SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-5097
UNITED VANGUARD HOMES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 11-2032899
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4 Cedar Swamp Road, Glen Cove, New York 11542
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (516) 759-1188
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of September 30, 1996, the aggregate market value of the
Registrant's outstanding voting Common Stock held by non-affiliates of the
Registrant was $4,219,408. This amount is based on $8.50 per share, the midpoint
of the proposed public offering price range. See "Item 1. BUSINESS." Solely for
purposes of this calculation, shares held by directors of the Registrant have
been excluded. Such exclusion should not be deemed a determination or an
admission by the Registrant that such individuals are, in fact, affiliates of
the Registrant.
As of September 30, 1996, there were 2,240,950 shares outstanding of
the Registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
Item 1. BUSINESS
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED HEREBY. ALL FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTY, INCLUDING WITHOUT LIMITATION, THE SUCCESSFUL
CONSUMMATION OF THE OFFERINGS (AS HEREINAFTER DEFINED), THE ACQUISITION OF
HARVEST VILLAGE AND TURNAROUND STRATEGIES FOR SENIOR LIVING FACILITIES. ALTHOUGH
THE REGISTRANT BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE ASSUMPTIONS COULD BE
INACCURATE, AND THEREFORE, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS REPORT WILL PROVE TO BE ACCURATE. IN LIGHT OF THE
SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE REGISTRANT OR ANY OTHER PERSON THAT THE OBJECTIVES AND
PLANS OF THE REGISTRANT WILL BE ACHIEVED.
GENERAL
United Vanguard Homes, Inc., a Delaware corporation, 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 Ventures, Inc. ("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 information requirements of the
Securities Exchange Act of 1934, as amended, there are less than 6,000 shares of
the Company's common stock, $.01 par value per share ("Common Stock") in the
public float and there is no public market for the Common Stock. The Company is
currently a majority-owned subsidiary of Vanguard. United Vanguard Homes, Inc.,
its predecessor and subsidiaries are hereinafter collectively referred to as the
Registrant.
The Registrant has filed a Registration Statement on Form SB-2 (No.
33-80812) for sale to the public of up to 2,070,000 shares of Common Stock and
2,070,000 common stock purchase warrants ("Warrants"), each Warrant to purchase
one-half share of Common Stock (the "Common Stock Offering"). The Registrant has
also filed a Registration Statement on Form SB-2 (No. 333- 09037) for sale to
the public of up to $14,375,000 aggregate amount Convertible Senior Secured
Notes Due 2006 (the "Notes Offering," and, together with the Common Stock
Offering, the "Offerings"). The notes to be sold in the Notes Offering (the
"Notes") are to be convertible into shares of Common Stock. The Registrant
expects that the Offerings will commence as soon as market conditions improve.
Upon consummation of the Offerings, the Company will cease to be a
majority-owned subsidiary of Vanguard.
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On June 21, 1996, the Board of Directors of the Registrant declared it
advisable and in the best interests of the Registrant and directed that there be
submitted to the stockholders a proposed 1-for-1.6667 reverse split of the then
issued and outstanding shares of Common Stock (the "Reverse Split"). On June 21,
1996, of the 3,723,129 shares of Common Stock outstanding, 2,726,769 shares (or
73.2%) delivered written consents to the Registrant adopting the Reverse Split.
The effect of the Reverse Split upon holders of Common Stock was that the total
number of shares of the Registrant's Common Stock held by each Stockholder was
automatically converted into the number of whole shares of Common Stock equal to
the number of shares of Common Stock owned immediately prior to the Reverse
Split divided by 1.6667, adjusted, as described below, for any fractional
shares. Each Stockholder's percentage ownership interest in the Registrant and
proportional voting power remained unchanged, except for minor differences
resulting from adjustments for fractional shares. The rights and privileges of
the holders of shares of Common Stock were substantially unaffected by the
Reverse Split. No certificates or scrip representing fractional shares of the
Registrant's Common Stock were issued to Stockholders because of the Reverse
Split. All fractional shares of one-half share or more were increased to the
next higher whole number of shares, and all fractional shares of less than
one-half share were decreased to the next lower whole number of shares,
respectively.
The Board of Directors believed the Reverse Split was the most
expeditious and cost-effective method by which the capitalization of the
Registrant could be restructured to conform to the terms of the Offerings. The
effective date of the Reverse Split was August 30, 1996.
The Registrant is an owner, manager and developer of senior living
facilities which provide housing and various levels of care and services for the
elderly.
FISCAL YEAR ENDED MARCH 31,
1994 1995 1996
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Statement of Operations Data: (in thousands)
Revenues:
Resident services......... $ 4,765 $ 4,887 $ 4,966
Healthcare services....... 2,464 2,491 2,555
Development fees.......... 150 700 1,004
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Total revenues......... $7,379 $8,078 $8,525
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
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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.
The Registrant currently owns and manages three properties (Hillside
Terrace, Olds Manor and The Whitcomb) and manages a fourth property, The
Whittier, which is owned by Vanguard. Upon the successful completion of the
Offerings, the Registrant will own and manage an additional property, Harvest
Village, a 360-unit senior living facility located in Atco, New Jersey ("Harvest
Village"). See "--Proposed Acquisition." The five properties mentioned above are
hereinafter referred to collectively as the "Initial Properties."
Two of the Initial Properties are independent living facilities with
assisted living services, as required, provided by outside homecare agencies of
the residents' choice, and the remaining three Initial Properties are CCRCs. The
Initial Properties contain 1,071 apartments and nursing units. Additionally, the
Registrant 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.
Of the eight properties, 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 Registrant'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 purchase of nine other sites for the
development of senior living facilities are currently being negotiated.
As residents of senior living facilities "age-in-place," they generally
require more assistance. In each of the Registrant'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 Registrant is in the initial stages, subject
to regulatory approval, of converting a number of its independent living
apartments in each of the Initial Properties to assisted living units.
The Registrant'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.
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The Registrant 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 Registrant 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.
PROPOSED ACQUISITION
On April 19, 1996, the Registrant entered into an agreement, as
amended, to purchase Harvest Village from Harvest Village Partners, L.P., a
Delaware limited partnership ("Harvest Partners") and an affiliate of Vanguard.
The purchase by the Registrant 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 Registrant from Gateway Communities, Inc. ("Gateway"), a 501(c)(3)
organization (as hereinafter defined) organized under Michigan not-for-profit
corporation law, the lessee of Harvest Village from Harvest Partners, and the
cancellation of $6,094,000 of debt owed to the Registrant 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 Registrant. The Registrant will enter into a management contract
with Gateway to operate and manage Harvest Village, subject to the consummation
of the Offerings. The Registrant will have an option to terminate Gateway's
lease in exchange for a sum equal to the fair value of the lease. The Registrant
does not anticipate exercising this option until Harvest Village has attained a
stabilized occupancy rate in excess of 90%.
BUSINESS STRATEGY
GENERAL. The Registrant'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 Registrant 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 Registrant believes that
income qualified elderly would choose residential CCRCs and assisted living
facilities over skilled nursing facilities when given the choice. The Registrant
believes that the elderly would choose the residential assisted living facility
alternative because of the significant quality of life advantages which they
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offer. Consequently, providing a high quality of life for its residents in a
safe, healthy and secure environment is the foundation of the Registrant's
business strategy.
In furtherance of this strategy, the Registrant has structured its
senior living facilities to offer residents a supportive, "home-like" setting
and availability of assistance with activities of daily living ("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 Registrant'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 Registrant also provides or makes available routine nursing
services (in addition to its skilled nursing facility services), entertainment,
banking and shopping. Generally, however, the Registrant 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 Registrant becomes dependent upon development and management fees
received through the development and management of additional senior living
facilities on behalf of others. Consequently, the second part of the
Registrant'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 Registrant may enter into an agreement with an
unaffiliated third-party entity, which may be a not-for-profit organization
exempt from federal income taxes under ss. 501(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. The Registrant would generally attempt
to obtain a management agreement to operate the facility upon its completion as
well as a fair market value option to purchase the facility at a future time.
Through this type of transaction, if the unaffiliated entity is adequately
financed, the Registrant 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 Registrant would not be the owner.
However, prior to entering into such agreement, the Registrant may incur certain
initial expenses associated with its site selection process. The Registrant
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 501(c)(3) organization) 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
Registrant nor any of the 501(c)(3) organizations involved with Vanguard or the
Registrant has received any inquiry or comment from any regulatory authority
with respect to its contractual arrangements with 501(c)(3) organizations.
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The Registrant's development program will initially focus on site
selection and residence size, both of which the Registrant believes are
essential to the success of its development projects. In evaluating a
prospective development site, the Registrant 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
Registrant 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 Registrant believes that the clustering
concept will allow it to reduce costs by sharing certain management, marketing
and operational resources within the regional cluster. The Registrant 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 Registrant
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 Registrant may 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 acquired with the advanced
funds, principally the land for the proposed facility, or expend funds itself,
on behalf of the third parties. 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 Registrant will be limited pursuant to the terms of the
Notes to be offered in the Notes Offering to advance no more than $1.5 million
for any one senior living facility. While these advances may at times consist of
the Registrant's working capital (including the proceeds from the Offerings),
the Registrant may also seek to arrange, through Vanguard or other sources,
short term financing to satisfy the project's initial funding requirements. The
Registrant may set up a special purpose wholly-owned subsidiary which would
issue the debt, which debt may then be convertible into the Registrant's Common
Stock. It is intended that these advances would be repaid from the proceeds of
construction financing arranged by the Registrant on behalf of the unaffiliated
third-party entity. The Registrant may be restricted from recording as a
receivable any advances to the unaffiliated third-party entity under certain
circumstances. The Registrant 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 Registrant 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, depending on the
type of facility.
