateway
to pay as rent its net operating cash flow, as defined, exclusive of advance
entrance fees, on a monthly basis plus an amount equal to all interest on the
note payable to Gateway.
c) Prior to formation of the Partnership, the partners had incurred certain
predevelopment costs, both tangible and intangible in nature. Certain
expenditures, because of their nature, have been reflected in the accompanying
financial statements as predevelopment costs and as contributions to capital
(see Note 9 (b) (4)).
d) The Partnership includes cash on hand and amounts due from banks with an
original maturity of three months or less as cash.
INCOME TAXES
Income taxes have not been provided as any income or loss is reportable on
the individual income tax return of the respective partner. The Partnership
files its tax returns using the accrual method of accounting.
3. GOING CONCERN CONSIDERATIONS
As more fully described in Note 4, the Company has long-term debt in excess
of $40,000,000. Additionally, the Company has been operating at a loss since
inception and through December 31, 1995, had accumulated a deficit of
$23,226,912. The Company is not aware of any alternate sources of capital nor
does it expect to be able to begin operating profitably. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
F-27
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
4. DEBT
Debt at December 31, 1995 and 1994, consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Construction loan payable to bank bearing interest at 1 1/2% above prime (10 1/2%
and 10% at December 31, 1995 and 1994, respectively). The loan is collateralized
by a mortgage on the facility and matures September 1, 1996..................... $ 22,349,309 $ 21,432,362
Loan payable to Gateway Communities, Inc. bearing interest at 9% per annum and is
collateralized by a third mortgage on the retirement center. Pursuant to the
terms of the lease agreement, rent income is due to the Partnership in the
amount of the interest on this loan, in addition to certain other amounts. See
Note 10. Interest expense for 1995 and 1994 aggregated $1,481,688 and
$1,393,163, respectively........................................................ 17,058,400 15,499,000
-------------- --------------
39,407,709 36,931,362
-------------- --------------
Notes payable to PHW bearing interest at 10% per annum which accrues to maturity
and is collateralized by a second mortgage on the property; the principal amount
of this note, together with all accrued and unpaid interest, shall be due and
payable on the earlier of September 1, 1996 (maturity date) or the sale of the
property........................................................................ 1,191,720 1,112,532
Notes payable to various vendors and professionals bearing interest at 8% per
annum and which are past due.................................................... 168,663 158,790
-------------- --------------
$ 40,768,092 $ 38,202,684
-------------- --------------
-------------- --------------
</TABLE>
Pursuant to a loan agreement originally entered into by the Partnership and
PHW and which was assumed by Gateway, Gateway is committed to transfer to the
Partnership the entrance fees collected by Gateway from residents up to the
Partnership's maximum indebtedness under the construction loan.
On September 8, 1994, the Partnership modified its financing agreement with
two financial institutions regarding the construction loan. The Partnership had
accrued interest aggregating $6,926,014 on that date, which was converted into
promissory notes bearing interest at 1 1/2% above prime and maturing on
September 1, 1996.
Also on September 8, 1994, the Partnership received a commitment from
financial institutions to enable it to borrow up to $1,000,000 of additional
funds. Closing costs incurred aggregated $260,000, which were paid by Vanguard
Homes of N.J., Inc. on behalf of the Partnership. Said funds were treated as a
capital contribution to the Partnership.
F-28
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
5. PROPERTY AND EQUIPMENT
As of December 31, 1995 and 1994, property and equipment consists of the
following:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Land......................................................... $ 719,907 $ 719,907
Building and improvements.................................... 21,350,721 21,350,721
Building and equipment....................................... 796,081 796,081
-------------- --------------
22,866,709 22,866,709
Less accumulated depreciation................................ 5,467,509 4,620,109
-------------- --------------
$ 17,399,200 $ 18,246,600
-------------- --------------
-------------- --------------
</TABLE>
The Partnership's property and equipment is pledged as collateral for the
mortgages discussed in Notes 4.
