<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1996
REGISTRATION NO. 333-09037
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
UNITED VANGUARD HOMES, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C>
DELAWARE 8052
(State or Other Jurisdiction of Incorporation (Primary Standard Industrial Classification
or Organization) Code Number)
<CAPTION>
DELAWARE 11-2032899
or Organization)
<CAPTION>
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
</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 LLP
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 OF-
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED FERING 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(5) $0(6)
Placement Agent's Warrants $14(7) $1
Common Stock, $.01 par value, underlying Placement Agent's
Warrants(4) $1,250,000(8) $431
Total $30,000,014 $5,388(9)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) 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) Based upon a proposed maximum offering price of $11.40 per share of Common
Stock.
(6) No additional consideration will be received by the Registrant upon issuance
of the Common Stock.
(7) Based upon a proposed maximum offering price of $0.0001 per Placement
Agent's Warrant.
(8) Based upon a proposed maximum offering price of $11.40 per share of Common
Stock.
(9) Paid in connection with the filing of the Registration Statement on July 26,
1996.
----------------------------------
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 Relationships and Related 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 SEPTEMBER 23, 1996
PROSPECTUS
$12,500,000
UNITED VANGUARD HOMES, INC.
% CONVERTIBLE SENIOR SECURED NOTES DUE 2006
------------------
Interest on the Notes will be payable on April 1 and October 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
November 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 107%, 106%, 105%, 104%, and 103% of the principal
amount, plus accrued interest, in years three 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 October 31, 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 thirty (30) 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., a Delaware corporation (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. Until the consummation
of the Offerings, the Company will continue to be a majority-owned subsidiary of
Vanguard Ventures, Inc. ("Vanguard"). Upon completion of the Offerings, the
Company will own and/or manage five senior living facilities containing 1,071
apartments and nursing units (the "Initial Properties"). Additionally, it is in
the process of developing, acquiring or leasing for itself or on behalf of
others, eight facilities expected to contain approximately 780 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 three are subject to acquisition or lease agreements. The purchase
and acquisition of nine other sites for the development of 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 eight properties being developed, acquired or leased, one is a CCRC, six are
assisted living facilities and one is an extension at one of the Initial
Properties to add 64 independent living units. 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 units.
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
3
<PAGE>
and services; (ii) pursuing development opportunities for itself or on behalf of
others; 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....................... April 1 and October 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 107%,106%, 105%, 104% and 103% of
the principal amount, plus accrued interest,
in years three 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 October 31, 2003.
Conversion Price............................. $ [ % of the initial public offering price
of the Common Stock.]
Mandatory Redemption......................... $3,125,000 on November 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 equally 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 unless
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 100% of the
principal amount thereof, 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
$7.50 and $9.50 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>
FISCAL YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
----------------------------------------------- --------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 (1) 1995 1996 1996 (1)
---------- ---------- ---------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident and healthcare
services...................... $ 7,229 $ 7,378 $ 7,521 $ 7,521 $ 1,820 $ 1,892 $ 1,892
Development fees............... 150 700 1,004 1,004 85 85
Rental income.................. -- -- -- 2,550 -- -- 637
---------- ---------- ---------- ----------- --------- --------- ----------
Total revenues................. 7,379 8,078 8,525 11,075 1,820 1,977 2,614
---------- ---------- ---------- ----------- --------- --------- ----------
Expenses:
Residence operating expenses... 5,372 5,595 5,913 5,913 1,389 1,481 1,481
General and administrative
expenses...................... 606 503 414 418 68 155 156
Depreciation and amortization.. 549 565 378 1,074 133 70 240
Provision for (recovery of)
loss on advances to
affiliates.................... 829 1,651 296 296 (72) (72)
---------- ---------- ---------- ----------- --------- --------- ----------
Total expenses................. 7,356 8,314 7,001 7,701 1,590 1,634 1,805
---------- ---------- ---------- ----------- --------- --------- ----------
Income from operations......... 23 (236) 1,524 3,374 230 343 809
Other income (expense):
Interest (expense) net......... (750) (623) (601) (1,797) (178) (135) (434)
Other income................... 145 232 109 109 13 21 21
Debt conversion expense........ -- -- -- -- -- (157) (157)
---------- ---------- ---------- ----------- --------- --------- ----------
Income (loss) before income
taxes......................... (582) (627) 1,032 1,686 65 72 239
Income taxes................ -- -- 420 675 26 33 110
---------- ---------- ---------- ----------- --------- --------- ----------
Net income (loss).............. $ (582) $ (627) $ 612 $ 1,011 $ 39 $ 39 $ 129
---------- ---------- ---------- ----------- --------- --------- ----------
---------- ---------- ---------- ----------- --------- --------- ----------
Earnings (loss) per share
(2)........................... $ (.20) $ (.22) $ .36 $ .29 $ .02 $ .02 $ .03
---------- ---------- ---------- ----------- --------- --------- ----------
---------- ---------- ---------- ----------- --------- --------- ----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average common shares
and equivalents outstanding
(2)........................... 2,937,722 2,848,825 1,692,894 3,492,894 1,681,938 2,197,166 3,997,166
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
MARCH 31, 1996 --------------------------
-------------- PRO FORMA,
ACTUAL ACTUAL AS ADJUSTED (1)
-------------- --------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................ $ (100) $ (4,181) $ 6,893
Total assets............................................................. 6,088 6,386 35,882
Long-term debt, excluding current portion:
Convertible mortgages and notes....................................... 2,616 1,315 14,005
Other debt............................................................ 4,557 285 95
Stockholders' (deficiency) equity........................................ (3,328) (1,689) 15,306
</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 June 30, 1996. See "Selected Financial
Data" and Note L to Consolidated Financial Statements.
(2) The weighted average number of shares of Common Stock and equivalents
outstanding at March 31, 1996 and June 30, 1996 give effect to the
cancellation by the Company, in March 1995, of 1,200,000 shares of Common
Stock held by Vanguard. See "Certain Relationships and Related 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. In addition, excluded
for all periods presented, from the weighted average number of common shares
and common equivalent shares are 46,936 shares owned by Vanguard which are
held in escrow pursuant to an agreement to be entered into in connection
with the Company's proposed public offering. See Note A to Consolidated
Financial Statements.
7
<PAGE>
OPERATING DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------ THREE MONTHS ENDED
1993 1994 1995 1996 JUNE 30, 1996
--------- --------- --------- --------- ---------------------
<S> <C> <C> <C> <C> <C>
PROPERTIES OWNED: HILLSIDE TERRACE, OLDS MANOR AND THE
WHITCOMB
Number of independent living apartments (end of
period).............................................. 270 270 270 270 265
Average occupancy percentage.......................... 93% 94% 94% 93% 98%
Number of assisted living units (end of period)....... 91 91 91 91 98
Average occupancy percentage.......................... 91% 92% 92% 88% 97%
Number of skilled nursing beds (end of period)........ 67 67 67 67 67
Average occupancy percentage.......................... 100% 99% 100% 99% 100%
PROPERTY TO BE ACQUIRED: HARVEST VILLAGE (1)
Number of independent living apartments
(end of period)...................................... 300 300 300 300 300
Average occupancy percentage.......................... 48% 51% 50% 52% 51%
Number of skilled nursing beds (end of period)........ 60 60 60 60 60
Average occupancy percentage.......................... 93% 95% 92% 91% 93%
MANAGED PROPERTY: THE WHITTIER (2)
Number of independent living apartments (end of
period).............................................. 229 229 229 229 229
Average occupancy percentage.......................... 60% 55% 46% 39% 47%
Number of assisted living units (end of period)....... 52 52 52 52 52
Average occupancy percentage.......................... 77% 77% 81% 92% 96%
</TABLE>
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(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."
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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.
HISTORY OF LOSSES; UNCERTAINTY OF PROFITABILITY
The Company reported losses in fiscal 1992, 1993, 1994 and 1995. Although
the Company operated profitably in fiscal 1996 and the three months ended June
30, 1996, there can be no assurance that profitability on a quarterly or annual
basis will be sustained in the future. At June 30, 1996, the Company had an
accumulated deficit of approximately $8,928,000 and a working capital deficit of
approximately $4,181,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LOSSES AT CERTAIN SENIOR LIVING FACILITIES
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 and the three months ended June 30, 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 December 31, 1995 and the six months ended June 30, 1996. 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 may have a material
adverse effect on the Company. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "The
Company--Proposed Acquisition" and Footnote L to Consolidated Financial
Statements.
UNCERTAINTY OF AVAILABILITY OF MORTGAGE REFINANCING; RISK OF FORECLOSURE
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. $1,453,947 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 June 30, 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 $4,087,500. Such
indebtedness is secured by a first mortgage loan on The Whittier and is due
April 30, 1997. 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
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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
Relationships and Related Transactions," "Description of Mortgage Loans" and
"Description of Notes."
REPAYMENT RISK ASSOCIATED WITH SPONSORED DEVELOPMENT PROJECTS; POSSIBLE
FLUCTUATIONS IN QUARTERLY RESULTS
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 if the unaffiliated
entity is adequately financed 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 recognition by the Company of development fees will generally be contingent
upon the completion of construction financing, therefore the Company's quarterly
recognition of development fee revenue can vary materially from quarter to
quarter. 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. 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. To the extent such advances are not secured by land, they will be
reserved as uncollectible until the unaffiliated entity can repay the advances.
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, "--Possibility of Regulatory Challenge to Tax Exempt
Not-For-Profit Organizations," and "Business -- Business Strategy."
POSSIBILITY OF REGULATORY CHALLENGE TO 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. 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
10
<PAGE>
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 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.
RISKS ASSOCIATED WITH 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 for itself or on behalf of others 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 for itself or
on behalf of others, 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 growth and development 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. The Company plans to obtain construction financing for Orchard Terrace
through a HUD Section 232 loan in the next nine months. There can be no
assurance that the Company will be able to secure such financing or, if
available, that the terms will be acceptable to the Company. 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."
11
<PAGE>
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."
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 for itself or on behalf of others 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; EFFORTS BY
THIRD-PARTY PAYORS TO LOWER REIMBURSEMENT RATES
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. See "Business -- Paying for Senior Living
Care."
BENEFITS TO RELATED PARTIES
As of June 30, 1996 Carl G. Paffendorf, the Company's Chairman of the Board
and Chief Executive Officer, guaranteed the repayment by Vanguard of $1.00 of
indebtedness relating to Harvest Village. The $1.00 guarantee increases to
$6,350,000 if Harvest Partners files for bankruptcy. That
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<PAGE>
indebtedness will be repaid as a result of the initial application of the net
proceeds of the Offerings. In addition, $6,094,000 due the Company from Vanguard
was cancelled as a result of the acquisition by the Company of Harvest Village.
See "Certain Relationships and Related Transactions."
IMMEDIATE SUBSTANTIAL DILUTION
Based upon the pro forma net tangible book value of the Company at June 30,
1996, and based upon an assumed initial public offering price of $8.50 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 $5.87 per share. See "Dilution."
CONFLICTS OF INTEREST
Certain officers and Directors of the Company are also officers and
directors of affiliates of the Company, either directly or indirectly. For
example, the Company manages The Whittier, which is owned by Vanguard, and the
management fee for The Whittier is set by agreement between the Company and
Vanguard, which have substantially identical officers and directors. In
connection with the Offerings, the Company has adopted a policy whereby all
future transactions between the Company and its officers, Directors, principal
stockholders or affiliates, will be approved by a majority of the Board of
Directors, including all of the independent and disinterested members of the
Board of 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 Relationships and Related
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
obtained 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."
EFFECT OF 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
13
<PAGE>
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. There can be no assurance that administrative or
judicial interpretation of existing laws, regulations or policies will not have
a material adverse effect on the Company's operations or financial condition.
The success of the Company will be dependent in part upon its ability to
satisfy the applicable laws, regulations and requirements and to procure and
maintain required licenses and certifications. In New York, for example, a
public for-profit corporation is not eligible for a license to operate a skilled
nursing or assisted living facility. Regulation of the senior living industry is
evolving and the Company's operations could also be adversely affected by, among
other things, future regulatory developments such as mandatory increases in the
scope and quality of care to be afforded residents and revisions in licensing
and certification standards. Currently, no federal rules explicitly define or
regulate assisted living. A majority of states have adopted certificate of need
("CON") or similar statutes that generally require a state agency to determine
that a need exists for new beds or assisted living units and that certain other
criteria are also satisfied before construction of new skilled nursing beds or
assisted living units commences, new services are provided or certain
expenditures are made, 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. 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 "-- Possibility of Regulatory Challenge to Tax Exempt
Not-For-Profit Organizations" and "Business -- Government Regulation of Senior
Living Facilities."
COMPETITION; POSSIBILITY OF NEW ENTRANTS INTO INDUSTRY
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."
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OPERATING RISKS MAY NOT BE COVERED BY INSURANCE
The provision of assisted living and healthcare services entails an inherent
risk of liability. In recent years, participants in the long-term care industry
have become subject to an increasing number of lawsuits alleging malpractice,
negligence or related legal theories, many of which involve large claims and
significant defense costs. The Company currently maintains liability insurance
in amounts and with such coverage and deductibles as it deems appropriate, based
upon the nature and risks of the business, historical experience and industry
standards. Effective April 1, 1992, the Company began to self-insure for health
and medical liability costs for up to a maximum of $300,000 in claims. There can
be no assurance, however, that claims in excess of the Company's insurance
coverage or claims not covered by the Company's insurance coverage (e.g., claims
for punitive damages) will not arise. A successful claim against the Company not
covered by, or in excess of, the Company's insurance coverage could have a
material adverse effect upon the Company's financial condition and results of
operations. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the Company's ability to
attract residents or expand its business. In 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. See
"Business -- Company Operations."
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
15
<PAGE>
liable for the costs of removal or remediation of certain hazardous or toxic
substances including, without limitation, asbestos-containing materials
("ACMs"), which could be located on, in or under such property. Such laws and
regulations often impose liability regardless of whether the owner or operator
knew of, or was responsible for, the presence of the hazardous or toxic
substances. The costs of any required remediation or removal of these substances
could be substantial, and the owner's liability as to any property is generally
not limited under such laws and regulations and could exceed the value of the
property and the aggregate assets of the owner or operator. The presence of
these substances or failure to remediate such substances properly may also
adversely affect the owner's ability to sell or rent the property or to borrow
using the property as collateral. Under these laws and regulations, an owner,
operator, or any entity who arranges for the disposal of hazardous or toxic
substances, such as ACMs, at a disposal site may also be liable for the costs of
any required remediation or removal of the hazardous or toxic substances at the
disposal site. In connection with the 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. 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 Janney Montgomery Scott Inc. and Rodman & Renshaw, Inc. the representatives
of the several Underwriters (the "Representatives") 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,
16
<PAGE>
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."
EFFECT OF CONTROL BY PRINCIPAL STOCKHOLDER AFTER OFFERINGS
Upon completion of the Offerings, Vanguard will beneficially own or have
voting control over 1,635,969 shares of Common Stock, or approximately 40.5%
(33.8% 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, BYLAWS AND DELAWARE
LAW
The Company's Certificate of Incorporation, Bylaws 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 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."
NO DIVIDENDS ANTICIPATED; 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 4,040,950
shares of Common Stock outstanding, 1,225,490 shares issuable upon conversion of
the Notes (at an assumed initial conversion price of $10.20 per share based upon
an assumed initial public offering price of $8.50 per share of Common Stock) and
190,876 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
17
<PAGE>
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 2,431,826 shares will be
"restricted" securities as defined in Rule 144 and may not be sold unless they
are registered under the Securities Act or are sold pursuant to an exemption
from registration, including an exemption contained in Rule 144. Of these
restricted shares, 1,698,836 shares are currently eligible for sale under Rule
144, subject, however, to any restrictions of Rule 144. Vanguard and each of the
directors and officers of the Company has agreed not to offer, sell or otherwise
dispose of any shares of Common Stock without the prior written consent of the
Placement Agent 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 Placement
Agent. 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 (which may include the
assumption of a first mortgage in the amount of $12,500,000) 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, based upon an appraisal, 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
19
<PAGE>
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 Relationships and Related Transactions."
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 $11.2 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 $13.5 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 $8.50 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.......................................................... $13,502,000
Net proceeds from the Notes offering........................................ $11,162,000
USES:
Cash portion of purchase price of Harvest Village (1)....................... $13,500,000
Capital improvements to Initial Properties (2).............................. $ 1,750,000
Working capital (3)......................................................... $ 3,000,000
General corporate purposes (which may include short-term advances associated
with development projects)................................................. $ 6,414,000
</TABLE>
- ------------------------
(1) See "The Company -- Proposed Acquisition" and "Certain Relationships and
Related Transactions."
(2) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(3) There are no current specific plans for the use of such working capital.
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 for others. 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. In the event that the Company is unable to
obtain construction financing for Orchard Terrace through a HUD Section 232
loan, the Company may use up to $1.5 million of the net proceeds of the
Offerings allocated from general corporate purposes together with financing from
other sources to finance such construction. 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 June 30,
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 $8.50 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>
JUNE 30, 1996 (1)
-------------------------------
PRO FORMA,
ACTUAL AS ADJUSTED (2)
-------------- ---------------
<S> <C> <C>
Current portion of long-term debt (3)........................ $ 4,862,091 $ 4,862,091
Long-term debt, less current maturities:.....................
% Convertible Senior Secured Notes due 2006............... -- 12,500,000
Mortgages payable.......................................... 1,344,833 1,344,833
Notes payable.............................................. 255,457 255,457
Stockholders' equity (deficiency) (4):
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,
2,240,950 shares issued and outstanding; 4,040,950 shares
issued and outstanding pro forma as adjusted.............. 22,410 40,410
Additional paid in capital................................. 7,216,026 20,700,026
Accumulated deficit........................................ (8,927,653) (5,434,511)
-------------- ---------------
Total stockholders' equity (deficiency)...................... (1,689,217) 15,305,925
Total capitalization......................................... $ 4,773,164 $ 34,268,306
-------------- ---------------
-------------- ---------------
</TABLE>
- ------------------------------
(1) See Note G to the Consolidated Financial Statements for certain commitments
and contingencies of the Company.
(2) See "Selected Financial Data" and Note L to Consolidated Financial
Statements.
(3) Includes $2,250,000 of mortgage indebtedness relating to Hillside Terrace
and $2,100,500 of mortgage indebtedness relating to The Whitcomb which
indebtedness is due April 30, 1997. Although the Company is attempting to
refinance such indebtedness no assurance can be given that the Company will
be successful. See "Risk Factors -- Uncertainty of Availability of Mortgage
Refinancing; Risk of Foreclosure."
(4) 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 126,480 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) 21,274 shares of
Common Stock issuable upon conversion of the 7% Notes, (vi) 1,225,490
shares of Common Stock into which the Notes are initially convertible (at
an assumed initial conversion price of $10.20 per share based upon an
assumed initial public offering price of $8.50 per share), (vii) 270,000
shares of Common Stock issuable upon exercise of the Representatives'
Warrants and upon exercise of the Warrants underlying the Representatives'
Warrants issued to the Representatives in the Concurrent Common Stock and
Common Stock Purchase Warrants Offering, (viii) 122,549 shares of Common
Stock issuable upon exercise of the Placement Agent's warrants issued to
the Placement Agent and (ix) 900,000 shares of Common Stock issuable upon
exercise of the Warrants sold in the Concurrent Common Stock and Common
Stock Purchase Warrants Offering. Under the treasury stock method of
computation, outstanding options and warrants represent 6,152 Common Stock
equivalents. See "Management-Stock Option Plans," "Description of Mortgage
Loans," "Certain Relationships and Related 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 June 30, 1996 was
$(2,888,322), or $(1.29) 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 $8.50 per Share
and $0.05 per Warrant and the initial application of the net proceeds therefrom,
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 June 30, 1996 would have been $10,613,678 or $2.63
per share. This represents an immediate increase in net tangible book value of
$3.92 per share to existing stockholders and an immediate dilution of $5.87 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............................ $ 8.50
Negative net tangible book value per Share before offering................. $ (1.29)
Increase in net tangible book value per share attributable to new
investors................................................................. 3.92
--------- ---------
As adjusted net tangible book value per Share after offering............... 2.63
---------
Dilution per Share to new investors........................................ $ 5.87
---------
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 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................ 2,240,000 55.5% $ 7,238,436 32.1% $ 3.23
New investors........................ 1,800,000 49.6 15,300,000 67.9 $ 8.50
------------- ------------- -------------- ------------- -------------
Total.......................... 4,040,950 100.0% $ 22,538,436 100.0%
</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. The data for the three months ended June 30, 1996
and 1995 has been derived from unaudited financial statements of the Company. In
the opinion of management, the unaudited financial statements have been prepared
on the same basis as the audited financial statements and include all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the results of these periods.