ACQUISITION OF PROPERTIES. In addition to the development and
management of senior living facilities for third parties, the Registrant may
acquire existing senior living facilities. These acquisitions may be effected
either through the exercise of a purchase option obtained on properties which
the Registrant had developed for third parties or through acquisitions in the
open market.
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When a facility managed by the Registrant 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 Registrant has a purchase option, the exercise of
the Registrant's option will be considered.
SERVICES AND AMENITIES
GENERAL. The Registrant's senior living facilities offer residents a
supportive, "home-like" setting and availability of assistance with ADLs. 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 or available 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 Registrant's residences include
the provision of three meals per day, laundry, housekeeping and maintenance.
Available support services provided by facility staff or outside agencies
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 Registrant 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 Registrant's residents age, the level of care required by
particular residents is expected to increase. The Registrant'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 ADLs 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 Registrant is unable to meet such resident's needs, the
Registrant maintains relationships with local hospitals and skilled nursing
facilities to facilitate a transfer of the resident. A resident of the
Registrant'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
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classes, nature walks, movies, and other group activities, church services and
healthcare monitoring. In addition, one of the Initial Properties, The Whittier,
has a swimming pool.
Special design features for independent and assisted living facilities
include large bathrooms with easy-to-operate fixtures and roll-in showers, wide,
barrier-free, well-lighted corridors, handicap access to all building interiors
and exteriors, large storage spaces, emergency call systems, ramps and elevators
(in addition to stairs), extensive signage, easy-to-operate kitchen appliances,
abundant common areas with appropriate seating and centralized service areas.
All of the Initial Properties have the features listed above, except only
Hillside Terrace and Harvest Village have an emergency call system for all
units; The Whitcomb, The Whittier and Olds Manor have emergency call systems for
selective units only.
Three of the Initial Properties have skilled nursing units. At the
Registrant'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 managed by the Registrant, provides
assisted living and home healthcare services to two of the Initial Properties
(The Whitcomb and The Whittier) that are independent living facilities not
licensed to provide assisted living or healthcare services.
In connection with the Registrant's purchase of Harvest Village,
Gateway, the current lessee of Harvest Village, will enter into a management
agreement with the Registrant for the management of Harvest Village. The
Registrant 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 and Harvest Partners have agreed to lend
Gateway $1.5 million for working capital purposes after the consummation of the
Offerings.
REGISTRANT 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 Registrant, subject to state regulatory
requirements. The nursing hours vary depending on the residents' needs. The
Registrant 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 Registrant. In two of the Initial Properties, The
Whitcomb and The Whittier, which are not licensed to provide personal care or
nursing services, such services are provided by third-party contractors.
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The Registrant 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 Registrant 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 Registrant'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 Registrant policies and procedures, development and implementation of new
programs, cash management and treasury functions, human resource management and
development.
The Registrant's executive team has been carefully selected based upon
each member's knowledge and experience in the senior living field and related
areas. The Registrant has sought talented self-starters who are capable of
handling many aspects of the senior living business. The Registrant 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 Registrant'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 Registrant believes it will be able to achieve high
occupancy levels. The Registrant 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
Registrant's senior living facilities.
For its assisted living facilities, the Registrant targets senior
citizens who, although generally ambulatory, need help with the ADLs. For
instance, a typical prospective resident for the Registrant'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 Registrant'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 Registrant'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 Registrant assesses the level of need of each resident regularly.
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
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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
-11-
<PAGE>
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.
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 Registrant 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 Registrant 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 requirements
with respect to such licensure. The facilities that the Registrant intends to
develop and manage in New York and Florida will apply for appropriate licensure.
In addition, the Registrant expects that it, or the facilities that the
Registrant manages, will obtain licenses in other states as required. Under
current New York law, a public for-profit corporation such as the Registrant 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 Registrant will
enter into lease, management and/or other service contract arrangements with the
licensee.
The facilities owned and managed by the Registrant 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
-12-
<PAGE>
any of its licenses nor is the Registrant aware of any conditions that could
reasonably lead to such proceedings. The Registrant believes that the Initial
Properties are in substantial compliance with all applicable licensing,
reimbursement and similar regulatory requirements.
The Registrant 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 Registrant 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
Registrant and/or the facilities managed by the Registrant have a variety of
management and/or lease agreements with various entities to which or from which
referrals may be made for healthcare services. In all such cases, the
compensation received by Registrant or the facility under such agreements is for
fair market value determined at arms-length and does not take into account the
volume or value of referrals between the parties.
The Registrant believes that its operations and those of the Initial
Properties that the Registrant manages are in material compliance with such laws
and regulations. The laws, rules and regulations which govern the Registrant,
the Initial Properties and other persons with whom the Registrant 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 Registrant or the Initial
Properties might be challenged. No assurance can be given that the Registrant or
the facilities managed by the Registrant 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 Registrant or a facility managed by the Registrant 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 Registrant
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 Registrant's
results of operations or financial condition.
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<PAGE>
COMPETITION
The long-term care industry generally is highly competitive and the
Registrant expects that the assisted living business in particular will become
more competitive in the future. The Registrant will be competing with numerous
other companies providing similar long-term care alternatives such as home
health agencies, lifecare at home, community-based service programs, congregate
care communities and convalescent centers. While there presently are few
assisted living facilities existing in the markets the Registrant intends to
serve, the Registrant 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 Registrant.
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 Registrant's competitors are significantly larger than the
Registrant and have, or may obtain, greater resources than those of the
Registrant.
The Registrant 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 Registrant
expects that its major competitors will be other long-term care facilities
within the same geographic area as the Registrant's facilities because
management's experience indicates that senior citizens who move into senior
living facilities frequently choose communities near their homes.
EMPLOYEES
The Registrant has approximately 250 employees of whom approximately
147 are full-time employees.
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<PAGE>
Item 2. PROPERTIES.
The table below sets forth certain information regarding the Initial
Properties as of October 31, 1996.
<TABLE>
<CAPTION>
Years Independent Assisted Skilled Occupancy Rate(%)
Name and Location Year 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, 97 55 44 97
1970
The Whitcomb, St. Joseph, MI 1928 1973, 102 34(1) -- 96
1989
TO BE ACQUIRED:
Harvest Village, Atco, NJ(2) 1989 300 -- 60 58
MANAGED ONLY PROPERTY:
The Whittier, Detroit, MI(3) 1920s 1972, 229 52(1) -- 56
1989
--- --- ---
794 150 127
</TABLE>
(1) Assisted living units at The Whitcomb and The Whittier are independent
living apartments with assisted living services provided by outside
homecare agencies.
(2) In connection with the Registrant's purchase of Harvest Village,
Gateway, the current lessee of Harvest Village, will enter into a
management agreement with the Registrant for the management of Harvest
Village. The Registrant 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. The panel of three real estate appraisers will be
unaffiliated with Harvest Partners, Gateway or the Registrant.
(3) Owned by Vanguard and managed by the Registrant. The Registrant has an
option to purchase The Whittier at the lesser of (i) its appraised fair
market value, but not less than the outstanding balance of the first
mortgage encumbering the facility, and (ii) (a) the amount of its
current mortgage debt, (b) accrued management fees payable, (c) amounts
paid by Vanguard or Whittier Towers, Inc. on or after April 1, 1996 for
capital improvements, (d) sums spent by Vanguard on or after April 1,
1996 to fund negative cash flow of Whittier Towers, Inc. and (e)
interest on (c) and (d) at 12% per annum.
HILLSIDE TERRACE. Hillside Terrace is a CCRC located in Ann Arbor,
Michigan, 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.
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<PAGE>
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 WHITCOMB. The Whitcomb is an independent living facility with
assisted living services, as required, provided by the outside homecare agencies
of the residents' choice, 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.
HARVEST VILLAGE. Harvest Village is a congregate care facility located
in Atco, New Jersey. With respect to the Registrant's proposed acquisition of
Harvest Village, the Registrant 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 Registrant
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 Registrant
believes that the purchase price at which it will acquire Harvest Village is
substantially lower than its current market value of $24,700,000 based upon a
recent appraisal. The appraisal does not represent the current market value of
the facility "as is," but assumes, among other things, the conversion of the
facility to its highest and best use, that of 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 Registrant. In
addition, the appraisal considered the eventual improvement in public perception
upon the refinancing of its current debt and management of the facility by the
Registrant. 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
constructing the facility. Moreover, after the conversion of one of the 36
apartment unit wings to 51 assisted living apartment units, Harvest Village will
still have 100 remaining saleable apartment units at an average cost of
approximately $ 100,000 per unit ($ 10 million), or approximately $60,000 per
unit ($6 million) if all units are sold pursuant to a Traditional Residency
Agreement, 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.
-16-
<PAGE>
In connection with the Registrant's purchase of Harvest Village,
Gateway, the current lessee of Harvest Village, will enter into a management
agreement with the Registrant for the management of Harvest Village. The
Registrant 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 WHITTIER. The Whittier is an independent living facility with
assisted living services, as required, provided by outside homecare agencies of
the residents' choice, 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 Registrant 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 30, 1996, which represents an eight-month increase of 23 percent. The
Registrant 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
Registrant'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 Registrant's ability to exercise its option.
PROJECTS IN DEVELOPMENT
To provide the appropriate level of personal care efficiently and
economically, the Registrant 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 Registrant 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 Registrant'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.
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<PAGE>
Resident units in the Registrant'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 Registrant's prototype may be configured with several different
types of resident units, including a mix of one- and two-bedroom suites and
large studio or alcove apartments. All units have a small kitchen and roll-in
showers for easy wheelchair access. The ground level typically contains a
kitchen and common dining area, administrative offices, exercise or physical
therapy room, arts and crafts, beauty salon, laundry room, a private dining
room, library, living room, and TV room. Typically, one floor or one or two
wings of a facility contain resident units and common areas, including separate
dining facilities, specifically designed to serve residents with cognitive
impairments (e.g., Alzheimer's disease) or other special needs.