6. CAPITALIZED COSTS
As of December 31, 1995 and 1994, capitalized costs consist of the
following:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Consulting fees................................................. $ -- $ 75,000
Refinancing fees................................................ 235,140 1,412,692
Acquisition fees................................................ 670,583 670,583
Marketing costs................................................. 797,600 797,600
------------- -------------
1,703,323 2,955,875
Less accumulated amortization................................... 1,119,461 2,103,533
------------- -------------
$ 583,862 $ 852,342
------------- -------------
------------- -------------
</TABLE>
7. DUE FROM LESSEE
As of December 31, 1995 and 1994, the Partnership has a receivable in the
aggregate amount of $920,615 and $368,907, respectively, due from Gateway, which
is the tenant of the Partnership's facility. Said receivable is comprised of
unsecured cash advances for various operating expenses, including, among other
things, advertising and marketing, with interest at prime plus 1 1/2% per annum,
payable from available cash flow.
8. RELATED PARTY TRANSACTIONS
A consulting fee in the amount of $75,000 is due to Vanguard Realty and
Management Company, Inc.("VRM" -- an affiliate of the general partner) for
services performed in 1990 in connection with a loan extension negotiated by VRM
on behalf of the Partnership.
On February 28, 1994, the Partnership assigned to its General Partner,
Vanguard Homes of N.J., Inc. ("VHNJ"), an aggregate receivable of $6,258,875,
being all sums due to the Partnership from Gateway at that date. This assignment
was treated as a capital distribution to VHNJ and was consummated at the
direction of and for benefit of VHNJ's parent company, Vanguard Ventures, Inc.
F-29
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
9. OWNERSHIP AND ALLOCATIONS
a) Pursuant to the Partnership agreement, profit or loss shall be allocated
among the partners as follows:
<TABLE>
<S> <C>
Vanguard Homes of N.J. Inc........................................... 95%
Rimco Associates, Inc................................................ 5%
</TABLE>
However, on January 10, 1995, Rimco Associates, Inc. ("Rimco") assigned
one-half of its limited partnership interest in the Partnership to Phoenix
Resources, Inc. ("Phoenix"). Phoenix agreed to pay Rimco $550,000 on January 10,
2005, with interest at the rate of 9% per annum
b) The partners have agreed that proceeds from refinancing or sale will be
distributed as follows:
1) Repay loans made directly or on behalf of the Partnership, plus
interest at prime plus 2% per annum.
2) A fee payable to VHNJ equal to 12% per annum based on the amount of
any guarantee and or collateral posted to VHNJ or any affiliate thereof in
connection with the December, 1990 loan restructuring or subsequent
guarantee or posting of collateral related to the Partnership. If such
guarantee is called or collateral is used such amounts will be treated as
loans and treated as #1 above.
3) Outstanding Partnership vendor obligations and Partnership
professional fees from operations due but not paid.
4) First $2,200,000 available for distribution will be split 81.5% to
VHNJ and $18.5% to Rimco, with no interest paid. The $2,200,000 represents
$1,100,000 as a return of VHNJ contribution and $1,100,000 as a reduction of
the Predevelopment Costs.
5) The next $866,225 will be split 63% to VHNJ and 37% to Rimco, with
8% simple interest earned on the unpaid balance of the $1,966,255
Predevelopment Cost from November 1, 1987 until entire Predevelopment Cost
is retired.
6) The next $762,000, plus interest of 8% per annum from November 1,
1987, will be split 93% to VHNJ and 7% to Rimco.
7) VHNJ limited partner's contribution of $1,000,000 will earn 10%
simple interest from November 1, 1987.
8) General Partners management fee: $15,000 per month for the first 18
months and $4,000 per month during each month thereafter, until December 31,
1990. To date $119,000 has been paid. The fee to be split equally between
VHNJ and Rimco.
9) The General Partners developers fee of up to $2,000,000 will be
distributed in accordance with paragraph 2 of the April 26, 1989 letter from
VHNJ to Rimco Associates.
10) Remaining proceeds will be divided 95% to VHNJ and 5% to Rimco.
