<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
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>
Convertible Senior Secured Notes due 2006(2) $14,375,000 $4,956
Common Stock, $.01 par value(3)(4) $14,375,000 $0(5)
Representative's Warrants $14 $1
Common Stock, $.01 par value, underlying Representative's
Warrants(4) $1,250,000 $431
Total $30,000,014 $5,388
</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 $1,875,000 aggregate principal amount of Convertible Senior Secured
Notes due 2006 issuable upon exercise of the Representative's option.
(3) Reserved for issuance upon conversion of the Convertible Senior Secured
Notes due 2006.
(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) No additional consideration will be received by the Registrant upon issuance
of the Common Stock.
------------------------------
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 26, 1996
PROSPECTUS
$12,500,000
UNITED VANGUARD HOMES, INC.
% CONVERTIBLE SENIOR SECURED NOTES DUE 2006
------------------
Interest on the Notes will be payable on October 1 and April 1 of each year,
commencing April 1, 1997. The Notes are convertible into shares of common stock,
$.01 par value per share (the "Common Stock"), of United Vanguard Homes, Inc.
(the "Company") at any time at or before maturity, unless previously redeemed,
at a conversion price of $ per share [ % of the initial public offering
price of the Common Stock] subject to adjustment in certain events (the
"Conversion Price"). The Company shall make a mandatory payment of $3,125,000 on
October 1, 2003, 2004 and 2005 and a final payment at maturity of $3,125,000.
The Notes are redeemable, at the option of the Company, in whole or in part, at
a redemption price equal to 106%, 105%, 104%, and 103% of the principal amount,
plus accrued interest, in years four through seven, respectively, provided that
the average closing bid price of the Common Stock equals or exceeds 150% of the
Conversion Price, subject to adjustment in certain events, for 20 consecutive
trading days within a period of 30 days' prior to the date of notice of such
redemption. The Notes are redeemable at the option of the Company, in whole or
in part, at a redemption price equal to 100% of the principal amount, plus
accrued interest, after September 30, 2003. See "Description of Notes."
Concurrently with the offering of the Notes, the Company is offering, by
means of a separate prospectus, 1,800,000 shares (the "Shares") of its Common
Stock and 1,800,000 Common Stock Purchase Warrants (the "Warrants"). The Notes
offering is conditioned upon, and is a condition to the consummation of, the
Common Stock and Common Stock Purchase Warrants offering (the "Concurrent Common
Stock and Common Stock Purchase Warrants Offering" and, collectively with this
offering, the "Offerings"). See "Prospectus Summary--Concurrent Common Stock and
Common Stock Purchase Warrants Offering."
------------------------
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
---------------------
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>
OFFERING PLACEMENT AGENT PROCEEDS TO
PRICE (1) COMMISSION (2) COMPANY (3)
<S> <C> <C> <C>
Per Note.............................. % % %
Total................................. $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) Estimated total commissions based upon commissions of 6% of the offering
price. Does not include additional compensation payable to Janney Montgomery
Scott Inc. (the "Placement Agent") in the form of a non-accountable expense
allowance. In addition, see "Plan of Distribution" for information
concerning indemnification and contribution arrangements with the Placement
Agent and other compensation payable to the Placement Agent.
(3) Before deducting estimated expenses of $ , payable by the Company.
(4) The Company has granted to the Placement Agent, an option, exercisable
within forty-five (45) days after the effective date of the Registration
Statement, to place up to an additional $1,875,000 aggregate principal
amount of Notes, upon the same terms and conditions as set forth above (the
"Over-Allotment Option"). If such Over-Allotment Option is exercised in
full, the total Offering Price, Placement Agent Commission and Proceeds to
Company will be, $ , $ and $ , respectively.
------------------------
The Placement Agent has agreed, as agent for the Company, to offer the Notes
on a best efforts, all or nothing basis. It is expected that delivery of the
Notes will be made on or about , 1996, at the offices of the
Placement Agent, New York, New York.
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 CONCURRENT COMMON STOCK AND COMMON STOCK PURCHASE
WARRANTS 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 "PLAN OF DISTRIBUTION." 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........................... $12,500,000 aggregate principal amount of %
Convertible Senior Secured Notes due 2006
(the "Notes").
<S> <C>
Interest Payment Dates....................... October 1 and April 1, commencing April 1,
1997.
Optional Redemption.......................... Redeemable at the option of the Company, in
whole or in part, at a redemption price
equal to 106%, 105%, 104% and 103% of the
principal amount, plus accrued interest, in
years four through seven, respectively,
provided that the average closing bid price
of the Common Stock equals or exceeds 150%
of the Conversion Price, subject to
adjustment in certain events, for 20
consecutive trading days within a period of
30 days' prior to the date of notice of such
redemption. The Notes are redeemable at the
option of the Company, in whole or in part,
at a redemption price equal to 100% of the
principal amount, plus accrued interest,
after September 30, 2003.
Conversion Price............................. $ [ % of the initial public offering price
of the Common Stock.]
Mandatory Redemption......................... $3,125,000 on October 1, 2003, 2004 and 2005
and a final payment at maturity of
$3,125,000.
Ranking...................................... 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
will constitute direct obligations of the
Company, ranking pari passu with, or senior
in priority to, all other unsecured
indebtedness of the Company.
Certain Restrictions......................... The Indenture will restrict, among other
things, the Company 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 225% 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 Restricted Subsidiaries, and short-term
indebtedness as otherwise allowed by the
Indenture; (iii) selling its assets (or
those of any Restricted Subsidiary) other
than in the ordinary course of its business
or to a Wholly-Owned Restricted 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)
consolidating or merging with or into any
other entity; (v) designating a subsidiary
as an "Unrestricted Subsidiary"; (vi)
declaring any dividends or making other
distributions on, or redeeming the Company's
equity securities, including the Common
Stock or making any
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
investments other than property or inventory
used in the ordinary course of business of
the Company or its Restricted Subsidiaries,
investment in an existing Restricted
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 Restricted Subsidiaries for the fiscal
quarter then ended); (vii) 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; (viii)
maintaining consolidated net worth
(calculated in accordance with GAAP) of the
Company and its Subsidiaries at a level
equal to the sum of $6,000,000 plus the sum
of 25% of consolidated net earnings for each
prior quarter subsequent to the Closing
Date; (ix) encumber any of its property
except for "Permitted Liens" as defined in
the Indenture; or (x) 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 covenants limiting the
Company's ability to exercise its option to
purchase The Whittier. See "Description of
Notes."
Repurchase Obligation........................ The Company will be required to offer to
repurchase all outstanding Notes, at a cash
purchase price equal to the optional
redemption price then in effect, plus
accrued and unpaid interest, if any, no
later than 45 calendar days after the
occurrence of a Change in Control (as
defined in the Indenture). See "Description
of Notes."
Use of Proceeds.............................. The net proceeds to be received by the
Company from the offering, together with the
net proceeds from the sale of Shares and the
Warrants in the Concurrent Common Stock and
Common Stock Purchase Warrants 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."
</TABLE>
CONCURRENT COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS OFFERING
Concurrently with the Notes offering, the Company is offering, by separate
prospectus, 1,800,000 shares of its Common Stock and 1,800,000 Common Stock
Purchase Warrants at an anticipated initial public offering price of between
$6.50 and $8.00 per Share and $0.05 per Warrant. The consummation of the Notes
offering made hereby is conditioned upon, and is a condition to, the
consummation of the Concurrent Common Stock and Common Stock Purchase Warrants
Offering.
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 NOTES 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 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."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture will restrict the ability of the Company and its subsidiaries
to, among other things, incur additional indebtedness, pay dividends or make
certain other restricted payments or investments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, or merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of their assets. The Indenture
will also impose limitations on the Company's ability to restrict the ability of
its subsidiaries to pay dividends or make certain payments to the Company or any
of its subsidiaries. See "Description of Notes."
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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 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 the Concurrent Common Stock and Common Stock Purchase
Warrants Offering will suffer an immediate and substantial dilution of their
investment of approximately $5.30 per share. See "Dilution."
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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 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
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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, 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
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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 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
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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 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 FOR THE COMMON STOCK; DETERMINATION OF PUBLIC OFFERING
PRICE FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK PRICE
There is currently no public market for the Common Stock and there can be no
assurance that an active trading market will develop in the Common Stock or, if
developed, be sustained after this offering. The initial public offering price
of the Common Stock will be determined by negotiation between the Company and
the Representative and does not necessarily relate to or reflect the Company's
assets or book value, results of operations or any other established criteria of
value. After completion of the Offerings, the market prices of the Common Stock
could be subject to significant fluctuations in response to various factors and
events, including the liquidity of the market for the Common Stock and the
Warrants, 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 Common Stock.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
market. If the Notes are traded after their initial issuance, they may trade at
a discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities and other factors. The Company does not
intend to apply for listing of the Notes on any securities exchange or on the
National Association of Securities Dealers, Inc. automated quotation system. See
"Plan of Distribution."
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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 of Common Stock) and
197,338 shares of Common Stock issuable upon conversion of convertible
securities. All of the 1,800,000 shares of Common Stock offered in the
Concurrent Common Stock and Common Stock Purchase Warrants Offering and the
shares issuable upon the 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 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
17
<PAGE>
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 Notes
offered hereby are estimated to be approximately $11.35 million, after deduction
of placement agent discounts and the estimated offering expenses payable by the
Company. 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 in the Concurrent Common
Stock and Common Stock Purchase Warrants Offering 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 following table sets forth the sources and uses of the cash
proceeds from the Offerings:
<TABLE>
<S> <C>
SOURCES:
Net proceeds from the Concurrent Common Stock and Common Stock Purchase
Warrants Offering.......................................................... $11,401,000
Net proceeds from the 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 the Concurrent Common
Stock and Common Stock Purchase Warrants 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 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 in the Concurrent Common Stock and Common Stock Purchase
Warrants Offering 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 the
Concurrent Common Stock and Common Stock Purchase Warrants 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 the
Concurrent Common Stock and Common Stock Purchase Warrants 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.
[LOGO]
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.
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<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.
[LOGO]
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.
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<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 and accrued management fees
payable. See "Description of Notes."
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<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.
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<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.................................... 57 Vice President--Administration and Secretary
Craig M. Shields..................................... 54 Vice President and General Counsel
Alan Guttman......................................... 47 Treasurer
James E. Eden........................................ 58 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 Vanguard, 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 president (since 1987) and chief executive officer (since 1993) 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
(since 1973) and chief executive officer (since 1985) 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
46
<PAGE>
elected to serve until the annual meeting of stockholders in 1997 and Messrs.
Paffendorf and Laird 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, and as adjusted to reflect the sale of the Shares in the
Concurrent Common Stock and Common Stock Purchase Warrants Offering. 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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DESCRIPTION OF NOTES
The Notes will constitute direct obligations of the Company, ranking pari
passu with, or senior in priority to, all other unsecured indebtedness of the
Company, and will be secured by a first mortgage lien on the real property
comprising Harvest Village and certain personal property as described in
"Security". The Notes are being issued under an indenture (the "Indenture")
between the Company and [ ], as trustee (the "Trustee"). The Indenture
will be qualified under the Trust Indenture Act of 1939, as amended (the "TIA").
See "The Trustee, Paying Agent, Conversion Agent and Registrar" below. The
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries of certain provisions of the
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by reference to all of the provisions of the Indenture, including
the definitions therein of certain capitalized terms used in this Prospectus.