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 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 as of October 31, 1996:
Number of Units
---------------------------------------------------
Independent Assisted Skilled
Name Living Living Nursing
---- ------ ------ -------
Cottage Grove Place, 135 50 16
Cedar Rapids, IA(a)
Presidential Place, -- 104 --
Hollywood, FL(b)(c)
Camelot Village, -- 132 --
Huntington, NY(b)(d)
Orchard Terrace, 64 -- --
Ann Arbor, MI(c)(e)
Camelot Village, -- 80 --
Stroudsburg, PA(b)(d)
Camelot Village, -- 80 --
Columbus, IN(f)
Home Place, -- 60 --
Indianapolis, IN(g)
Sanders Glen, -- 69 --
Westfield, IN(g)
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<PAGE>
(a) A 201-unit CCRC being developed by the Registrant pursuant to
development and management agreements with an unaffiliated
not-for-profit entity. Initial occupancy commenced October 15, 1996.
(b) The Registrant has entered into development and management agreements
and has a purchase option on this proposed senior living facility.
(c) Zoning approval has been obtained, and the Registrant is awaiting
Federal Housing Administration financing approval.
(d) Zoning approval is in the process of being obtained.
(e) This site is owned by the Registrant and is being used to expand
Hillside Terrace by 64 independent living units. Upon completion, the
Registrant will convert 66 of Hillside Terrace's independent living
units into assisted living units. The commencement of construction is
contingent upon financing which the Registrant expects to arrange
within the next nine months. Completion is anticipated in Fall 1998.
(f) The Registrant has entered into a letter of intent to develop a senior
living facility on this site.
(g) The Registrant intends to lease this existing senior living facility
following its proposed acquisition by an unaffiliated third party.
INDEBTEDNESS
Upon the consummation of the Offerings, the Registrant's indebtedness
for borrowed money will consist primarily of the mortgage loans described below
(the "Mortgage Loans") and the Notes sold in the Notes Offering. See Note E to
Consolidated Financial Statements. The Mortgage Loans encumber all of the
Initial Properties.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
As of June 30, 1996, Hillside Terrace, Inc., a wholly-owned subsidiary
of the Registrant 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 on Hillside
Terrace. As of June 30, 1996, Whitcomb Tower Corp., a wholly-owned subsidiary of
the Registrant 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 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 on The
Whittier. Each of the foregoing first mortgages bears interest at 7.5% per annum
and is due April 30, 1997. The first mortgage encumbering The Whittier provides
that a default under such loan is also a default under both of the first
mortgages encumbering Hillside Terrace and The Whitcomb. Consequently, a default
under the first mortgage encumbering The Whittier could result in the
foreclosure of Hillside Terrace and The Whitcomb.
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<PAGE>
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
Registrant and the owner of Olds Manor sells, conveys, transfers, pledges or
further encumbers its property without the prior written consent of GWL, then
GWL shall have the right, at its option, to declare forthwith due and payable
the entire balance of the unpaid principal with accrued and unpaid interest
thereon, plus the prepayment premium provided in the promissory notes executed
by Hillside Terrace, Inc., Whittier Towers, Inc. and Whitcomb Tower Corp.
OLD KENT BANK
As of June 30, 1996, Olds Manor, Inc., a wholly-owned subsidiary of the
Registrant 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.
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 obligation is
secured by a convertible mortgage on Olds Manor that is subordinate to the first
mortgage 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 Registrant is the guarantor of the Olds Manor Note.
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<PAGE>
WHITCOMB MORTGAGE TRUST
As of June 30, 1996, Whitcomb Tower Corp. was indebted to The Whitcomb
Mortgage Trust in the aggregate principal amount of $850,000. Such obligation is
secured by a convertible mortgage on The Whitcomb that is subordinate to the
first mortgage 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 Registrant is guarantor of the Whitcomb Tower Note.
SEVEN PERCENT PROMISSORY NOTES
During 1993 and 1994, the Registrant issued and sold $795,000 aggregate
principal amount of Seven Percent Promissory Notes due December 31, 2000 (the
"7% Notes"). As of September 20, 1996, the outstanding principal amount of the
7% Notes was 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.
Item 3. LEGAL PROCEEDINGS. The Registrant is not a party to any material legal
proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable.
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<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information. There is currently no public market
for the equity securities of the Registrant.
(b) Holders.
Approximate Number of Record
Title of Class Holders (as of September 30, 1996)
-------------- ----------------------------------
Common Stock, Par Value $.01 Per Share 800
(c) Dividends. The Registrant 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 Registrant 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 Registrant limit, and the
terms of the Notes will limit, future indebtedness of the Registrant as well as
the Registrant's ability to pay cash dividends.
Item 6. SELECTED FINANCIAL DATA.
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Resident services ............ $ 4,589 $ 4,698 $ 4,765 $ 4,887 $ 4,966
Healthcare services .......... 2,184 2,252 2,464 2,491 2,555
Management fees .............. 202 -- -- -- --
Development fees ............. -- -- 150 700 1,004
----------- ----------- ----------- ----------- -----------
Total revenues ............ 6,975 6,950 7,379 8,078 8,525
----------- ----------- ----------- ----------- -----------
Expenses:
Residence operating expenses . 4,791 5,064 5,372 5,595 5,913
General and administrative
expenses ..................... 579 585 606 503 414
Depreciation and amortization 529 551 549 565 378
Provision for loss on advances
to affiliates ................ 1,715 1,662 829 1,651 296
----------- ----------- ----------- ----------- -----------
Total expenses ............ 7,614 7,862 7,356 8,314 7,001
----------- ----------- ----------- ----------- -----------
Income (loss) from operations ...... (639) (912) 23 (236) 1,524
Other income (expense):
Interest (expense) net ............. (622) (613) (750) (623) (601)
Other income ....................... 255 251 145 232 109
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes ..... (1,006) (1,274) (582) (627) 1,032
Income taxes ....................... -- -- -- -- 420
----------- ----------- ----------- ----------- -----------
Net income (loss) .................. $ (1,006) $ (1,274) $ (582) $ (627) $ 612
=========== =========== =========== =========== ===========
Earnings (loss) per share (1) ...... $ (.41) $ (.54) $ (.24) $ (.27) $ .51
=========== =========== =========== =========== ===========
Weighted average common shares and
equivalents outstanding (1) ........... 2,458,925 2,339,533 2,443,974 2,355,077 1,199,146
</TABLE>
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<PAGE>
March 31, 1996
--------------
BALANCE SHEET DATA: Actual
----------
Deficit and working capital........................... $(100)
Total assets.......................................... 6,088
Long term debt, excluding current portion:
Convertible mortgages and notes.................... 2,616
Other debt......................................... 4,557
Stockholders' deficiency.............................. (3,328)
- -----------------
(1) 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 Registrant in March 1995 of 1,200,000 shares of
Common Stock held by Vanguard. See 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 certain shares owned by
Vanguard which are to be held in escrow pursuant to an agreement to be
entered into in connection with the Registrant's proposed public
offering. See Note A to Consolidated Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Registrant 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 Registrant had revenues of approximately
$8.5 million and income from operations of approximately $1.5 million.
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 Registrant, 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 Registrant 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 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
Registrant believes that at an occupancy level of 180 residents The Whittier
will generate sufficient revenues to cover operating expenses and debt service.
The Registrant's approach in this and other underperforming senior living
facilities is to obtain a management contract, without incurring the
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<PAGE>
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.
The Registrant's two primary sources of revenue are: (i) operating
revenue and management fees from senior living facilities owned by the
Registrant and managed by the Registrant, 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 Registrant
attains a level of profitability after the payment of debt service and
management fees and the Registrant has a purchase option, the exercise of the
Registrant's option, if any, will generally be considered. The Registrant'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 Registrant 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 Registrant's typical management agreement calls
for a management fee between four and five percent of the facility's gross
revenue. In addition, where the Registrant provides data processing services, an
additional one percent fee would be charged. These fees are paid on a monthly
basis.
DEVELOPMENT FEES. The Registrant'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 Registrant. 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 Registrant such as market factors relating to
site acquisition and regulatory factors impacting zoning and licensing
approvals. The recognition by the Registrant of development fees will generally
be contingent upon the completion of construction financing, therefore the
Registrant's quarterly recognition of development fee revenue can vary
materially from quarter to quarter.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial information derived from the Registrant's consolidated statement of
operations. There can be no assurance that trends in sales growth or operating
results will continue in the future.
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<PAGE>
<TABLE>
<CAPTION>
Percentage Change
Fiscal Year Ended March 31, Increase (Decrease)
--------------------------- -------------------
1994 1995 1996 1994-1995 1995-1996
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues, as a percentage of total
revenues
Resident services ...................... 64.6% 60.5% 58.3% (4.1)% (2.2)%
Healthcare services .................... 33.4 30.8 30.0 (2.6) (.8)
Development fees ....................... 2.0 8.7 11.7 6.7 3.0
----- ----- ----- --- ----
Total revenues ............................ 100.0% 100.0% 100.0% -- --
===== ===== ===== === ====
Expenses as a percentage of total revenues:
Resident operating expenses ............... 72.8% 69.3% 69.3% (3.5) --
General and administrative expenses ....... 8.2 6.2 4.9 (2.0) (1.3)%
Depreciation and amortization ............. 7.4 7.0 4.4 (.4) (2.6)
Provision for loss on (recovery of)
advances to affiliates .................... 11.3 20.4 3.5 9.1 (16.9)
----- ----- ----- --- ----
Total expenses ......................... 99.7 102.9 82.1 3.2 (20.8)
----- ----- ----- --- ----
Income (loss) from operations .......... .3 (2.9) 17.9 3.2 20.8
Other income (expense):
Interest (expense) net ................. (10.2) (7.7) (7.1) (2.5) .6
Other income ........................... 2.0 2.8 1.3 (.8) (1.5)
----- ----- ----- --- ----
Income (loss) before income taxes ......... (7.9) (7.8) 12.1 (.1) 19.9
Income taxes ........................... -- -- (4.9) -- (4.9)
----- ----- ----- --- ----
Net income (loss) ......................... (7.9)% (7.8)% 7.2% (.1) 15.0%
===== ===== ===== === ====
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
REVENUES
Net revenues of the Registrant represent gross consolidated revenues of
the Registrant, less charitable and Supplemental Security Income ("SSI")
discounts.