10. COMMITMENTS
The minimum rental income due the Partnership from Gateway is equal to net
operating cash flow, as defined, exclusive of advance entrance fees, on a
monthly basis, plus an amount equal to all interest paid on the construction
loan payable discussed in Note 4. This provision remains in effect until
repayment in full of all principal and interest due and owing by the
Partnership, pursuant to its mortgage obligation with Gateway. To date, there
has been no net operating cash flow.
F-30
<PAGE>
OUR MISSION
The Company's mission and
the foundation of its operating
philosophy is to improve the
quality of life of its residents
in a safe, healthy and secure
environment at an affordable price.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 9
The Company.................................... 19
Use of Proceeds................................ 20
Capitalization................................. 21
Dividend Policy................................ 22
Dilution....................................... 22
Selected Financial Data........................ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 25
Business....................................... 29
Description of Mortgage Loans.................. 43
Management..................................... 45
Certain Transactions........................... 50
Principal and Selling Stockholders............. 54
Description of Notes........................... 55
Description of Capital Stock................... 57
Shares Eligible for Future Sale................ 60
Underwriting................................... 62
Legal Matters.................................. 64
Experts........................................ 64
Change in Accountants.......................... 64
Indemnification for Securities Act
Liabilities................................... 64
Available Information.......................... 65
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS REPRESENTATIVE AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
UNITED VANGUARD HOMES, INC.
1,800,000 SHARES OF COMMON STOCK
AND
1,800,000 COMMON
STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
JANNEY MONTGOMERY SCOTT INC.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except to the extent hereinafter set forth, there is no statute, charter
provision, bylaw, contract or other arrangement under which any controlling
person, director, or officer of the Registrant is insured or indemnified in any
manner against liability which he may incur in his capacity as such.
Article Tenth of the Registrant's Certificate of Incorporation provides for
the indemnification of directors and officers to the fullest extent allowed by
Section 145 of the General Corporation Law of the State of Delaware.
Registrant has entered into Indemnification Agreements with its officers and
directors consistent with the foregoing authority.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors,officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Registrant does not have directors' and officers' liability insurance.
Registrant is seeking to obtain directors' and officers' liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be borne
by the Company in connection with the offering described in the Registration
Statement, other than underwriting commissions and discounts.
<TABLE>
<S> <C>
SEC Registration Fee..................................................... $ 10,631
Nasdaq National Market Listing Fee....................................... 20,000
National Association of Securities Dealers, Inc. Fee..................... 3,582
Legal Fees and Expenses.................................................. 120,000
Accounting Fees and Expenses............................................. 100,000
Printing and Engraving Expenses.......................................... 100,000
Blue Sky Fees and Expenses............................................... 35,000
Transfer Agent's and Registrar's Fees.................................... 10,000
Miscellaneous Expenses................................................... 25,787
---------
Total............................................................ $ 425,000
---------
---------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
<TABLE>
<CAPTION>
PERSONS OR CLASS
OF PERSONS TO TOTAL OFFERING
AMOUNT OF PRINCIPAL WHOM SECURITIES PRICE (COMMISSIONS NON-CASH
DATE TITLE SECURITIES SOLD UNDERWRITER SOLD PAID) CONSIDERATION
- ---------- ---------------- ---------------- ---------------- ---------------- ------------------ ---------------
<C> <S> <C> <C> <C> <C> <C>
05/03/93 United Vanguard 250,000 wts. None Vanguard $ 37,500 None
Homes, Inc. Ventures, Inc.
Common Stock (parent company)
Warrants
05/31/93 United Vanguard 61,200 shs. Advanced Private $ 680,000 (10%) None
Homes, Inc. Planning Investors
Common Stock (re Securities,
Olds Manor Inc., an
Mortgage Trust) affiliated
broker-dealer
10/31/93 United Vanguard 194 shs. None Former $ 646 (None) None
Homes, Inc. shareholder of
Common Stock COAP Systems
Inc.