GENERAL
The Notes will be limited to $12,500,000 ($14,375,000 if the Purchaser's
over-allotment option is exercised) in aggregate principal amount, and will
mature on October 1, 2006. The Notes will bear interest at the rate per annum
shown on the cover of this Prospectus from and including the date of the initial
issuance of the Notes or from and including the most recent Interest Payment
Date to which interest has been paid or provided for, payable semiannually on
April 1 and October 1 of each year, commencing April 1, 1997, to the Person in
whose name the Note is registered. Interest on the Notes will be paid on the
basis of a 360-day year of twelve 30-day months.
Principal of, premium, if any, and interest on, the Notes will be payable at
the office or agency of the Company maintained for that purpose as provided in
the Indenture.
The Notes will be initially issued only in fully registered book-entry form
with the Depository Trust Company, as the book-entry depositary. Except as
provided elsewhere in this Prospectus or in the Indenture, the Notes will not be
issuable in certificated form to any person other than the Depositary or its
nominees. See "Global Securities". No service charge will be made for any
transfer or exchange of the Notes, but the Company may require payment of a sum
sufficient to cover any taxes levied on such transfer.
All moneys paid by the Company to the Trustee or any Paying Agent for the
payment of principal of, and premium, if any, and interest on, any Note which
remain unclaimed for two years after such principal, premium, or interest
becomes due and payable may be repaid to the Company.
When issued, the Notes will be a new issue of securities with no established
trading market. No assurance can be given as to the liquidity of the trading
market for the Notes. Because the Notes may be exchanged for Common Stock, the
prices at which the Notes may be sold will likely be affected by the price of
the Company's Common Stock.
The Indenture does not contain any provisions that would provide protection
to Holders of the Notes against a sudden and dramatic decline in credit quality
of the Company resulting from any takeover, recapitalization or other similar
restructuring, except as described in "Optional Repurchase of Notes on Change of
Control."
SECURITY
The Notes will be secured by a mortgage between the Company and the Trustee
(the "Mortgage"), creating a lien on the real property and fixtures comprising
Harvest Village and a security interest in the equipment, furniture and other
movable personal property owned by the Company and located at Harvest Village.
The Mortgage has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. All references to the Mortgage herein are qualified
in their entirety by reference to all of the provisions of the Mortgage. In the
Mortgage the Company has made certain
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covenants relating to maintenance of the property in good condition, free from
Liens, and covered by adequate insurance. The Mortgage further provides that any
Event of Default under the Indenture will be an event of default thereunder.
GLOBAL SECURITIES
The Notes will be issued in the form of one or more global securities (each
a "Global Security") registered in the name of Cede & Co., as nominee of the
Depository Trust Company. The Global Security will be issued in a denomination
or aggregate denominations equal to the portion of the aggregate principal
amount of the outstanding Notes represented by such Global Security. Except as
described herein, Notes will not be issued in definitive form. The following
provisions will apply to depositary arrangements.
Upon the issuance of a Global Security, the Depository or its nominee will
credit the accounts of persons holding through it with the respective principal
amounts of the Notes represented by such Global Security to which they are
entitled. Such accounts will initially be designated by the Placement Agents.
Ownership of beneficial interests in a Global Security will be limited to
persons that have accounts with the Depository ("participants") or persons that
may hold interests through participants. Ownership of beneficial interests in a
Global Security will be shown on, and the transfer of that ownership interest
through such participant will be effected only through, records maintained by
such participant. The foregoing may impair the ability to transfer beneficial
interests in a Global Security.
Payment of principal and interest, if any, on Notes represented by any such
Global Security will be made to the Depository or its nominee, as the case may
be, as the sole registered holder of the Notes represented thereby for all
purposes under the Indenture. None of the Company, the Trustee, any agent of the
Company or the Trustee or any Underwriter will have any responsibility or
liability for any aspect of the Depository's records relating to or payments
made on account of beneficial ownership interests in a Global Security
representing any Notes or for maintaining, supervising, or reviewing any of the
Depository's records relating to such beneficial ownership interests.
The Company has been advised by the Depository that, upon receipt of any
payment of principal or interest on any Global Security, the Depository will
immediately credit, on its book-entry registration and transfer system, the
account of participants with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Security
as shown on the records of the Depository. Payments by participants to owners of
beneficial interests in a Global Security held through such participants will be
governed by standing instructions and customary practices as is now the case
with securities held for customer accounts registered in "street name" and will
be the sole responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depository
for such Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor of such Depository or a nominee of
such successor. If the Depository is at any time unwilling or unable to continue
as depository and a successor depository is not appointed by the Company or the
Depository within 90 days, the Company will issue Notes in definitive form in
exchange for the Global Security. In addition, the Company or the Depository may
at any time and in its sole discretion determine not to have the Notes
represented by the Global Security and, in such event, the Company will issue
Notes in definitive form in exchange for the Global Security. In either
instance, an owner of a beneficial interest in the Global Security will be
entitled to have Notes equal in principal amount to such beneficial interest
registered in its name and will be entitled to physical delivery of such Notes
in definitive form. Notes issued in definitive form will be issued in
denominations of $1,000 and integral multiples thereof and will be issued in
registered form only, without coupons. Principal and interest, if any, on the
Notes will be payable, and the Notes may be presented for registration of
transfer or exchange at the office of the Registrar or conversion at the offices
of the Conversion Agent or for payment at the office of the Trustee.
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So long as the Depository for a Global Security, or its nominees, is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole registered holder of the Notes
represented by such Global Security for all purposes of receiving payment on the
Notes, receiving notices and for all other purposes under the Indenture and the
Notes. Beneficial interests in Notes will be evidenced only by, and transfers
thereof will be effected only through, records maintained by the Depository and
its participants. Except as provided above, owners of beneficial interests in a
Global Security will not be entitled to and will not be considered the
registered holders thereof for any purposes under the Indenture. Accordingly,
any such person owning a beneficial interest such a Global Security must rely on
the procedures of the Depository and, if any such person is not a participant,
on the procedure of the participant through which such person owns its interest,
to exercise any rights of a registered holder under the Indenture. The Company
understands that under existing industry practices, in the event that the
Company requests any action of registered holders or that an owner of a
beneficial interest in such a Global Security desires to give or take any action
which a registered holder is entitled to give or take under the Indenture, the
Depository would authorize the participants holding the relevant beneficial
interest to give or take such action and such participants would authorize
beneficial owners owning through such participants to give or take such action
or would otherwise act upon the instructions of beneficial owners owning through
them. The Placement Agents named herein are participants of The Depository Trust
Company.
The Depository has advised the Company that the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under the Exchange Act. The Depository was created to hold the
securities of its participants and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. The Depository's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their
representatives) own the Depository. Access to the Depository's book-entry
system is also available to others, such as banks, brokers, dealers and trust
companies, that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
OPTIONAL REPURCHASE OF NOTES ON CHANGE OF CONTROL
The Indenture provides that in the event of a Change of Control, each Holder
shall have the right, subject to the terms and conditions set forth below, 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 (i) if the Company shall not be entitled, as of the date such
notice is given, to give a notice of redemption of the Notes at its option
pursuant to the provisions described under "Redemption--Optional Redemption",
106% of the principal amount thereof or (ii) otherwise, the Redemption Price,
plus, in each case, 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 (x) Carl G.
Paffendorf or (y) for so long as Carl G. Paffendorf is the beneficial owner of
securities representing more than 50% of the total number of votes that may be
cast for the election of directors of Vanguard, Vanguard or any wholly-owned
subsidiary of Vanguard, is or becomes the beneficial owner, directly or
indirectly, of securities representing more than 50% of the 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 Restricted 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 Restricted
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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.
The Indenture provides that within 30 calendar days after the occurrence of
a Change of Control, the Company shall make an irrevocable unconditional offer
(a "Repurchase Offer") to the Holders to purchase all the Notes at the
Repurchase Price plus accrued and unpaid interest, if any, to the Repurchase
Date. The Company is also required to notify the Trustee within five Business
Days after each date upon which the Company knows of the occurrence of a Change
of Control requiring the Company to make a Repurchase Offer as described above.
Such notice to the Holders shall contain all instructions and materials required
by applicable law and shall contain or make available to Holders other
information material to the decision of Holders generally to tender Notes
pursuant to the Repurchase Offer. Each notice, which shall govern the terms of
each Repurchase Offer, shall state (i) that the Repurchase Offer is being made
pursuant to such notice and that all Notes, or portions thereof, properly
tendered pursuant to the Repurchase Offer prior to the fifth Business Day prior
to the Repurchase Date (the "Final Repurchase Put Date") will be accepted for
payment; (ii) the Repurchase Price, the Repurchase Date and the Final Repurchase
Put Date; (iii) that any Note, or portion thereof, not tendered or accepted for
payment will continue to accrue interest, if interest is then accruing; (iv)
that, unless the Company defaults in depositing funds with the Paying Agent in
accordance with the provisions of the Indenture, any Notes, or portion thereof,
accepted for payment pursuant to the Repurchase Offer shall cease to accrue
interest after the Repurchase Date; (v) that Holders electing to have a Note, or
portion thereof, purchased to a Repurchase Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the Final Repurchase Put Date; (vi)
that Holders will be entitled to withdraw their election if the Paying Agent
receives, prior to the close of business on the Final Repurchase Put Date, a
notice setting forth the name of the Holder, the principal amount of the Notes
the Holder is withdrawing and a statement containing a facsimile signature that
such Holder is withdrawing his election to have such principal amount of Notes
purchased; (vii) that Holders whose Notes were purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered; and (viii) a brief description, to the extent known to the
Company, of the events resulting in such Change of Control.
The Indenture further requires that any such Repurchase Offer shall comply
with all applicable provisions of federal and state laws, including those
regulating tender offers, if applicable, and any provisions of the Indenture
which conflict with such laws shall be deemed to be superseded by the provisions
of such laws. On or before the Repurchase Date, the Company shall (a) accept for
payment Notes or portions thereof properly tendered pursuant to the Repurchase
Offer prior to the close of business on the Final Repurchase Put Date, (b)
deposit with the Paying Agent funds sufficient to pay the Repurchase Price plus
accrued and unpaid interest and (c) deliver to the Trustee Notes so accepted
together with an officers' certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent shall promptly mail to the
Holders of Notes so accepted payment in an amount equal to the Repurchase Price
plus accrued and unpaid interest, if any, to the Repurchase Date, and the
Trustee shall promptly authenticate and mail or deliver to such Holders a new
Note equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof and the principal shall, until paid, bear
interest to the extent permitted by applicable law from the Repurchase Date at
the rate borne by the Note and each Note shall remain convertible into Common
Stock until the principal of such Note shall have been paid or duly provided
for. The Company shall publicly announce the results of the Repurchase Offer on
or as soon as practicable after the Repurchase Date.
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CONVERSION RIGHTS
The Indenture provides that the Holder of any Note or Notes shall have the
right, at his option, at any time (except that, with respect to any Note or
portion of a Note which shall be called for redemption), to convert the
principal of any such Note or Notes or any portion thereof which is $1,000
principal amount or an integral multiple thereof into shares of Common Stock,
initially at the conversion price per share of $ ( % of Common Stock
Offering Price); or, in case an adjustment of such price has taken place as
described below, at the price as last adjusted (such price or adjusted price
being referred to herein as the "conversion price"), upon surrender of the Note
or Notes, the principal of which is so to be converted, accompanied by written
notice of conversion duly executed, to the Company, at any time during usual
business hours at the office or agency maintained by it for such purpose, and,
if so required by the Conversion Agent or Registrar, accompanied by a written
instrument or instruments of transfer in form satisfactory to the Conversion
Agent or Registrar duly executed by the Holder or his duly authorized
representative in writing.