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.
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<PAGE>
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
Resident operating expenses include all retirement and healthcare
center operating expenses, including, among other things, payroll and employment
costs, food, utilities, repairs and maintenance, insurance and property taxes.
Residence operating expenses have increased for each 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 include all marketing costs, as
well as the general and administrative expenses incurred at the Registrant's
principal executive offices. General and administrative expenses include, among
other things, administrative salaries, rent, utilities, insurance and related
expenses.
General and administrative expenses decreased by approximately
$103,000, or 17%, in fiscal 1995 and $89,000 or 18%, in fiscal 1996, primarily
due to the closing of the Registrant'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 Registrant'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 Registrant recorded losses in the amount of $296,000 and
$1,651,000, respectively, net of recoveries.
INTEREST EXPENSE, NET
Interest expense, net, also fluctuated during the reporting period. In
fiscal 1995, interest expense, net, decreased by $137,000, or 22%, which is
directly attributable to a 3% interest rate decrease on two of the Registrant's
three mortgages on the Initial Properties in Michigan, and in fiscal 1996,
interest decreased by 4%, or $22,000.
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<PAGE>
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 Registrant 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.
The Common Stock 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.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
REVENUES
Net revenues increased by $429,000, or 6%, in fiscal 1994 and by
$699,000, or 9%, in fiscal 1995. The growth in net revenues in fiscal 1994 and
fiscal 1995 was largely attributable to a further increase in development fees
in the amount of $150,000 and $550,000 respectively. Resident and healthcare
services increased $279,000 in fiscal 1994 and $149,000 in fiscal 1995. 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 $308,000, or 6%, in fiscal 1994 and by $223,000, or 4%, in fiscal
1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by approximately $21,000,
or 4%, in fiscal 1994 and decreased by $103,000, or 17%, in fiscal 1995. The
increase in fiscal 1994 was primarily due to normal inflationary cost increases,
while the decrease in fiscal 1995 was primarily due to the closing of the
Registrant's Florida office in fiscal 1995.
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<PAGE>
PROVISION FOR LOSS ON ADVANCES TO AFFILIATES
The provision for loss on advances to affiliates represents the net
expense pertaining to amounts advanced to the Registrant'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, 1994
and 1995, the Registrant recorded losses in the amount of $829,000 and
$1,651,000, respectively, net of recoveries.
INTEREST EXPENSE, NET
Interest expense, net, also fluctuated during the reporting period. In
fiscal 1994, interest expense, net increased by $137,000 or 18%, and 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 Registrant's three
mortgages on the Initial Properties in Michigan.
INCOME TAXES
The income tax expense was zero for each of the fiscal years ended
March 31, 1994 and 1995, 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 Registrant 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.
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 Registrant earned
development fees of approximately $700,000, that were not collected until the
subsequent year. The Registrant'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
Registrant generated cash flow of approximately $1,400,000 by issuing promissory
notes to
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<PAGE>
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 Registrant's senior living facilities. The funds from this private
placement represented the major portion of the cash used in financing activities
during 1996.
The Registrant has financed the operating losses of certain affiliates
with advances when the Registrant believed that the affiliate at some future
date would be able to repay such advances. In connection with such advances, the
Registrant 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 Registrant 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 Registrant is uncertain. Accordingly, a reserve for such amounts has been
provided for by the Registrant, 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 $7,182,272 and $658,717,
respectively. In connection with the acquisition of Harvest Village, $6,094,000
due from Vanguard and its affiliates was cancelled. See Notes C and L to
Consolidated Financial Statements.
The Registrant 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 Registrant's business grows) and future development
projects. Registrant believes that 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.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from assisted living facilities and congregate care
facilities operated by the Registrant are the primary sources of revenue earned
by the Registrant. 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 Registrant has been able historically to offset the
effects of inflation on salaries and other operating expenses by increasing
rental and assisted living rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements
and supplementary data are included under Item 14 of this Report.
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<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On May 16, 1996, the Registrant dismissed Farber, Blicht & Eyerman,
LLP. The dismissal of Farber, Blicht & Eyerman, LLP was approved by the Board of
Directors. On May 16, 1996, the Registrant 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 Registrant's financial statements were
audited by Farber, Blicht & Eyerman, LLP.
The Registrant 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 Registrant 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 Registrant's financial
statements to the subject matter of the disagreement.
No report of Farber, Blicht & Eyerman, LLP on the Registrant'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-K promulgated under the Securities Act.
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<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding the Directors and
executive officers of the Registrant.
Name Age Positions(s)
---- --- -----------------------------------------
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
CARL G. PAFFENDORF has been Chairman of the Board and Chief Executive
Officer of the Registrant since 1988 as well as a Director of the Registrant
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
Registrant since 1994 and a Director of the Registrant 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
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<PAGE>
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 Registrant 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 Registrant 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.
CRAIG M. SHIELDS has been Vice President and General Counsel of the
Registrant 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 Registrant 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 Registrant 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 Registrant 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
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<PAGE>
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 Registrant 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 Registrant 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 Registrant 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 (AAHSA) since 1978 and a frequent speaker at
many national conventions and seminars regarding the provision of services to
the aging.
BOARD OF DIRECTORS COMPENSATION
Outside Directors are 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 Registrant's 1996 Outside Directors' Stock
Option Plan. All of the officers of the Registrant and all of its Directors,
other than Messrs. Laird, Hoshino, Eden and Shuster, are officers and directors
of Vanguard. The Registrant also has an Audit Committee composed of Messrs.
Eden, Frank and Hoshino. Audit Committee members will be compensated at the rate
of $1,000 per meeting, when such meeting is not held in conjunction with a Board
of Directors meeting and $500 per meeting when such meeting is held in
conjunction with a Board of Directors meeting.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Registrant's officers and Directors and persons who own more than
five percent of a registered class of the Registrant's equity securities, to
file reports of ownership and changes in ownership with the Commission.
Officers, directors and greater than five percent stockholders are required
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<PAGE>
by the Commission's regulations to furnish the Registrant with copies of all
Section 16(a) forms they file.
Number of Transactions Not
Number of Late Reports Reported on a Timely Basis
---------------------- --------------------------
Carl G. Paffendorf 6 11
Larry L. Laird 5 5
Craig M. Shields 1 1
Paul D'Andrea 2 2
Theresa A. Govier 2 2
Alan Guttman 2 2
Benjamin Frank 3 3
Francis S. Gabreski 3 3
James E. Eden 1 1
Robert S. Hoshino 1 1
Stanford J. Shuster 1 1
Vanguard 10 10
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation for Carl G.
Paffendorf, the Registrant'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 Registrant during such years.
SUMMARY COMPENSATION TABLE
Fiscal Year
Ended Annual Compensation
March 31, Salary
NAME AND PRINCIPAL POSITION --------------- -------------------
- ---------------------------
Carl G. Paffendorf..................... 1996 --(1)
Chief Executive Officer 1995 --(1)
1994 --(1)
(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 Registrant estimates that Mr. Paffendorf devoted
40% of his time during the fiscal year ended March 31, 1994 to the
Registrant, 50% of his time during the fiscal year ended March 31, 1995
to the Registrant and 60% of his time during the fiscal year ended
March 31, 1996 to the Registrant. The Registrant paid to Vanguard
administrative fees of $50,000 per year in each of the three fiscal
years ended March 31, 1996.
The following table sets forth certain information regarding stock
option grants made to the Chief Executive Officer during the fiscal year ended
March 31, 1996.
-35-
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------------------
% of Total Options
Granted to Exercise or
Options Employees in Base Price Expiration
NAME Granted(#) Fiscal Year ($/sh) Date
- ---- ------------ --------------------- -------------- -------------
<S> <C> <C> <C> <C>
Carl G. Paffendorf......... 1,800 3.3% $6.10 01/01/01
4,200 7.8% $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
Number of Unexercised
Options at March 31, 1996
NAME Exercisable/Unexercisable
- ---- ----------------------------------
Carl G. Paffendorf................. 4,800/18,000
LONG-TERM INCENTIVE AND PENSION PLANS
The Registrant 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 Registrant, 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 Registrant during
the term of his employment and for a period of three years thereafter, and he
will not, without the Registrant's written consent, solicit the residents of
facilities owned or managed by the Registrant or any management contract owned
or being negotiated by the Registrant 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 Registrant 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.
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<PAGE>
Mr. Laird entered into a two-year employment agreement with the
Registrant as of April 1, 1996, pursuant to which he serves as the Registrant'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
Registrant'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 Registrant 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 Registrant, Mr. Laird's estate will
receive the full bonus due on March 31, 1998.
Mr. Laird has agreed not to compete with the Registrant 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 Registrant, and, upon his termination he
will not, without the Registrant's written consent, solicit the residents of
facilities owned or managed by the Registrant, any management contract owned or
being negotiated by the Registrant or any employees of the Registrant 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 Registrant 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 Registrant ceases to be manager of Cottage Grove Place and Mr.
Laird becomes its manager, the Registrant will receive one-half of the Cottage
Grove Place management fee. In the event that Mr. Laird's employment is
terminated, the Registrant ceases to be the developer of Cottage Grove Place and
Mr. Laird becomes its developer, the Registrant will receive 90% of the
development fee.