07/31/94 UVH Development $1,400,000 Notes Advanced Private $1,400,000 (10%) None
Corp. 9% Planning Investors
Convertible Securities,
Notes Inc., an
affiliated
broker-dealer
08/15/94 United Vanguard $ 730,000 Notes Advanced Private $ 730,000 (10%) None
Homes, Inc. 7% Planning Investors
Convertible Securities,
Notes Inc., an
affiliated
broker-dealer
08/15/94 United Vanguard 73,000 Wts. Advanced Private None None
Homes, Inc. Planning Investors
Common Stock Securities,
Warrants Inc., an
affiliated
broker-dealer
<CAPTION>
CLAIMED EXEMPTIONS
DATE FROM REGISTRATION
- ---------- -------------------
<C> <C>
05/03/93 Section4(2)
05/31/93 Section4(2);(a)
Reg. D.(a)
10/31/93 Section4(2)
07/31/94 Section4(2); Reg.
D(a)
08/15/94 Section4(2); Reg.
D(a)
08/15/94 Section4(2); Reg.
D(a)
</TABLE>
- ------------------------
(a) A private placement to Accredited Investors was structured to comply with
Regulation D promulgated under Section 4(2) of the Securities Act.
II-2
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1 Underwriting Agreement (a)
3.1 Restated Certificate of Incorporation of Company. (a)
3.2 Bylaws of the Company. (a)
4 Form of Warrant to be issued to Janney Montgomery Scott Inc. (a)
5 Opinion of Olshan Grundman Frome & Rosenzweig LLP with respect to the legality of the Common Stock. (a)
10.1 Employment Agreement of Larry L. Laird dated as of April 1,1996 with United Vanguard Homes, Inc. and UVH
Development Corp. (a)
10.2 Employment Agreement between Carl Pattendorf and the Company, dated as of April 1, 1996. (a)
10.3 1991 Incentive Stock Option Plan. (a)
10.4 1996 Outside Directors' Stock Option Plan.
10.4 Management Agreement between Whittier Towers, Inc. and Vanguard Realty and Management Company, Inc. dated
as of April 1, 1991. (b)
10.5 Management Agreement between Lake Fredrica, Ltd. and Vanguard Realty and Management Company, Inc. dated
as of August 1, 1985. (b)
10.6 Management Agreement between Colony Court Associates, Ltd. and Vanguard Realty and Management Company,
Inc. dated as of August 1, 1985. (b)
10.7 Development Agreement between UVH Development Corp. and Cottage Grove Place, Inc. dated October 13,
1993.(b)
10.8 Management Agreement between Cottage Grove Place, Inc. and Laird Lifecare, Ltd. dated October 13, 1993.
(b)
10.9 Assignment, Assumption & Financing Agreement dated as of November 1, 1993, among Advanced Planning
Securities, Inc., Heritage Corporation of Iowa, Cottage Grove Place, Inc., Laird Lifecare, Ltd., United
Vanguard Homes, Inc., UVH Development Corp., Vanguard Realty and Management Company, Inc., and Vanguard
Ventures, Inc. (b)
10.10 Management Agreement dated March 24, 1995 between Phoenix Lifecare Corp. and Vanguard Realty and
Management Company, Inc. (c)
10.11 Development Agreement between Phoenix Lifecare Corp. and UVH Development Corp. dated March 24, 1995. (c)
10.12 Business Loan Agreement dated October 18, 1994 between United Vanguard Homes, Inc. and Michigan National
Bank. (c)
10.13 Development Agreement between UVH Development Corp. and Cottage Grove Place, Inc. dated June 7, 1995. (c)
10.14 Management Agreement between Cottage Grove Place, Inc. and Vanguard Realty and Management Company, Inc.
dated June 7, 1995. (c)
10.15 Letter agreement dated June 8, 1995 among Terry R. Bjornsen, Heritage Corporation of Iowa, Cottage Grove
Place, Vanguard Ventures, Inc. and United Vanguard Homes, Inc. (c)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.16 Option Agreement dated June 23, 1995 between Phoenix Lifecare Corp. and United Vanguard Homes, Inc.,
without exhibits. (c)
22 List of Subsidiaries of the Registrant. (a)
24.1 The consent of securities counsel will be included in the opinion filed as Exhibit 5 to this Registration
Statement. (c)
24.2 The consent of Farber, Blicht & Eyerman, LLP, certified public accountants.
24.3 The consent of Grant Thornton LLP, certified public accountants.
25 Powers of Attorney appear on Part II-6 of the Registration Statement.
</TABLE>
FOOTNOTES
(a) To be filed by amendment.