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>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
---------- ---------- ---------- ---------- ---------- -----------
<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
Provision for (recovery
of) loss on advances to
affiliates............... 1,715 1,662 829 1,651 296 296
---------- ---------- ---------- ---------- ---------- -----------
Total expenses.......... 7,614 7,862 7,356 8,314 7,001 7,701
---------- ---------- ---------- ---------- ---------- -----------
Income from operations...... (639) (912) 23 (236) 1,524 3,374
Other income (expense):
Interest (expense) net...... (622) (613) (750) (623) (601) (1,797)
Other income................ 255 251 145 232 109 109
Debt conversion expense..... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes........................ (1,006) (1,274) (582) (627) 1,032 1,686
Income taxes................ -- -- -- -- 420 675
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss)........... $ (1,006) $ (1,274) $ (582) $ (627) $ 612 $ 1,011
---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- -----------
Earnings (loss) per share
(2)........................ $ (.34) $ (.45) $ (.20) $ (.22) $ .36 .29
---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- -----------
Weighted average common
shares and equivalents
outstanding (2)............ 2,952,673 2,833,281 2,937,722 2,848,825 1,692,894 3,492,894
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------
PRO FORMA
1995 1996 1996(1)
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident services......... $ 1,195 $ 1,248 $ 1,248
Healthcare services....... 625 644 644
Management fees........... -- -- --
Development fees.......... 85 85
Rental income............. -- -- 637
--------- --------- ---------
Total revenues.......... 1,820 1,977 2,614
--------- --------- ---------
Expenses:
Residence operating
expenses................. 1,389 1,481 1,481
General and administrative
expenses................. 68 155 156
Depreciation and
amortization............. 133 70 240
Provision for (recovery
of) loss on advances to
affiliates............... (72) (72)
--------- --------- ---------
Total expenses.......... 1,590 1,634 1,805
--------- --------- ---------
Income from operations...... 230 343 809
Other income (expense):
Interest (expense) net...... (178) (135) (434)
Other income................ 13 21 21
Debt conversion expense..... -- (157) (157)
--------- --------- ---------
Income (loss) before income
taxes........................ 65 72 239
Income taxes................ 26 33 110
--------- --------- ---------
Net income (loss)........... $ 39 $ 39 $ 129
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per share
(2)........................ $ .02 $ .02 $ .03
--------- --------- ---------
--------- --------- ---------
Weighted average common
shares and equivalents
outstanding (2)............ 1,681,938 2,197,166 3,997,166
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, 1996
1996 ----------------------------
--------- PRO FORMA,
ACTUAL ACTUAL AS ADJUSTED (1)
--------- --------- ----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $ (100) $ (4,181) $ 6,893
Total assets............................... 6,088 6,386 35,882
Long-term debt, excluding current portion:
Convertible mortgages and notes.......... 2,616 1,315 14,005
Other debt............................... 4,557 285 95
Stockholders' (deficiency) equity.......... (3,328) (1,689) 15,306
</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 June 30, 1996. See Note L to Consolidated
Financial Statements.
(2) The weighted average number of shares of Common Stock and equivalents
outstanding at March 31, 1996 and June 30, 1996 give effect to the
cancellation by the Company in March 1995 of 1,200,000 shares of Common
Stock held by Vanguard. See "Certain Relationships and Related Transactions"
and Note I of Notes to Consolidated Financial Statements. Fully diluted
earnings per share are not presented as the effect would be anti-dilutive.
In addition, excluded for all periods presented, from the weighted average
number of common shares and common equivalent shares are 46,936 shares owned
by Vanguard which are held in escrow pursuant to an agreement to be entered
into in connection with the Company's proposed public offering. See Note A
to Consolidated Financial Statements.
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 for
itself or on behalf of others 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 $1.5 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
794 independent living apartments, 150 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 $3.4 million. The Company is
in the process of developing, acquiring or leasing for itself or on behalf of
others, eight facilities expected to contain approximately 780 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 three are subject to acquisition or lease agreements. The purchase
of nine other sites for the development of 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 30, 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 52-unit
assisted living facility. The Company believes that removing the financial
uncertainty and the assisted living conversion will improve Harvest Village's
occupancy level. The purchase price for Harvest Village is $17,400,000,
consisting of (i) $13,500,000 cash (which may include the assumption of a first
mortgage in the amount of $12,500,000) and (ii) the assignment to Vanguard of a
promissory note in the amount of $7,481,953 due to the Company from 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, based
upon an appraisal, have deemed to collectively have a stipulated value of
$3,900,000. 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 of
25
<PAGE>
$24,700,000 based upon a recent appraisal. The appraisal assumes the conversion
of the facility to a retirement facility comprised of 264 independent living
units, 52 assisted living rental units and 60 skilled nursing beds which is the
use for the facility planned by the Company. In addition, the appraisal
considered the improvement in public perception upon the refinancing of its
current debt and management of the facility by the Company. The independent
auditors report on Harvest Partners, the owner of Harvest Village, states that
conditions raise substantial doubt about Harvest Partners' ability to continue
as a going concern. See the Financial Statements of Harvest Partners, page F-27.
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 approximately 10 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 will generally be
contingent upon the completion of construction financing, therefore the
Company's quarterly recognition of development fee revenue can vary materially
from quarter to quarter. See "Risk Factors--Repayment Risk Associated With
Sponsored Development Projects; Possible Fluctuations in Quarterly Results."
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 THREE MONTHS ENDED
PERCENTAGE PERCENTAGE
MARCH 31, CHANGE JUNE 30, CHANGE
-------------------- INCREASE -------------------- INCREASE
1995 1996 (DECREASE) 1995 1996 (DECREASE)
--------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues, as a percentage of total revenues:
Resident services.............................. 60.5% 58.3% (2.2)% 65.7% 63.1% (2.6)%
Healthcare services............................ 30.8 30.0 (.8) 34.3 32.6 (1.7)
Development fees............................... 8.7 11.7 3.0 -- 4.3 4.3
--------- --------- ----- --------- --------- ---
Total revenues................................... 100.0% 100.0% -- 100.0% 100.0% --
--------- --------- ----- --------- --------- ---
--------- --------- ----- --------- --------- ---
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
PERCENTAGE PERCENTAGE
MARCH 31, CHANGE JUNE 30, CHANGE
-------------------- INCREASE -------------------- INCREASE
1995 1996 (DECREASE) 1995 1996 (DECREASE)
--------- --------- ------------- --------- --------- -------------
Expenses as a percentage of total revenues
<S> <C> <C> <C> <C> <C> <C>
Residence operating expenses..................... 69.3% 69.3% 76.3% 74.9% (1.4)%
General and administrative expenses.............. 6.2 4.9 (1.3)% 3.8 7.8 4.0
Depreciation and amortization.................... 7.0 4.4 (2.6) 7.3 3.5 (3.8)
Provision for loss on (recovery of) advances to
affiliates...................................... 20.4 3.5 (16.9) -- (3.6) (3.6)
--------- --------- ----- --------- --------- ---
Total expenses................................. 102.9 82.1 (20.8) 87.4 82.6 (4.8)
--------- --------- ----- --------- --------- ---
Income from operations......................... (2.9) 17.9 20.8 12.6 17.4 4.8
Other income (expense)
Interest (expense) net......................... (7.7) (7.1) .6 (9.7) (6.8) 2.9
Other income................................... 2.8 1.3 (1.5) .7 1.0 .3
Debt conversion expense........................ -- -- -- -- (7.9) (7.9)
--------- --------- ----- --------- --------- ---
Income (loss) before income taxes................ (7.8) 12.1 19.9 3.6 3.7 .1
Income taxes................................... -- (4.9) (4.9) (1.5) (1.7) (.2)
--------- --------- ----- --------- --------- ---
Net income (loss)................................ (7.8)% 7.2% 15% 2.1% 2.0% (.1 )%
--------- --------- ----- --------- --------- ---
--------- --------- ----- --------- --------- ---
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
REVENUES
Net revenues of the Company represent gross consolidated revenues of the
Company, less charitable and SSI discounts.
Net revenues increased by $157,000, or 9%, from $1,820,000 in the 1995
period to $1,977,000 in the 1996 period. Approximately $85,000 of the increase
represented development fees. Development fees can vary substantially from
quarter to quarter depending upon the number of projects in development, the
percentage of completion and, in certain instances, the project owner's
financial condition. Development fees are generally deferred in periods in which
the project owner's ability to remit such fees is uncertain. Resident and
healthcare services revenues increased by $72,000, or 4%, from $1,820,000 in the
1995 period to $1,892,000 in the 1996 period. Resident and healthcare services
revenues increased as a result of higher rates as well as a slight increase in
occupancy rates.
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 increased by $92,000, or 7%, from $1,389,000 in
the 1995 period to $1,481,000 in the 1996 period. During the 1996 period,
payroll costs increased by approximately $59,000 due to salary increases and
additional personnel. Further, in the 1996 period, $27,000 of additional
maintenance was performed at the Company's Michigan facilities as part of the
Company's refurbishment plan.
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 increased by $87,000, or 128%, from
$68,000 in the 1995 period to $155,000 in the 1996 period. The increase is
primarily attributable to increased administrative staff and salary increases.
27
<PAGE>
PROVISION FOR RECOVERY ON ADVANCES TO AFFILIATES
During the 1996 period, the Company recognized a recovery of $72,000 due to
repayment of advances from affiliates. During the 1995 period, there was no
provision for (recovery of) loss on advances to affiliates.
INTEREST EXPENSE, NET
Interest expense, net, decreased by $43,000 or 24%, from $178,000, in the
1995 period to $135,000 in the 1996 period. The decrease is primarily
attributable to the conversion of $1,305,000 of debt to equity.
DEBT CONVERSION EXPENSE
The Company offered its debtholders an inducement in the form of a reduced
conversion price on its then outstanding debt. As a result of such inducement an
aggregate of $1,305,000 of the Company's debt was converted into 347,996 shares
of the Company's Common Stock effective April 1, 1996. The fair value of the
additional shares issued, $167,877, as a result of such inducement has been
recorded as debt conversion expense during the 1996 period.
INCOME TAXES
Income taxes increased by $7,000, or 27%, from $26,000 in the 1995 period to
$33,000 in the 1996 period. The increase in the effective tax rate from 40.7% in
the 1995 period to 46.3% in the 1996 period is primarily due to the
non-deductibility of the debt conversion expense.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
REVENUES
Net revenues increased by $699,000, or 9%, in fiscal 1995, and by $447,000,
or 6%, in fiscal 1996. The growth in net revenues in fiscal 1995 and fiscal 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 fiscal 1995 and $143,000 in fiscal 1996. Resident and
healthcare revenues increased as a result of higher rates, while occupancy rates
remained relatively constant from fiscal 1994 through fiscal 1996.
RESIDENCE OPERATING EXPENSES
Residence operating expenses have increased for each fiscal year presented,
primarily due to normal inflationary cost increases. Said expenses increased by
$223,000, or 4%, in fiscal 1995, and by $318,000, or 6%, in fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by approximately $103,000, or
17%, in fiscal 1995 and $89,000 or 18% in fiscal 1996, primarily due to the
closing of the Company's Florida office in fiscal 1995.
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. See "Risk Factors--Repayment Risk Associated
With Sponsored Development Projects; Possible Fluctuations in Quarterly
Results."
28
<PAGE>
INTEREST EXPENSE, NET
Interest expense, net, also fluctuated during the reporting period. In
fiscal 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 fiscal 1996,
interest decreased by 4%, or $22,000.
INCOME TAXES
The income tax expense was zero and $420,000 for the fiscal 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 has financed the operating losses of certain affiliates with
advances when the Company believed that the affiliate at some future date would
be able to repay such advances. In connection with such advances, the Company
has generally obtained an option to buy a facility owned by the affiliate to
which advances have been made for a price equal to the facility's fair market
value. In the event the Company exercises its option, such advances may
constitute a portion of the purchase price.
Amounts due from affiliates consist of cash advances, unpaid management
fees, interest income and other revenue items. Most of the affiliates have been
operating at a loss and their ability to repay 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 June 30, 1996, the aggregate amount due from affiliates and the
unreserved amounts due from affiliates were $6,786,361 and $280,207,
respectively. In connection with the acquisition of Harvest Village, $6,094,000
due from Vanguard and its affiliates was cancelled. See "The Company--Proposed
Acquisition", "Certain Relationships and Related Transactions" and Notes C and L
to Consolidated Financial Statements.
29
<PAGE>
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 (including expenses of additional
personnel required as the Company's business grows) 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.
30
<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.
Upon completion of the Offerings, the Company will own and/or manage five senior
living facilities containing 1,071 apartments and nursing units (the "Initial
Properties"). Additionally, it is in the process of developing, acquiring or
leasing for itself or on behalf of others, eight facilities expected to contain
approximately 780 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 three are subject to
acquisition or lease agreements. The purchase of nine other sites for the
development of 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 eight properties being developed, acquired or leased, one is a CCRC, six are
assisted living facilities and one is an expansion at one of the Initial
Properties to add 64 independent living units. 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 units.
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 for itself or on behalf of
others; 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
31
<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 50% 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.
32
<PAGE>
The increased financial net worth of the elderly population is illustrated
by the following chart:
[GRAPHIC]
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
33
<PAGE>
creates opportunities for, assisted living facilities. In the effort to cut
costs, healthcare payors 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 CCRCs.
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 for itself or on behalf of others; 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 for itself or on behalf of others. Consequently, the second part of
the Company's business strategy is to increase the number of senior living
facilities it develops and manages for itself or on behalf of others, 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 if the unaffiliated entity is adequately financed, 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
34
<PAGE>
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 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. To date, neither the Company nor any of the
501(c)(3) organizations involved with Vanguard or the Company has received any
inquiry or comment from any regulatory authority with respect to its contractual
arrangements with 501(c)(3) organizations. See "Risk Factors -- Repayment Risk
Associated with Sponsored Development Projects; Possible Fluctuations in
Quarterly Results" and "-- Possibility of Regulatory Challenge to 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. To the extent such advances are not
secured by land, they will be reserved as uncollectible until the unaffiliated
entity can repay the advances. 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 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
35
<PAGE>
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 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
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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.
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
1,071 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 OCCUPANCY RATE(%)
NAME AND LOCATION BUILT RENOVATED LIVING LIVING NURSING JUNE 30, 1996
- ------------------------------ ----------- ------------- --------------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
PROPERTIES OWNED:
Hillside Terrace, Ann Arbor,
MI........................... 1969 1994 66 9 23 99
Olds Manor, Grand Rapids,
MI........................... 1920s 1964, 1970 97 55 44 97
The Whitcomb, St. Joseph,
MI........................... 1928 1973, 1989 102 34 -- 96
TO BE ACQUIRED:
Harvest Village, Atco,
NJ(1)........................ 1989 300 -- 60 58
MANAGED ONLY PROPERTY:
The Whittier, Detroit,
MI(2)........................ 1920s 1972, 1989 229 52 -- 56
--- --- ---
794 150 127
</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. The fair market value of the lease at the time of termination
will be determined by a panel of three real estate appraisers, one selected
by Harvest Partners, one selected by Gateway and the third selected by the
other two appraisers.
(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."
37
<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 97 apartment units,
55 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 September 30, 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 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 of $24,700,000 based upon
a recent appraisal. The appraisal assumes the conversion of the facility to a
retirement facility comprised of 264 independent living units, 52 assisted
living rental units and 60 skilled nursing beds which is the use for the
facility planned by the Company. In addition, the appraisal considered the
improvement in public perception upon the refinancing of its current debt and
management of the facility by the Company. 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 of $69,892 for a CCRC unit 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
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<PAGE>
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 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.
Harvest Partners, the owner of Harvest Village, is the defendant in an
action to recover uncollected attorney's fees, interest thereon and costs. See
"--Legal Proceedings." In the event that the plaintiff in such action is
successful, Harvest Partners would be liable for such fees, interest thereon and
costs, not the Company.
COMPANY PROJECTS
To provide the appropriate level of personal care efficiently and
economically, the Company intends to develop for itself or on behalf of others,
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,
39
<PAGE>
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.
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 units.
The following table sets forth certain information regarding sites and
facilities that are either owned, under construction or are subject to
development, management or purchase 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) -- 122 --
Orchard Terrace,
Ann Arbor, MI(c)(e) 64 -- --
Camelot Village,
Stroudsburg, PA(b)(d) -- 80 --
Camelot Village,
Columbus, IN(f) -- 80 --
Home Place, Indianapolis, IN(g) -- 60 --
Sanders Glen, Westfield, IN(g) -- 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. Initial
occupancy is scheduled for October 15, 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. The commencement of construction is contingent upon financing
which the Company expects to arrange within the next nine months. Completion
is anticipated in Fall 1998. See "Use of Proceeds."
(f) The Company has entered into a letter of intent to develop a senior living
facility on this site.
(g) The Company intends to lease this existing senior living facility following
its proposed acquisition by an unaffiliated third party.
40
<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.
41
<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 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.
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
42
<PAGE>
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. Under current New
York law, a public for-profit corporation such as the Company may own the land
and buildings in which a nursing facility or assisted living facility (denoted
under New York law as an "adult home") is located but is not eligible to be the
licensed operator of the facility. It is anticipated, therefore, that a
not-for-profit entity or other legally eligible person will be the licensed
operator of the New York facilities and that the Company will enter into lease,
management and/or other service contract arrangements with the licensee.
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
43
<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 or 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 conduct 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 Relationships and Related
Transactions" and Note G to Notes to Consolidated Financial Statements.
EMPLOYEES
As of June 30, 1996, the Company had approximately 250 employees of whom
approximately 147 are full-time employees. 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.
44
<PAGE>
On January 5, 1996, the law firm of Hannoch Weisman commenced an action in
the Superior Court of New Jersey, Law Division, Essex County 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 June 30, 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
$2,250,700. Such indebtedness is secured by a first mortgage loan on Hillside
Terrace. As of June 30, 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 $2,100,500. 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
June 30, 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 $4,087,500. 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 Relationships and
Related 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. See "--Old Kent
Bank."
OLD KENT BANK
As of June 30, 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 $243,947. 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 August 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.
45
<PAGE>
OLDS MANOR MORTGAGE TRUST
As of June 30, 1996, Olds Manor, Inc. was indebted to Olds Manor Mortgage
Trust in the aggregate principal amount of $360,000. 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 (11 1/4% per
annum as of August 31, 1996), 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 June 30, 1996, Whitcomb Tower Corp. was indebted to Whitcomb Mortgage
Trust in the aggregate principal amount of $850,000. 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 (11 1/4% per annum as of
August 31, 1996), 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 outstanding principal amount
of the 7% Notes is currently convertible into 21,274 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, as of June 30, 1996, Vanguard had 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 acquisition of Harvest Village, 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.
46
<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.
47
<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 1992, 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 operates 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 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. 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 1987) 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
48
<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 Representatives 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 40% 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 60% 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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND 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>
49
<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" (a breach of the terms and conditions of
the agreement, dishonesty, habitual drunkenness or committing an act of moral
turpitude) 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 received 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 within a 15-mile radius of
any facility owned by the Company, 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" (a breach
of the terms and conditions of the agreement,dishonesty, habitual drunkenness or
committing an act of moral turpitude) 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 126,480 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 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
50
<PAGE>
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 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 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.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED 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, JUNE 30,
1994 1995 1996 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Due from Vanguard................................ $ 1,708,684 $ 2,829,998 $ 2,452,137 $ 2,379,165
Due from Whittier Tower Corp..................... 1,078,634 1,576,150 2,406,266 2,441,068
Due from Vanguard Affiliated Limited Partnerships
(Vanguard is General Partner)................... 951,201 1,107,467 1,235,661 1,242,523
Management fees and cash advances due from
not-for-profit entities......................... 913,873 1,422,746 1,088,208 723,605
-------------- -------------- -------------- -------------
$ 4,652,392 $ 6,936,361 $ 7,182,272 $ 6,786,361
</TABLE>
The aggregate of $6,786,361 due from affiliates at June 30, 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 $723,605 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 American Stock Transfer and Trust
Company 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, $7,481,953 and $7,481,953 at March 31, 1995, March 31, 1996 and June
30, 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
52
<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 (which may include the assumption of a first
mortgage of $12,500,000), (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, based upon an appraisal, 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.
As of June 30, 1996 the guaranty was 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. See "--Guarantees."
GUARANTEES
Vanguard has guaranteed to the Company the payment of the management fees
and other sums aggregating $2,406,266 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.
The Company, Mr. Carl G. Paffendorf, Chief Executive Officer of the Company,
and Vanguard have guaranteed certain bank debt as follows:
<TABLE>
<CAPTION>
AMOUNT AS OF
AUGUST 31,
GUARANTOR MAKER(S) LENDER/OBLIGEE 1996
- --------------------------------- --------------------------------- --------------------------------- --------------
<S> <C> <C> <C>
The Company CBF Building Company Apple Savings Bank $ 112,000
The Company, Vanguard, Phoenix
Lifecare Corp. and Carl G.
Paffendorf Camelot Retirement Homes, Inc. State Bank of Long Island 450,000
Vanguard and Carl G. Paffendorf The Company State Bank of Long Island 450,000
Vanguard Hillside Terrace, Inc. Great-West Life 2,250,659
Vanguard Whitcomb Tower Corp. Great-West Life 2,100,449
Vanguard The Company Cedar Rapids CGP, L.C. $ 451,275
</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 has guaranteed $1.00 of the Harvest Village construction loan.
This $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 $4,087,500 at June 30, 1996. A default under The Whittier mortgage is a
default under the Hillside Terrace and Whitcomb mortgages.
Under an agreement, dated September 15, 1995 among the Company, Vanguard,
Heritage Corporation of Iowa ("Heritage"), an unaffiliated corporation and owner
of certain real property ("Lot 3") adjacent to the Cottage Grove Place
retirement facility in Cedar Rapids, Iowa, and Cottage Grove Place ("CGP"), an
unaffiliated 501(c)(3) corporation, Heritage granted CGP a five-year option to
purchase Lot 3 for approximately $450,000 plus certain expenses. The Company
agreed to advance
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<PAGE>
sums during the term of the option to pay real estate taxes and other expenses
relating to Lot 3 and agreed that it would exercise such option if CGP did not.
Vanguard has guaranteed the foregoing agreement of the Company.
Subsequently, under an agreement dated November 20, 1995, as amended, CGP
assigned its option rights to Cedar Rapids CGP, L.C. ("L.C."), a limited
liability company affiliated with CGP but unaffiliated with the Company, and
L.C. acquired Lot 3 from Heritage; L.C. granted CGP a five-year option to
purchase Lot 3 for approximately $450,000 plus certain interest and taxes. The
option expires September 19, 2000. The Company continued its agreement which
requires it to pay real estate taxes and other expenses and exercise its option
if CGP does not exercise its option. Vanguard continues to guarantee this
agreement of the Company.
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. As of the date of this Prospectus no director,
officer, employee or agent of the Company, Vanguard or any of their respective
affiliates is a director of Phoenix or will, in the aggregate, constitute a
majority of the officers 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 June 30, 1996, the amounts due from Phoenix,
$369,950, 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 Care Corp., a 501(c)(3) organization of
which Phoenix is the sole member, in return for agreements to develop and manage
an assisted living facility on such property, plus an option to acquire the
facility. The option is exercisable from January 1, 2000 until 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 $531,077 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 contributed 1,200,000 shares to the Company for
cancellation.