The Indenture provides that the Company shall deliver or cause to be
delivered certificates representing the number of fully paid and nonassessable
shares of Common Stock into which such Note or Notes may be converted in
accordance with the provisions of the Indenture. Upon conversion of any Note
which is converted in part only, the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the Holder thereof, at the
expense of the Company, a new Note or Notes of authorized denominations in
principal amount equal to the unconverted portion of such Note.
The Indenture provides that no payment or adjustment in respect of interest
on the Notes or dividends on the shares of Common Stock shall be made upon the
conversion of any Note or Notes except that (i) if a Note or any portion thereof
(other than any Note or portion thereof called for redemption) shall be
converted subsequent to any Record Date and on or prior to the next succeeding
Interest Payment Date, the interest falling due on such date shall be payable
notwithstanding such conversion, and interest shall be paid to the Person in
whose name such Note is registered at the close of business on such Record Date
and Notes surrendered for conversion during the period from the close of
business on any Record Date to the opening of business on the corresponding
Interest Payment Date must be accompanied by payment of an amount equal to the
interest payable on such Interest Payment Date, or (ii) if a Note or any portion
thereof called for redemption shall be converted or if a Note or any portion
thereof (other than any Note or portion thereof called for redemption) shall be
converted on or prior to the Record Date next succeeding the Interest Payment
Date on which interest on the Notes was last paid, interest accrued on such Note
or portion thereof converted through the conversion date shall be payable on the
conversion date notwithstanding such conversion, and interest shall be paid on
the conversion date to the Person in whose name such Note is registered on the
conversion date.
The Indenture provides that the conversion price shall be adjusted as
follows to avoid the dilution of ownership interests of holders of Common Stock
at the time of such event:
(a)in case the Company shall pay or make a dividend or other distribution on
any class of capital stock of the Company in shares of Common Stock or
any class of capital stock of the Company;
(b)in case the Company shall issue rights, options or warrants entitling any
Person to subscribe for or purchase shares of Common Stock at a price per
share less than the current market price per share (determined as provided in
paragraph (f) below), provided, however, that no adjustment in the conversion
price need be made for the issuance of options to purchase Common Stock granted
to employees or directors of the Company pursuant to a Company plan (or the
issuance of Common Stock pursuant to such options) at an exercise price per
share less than the then current market price per share to the extent that the
number of shares of Common Stock issuable pursuant to such options does not
exceed 9.661% of the amount of Common Stock issued and outstanding immediately
subsequent to the initial public offering of Common Stock;
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(c)in case the outstanding shares of Common Stock shall be subdivided or
reclassified into a greater number of shares, or combined into a smaller
number of shares;
(d)in case the Company shall, by dividend or otherwise, distribute to all or
substantially all holders of shares of Common Stock evidences of
indebtedness or assets of the Company or rights or warrants to acquire such
evidences of indebtedness or assets (including securities, but excluding any (i)
rights, options or warrants referred to in paragraph (b) above and (ii) any
dividend or distribution referred to in paragraph (a) above), the conversion
price shall be adjusted so that the same shall equal the price determined by
multiplying the conversion price in effect immediately prior to the close of
business on the day fixed for the determination of stockholders entitled to
receive such distribution by a fraction of which the numerator shall be the
current market price per share (determined as provided in paragraph (f) below)
of Common Stock on the date fixed for such determination less the then fair
market value as determined by the Board of Directors of the Company (whose
determination shall be conclusive and described in a resolution filed with the
Trustee) of the portion of the assets or evidences of indebtedness so
distributed allocable to one share of Common Stock and the denominator shall be
such current market price per share of Common Stock, such adjustment to become
effective immediately prior to the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
distribution; and
(e)in case the shares of Common Stock shall be changed into the same or a
different number of shares of any class or classes of stock, whether by
capital reorganization, reclassification, or otherwise (other than a subdivision
or combination of shares or a stock dividend described in paragraph (a) or
paragraph (c) above, or a consolidation, merger or sale of assets described
under "Limitations on Mergers and Asset Sales"), the Holders of Notes shall have
the right thereafter to convert such Notes into the kind and amount of shares of
stock and other securities and property receivable upon such reorganization,
reclassification or other change, by holders of the number of shares of Common
Stock into which such Notes might have been converted immediately prior to such
reorganization, reclassification or change.
(f)For the purpose of any computation under paragraphs (b) and (d) above,
the current market price per share of Common Stock on any date shall be
deemed to be the average of the Closing Prices for the 20 consecutive Trading
Days selected by the Company commencing not more than 30 and not less than 25
Trading Days before the date in question.
(g)No adjustment in the conversion price shall be required unless such
adjustment (plus any adjustments not previously made by reason of this
paragraph (g)) would require an increase or decrease of at least $0.01;
PROVIDED, HOWEVER, that any adjustments which by reason of this paragraph (g)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment.
(h)The Company may, but shall not be required to, make such reductions in
the conversion price, in addition to those required by paragraphs (a),
(b), (c) and (d) above as the Company's Board of Directors, in its discretion,
considers to be advisable. The Company's Board of Directors shall have the power
to resolve any ambiguity or correct any error in the adjustments described
herein and its actions in so doing shall be final and conclusive.
The Indenture also provides that, whenever the conversion price is adjusted
that (a) the Company shall compute the adjusted conversion price and shall file
an officers' certificate at each office or agency maintained for the purpose of
conversion of Notes pursuant to the Indenture and with the Trustee, setting
forth the adjusted conversion price and showing in reasonable detail the facts
upon which such adjustment is based on the computation thereof; and (b) the
Company shall mail, as soon as practicable, to all Holders at their last
addresses as they shall appear in the Note Register notice stating that the
conversion price has been adjusted and setting forth the adjusted conversion
price.
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The Indenture provides that the Company shall file at the office maintained
for the conversion of Notes and mail to each Holder, at least 10 days (or 20
days in any case specified in clause (c) below) prior to the applicable record
date hereinafter specified, a written notice whenever:
(a)the Company shall authorize the granting to holders of its shares of
Common Stock of rights or warrants entitling them to subscribe for or
purchase any shares of capital stock of any class or of any other rights; or
(b)the Company reclassifies the shares of Common Stock, or of any
consolidation or merger to which the Company is a part and for which
approval of any stockholders of the Company is required, or of the sale or
transfer of all or substantially all of the assets of the Company; or
(c)the Company is voluntarily or involuntarily dissolved or liquidated.
Such notice shall state (1) the date on which a record is to be taken for the
purpose of such dividend, distribution, rights or warrants, or, if a record is
not to be taken, the date as of which the holders of shares of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants is to
be determined, or (2) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of shares
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Such notice shall also state whether such transaction
will result in the adjustment in the conversion price applicable to the Notes
and, if so, shall state what the adjusted conversion price will be and when it
will become effective.
The Indenture provides that in case the Company or any Affiliate of the
Company shall propose to engage in a "Rule 13e-3 Transaction" (as defined in the
SEC's Rule 13e-3 under the Exchange Act) the Company shall, no later than the
date on which any information with respect to such Rule 13e-3 Transaction is
first required to be given to the SEC or any other person pursuant to such Rule
13e-3, cause to be mailed to all Holders at their last addresses as they shall
appear in the Note Register, a copy of all information required to be given to
the SEC or such other person pursuant to such Rule 13e-3. The information
required to be given under this paragraph shall be in addition to and not in
lieu of any other information required to be given by the Company pursuant to
any other provision of the Notes or the Indenture.
The Indenture provides that the Company will pay any and all stamp or
similar taxes that may be payable in respect to the issuance or delivery of
shares of Common Stock on conversion of Notes. The Company shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of shares of Common Stock in a name other
than that of the Holder of the Note or Notes to be converted, and no such
issuance or delivery shall be made unless and until the Person requesting such
issuance has paid the Company the amount of any such tax, or has established to
the satisfaction of the Company that such tax has been paid.
The Indenture further provides that no fractional shares or scrip
representing fractional shares shall be issued upon the conversion of Notes. If
any such conversion would otherwise require the issuance of a fractional share,
an amount equal to such fraction multiplied by the current market price per
share of Common Stock (determined as provided in paragraph (f) above) on the day
of conversion shall be paid to the Holder in cash by the Company.
All Notes delivered for conversion shall be delivered to the Trustee to be
cancelled by or at the direction of the Trustee, which shall dispose of the same
as provided in the Indenture.
The Indenture further provides that in case of any consolidation of the
Company with, or merger of the Company into, any other corporation or trust, or
in the case of any merger of another corporation or trust into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company),
or in the case of any sale, transfer or other disposition of all or
substantially all of the assets of the Company,
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the corporation or trust formed by such consolidation or resulting from such
merger or which acquires such assets, as the case may be, shall execute and
deliver to the Trustee a supplemental indenture (which shall conform to the TIA
at the time of execution) providing that the Holder of each Note then
outstanding shall have the right thereafter, during the period such Note shall
be convertible as specified in the Indenture to convert such Note only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock of the Company into which such Note might have been converted
immediately prior to such consolidation, merger, sale or transfer, assuming such
holder of Common Stock (i) is not a Person with which the Company consolidated
or into which the Company merged or which merged into the Company or to which
such sale or transfer was made, as the case may be (a "Constituent Person"), or
an Affiliate of the Constituent Person and (ii) failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer is not the same for each share
of Common Stock held immediately prior to such consolidation, merger, sale or
transfer by other than a Constituent Person or an Affiliate thereof and in
respect of which such rights of election shall not have been exercised
("non-electing share"), the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of non-electing shares). Such supplemental indenture shall
provide for adjustments which, for events subsequent to the effective date of
such supplemental indenture, shall be as nearly equivalent as may be practicable
to the adjustments provided for in the Indenture. The above provisions shall
similarly apply to successive consolidations, mergers, sales or transfers.
CERTAIN COVENANTS OF THE COMPANY
AFFIRMATIVE COVENANTS. In addition to the other covenants described herein,
the Indenture requires the Company, 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 subject to the
provisions described below under the caption "Limitations on Mergers and
Consolidations"; (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, and (ix) 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.
LIMITATION ON DESIGNATION OF UNRESTRICTED SUBSIDIARIES. The Indenture will
provide that the Company may designate (a "Designation") any Subsidiary as an
Unrestricted Subsidiary only if:
(i)no Default or Event of Default under the Indenture shall have occurred
and be continuing at the time of or after giving effect to such
Designation; and
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(ii)
the Company would be permitted under the Indenture to make an Investment
at the time of the Designation in an amount (the "Designation Amount")
equal to greater of the fair market value or book value of the aggregate amount
of its Investments in such Subsidiary on such date; and
(iii)
immediately after giving effect to such Designation, the Company would be
permitted to incur $1.00 of additional Funded Debt in compliance with the
limitation on Funded Debt described in "LIMITATION ON FUNDED DEBT".
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Investment for all purposes of the
Indenture in the Designation Amount.
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a)no Default or Event of Default shall have occurred and be continuing at
the time of and after giving effect to such Revocation; and
(b)all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
innediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by resolutions of the
Company delivered to the Trustee certifying compliance with the foregoing
provisions.
The Indenture also provides that the Company will comply with the other
provisions of Section 314(a) of the TIA.