STOCK OPTION PLANS
1991 INCENTIVE STOCK OPTION PLAN. Under the Registrant'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 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
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<PAGE>
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 Registrant's 1996
Outside Directors' Stock Option Plan (the "Directors' Plan") provides for the
grant of options to purchase Common Stock of the Registrant to non-employee
directors of the Registrant. 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.
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Carl G. Paffendorf, the Registrant's Chief Executive Officer,
participated in the decisions of the Registrant's Board of Directors concerning
executive office compensation. However, Mr. Paffendorf abstained from decisions
concerning his own compensation.
Mr. Paffendorf is Chairman and Chief Executive Officer of Vanguard.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
The goal of the Board of Directors is to establish a motivational
compensation plan for executives that will enable the Registrant to attract and
retain those individuals deemed most qualified to improve and enhance its future
performance. As part of its periodic review of executive compensation, the Board
of Directors considers such factors as level of responsibility, the Registrant's
general growth, improved financial condition, compensation of executives at
comparable companies and other relevant factors. The Board of Directors strongly
believes that by providing those persons who have substantial responsibility for
the management and growth of the Registrant with an opportunity to increase
their ownership of Registrant stock, the best interests of stockholders and
executives will be closely aligned. Therefore, the Board of directors included
executives as eligible employees under the Registrant's Incentive Plan, whereby
executives are eligible to receive stock options that give them the right to
purchase shares of Common Stock of the Registrant at specified prices in the
future.
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<PAGE>
The Board of Directors believes executive compensation should be tied
to benefits directly accruing to stockholders from positioning the Registrant to
grow through acquisitions, increases in stockholders' equity and improved
operating results. As indicated in the discussion above, the Board of Directors
believes that the Registrant's executive compensation should be first and
foremost based on financial performance and returns to stockholder. The
compensation levels of the Registrant's officers are based on these two factors.
The Board of Directors will continue to monitor the level and
effectiveness of executive compensation.
PERFORMANCE GRAPH
There has not been a public market for the Registrant's Common Stock
for the past five years. Consequently, no performance graph is being filed with
this report.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Registrant's Common Stock as of August 31, 1996 by
(i) each person who is known by the Registrant to be the beneficial owner of
more than 5% of the Registrant'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.
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<PAGE>
Percent of
Outstanding
Shares Beneficially Common
Owned Stock
------------------- -----------
Vanguard Ventures, Inc................. 1,635,969(1) 73.0%
Carl G. Paffendorf..................... 1,700,010(2) 75.6
Larry L. Laird......................... 22,680(3) 1.0
Benjamin Frank......................... 13,402(4) *
Francis S. Gabreski.................... 29,326(5) 1.3
Robert S. Hoshino, Jr.................. 17,817 *
James E. Eden.......................... -- --
Stanford J. Shuster................... -- --
Directors and Executive Officers,
as a Group (11 Persons)................ 1,794,275(6) 78.3%
- -------------------
* 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 of August 31, 1996.
(3) Includes 4,680 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1996.
(4) Includes 6,480 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1996.
(5) Includes 20,326 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of August
31, 1996.
(6) Includes 49,726 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of August
31, 1996.
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<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DUE FROM AFFILIATES
The Registrant 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.
(Vanguard subsidiary).......................... 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 will
be 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 Registrant and American Stock
Transfer and Trust Registrant as escrow agent. In addition, the Registrant 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 Registrant from affiliates was reduced by $6,711,253.
Vanguard owned certain receivables from Gateway which it assigned to the
Registrant in partial settlement of Vanguard's obligation to the Registrant. 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 Registrant 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 Registrant'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
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<PAGE>
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 Registrant, and other
consideration, the Registrant agreed that if, as and when the GCI Note is paid
that the Registrant 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 Registrant's obligation to fund Phoenix Resources, Inc. and VHNJ out
of the proceeds of the GCI Note was terminated.
In fiscal 1996, the Registrant agreed to purchase Harvest Village from
Harvest Partners. The purchase is contingent upon certain events, including the
consummation of a proposed $25 million 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 Registrant 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 Registrant'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 Registrant which will result in the repayment of the debt
and a full release from the current mortgages.
GUARANTEES
Vanguard has guaranteed to the Registrant 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 $630,337 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
Registrant assigned to Vanguard the management agreements for Lake Fredrica and
Colony Court, and Lake Fredrica was sold.
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<PAGE>
The Registrant, Mr. Carl G. Paffendorf, Chief Executive Officer of the
Registrant, and Vanguard have guaranteed certain bank debt as follows:
<TABLE>
<CAPTION>
Amount As of
Guarantor Maker(s) Lender/Obligee August 31, 1996
- -------------------------- -------------------------- ------------------------ ----------------------
<S> <C> <C> <C>
The Registrant CBF Building Registrant Apple Savings Bank $ 112,000
The Registrant, Camelot Retirement State Bank of Long 450,000
Vanguard, Phoenix Homes, Inc. Island
Lifecare Corp. and Carl
G. Paffendorf
Vanguard and Carl G. The Registrant State Bank of Long 450,000
Paffendorf Island
Vanguard Hillside Terrace, Inc. Great-West Life 2,245,526
Vanguard Whitcomb Tower Corp. Great-West Life 2,095,659
Vanguard The Registrant Cedar Rapids CGP, L.C. $ 451,056
</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. This guarantee reduces to $300,000 if certain events occur. Upon the
acquisition of Harvest Village by the Registrant, 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 Registrant,
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 Registrant
agreed to advance 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
Registrant.
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 Registrant, 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 Registrant 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 Registrant.
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<PAGE>
OTHER
The Registrant leases its offices in Glen Cove, New York, 5,600 square
feet, from CBF Building Company, a limited partnership in which Vanguard is the
general partner. The Registrant has sublet 550 square feet of its space to
Vanguard on the same terms as the Registrant's lease with CBF.
In fiscal 1996, certain officers/directors of the Registrant 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 Registrant, 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 who request such services. The Registrant earns a management fee
from Phoenix for management services rendered. The amount of such fee represents
fair market value determined at arms-length and does not take into account the
volume or value of referrals between Phoenix and The Whittier. 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 Registrant 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 Registrant to Phoenix and Presidential Care Corp. as of
March 31, 1996 aggregated $871,459, of which $545,979 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 Registrant 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 Registrant in payment or sale of the GCI Note.
Effective March 31, 1995, Vanguard contributed 1,200,000 shares to the
Registrant for cancellation.
The Registrant entered into agreements with Camelot Retirement Homes,
Inc., then a wholly-owned subsidiary of Vanguard for the development and
management of Camelot Village at Huntington, a proposed 132-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 Registrant has an option, exercisable at any time
during the seven-year period after construction of the facility, to purchase
Camelot Village at Huntington at a purchase price equal to the appraised fair
market value, provided that in no event
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<PAGE>
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 Registrant, Vanguard, Phoenix 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.
The Registrant 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.
During the year ended December 31, 1994, Carl G. Paffendorf and a
partnership controlled by his spouse purchased $100,000 of the Registrant'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 Registrant has adopted a policy whereby all future transactions
between the Registrant 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 Registrant than could be obtained in arm's length
transactions from unaffiliated third parties. In addition, the Notes offered in
the Notes Offering will contain certain restrictions on the Registrant involving
transactions with affiliates.
Vanguard and each of its subsidiaries have agreed to indemnify the
Registrant 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 Registrant prior to the effective date of the Offerings,
(ii) any disallowance of any operating loss carry-forward recorded by the
Registrant 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 Registrant from a Vanguard
affiliate.
MANAGEMENT AGREEMENT
Under an agreement dated as of April 1, 1991, Whittier Towers Inc., a
Vanguard subsidiary, agreed to pay to the Registrant'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
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<PAGE>
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 Registrant and American
Stock Transfer and Trust Registrant as escrow agent anticipate entering 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 Registrant 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.
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<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1), (2) FINANCIAL STATEMENTS. See Page F-1
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- ---------------------------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement.
*1.2 Form of Agency Agreement relating to the Notes.
***3.1 Form of 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 Registrant, including form of Common Stock
Purchase Warrant.
*4.2 Form of Representatives' Warrant Agreement, including form of
Representatives' 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
4.4).
**4.5 Form of Placement Agent's Warrant Agreement, including form of
Placement Agent's Warrant.
*4.6 Form of 7% Convertible Promissory Note.
4.7 Form of Common Stock Certificate.
*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.
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- ---------------------------------------------------------------------------------------------
<S> <C>
*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 Amended and Restated Camelot Village Management Agreement
(Huntington, NY) between Camelot Retirement Homes, Inc. and
Vanguard Realty and Management Company, Inc. dated as of
September 30, 1996.
*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.
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- ---------------------------------------------------------------------------------------------
<S> <C>
*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 Amended and Restated Option Agreement between Whittier Towers,
Inc. and Registrant dated October 23, 1996.
*10.23 [Intentionally Omitted]
*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.
*10.31 Mortgage given to Old Kent Bank and Trust Registrant 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.
</TABLE>
-49-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- ---------------------------------------------------------------------------------------------
<S> <C>
*10.33 Mortgage given to Citibank N.A. and Lloyd's Bank Plc 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 and 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.
24. Powers of Attorney appear on page 52 of this Report.
27. Financial Data Schedule.
</TABLE>
- -----------------
* Filed as an Exhibit to Amendment No. 5 to Registrant's Registration
Statement on Form SB-2 (No. 33-80812).
-50-
<PAGE>
** Filed as an Exhibit to Amendment No. 1 to Registrant's Registration
Statement on Form SB-2 (No. 333-09037).
*** 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.
***** 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.
(b) REPORTS ON FORM 8-K
The Registrant filed no reports on Form 8-K during the quarter ended
March 31, 1996.