The Company entered into agreements with Camelot Retirement Homes, Inc., a
wholly-owned subsidiary of Vanguard for the development and management of
Camelot Village at Huntington, a proposed 122-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 Camelot Retirement Homes, Inc., were transferred to
Phoenix. 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," the Company, Vanguard, Phoenix Lifecare Corp. and Carl G.
Paffendorf have guaranteed a $450,000 bank loan to Camelot Retirement Homes,
Inc., the proceeds of which were used as part of the purchase price for the
Huntington, New York property.
54
<PAGE>
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 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."
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 was 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 American Stock
Transfer and Trust Company as escrow agent have entered into an escrow agreement
pursuant to which 540,684 shares of Common Stock (assuming a public offering
price of $8.50 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 $4,596,000. Subject to certain conditions and formulas
contained in the escrow agreement, shares will be released to Vanguard as the
obligations are repaid. In the event the obligations are not repaid within three
years of the date of the escrow agreement shares with a value aggregating such
unpaid indebtedness will be cancelled.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus by (i)
each person who is known by the Company to be the beneficial owner of more than
5% of the Company's Common Stock, (ii) each director and each executive officer
named in the Summary Compensation Table and (iii) all directors and executive
officers as a group. Except as otherwise noted, each person maintains a business
address at c/o United Vanguard Homes, Inc., 4 Cedar Swamp Road, Glen Cove, New
York 11542, and has sole voting and investment power over the shares shown as
beneficially owned.
<TABLE>
<CAPTION>
SHARES TO
BE SHARES TO BE
SOLD IN BENEFICIALLY OWNED
EVENT OVER-
ALLOTMENT IN EVENT OVER-
SHARES SHARES TO BE OPTION IS ALLOTMENT OPTION IS
BENEFICIALLY OWNED BENEFICIALLY OWNED FULLY
BEFORE OFFERING SHARES OFFERED AFTER OFFERING EXERCISED FULLY EXERCISED
-------------------- ------------------- -------------------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vanguard Ventures, Inc....... 1,635,969(1) 73.0% -- 1,635,969(1) 40.5% 270,000 1,365,969(1) 33.8%
Carl G. Paffendorf........... 1,700,010(2) 75.6 -- 1,700,010(2) 42.0 270,000 1,430,010(2) 35.3
Larry L. Laird............... 22,680(3) 1.0 -- 22,680(3) * -- 22,680(3) *
Benjamin Frank............... 13,402(4) * -- 13,402(4) * -- 13,402(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)................ 1,794,275(6) 78.3% -- 1,794,275(6) 43.9% 270,000 1,524,275(6) 37.3%
</TABLE>
- ------------
* less than 1%.
(1) As of June 30, 1996, Vanguard had 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 Relationships and
Related 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.
(6) Includes 49,726 shares of Common Stock issuable upon exercise of options and
convertible securities exercisable within 60 days after the date of this
Prospectus.
56
<PAGE>
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 American Stock Transfer and Trust Company, 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 November 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 computed 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 comprising Harvest
Village and a security interest in certain 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 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.
57
<PAGE>
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.
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.
58
<PAGE>
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 in 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
(provided that the principal amount of such Notes at maturity must be $1,000 or
an integral multiple thereof) 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 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to and including the
Repurchase Date.
"Change of Control" is defined in the Indenture to mean, except as described
below, the occurrence of either of the following events, whether or not approved
by the Board of Directors of the Company: (i) any person other than (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 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.
59
<PAGE>
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.
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, such right shall
terminate at the close of business on the fifth calendar day prior to the date
fixed for redemption of such Note or portion of a Note unless the Company shall
default in payment due upon redemption thereof), 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
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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 prior to any Record Date and on or prior to the next succeeding
Interest Payment Date, interest shall continue to accrue on such Note or portion
thereof through the Conversion Date, and such interest shall be payable on the
next succeeding Interest Payment 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, the conversion price in effect at the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such conversion price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the date fixed
for such determination:
(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) of Common Stock on the date fixed for the determination of
stockholders entitled to receive such rights or warrants, the conversion price
in effect at the opening of business on the day following the date fixed for
such determination shall be reduced by multiplying such conversion price by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate of the
subscription price of the total number of shares of Common Stock so offered for
subscription or purchase would
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purchase at such current market price and the denominator shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. In the event that all of the shares of Common Stock subject to
such rights or warrants have not been issued when such rights or warrants
expire, then the conversion price shall promptly be readjusted to the conversion
price which would then be in effect had the adjustment upon the issuance of such
rights or warrants been made on the basis of the actual number of shares of
Common Stock issued upon the exercise of such rights or warrants, 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), provided, however, that the aggregate number of
shares of Common Stock issuable under 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;
(c)in case the outstanding shares of Common Stock shall be subdivided or
reclassified into a greater number of shares, the conversion price in
effect at the opening of business on the day following the day upon which such
subdivision or reclassification becomes effective shall be proportionately
reduced, and, conversely, in case outstanding shares of Common Stock shall be
combined into a smaller number of shares, the conversion price in effect at the
opening of business on the day following the day upon which such combination
becomes effective shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately after the opening
of business on the day following the day upon which such subdivision,
reclassification or combination becomes effective;
(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.
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(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
(a) the Company shall compute the adjusted conversion price and shall prepare 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, a notice stating that the
conversion price has been adjusted and setting forth the adjusted conversion
price.
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
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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, 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, premium if any, 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 working order and condition 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
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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;
and (viii) 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
(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
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(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 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, advances
or guarantees to Development Entities; PROVIDED that (i) the aggregate amount of
all such loans, advances or guarantees 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, advance or guarantee) not less than the aggregate
amount of such loans, advances or guarantees outstanding, except that such
loans, advances or guarantees in an aggregate amount of not more than 25% of any
such loan, advance or guarantees, solely for working capital purposes, may be
unsecured; (ii) the aggregate amount of all such loans, advances or guarantees
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, advance or guarantee, no Default or Event of Default under the Indenture
shall exist; and (iv) immediately after giving effect to such loan, advance or
guarantee, 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 225%
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.
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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 shall have happened and be continuing; (iii)
immediately after giving effect to such transaction, the Company shall be
permitted to incur at least $1.00 of additional 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
Company (such Company or such other Person being hereinafter referred to as a
"Surviving Person") 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.
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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 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 Person 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;
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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
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.
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"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.
"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.
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"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 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
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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 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
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(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 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
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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.
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>
November 1, 1998 - October 31, 1999................................................. 107%
November 1, 1999 - October 31, 2000................................................. 106%
November 1, 2000 - October 31, 2001................................................. 105%
November 1, 2001 - October 31, 2002................................................. 104%
November 1, 2002 - October 31, 2003................................................. 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) (ii) that the Company has
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.
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
- ------------------------
(1) $3,743,489.58 if the Placement Agent has exercised its over-allotment
option.
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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.
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.
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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 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
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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 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.
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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 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.
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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.
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
American Stock Transfer and Trust Company 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.
COMMON STOCK
Upon the closing of the Offerings there will be 4,040,950 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
Representatives and Continental Stock Transfer & Trust Company (the "Warrant
Agent").
EXERCISE PRICE AND TERMS. One Warrant entitles the registered holder
thereof to purchase one-half share of Common Stock at an exercise price of $
per share [120% of the initial public offering price per share] at any time
during the eighteen (18) month period commencing on the date of this Prospectus
and $ per share [138% of the initial public offering price per share] at any
time during the period commencing on the date of this Prospectus until
, 1998 [eighteen (18) months from the date of this Prospectus] and
$ per share [138% of the initial public offering price per share] at any time
during the period commencing , 1998 [eighteen (18) months from the
date of this Prospectus] until , 1999 [three (3) years from the date
of this Prospectus], subject to adjustment in accordance with the anti-dilution
and other provisions referred to below. The
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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 Representatives. 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 Representatives. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Representatives. Although it has no obligation to do so, the Representatives
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
Representatives 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
Representatives' participation in such market.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to
84
<PAGE>
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 Shares and Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Shares and Warrants 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.
85
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offerings, the Company will have 4,040,950
shares of Common Stock outstanding, 1,225,490 shares issuable upon conversion of
the Notes (at an assumed initial conversion price of $10.20 per share based upon
an initial public offering price of $8.50 per share of Common Stock) and 190,876
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 2,431,826 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 Securities and Exchange Commission (the "Commissions") 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 as proposed, 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 Placement Agent 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 Placement Agent. 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.
86
<PAGE>
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 122,549
shares of Common Stock (based upon an assumed initial public offering price of
$8.50 per Share. The Placement Agent'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 Placement Agent.
In connection with the Concurrent Common Stock and Common Stock Purchase
Warrants Offering, the Company as agreed to sell to the Representatives,
warrants to purchase up to 180,000 shares of Common Stock and/or 180,000
Warrants (the "Representatives' Warrants") at a price of $.0001 per
Representatives' Warrant. The Representatives' 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 [120% of the initial public offering
price per Share] and $ per Warrant [120% of the initial public offering price
per Warrant]. The Representatives' 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 Representatives. The Representatives'
Warrants provide for adjustment in the number of shares of Common Stock issuable
upon the exercise thereof and in the exercise price of the Representatives'
Warrants as a result of certain events, including subdivisions and combinations
of the Common Stock. The Representatives' Warrants grant to the holders thereof
certain rights of registration of the securities underlying the Representatives'
Warrants.
The Company has agreed to pay to the Placement Agent a non-accountable
expense allowance equal to one and one-half percent (1 1/2%) 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 LLP, New York, New York has acted as
counsel to the Underwriters.
EXPERTS
The financial statements of the Company as of March 31, 1996 and for the
fiscal year then ended have been audited by Grant Thornton LLP, independent
certified public accountants, as stated in their report thereon appearing
elsewhere herein, and are included in reliance upon the authority of such firm
as experts in accounting and auditing.
The financial statements of the Company as of March 31, 1995 and for the
fiscal year then ended have been included herein in reliance upon the report of
Farber, Blicht & Eyerman, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
87
<PAGE>
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 has a directors and officers insurance policy in the amount of
$1,000,000 insuring directors and officers against loss arising from certain
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 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
88
<PAGE>
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.
89
<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-27
Statements of Assets, Liabilities and Partners' Deficit.................................................. F-28
Statements of Revenues and Expenses and Partners' Deficit................................................ F-29
Statements of Cash Flows................................................................................. F-30
Notes to Financial Statements............................................................................ F-31
</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, except for Note A
as to which the date is September 17, 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 SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash........................................................... $ 210,245 $ 843,843
Accounts receivable, less allowance for doubtful accounts of
$40,000....................................................... 413,539 451,904
Development fees and advances.................................. 270,864 159,932
Due from affiliates, net....................................... 658,717 280,207
Prepaid expenses and other..................................... 274,654 239,992
----------- -----------
Total current assets......................................... 1,828,019 1,975,878
PROPERTY AND EQUIPMENT, NET...................................... 2,361,698 2,374,360
OTHER ASSETS
Development fees............................................... 575,017 660,750
Restricted assets.............................................. 176,352 176,352
Deferred income taxes.......................................... 981,000 976,500
Other assets................................................... 165,453 222,605
----------- -----------
1,897,822 2,036,207
----------- -----------
$6,087,539 $ 6,386,445
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt.............................. $ 626,043 $ 4,862,091
Accounts payable............................................... 242,470 146,675
Accrued expenses............................................... 617,043 687,162
Income taxes payable........................................... 442,371 461,139
----------- -----------
Total current liabilities.................................... 1,927,927 6,157,067
RESIDENT SECURITY DEPOSITS....................................... 314,705 318,305
LONG-TERM DEBT, less current portion............................. 7,172,982 1,600,290
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, 1,827,833 and 2,240,950 shares,
respectively.................................................. 18,278 22,410
Additional paid-in capital..................................... 5,619,905 7,216,026
Accumulated deficit............................................ (8,966,258) (8,927,653)
----------- -----------
(3,328,075) (1,689,217)
----------- -----------
$6,087,539 $ 6,386,445
----------- -----------
----------- -----------
</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, THREE MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
1995 1996 1995 1996
-------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues
Resident services.................................... $ 4,887,231 $ 4,966,058 $ 1,195,053 $ 1,247,844
Health care services................................. 2,491,261 2,555,138 624,988 644,005
Development fees..................................... 700,000 1,003,955 -- 85,000
-------------- ------------- ------------- -------------
8,078,492 8,525,151 1,820,041 1,976,849
-------------- ------------- ------------- -------------
Operating expenses
Residence operating expenses......................... 5,594,826 5,912,624 1,388,801 1,481,302
General and administrative........................... 503,164 414,703 68,334 155,020
Depreciation and amortization........................ 565,067 378,215 133,156 69,601
Provision for loss on (recovery of) advances to
affiliates.......................................... 1,650,772 296,093 -- (71,856)
-------------- ------------- ------------- -------------
8,313,829 7,001,635 1,590,291 1,634,067
-------------- ------------- ------------- -------------
Income (loss) from operations...................... (235,337) 1,523,516 229,750 342,782
Other income (expense)
Interest expense, net................................ (623,224) (600,871) (177,517) (135,317)
Other income......................................... 231,910 109,022 13,059 20,856
Debt conversion expense.............................. -- -- -- (156,466)
-------------- ------------- ------------- -------------
Income (loss) before income taxes.................. (626,651) 1,031,667 65,292 71,855
Income taxes........................................... -- 420,000 26,600 33,250
-------------- ------------- ------------- -------------
NET INCOME (LOSS).................................. $ (626,651) $ 611,667 $ 38,692 $ 38,605
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Earnings (loss) per share.............................. $(.22) $.36 $.02 $.02
Common shares and equivalents outstanding.............. 2,848,825 1,692,894 1,681,938 2,197,166
</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 AND THE THREE MONTHS
ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ---------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1994..................... 2,898,833 $ 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.................... 1,698,833 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.................... 1,827,833 18,278 5,619,905 (8,966,258) (3,328,075)
Shares issued upon conversion of debt...... 347,996 3,480 1,386,918 1,390,398
Exercise of Warrants....................... 62,121 622 206,452 207,074
Shares issued as compensation.............. 3,000 30 2,751 2,781
Net income................................. 38,605 38,605
------------ ---------- ------------- --------------- --------------
Balance, June 30, 1996 (unaudited)......... 2,240,950 $ 22,410 $ 7,216,026 $ (8,927,653) $ (1,689,217)
------------ ---------- ------------- --------------- --------------
------------ ---------- ------------- --------------- --------------
</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>
THREE MONTHS ENDED JUNE
YEAR ENDED MARCH 31, 30,
-------------------------- --------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss).................................... $ (626,651) $ 611,667 $ 38,692 $ 38,605
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization...................... 565,067 378,215 137,298 69,601
Common stock issued for services................... 49,950 2,781
Deferred income taxes.............................. (400,000) (581,000) (36,751) 4,500
Debt conversion expense............................ 156,466
Changes in operating assets and liabilities
Accounts receivable, advances and other
receivables..................................... 48,168 977,180 9,261 340,145
Prepaid expenses and other....................... (104,471) (84,746) (145,658) 34,662
Development fees................................. (1,343,614) (575,017) 25,199
Other assets..................................... (143,804) (34,232) --
Accounts payable................................. (120,445) (32,238) 60,156 (95,795)
Accrued expenses................................. 15,355 (267,102) 78,752 70,119
Income taxes payable............................. (26,700) 310,621 80,851 18,768
Resident security deposits....................... (8,513) 12,731 11,425 3,600
Deferred revenue................................. 135,943 (177,221)
------------ ------------ ------------ ------------
Net cash (used in) provided by operating
activities........................................ (2,009,665) 588,808 234,026 668,651
------------ ------------ ------------ ------------
Cash flows used in investing activities
Purchases of property and equipment.................. (169,565) (79,121) (12,900) (74,320)
------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from borrowings on mortgages and notes
payable............................................. 1,441,000 249,880 47,591
Principal repayments of mortgages and notes
payable............................................. (124,620) (1,543,131) (34,738) (79,235)
Decrease (increase) in restricted cash financing..... 464,257 (26,752)
Increase in additional paid-in capital............... 311,000 771,000
Proceeds from exercise of warrants................... 207,074
Increase in deferred offering costs.................. (136,163)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities........................................ 2,091,637 (549,003) (34,738) 39,267
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH.................... (87,593) (39,316) 186,388 633,598
Cash at beginning of period............................ 337,154 249,561 249,561 210,245
------------ ------------ ------------ ------------
Cash at end of period.................................. $ 249,561 $ 210,245 $ 435,949 $ 843,843
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest........................................... $ 751,000 $ 619,000 $ 180,000 $ 119,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income taxes....................................... $ 41,000 $ 57,000 $ $ 1,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Non-cash financing and investing activity: Conversion
of debt to common stock............................... $ 1,305,000
------------
------------
</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 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
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
F-8
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
Excluded, for all periods presented, from the weighted average number of
common shares and common equivalent shares are 46,936 shares owned by VVI which
are held in escrow purusant to an agreement to be entered into in connection
with the Company's proposed public offering. The shares held in escrow, 540,684,
will be released from escrow on a pro rata basis upon the collection by the
Company of certain amounts due from affiliates and the payment by certain
affiliates of obligations guaranteed by or collateralized by assets of the
Company, as defined in the agreement. As the conditions for the release of the
shares held in escrow are dependent upon the performance of the affiliates, no
compensation expense is expected to be recognized by the Company upon release.
To the extent the number of shares excluded from the calculation of earnings per
share differs upon actual release of such shares earnings per share will be
retroactively restated.
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.
F-9
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," is required to be implemented in fiscal 1997. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by the entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS No. 121 is not expected to have a material
impact on the Company's financial position or results of its operations.
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.
12. INTERIM FINANCIAL INFORMATION
The financial information presented as of June 30, 1996, for the three
months ended June 30, 1996 and 1995 and events subsequent to June 30, 1996
disclosed in the notes to the financial statements are unaudited. In the opinion
of management, this unaudited financial information contains all adjustments
(which consist of normal recurring accrual adjustments) necessary for a fair
presentation for the interim periods presented. The results for the interim
periods are not necessarily indicative of results expected for the full year.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Land............................................... $ 632,408 $ 632,408
Buildings and improvements......................... 4,405,417 4,424,286
Equipment.......................................... 850,969 906,421
---------- ----------
5,888,794 5,963,115
Less accumulated depreciation and amortization..... 3,527,096 3,588,755
---------- ----------
Property and equipment, net........................ $2,361,698 $2,374,360
---------- ----------
---------- ----------
</TABLE>
F-10
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
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. Amounts due from affiliates consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
Due from VVI...................................... $2,452,137 $2,379,165
Due from VVI affiliated companies................. 2,406,266 2,441,068
Due from VVI affiliated limited partnerships (VVI
is general partner).............................. 1,235,661 1,242,523
Management fees and cash advances due from
affiliated not-for-profit companies.............. 1,088,208 723,605
----------- ----------
7,182,272 6,786,361
Less reserve for losses........................... 6,523,555 6,506,154
----------- ----------
Due from affiliates, net.......................... $ 658,717 $ 280,207
----------- ----------
----------- ----------
</TABLE>
At March 31, 1996 and June 30, 1996, the unreserved amounts due from
affiliates represent development fees and advances of $143,200, and $515,517 and
$143,200 and $137,007, respectively, 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 and $137,007 as of
March and June 1996, respectively, net of repayments during the year ended March
31, 1996 of $359,000, primarily relate to the purchase of land. 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.
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 and
June 30, 1996, the amounts due from Phoenix, $355,942 and $369,950 resepctively,
have been fully reserved and no management fees have been recognized during
fiscal 1995 and 1996 and the three months ended June 30, 1996.
F-11
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE C -- RELATED PARTY TRANSACTIONS (CONTINUED)
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. During the three
month period ended June 30, 1996, no additional advances were made to Camelot.
At March 31, 1996 and June 30, 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 and June 30, 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. The Company acquired the note receiveable from
Gateway through a series of assignments from VVI and affiliates.
b. OTHER RECEIVABLES
Other receivables consist of prior years' management fees and cash advances
to Gateway aggregating $1,066,197 at March 31, 1996 and June 30, 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 the years ended 1996 and 1995,
the Company recognized $1,003,955 (net of financing discount of $144,500) and
$700,000, respectively, of such development fee. During the three-month period
ended June 30, 1996, the Company recognized an additional $85,000 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-12
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE D -- DEVELOPMENT FEES AND ADVANCES (CONTINUED)
The components of fees and advances receivable from Cottage Grove Place are
as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
Advances.............................................. $ 39,861 $ 5,930
Development fees, net................................. 806,020 814,752
--------- -----------
845,881 820,682
Less long-term portion, net........................... 575,017 660,750
--------- -----------
$ 270,864 $ 159,932
--------- -----------
--------- -----------
</TABLE>
NOTE E -- MORTGAGES AND NOTES PAYABLE
1. MORTGAGES PAYABLE
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
---------- ----------
(UNAUDITED)
<S> <C> <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 $4,351,108
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 $55,214, respectively.