LIMITATIONS ON ASSET SALES. The Indenture provides, subject to the
provisions of the Indenture described under the caption "Limitations on Mergers
and Consolidations", that the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, in a single transaction or a
series of transactions, sell, lease, transfer, abandon or otherwise dispose of
or suffer to be sold, leased, transferred, abandoned or otherwise disposed of,
all or any part of its assets except for (i) sales of surplus and obsolete
equipment in the ordinary course of its business; (ii) any sale, lease or other
disposition of any or all of assets by or to the Company by or to any
Wholly-Owned Restricted Subsidiary; (iii) any sale of an Underperforming
Property; and (iv) any other sale of assets for cash, so long as (A) after
giving effect to such other sale, no Material Sale of Assets shall have
occurred; (B) both before and immediately after the consummation of such sale,
no Default or Event of Default shall exist with respect to the Indenture; and
(C) immediately after the consummation of such sale, and after giving effect
thereto, the Company would be permitted to incur at least $1.00 of additional
Funded Debt in compliance with the limitation on Funded Debt in the Indenture
described in "LIMITATION ON FUNDED DEBT". Notwithstanding the foregoing, in the
event a Material Sale of Assets shall have occurred, no Default or Event of
Default shall be deemed to occur unless the proceeds received by the Company or
any Restricted Subsidiary in connection with any sale or sales of assets
(excluding any such sale or sales which would not constitute a Material Sale of
Assets) are either (i) used by the Company or a Restricted Subsidiary to acquire
assets to be used by the Company or such Restricted Subsidiary in a business
permitted under the limitations described under "LIMITATIONS ON LINE OF
BUSINESS"; or (ii) used by the Company, to the extent the Company shall
otherwise be permitted, to redeem Notes at the Company's option as described
under "Redemption--Optional Redemption" herein.
LIMITATION ON RESTRICTED INVESTMENTS AND RESTRICTED PAYMENTS. The Indenture
provides that the Company will not, and will not permit any of its Restricted
Subsidiaries to, make any Restricted Investment or declare, make or pay, or
incur any liability to make or pay, or cause or permit to be declared, made or
paid any Restricted Payment unless (i) the amount of such Restricted Payment or
Restricted Investment, together with any other Restricted Investments made and
any other Restricted Payments declared, made or paid on or after July 1, 1996,
does not exceed an amount equal to
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25% of the Consolidated Net Earnings for the period commencing on such date and
ending on the last day of the Fiscal Quarter then most recently ended, (ii)
immediately after giving effect to such Restricted Investment or Restricted
Payment, no Default or Event of Default shall exist and (iii) immediately after
giving effect to such Restricted Investment or Restricted Payment, the Company
would be permitted to incur at least $1.00 of additional Funded Debt in
compliance with the limitation on Funded Debt in the Indenture described in
"LIMITATION ON FUNDED DEBT". The amount of any Restricted Payment in the form of
property shall be deemed to be the greater of its net book value or its fair
value (as determined by the Board, which determination shall be evidenced by a
resolution of the Board filed with the Trustee) at the time of making the
Restricted Payment. In addition, the Company or any Restricted Subsidiary shall
be permitted to make loans or advances to Development Entities; PROVIDED that
(i) the aggregate amount of all such loans or advances to any single Development
Entity outstanding at any time shall not exceed $1,500,000 and shall be secured
by assets of such Development Entity having an appraised fair market value (at
the time of making any such loan or advance) not less than the aggregate amount
of such loans and advances outstanding, except that such loans or advances in an
aggregate amount of not more than 25% of any such loan or advance, solely for
working capital purposes, may be unsecured; (ii) the aggregate amount of all
such loans and advances to all Development Entities outstanding at any time
shall not exceed 40% of the sum of (x) Consolidated Net Worth, (y) the
outstanding principal amount of the Notes and (z) all Indebtedness of the
Company and its Restricted Subsidiaries subordinate to the Notes; (iii)
immediately after giving effect to any such loan or advance, no Default or Event
of Default under the Indenture shall exist; and (iv) immediately after giving
effect to such loan or advance, the Company shall be permitted to incur at least
$1.00 of additional Funded Debt in compliance with the limitation on
Indebtedness in the Indenture described in "LIMITATION ON INDEBTEDNESS".
LIMITATION ON FUNDED DEBT. The Indenture provides that the Company will not
incur, assume, guarantee or otherwise become liable with respect to any
Indebtedness other than (i) the Notes and (ii) other Funded Debt, so long as
after giving effect thereto, the Funded Debt of the Company does not exceed 25%
of the sum of Consolidated Net Worth and the aggregate principal amount of the
Notes then outstanding.
LIMITATIONS ON LINE OF BUSINESS. The Indenture provides that the Company
will not engage in any business other than owning, managing, and developing
long-term health care living facilities for senior citizens and the provision of
other health care services relating to the operation of long-term health care
living facilities for senior citizens and performing its obligations hereunder
and under the Mortgage and the other documents executed by it in connection with
the transactions contemplated in the Indenture.
FIXED CHARGE COVERAGE. The Indenture provides that the Company will
maintain at all times a ratio of Consolidated EBITR to Fixed Charges for the
period of the four Fiscal Quarters most recently ended of not less than to
1.00.
CONSOLIDATED NET WORTH. The Company will not permit Consolidated Net Worth
to be less than an amount equal to the sum of (i) $6,000,000 plus (ii) the sum
of twenty-five percent (25%) of Consolidated Net Earnings for each Fiscal
Quarter ended on or after September 30, 1996, for which Consolidated Net
Earnings is a positive number (Consolidated Net Earnings for any such fiscal
quarter for which Consolidated Net Earnings is a loss having no effect on the
calculation of the amount referred to herein).
LIMITATIONS ON MERGER AND CONSOLIDATION. The Indenture 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 Affiliated Persons, unless (i) the Company
shall be the continuing Person; (ii) immediately after giving effect to such
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have happened and be
continuing; (iii)
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immediately after giving effect to such transaction, the Company shall be
permitted to incur at least $1.00 of additional Funded Debt under the limitation
on Funded Debt in the Indenture described in "LIMITATION ON FUNDED DEBT"; 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.
Upon consolidation or merger, or any transfer or disposition of assets
described above, the Person formed by such consolidation or into which the
assets of the Company are transferred as an entirety or substantially as an
entirety (such Company or such other Person being hereinafter referred to as a
"Surviving Person") formed by such consolidation or into which the Company is
merged or to which such transfer is made shall succeed to every right and power
of the Company under the Indenture. When a Surviving Person duly assumes all of
the obligations of the Company under the Indenture and the Notes, the Company
shall be released from such obligations.
TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any transaction (including,
without limitation, the purchase, sale or exchange of any property, the
rendering of any services or the payment of management fees) with any Affiliate
(other than the Company or any Restricted Subsidiary), except in the ordinary
course of, and pursuant to the reasonable requirements of, the business of the
Company and its Restricted Subsidiaries, and in good faith and upon commercially
reasonable terms that are no less favorable to the Company or such Restricted
Subsidiary than would be obtained in a comparable arm's-length transaction with
a Person other than an Affiliate.
LIMITATIONS ON LIENS. Neither the Company nor any Restricted Subsidiary
will create, incur, assume or suffer to exist any Lien other than Permitted
Liens.
FINANCIAL STATEMENTS. The Indenture provides that the Company will provide
to the Trustee and each holder (i) within 45 days of the end of each of the
first three Fiscal Quarters of each Fiscal Year, consolidated and consolidating
and cash flow statements for such Fiscal Quarter, prepared in accordance with
generally accepted accounting principles and certified by the Chief Financial
Officer of the Company verifying the Company's compliance with the Indenture and
(ii) within 90 days of the end of each Fiscal Year, consolidated financial
statements prepared and certified by a firm of independent public accountants in
accordance with generally accepted accounting principles which shall include
such accountant's certificate verifying the Company's compliance with the terms
of the Indenture, together with unaudited consolidating financial statements.
WHITTIER OPTION. The Indenture will also provide that the Company may not
exercise its option to acquire The Whittier for a purchase price greater than
(i) the lesser of (x) the appraised fair market value of The Whittier or (y) the
amount of Indebtedness secured by the mortgage encumbering The Whittier plus any
accrued management fees payable or (ii) the product of (x) [ ] times (y)
operating cash flow of The Whittier for period of four fiscal quarters of The
Whittier most recently ended at the time of exercise of the option.
For purposes solely of this "Indenture Covenants" section of this Prospectus,
the terms set forth below shall have the following meanings:
"AFFILIATE", with respect to any Person (hereinafter "SUCH PERSON"), shall
mean any other Person (a) directly or indirectly controlling, (including all
directors, officers and partners of such Person), controlled by, or under direct
or indirect common control with, such Person or (b) that directly or
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indirectly owns more than 5% of any class of the voting securities or 10% of the
shares of such Person. A Person shall be deemed to control another Person if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such other Person, whether through
the ownership of voting securities, by contract or otherwise. The term
"AFFILIATE", when used herein without reference to any Person, shall mean an
Affiliate of the Company.
"CAPITAL LEASE" means a lease with respect to which the lessee is required
concurrently to recognize the acquisition of an asset and the incurrence of a
liability in accordance with generally accepted accounting principles.
"CAPITAL LEASE OBLIGATION" means, with respect to any Person and a Capital
Lease, the amount of the obligation of such Person as the lessee under such
Capital Lease which would, in accordance with generally accepted accounting
principles, appear as a liability on a balance sheet of such Person.
"CONSOLIDATED EBITR" for any period, means Consolidated Net Earnings for
such period increased by the sum of (i) interest expense for such period, (ii)
income tax expense for such period, and (iii) rental expense for such period,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in accordance with generally accepted accounting principles.
"CONSOLIDATED NET EARNINGS," for any period, means the consolidated net
earnings of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with generally accepted
accounting principles, after elimination of earnings or losses attributable to
Minority Interests (without duplication), but, in any event, determined after
exclusion of:
1. any gains or losses on the sale or other disposition of Investments
or fixed or capital assets, and any taxes on such excluded gains and
any tax deductions or credits on account of any such excluded losses;
2. the proceeds of any life insurance policy;
3. net earnings and losses of any of its Restricted Subsidiaries accrued
prior to the date it became a Restricted Subsidiary;
4. net earnings and losses of any corporation , substantially all the
assets of which have been acquired in any manner, realized by such
other corporation prior to the date of such acquisition;
5. net earnings and losses of any corporation with which the Company or
any of Restricted Subsidiaries shall have consolidated or which shall
have merged into or with the Company or any of its Restricted Subsidiaries
prior to the date of such consolidation or merger;
6. net earnings of any Person in which the Company or any of its
Restricted Subsidiaries has an ownership interest unless such net
earnings shall have actually been received by the Company or a Restricted
Subsidiary in the form of cash distributions;
7. any portion of the net earnings of any of the Company's Restricted
Subsidiaries which for any reason is unavailable for payment of
dividends to the Company or any other Restricted Subsidiary, provided,
however, that the net earnings of any of its Restricted Subsidiaries are not
required to be excluded if and to the extent that such net earnings are
otherwise available for the purpose of making principal and interest
payments on the Notes;
8. earnings resulting from any reappraisal, revaluation or write-up of
assets;
9. any deferred or other credit representing any excess of the equity in
any of its Restricted Subsidiaries at the date of acquisition thereof
over the amount invested in such Restricted Subsidiary;
10. any reversal of any contingency reserve, except to the extent that
provision for such contingency reserve shall have been made from
income arising during such period; or
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11. any other extraordinary items (including, without limitation, any
prepayment penalties paid on the Closing Date in connection with any
payment of Indebtedness).
"CONSOLIDATED NET WORTH" means, as of any date of determination, (i) the
total assets of the Company and its Restricted Subsidiaries which would be shown
as assets on a consolidated balance sheet of the Company and its Restricted
Subsidiaries as of such time prepared in accordance with generally accepted
accounting principles, after eliminating all amounts properly attributable to
minority interests, if any, in the stock and surplus of Restricted Subsidiaries,
minus (ii) the total liabilities of the Company and its Restricted Subsidiaries
which would be shown as liabilities on a consolidated balance sheet of the
Company and its Restricted Subsidiaries as of such time prepared in accordance
with generally accepted accounting principles.