-51-
<PAGE>
POWERS OF ATTORNEY
United Vanguard Homes, Inc. and each of the undersigned do hereby
appoint Paul D'Andrea, Larry L. Laird and Carl G. Paffendorf, and each of them
severally, its or his true and lawful attorneys to execute on behalf of United
Vanguard Homes, Inc. and the undersigned any and all amendments to this Report
and to file same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission. Each of such attorneys
shall have the power to act hereunder with or without the other.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized on the 31st day of
October, 1996.
UNITED VANGUARD HOMES, INC.
(Registrant)
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 Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/S/ PAUL D'ANDREA Vice President - Finance October 31, 1996
- ------------------------------ (Principal Financial
Paul D'Andrea Officer and Principal
Accounting Officer)
/S/ BENJAMIN FRANK Director October 31, 1996
- ------------------------------
Benjamin Frank
/S/ FRANCIS S. GABRESKI Director October 31, 1996
- ------------------------------
Francis S. Gabreski
/S/ LARRY L. LAIRD President, Chief October 31, 1996
- ------------------------------ Operating Officer and
Larry L. Laird Director
-52-
<PAGE>
/S/ CARL G. PAFFENDORF Chairman of the Board
- ------------------------------ and Chief Executive October 31, 1996
Carl G. Paffendorf Officer
/S/ ROBERT S. HOSHINO, JR. Director
- ------------------------------
Robert S. Hoshino, Jr. October 31, 1996
/S/ JAMES E. EDEN Director
- ------------------------------
James E. Eden October 31, 1996
/S/ STANFORD J. SHUSTER Director
- ------------------------------
Stanford J. Shuster October 31, 1996
-53-
<PAGE>
C O N T E N T S
PAGE
----
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-6
Consolidated Statement of Stockholders' Deficiency F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9 - F-32
Schedule II - Valuation and Qualifying Accounts F-33
<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.
We have also audited Schedule II of United Vanguard Homes, Inc. and Subsidiaries
as of and for the year ended March 31, 1996. In our opinion, this schedule
presents fairly, in all material respects, information required to be set forth
therein.
GRANT THORNTON LLP
/s/ 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. AND SUBSIDIARIES
We have audited the accompanying balance sheet of United Vanguard Homes, Inc.
and Subsidiaries as of March 31, 1995 and the related statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended March 31, 1995. 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 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 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 United Vanguard Homes, Inc. and
Subsidiaries as of March 31, 1995 and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 1995, in
conformity with generally accepted accounting principles.
We have also audited Schedule II of United Vanguard Homes, Inc. and Subsidiaries
for each of the two years in the period ended March 31, 1995. In our opinion,
this schedule presents fairly, in all material respects, the information
required to be set forth therein.
/S/ FARBER, BLICHT & EYERMAN, LLP
FARBER, BLICHT & EYERMAN, LLP
Plainview, New York
February 29, 1996, except for Notes A-7 and L,
the latest of which is dated June 25, 1996
F-3
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS 1995 1996
---------- ----------
CURRENT ASSETS
Cash $ 249,561 $ 210,245
Accounts receivable, less allowance for doubtful
accounts of $40,000 in 1995 and 1996 330,247 413,539
Development fees and advances 1,990,053 270,864
Due from affiliates, net -- 658,717
Prepaid expenses and other 189,908 274,654
---------- ----------
Total current assets 2,759,769 1,828,019
PROPERTY AND EQUIPMENT, NET 2,637,788 2,361,698
OTHER ASSETS
Development fees -- 575,017
Restricted assets 149,600 176,352
Deferred income taxes 400,000 981,000
Other assets 154,225 165,453
---------- ----------
703,825 1,897,822
---------- ----------
$6,101,382 $6,087,539
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 1995 1996
----------- -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,116,631 $ 626,043
Accounts payable 274,708 242,470
Accrued expenses 884,145 617,043
Income taxes payable 131,750 442,371
Deferred revenue 177,221 --
----------- -----------
Total current liabilities 3,584,455 1,927,927
RESIDENT SECURITY DEPOSITS 301,974 314,705
LONG-TERM DEBT, less current portion 6,975,645 7,172,982
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock $.001 par value; 1,000,000 shares
authorized; none issued and outstanding
Common stock $.01 par value; authorized,
14,000,000 shares; issued and outstanding,
1,698,833 shares and 1,827,833 shares in
1995 and 1996, respectively 16,988 18,278
Additional paid-in capital 4,800,245 5,619,905
Accumulated deficit (9,577,925) (8,966,258)
----------- -----------
(4,760,692) (3,328,075)
----------- -----------
$ 6,101,382 $ 6,087,539
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues
Resident services $ 4,765,251 $ 4,887,231 $ 4,966,058
Health care services 2,464,380 2,491,261 2,555,138
Development fees 149,925 700,000 1,003,955
----------- ----------- -----------
7,379,556 8,078,492 8,525,151
Operating expenses
Residence operating expenses 5,371,327 5,594,826 5,912,624
General and administrative 606,182 503,164 414,703
Depreciation and amortization 549,389 565,067 378,215
Provision for loss on advances to
affiliates 828,663 1,650,772 296,093
----------- ----------- -----------
7,355,561 8,313,829 7,001,635
----------- ----------- -----------
Income from operations 23,995 (235,337) 1,523,516
Other income (expense)
Interest expense, net (750,328) (623,224) (600,871)
Other income 144,610 231,910 109,022
----------- ----------- -----------
(605,718) (391,314) (491,849)
Income (loss) before income taxes (581,723) (626,651) 1,031,667
Income taxes -- -- 420,000
----------- ----------- -----------
NET INCOME (LOSS) $ (581,723) $ (626,651) $ 611,667
=========== =========== ===========
Earnings per share $ (.24) $ (.27) $ .51
=========== =========== ===========
Common shares and equivalents outstanding 2,443,974 2,355,077 1,199,146
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
Years ended March 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Additional
paid-in Accumulated
Shares Amount Capital Deficit Total
---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1993 2,861,997 $ 28,620 $ 4,434,663 $(8,369,551) $(3,906,268)
Shares issued in connection
with Olds Manor Trust 36,720 367 41,937 42,304
Other shares issued 116 1 645 646
Net loss (581,723) (581,723)
---------- --------- ----------- ----------- -----------
Balance, March 31, 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)
========== ========= =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-7
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (581,723) $ (626,651) $ 611,667
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Depreciation and amortization 549,389 565,067 378,215
Common stock issued for services -- 49,950
Deferred income taxes -- (400,000) (581,000)
Changes in operating assets and liabilities
Accounts receivable, advances and other
receivables (831,368) 48,168 977,180
Prepaid expenses and other -- (104,471) (84,746)
Development fees -- (1,343,614) (575,017)
Other assets 232,559 (143,804) (34,232)
Accounts payable 66,620 (120,445) (32,238)
Accrued expenses (291,001) 15,355 (267,102)
Income taxes payable (32,074) (26,700) 310,621
Resident security deposits 9,882 (8,513) 12,731
Deferred revenue 44,654 135,943 (177,221)
----------- ----------- -----------
Net cash (used in) provided by operating
activities (833,062) (2,009,665) 588,808
----------- ----------- -----------
Cash flows used in investing activities
Purchases of property and equipment (213,733) (169,565) (79,121)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from borrowings on mortgages and
notes payable 1,790,000 1,441,000 249,880
Principal repayments of mortgages and notes payable (133,037) (124,620) (1,543,131)
Decrease (increase) in restricted cash financing (464,257) 464,257 (26,752)
Increase in additional paid-in capital -- 311,000 771,000
Proceeds from issuance of common stock 646 --
----------- ----------- -----------
Net cash provided by (used in) financing
activities 1,193,352 2,091,637 (549,003)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 146,557 (87,593) (39,316)
Cash at beginning of year 190,597 337,154 249,561
----------- ----------- -----------
Cash at end of year $ 337,154 $ 249,561 $ 210,245
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 709,000 $ 751,000 $ 619,000
=========== =========== ===========
Income taxes $ -- $ 41,000 $ 57,000
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994, 1995 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BUSINESS
United Vanguard Homes, Inc. ("UVH") (the "Company") is a Delaware
corporation which was originally formed in New York in 1964 as Coap
Systems Inc. ("Coap") and is a majority-owned subsidiary of Vanguard
Ventures, Inc. ("VVI"). UVH owns and operates three residential
retirement centers in the State of Michigan, which provide living
and extended care services for residents on a month-to-month basis.
The facilities are known as Olds Manor, Hillside Terrace and
Whitcomb Tower. In addition, UVH, through a wholly-owned subsidiary,
provides management and other services for companies affiliated with
VVI and partnerships which are located in Michigan and Florida (Note
C). During the year ended March 31, 1994, UVH commenced providing
services, through a subsidiary, to develop residential retirement
centers.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UVH
and its wholly-owned subsidiary corporations. All significant
intercompany balances and transactions have been eliminated in
consolidation.
3. RESTRICTED ASSETS
Restricted assets include cash of $99,600 that collateralizes an
insurance bond required by Michigan State law for resident security
deposits. In addition, restricted use cash accounts totalling
approximately $50,000 and $76,000 at March 31, 1995 and 1996,
respectively, 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:
Buildings and improvements 10 to 30 years
Equipment 12-1/2 years
Vehicles 3 years
Furniture and office equipment 5 to 7 years
F-9
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE A (CONTINUED)
5. DEBT
The fair value of the Company's debt is estimated based on the
quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining
maturities. The carrying amounts of the Company's borrowings are
estimated to approximate fair value.
6. INCOME TAXES
The Company is included in the consolidated Federal income tax
return of VVI. It is the policy of VVI to allocate income taxes to
the Company pro rata on a separate return basis, charging or
crediting the Company with its proportionate share of expense or
reduction in taxes.
Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and
liabilities and loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance has
been established to reduce the deferred tax assets, as it is more
likely than not, that 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.
F-10
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE A (CONTINUED)
In connection with the Company's proposed public offering, 540,684
shares owned by VVI, will be placed in escrow. Upon the payment by
VVI or its affiliates of amounts guaranteed by the Company, 493,748
of such shares will be released and upon the payment by VVI or the
affiliate of certain amounts due to the Company, 46,936 shares will
be released. In the event such amounts are not repaid by VVI or its
affiliates, the shares held in escrow will be returned to the
Company. As the conditions for the release of the shares are not
currently being met, such shares (540,684) have been excluded from
earnings per share for all periods presented. No compensation
expense will be recognized upon the release of all such shares as
the release is dependent upon the performance of the affiliates. To
the extent the actual number of shares excluded from the
calculation of earnings per share differs upon the 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.
F-11
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE A (CONTINUED)
9. RECLASSIFICATIONS
Certain prior years amounts have been reclassified to conform with
the current year's presentation.
10. USE OF ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
11. ACCOUNTING PRONOUNCEMENTS 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.
F-12
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment at March 31 consist of the following:
1995 1996
---------- ----------
Land $ 632,408 $ 632,408
Buildings and improvements 4,349,747 4,405,417
Equipment 827,518 850,969
---------- ----------
5,809,673 5,888,794
Less accumulated depreciation and amortization 3,171,885 3,527,096
---------- ----------
Property and equipment, net $2,637,788 $2,361,698
========== ==========
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. The
amounts due from affiliates at March 31 consisted of the following:
1995 1996
---------- ----------
Due from VVI $2,830,001 $2,452,137
Due from VVI affiliated companies 1,576,150 2,406,266
Due from VVI affiliated limited partnerships (VVI is
general partner) 1,107,467 1,235,661
Management fees and cash advances due from affiliated
not-for-profit companies 356,548 1,088,208
---------- ----------
5,870,166 7,182,272
Less reserve for losses 5,870,166 6,523,555
---------- ----------
Due from affiliates, net $ -- $ 658,717
========== ==========
F-13
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE C (CONTINUED)
At March 31, 1996, the unreserved amounts due from affiliates
represent development fees and advances of $143,200 and $515,517,
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, net of
repayments during 1996 of $359,000, primarily relate to the purchase
of land. Subsequent to March 31, 1996, $350,000 was collected.
Presidential received interim financing of approximately $500,000
through a private placement and is awaiting approval on its
construction financing. Management believes all amounts due from
Presidential will be collected currently upon the securing of
construction financing.
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. The amounts due from Phoenix of
$256,649 and $355,942 at March 31, 1995 and 1996, respectively, have
been fully reserved and no management fees have been recognized
during fiscal 1994, 1995 and 1996.
During fiscal 1996, the Company advanced $73,449 to Camelot
Retirement Homes, Inc. ("Camelot"), a corporation affiliated with
the Company. The Company has entered into a development agreement
with Camelot and has obtained an option to purchase the underlying
property. In addition, the Company has guaranteed $450,000 of
mortgage indebtedness relating to the property. The above-mentioned
advance has been fully reserved.
F-14
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE C (CONTINUED)
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 $6,863,341 and $7,481,953 at March 31, 1995 and
1996, respectively. 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 receivable 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 $1,076,197 at March 31,
1995 and 1996, which have been fully reserved.
NOTE D - DEVELOPMENT FEES AND ADVANCES
During 1994, 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 1994, 1995 and 1996, the Company recognized $149,265,
$700,000 and $1,003,955 (net of financing discount of $144,500 in 1996),
respectively, of such development fee. The initial installment of
$750,000 was paid upon the bond closing, which provided Cottage Grove
Place with its construction financing in 1995. An additional $385,005
will be paid in monthly installments during construction provided
construction is on time and on budget, and the remaining $1,135,000 will
be paid upon the later of: (i) 90% occupancy achieved by the project or
(ii) the payment in full of the short-term bonds of Cottage Grove Place,
which mature on or before July 1, 2001, and the satisfaction of the Debt
Service Coverage Ratio and the Reserve Ratio (as defined) after giving
effect to the repayment of such short-term bonds. While the Company has
F-15
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE D (CONTINUED)
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.
The components of fees and advances receivable from Cottage Grove Place
are as follows:
1995 1996
---------- ----------
Advances $1,240,788 $ 39,861
Development fees, net 749,265 806,020
---------- ----------
1,990,053 845,881
Less long-term portion, net -- 575,017
---------- ----------
$1,990,053 $ 270,864
========== ==========
NOTE E - MORTGAGES AND NOTES PAYABLE
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
1. MORTGAGES PAYABLE
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) $4,353,238 $4,351,862
Convertible mortgages with interest at prime, plus 3%
(11.25% at March 31, 1996), payable in interest only
installments quarterly, maturity dates are March 1999 and
August 2000, net of original issue discount of $59,356 and
$75,922, respectively. Convertible into 264,074 shares
of UVH common stock subject to adjustment, as defined. 1,804,078 1,820,643
</TABLE>
F-16
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE E (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Mortgage with interest at prime plus 1% (9.25% at March 31,
1996) payable in monthly installments of
$6,400; including interest balance due August 2001. $ 290,124 $ 252,433
---------- ----------
6,447,440 6,424,938
---------- ----------
2. NOTES PAYABLE
Note payable bearing interest at 8.25% 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 shares of the Company's common
stock at $7.50 per share. Notes include warrants for issuance
of 47,690 shares of common stock at $3.33 per share. 795,000 795,000
Equipment notes payable, with interest ranging from 8.25%
to 12% payable in monthly installments of principal
and interest of $21,620 until July 1999 35,503 199,754
Promissory note payable, with interest at prime plus 1%
(9.25% at March 31, 1996) payable in monthly principal
installments of $2,917, plus interest until December 1996. 58,333 23,333
Convertible 9% promissory notes (Cottage Grove issue) were
paid off in their entirety by December 31, 1995; interest
was payable quarterly, compounded annually; notes were
convertible at holder's option into shares of the Company's
common stock at $8.33 per share; the principal of the notes
was paid and an additional 16% per annum in interest was
paid. Notes were convertible into 168,000 share of UHV
common stock 1,400,000
2,644,836 1,374,087
---------- ----------
9,092,276 7,799,025
Less current portion 2,116,631 626,043
---------- ----------
$6,975,645 $7,172,982
========== ==========
</TABLE>
F-17
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE E (CONTINUED)
The aggregate maturities of mortgages and notes payable are as follows:
Fiscal year ending March 31,
1997 $ 626,043
1998 4,409,983
1999 1,229,492
2000 56,735
2001 1,476,772
----------
$7,799,025
==========
NOTE F - INCOME TAXES
The consolidated provision for income taxes consists of the following at
March 31:
1994 1995 1996
--------- ----------- -----------
Current
Federal $ 455,000 $ 311,000 $ 771,000
State and local 90,000 89,000 230,000
--------- ----------- -----------
545,000 400,000 1,001,000
--------- ----------- -----------
Deferred
Federal (455,000) (311,000) (449,000)
State and local (90,000) (89,000) (132,000)
--------- ----------- -----------
(545,000) (400,000) (581,000)
--------- ----------- -----------
$ -- $ -- $ 420,000
========= =========== ===========
F-18
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE F (CONTINUED)
The Company files its Federal consolidated tax return with its parent,
VVI. During fiscal 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:
1994 1995 1996
--------- ----------- -----------
Statutory Federal tax rate 34.00% 34.00% 34.00%
State income taxes, net of Federal
income tax benefit 5.94 5.94 6.23
Other -- .48
Losses for which no future tax benefit
has been recorded (39.94) (39.94) --
--------- ----------- -----------
Effective tax rate .00% .00% 40.71%
========= =========== ===========
Temporary differences which give rise to deferred tax assets are as
follows:
1995 1996
---------- ----------
Net operating loss carryover $1,119,000 $ 838,000
Due from affiliate 4,759,000 5,274,000
Fixed assets 893,000 902,000
Other -- 57,000
---------- ----------
6,771,000 7,071,000
Valuation allowance 6,371,000 6,090,000
---------- ----------
$ 400,000 $ 981,000
========== ==========
F-19
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE F (CONTINUED)
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. 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 carryforwards.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. OPERATING LEASES
Aggregate rental expense under operating leases was approximately
$51,700, $29,100 and $35,000 for the years ended March 31, 1994,
1995 and 1996, respectively. UVH rents its administrative office
facilities from CBF Building Company, an affiliate of VVI, under a
lease expiring December 31, 2002, at an annual rental as follows:
Fiscal year ending March 31,
1997 $ 35,163
1998 36,921
1999 38,767
2000 40,705
2001 42,740
Thereafter 79,781
--------
$274,077
========
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-20
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE G (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) 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)
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 is $122,832 at March 31, 1996.
The Company guaranteed a bank loan to an affiliate of VVI with a
balance of $450,000 at March 31, 1996 (Note C).
The Company is a co-borrower on a line of credit given to VVI in the
original amount of $300,000. The balance outstanding at March 31,
1995 and 1996 was approximately $283,000 and $192,000, 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 was $192,244.
F-21
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE G (CONTINUED)
6. CONCENTRATIONS OF CREDIT RISK AND REVENUES
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and receivables.
The Company maintains its cash in highly rated financial
institutions and limits the amount of credit exposure to any one
institution. The Company has no bank deposits exceeding federally
insured limits.
A concentration of credit risk exists with respect to development
fees and advances and amounts due from affiliates.