Convertible into 264,074 and 169,602 shares of UVH
common stock, respectively, subject to adjustment,
as defined........................................ 1,820,643 1,154,786
Mortgage with interest at prime plus 1% (9.25% at
March 31, 1996) payable in monthly installments of
$4,700; including interest balance due August
2001.............................................. 252,433 243,947
---------- ----------
$6,424,938 $5,749,841
---------- ----------
</TABLE>
F-13
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE E -- MORTGAGES AND NOTES PAYABLE (CONTINUED)
2. NOTES PAYABLE
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
---------- ----------
(UNAUDITED)
<S> <C> <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 $ 356,000
Convertible 7% promissory notes, interest payable
quarterly, compounded annually, maturity no later
than July 15, 2001; convertible into 105,999 and
21,274 shares, respectively of the Company's
common stock at $7.50 per share................... 795,000 160,000
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.............................................. 199,754 179,457
Promissory notes 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 17,083
---------- ----------
1,374,087 712,540
---------- ----------
7,799,025 6,462,381
Less current portion............................... 626,043 4,862,091
---------- ----------
$7,172,982 $1,600,290
---------- ----------
---------- ----------
</TABLE>
The aggregate maturities of mortgages and notes payable are as follows:
<TABLE>
<CAPTION>
Fiscal years 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>
F-14
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE F -- INCOME TAXES
The consolidated provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 31, JUNE 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Current
Federal............................ $ 311,000 $ 771,000 $ 48,750 $ 24,500
State and local.................... 89,000 230,000 14,601 4,250
----------- ------------- ----------- -------------
400,000 1,001,000 63,351 28,750
----------- ------------- ----------- -------------
Deferred
Federal............................ (311,000) (449,000) (28,400) 3,400
State and local.................... (89,000) (132,000) (8,351) 1,100
----------- ------------- ----------- -------------
(400,000) (581,000) (36,751) 4,500
----------- ------------- ----------- -------------
$ -- $ 420,000 $ 26,600 $ 33,250
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
</TABLE>
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. As a
result of the Company's issuance of additional common shares pursuant to the
conversion of debt (Note I) and the proposed public offering, the Company may be
unable to file its consolidated tax return with its parent, 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>
THREE MONTHS ENDED
YEAR ENDED
MARCH 31, JUNE 30,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory Federal tax rate.......................... (34.0)% 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax
benefit............................................ (5.9) 6.2 6.3 7.5
Debt conversion costs............................... 3.8
Other............................................... .5 .4 1.0
Losses for which no future tax benefit has been
recorded........................................... 39.9
--------- --------- --------- ---------
Effective tax rate.................................. 0.0% 40.7% 40.7% 46.3%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-15
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE F -- INCOME TAXES (CONTINUED)
Temporary differences which give rise to deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
MARCH 31, ENDED
1996 JUNE 30, 1996
----------- ---------------
(UNAUDITED)
<S> <C> <C>
Net operating loss carryover.................. $ 838,000 $ 838,000
Due from affiliate............................ 5,274,000 5,267,000
Fixed assets.................................. 902,000 904,500
Other......................................... 57,000 57,000
----------- ---------------
7,071,000 7,066,500
Valuation allowance........................... 6,090,000 6,090,000
----------- ---------------
Net deferred tax asset........................ $ 981,000 $ 976,500
----------- ---------------
----------- ---------------
</TABLE>
The Company has net operating loss carryforwards for Federal income tax
purposes as of March 31, 1996 and June 30, 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.
NOTE G -- COMMITMENTS AND CONTINGENCIES
1. OPERATING LEASES
Aggregate rental expense under operating leases was approximately $29,100
and $35,000 for March 31, 1995 and 1996, respectively. Rent expense for the
three months ended June 30, 1995 and 1996 was approximately $8,800 and $8,500,
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.
F-16
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 ARE UNAUDITED)
NOTE G -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 and $280,000 at March 31, 1996 and June 30, 1996,
respectively) in the amount of $1,400,000 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 and $1,689,000 at March 31, 1996 and June 30, 1996, respectively)
collateralizing VVI's $6,350,000 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 and $115,997 at March 31, 1996 and June
30, 1996, respectively.
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 and June
30, 1996 was approximately $192,000 and $167,000, respectively.
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 and June 30, 1996 was
$192,244 and $208,195, respectively.
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-17
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND
1995 ARE UNAUDITED)
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 fair valued at $5.55
per share. In June 1996, the President received a $25,000 cash bonus and 3,000
shares of the Company's common stock fair valued at $.97 per share. An
additional bonus of $25,000 and 3,000 shares of the Company's common stock is
payable on 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:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
Interest.............................................. $ 95,551 $ 96,432
Real estate taxes..................................... 1,814 --
Payroll and related taxes............................. 220,234 251,865
Insurance............................................. 192,244 208,195
Professional fees..................................... 107,200 130,670
--------- -----------
$ 617,043 $ 687,162
--------- -----------
--------- -----------
</TABLE>
F-18
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND
1995 ARE UNAUDITED)
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, 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. As the amounts
due from Gateway had been fully reserved for by the Company (Note C), the net
contribution of shares by the Company has been accounted for in a manner similar
to a recapitalization.
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, 62,121 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, 347,996 common shares were issued in connection with the offer. The
estimated fair value of the incremental shares issued, 167,887, as a result of
the offer has been recorded as debt conversion expense in the accompanying
consoldiated statement of operations for the three months ended June 30, 1996.
Had the conversion of this debt and exercise of warrants taken place at the
beginning of 1996, earnings per share would have been $.33 as compared to
historical earnings per share of $.36.
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. 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
F-19
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND
1995 ARE UNAUDITED)
NOTE I -- STOCKHOLDERS' EQUITY (CONTINUED)
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. A summary of the activity within the 1991 Plan and the
Directors' 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
Granted............................................ $1.33 to $6.10 53,880 (53,880)
Terminated......................................... $1.33 (2,700) 2,700
--------- ---------
Balance, March 31, 1996............................ $1.33 to $6.10 127,380 172,620
Granted............................................ $5.55 9,000 (9,000)
Terminated......................................... $5.55 (900) 900
--------- ---------
Balance June 30, 1996 (unaudited).................. $1.33 to $6.10 135,480 164,520
--------- ---------
--------- ---------
</TABLE>
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. Losses and
recoveries on advances have been classified as a separate business segment.
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, classified
as described above:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------ ----------------------------
1995 1996 1995 1996
-------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Resident centers................................. $ 7,378,492 $ 7,521,196 $ 1,820,041 $ 1,891,849
Management and development companies............. 700,000 1,003,955 85,000
-------------- -------------- ------------- -------------
$ 8,078,492 $ 8,525,151 $ 1,820,041 $ 1,976,849
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Operating profit (loss)
Resident centers................................. $ 1,275,106 $ 1,268,361 $ 301,240 $ 350,030
Management and development companies............. 140,329 551,248 (71,490) (79,104)
(Loss) recovery on advances to affiliates........ (1,650,772) (296,093) 71,856
-------------- -------------- ------------- -------------
Income (loss) from operations.................. $ (235,337) $ 1,523,516 $ 229,750 $ 342,782
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
F-20
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND
1995 ARE UNAUDITED)
NOTE J -- BUSINESS SEGMENTS (CONTINUED)
Corporate assets are principally cash, and corporate office equipment,
furnishings and related assets.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Identifiable assets are as follows:
Retirement centers............................... $3,656,272 $3,802,356
Management and development companies............. 2,250,917 2,024,000
Corporate........................................ 180,350 560,089
---------- ----------
$6,087,539 $6,386,445
---------- ----------
---------- ----------
</TABLE>
NOTE K -- PRIOR PERIOD ADJUSTMENTS
The Company has restated its previously issued financial statements for the
fiscal year ended March 31, 1994 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 $11,120,209 at March 31, 1994. Therefore, the retained earnings as originally
reported in the amount of $2,168,935 have been adjusted so that, as restated,
the Company reflects an accumulated deficit of $8,951,274. 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 March 31, 1995............ $ .46
As restated March 31, 1995....................... (.23)
Retained earnings (deficit)
As previously reported March 31, 1994............ $ 2,168,935
As restated, March 31, 1994...................... (8,951,274)
</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 firm commitment public offering. The
purchase price is $17,400,000 consisting: (i) $13,500,000 in cash (which sum may
include the assumption of a first mortgage of $12,500,000), (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. The intercompany debt and assignment of the
Gateway Note have been valued by the parties, based upon an appraisal, at $3.9
million.
F-21
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND
1995 ARE UNAUDITED)
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>
HARVEST PRO FORMA
UVH VILLAGE ADJUSTMENTS
HISTORICAL HISTORICAL ASSUMING
YEAR ENDED YEAR ENDED ACQUISITION AND
MARCH 31, DECEMBER 31, THE OFFERINGS AS OF PRO FORMA
1996 1995 APRIL 1, 1995 AMOUNTS
------------- -------------- ------------------- -------------
<S> <C> <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..................... $ 1,689,372 (A) $860,628 2,550,000
------------- -------------- ------------------- -------------
8,525,151 1,689,372 860,628 11,075,151
------------- -------------- ------------------- -------------
Operating expenses
Residence operating expenses...... 5,912,624 5,912,624
General and administrative........ 414,703 162,056 (E) (158,856) 417,903
Depreciation and amortization..... 378,215 1,115,881 (B) (419,881) 1,074,215
Provision for loss on advances to
affiliates....................... 296,093 296,093
------------- -------------- ------------------- -------------
7,001,635 1,277,937 (578,737) 7,700,835
------------- -------------- ------------------- -------------
Income from operations.......... 1,523,516 411,435 1,439,365 3,374,316
Other income (expense)
Interest expense, net............. (600,871) (3,894,837) (C) 2,698,537 (1,797,171)
Other income...................... 109,022 109,022
------------- -------------- ------------------- -------------
Income (loss) before income
taxes.......................... 1,031,667 (3,483,402) 4,137,902 1,686,167
Income taxes........................ 420,000 (D) 255,000 675,000
------------- -------------- ------------------- -------------
NET INCOME (LOSS)............... $ 611,667 $ (3,483,402) $3,882,902 $ 1,011,167
------------- -------------- ------------------- -------------
------------- -------------- ------------------- -------------
Earnings per share.................. $.36 $.29
Common shares and equivalents
outstanding........................ 1,692,894 3,492,894
------------- -------------
------------- -------------
</TABLE>
F-22
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND
1995 ARE UNAUDITED)
NOTE L -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
Had the contemplated acquisition taken place at June 30, 1996, the balance
sheet would have been as follows:
ASSETS
<TABLE>
<CAPTION>
HARVEST PRO FORMA ADJUSTMENTS
VILLAGE ASSUMING ACQUISITION
UVH HISTORICAL HISTORICAL AND THE OFFERINGS AS OF PRO FORMA
JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1996 AMOUNTS
-------------- ------------- ----------------------- -------------
<S> <C> <C> <C> <C>
Current assets
(A) (60)
Cash............................. $ 843,843 $ 60 (E) 24,664,000 $ 12,007,843
(D) (13,500,000)
Accounts receivable, net......... 451,904 1,108,672 (A) (1,108,672) 451,904
Development project fees and
advances........................ 159,932 159,932
Due from affiliates, net......... 280,207 280,207
Prepaid expenses and other....... 239,992 239,992
-------------- ------------- ----------------------- -------------
Total current assets........... 1,975,878 1,108,732 10,055,268 13,139,878
Property and equipment, net........ 2,374,360 16,993,142 19,367,502
Other Assets
Development fees............... 660,750 660,750
Restricted assets.............. 176,352 176,352
Deferred income taxes.......... 976,500 976,500
(E) 1,338,000
Other assets................... 222,605 456,405 (A) (456,405) 1,560,605
-------------- ------------- ----------------------- -------------
$ 6,386,445 $ 18,558,279 $10,936,863 $ 35,881,587
-------------- ------------- ----------------------- -------------
-------------- ------------- ----------------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Current portion of long-term
debt............................ $ 4,862,091 $ 42,160,652 (B) $(42,160,652) $ 4,862,091
Accounts payable................. 146,675 146,675
Accrued expenses................. 687,162 1,359,366 (B) (1,359,366) 687,162
Income taxes payable............. 461,139 461,139
-------------- ------------- ----------------------- -------------
Total current liabilities...... 6,157,067 43,520,018 (43,520,018) 6,157,067
Resident security deposits......... 318,305 318,305
Long-term debt, less current
portion........................... 1,600,290 (E) $12,500,000 14,100,290
Stockholders' deficiency
Common stock..................... 22,410 (E) 18,000 40,410
Additional paid-in capital....... 7,216,026 (E) 13,484,000 20,700,026
Accumulated deficit.............. (8,927,653) (24,961,739) (C) 28,454,881 (5,434,511)
-------------- ------------- ----------------------- -------------
(1,689,217) (24,961,739) 41,956,881 15,305,925
-------------- ------------- ----------------------- -------------
$ 6,386,445 $ 18,558,279 10,936,863 35,881,587
-------------- ------------- ----------------------- -------------
-------------- ------------- ----------------------- -------------
</TABLE>
F-23
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND 1996 AND JUNE 30, 1995 AND 1996
(INFORMATION WITH RESPECT TO THE THREE-MONTH PERIODS ENDED JUNE 30, 1996 AND
1995 ARE UNAUDITED)
NOTE L -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
The pro forma results of operations for the three months ended June 30, 1996
of the Company, assuming the acquisition had taken place as of April 1, 1996,
would have been as follows:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
HARVEST ASSUMING ACQUISITION
VILLAGE AND
UVH HISTORICAL HISTORICAL THE OFFERINGS AS OF PRO FORMA
JUNE 30, 1996 JUNE 30, 1996 APRIL 1, 1996 AMOUNTS
-------------- ----------------- ----------------------- ------------
<S> <C> <C> <C> <C>
Operating revenues
Residents services.......... $ 1,247,844 $ $ 1,247,844
Health care services........ 644,005 644,005
Development fees............ 85,000 85,000
Rental Income............... 355,762 (A) 281,738 637,500
-------------- ----------------- ----------------------- ------------
1,976,849 355,762 281,738 2,614,349
-------------- ----------------- ----------------------- ------------
Operating expenses
Residence operating
expenses................... 1,481,302 1,481,302
General and
administrative............. 155,020 1000 156,020
Depreciation and
amortization............... 69,601 266,758 (B) (96,000) 240,359
Provision for loss on
(recovery of) advances to
affiliates................. (71,856) (71,856)
-------------- ----------------- ----------------------- ------------
1,634,067 267,758 (96,000) 1,805,825
-------------- ----------------- ----------------------- ------------
Income from operations.... 342,782 88,004 377,738 808,524
Other income (expense)
Interest expense, net....... (135,317) (955,418) (C) 656,343 (434,392)
Other income................ 20,856 20,856
Debt conversion expense..... (156,466) (156,466)
-------------- ----------------- ----------------------- ------------
Income (loss) before
income taxes............. 71,855 (867,414) 1,034,081 238,522
Income taxes.................. 33,250 (D) 76,450 109,700
-------------- ----------------- ----------------------- ------------
NET INCOME (LOSS)......... $ 38,605 $ (867,414) $957,631 $ 128,822
-------------- ----------------- ----------------------- ------------
-------------- ----------------- ----------------------- ------------
Earnings per share............ $.02 $.03
Common shares and equivalents
outstanding.................. 2,197,166 3,997,166
-------------- ------------
-------------- ------------
</TABLE>
F-24
<PAGE>
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.
The following pro-forma adjustments have been recorded assuming the purchase
of Harvest Village and the Offerings have been consummated as of the perspective
balance sheet date and as of the beginning of the period for each respective
pro-forma statement of operations.
BALANCE SHEET
(A) To reflect assets of Harvest Village not acquired by the Company.
(B) To reflect liabilities assumed or satisfied by VVI and not acquired by the
Company.
(C) To eliminate the historical deficit of Harvest Village and reflect the
cancellation of intercompany debt valued at $3.9 million (subject to
founders cost limitations) as purchase consideration.
(D) To reflect cash consideration paid for Harvest Village.
(E) 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.
STATEMENT OF OPERATIONS
(A) To adjust rental income to amounts payable by Gateway pursuant to the lease
agreement.
(B) To adjust depreciation expense to reflect an estimated life of 25 years,
using the straight line method.
(C) To adjust interest expense to reflect the elimination of pre-acquisition
Harvest Village debt and to provide for interest expense related to the
proposed convertible debt offering.
(D) To adjust income tax expense.
(E) To eliminate general and administrative expenses not to be incurred by the
Company.
F-25
<PAGE>
NOTE L -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
UNITED VANGUARD HOMES, INC.
ESTIMATED TWELVE MONTH PRO FORMA STATEMENT OF
TAXABLE NET OPERATING INCOME AND OPERATING FUNDS AVAILABLE
(UNAUDITED)
The following unaudited statement is a pro forma estimate for a twelve month
period of taxable income and funds available from operations of the Company. The
pro forma estimate is based upon the historical operating results of the Company
for the year ended March 31, 1996, adjusted for the Company's proposed public
offering and the acquisition of Harvest Village. This statement does not purport
to, nor is it intended to, forecast actual operating results for any future
period.
This statement should be read in conjunction with (i) the historical
financial statements and notes thereto of the Company and Harvest Village
Partners, L.P. and (ii) the pro forma financial statements of the Company.
<TABLE>
<S> <C>
ESTIMATE OF TAXABLE NET OPERATING INCOME
Pro forma net income for the year ended March 31, 1996(1)......... $1,011,167
Adjust depreciation expense to tax basis depreciation(2)........ 261,000
-----------
Estimated taxable net operating income............................ $1,272,167
-----------
-----------
ESTIMATE OF PRO FORMA OPERATING FUNDS AVAILABLE
Pro forma net income for the year ended March 31, 1996(1)......... $1,011,167
Add depreciation and amortization............................... 1,074,215
-----------
Estimate of pro forma operating funds available(3)................ $2,085,382
-----------
-----------
</TABLE>
- --------------------------
1. The pro forma net income should be read in conjunction with the pro forma
information and notes thereto appearing elsewhere in this report.
2. To adjust depreciation expense to reflect depreciation expense for the
acquired property using a 40 year life and the straight line method.
3. Operating funds available does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs.
F-26
<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-27
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------ ------------------------------
1995 1994 1996 1995
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Residential real estate:
Property and equipment at cost, net of
accumulated depreciation (Note 5)............. $ 17,399,200 $ 18,246,600 $ 16,993,142 $ 17,822,900
Cash........................................... 60 88 60 60
Due from lessee (Note 7)....................... 920,615 368,907 1,108,672 671,805
Capitalized costs, net of accumulated
amortization (Note 6)......................... 583,862 852,342 456,405 718,101
-------------- -------------- -------------- --------------
$ 18,903,737 $ 19,467,937 $ 18,558,279 $ 19,212,866
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Construction loan payable (Note 4)............. $ 22,349,309 $ 21,432,362 $ 23,636,339 $ 21,902,080
Loan payable--Gateway Communities, Inc. (Note
4)............................................ 17,058,400 15,499,000 17,119,400 16,303,200
Notes payable--Presbyterian Home at Winslow,
Inc. (Note 4)................................. 1,191,720 1,112,532 1,231,314 1,152,126
Notes payable--other (Note 4).................. 168,663 158,790 173,599 163,726
Accrued interest (Note 4)...................... 197,264 121,390 192,073 191,616
Accrued expenses............................... 552,903 323,199 554,903 552,903
Due to affiliates (Note 8)..................... 612,390 564,174 612,390 588,381
-------------- -------------- -------------- --------------
Total liabilities......................... 42,130,649 39,211,447 43,520,018 40,854,032
Partners' deficit.............................. (23,226,912) (19,743,510) (24,961,739) (21,641,166)
-------------- -------------- -------------- --------------
$ 18,903,737 $ 19,467,937 $ 18,558,279 $ 19,212,866
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF REVENUES AND EXPENSES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
1995 1994 1996 1995
--------------- --------------- --------------- ---------------
(UNAUDITED)
<CAPTION>
Revenues:
<S> <C> <C> <C> <C>
Rental (Notes 2b, 4 and 10)............... $ 1,689,372 $ 1,393,236 $ 711,524 $ 767,015
Interest.................................. 66,446 94,885 48,287 27,405
--------------- --------------- --------------- ---------------
1,755,818 1,488,121 759,811 794,420
--------------- --------------- --------------- ---------------
Expenses:
Interest expense.......................... 3,961,283 2,962,255 1,959,123 1,974,078
Depreciation and amortization............. 1,115,881 1,034,973 533,515 557,941
Professional fees......................... 161,829 4,500 2,000 159,830
Miscellaneous expense..................... 227 867 -- 227
--------------- --------------- --------------- ---------------
5,239,220 4,002,595 2,494,638 2,692,076
--------------- --------------- --------------- ---------------
Net loss.................................... (3,483,402) (2,514,474) (1,734,827) (1,897,656)
Partners' deficit, beginning of period...... (19,743,510) (11,230,161) (23,226,912) (19,743,510)
Capital contribution........................ -- 260,000 -- --
Distribution (Note 8)....................... -- (6,258,875) -- --
--------------- --------------- --------------- ---------------
Partners' deficit, end of period............ $ (23,226,912) $ (19,743,510) $ (24,961,739) $ (21,641,166)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------------
1995 1994 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss.............................. $(3,483,402) $(2,514,474) $(1,734,827) $(1,897,656)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 1,115,881 1,034,973 533,515 557,941
Accrued interest income............. (66,446) (94,885) (48,287) (27,405)
Changes in assets and liabilities:
Increase in accrued interest........ 2,375,385 1,569,091 1,186,599 1,197,015
Increase in accrued expenses........ 229,704 2,500 2,000 218,599
----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities................... 171,122 (2,795) (61,000) 48,494
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from construction loan....... 485,262 341,599 139,770 275,493
Proceeds from loan from Gateway....... 1,559,400 310,150 61,000 804,200
Payments on construction loan......... (1,778,766) (310,150) -- (852,722)
Advances from affiliates.............. 48,216 2,867 -- --
Advances to affiliates................ (485,262) (366,518) (139,770) (275,493)
Partners capital contribution......... -- 260,000 -- --
Payments for capitalized loan costs... -- (235,140) -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (171,150) 2,808 61,000 (48,522)
----------- ----------- ----------- -----------
Net change in cash...................... (28) 13 -- (28)
Cash -- beginning of period............. 88 75 60 88
----------- ----------- ----------- -----------
Cash -- end of period................... $ 60 $ 88 $ 60 $ 60
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest............................. $ 1,481,688 $ 1,393,163 $ 770,395 $ 718,492
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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-30
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 IS
UNAUDITED)
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective for fiscal years ending after December 15, 1995, Statement of
Financial Accounting Standards No. 107 requires entities with total assets less
than $150 million to disclose the fair value of financial instruments recognized
in the balance sheet. At June 30, 1996, the carrying amounts of the Company's
financial instruments, including cash, receivables, accounts payable, and notes
and loans payable approximate fair value because of the short maturity of those
instruments.