"CONSOLIDATED TOTAL ASSETS" means as of any date of determination the total
amount of assets of the Company and its Restricted Subsidiaries (less applicable
reserves and other properly deductible items) determined on a consolidated basis
in accordance with generally accepted accounting principles.
"CONTINGENT OBLIGATIONS" means any guaranty or other contingent liability,
direct or indirect, with respect to any Indebtedness of another Person, through
an agreement or otherwise, including, without limitation, (a) any endorsement
(other than of notes, bills and checks presented to banks and other financial
institutions for collection or deposit in the ordinary course of business) or
discount with recourse or undertaking substantially equivalent to or having
similar economic effect of a guaranty with respect to any such Indebtedness, (b)
any agreement (i) to purchase, or to advance or supply funds for the payment or
purchase of, any such Indebtedness, (ii) to purchase, sell or lease property,
products, materials or supplies, or transportation or services, primarily for
the purpose of enabling such other Person to pay such Indebtedness or to insure
the owner thereof against loss regardless of the delivery or non-delivery of the
property, products, materials or supplies, or transportation or services, or
(iii) to make any loan, advance, capital contribution or other investment in
such other Person to assure a minimum equity, working capital or other balance
sheet condition as of any date, or to provide funds for the payment of any
liability, dividend or stock liquidation payment, or otherwise to supply funds
or to in any manner invest in such other Person, in each case, for the direct or
indirect benefit of the holder or obligee of such Indebtedness, (c) obligations
for which such Person is obligated pursuant to or in respect of a letter of
credit or similar instrument which is issued upon the application of such Person
or upon which such Person is an account party or for which such Person is in any
way liable, (d) repurchase obligations or liabilities of such Person with
respect to accounts or notes receivable sold by such Person or (e) guaranties or
obligations with respect to (i) maintaining the value of any asset of any Person
or (ii) protecting the holder of such asset against loss in respect thereof. The
amount of any Contingent Obligation shall (subject to any limitation contained
therein) be equal to the outstanding principal amount of the Indebtedness
guarantied or subject thereto or, in the case of (e) above, the guarantied value
of the subject asset.
"DEVELOPMENT ENTITY" shall mean any Person that is not an Affiliate of the
Company and that has entered into an agreement with the Company for the
development and/or management of senior living facilities.
"FISCAL QUARTER" means any quarter in any Fiscal Year, the duration of such
quarter being defined in accordance with generally accepted accounting
principles.
"FISCAL YEAR" means the fiscal year of the Company and its Restricted
Subsidiaries, which is and will be the twelve-month period prior to March 31 of
each year after the date hereof.
"FIXED CHARGES" for any period, means the sum of interest expense for such
period and actual rental obligations under operating leases paid or payable of
the Company and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with generally accepted accounting principles.
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"FUNDED DEBT" shall mean, with respect to the Company and its Restricted
Subsidiaries, all Indebtedness of the Company and its Restricted Subsidiaries
which would, in accordance with generally accepted accounting principles,
constitute long term Indebtedness, including (a) any Indebtedness with a
maturity of more than one year after the creation of such Indebtedness
(including, without limitation, current maturities thereof), (b) any redeemable
stock issued on or after the Closing Date, (c) any Capital Lease Obligation of
the Company and its Restricted Subsidiaries and (d) Contingent Obligations of
the Company and its Restricted Subsidiaries with respect to Indebtedness of
another Person, determined on a consolidated basis in accordance with generally
accepted accounting principles.
"INDEBTEDNESS" means with respect to any Person, at any time, without
duplication:
(a)its liabilities for borrowed money and its redemption obligations in
respect of mandatory redeemable Preferred Stock;
(b)its liabilities for the deferred purchase price of property acquired by
such Person (excluding accounts payable arising in the ordinary course of
business but including all liabilities created or arising under any conditional
sale or other title retention agreement with respect to any such property);
(c)all liabilities appearing on its balance sheet in accordance with
generally accepted accounting principles in respect of Capital Leases;
(d)all liabilities for borrowed money secured by any Lien with respect to
any property owned by such Person (whether or not it has assumed or
otherwise become liable for such liabilities);
(e)all liabilities in respect of letters of credit or instruments serving a
similar function issued or accepted for its accounts by banks and other
financial institutions (whether or not representing obligations for borrowed
money);
(f)any Contingent Obligation of such Person with respect to liabilities of a
type described in any of clauses (a) through (e) hereof.
Indebtedness of any Person shall include all obligations of such Person of the
character described in clauses (a) through (g) to the extent such Person remains
legally liable in respect thereof notwithstanding that any such obligation is
deemed to be extinguished under generally accepted accounting principles.
"INVESTMENTS" means any investment, made in cash or by delivery of property,
by the Company or any of its Restricted Subsidiaries (i) in any Person, whether
by acquisition of stock, indebtedness or other obligation or security, or by
loan, Contingent Obligation, advance, capital contribution or otherwise, or (ii)
in any property.
"LIEN" means any mortgage, lien, pledge, charge, security interest or
encumbrance, or any interest or title of any vendor, lessor, lender or other
secured party under any conditional sale or other title retention agreement or
Capital Lease.
"MATERIAL SALE OF ASSETS" means any sale of assets, or series of such sales,
consummated during any Fiscal Year which in the aggregate represent more than
(i) 10% of the consolidated assets of the Company and its Restricted
Subsidiaries as of the end of the immediately preceding Fiscal Year or (ii) 10%
of Consolidated Net Earnings for the immediately preceding Fiscal Year.
"MINORITY INTERESTS" means any shares of stock of any class of any of the
Restricted Subsidiaries (other than directors' qualifying shares as required by
law) that are not owned by the Company or another Restricted Subsidiary.
"Minority Interests" shall be valued by valuing "Minority Interests"
constituting preferred stock at the voluntary or involuntary liquidation value
of such preferred stock, whichever is greater, and by valuing "Minority
Interests" constituting common stock at the book
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value of capital and surplus applicable thereto adjusted, if necessary, to
reflect any changes from the book value of such common stock required by the
foregoing method of valuing "Minority Interests" in preferred stock.
"PERMITTED LIENS" means: (i) Liens for taxes, assessments or charges of any
governmental body for claims not yet due or which are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves or
other appropriate provisions are being maintained in accordance with the
provisions of generally accepted accounting principles; (ii) statutory Liens of
landlords and Liens of carriers, warehousemen, mechanics, materialmen and other
Liens (other than any lien imposed under ERISA or section 401(a)(29) or 412 of
the Code) imposed by law and created in the ordinary course of business and
Liens on deposits made to obtain the release of such Liens if (x) the underlying
obligations are not overdue for a period of more than sixty (60) days or (y)
such Liens are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves or other appropriate provisions are being
maintained in accordance with the provisions of generally accepted accounting
principles; (iii) Liens (other than any lien imposed under ERISA or section
401(a)(29) or 412 of the Code) incurred on deposits made in the ordinary course
of business (including, without limitation, surety bonds and appeal bonds) in
connection with workers' compensation, unemployment insurance and other types of
social security benefits or to secure the performance of tenders, bids, leases,
contracts (other than the repayment of Indebtedness), statutory obligations and
other similar obligations or arising as a result of progress payments under
contracts; (iv) easements (including, without limitation, reciprocal easement
agreements and utility agreements), rights-of-way, covenants, consents,
reservations, encroachments, variations and other restrictions, charges or
encumbrances (whether or not recorded) which do not interfere materially with
the ordinary conduct of the business of the Company or its Restricted
Subsidiaries and which do not materially detract form the value of the property
to which they attach or materially impair the use thereof to the Company or its
Restricted Subsidiaries; (v) building restrictions, zoning laws and other
statutes, laws, rules, regulations, ordinances and restrictions, and any
amendments thereto, now or at any time hereafter adopted by any Governmental
Body having jurisdiction; (vi) any attachment or judgment Lien unless it
constitutes an Event of Default; (vii) Liens existing on the Closing Date and
listed in SCHEDULE I to the Indenture; (viii) Liens created to secure all or any
part of the purchase price, or to secure Indebtedness incurred or assumed to pay
all or any part of the purchase price or cost of construction of property (or
any improvement thereon) acquired or constructed by the Company or a Restricted
Subsidiary after the Closing Date, PROVIDED that (A) any such Lien shall extend
solely to the item or items of such property (or improvement thereon) so
acquired or constructed and, if required by the terms of the instrument
originally creating such Lien, other property (or improvement thereon) which is
an improvement to or is acquired for specific use in connection with such
acquired or constructed property (or improvement thereon) or which is real
property being improved by such acquired or constructed property (or improvement
thereon, (B) the principal amount of the Indebtedness secured by any such Lien
shall at no time exceed an amount equal to the lesser of the cost to the Company
or such Restricted Subsidiary of the property (or improvement thereon) so
acquired or constructed and the fair market value thereof (as determined in good
faith by the board of directors of the Company) at the time of such acquisition
or construction, and (C) any such Lien shall be created contemporaneously with,
or within 90 days after, the acquisition or construction of such property; (ix)
any Lien exist on property of a Person immediately prior to its being
consolidated with or merged into the Company or a Restricted Subsidiary or its
becoming a Restricted Subsidiary, or any Lien existing on any property acquired
by the company or any Restricted Subsidiary at the time such property is so
acquired (whether or not the Indebtedness secured thereby shall have been
assumed), provided that (A) no such Lien shall have been created or assumed in
contemplation of such consolidation or merger of such Person's becoming a
Restricted Subsidiary or such acquisition of property, and (B) each such Lien
shall extend solely to the item or items of property so acquired and, if
required by the terms of the instrument originally creating such Lien, other
property which is an improvement to or is acquired for specific use in
connection with such acquired property; and (x) any Lien renewing, extending or
refunding any Lien permitted by the foregoing clauses (viii) and (ix), PROVIDED,
that (A) the principal
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amount of Indebtedness secured by such Lien immediately prior to such extension,
renewal or refunding is not increased or the maturity thereof reduced, (B) such
Lien is not extended to any other property, (C) immediately after such
extension, renewal or refunding, nor Default or Event of Default would exist,
and (D) immediately after such extension, renewal or refunding, the Company
shall be permitted to incur at least $1.00 of additional Funded Debt under the
limitation on Funded Debt in the Indenture described in "LIMITATION ON FUNDED
DEBT".
"PERSON" means any corporation, individual, joint stock company, joint
venture, partnership, unincorporated association, governmental regulatory
entity, country, state or political subdivision thereof, trust, municipality or
other entity.
"PREFERRED STOCK" means any class of capital stock of a corporation that is
preferred over any other class of capital stock of such corporation as to the
payment of dividends or the payment of any amount upon liquidation or
dissolution of such corporation.
"RESTRICTED INVESTMENTS" means all investments except the following:
(a) property to be used in the ordinary course of business of the Company
and its Restricted Subsidiaries;
(b) current assets arising from the sale of goods and services in the
ordinary course of business of the Company and its Restricted
Subsidiaries;
(c) Investments in one or more Restricted Subsidiaries or any Person that
concurrently with such Investment becomes a Restricted Subsidiary;
(d) Investments in United States Governmental Securities, provided that
such obligations mature within 365 days from the date of acquisition
thereof;
(e) Investments in certificates of deposit or banker's acceptances issued
by an Acceptable Bank, provided that such obligations mature within
365 days from the date of acquisition thereof;
(f) Investments in commercial paper given the highest rating by a credit
rating agency of recognized national standing and maturing not more
than 270 days from the date of creation thereof; or
(g) Mutual funds comprised solely of any of the investments described in
(d)-(f) above.