(b) Filed as an Exhibit to Amendment No. 1 to Company's Annual Report on Form
10-K for the year ended March 31, 1994, SEC File No. 0-5097.
(c) Filed as an Exhibit to Company's Form 10-K for the year ended March 31,
1995, SEC File No. 0-5097.
ITEM 28. UNDERTAKINGS.
Registrant hereby undertakes:
a. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
b. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
c. To remove from registration by means of a post-effective amendment any
securities being registered which remain unsold at termination of the offering.
d. For the purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
e. For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
f. In the event that a claim for indemnification against such liabilities
(other than the payment by Registrant of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Glen Cove, State of New York, on the 19th day of July, 1996.
UNITED VANGUARD HOMES, INC.
By: /s/ CARL G. PAFFENDORF
-----------------------------------
Name: Carl G. Paffendorf
Title: Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul D'Andrea, Larry L. Laird and Carl G.
Paffendorf, and each one of them individually, his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including post-effective amendments) to this registration
statement, and any registration statement relating to the offering hereunder
pursuant to Rule 462 under the Securities Act of 1933, as amended, and to file
the same with the Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite or necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ---------------------------------- ---------------------
/s/ PAUL D'ANDREA Vice President--Finance (Principal
------------------------------------------- Financial Officer and Principal July 19, 1996
Paul D'Andrea Accounting Officer)
/s/ BENJAMIN FRANK
------------------------------------------- Director July 19, 1996
Benjamin Frank
/s/ FRANCIS S. GABRESKI
------------------------------------------- Director July 19, 1996
Francis S. Gabreski
/s/ LARRY L. LAIRD
------------------------------------------- President, Chief Operating Officer July 19, 1996
Larry L. Laird and Director
/s/ CARL G. PAFFENDORF
------------------------------------------- Chairman of the Board and Chief July 19, 1996
Carl G. Paffendorf Executive Officer
/s/ ROBERT S. HOSHINO, JR.
------------------------------------------- Director July 19, 1996
Robert S. Hoshino, Jr.
/s/ JAMES E. EDEN
------------------------------------------- Director July 19, 1996
James E. Eden
/s/ STANFORD J. SHUSTER
------------------------------------------- Director July 19, 1996
Stanford J. Shuster
</TABLE>
II-6
<PAGE>
EXHIBIT 24.2
CONSENT
We have issued our report dated February 29, 1996, except for Notes A7 and
L, the latest of which is dated June 25, 1996, accompanying the statements of
operations, stockholders' deficiency and cash flows for the year ended March 31,
1995 of United Vanguard Homes, Inc. and Subsidiaries. We have also issued our
report dated April 16, 1996, accompanying the statements of assets, liabilities
and partners' deficit of Harvest Village Partners, L.P. (a limited partnership)
as of December 31, 1995 and 1994 and the related statements of revenues and
expenses and partners' deficit, and cash flows for the years then ended. Each of
the aforementioned reports are contained in the Registration Statement (No.
33-80812) on Form SB-2 Amendment No. 4. We consent to the use of the
aforementioned reports in the Registration Statement, and to the use of our name
as it appears under the caption "Experts".
FARBER, BLICHT & EYERMAN, LLP
Plainview, New York
July 19, 1996
<PAGE>
EXHIBIT 24.3
CONSENT
We have issued our report dated July 15, 1996, accompanying the consolidated
financial statements of United Vanguard Homes, Inc. and subsidiaries contained
in the Registration Statement (No. 33-80812) on Form SB-2 Amendment No. 4. We
consent to the use of the aforementioned report in the Registration Statement,
and to the use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
Melville, N.Y.
July 19, 1996