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of June 30, 1996 and 1995 and the
six months then ended, are unaudited but, in the opinion of management of the
Partnership, reflects all adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation.
F-31
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The financial position as of June 30, 1996 and 1995, and the results of
operations and cash flows for the six months then ended are not necessarily
indicative of the results that may be expected for the entire year.
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 Partnership has long-term debt in
excess of $40,000,000. Additionally, the Partnership has been operating at a
loss since inception and through June 30, 1996, had accumulated a deficit of
$24,961,739. The Partnership 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 Partnership'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-32
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 IS
UNAUDITED)
4. DEBT
Debt at December 31, 1995 and 1994 and June 30, 1996 and 1995, consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------ ------------------------------
1995 1994 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Construction loan payable to bank bearing
interest at 1 1/2% above prime (10 1/2%, 10%,
9 3/4% and 10 1/4% at December 31, 1995 and
1994, and June 30, 1996 and 1995,
respectively). The loan is collateralized by a
mortgage on the facility and matures September
30, 1996....................................... $ 22,349,309 $ 21,432,362 $ 23,636,339 $ 21,902,080
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
December 31, 1995 and 1994 and June 30, 1996
and 1995 aggregated $1,481,688, $1,393,163,
$770,395 and $718,492, respectively............ 17,058,400 15,499,000 17,119,400 16,303,200
-------------- -------------- -------------- --------------
39,407,709 36,931,362 40,755,739 38,205,280
-------------- -------------- -------------- --------------
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 1,231,314 1,152,126
Notes payable to various vendors and
professionals bearing interest at 8% per annum
and which are past due......................... 168,663 158,790 173,599 163,726
-------------- -------------- -------------- --------------
$ 40,768,092 $ 38,202,684 $ 42,160,652 $ 39,521,132
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</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.
F-33
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 IS
UNAUDITED)
4. DEBT (CONTINUED)
On September 8, 1994, the Partnership modified its financing agreement with
two financial institutions regarding the construction loan. The Partnership had
accrued interest aggregating $6,926,013 on that date, which was converted into
promissory notes bearing interest at 1 1/2% above prime and maturing on
September 1, 1996. An extension until September 30, 1996 was negotiated in July,
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.
5. PROPERTY AND EQUIPMENT
As of December 31, 1995 and 1994 and June 30, 1996 and 1995, property and
equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------ ------------------------------
1995 1994 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Land........................ $ 719,907 $ 719,907 $ 719,907 $ 719,907
Building and improvements... 21,350,721 21,350,721 21,350,721 21,350,721
Building and equipment...... 796,081 796,081 796,081 796,081
-------------- -------------- -------------- --------------
22,866,709 22,866,709 22,866,709 22,866,709
Less accumulated
depreciation............... 5,467,509 4,620,109 5,873,567 5,043,809
-------------- -------------- -------------- --------------
$ 17,399,200 $ 18,246,600 $ 16,993,142 $ 17,822,900
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</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 and June 30, 1996 and 1995, capitalized
costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- ----------------------------
1995 1994 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Consulting fees.................. $ -- $ 75,000 $ -- $ --
Refinancing fees................. 235,140 1,412,692 235,140 235,140
Acquisition fees................. 670,583 670,583 670,583 670,583
Marketing costs.................. 797,600 797,600 797,600 797,600
------------- ------------- ------------- -------------
1,703,323 2,955,875 1,703,323 1,703,323
Less accumulated amortization.... 1,119,461 2,103,533 1,246,918 985,222
------------- ------------- ------------- -------------
$ 583,862 $ 852,342 $ 456,405 $ 718,101
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-34
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 IS
UNAUDITED)
7. DUE FROM LESSEE
As of December 31, 1995 and 1994 and June 30, 1996 and 1995, the Partnership
has a receivable in the aggregate amount of $920,615, $368,907, $1,108,672 and
$671,805, 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.
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.
F-35
<PAGE>
HARVEST VILLAGE PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1994
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 IS
UNAUDITED)
9. OWNERSHIP AND ALLOCATIONS (CONTINUED)
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-36
<PAGE>
OUR MISSION
The Company's mission and
the foundation of its operating
philosophy is to improve the
quality of life of its residents
in a safe, healthy and secure
environment at an affordable price.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE 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....................................... 31
Description of Mortgage Loans.................. 45
Management..................................... 47
Certain Relationships and Related
Transactions.................................. 52
Principal and Selling Stockholders............. 56
Description of Notes........................... 57
Certain Federal Income Tax Considerations...... 80
Description of Capital Stock................... 83
Shares Eligible for Future Sale................ 86
Plan of Distribution........................... 87
Legal Matters.................................. 87
Experts........................................ 87
Change in Accountants.......................... 88
Indemnification for Securities Act
Liabilities................................... 88
Available Information.......................... 88
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
% 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 has a $1,000,000 directors' and officers' liability insurance
policy.
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 CLAIMED
AMOUNT OF WHOM PRICE EXEMPTIONS
SECURITIES PRINCIPAL SECURITIES (COMMISSIONS NON-CASH FROM
DATE TITLE SOLD UNDERWRITER SOLD PAID) CONSIDERATION REGISTRATION
- --------- ------------- ------------- ------------- ------------- --------------- ------------- ----------------
<C> <S> <C> <C> <C> <C> <C> <C>
05/03/93 United 250,000 wts. None Vanguard $ 37,500 None Section4(2)
Vanguard Ventures,
Homes, Inc. Inc. (parent
Common Stock company)
Warrants
05/31/93 United 61,200 shs. Advanced Private $680,000 (10%) None Section4(2);
Vanguard Planning Investors Reg. D.(a)
Homes, Inc. Securities,
Common Stock Inc., an
(re Olds affiliated
Manor broker-dealer
Mortgage
Trust)
10/31/93 United 194 shs. None Private $ 646 (None) None Section4(2)
Vanguard Investors
Homes, Inc.
Common Stock
07/31/94 UVH $ 1,400,000 Advanced Private 1$,400,000 (10%) None Section4(2);
Development Notes Planning Investors Reg. D(a)
Corp. 9% Securities,
Convertible Inc., an
Notes affiliated
broker-dealer
08/15/94 United $730,000 Notes Advanced Private $730,000 (10%) None Section4(2);
Vanguard Planning Investors Reg. D(a)
Homes, Inc. Securities,
7% Inc., an
Convertible affiliated
Notes broker-dealer
08/15/94 United 73,000 Wts. Advanced Private None None Section4(2);
Vanguard Planning Investors Reg. D(a)
Homes, Inc. Securities,
Common Stock Inc., an
Warrants affiliated
broker-dealer
04/96 United 103,537 shs. None Existing $ 207,074 None Section3(a)(9)
Vanguard Warrantholders
Homes, Inc.
Common Stock
06/96 United 3,000 shs. None Executive None (b) Section4(2)
Vanguard Officer
Homes, Inc.
Common Stock
</TABLE>
- ------------------------------
(a) The Company conducted the offering and sale pursuant to the terms and
provisions of a confidential private placement memorandum. The Company had
reason to believe, prior to the making of any offer that, each offeree,
either:
(a) had such knowledge and experience in business and financial matters
that he was capable of evaluating the merits and risks of the investment and
had the capacity to protect his own interests in connection with the
transaction: or
(b) was able to bear all of the economic risks of the investment.
Each purchaser represented and warranted in writing that he:
(a) Had such knowledge and experience in financial and business matters
as to capable of evaluating the merits and risks of his investment in the
Company;
(b) Was able to bear the economic risks of such investment;
(c) Had received and reviewed the confidential memorandum (including the
exhibits thereto); and
(d) Understood and acknowledged that the Company had given him the
opportunity to ask questions of, receive answers and review documents
relating to an investment in the Company.
Further, each investor acknowledged that the securities were being sold
without registration under the Securities Act of 1933, as amended, pursuant to
the exemption afforded by Section 4(2) thereof and that the Shares were not
freely transferable. Each investor acknowledged that he could not transfer his
securities except as set forth in the confidential private placement memorandum
and the restrictions on the transferability of securities as set forth in an
executed subscription agreement. A Form D was filed with the Securities and
Exchange Commission.
Stock certificates evidencing the securities bear an investment legend, and
a stop order were placed.
The Company did not engage in any general solicitation or advertising with
regard to the offering.
(b) Pursuant to employment agreement
II-2
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------ ------------------------------------------------------------
<C> <S>
1.1 Form of Agency Agreement.
*3.1 Restated Certificate of Incorporation of Registrant.
******3.2 Form of Certificate of Amendment to the Certificate of
Incorporation of Registrant.
******3.3 Bylaws of Registrant.
******4.1 Form of Common Stock Purchase Warrant Agreement between
Registrant and Continental Stock Transfer & Trust Company,
including form of Common Stock Purchase Warrant.
4.2 Form of Placement Agent's Warrant Agreement, including form
of Placement Agent's Warrant.
******4.3 Form of Indenture between Registrant and American Stock
Transfer and Trust Company, as Trustee, relating to the
Notes.
******4.4 Form of [ ]% Convertible Senior Secured Notes (included in
Exhibit 4.3).
******4.5 Form of 7% Convertible Promissory Note.
*****4.6 Form of Common Stock Certificate.
*****5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP with
respect to the legality of the Notes.
******10.1 Employment Agreement of Larry L. Laird with Registrant dated
as of April 1, 1996.
******10.2 Letter Agreement between Larry L. Laird and Registrant dated
September 3, 1996.
******10.3 Amended and Restated Employment Agreement between Carl
Paffendorf and Registrant dated as of April 1, 1996.
******10.4 Letter Agreement between Carl G. Paffendorf and Registrant
dated July 24, 1996.
******10.5 Amended and Restated 1991 Incentive Stock Option Plan.
******10.6 1996 Outside Directors' Stock Option Plan.
******10.7 Whittier Management Agreement between Whittier Towers, Inc.
and UVH Management Corp. (f/k/a Vanguard Realty and
Management Company, Inc.) dated as of April 1, 1996.
***10.8 Management Agreement between Cottage Grove Place, Inc. and
Vanguard Realty and Management Company, Inc. dated June 7,
1995.
***10.9 Management Agreement between Phoenix Lifecare Corp. and
Vanguard Realty and Management Company, Inc. dated March 24,
1995.
******10.10 Camelot Village Management Agreement (Huntington, NY)
between Camelot Retirement Homes, Inc. and Vanguard Realty
and Management Company, Inc. dated March 18, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
******10.11 Camelot Village Management Agreement (Stroudsburg, PA)
between Camelot Village at Stroudsburg LLC and UVH
Management Corp. dated as of July 12, 1996.
**10.12 Development Agreement between UVH Development Corp. and
Cottage Grove Place, Inc. dated October 13, 1993.
***10.13 Development Agreement between UVH Development Corp. and
Cottage Grove Place, Inc. dated June 7, 1995.
***10.14 Development Agreement between Phoenix Lifecare Corp. and UVH
Development Corp. dated March 24, 1995.
******10.15 Camelot Village Development Agreement (Huntington, NY)
between Camelot Retirement Homes, Inc. and UVH Development
Corp. dated January 26, 1996.
******10.16 Camelot Village Development Agreement (Stroudsburg, PA)
between Camelot Village at Stroudsburg, LLC and Registrant
(D/B/A UVH Development) dated as of July 12, 1996.
***10.17 Option Agreement dated June 23, 1995 between Phoenix
Lifecare Corp. and Registrant.
******10.18 Option and Agreement to Purchase Real Estate-Lot 3 among
Heritage Corporation of Iowa, Cottage Grove Place and
Registrant dated September 15, 1995.
******10.19 Agreement between Cedar Grove Place, Cedar Rapids CGP, L.C.,
Registrant and Vanguard Ventures, Inc. dated November 20,
1995.
******10.20 Amendment to November 20, 1995 Agreement among Cottage Grove
Place, Cedar Rapids CGP, L.C., Registrant and Vanguard
Ventures, Inc. dated as of March 12, 1996.
******10.21 Camelot Village Option Agreement (Huntington, NY) between
Camelot Retirement Homes, Inc. and Registrant dated March
29, 1996.
******10.22 Option Agreement between Whittier Towers, Inc. and
Registrant dated March 29, 1996.
******10.23 Amendment No. 1 to Whittier Option Agreement between
Whittier Towers, Inc. and Registrant dated July 15, 1996.
******10.24 Camelot Village Option Agreement (Stroudsburg, PA) between
Camelot Village at Stroudsburg, LLC and Registrant dated
July 24, 1996.
******10.25 Harvest Village Purchase Agreement by and among Harvest
Village Partners, L.P., Registrant and Vanguard Ventures,
Inc. dated April 19, 1996.
******10.26 Amendment No. 1 to the Harvest Village Purchase Agreement
among Harvest Village Partners, L.P., Registrant and
Vanguard Ventures, Inc. dated June 20, 1996.
******10.27 Amendment No. 2 to the Harvest Village Purchase Agreement
among Harvest Village Partners, L.P., Registrant and
Vanguard Ventures, Inc. dated July 6, 1996.
******10.28 Amendment No. 3 to the Harvest Village Purchase Agreement
among Harvest Village Partners, L.P., Registrant and
Vanguard Ventures, Inc. dated July 8, 1996.
******10.29 Form of Harvest Village Return of Capital Residency
Agreement.
******10.30 Form of Harvest Village Traditional Residency Agreement.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
******10.31 Mortgage given to Old Kent Bank and Trust Company by Olds
Manor, Inc. dated June 30, 1989.
******10.32 Mortgage given to the Olds Manor Mortgage Trust by Olds
Manor Inc. dated May 31, 1993.
******10.33 Mortgage given to Citibank N.A. by Olds Manor Inc. dated
October 18, 1989.
******10.34 Mortgage given to Whitcomb Mortgage Trust by Whitcomb Tower
Corporation dated March 30, 1992.
******10.35 First Amendment to Mortgage between Whitcomb Tower
Corporation and The Whitcomb Mortgage Trust c/o Carl
Paffendorf, Trustee, dated January 31, 1995.
******10.36 Consolidation Agreement among Whittier Towers, Inc.,
Whitcomb Tower Corp., Vanguard Ventures, Inc., Citibank N.A.
and Lloyd's Bank Plc dated December 14, 1990.
******10.37 Restated Consolidation Agreement and Guarantee among
Whittier Towers Inc., Vanguard Homes of Michigan, Inc.
(n/k/a Gateway Communities, Inc.), Vanguard Ventures, Inc.
and The Great-West Life Assurance Company dated December 7,
1988.
******10.38 First Amendment to Loan Documents between Great-West Life
and Annuity Insurance Company, Whittier Towers, Inc.,
Whitcomb Tower Corp., Hillside Terrace, Inc., Olds Manor,
Inc. and Vanguard Ventures, Inc. dated August 31, 1995.
******10.39 Letter Agreement between Great-West Life and Annuity
Insurance Company and Carl Paffendorf dated April 1, 1996.
******10.40 Guarantee Agreement of Vanguard Ventures, Inc. to Vanguard
Realty and Management Company, Inc. dated December 30, 1994.
******10.41 Guarantee Agreement of Vanguard Ventures, Inc. to Vanguard
Realty and Management Company, Inc. dated March 12, 1996.
******10.42 Form of Escrow Agreement among Registrant, Vanguard
Ventures, Inc. and American Stock Transfer & Trust Company.
******11. Statement of Computation of Per Share Earnings.
****16. Letter from Farber, Blicht & Eyerman, LLP dated May 23,
1996.
******21. Subsidiaries of Registrant.
*****23.1 The consent of Olshan Grundman Frome & Rosenzweig LLP will
be included in the opinion filed as Exhibit 5 to this
Registration Statement.
23.2 The consent of Farber, Blicht & Eyerman, LLP, certified
public accountants.
23.3 The consent of Grant Thornton LLP, certified public
accountants.
*******24. Powers of Attorney.
*****25. Statement on Form T-1 of Eligibility and Qualification under
the Trust Indenture Act of 1989 of American Stock Transfer
and Trust Company, as Trustee under the Indenture relating
to the Notes.
</TABLE>
- ------------------------
* Filed as an Exhibit to Registrant's Form 8-K filed on April 16, 1993.
** Filed as an Exhibit to Amendment No. 1 to Registrant's Annual Report on
Form 10-K for the year ended March 31, 1994, SEC File No. 0-5097.
II-5
<PAGE>
*** Filed as an Exhibit to Registrant's Form 10-K for the year ended March
31, 1995, SEC File No. 0-5097.
**** Filed as an Exhibit to Registrant's Form 8-K filed on May 23, 1996.
***** To be filed by amendment.
****** Filed as an Exhibit to Amendment No. 5 to Registrant's Registration
Statement on Form SB-2 (No. 33-80812).
******* Filed as an Exhibit to Registrant's Registration Statement on Form SB-2
(No. 333-09037).
II-6
<PAGE>
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) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(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.
f. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer 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 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-7
<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 20th day of September, 1996.
UNITED VANGUARD HOMES, INC.
By: /s/ CARL G. PAFFENDORF
-----------------------------------
Name: Carl G. Paffendorf
Title: Chairman of the Board and
Chief Executive Officer
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
- ------------------------------------------------------ -------------------------------- -----------------------
Vice President--Finance
* (Principal Financial Officer
------------------------------------------- and Principal Accounting September 20, 1996
Paul D'Andrea Officer)
*
------------------------------------------- Director September 20, 1996
Benjamin Frank
*
------------------------------------------- Director September 20, 1996
Francis S. Gabreski
*
------------------------------------------- President, Chief Operating September 20, 1996
Larry L. Laird Officer and Director
/s/ CARL G. PAFFENDORF
------------------------------------------- Chairman of the Board and Chief September 20, 1996
Carl G. Paffendorf Executive Officer
*
------------------------------------------- Director September 20, 1996
Robert S. Hoshino, Jr.
*
------------------------------------------- Director September 20, 1996
James E. Eden
------------------------------------------- Director
Stanford J. Shuster
*By: /s/ CARL G. PAFFENDORF
--------------------------------------
Carl G. Paffendorf
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
OHS DRAFT
9/19/96
AGENCY AGREEMENT
Dated as of: ________________, 1996
Janney Montgomery Scott Inc.
26 Broadway
New York, NY 10004
Attention: Herbert M. Gardner
Senior Vice President
Dear Sirs:
The undersigned, United Vanguard Homes, Inc. (the "Company"), hereby agrees
with Janney Montgomery Scott Inc. ("Janney") as follows:
1. OFFERING.
(a) The Company hereby engages Janney to act as its exclusive placement
agent in connection with the sale by the Company (the "Offering") of up to
$12,500,000 aggregate principal amount of its Senior Secured Notes due 2006 (the
"Notes"). The Notes are convertible into shares of common stock, $.01 par value
per share (the "Common Stock") of the Company at any time at or before maturity,
unless previously redeemed, at a conversion price of $_____ per share subject to
adjustment (the "Conversion Price"). The Common Stock issuable upon conversion
of the Notes is hereinafter sometimes referred to as the "Note Shares." 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, for 20 consecutive trading days within
a period of 30 days prior to the date of notice of such redemption.
Upon your request, as provided in Section 2(c) of this Agreement, the
Company shall also offer up to an additional $1,875,000 aggregate principal
amount of Notes (the "Over-Allotment Option"). The Company also proposes to
issue and sell to you warrants (the "Placement Agent Warrants") pursuant to the
Placement Agent Warrant Agreement (the "Placement Agent Warrant Agreement") for
the purchase of ________ shares of Common Stock. The shares of Common Stock
issuable upon exercise of the Placement Agent Warrants are hereinafter referred
to as the "Warrant Shares." The Notes, the Note Shares, the Placement
<PAGE>
Agent Warrants and the Warrant Shares are hereinafter sometimes collectively
referred to as the "Securities."
(b) The Notes will be offered by Janney on a "best efforts" basis. The
Company and Janney will issue Notes at one closing (the "Closing Date") after
(i) subscriptions have been received and accepted by the Company, (ii) when
funds from investors have cleared the banking system in the normal course of
business and (iii) when a closing of a public offering by the Company of Common
Stock and Common Stock Purchase Warrants resulting in gross proceeds to the
Company of at least $13,500,000 has occurred, except that the Notes issued
pursuant to the exercise of the Over-Allotment Option may be issued at a date
subsequent to the Closing Date (the "Option Closing Date").
(c) The Offering shall terminate on _______________, 1996, unless extended
for an additional thirty (30) day period by the mutual consent of Janney and the
Company (such date, as the same may be extended, is hereinafter referred to as
the "Termination Date"; the period commencing on the date hereof and ending on
the Termination Date is sometimes referred to herein as the "Offering Period").
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) Payment for the Notes shall be made by check or wire transfer as more
fully described in the Subscription Agreement and Investment Representation to
be executed by the Purchaser and the Company. Janney and the Company agree that
the Notes will be offered and sold only to "accredited investors" within the
meaning of Rule 501 of Regulation D ("Accredited Investors") promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Act") and in compliance with Rule 506 of Regulation D of the
Act.
(b) All funds received from subscriptions will be promptly transmitted
pursuant to the terms of an escrow agreement to a special escrow account at
American Stock Transfer & Trust Company (the "Escrow Agent"). In the event that
a Closing Date or Option Closing Date occurs, the funds received in respect of
the Notes closed on, net of (i) the placement agent commission equal to six
percent (6%) of the gross proceeds from the sale of the Notes, (ii) the non-
accountable expense allowance equal to one and one-half percent (11/2%) of the
gross proceeds from the sale of the Notes, and (iii) reasonable legal fees and
expenses, and reasonable "Blue Sky" fees and expenses, due to Placement Agent's
Counsel (as defined herein), to the extent not previously paid by the Company or
directly by the Escrow Agent, will be forwarded to the Company, against delivery
of the appropriate aggregate principal amount of the Notes. In addition to the
foregoing, the Company shall be responsible for the fees and expenses identified
in Section 6 hereof, which expenses shall not be deemed to be commissions.