As of any date of determination, each Restricted Investment shall be valued
at the greater of
(x)the amount at which such Restricted Investment is shown on the books of
the Company or any of its Restricted Subsidiaries (or zero if such
Restricted Investment is not shown on any such books); and
(y)either
(i) in the case of any Contingent Obligation in respect of the obligation
of any Person, the amount which the Company or any of its Restricted
Subsidiaries has paid on account of such obligation less any recoupment by
the Company or such Restricted Subsidiary of any such payments, or
(ii)in the case of any other Restricted Investment, the excess of (x) the
greater of (A) the amount originally entered on the books of the
Company or any of its Restricted Subsidiaries with respect thereto and (b)
the cost thereof to the Company or its Restricted Subsidiary over (y) any
return of capital (after income taxes applicable thereto) upon such
Restricted Investment through the sale or other liquidation thereof or part
thereof or otherwise.
As used in this definition of "Restricted Investments""
"Acceptable Bank" means any bank or trust company (i) which is organized
under the laws of the United States of America or any State thereof, (ii) which
has capital, surplus and undivided profits
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aggregating at least $500,000,000, and (iii) whose long-term unsecured debt
obligations of the bank holding company owning all of the capital stock of such
bank or trust company) shall have been given a rating of "A" or better by S&P,
"A2" or better by Moody's or an equivalent rating by any other credit rating
agency of recognized national standing.
"Moody's" means Moody's Investors Service, Inc.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc.
"United States Governmental Security" means any direct obligation of, or
obligation guaranteed by, the United States of America, or any agency controlled
or supervised by or acting as an instrumentality of the United States of America
pursuant to authority granted by the Congress of the United States of America,
so long as such obligation or guarantee shall have the benefit of the full faith
and credit of the United States of America which shall have been pledged
pursuant to authority granted by the Congress of the United States of America.
"RESTRICTED PAYMENT" means (1) any dividends or other distributions, direct
or indirect, in respect of any shares of the common stock of the Company or any
of its Restricted Subsidiaries, other than dividends or other distributions
payable solely in shares of its common stock, or warrants, rights, or options
therefor, and dividends or other distributions by any of its Restricted
Subsidiaries to the Company or a Wholly-Owned Restricted Subsidiary; or (2) any
purchase, redemption, retirement or other acquisition of any shares of common
stock of the Company or any of its Restricted Subsidiaries, or of any warrants,
rights or options evidencing a right to purchase or acquire any such common
stock of the Company or any of its Restricted Subsidiaries (except in exchange
for other shares of common stock of the Company or any of its Restricted
Subsidiaries, or warrants, rights or options evidencing a right to purchase or
acquire any such common stock).
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the Board of the Company, by resolution to the Trustee, as an
Unrestricted Subsidiary pursuant to the covenant described herein under
"Limitation on Designations of Unrestricted Subsidiaries". Any such designation
may be revoked by the Company by resolution to the Trustee, subject to the
provisions of such covenant.
"SUBSIDIARY" means, as to any Person, any corporation, association or other
business entity in which such Person or one or more of its Subsidiaries or such
Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries (unless such partnership can and does ordinarily take major
business actions without the prior approval of such Person or one or more of its
Subsidiaries). Unless the context otherwise clearly requires, any reference to a
"Sub- sidiary" is a reference to a Subsidiary of the Company.
"UNDERPERFORMING PROPERTY" means, as of any date of determination at the
time of a proposed sale thereof, any health-care related facility (except for
Harvest Village) which has experienced pre-tax operating losses for a period of
at least twelve consecutive calendar months immediately prior to such date.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has been
declared an Unrestricted Subsidiary pursuant to resolution of the board of
directors in compliance with the provisions of the Indenture described in
"Limitation on Designation of Unrestricted Subsidiaries" herein.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means, at any time, any Restricted
Subsidiary one hundred percent (100%) of all of the equity interests (except
directors' qualifying shares) and voting interests of which are owned by any one
or more of the Company and the Company's other Wholly-Owned Restricted
Subsidiaries at such time.
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REDEMPTION
OPTIONAL REDEMPTION. The Notes may be redeemed, in whole or in part, at any
time on and after October 1, 1999, at the option of the Company, at the
Redemption Price (expressed as a percentage of principal amount) set forth below
with respect to the indicated Redemption Date, in each case, together with any
accrued but unpaid interest to and including the Redemption Date.
The Redemption Price shall be an amount equal to the percentage of the principal
amount of Notes redeemed set forth below opposite the period in which the
Redemption Date occurs:
<TABLE>
<S> <C>
October 1, 1998 - September 30, 1999................................................ 106%
October 1, 1999 - September 30, 2000................................................ 105%
October 1, 2000 - September 30, 2001................................................ 104%
October 1, 2001 - September 30, 2002................................................ 103%
</TABLE>
if the price of the Company's Common Stock shall have been at least 150% of the
conversion price for at least 20 consecutive trading days within a period of 30
trading days ending not more than five trading days prior to the notice of such
redemption; and on and after April 1, 2003, the Redemption Price shall be 100%
of the principal amount thereof.
The Company may at any time buy Notes on the open market at prices which may
be greater or less than the Redemption Price set forth above.
MANDATORY REDEMPTION. The Company will redeem $3,125,000(1) principal
amount of Notes on October 1, 2003, and on each October 1 thereafter through
maturity at a redemption price of 100% of principal amount, plus accrued
interest to the Redemption Date. The Company may reduce the principal amount of
Notes to be redeemed by subtracting 100% of the principal amount (excluding
premium) of any Notes (i) that Noteholders have converted (other than Notes
converted after being called for mandatory redemption) that the Company has
delivered to the Trustee for cancellation, (ii) that the Company has purchased
on the open market and delivered to the Trustee for cancellation or (iii) that
the Company has redeemed other than pursuant to the mandatory redemption
requirement. The Company may so subtract the same Note only once.
If less than all of the Notes are to be redeemed, the Trustee shall redeem
PRO RATA or by lot or in such other manner as complies with any applicable legal
and stock exchange requirements of such provision and the Indenture.
NOTICES TO TRUSTEE. If the Company elects to redeem Notes, it shall notify
the Trustee in writing of date on which the Notes will be redeemed (the
"Redemption Date") and the principal amount of Notes to be redeemed and whether
the Company or the Trustee is to give notice of redemption to the Holder or
Holders. The Company shall give each such notice to the Trustee at least 10 days
before the Redemption Date (unless a shorter notice shall be satisfactory to the
Trustee).
SELECTION OF NOTES TO BE REDEEMED. The Indenture provides that if less than
all of the Notes are to be redeemed, the Trustee shall redeem pro rata or by lot
or in such other manner as complies with any applicable legal and stock exchange
requirements. The Trustee shall make the selection from the Notes outstanding
and not previously called for redemption and shall promptly notify the Company
in writing of the Notes selected for redemption and, in the case of any Note
selected for partial redemption, the principal amount thereof to be redeemed.
Notes in denominations of $1,000 may be redeemed only in whole. The Trustee may
select for redemption portions (equal to $1,000 or any integral multiple
thereof) of the principal of Notes that have denominations larger than $1,000.
Provisions of the Indenture that apply to Notes called for redemption also apply
to portions of Notes called for redemption.
- ------------------------
(1) $3,743,489.58 if the Placement Agent has exercised its over-allotment
option.
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<PAGE>
NOTICE OF REDEMPTION. At least 30 days but not more than 60 days before a
Redemption Date, the Company shall mail a notice of redemption by first class
mail, postage prepaid, to the Trustee and each Holder whose Notes are to be
redeemed at his address appearing in the Note Register.
Each notice of redemption shall identify the Notes to be redeemed and shall
state the Redemption Date; the Redemption Price and the amount of accrued and
unpaid interest to be paid upon such redemption; the name, address and telephone
number of the Paying Agent; that Notes called for redemption must be surrendered
to the Paying Agent to collect the Redemption Price plus accrued and unpaid
interest; that, unless the Company defaults in its obligation to deposit funds
for the payment of such redeemed Note with the Paying Agent, interest on Notes
called for redemption ceases to accrue on and after the Redemption Date; if any
Note is being redeemed in part, the portion of the principal amount of such Note
that will not be redeemed and that upon surrender of such Note, a new Note or
Notes in aggregate principal amount equal to the unredeemed portion thereof will
be issued; if less than all the Notes are to be redeemed, the identification of
the particular Notes (or portion thereof) to be redeemed, as well as the
aggregate principal amount of such Notes to be redeemed and the aggregate
principal amount of Notes to be outstanding after such partial redemption; that
such notice is being sent pursuant to the Indenture; and such other matters as
the Trustee shall deem proper.
At the Company's request, the Trustee shall give the notice of redemption in
the Company's name and at the Company's expense. If a CUSIP number is listed in
such notice or printed on the Note, the notice shall state that no
representation is made as to the correctness or accuracy of such CUSIP number.
EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Notes
called for redemption become due and payable on the Redemption Date at the
Redemption Price plus accrued and unpaid interest to the Redemption Date. Upon
surrender to the Trustee or Paying Agent, such Notes called for redemption shall
be paid on the Redemption Date at the Redemption Price plus interest, if any,
accrued and unpaid to the Redemption Date; PROVIDED that if the Redemption Date
is after a regular
Record Date and on or prior to the Interest Payment Date, the accrued interest
shall be payable to the Holder of the redeemed Notes registered as of the close
of business on the relevant Record Date; and PROVIDED, FURTHER, that if a
Redemption Date is a legal holiday, payment shall be made on the next succeeding
Business Day and no interest shall accrue for the period from such Redemption
Date to such succeeding Business Day. See "CONVERSION RIGHTS" for a discussion
of interest payments to Holders converting Notes prior to a Record Date.
DEPOSIT OF REDEMPTION PRICE. On or prior to the Redemption Date, the
Company shall deposit with the Paying Agent funds sufficient to pay the
Redemption Price of and accrued and unpaid interest on all Notes to be redeemed
on such Redemption Date. The Paying Agent shall promptly return to the Company
any funds so deposited which are not required for that purpose upon the written
request of the Company.
If the Company complies with the provisions of the Indenture relating to
Redemption described herein, interest on the Notes to be redeemed will cease to
accrue on the applicable Redemption Date, whether or not such Notes are
presented for payment. If the Company fails to comply with the provisions of
Article III of the Indenture, interest shall continue to accrue and be paid from
the Redemption Date until such payment is made on the unpaid principal, and, to
the extent lawful, on any interest not paid on such unpaid principal, in each
case at the rate and in the manner provided in the Indenture and the Notes.
NOTES REDEEMED IN PART. Upon surrender of a Note that is to be redeemed in
part, the Company shall execute and the Trustee shall authenticate and deliver
to the Holder, without service charge, a new Note or Notes equal in principal
amount to the unredeemed portion of the Note surrendered. If a Note in global
form is so surrendered, the Company shall execute, and the Trustee shall
authenticate and deliver to the Depository for such Note in global form as shall
be specified in the company order
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requesting such redemption, without service charge, a new Note in global form in
a denomination equal to and in exchange for the unredeemed portion of the
principal of the Note in global form so surrendered.