(c) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company grants an option to Janney to place an
additional $1,875,000 aggregate principal amount
2
<PAGE>
of Notes. This option will expire thirty (30) days after (i) the date the
Registration Statement becomes effective, if the Company has elected not to rely
on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement
if the Company has elected to rely upon Rule 430A under the Rules and
Regulations, and may be exercised in whole or in part from time-to-time upon
notice by Janney to the Company setting forth the aggregate principal amount of
Notes as to which Janney is then exercising the option and the time and date of
payment and delivery for any such Notes. The Option Closing Date shall be
determined by Janney, but shall not be later than three (3) full business days
after the exercise of said option, nor in any event prior to the Closing Date,
unless otherwise agreed upon by Janney and the Company.
(d) On the Closing Date, the Company shall issue and sell to Janney,
Placement Agent Warrants at a purchase price of $.0001 per warrant, which
Placement Agent Warrants shall entitle the holders thereof to purchase an
aggregate of ________ shares of Common Stock. The Placement Agent Warrants
shall be exercisable for a period of four (4) years commencing one (1) year from
the effective date of the Registration Statement at a price equaling 120% of the
initial public offering price of the Common Stock offered to the public. The
Placement Agent Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit [___] to the Registration Statement.
Payment for the Placement Agent Warrants shall be made on the Closing Date.
(e) Janney shall not be obligated to sell any Notes and shall only be
obligated to offer the Notes on a "best efforts" basis.
(f) The Company reserves the right to reject any subscriber, in whole or
in part, in its sole discretion. Notwithstanding anything to the contrary
contained in this Paragraph E, the Company's right to reject a subscriber shall
lapse ten (10) business days after receipt by the Company of the fully completed
and duly executed subscription documents from Janney with respect to such
subscriber, unless the Company shall notify Janney of its election to reject
such subscriber prior thereto. Funds received by the Escrow Agent or the
Company from any subscriber whose subscription is rejected will be returned to
such subscriber, without deduction therefrom or interest thereon, but no sooner
than such funds have cleared the banking system in the normal course of
business.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
(a) The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and an amendment or
amendments thereto, on Form SB-2 (No. 333-_________), including any related
preliminary prospectus ("Preliminary Prospectus"), for the registration of the
Securities under the Act, which registration statement and amendment or
amendments have been prepared by the Company in conformity with the requirements
of the Act, and the rules and regulations (the "Regulations") of the Commission
under the Act. The Company will promptly file a further amendment to said
registration statement in the form heretofore delivered to Janney and will not
file any other amendment thereto to which Janney shall have objected in writing
after having been furnished with a copy thereof. Except as the context may
otherwise require, such registration statement, as amended,
3
<PAGE>
on file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the Regulations), is
hereinafter called the "Registration Statement", and the form of Prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof,
"Rules and Regulations" mean the rules and regulations adopted by the Commission
under either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed in all material respects
with the requirements of the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, the Registration Statement or Prospectus at the time of
filing thereof contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written information
furnished to the Company with respect to Janney by or on behalf of Janney
expressly for use in such Preliminary Prospectus, Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date (as defined herein) and each Option
Closing Date (as defined herein), if any, and during such longer period as the
Prospectus may be required to be delivered, the Registration Statement and the
Prospectus will contain all material statements which are required to be stated
therein in accordance with the Act and the Rules and Regulations, and will
conform in all material respects to the requirements of the Act and the Rules
and Regulations; neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, PROVIDED, HOWEVER, that this
representation and warranty does not apply to statements made or statements
omitted in reliance upon and in strict conformity with information furnished to
the Company in writing by or on behalf of Janney expressly for use in the
Preliminary Prospectus, Registration Statement or Prospectus or any amendment
thereof or supplement thereto.
(d) Each of the Company, and the Company's wholly-owned subsidiaries
listed on Schedule B hereto, (such subsidiaries are hereinafter referred to
individually as a "Subsidiary" and collectively as the "Subsidiaries"), has been
duly organized and is validly existing as a corporation in good standing under
the laws of the state of its incorporation. Except as set forth
4
<PAGE>
in the Prospectus, none of the Company nor the Subsidiaries owns an interest in
any corporation, partnership, trust, joint venture or other business entity.
Each of the Company and the Subsidiaries is duly qualified and licensed and in
good standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its operations
requires such qualification or licensing. The Company owns, directly or
indirectly, one hundred percent (100%) of the outstanding capital stock of each
of the Subsidiaries, and all of such shares have been validly issued, are fully
paid and non-assessable, were not issued in violation of any preemptive rights,
and, except as set forth in the Prospectus, are owned free and clear of any
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, other than restrictions
on transfer imposed by securities laws. Each of the Company and the
Subsidiaries has all requisite power and authority (corporate and other), and
has obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; each of the Company and the
Subsidiaries is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all applicable federal, state, local and foreign laws, rules and
regulations; and none of the Company nor the Subsidiaries has received any
notice of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company or the
Subsidiaries. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and regulations on the
Company's and the Subsidiaries' businesses as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading in light of the circumstances under which they
were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization,"
"Description of Mortgage Loans," "Description of Notes" and "Description of
Capital Stock" and will have the adjusted capitalization set forth therein on
the Closing Date and each Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Placement Agent Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable and the holders thereof
have no rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company. The
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when
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issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and will conform to the
description thereof contained in the Prospectus; the holders thereof will not be
subject to any liability solely as such holders; all corporate action required
to be taken for the authorization, issue and sale of the Securities has been
duly and validly taken; and the certificates representing the Securities will be
in due and proper form.
(f) The consolidated financial statements of the Company and the
Subsidiaries, together with the related notes and schedules thereto, included in
the Registration Statement, each Preliminary Prospectus and the Prospectus
fairly present the financial position, income, changes in cash flow, changes in
stockholders' equity and the results of operations of the Company and the
Subsidiaries at the respective dates and for the respective periods to which
they apply and such financial statements have been prepared in conformity with
generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved and such financial
statements as are audited have been examined by each of Grant Thornton LLP and
Farber, Blicht & Eyerman, LLP, who are independent certified public accountants
within the meaning of the Act and the Rules and Regulations, as indicated in
their reports filed therewith. There has been no adverse change or development
involving a prospective adverse change in the condition, financial or otherwise,
or in the earnings, position, prospects, value, operation, properties, business,
or results of operations of the Company and the Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company and the Subsidiaries, conform in all material respects
to the descriptions thereof contained in the Registration Statement and the
Prospectus. Financial information (including, without limitation, any pro forma
financial information) set forth in the Prospectus under the headings "Summary
Financial Data", "Selected Financial Data," "Capitalization," "Dilution," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the Prospectus, the
information set forth therein, and have been derived from or compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus; and, in the case of pro forma financial information, if any, the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein. The amounts shown as accrued for current and
deferred income and other taxes in such financial statements are sufficient for
the payment of all accrued and unpaid federal, state, local and foreign income
taxes, interest, penalties, assessments or deficiencies applicable to the
Company and the Subsidiaries, whether disputed or not, for the applicable period
then ended and periods prior thereto; adequate allowance for doubtful accounts
has been provided for unindemnified losses due to the operations of the Company
and the Subsidiaries; and the statements of income do not contain any items of
special or nonrecurring income not earned in the ordinary course of business,
except as specified in the notes thereto.
(g) Each of the Company and the Subsidiaries (i) has paid all federal,
state, local, and foreign taxes for which it is liable, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986, as amended (the "Code"), and has furnished
all information returns it is required to furnish pursuant to the Code,
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(ii) has established adequate reserves for such taxes which are not due and
payable, and (iii) does not have any tax deficiency or claims outstanding,
proposed or assessed against it.
(h) Each of the Company and the Subsidiaries maintains insurance policies,
including, but not limited to, general liability, environmental and property
insurance, which insures each of the Company, the Subsidiaries and their
respective employees, against such losses and risks generally insured against by
comparable businesses. None of the Company nor the Subsidiaries (A) has failed
to give notice or present any insurance claim with respect to any matter,
including but not limited to the Company's business, property or employees,
under any insurance policy or surety bond in a due and timely manner, (B) has
any disputes or claims against any underwriter of such insurance policies or
surety bonds or has failed to pay any premiums due and payable thereunder, or
(C) has failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company or any Subsidiary.
(i) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
or the Subsidiaries which (i) questions the validity of the capital stock of the
Company, this Agreement, the Placement Agent Warrant Agreement, or of any action
taken or to be taken by the Company pursuant to or in connection with this
Agreement, the Placement Agent or the Placement Agent Warrant Agreement, (ii) is
required to be disclosed in the Registration Statement which is not so disclosed
(and such proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), or (iii) might materially and
adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, stockholders' equity, value, operation, properties,
business or results of operations of the Company and the Subsidiaries taken as a
whole.
(j) The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, enter into this Agreement, and the
Placement Agent Warrant Agreement and to consummate the transactions provided
for in this Agreement, and the Placement Agent Warrant Agreement; and this
Agreement and the Placement Agent Warrant Agreement have each been duly and
properly authorized, executed and delivered by the Company. Each of this
Agreement, and the Placement Agent Warrant Agreement constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, and none of the Company's issue and sale of the
Securities, execution or delivery of this Agreement or the Placement Agent
Warrant Agreement, its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any amendments
or supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or
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intangible) of any of the Company or the Subsidiaries pursuant to the terms of
(i) the certificate of incorporation or by-laws of any of the Company or the
Subsidiaries, (ii) any license, contract, collective bargaining agreement,
indenture, mortgage, deed of trust, lease, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or instrument
to which any of the Company or the Subsidiaries is a party or by which any of
the Company or the Subsidiaries is or may be bound or to which either of its or
their respective properties or assets (tangible or intangible) is or may be
subject, or any indebtedness, or (iii) any statute, judgment, decree, order,
rule or regulation applicable to any of the Company or the Subsidiaries of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over any of the Company or the Subsidiaries or any of its or their
respective activities or properties.
(k) No consent, approval, authorization or order of, and no filing with,
any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement,
and the Placement Agent Warrant Agreement and the transactions contemplated
hereby and thereby, including without limitation, any waiver of any preemptive,
first refusal or other rights that any entity or person may have for the issue
and/or sale of any of the Securities, except such as have been or may be
obtained under the Act or may be required under state securities or Blue Sky
laws in connection with the distribution of the Securities to be sold by the
Company hereunder.
(l) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which any of the Company or the Subsidiaries is a
party or by which it or they may be bound or to which its or their respective
assets, properties or business may be subject have been duly and validly
authorized, executed and delivered by the Company or the Subsidiaries, as the
case may be, and constitute the legal, valid and binding agreements of the
Company or the Subsidiaries, as the case may be, enforceable against each of
them in accordance with their respective terms. The descriptions in the
Registration Statement of agreements, contracts and other documents are accurate
and fairly present the information required to be shown with respect thereto by
Form SB-2, and there are no contracts or other documents which are required by
the Act to be described in the Registration Statement or filed as exhibits to
the Registration Statement which are not described or filed as required, and the
exhibits which have been filed are complete and correct copies of the documents
of which they purport to be copies.
(m) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, none of the Company nor the
Subsidiaries has (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, (ii) entered into any
transaction other than in the ordinary course of business, or (iii) declared or
paid any dividend or made any other distribution on or in respect of its capital
stock of any class, and there has not been any change in the capital stock, or
any change in the debt (long or short term) or liabilities or material adverse
change in or affecting the general affairs, management, financial
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<PAGE>
operations, stockholders' equity or results of operations of any of the Company
or the Subsidiaries.
(n) No default exists in the due performance and observance of any term,
covenant or condition of any license, contract, collective bargaining agreement,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, partnership agreement, note, loan or
credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which any of the Company or the Subsidiaries is a party or by
which any of the Company or the Subsidiaries may be bound or to which the
property or assets (tangible or intangible) of any of the Company or the
Subsidiaries is subject or affected, which default would have a material adverse
effect on the Company and the Subsidiaries taken as a whole.
(o) Each of the Company and the Subsidiaries has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations involving
any of the Company or the Subsidiaries by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor
practice charge or complaint against any of the Company or the Subsidiaries
pending before the National Labor Relations Board or any lockout, strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving any of the Company or the Subsidiaries, or any predecessor entity,
and none has ever occurred. No representation question exists respecting the
employees of any of the Company or the Subsidiaries, and no collective
bargaining agreement or modification thereof is currently being negotiated by
any of the Company or the Subsidiaries. No grievance or arbitration proceeding
is pending under any expired or existing collective bargaining agreements of any
of the Company or the Subsidiaries. No labor dispute with the employees of any
of the Company or the Subsidiaries exists, or, is imminent.
(p) None of the Company nor any of the Subsidiaries maintains, sponsors or
contributes to any program or arrangement that is an "employee pension benefit
plan," an "employee welfare benefit plan," or a "multiemployer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). None of the Company nor the Subsidiaries maintains or contributes, now
or at any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in
a "prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company or the Subsidiaries to any tax
penalty on prohibited transactions and which has not adequately been corrected.
Each ERISA Plan is in compliance with all reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
None of the Company nor the Subsidiaries has ever completely or partially
withdrawn from a "multiemployer plan."
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(q) None of the Company, the Subsidiaries, nor any of its or their
respective employees, directors, stockholders, partners, or affiliates (within
the meaning of the Rules and Regulations) of any of the foregoing has taken or
will take, directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under the Exchange
Act, or otherwise, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or otherwise.
(r) Each of the Company and the Subsidiaries has good and marketable title
to, or valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or leased by it, free and
clear of all liens, charges, claims, encumbrances, pledges, security interests,
defects, or other restrictions or equities of any kind whatsoever, other than
those referred to in the Prospectus, liens for taxes not yet due and payable and
liens which would not have a material adverse effect on the Company and the
Subsidiaries taken as a whole.
(s) Each of Grant Thornton LLP and Farber, Blicht & Eyerman, LLP, whose
reports are filed with the Commission as a part of the Registration Statement,
are independent certified public accountants as required by the Act and the
Rules and Regulations.
(t) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, the Subsidiaries, or any of its or their respective
officers, directors, stockholders, partners, employees or affiliates, that may
affect the Underwriters' compensation, as determined by the National Association
of Securities Dealers, Inc. ("NASD").
(u) None of the Company, the Subsidiaries, nor any of its or their
respective officers, employees, agents or any other person acting on behalf of
any of the Company or the Subsidiaries has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, or official or employee
of any governmental agency (domestic or foreign) or instrumentality of any
government (domestic or foreign) or any political party or candidate for office
(domestic or foreign) or other person who was, is, or may be in a position to
help or hinder the business of any of the Company or the Subsidiaries (or assist
any of the Company or the Subsidiaries in connection with any actual or proposed
transaction) which (a) might subject any of the Company or the Subsidiaries, or
any other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (b) if not given in
the past, might have had a material adverse effect on the assets, business or
operations of any of the Company or the Subsidiaries, or (c) if not continued in
the future, might adversely affect the assets, business, condition, financial or
otherwise, earnings, position, properties, value, operations or prospects of any
of the Company or the Subsidiaries. The Company's and each Subsidiary's
internal accounting controls are sufficient to cause each of the Company and the
Subsidiaries to comply with the Foreign Corrupt Practices Act of 1977, as
amended.
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(v) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company or of any Subsidiary, or any "affiliate"
or "associate" (as these terms are defined in Rule 405 promulgated under the
Rules and Regulations) of any of the foregoing persons or entities has or has
had, either directly or indirectly, (i) an interest in any person or entity
which (A) furnishes or sells services or products which are furnished or sold or
are proposed to be furnished or sold by any of the Company or the Subsidiaries,
or (B) purchases from or sells or furnishes to any of the Company or the
Subsidiaries any goods or services, or (ii) a beneficiary interest in any
contract or agreement to which the Company or any Subsidiary is a party or by
which it may be bound or affected. Except as set forth in the Prospectus under
"Certain Relationships and Related Transactions," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company or any Subsidiary, and any officer, director, or 5% or greater
securityholder of the Company or any Subsidiary, or any partner, affiliate or
associate of any of the foregoing persons or entities.
(w) The minute books of each of the Company and the Subsidiaries have been
made available to Janney and contain a complete summary of all meetings and
actions of the directors (including committees thereof) and stockholders of each
of the Company and the Subsidiaries, since the time of its incorporation, and
reflect all transactions referred to in such minutes accurately in all material
respects.
(x) Except and to the extent described in the Prospectus, no holders of
any securities of the Company or of any options, warrants or other convertible
or exchangeable securities of the Company have the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(y) The Company is not, and upon the issuance and sale of the Securities
as herein contemplated and the application of the net proceeds therefrom as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
(z) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the sale of the Notes by Janney of which Janney shall
not previously have been advised and furnished with a copy, or to which Janney
shall have objected or which is not in compliance with the Act, the Exchange Act
or the Rules and Regulations.
(aa) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise Janney and confirm the notice in writing (i) when the
Registration Statement, as amended, becomes effective, if the provisions of
Rule 430A promulgated under the Act will be
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relied upon, when the Prospectus has been filed in accordance with said Rule
430A and when any post-effective amendment to the Registration Statement becomes
effective; (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding suspending the effectiveness
of the Registration Statement or any order preventing or suspending the use of
the Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose; (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities for
offering or sale in any jurisdiction or of the initiation, or the threatening,
of any proceeding for that purpose; (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
shall enter a stop order or suspend such qualification at any time, the Company
will make every effort to obtain promptly the lifting of such order.
(bb) The Company shall file the Prospectus (in form and substance
satisfactory to Janney) or transmit the Prospectus by a means reasonably
calculated to result in filing with the Commission pursuant to Rule 424(b)(1)
(or, if applicable and if consented to by Janney, pursuant to Rule 424(b)(4))
not later than the Commission's close of business on the earlier of (i) the
second business day following the execution and delivery of this Agreement and
(ii) the fifth business day after the effective date of the Registration
Statement.
(cc) The Company will give Janney notice of its intention to file or
prepare any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus (including
any revised prospectus which the Company proposes for use by Janney in
connection with the sale of the Notes which differs from the corresponding
prospectus on file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus is required to be
filed pursuant to Rule 424(b) of the Rules and Regulations), and will furnish
Janney with copies of any such amendment or supplement a reasonable amount of
time prior to such proposed filing or use, as the case may be, and will not file
any such prospectus to which Janney or Orrick, Herrington & Sutcliffe LLP
("Placement Agent's Counsel") shall object.
(dd) The Company shall endeavor in good faith, in cooperation with Janney,
at or prior to the time the Registration Statement becomes effective, to qualify
the Notes for sale under the securities laws of such jurisdictions as Janney may
designate to permit the continuance of sales and dealings therein for as long as
may be necessary to complete the distribution, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; PROVIDED, HOWEVER, the Company shall not be required to qualify as a
foreign corporation or file a general or limited consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall
be effected, the Company will, unless Janney agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
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(ee) During the time when a prospectus is required to be delivered under
the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus
relating to the Securities is required to be delivered under the Act, any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or Placement Agent's Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will notify Janney promptly and prepare and
file with the Commission an appropriate amendment or supplement in accordance
with Section 10 of the Act, each such amendment or supplement to be satisfactory
to Placement Agent's Counsel, and the Company will furnish to Janney copies of
such amendment or supplement as soon as available and in such quantities as
Janney may request.
(ff) The Company will furnish to Janney or on Janney's order, without
charge, at such place as Janney may designate, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or post-effective
amendments thereto (two of which copies will be signed and will include all
financial statements and exhibits), the Prospectus, and all amendments and
supplements thereto, including any prospectus prepared after the effective date
of the Registration Statement, in each case as soon as available and in such
quantities as Janney may request.
(gg) None of the Company, the Subsidiaries, nor any of its or their
respective officers, directors, stockholders, nor any of its or their respective
affiliates (within the meaning of the Rules and Regulations) will take, directly
or indirectly, any action designed to, or which might in the future reasonably
be expected to cause or result in, stabilization or manipulation of the price of
any securities of the Company.
(hh) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(ii) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(jj) As soon as practicable, but in no event more than five (5) business
days before the effective date of the Registration Statement, file a Form 8-A
with the Commission providing for the registration under the Exchange Act of the
Securities.
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(kk) For a period equal to the lesser of (i) seven (7) years from the date
hereof, and (ii) the sale to the public of the Warrant Shares, the Company will
not take any action or actions which may prevent or disqualify the Company's use
of Form S-1 (or other appropriate form) for the registration under the Act of
the Warrant Shares.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF JANNEY.
(a) Janney represents, warrants and covenants as follows:
(i) Janney has the necessary power to enter into this Agreement and
to consummate the transactions contemplated hereby.
(ii) Janney will deliver to each purchaser, prior to any submission
by such person of a written offer relating to the purchase of Notes, a copy
of the Preliminary Prospectus, as it may have been most recently amended or
supplemented by the Company.
(iii) Upon receipt of an executed Subscription Agreement and the
payments representing subscriptions for Notes, Janney will promptly forward
copies of the subscription documents to the Company and shall forward all
consideration received for such Notes to the Escrow Agent to be held in
escrow.
(iv) Janney will not deliver the Preliminary Prospectus to any
person it does not reasonably believe to be an Accredited Investor.
(v) Janney will not intentionally take any action which it
reasonably believes would cause the Offering to violate the provisions of
the Act, the Exchange Act or the Rules and Regulations.
(vi) Janney shall use all reasonable efforts to determine (a) that
each prospective purchaser is an Accredited Investor and (b) that any
information furnished by a prospective investor is true and accurate.
Janney shall obtain from each prospective purchaser of Notes a completed
and executed copy of the Subscription Agreement and the Accredited Investor
Questionnaire, and shall promptly deliver a copy thereof to the Company.
Janney shall offer the Notes only to persons it reasonably believes to be
Accredited Investors, which reasonable belief shall be based upon, among
other items as Janney shall deem appropriate, the information provided by
each such person in the applicable executed Accredited Investor
Questionnaire. Janney will not offer the Notes in any state without first
receiving notice of "blue sky" compliance from "blue sky" counsel. Janney
will not make representations with respect to the Company other than as
contained in the Prospectus. Subject to the performance by the Company of
its obligations hereunder, the Prospectus and the offer and sale of the
securities comply, and will continue to comply, up to the Termination Date
in all material respects with the requirements of Rule 506 of Regulation D
promulgated by the SEC pursuant to the Act and any other applicable Federal
and state laws, rules, regulations and executive orders.
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Janney shall have no obligation to insure that (a) any check, note, draft
or other means of payment for Notes will be honored, paid or enforceable
against the subscriber in accordance with its terms, or (b) subject to the
performance of Janney's obligations and the accuracy of Janney's
representations and warranties hereunder, (i) the Offering is exempt from
the registration requirements of the Act or any applicable state "Blue Sky"
law or (ii) any prospective purchaser is an Accredited Investor.
(vii) Janney is a member of the National Association of Securities
Dealers, Inc. and is a broker-dealer registered as such under the Exchange
Act and under the securities laws of the states in which the Notes will be
offered or sold by Janney, unless an exemption for such state registration
is available to Janney. Janney is in compliance with all material rules
and regulations applicable to Janney generally and applicable to Janney's
participation in this Offering.
5. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless Janney, any officer,
director, partner, employee, agent and counsel of Janney and each person, if
any, who controls Janney ("controlling person") within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, from and against any and all
losses, claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which Janney or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon (A) any untrue statement
or alleged untrue statement of a material fact contained (i) in any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time to time
amended and supplemented); (ii) in any post-effective amendment or amendments or
any new registration statement and prospectus in which is included securities of
the Company issued or issuable upon exercise of the Securities; or (iii) in any
application or other document or written communication (in this SECTION 8
collectively called "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the Commission, any
state securities commission or agency, Nasdaq or any other securities exchange;
(B) the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading (in
the case of the Prospectus, in the light of the circumstances under which they
were made), or (C) any breach of any representation, warranty, covenant or
agreement of the Company contained herein or in any certificate by or on behalf
of the Company or any Subsidiary or any of their respective officers delivered
pursuant hereto, unless, in the case of clause (A) or (B) above, such statement
or omission was made in reliance upon and in strict conformity with written
information furnished to the Company with respect to Janney by or on behalf of
Janney expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment thereof or supplement thereto, or in
any application, as the case may be. The indemnity agreement in
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this SUBSECTION (a) shall be in addition to any liability which the Company may
have at common law or otherwise.
The foregoing indemnity with respect to any untrue statement contained in
or omission from a Preliminary Prospectus shall not inure to the benefit of
Janney (or any person controlling Janney) from whom the person asserting any
such loss, liability, claim, damage or expense purchased any of the Securities
which are the subject thereof if (1) the Company sustains the burden of proving
that such asserting person did not receive a copy of the Prospectus (or the
Prospectus as amended or supplemented) (in each case exclusive of the documents
from which information is incorporated by reference) at or prior to the written
confirmation of the sale of such Securities to such person and the untrue
statement contained in or omitted from such Preliminary Prospectus was corrected
in the Prospectus (or the Prospectus as amended or supplemented) and (2) the
Company shall have complied with its covenant pursuant to Section 3(ee) of this
Agreement.
(b) Janney agrees to indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration Statement and
each other person, if any, who controls the Company within the meaning of the
Act, to the same extent as the foregoing indemnity from the Company to Janney
but only with respect to statements or omissions, if any, made in any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any application made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to Janney by Janney expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by Janney in connection with this Offering. The Company
acknowledges that the statements with respect to the offering of the Notes set
forth under the heading "Plan of Distribution" and the stabilization legend in
the Prospectus have been furnished by Janney expressly for use therein and
constitute the only information furnished in writing by or on behalf of Janney
for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this SECTION 5 of
notice of the commencement of any claim, action, suit, investigation, inquiry,
proceeding or litigation, such indemnified party shall, if a claim in respect
thereof is to be made against one or more indemnifying parties under this
SECTION 5, notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this SECTION 5 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding
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the foregoing, the indemnified party or parties shall have the right to employ
its or their own counsel in any such case but the fees and expenses of such
counsel shall be at the expense of such indemnified party or parties unless (i)
the employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of thereof at the expense of
the indemnifying party, (ii) the indemnifying parties shall not have employed
counsel reasonably satisfactory to such indemnified party to have charge of the
defense thereof within a reasonable time after notice of commencement thereof,
or (iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense thereof on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one claim, action, suit, investigation, inquiry, proceeding or litigation or
separate but similar or related claims, actions, suits, investigations,
inquiries, proceedings or litigation in the same jurisdiction arising out of the
same general allegations or circumstances. Anything in this SECTION 5 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim, action, suit, investigation, inquiry, proceeding or
litigation effected without its written consent; PROVIDED, HOWEVER, that such
consent was not unreasonably withheld. An indemnifying party will not, without
the prior written consent of the indemnified parties, settle, compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit, investigation, inquiry, proceeding or litigation in respect
of which indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim, action,
suit, investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any case in
which (i) an indemnified party makes claim for indemnification pursuant to this
SECTION 5, but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
this SECTION 5 provide for indemnification in such case, or (ii) contribution
under the Act may be required on the part of any indemnified party, then each
indemnifying party shall contribute to the amount paid as a result of such
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
(A) in such proportion as is appropriate to reflect the relative benefits
received by each of the contributing parties, on the one hand, and the party to
be indemnified on the other hand, from the offering of the Notes or (B) if the
allocation provided by clause (A) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities,
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as well as any other relevant equitable considerations. In any case where the
Company is the contributing party and Janney is the indemnified party, the
relative benefits received by the Company on the one hand, and Janney, on the
other, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Notes (before deducting expenses) bear to the total
placement agent commission received by Janney hereunder, in each case as set
forth in the table on the Cover Page of the Prospectus. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by Janney, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred to above in
this SUBSECTION (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
SUBSECTION (d) Janney shall not be required to contribute any amount in excess
of the placement agent commission applicable to the Notes placed by Janney
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 117(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
SECTION 5, each person, if any, who controls the Company or Janney within the
meaning of the Act, each officer of the Company who has signed the Registration
Statement, and each director of the Company shall have the same rights to
contribution as the Company or Janney, as the case may be, subject in each case
to this SUBSECTION (d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect to which a claim for contribution may be made against another
party or parties under this SUBSECTION (d), notify such party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties shall not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have hereunder or otherwise than under
this SUBSECTION (d), or to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement set forth above
shall be in addition to any liabilities which any indemnifying party may have at
common law or otherwise.
6. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on each of the Closing Date and the
Option Closing Date (to the extent not paid at the Closing Date) all expenses
and fees (other than fees of Placement Agent's Counsel, except as provided in
(iv) below) incident to the performance of the obligations of the Company under
this Agreement and the Placement Agent Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Placement Agent
Warrant Agreement, and related documents, including the cost of all copies
thereof and of the
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Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to Janney and such dealers as Janney may request,
in quantities as hereinabove stated, (iii) the printing, engraving, issuance and
delivery of the Securities, (iv) the qualification of the Securities under state
or foreign securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and "tomb-stone" advertisement expenses, (vi) fees and expenses of
the Trustee and all issue and transfer taxes, if any, (vii) applications for
assignment of a rating of the Securities by qualified rating agencies, and
(viii) the fees payable to the Commission and the NASD.
(b) If this Agreement is terminated by Janney in accordance with the
provisions of SECTION 8, the Company shall reimburse and indemnify Janney for
all of their actual out-of-pocket expenses, including the fees and disbursements
of Placement Agent's Counsel.
(c) The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this SECTION 6, it will pay to Janney on the
Closing Date by certified or bank cashier's check or, at the election of Janney,
by deduction from the proceeds of the offering contemplated herein a non-
accountable expense allowance equal to one and one-half percent (1.5%) of the
gross proceeds received by the Company from the sale of the Notes. In the event
Janney elects to exercise the over-allotment option described in SECTION 2
hereof, the Company agrees to pay to Janney on the Option Closing Date (by
certified or bank cashier's check or, at Janney's election, by deduction from
the proceeds of the offering) a non-accountable expense allowance equal to one
and one-half percent (1.5%) of the gross proceeds received by the Company from
the sale of the Option Notes.
7. CLOSING.
The Closing shall be held at the offices of Janney or its counsel.
(a) At the Closing Date, Janney shall have received the favorable opinion
of Olshan Grundman Frome & Rosenzweig LLP, counsel to the Company and the
Subsidiaries, dated the Closing Date, addressed to Janney and in form and
substance satisfactory to Placement Agent's Counsel, to the effect that:
(i) each of the Company and the Subsidiaries (A) has been duly
organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction, (B) is duly qualified and licensed and in
good standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its operations
requires such qualification or licensing, and (C) has all requisite
corporate power and authority to own or lease its properties and conduct
its business as described in the Prospectus;
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(ii) the Company owns, directly or indirectly, one hundred percent
(100%) of the outstanding capital stock of each of the Subsidiaries, and,
to the best knowledge of such counsel, all such shares have been validly
issued, are fully paid and non-assessable, were not issued in violation of
any preemptive rights and are owned free and clear of any liens, charges,
claims, encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever;
(iii) except as described in the Prospectus, to the best knowledge of
such counsel, none of the Company nor the Subsidiaries owns an interest in
any other corporation, partnership, joint venture, trust or other business
entity;
(iv) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "CAPITALIZATION", and, to the best knowledge of
such counsel, the Company is not a party to or bound by any instrument,
agreement or other arrangement providing for it to issue, sell, transfer,
purchase or redeem any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Warrant Agreement, the Placement
Agent Warrant Agreement and the Representative's Warrant Agreement and as
described in the Prospectus. The Notes and all other securities issued or
issuable by the Company conform in all material respects to all statements
with respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the holders thereof have no rights of rescission with respect thereto, and
are not subject to personal liability by reason of being such holders; and,
to the best knowledge of such counsel, none of such securities were issued
in violation of the preemptive rights of any holders of any security of the
Company or any similar rights granted by the Company. The Securities to be
sold by the Company hereunder and under the Placement Agent Warrant
Agreement, to the best knowledge of such counsel, are not and will not be
subject to any preemptive or other similar rights of any stockholder, have
been duly authorized and, when issued, paid for and delivered in accordance
with the terms hereof, will be validly issued, fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and validly
taken; and the certificates representing the Securities are in due and
proper form. The Placement Agent Warrants constitute valid and binding
obligations of the Company to issue and sell, upon exercise thereof and
securities of the Company called for thereby. Upon the issuance and
delivery pursuant to this Agreement of the Placement Agent Warrants to be
sold by the Company, the Placement Agent will acquire good and marketable
title to the Placement Agent Warrants free and clear of any pledge, lien,
charge, claim, encumbrance, pledge, security interest, or other restriction
or equity of any kind whatsoever.
(v) the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in the
appropriate form under
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Rule 430A, and no stop order suspending the use of the Preliminary
Prospectus, the Registration Statement or Prospectus or any part of any
thereof or suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
pending or, to the best of such counsel's knowledge, threatened or
contemplated under the Act;
(vi) each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto (other than
the financial statements and other financial and statistical data included
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations.
(vii) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement and the Prospectus and filed as exhibits thereto,
and the exhibits which have been filed are correct copies of the documents
of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or amendment
thereto of contracts and other documents to which the Company or any
Subsidiary is a party or by which it is bound, including any document to
which the Company or any Subsidiary is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate in all material respects and fairly
represent the information required to be shown by Form SB-2; (C) to the
best knowledge of such counsel, there is not pending or threatened against
any of the Company or the Subsidiaries any action, arbitration, suit,
proceeding, inquiry, investigation, litigation, governmental or other
proceeding (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same), or
involving the properties or business of any of the Company or the
Subsidiaries which (x) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized
in the Registration Statement are accurately summarized in all respects),
(y) questions the validity of the capital stock of the Company or this
Agreement or the Placement Agent Warrant Agreement, or of any action taken
or to be taken by the Company pursuant to or in connection with any of the
foregoing; (D) no statute or regulation or legal or governmental proceeding
required to be described in the Prospectus is not described as required,
except for those statutes or regulations pertaining to tax exempt not-for-
profit organizations and healthcare regulation; and (E) there is no action,
suit or proceeding pending, or threatened, against or affecting any of the
Company or the Subsidiaries before any court or arbitrator or governmental
official (or any basis thereof known to such counsel) in which there is a
reasonable possibility of a decision which may result in a material adverse
change in the condition, financial or otherwise, or the earnings, position,
prospects, stockholders' equity, value, operation, properties, business or
results of operations of any of the Company or the Subsidiaries, which
could adversely affect the present or prospective ability of the Company to
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perform its obligations under this Agreement or the Placement Agent Warrant
Agreement or which in any manner draws into question the validity or
enforceability of this Agreement or the Placement Agent Warrant Agreement;
(viii) the Company has full legal right, power and authority to enter
into each of this Agreement and the Placement Agent Warrant Agreement, and
to consummate the transactions provided for therein; and each of this
Agreement and the Placement Agent Warrant Agreement has been duly
authorized, executed and delivered by the Company. Each of this Agreement
and the Placement Agent Warrant Agreement, assuming due authorization,
execution and delivery by each other party thereto constitutes a legal,
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms (except as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law), and none of the Company's
execution or delivery of this Agreement and the Placement Agent Warrant
Agreement, its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result
in the creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any
kind whatsoever upon, any property or assets (tangible or intangible) of
any of the Company or the Subsidiaries pursuant to the terms of, (A) the
certificate of incorporation or by-laws of any of the Company or the
Subsidiaries, (B) any license, contract, collective bargaining agreement,
indenture, mortgage, deed of trust, lease, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which any of the Company or the Subsidiaries is
a party or by which it is or they are or may be bound or to which any of
its or their respective properties or assets (tangible or intangible) is or
may be subject, or any indebtedness, or (C) any statute, judgment, decree,
order, rule or regulation applicable to any of the Company or the
Subsidiaries of any arbitrator, court, regulatory body or administrative
agency or other governmental agency or body (including, without limitation,
those having jurisdiction over environmental or similar matters), domestic
or foreign, having jurisdiction over any of the Company or the Subsidiaries
or any of its or their respective activities or properties, except for any
matters relating to tax exempt not-for-profit organizations and healthcare
regulation.
(ix) no consent, approval, authorization or order, and no filing
with, any court, regulatory body, government agency or other body (other
than such as may be required under Blue Sky laws, as to which no opinion
need be rendered) is required in connection with the issuance of the Notes
pursuant to the Prospectus and the Registration Statement, the issuance of
the Placement Agent Warrants, the performance of this Agreement and
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the Placement Agent Warrant Agreement, and the transactions contemplated
hereby and thereby;
(x) the properties and business of each of the Company and the
Subsidiaries conform in all material respects to the description thereof
contained in the Registration Statement and the Prospectus; and, to the
best knowledge of such counsel, each of the Company and the Subsidiaries
has good and marketable title to, or valid and enforceable leasehold
estates in, all items of real and personal property stated in the
Prospectus to be owned or leased by it, in each case free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects
or other restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and payable;
(xi) to the best knowledge of such counsel, none of the Company nor
the Subsidiaries is in breach of, or in default under, any term or
provision of any license, contract, collective bargaining agreement,
indenture, mortgage, installment sale agreement, deed of trust, lease,
voting trust agreement, stockholders' agreement, partnership agreement,
note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which any of the Company or the Subsidiaries is a party or by
which any of the Company or the Subsidiaries may be bound or to which the
respective properties or assets (tangible or intangible) of any of the
Company or the Subsidiaries is subject or affected; and none of the Company
nor the Subsidiaries is in violation of any term or provision of its
Articles of Incorporation or By-Laws or, to the best knowledge of such
counsel, in violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation;
(xii) the statements in the Prospectus under "RISK FACTORS," "THE
COMPANY," "BUSINESS," "MANAGEMENT," "DESCRIPTION OF MORTGAGE LOANS,"
"PRINCIPAL AND SELLING STOCKHOLDERS," "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS," "DESCRIPTION OF CAPITAL STOCK," "DESCRIPTION OF NOTES" and
"SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in all
material respects, except for any matters relating to tax exempt
not-for-profit organizations and healthcare regulation;
(xiii) the persons listed under the caption "PRINCIPAL AND SELLING
STOCKHOLDERS" in the Prospectus are the respective "beneficial owners" (as
such phrase is defined in regulation 13d-3 under the Exchange Act) of the
securities set forth opposite their respective names thereunder as and to
the extent set forth therein;
(xiv) to the best knowledge of such counsel, none of the Company, the
Subsidiaries nor any of their respective officers, stockholders, employees
or agents, nor any other person acting on behalf of any of the Company or
the Subsidiaries has, directly
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or indirectly, given or agreed to give any money, gift or similar benefit
(other than legal price concessions to customers in the ordinary course of
business) to any customer, supplier, employee or agent of a customer or
supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political
party or candidate for office (domestic or foreign) or other person who is
or may be in a position to help or hinder the business of any of the
Company or the Subsidiaries (or assist it in connection with any actual or
proposed transaction) which might subject any of the Company or the
Subsidiaries to any damage or penalty in any civil, criminal or
governmental litigation or proceeding;
(xv) to the best knowledge of such counsel, no person, corporation,
trust, partnership, association or other entity has the right to include
and/or register any securities of the Company in the Registration
Statement, require the Company to file any registration statement or, if
filed, to include any security in such registration statement;
(xvi) except as described in the Prospectus, to the best knowledge
of such counsel, there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Securities hereunder or financial
consulting arrangements or any other arrangements, agreements,
understandings, payments or issuances that may affect Janney's
compensation, as determined by the NASD;
(xvii) except as described in the Prospectus, to the best knowledge
of such counsel, none of the Company nor the Subsidiaries (A) maintains,
sponsors or contributes to any ERISA Plans, (B) maintains or contributes,
now or at any time previously, to a defined benefit plan, as defined in
Section 3(35) of ERISA, and (C) has ever completely or partially withdrawn
from a "multiemployer plan";
(xviii) except as set forth in the Prospectus and to the best
knowledge of such counsel, no officer, director or stockholder of any of
the Company or the Subsidiaries, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and
Regulations) of any of the foregoing persons or entities has or has had,
either directly or indirectly, (A) an interest in any person or entity
which (x) furnishes or sells services or products which are furnished or
sold or are proposed to be furnished or sold by any of the Company or the
Subsidiaries, or (y) purchases from or sells or furnishes to any of the
Company or the Subsidiaries any goods or services, or (B) a beneficial
interest in any contract or agreement to which any of the Company or the
Subsidiaries is a party or by which it or they may be bound or affected.
Except as set forth in the Prospectus under "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS," to the best knowledge of such counsel, there are no
existing agreements, arrangements, understandings or transactions, or
proposed agreements, arrangements, understandings or transactions, between
or among any of the Company or the Subsidiaries, and any officer, director,
or 5% or greater securityholder of any of the Company or the Subsidiaries,
or any affiliate or associate of any such person or entity;
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(xix) none of the Company, the Subsidiaries or any of their
respective affiliates shall be subject to the requirements of or shall be
deemed an "Investment Company," pursuant to and as defined under,
respectively, the Investment Company Act.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and the
Subsidiaries, and representatives of the independent public accountants for the
Company and the Subsidiaries, at which conferences such counsel made inquiries
of such officers, representatives and accountants and discussed the contents of
the Preliminary Prospectus, the Registration Statement, the Prospectus, and
related matters and, although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Preliminary Prospectus, the Registration Statement
and Prospectus, on the basis of the foregoing, no facts have come to the
attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective or the Preliminary Prospectus or
Prospectus or amendment or supplement thereto as of the date of such opinion
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (it being understood that such counsel need express no opinion
with respect to the financial statements and schedules and other financial and
statistical data included in the Preliminary Prospectus, the Registration
Statement or the Prospectus). Such counsel shall further state that its
opinions may be relied upon by Placement Agent's Counsel in rendering its
opinion to Janney.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Placement Agent's Counsel) of
other counsel acceptable to Placement Agent's Counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of each of the
Company and the Subsidiaries and certificates or other written statements of
officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of each of the Company and
the Subsidiaries, provided that copies of any such statements or certificates
shall be delivered to Placement Agent's Counsel if requested. The opinion of
such counsel for the Company and the Subsidiaries shall state that the opinion
of any such other counsel is in form satisfactory to such counsel and that
Janney, Placement Agent's Counsel and they are each justified in relying
thereon. Any opinion of counsel for the Company and the Subsidiaries shall not
state that it is to be governed or qualified by, or that it is otherwise subject
to, any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991) or any comparable state accord.
(b) At the Closing Date, Janney shall have received the favorable opinion
of Epstein Becker & Green, special counsel to the Company and the Subsidiaries,
dated the Closing Date, addressed to Janney, in form and substance satisfactory
to Placement Agent's Counsel, and in substantially the form of Schedule C
attached hereto.
25
<PAGE>
(c) At each Option Closing Date, if any, Janney shall have received the
favorable opinions of each of Olshan Grundman Frome & Rosenzweig LLP, counsel to
the Company and the Subsidiaries, and Epstein Becker & Green, special counsel to
the Company and the Subsidiaries, dated such Option Closing Date, addressed to
Janney and in form and substance satisfactory to Placement Agent's Counsel
confirming as of such Option Closing Date the statements made by each of Olshan
Grundman Frome & Rosenzweig LLP, and Epstein Becker & Green, in their respective
opinions delivered on the Closing Date.