EVENTS OF DEFAULT
An "Event of Default" is defined in the Indenture for the Notes as any of
the following events (whatever the reason for such Event of Default and whether
it shall be caused voluntarily or involuntarily or effected, without limitation,
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(a)the failure by the Company to pay installments of interest upon any Note
as and when the same becomes due and payable;
(b)the failure by the Company to pay all or any part of the principal of, or
premium, if any, on the Notes when and as the same becomes due and
payable at Stated Maturity, upon redemption, upon acceleration, or otherwise,
including payment of the Repurchase Price;
(c)the failure of the Company to comply with the covenants described under
"CERTAIN COVENANTS OF THE COMPANY" (other than "CERTAIN COVENANTS OF THE
COMPANY--AFFIRMATIVE COVENANTS") and the continuance of such failure for a
period of 15 days;
(d)the failure of the Company to provide notice of a Change of Control as
defined herein;
(e)the failure by the Company to observe or perform any other covenant,
agreement or warranty of the Company contained in the Notes or the
Indenture or the Mortgage and continuance of such failure for the period and
after the notice specified below;
(f)(i) a default or defaults under the Mortgage, any bond, debenture, note
or other evidence of Indebtedness of the Company or any Subsidiary in the
outstanding aggregate principal amount of at least $100,000, or under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any such Indebtedness, which shall have
resulted in such Indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable (or one or
more Persons being entitled to cause such Indebtedness to become due and
payable);
(g)the entry by a court or courts of competent jurisdiction of a final
judgment or final judgments for the payment of money against the Company
or any Subsidiary which remain undischarged for a period (during which execution
shall not be effectively stayed, the posting of any required bond not being
deemed an execution for purposes hereof) of 30 days after all rights to appeal
have been exhausted, provided that the aggregate amount of all such judgments
exceeds $100,000;
(h)commencement of an action with a court having jurisdiction in the
premises thereof which could result in (A) a decree or order for relief
in respect of the Company or any Subsidiary in an involuntary case or proceeding
under any applicable federal or state bankruptcy, insolvency, reorganization or
other similar law or (B) a decree or order adjudging the Company or any
Subsidiary as bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company or any Subsidiary under any applicable federal or state law, or
ordering the winding up or liquidation of affairs, and such proceedings are
consented to or not dismissed within 60 days of such commencement; or
(i)the commencement by the Company or any Subsidiary of a voluntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated as bankrupt or insolvent, or the consent to the entry of a decree or
order for relief in respect of the Company or any Subsidiary in an involuntary
case or proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, or the filing of a petition or answer
or consent seeking reorganization or relief under any applicable
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<PAGE>
federal or state law, or the consent to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company or any
Subsidiary or of any substantial part of their respective property, or the
making of an assignment for the benefit of creditors, or the admission in
writing of inability to pay debts generally as they become due, or the taking of
corporate action by the Company or any Subsidiary in furtherance of any such
action; or
(j)the Lien created or intended to be created by the Mortgage shall cease to
be a valid and enforceable Lien, or shall cease to have priority over any
other Liens.
The Indenture further provides that a Default under clause (e) above is not
an Event of Default until the Trustee notifies the Company, or a Holder notifies
the Company and the Trustee, of the Default, and the Company does not cure the
Default within 30 days after the earlier of the date on which the Company
receives such notice or the date on which the Company first obtains knowledge of
such Default. The notice must specify the Default, demand that it be remedied
and state that the notice is a "Notice of Default." Such notice shall be given
by the Trustee if so requested by the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding.
The Indenture provides that if an Event of Default (other than an Event of
Default specified in (h) or (i) above relating to the Company or its
Subsidiaries) occurs and is continuing, then, and in every such case, unless the
principal of all of the Notes shall have already become due and payable, either
the Trustee or the Holders of not less than 25% in aggregate principal amount of
the Notes then outstanding, by a notice in writing to the Company (and to the
Trustee if given by Holders) (an "Acceleration Notice"), may declare all of the
principal of the Notes, determined as set forth below, including in each case
accrued interest thereon, to be due and payable immediately. If an Event of
Default specified in (h) or (i) above relating to the Company or its
Subsidiaries occurs, all principal of, premium, if any, and accrued and unpaid
interest on the Notes shall be immediately due and payable on all outstanding
Notes without any declaration or other act on the part of the Trustee or the
Holders.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the Notes then outstanding, by written notice to the Company and the
Trustee, may waive, rescind and annul on behalf of all Holders, any such
declaration of acceleration if (a) the Company has paid or deposited with the
Trustee a sum sufficient to pay all overdue interest on all Notes and the
principal of, and premium, if any, applicable to, any Notes which is then due
other than by such declaration of acceleration, and interest thereon at the rate
borne by the Notes, and to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Notes; and all sums paid
or advanced by the Trustee hereunder and the reasonable compensation, expenses,
disbursements and advances then due and unpaid of the Trustee, its agents and
counsel; and (b) all Events of Default (other than the nonpayment of the
principal of, premium, if any, and interest on Notes which have become due
solely by such declaration of acceleration) have been cured or waived as
provided in the Indenture. No such waiver shall cure or waive any subsequent
default or impair any right consequent thereon.
The Indenture also provides that if an Event of Default in payment of
principal of, premium, if any, or interest specified in clause (a) or (b) of
above occurs and is continuing, the Company shall, upon demand of the Trustee,
pay to it, for the benefit of the Holders of such Notes, the whole amount then
due and payable on such Notes for principal, premium, if any, and interest, and,
to the extent that payment of such interest shall be legally enforceable,
interest on any overdue principal, and premium, if any, and on any overdue
interest, at the rate borne by the Notes, and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation to, and expenses, disbursements and
advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts within 10 days of such demand, the
Trustee, in its own name and as trustee of an express trust in favor of the
Holders, may institute a judicial proceeding for
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the collection of the sums so due and unpaid, may prosecute such proceeding to
judgment or final decree and may enforce the same against the Company or any
other obligor upon the Notes and collect the moneys adjudged or decreed to be
payable in the manner provided by law out of the property of the Company or any
other obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effective to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in the Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
The Indenture provides that the Trustee may act on behalf of the Holders to
enforce any right or power under the Indenture at the request of the Holders,
after provision of the payment of reasonable compensation to, and reasonable
expenses, disbursements and advances of the Trustee, its agents and counsel, be
for the ratable benefit of the Holders of the Notes in respect of which such
judgment has been recovered.
The Indenture provides that no Holder of any Note shall have any right to
institute or to order or direct the Trustee to institute any proceeding,
judicial or otherwise, with respect to the Indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder
has previously given written notice to the Trustee of a continuing Event of
Default; (b) the Holders of not less than 25% in aggregate principal amount of
the Notes then outstanding shall have made written request to the Trustee to
institute proceedings in respect to such Event of Default in its own name; (c)
such Holder or Holders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities to be incurred or
reasonably probable to be incurred in compliance with such request; (d) the
Trustee for 60 days after its receipt of such notice, request and offer of
indemnity has failed to institute any such proceeding; and (e) no direction
inconsistent with such written request has been given to the Trustee during such
60-day period by the Holders of a majority in aggregate principal amount of the
Notes then outstanding.
The Indenture provides that Holders of a majority in aggregate principal
amount of the Notes then outstanding shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred upon the Trustee, provided,
that such direction shall not be in conflict with any rule of law or with the
Indenture, and the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction. The Indenture provides
that the Holder or Holders of not less than a majority in aggregate principal
amount of the Notes then outstanding may, on behalf of all Holders, prior to the
declaration of the maturity of the Notes, waive any past default hereunder and
its consequences, except a default in the payment of the principal of, premium,
if any, or interest on, any Note as specified in clauses (a) and (b) under
"Events of Default" above, or in respect of a covenant or provision hereof
which, under Article IX of the Indenture, cannot be modified or amended without
the consent of the Holder of each outstanding Note affected.
DISCHARGE, DEFEASANCE, AND COVENANT DEFEASANCE
The Company may terminate certain of its obligations under the Indenture
with respect to the Notes including its obligations to comply with the
restrictive covenants described herein, on the terms and subject to the
conditions contained in the Indenture, by depositing in trust with the Trustee
money or obligations of, or guaranteed by, the United States sufficient to pay
the principal and interest, if any, on such Notes to maturity (or earlier
redemption).
TRANSFER AND EXCHANGE
A holder of a Note will be able to transfer or exchange the Notes only in
accordance with the provisions of the Indenture. The registrar may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by the
Indenture.
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MODIFICATIONS TO THE INDENTURE
The Indenture provides that the Company and the Trustee may enter into
supplemental indentures without the consent of the holders of Notes to, among
other things: (a) to cure any ambiguity, defect, or inconsistency in the
Indenture; (b)to add to the covenants or surrender any right of the Company for
the benefit of the Holders; (c) to provide for collateral for the Notes; (d) to
evidence the succession of any other Person to the Company and the assumption by
any such successor of the obligations of the Company; or (e) to comply with the
TIA.
The Indenture also provides that the Company and the Trustee may, with the
consent of the Holders of not less than a majority in aggregate principal amount
of the Notes then outstanding, amend or supplement the Indenture or the Notes or
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or Notes or of modifying in any manner the rights of
the Holders under the Indenture or the Notes. The Indenture also provides that
Holders of not less than a majority in aggregate principal amount of the Notes
then outstanding may waive compliance by the Company with any provision of the
Indenture or the Notes. Notwithstanding any of the above, however, no such
amendment, supplemental indenture or waiver shall, without the consent of the
Holder of each outstanding Note affected thereby, reduce the percentage of
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver of any provision of the Indenture or the Notes, reduce the rate or
extend the time for payment of interest on any Note, reduce the principal amount
of any Note, or reduce the Repurchase Price or the Redemption Price; change the
Stated Maturity or Repurchase Date of any Note, alter the redemption provisions
of Article III or XII of the Indenture or paragraph 5 or 14 of the Notes, make
any changes in the provisions concerning waivers of Defaults or Events of
Default or rights to recover principal and interest by Holders of the Notes, or
make the principal of, premium, if any, or the interest on, any Note payable
with anything or in any manner other than as provided for in the Indenture.
THE TRUSTEE, PAYING AGENT, CONVERSION AGENT AND REGISTRAR
[ ] is Trustee and Paying Agent under the Indenture and Continental
Stock Transfer and Trust Company has been appointed by the Company as Conversion
Agent and Registrar. The Indenture contains certain limitations on the rights of
the Trustee, should it or its affiliates become a creditor of the Company, to
obtain payment of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee and
its affiliates will be permitted to engage in other transactions; however, if
they acquire any conflicting interest, the conflict must be eliminated or the
Trustee must resign.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of New
York.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary sets forth the principal U.S. federal income tax
consequences of holding and disposing of Notes. This summary is based upon laws,
regulations, rulings and judicial decisions now in effect, all of which are
subject to change, possibly on a retroactive basis. This summary is presented
for informational purposes only and relates only to Notes or shares of Common
Stock received in exchange therefor that are held as "capital assets"
(generally, property held for investment within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code")). The summary
discusses certain U.S. federal income tax consequences to holders of Notes
("holders") that are individuals who are citizens or residents of the United
States, a corporation or other entity organized under the laws of the United
States or a political subdivision thereof, or an estate or trust, the income of
which is includible in gross income for U.S. federal income tax purposes,
regardless of source. It does not discuss state, local or foreign tax
consequences, nor does it discuss tax consequences to categories of holders that
may be subject to special rules, such as tax exempt organizations, insurance
companies, financial institutions and dealers in stocks and securities. Tax
consequences may vary depending on the particular status of an investor.
This summary does not purport to deal with all aspects of federal income
taxation that may be relevant to an investor's decision to purchase Notes. Each
investor should consult his or her own tax advisor as to the particular tax
consequences to such person of purchasing, holding and disposing of the Notes,
including the applicability and effect of any state, local or foreign tax laws
and any recent proposed changes in applicable tax laws.
STATED INTEREST
A holder using the accrual method of accounting for tax purposes generally
will be required to include interest in income as such interest accrues, while a
cash basis holder generally will be required to include interest in income when
cash payments are received (or made available for receipt) by such holder.
CONVERSION OF NOTES
Except as otherwise indicated below, no gain or loss will be recognized for
federal income tax purposes upon the conversion of Notes into shares of Common
Stock. Cash paid in lieu of fractional shares of Common Stock will be taxed as
if the fractional shares of Common Stock were issued and then redeemed for cash,
generally resulting in sale or exchange treatment. The tax basis of the shares
of Common Stock received upon conversion will be equal to the tax basis of the
Notes converted reduced by the portion of such tax basis, if any, allocable to
any fractional share interest exchanged for cash. The holding period of the
shares of Common Stock received upon conversion will include the holding period
of the Notes converted.
If at any time the Company makes a distribution of property to its
shareholders that would be taxable to such shareholders as a dividend for U.S.
federal income tax purposes (e.g. distributions of cash, evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for shares of Common Stock) and, pursuant to the
anti-dilution provisions of the Indenture, the conversion price of the Notes is
reduced, such reduction will be deemed to be the payment of a stock distribution
to holders equal to the fair market value of additional shares of Common Stock
that may be acquired at such conversion price, which will be taxable as a
dividend to the extent of the current or accumulated earnings and profits of the
Company. To the extent that such deemed stock distribution exceeds the Company's
current or accumulated earnings and profits, it will be treated as a tax-free
return of capital to the extent of the holder's tax basis in the applicable
Notes, and then as capital gains. If the Company voluntarily reduces the
conversion price for a period of time, holders may, in certain circumstances,
have to include in gross income an amount equal to the value of the reduction in
the conversion price. Holders could, therefore, have taxable income as a result
of an event pursuant to which they received no cash or property that could be
used to pay the related income tax.
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DISPOSITION OF NOTES OR SHARES OF COMMON STOCK
In general, the holder of Notes or shares of Common Stock into which it is
converted will recognize gain or loss upon the sale, redemption, retirement or
other disposition of the Notes or shares of Common Stock in an amount equal to
the difference between the amount of cash and the fair market value of property
received (except to the extent attributable to the payment of accrued interest)
and the holder's adjusted tax basis in the Notes or shares of Common Stock. The
holder's tax basis in a Note generally will be such holder's cost, increased by
(i) the amount of accrued market discount a holder elects to include in income
with respect to the Notes (discussed below), (ii) the amount of any taxable
deemed stock distribution arising from a conversion price adjustment (see
"Conversion of Notes") and reduced by (i) any principal payments received by
such holder, (ii) the amount of any amortizable bond premium the holder elects
to amortize with respect to the Notes and (iii) any taxable conversion price
adjustments not treated as a dividend or capital gains under the rules described
above (see "Conversion of Notes"). As discussed above (see "Conversion of
Notes"), a holder's tax basis in the shares of Common Stock received on
conversion will be equal to such holder's tax basis in the Notes converted,
reduced by the portion of such tax basis, if any, allocable to any fractional
share interest exchanged for cash. If a holder holds Notes or shares of Common
Stock as a capital asset, gain or loss arising from sale, exchange, redemption
or retirement of such Notes or shares of Common Stock will be capital gain or
loss except to the extent of any accrued market discount (see "Market Discount
on Resale"), and such gain or loss will be long-term capital gain or loss if the
holding period of either the Notes or the shares of Common Stock (including the
holding period of the Notes converted into such shares of Common Stock), as the
case may be, is more than one year at such time.
MARKET DISCOUNT ON RESALE
The tax consequences of the sale of Notes by a holder may be affected by the
market discount provisions of the Code. Market discount is defined as the excess
of a debt instrument's stated redemption price (or its revised issue price in
the case of a debt instrument issued with original issue discount) at maturity
over the holder's tax basis in such debt instrument immediately after its
acquisition. If the market discount is less than l/4th of 1 percent of the
stated redemption price (or the revised issue price, as the case may be) at
maturity multiplied by the number of complete years to maturity (after the
holder acquired the debt instrument), then the market discount will be
considered to be zero.
If a holder purchases Notes at a market discount and thereafter recognizes
gain on its disposition (or the disposition of the shares of Common Stock into
which such Notes is converted) such gain is treated as ordinary interest income
to the extent it does not exceed the accrued market discount on such Notes. In
addition, recognition of gain to the extent of accrued market discount may be
required in the case of some dispositions which would otherwise be
nonrecognition transactions. Unless a holder elects to use a constant rate
method, accrued market discount equals the Notes' market discount multiplied by
a fraction, the numerator of which equals the number of days the holder holds
such Notes and the denominator of which equals the total number of days
following the date the holder acquires such Notes up to and including the date
of its maturity. If a holder of Notes acquired at a market discount receives a
partial principal payment prior to maturity, that payment is treated as ordinary
income to the extent of the accrued market discount on the Notes at the time
payment is received. However, when the holder disposes of the Notes, the accrued
market discount is reduced by the amount of the partial principal payment
previously included in income. A holder that acquires Notes at a market discount
may be required to defer a portion of any interest expense that may otherwise be
deductible on any indebtedness incurred to purchase or carry such Notes until
the holder disposes of such Notes in a taxable transaction.
A holder of Notes acquired at a market discount may elect to include the
market discount in income as the discount accrues, either on a ratable basis,
or, if elected, on a constant interest rate basis. Once made, the current
inclusion election applies to all market discount obligations acquired on or
after the first day of the first taxable year to which the election applies and
may not be revoked
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without the consent of the Internal Revenue Service (the "IRS"). If a holder of
Notes elects to include the market discount in income as it accrues, the
foregoing rules with respect to the recognition of ordinary income on sales and
certain other dispositions and with respect to the deferral of interest
deductions on related indebtedness would not apply.
BOND PREMIUM
If, as a result of a purchase at a premium, a holder's adjusted tax basis in
a Note exceeds the Notes' stated redemption price at maturity, such excess may
constitute amortizable bond premium. If the Note is a capital asset in the hands
of the holder, Section 171 of the Code allows the holder to elect to amortize
any such bond premium under the constant interest rate method as an offset
against interest income earned on the Note. The amount of amortizable bond
premium equals the excess of the holder's basis (for determining loss on sale or
exchange) in the Notes over the amount payable at maturity or, if it results in
a smaller amortizable bond premium, an earlier call date. If a holder is
required to amortize bond premium by reference to such a call date and the Notes
are not in fact called on such date, the remaining unamortized premium must be
amortized to a succeeding call date or to maturity.
A holder's tax basis in a Note must be reduced by the amount of amortized
bond premium. An election to amortize bond premium applies to all bonds (other
than tax-exempt bonds) held by the holder at the beginning of the first taxable
year to which the election applies or thereafter acquired by the holder and is
irrevocable without the consent of the IRS.
BACKUP WITHHOLDING
Under the "backup withholding" provisions of federal income tax law, the
Company, its agent, a broker or any paying agent, as the case may be, will be
required to withhold a tax equal to 31% of any payment of (i) principal,
premium, if any, and interest on the Notes, (ii) proceeds from the sale or
redemption of the Notes, (iii) dividends on the shares of Common Stock and (iv)
proceeds from the sale or redemption of the shares of Common Stock, unless the
holder (a) is exempt from backup withholding and, when required, demonstrates
this fact to the payor or (b) provides a taxpayer identification number to the
payor, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
Certain holders (including corporations, tax exempt organizations, individual
retirement accounts and, to a limited extent, nonresident aliens) are not
subject to the backup withholding reporting requirements. A nonresident alien
must submit a statement, signed under penalties of perjury, attesting to that
individual's exemption from backup withholding. A holder of Notes or shares of
Common Stock that is otherwise required to but does not provide the Company with
a correct taxpayer identification number may be subject to penalties imposed by
the Code. Any amounts paid as backup withholding with respect to the Notes or
shares of Common Stock will be creditable against the income tax liability of
the person receiving the payment from which such amount was withheld. Holders of
Notes and shares of Common Stock should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
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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, par value $.001 per share, 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 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
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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 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
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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.
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.
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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 of Common Stock) and 197,338
shares of Common Stock issuable upon conversion of convertible securities. All
of the 1,800,000 shares of Common Stock offered in the Concurrent Common Stock
and Common Stock Purchase Warrants Offering 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 "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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PLAN OF DISTRIBUTION
Janney Montgomery Scott Inc. as Placement Agent (the "Placement Agent") will
offer the Notes on a "best-efforts," all or none basis. The Placement Agent will
receive a commission equal to six percent (6%) of the purchase price of the
Notes sold.
The Company has agreed to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act. In addition, the
Company has granted to the Placement Agent a right of first refusal for a period
of three years from the date of this Prospectus with respect to any issuance of
debt by the Company, its affiliates or subsidiaries.
In connection with the Notes offering, the Company has agreed to sell to the
Placement Agent, 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 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.
In connection with the Concurrent Common Stock and Common Stock Purchase
Warrants Offering, the Company as agreed to sell to the Placement Agent, 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 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 Placement Agent. The Placement Agent's Warrants provide for
adjustment in the number of shares of Common Stock issuable upon the exercise
thereof and in the exercise price of the Placement Agent's Warrants as a result
of certain events, including subdivisions and combinations of the Common Stock.
The Placement Agent's Warrants grant to the holders thereof certain rights of
registration of the securities underlying the Placement Agent's Warrants.
The Company has agreed to pay to the Placement Agent a non-accountable
expense allowance equal to one percent (1%) of the gross proceeds derived from
the sale of the Notes, $40,000 of which has been paid to date.
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 forms a part. See "Additional Information."
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.
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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 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
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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.
87
<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 C). 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 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.
[LOGO]
<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 PLACEMENT AGENT.
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 OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO 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
Certain Federal Income Tax Considerations...... 78
Description of Capital Stock................... 81
Shares Eligible for Future Sale................ 84
Plan of Distribution........................... 85
Legal Matters.................................. 85
Experts........................................ 85
Change in Accountants.......................... 86
Indemnification for Securities Act
Liabilities................................... 86
Available Information.......................... 86
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
$12,500,000
UNITED VANGUARD HOMES, INC.
% CONVERTIBLE SENIOR SECURED NOTES DUE 2006
---------------------
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..................................................... $ 5,388
National Association of Securities Dealers, Inc. Fee..................... 3,500
Legal Fees and Expenses.................................................. 120,000
Accounting Fees and Expenses............................................. 100,000
Printing and Engraving Expenses.......................................... 100,000
Blue Sky Fees and Expenses............................................... 15,000
Transfer Agent's and Registrar's Fees.................................... 10,000
Miscellaneous Expenses................................................... 46,112
---------
Total............................................................ $ 400,000
---------
---------
</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 26th 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 26, 1996
Paul D'Andrea Accounting Officer)
/s/ BENJAMIN FRANK
------------------------------------------- Director July 26, 1996
Benjamin Frank
/s/ FRANCIS S. GABRESKI
------------------------------------------- Director July 26, 1996
Francis S. Gabreski
/s/ LARRY L. LAIRD
------------------------------------------- President, Chief Operating Officer July 26, 1996
Larry L. Laird and Director
/s/ CARL G. PAFFENDORF
------------------------------------------- Chairman of the Board and Chief July 26, 1996
Carl G. Paffendorf Executive Officer
/s/ ROBERT S. HOSHINO, JR.
------------------------------------------- Director July 26, 1996
Robert S. Hoshino, Jr.
/s/ JAMES E. EDEN
------------------------------------------- Director July 26, 1996
James E. Eden
/s/ STANFORD J. SHUSTER
------------------------------------------- Director July 26, 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 on Form
SB-2. 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 25, 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 on Form SB-2. 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 26, 1996