(d) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no adverse change nor development involving a
prospective change in the condition, financial or otherwise, earnings, position,
value, properties, results of operations, prospects, stockholders' equity or the
business activities of the Company and the Subsidiaries, taken as a whole,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by any of the Company or the Subsidiaries, from the
latest date as of which the financial condition of the Company and the
Subsidiaries is set forth in the Registration Statement and Prospectus which is
adverse to the Company and the Subsidiaries taken as a whole; (iii) none of the
Company nor the Subsidiaries shall be in default under any provision of any
instrument relating to any outstanding indebtedness; (iv) none of the Company
nor the Subsidiaries shall have issued any securities (other than the Securities
and except as described in the Prospectus) or declared or paid any dividend or
made any distribution in respect of its capital stock of any class and there has
not been any change in the capital stock or any material change in the debt
(long or short term) or liabilities or obligations of any of the Company or the
Subsidiaries (contingent or otherwise); (v) no material amount of the assets of
any of the Company or the Subsidiaries shall have been pledged or mortgaged,
except as set forth in the Registration Statement and Prospectus; (vi) no
action, suit or proceeding, at law or in equity, shall have been pending or
threatened (or circumstances giving rise to same) against any of the Company or
the Subsidiaries, or affecting any of its or their respective properties or
businesses before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may adversely affect the business, operations, earnings, position,
value, properties, results of operations, prospects or financial condition or
income of the Company and the Subsidiaries taken as a whole; and (vii) no stop
order shall have been issued under the Act and no proceedings therefor shall
have been initiated, threatened or contemplated by the Commission.
(e) At the Closing Date and each Option Closing Date, if any, Janney shall
have received a certificate of the Company signed by its chief executive
officer, dated as of the date of such Closing Date or Option Closing Date, if
any, to the effect that the conditions set forth in subparagraph (d) above have
been satisfied and that, as of the date of such Closing Date or Option Closing
Date, if any,, the representations and warranties of the Company set forth
herein are true and correct.
26
<PAGE>
8. TERMINATION.
(a) Subject to SUBSECTION (b) of this SECTION 8, Janney shall have the
right to terminate this Agreement, (i) if any domestic or international event or
act or occurrence has materially adversely disrupted, or in Janney's opinion
will in the immediate future materially adversely disrupt, the financial
markets; or (ii) if any material adverse change in the financial markets shall
have occurred; or (iii) if trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the NASD, the Boston Stock Exchange, the
Commission or any governmental authority having jurisdiction over such matters;
or (iv) if trading of any of the securities of the Company shall have been
suspended, or any of the securities of the Company shall have been delisted, on
any exchange or in any over-the-counter market; (v) if the United States shall
have become involved in a war or major hostilities, or if there shall have been
an escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (vi) if a banking moratorium
has been declared by a state or federal authority; or (vii) if a moratorium in
foreign exchange trading has been declared; or (viii) if the Company shall have
sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in Janney's
opinion, make it inadvisable to proceed with the offering, sale and/or delivery
of the Notes; or (ix) if there shall have been such a material adverse change in
the conditions or prospects of the Company, or such material adverse change in
the general market, political or economic conditions, in the United States or
elsewhere, that, in each case, in Janney's judgment, would make it inadvisable
to proceed with the offering, sale and/or delivery of the Notes or (x) if any of
Carl G. Paffendorf or Larry L. Laird shall no longer serve the Company in their
present capacity.
(b) If this Agreement is terminated by Janney in accordance with the
provisions of SECTION 8(a) the Company shall promptly reimburse and indemnify
Janney for all of its actual out-of-pocket expenses, including the fees and
disbursements of Placement Agent's Counsel (less amounts previously paid
pursuant to SECTION 6(c) above, if any). Notwithstanding any contrary provision
contained in this Agreement, if this Agreement shall not be carried out within
the time specified herein, or any extension thereof granted to Janney, by reason
of any failure on the part of the Company to perform any undertaking or satisfy
any condition of this Agreement by it to be performed or satisfied (including,
without limitation, pursuant to SECTION 3 or SECTION 7) then, the Company shall
promptly reimburse and indemnify Janney for all of its actual out-of-pocket
expenses, including the fees and disbursements of Placement Agent's Counsel
(less amounts previously paid pursuant to SECTION 6(c) above, if any). In
addition, the Company shall remain liable for all Blue Sky counsel fees and
disbursements, expenses and filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to SECTIONS 3, 7, and 11
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of SECTION 5 and SECTION 6 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
27
<PAGE>
9. MISCELLANEOUS.
(a) This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all which shall be deemed to be one
and the same instrument.
(b) Any notice required or permitted to be given hereunder shall be given
in writing and shall be deemed effective when deposited in the United States
mail, postage prepaid, or when received if personally delivered, addressed as
follows:
To Janney:
Janney Montgomery Scott Inc.
26 Broadway
New York, New York 10004
Attention: Mr. Herbert M. Gardner, Senior Vice President
with a copy to:
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
18th Floor
New York, New York 10103
Attention: Lawrence B. Fisher, Esq.
To the Company:
United Vanguard Homes, Inc.
4 Cedar Swamp Road
Glen Cove, New York 11542
Attention: Mr. Carl G. Paffendorf, Chief Executive Officer
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP,
505 Park Avenue
New York, New York 10022
Attention: Robert H. Friedman, Esq.
or to such other address of which written notice is given to the others.
(c) This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York without giving effect to conflicts of laws.
28
<PAGE>
(d) This Agreement contains the entire understanding between the parties
hereto and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
(e) If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
UNITED VANGUARD HOMES, INC.
By:________________________________
Name: Carl G. Paffendorf
Title: Chief Executive Officer
JANNEY MONTGOMERY SCOTT INC.
By:_________________________________
Name: Herbert M. Gardner
Title: Senior Vice President
<PAGE>
EXHIBIT 4.2
OH&S DRAFT
9/13/96
[FORM OF PLACEMENT AGENT'S WARRANT AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
-------------------------------------------------------
UNITED VANGUARD HOMES, INC.
AND
JANNEY MONTGOMERY SCOTT INC.
---------
PLACEMENT AGENT'S
WARRANT AGREEMENT
Dated as of , 1996
--------- ----
------------------------------------------------------
<PAGE>
PLACEMENT AGENT'S WARRANT AGREEMENT dated as of , 1996 between
UNITED VANGUARD HOMES, INC., a Delaware corporation (the "Company"), and JANNEY
MONTGOMERY SCOTT INC., (hereinafter referred to variously as the "Holder" or the
"Placement Agent").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Placement Agent warrants
("Warrants") to purchase up to an aggregate 122,549 shares of Common Stock,
$.001 par value, of the Company (the amount of Common Stock issuable upon
conversion of 10% of the amount of Notes sold in the Institutional Placement
assuming a conversion price of $10.20 which is based on an assumed initial
public offering price of $8.50 per share); and
WHEREAS, the Placement Agent has agreed pursuant to the agency agreement
(the "Agency Agreement") dated as of the date hereof between the Company and the
Placement Agent listed therein to act as the Placement Agent in connection with
the Company's proposed placement (the "Institutional Placement") of up to
$12,500,000 aggregate principal amount Convertible Senior Secured Notes due 2006
(the "Notes"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Agency Agreement) by
the Company to the Placement Agent in consideration for, and as part of the
Placement Agent's compensation in connection with, the Placement Agent acting as
the Placement Agent pursuant to the Agency Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the premises, the payment by the
Placement Agent to the Company of an aggregate twelve dollars ($12.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. GRANT. The Placement Agent (or its designees) is hereby granted the
right to purchase, at any time from , 1997 [one year from the effective
date of the Registration Statement], until 5:30 P.M., New York time, on ,
2001 [five years from the effective date of the Registration Statement], up to
an aggregate of 122,549 shares of Common Stock (the amount of Common Stock
issuable upon conversion of 10% of the amount of Notes sold in the Institutional
Placement assuming a conversion price of $10.20 which is based on an assumed
initial public offering price of $8.50 per share) at an initial exercise price
(subject to adjustment as provided in SECTION 8 hereof) of $ per share of
Common Stock [120% of the initial public offering price per share]. Except as
set forth herein, the shares of Common Stock issuable upon exercise of the
Warrants are in all respects identical to the shares of Common Stock issuable
upon conversion of the Notes sold in the Institutional Placement pursuant to the
terms and provisions of the Agency Agreement. The shares of Common Stock
issuable upon exercise of the Warrants are sometimes hereinafter referred to
collectively as the "Securities."
2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
- 2 -
<PAGE>
3. EXERCISE OF WARRANT.
SECTION 3.1 METHOD OF EXERCISE. The Warrants initially are exercisable
at an aggregate initial exercise price (subject to adjustment as provided in
SECTION 8 hereof) per share of Common Stock set forth in SECTION 6 hereof
payable by certified or official bank check in New York Clearing House funds,
subject to adjustment as provided in SECTION 8 hereof. Upon surrender of a
Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock purchased at the Company's principal executive offices in
Glen Cove, New York (presently located at 4 Cedar Swamp Road, Glen Cove, New
York 11542) the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
shares of Common Stock so purchased. The purchase rights represented by each
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares of the Common Stock underlying
the Warrants). Warrants may be exercised to purchase all or part of the shares
of Common Stock represented thereby. In the case of the purchase of less than
all the shares of Common Stock purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the shares of Common Stock purchasable thereunder.
SECTION 3.2 EXERCISE BY SURRENDER OF WARRANT. In addition to the method
of payment set forth in SECTION 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in SECTION 3.1 in exchange for
the number of shares of Common Stock equal to the quotient derived from dividing
- 3 -
<PAGE>
the numerator (x) an amount equal to the difference between (A) the number of
shares of Common Stock as to which the Warrants are being exercised multiplied
by the per share Market Price, and (B) the number of Warrants which are being
exercised multiplied by the Exercise Price as then in effect, by the denominator
(y) the per share Market Price of the Common Stock. Solely for the purposes of
this paragraph, Market Price shall be calculated either (i) on the date on which
the form of election attached hereto is deemed to have been sent to the Company
pursuant to SECTION 14 hereof ("Notice Date") or (ii) as the average of the
Market Prices for each of the five trading days preceding the Notice Date,
whichever of (i) or (ii) is greater.
SECTION 3.3 DEFINITION OF MARKET PRICE. As used herein, the phrase "Market
Price" at any date shall be deemed to be when referring to the Common Stock, the
last reported sale price, or, in case no such reported sale takes place on such
day, the average of the last reported sale prices for the last three (3) trading
days, in either case as officially reported by the principal securities exchange
on which the Common Stock is listed or admitted to trading or by the Nasdaq
National Market ("Nasdaq/NM"), or, if the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted by the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"), the
average closing bid price as furnished by the National Association of Securities
Dealers, Inc. ("NASD") through Nasdaq or similar organization if Nasdaq is no
longer reporting such information, or if the Common Stock is not quoted on
Nasdaq, as determined in good faith (using customary valuation methods) by
resolution of the members of the Board of Directors of the Company, based on the
best information available to it.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying
- 4 -
<PAGE>
such Warrants and, shall be made forthwith (and in any event within five (5)
business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of SECTIONS 5
and 7 hereof) be issued in the name of, or in such names as may be directed
by, the Holder thereof; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name
other than that of the Holder, and the Company shall not be required to issue
or deliver such certificates unless or until the person or persons requesting
the issuance thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such tax has
been paid.
The Warrant Certificates and the certificates representing the shares of
Common Stock underlying the Warrants (and/or other securities, property or
rights issuable upon the exercise of the Warrants) shall be executed on behalf
of the Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
Certificates representing the shares of Common Stock (and/or other securities,
property or rights issuable upon exercise of the Warrants) shall be dated as of
the Notice Date (regardless of when executed or delivered) and dividend bearing
securities so issued shall accrue dividends from the Notice Date.
5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred,
- 5 -
<PAGE>
assigned, hypothecated or otherwise disposed of, in whole or in part, for a
period of one (1) year from the date hereof, except to officers of the
Representative.
6. EXERCISE PRICE.
SECTION 6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in SECTION 8 hereof, the initial exercise price of each Warrant shall
be $ [120% of the initial public offering price] per share of Common Stock
commencing , 1997 [one year from the effective date of the
Registration Statement until , 2001 [five years from the effective date
of the Registration Statement]. The adjusted exercise price shall be the price
which shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of SECTION 8 hereof. Any
transfer of a Warrant shall constitute an automatic transfer and assignment of
the registration rights set forth in SECTION 7 hereof with respect to the
Securities or other securities, properties or rights underlying the Warrants.
SECTION 6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean
the initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
7. REGISTRATION RIGHTS.
SECTION 7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The shares of
Common Stock issuable upon exercise of the Warrants and any of the other
securities issuable upon exercise of the Warrants (collectively, the "Warrant
Securities") have been registered under the Securities Act of 1933, as amended
(the "Act"), pursuant to the Company's Registration Statement on Form SB-2
(Registration No. 33- ) (the "Registration Statement"). All of the
representations and warranties of the Company contained in the Agency Agreement
relating to the Registration Statement, the Preliminary Prospectus and
Prospectus (as such terms are defined in the Agency
- 6 -
<PAGE>
Agreement) and made as of the dates provided therein, are incorporated by
reference herein. The Company agrees and covenants promptly to file
post-effective amendments to such Registration Statement as may be necessary
in order to maintain its effectiveness and otherwise to take such action as
may be necessary to maintain the effectiveness of the Registration Statement
as long as any Warrants are outstanding. In the event that, for any reason
whatsoever, the Company shall fail to maintain the effectiveness of the
Registration Statement, the certificates representing the Warrant Securities
shall bear the following legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration statement
under the Act, (ii) to the extent applicable, RULE 144 under the Act (or
any similar rule under such Act relating to the disposition of securities),
or (iii) an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from registration
under such Act is available.
SECTION 7.2 PIGGYBACK REGISTRATION. If, at any time commencing after the
date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities under the Act (other than pursuant to Form S-4,
Form S-8 or a comparable registration statement) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Placement Agent and to all other Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Placement Agent or other Holders of the Warrants and/or Warrant Securities
notify the Company within twenty (20) business days after receipt of any such
notice of its or their desire to include any such securities in such proposed
registration statement, the Company shall afford the Placement Agent and such
Holders of the Warrants and/or Warrant Securities the opportunity to have any
such Warrant Securities registered under such registration statement.
- 7 -
<PAGE>
Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
Section 7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring five (5)
years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof), exercisable by
written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Placement Agent and Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale of their respective Warrant
Securities for nine (9) consecutive months by such Holders and any other Holders
of the Warrants and/or Warrant Securities who notify the Company within ten (10)
days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing after the date hereof
and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant
Securities shall have the right, exercisable by written request to the Company,
to have the Company prepare and file, on one occasion, with the Commission a
registration statement so as to permit a public offering and sale for nine (9)
consecutive months by any such Holder of its Warrant Securities provided,
however, that the provisions of Section 7.4(b) hereof shall not apply to any
such registration request and registration and all costs incident thereto shall
be at the expense of the Holder or Holders making such request.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
written notice specified in Section 7.3(a) of a Majority of the Holders of the
Warrants and/or Warrant Securities, the Company may, at its option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities requesting such registration, repurchase (i) any and all
Warrant Securities of such Holders at the higher of the Market Price per share
of Common Stock and per Purchase Warrant on (x) the date of the notice sent
pursuant to Section 7.3(a) or (y) the expiration of the period specified in
Section 7.4(a) and (ii) any and all Warrants of such Holders at such Market
Price less the Exercise Price of such Warrant. Such repurchase shall be in
immediately available funds and shall close within two (2) days after the later
of (i) the expiration of the period specified in Section 7.4(a) or (ii) the
delivery of the written notice of election specified in this Section 7.3(d).
Section 7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) whose Warrant Securities are the subject of such registration
statement will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c).
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Securities to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
<PAGE>
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify the Placement Agent contained in Section 5 of the Agency
Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 5 of the Agency Agreement
pursuant to which the Placement Agent has agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in any registration statement filed
pursuant to Section 7.3 hereof, or permit any other registration statement to be
or remain effective during the effectiveness of a registration statement filed
pursuant to Section 7.3 hereof, without the prior written consent of the Holders
of the Warrants and Warrant Securities representing a Majority of such
securities.
(h) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under the
underwriting agreement) signed by the independent public accountants who have
issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least 12 consecutive months
beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Placement Agent. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriter(s), and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter(s). The Holders shall be parties
to any underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter(s) shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written request
<PAGE>
therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities that (i)
are not held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not been resold to
the public pursuant to a registration statement filed with the Commission under
the Act.
8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Subdivision and Combination. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
Section 8.2 Stock Dividends and Distributions. In case the Company shall
pay a dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately decreased. An adjustment made pursuant to this
Section 8.2 shall be made as of the record date for the subject stock dividend
or distribution.
Section 8.3 Adjustment in Number of Securities. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 8, the number of
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
Section 8.4 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value. In the event that the Company shall after the date hereof issue
securities with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Holder, at its option, may receive
upon exercise of any Warrant either the Warrant Securities or a like number of
such securities with greater or superior voting rights.
Section 8.5 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of securities of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations or mergers.
Section 8.6 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the Warrant
Securities issuable upon the exercise of the Warrants;
(b) If the amount of said adjustment shall be less than two cents
(2CENTS) per Warrant Security, provided, however, that in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents (2CENTS) per Warrant Security.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
<PAGE>
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all shares
of Common Stock and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed and/or quoted on Nasdaq/NM or
Nasdaq.
12. Notices to Warrant Holders. Nothing contained in this Agreement shall
be construed as conferring upon the Holders the right to vote or to consent or
to receive notice as a stockholder in respect of any meetings of stockholders
for the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings or
capital surplus (in accordance with applicable law), as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the
Holders.
14. Supplements and Amendments. The Company and the Placement Agent may
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Placement Agent) in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Placement Agent may deem necessary or desirable and which
the Company and the Placement Agent deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of business
<PAGE>
on _______, 2003. Notwithstanding the foregoing, the indemnification provisions
of Section 7 shall survive such termination until the close of business on
_______, 2009.
17. Governing Law; Submission to Jurisdiction. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, the Placement Agent and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Placement Agent and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Placement
Agent and the Holders (at the option of the party bringing such action,
proceeding or claim) may be served by transmitting a copy thereof, by registered
or certified mail, return receipt requested, postage prepaid, addressed to it at
the address set forth in Section 13 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the party so served in any
action, proceeding or claim. The Company, the Placement Agent and the Holders
agree that the prevailing party(ies) in any such action or proceeding shall be
entitled to recover from the other party(ies) all of its/their reasonable legal
costs and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.
18. Entire Agreement; Modification. This Agreement (including the Agency
Agreement to the extent portions thereof are referred to herein) contains the
entire understanding between the parties hereto with respect to the subject
matter hereof and may not be modified or amended except by a writing duly signed
by the party against whom enforcement of the modification or amendment is
sought.
19. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Placement Agent and any other registered Holder(s) of the Warrant Certificates
or Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Placement Agent and any other registered Holders of Warrant Certificates or
Warrant Securities.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
UNITED VANGUARD HOMES, INC.
By:
Name:
Title:
Attest:
Secretary
JANNEY MONTGOMERY SCOTT INC.
By:
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2001
No. W- Warrants to Purchase
____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that , or
registered assigns, is the registered holder of Warrants to
purchase initially, at any time from __________, 1997 [one year from the
effective date of the Registration Statement] until 5:30 p.m. New York time on
___________, 2001 [five years from the effective date of the Registration
Statement] ("Expiration Date"), up to __________ fully-paid and non-assessable
shares of common stock, $.01 par value ("Common Stock"), of UNITED VANGUARD
HOMES, INC., a Delaware corporation (the "Company"), at the initial exercise
price, subject to adjustment in certain events (the "Exercise Price"), of
$______ [120% of the initial public offering price] per share of Common Stock
upon surrender of this Warrant Certificate and payment of the Exercise Price at
an office or agency of the Company, but subject to the conditions set forth
herein and in the warrant agreement dated as of _______, 1996 between the
Company and JANNEY MONTGOMERY SCOTT INC. (the "Warrant Agreement"). Payment of
the Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company or by surrender of this
Warrant Certificate.
No Warrant may be exercised after 5:30 p.m., New York time,
on the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
<PAGE>
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ___________, 1996
UNITED VANGUARD HOMES, INC.
By:
Name:
Title:
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase:
shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of United Vanguard
Homes, Inc. in the amount of $_______________________, all in accordance with
the terms of Section 3.1 of the Placement Agent's Warrant Agreement dated as of
______________________, 1996 between United Vanguard Homes, Inc. and Janney
Montgomery Scott Inc. The undersigned requests that a certificate for such
securities be registered in the name of whose
address is and that such Certificate be
delivered to whose address is
.
Dated:
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other
Identifying
Number of Holder)
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
shares of Common Stock;
<PAGE>
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Placement Agent's Warrant
Agreement dated as of __________________, 1996 between United Vanguard Homes,
Inc. and Janney Montgomery Scott Inc. The undersigned requests that a
certificate for such securities be registered in the name of
whose address is
and that such Certificate be delivered to
whose address is
Dated:
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other
Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED hereby sells,
assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other
Identifying
Number of Assignee)
<PAGE>
EXHIBIT 23.2
CONSENT
We have issued our report dated February 29, 1996, except for Notes A7 and
L, the latest of which is dated June 25, 1996, accompanying the statements of
operations, stockholders' deficiency and cash flows for the year ended March 31,
1995 of United Vanguard Homes, Inc. and Subsidiaries. We have also issued our
report dated April 16, 1996, accompanying the statements of assets, liabilities
and partners' deficit of Harvest Village Partners, L.P. (a limited partnership)
as of December 31, 1995 and 1994 and the related statements of revenues and
expenses and partners' deficit, and cash flows for the years then ended. Each of
the aforementioned reports are contained in the Registration Statement (No.
333-09037) on Form SB-2 Amendment No. 1. 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
September 20, 1996
<PAGE>
EXHIBIT 23.3
CONSENT
We have issued our report dated July 15, 1996, (except for Note A-7 as to
which the date is September 17, 1996) accompanying the consolidated financial
statements of United Vanguard Homes, Inc. and subsidiaries contained in the
Registration Statement on Form SB-2 Amendment No. 1. We consent to the use of
the aforementioned report in the Registration Statement (No. 333-09037), and to
the use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
Melville, N.Y.
September 17, 1996