7. EMPLOYMENT AGREEMENTS
Effective April 1, 1996, the Company entered into a three-year
employment agreement with the Company's Chief Executive Officer,
pursuant to which annual cash compensation under the agreement is
$100,000 during the first year of employment.
In addition, as of April 1, 1996, the Company entered into an
employment agreement with the Company's President and Chief
Operating Officer pursuant to which an annual base salary under the
employment agreement is $100,000. In December 1995, the President
received a $25,000 cash bonus and the Company agreed to issue 9,000
shares of the Company's common stock valued at $5.55 per share.
Additional bonuses of $25,000 and 3,000 shares of the Company's
common stock are payable on June 30, 1996 and March 31, 1998,
subject to continued employment.
8. POSSIBILITY OF CROSS DEFAULT
An affiliate of VVI was indebted under a first mortgage in the
principal amount of $4,087,500. 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.
F-22
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE G (CONTINUED)
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.
Olds Manor and Hillside Terrace have received deficiency reports
from the State of Michigan. Both facilities are taking steps to
correct these deficiencies. If those deficiencies are not corrected
within a prescribed period of time the State may commence
administrative proceedings, which could be a lengthy and costly
process and could result in the loss of their license as a home for
the aged.
NOTE H - ACCRUED EXPENSES
Accrued expenses consist of the following at March 31:
1995 1996
---------- ----------
Interest $ 278,036 $ 95,551
Real estate taxes 277,957 1,814
Payroll and related taxes 163,667 220,234
Insurance 161,770 192,244
Professional fees -- 107,200
Other 2,715 --
---------- ----------
$ 884,145 $ 617,043
========== ==========
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
F-23
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE I (CONTINUED)
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. As a result of the offer,
167,887 additional shares were issued upon conversion, the estimated
fair value of which ($156,466) has been recorded as debt conversion
expense in April 1996. Had the conversion of this debt and exercise
of warrants taken place at the beginning of 1996, earnings per share
would have been $.40 as compared to historical earnings per share of
$.51.
2. INCENTIVE STOCK OPTION PLAN
The Company has reserved 300,000 shares of common stock for issue to
key employees and/or directors under the Company's Incentive Stock
Option Plan (the "1991 Plan"), as amended. A summary of the activity
within the 1991 Plan is as follows:
Option price
per share Granted Available
----------- ----------- -----------
Balance, April 1, 1993 $1.33 66,600 233,400
Granted $5.55 to $6.10 45,000 (45,000)
----------- -----------
Balance, March 31, 1994 $1.33 to $6.10 111,600 188,400
Terminated $1.33 to $6.10 (35,400) 35,400
----------- -----------
Balance, March 31, 1995 $1.33 to $6.10 76,200 223,800
Terminated $1.33 (2,700) 2,700
Granted $1.33 to $6.10 53,880 (53,880)
----------- -----------
BALANCE, MARCH 31, 1996 $1.33 TO $6.10 127,380 172,620
=========== ===========
F-24
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE I (CONTINUED)
Under the plan, option 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, options
for an aggregate of 35,220 shares are exercisable at March 31, 1996.
In June 1996, the Company adopted the 1996 Outside Directors' Stock
Option Plan (the "Directors' Plan"), which provides for the granting
of options to purchase common stock of the Company to nonemployee
directors of the Company. The Directors' Plan authorizes the
issuance of a maximum of 90,000 shares of common stock.
The Directors' Plan is administered by the Board of Directors. Under
the Directors' Plan, each nonemployee director elected after April
1, 1996 will receive options for 3,000 shares of common stock upon
election. To the extent that shares of common stock remain available
for the grant of options under the Directors' Plan, each year on
April 1, commencing April 1, 1997, each nonemployee director will be
granted an option to purchase 1,800 shares of common stock. The
exercise price per share for all options granted under the
Directors' Plan will be equal to the fair market value of the common
stock as of the date preceding the date of grant. All options vest
in three equal annual installments beginning on the first
anniversary of the date of grant. Each option will be for a ten-year
term, subject to earlier termination in the event of death or
permanent disability.
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 have been classified as a separate business segment.
F-25
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE J (CONTINUED)
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:
1994 1995 1996
--------- ----------- -----------
Revenues
Resident centers $7,229,631 $ 7,378,492 $ 7,521,196
Management and development
companies 149,925 700,000 1,003,955
--------- ----------- -----------
$7,379,556 $ 8,078,492 $ 8,525,151
========= =========== ===========
Operating profits
Resident centers $ 727,733 $ 1,275,106 $ 1,268,361
Management and development
companies 124,925 140,329 551,248
(Loss) recovery on advances
to affiliates (828,663) (1,650,772) (296,093)
--------- ----------- -----------
Income from operations $ 23,995 $ (235,337) $ 1,523,516
========= =========== ===========
Corporate assets are principally cash, and corporate office equipment,
furnishings and related assets.
1995 1996
---------- ----------
Identifiable assets are as follows:
Retirement centers $3,915,156 $3,656,272
Management and development companies 2,079,448 2,250,917
Corporate 106,778 180,350
---------- ----------
$6,101,382 $6,087,539
========== ==========
F-26
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE K - PRIOR PERIOD ADJUSTMENTS
The Company restated its previously issued financial statements for the
fiscal years ended March 31, 1994 and 1995 to reflect adjustments related
to the receivables due the Company from related parties and the associated
income reported during those years and in prior periods. The adjustments
were necessary as it had 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 $8,429,983 at March 31, 1993. Therefore, the retained earnings
as originally reported in the amount of $60,432 have been adjusted so
that, as restated, the Company reflected an accumulated deficit of
$8,369,551. The adjustments had the following changes on previously
reported results of 1994 operations and financial position:
Net income (loss)
As previously reported, March 31, 1994 $ 2,108,503
As restated, March 31, 1994 (581,723)
Net income (loss) per common share
As previously reported, March 31, 1994 $ .86
As restated, March 31, 1994 (.24)
Retained earnings (deficit)
As previously reported, March 31, 1993 $ 60,432
As restated, March 31, 1993 (8,369,551)
F-27
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
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. 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 of: (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
$7,481,953 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.
Had the contemplated acquisition taken place at March 31, 1996, the
balance sheet would have been as follows:
<TABLE>
<CAPTION>
Harvest
UVH Village Pro forma adjustments
historical as historical as of assuming acquisition and
of March 31, December 31, the offerings as of Pro forma
ASSETS 1996 1995 March 31, 1996 Amounts
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets
(A) $ (60)
Cash $ 210,245 $ 60 (E) 24,664,000 $11,374,245
(D) (13,500,000)
Accounts receivable, net 413,539 920,615 (A) (920,615) 413,539
Development fees and advances 270,864 270,864
Due from affiliates, net 658,717 658,717
Prepaid expenses and other 274,654 274,654
----------- ----------- ----------- -----------
Total current assets 1,828,019 920,675 10,243,325 12,992,019
Property and equipment, net 2,361,698 17,399,200 19,760,898
Other assets
Development fees 575,017 575,017
Restricted assets 176,352 176,352
Deferred income taxes 981,000 981,000
(E) 1,338,000
Other assets 165,453 583,862 (A) (583,862) 1,503,453
----------- ----------- ----------- -----------
$ 6,087,539 $18,903,737 $10,997,463 $35,988,739
=========== =========== =========== ===========
</TABLE>
F-28
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
Harvest
UVH Village Pro forma adjustments
historical as historical as of assuming acquisition and
LIABILITIES AND of March 31, December 31, the offerings as of Pro forma
STOCKHOLDERS' EQUITY 1996 1995 March 31, 1996 amounts
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Current liabilities
Current portion of long-term debt $ 626,043 $ 40,768,092 (B) $(40,768,092) $ 626,043
Accounts payable 242,470 242,470
Accrued expenses 617,043 1,362,557 (B) (1,362,557) 617,043
Income taxes payable 442,371 442,371
----------- ------------ ------------ -----------
Total current liabilities 1,927,927 42,130,649 (42,130,649) 1,927,927
Resident security deposits 314,705 314,705
Long-term debt, less current portion 7,172,982 (E) 12,500,000 19,672,982
Stockholders' deficiency
Common stock 18,278 (E) 18,000 36,278
Additional paid-in capital 5,619,905 (E) 13,484,000 19,103,905
Accumulated deficit (8,966,258) (23,226,912) (C) 27,126,112 (5,067,058)
----------- ------------ ------------ -----------
(3,328,075) (23,226,912) 40,628,112 14,073,125
----------- ------------ ------------ -----------
$ 6,087,539 $ 18,903,737 $ 10,997,463 $35,988,739
=========== ============ ============ ===========
</TABLE>
F-29
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE L (CONTINUED)
The pro forma results of operations for the year ended March 31, 1996 of
the Company, assuming the acquisition had taken place on April 1, 1995,
would have been as follows:
<TABLE>
<CAPTION>
Harvest
UVH Village
historical historical
for the for the Pro forma adjustments
year ended year ended assuming 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 $ .51 $ .34
=========== ============
Common shares and equivalents
outstanding 1,199,146 2,999,146
=========== ============
</TABLE>
The pro forma 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
F-30
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE L (CONTINUED)
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 prospective 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 required 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 assumes Gateway is financially able to pay rental amounts
currently.
(B) To adjust depreciation and amortization expense to reflect the
elimination of capitalized costs not acquired, depreciation is being
provided using an estimated life of 25 years and the straight-line method.
F-31
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE L (CONTINUED)
(C) To adjust interest expense to reflect the elimination of
preacquisition 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.
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 twelve months ended March 31,
1996 and Harvest Village for the twelve months ended December 31, 1995,
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.
(in thousands)
Estimate of taxable net operating income
Historical pretax earnings of the Company, exclusive of
depreciation and amortization (1) $ 1,410
Historical loss of Harvest Village, exclusive of
depreciation and amortization (2) (2,368)
------
(958)
Pro forma adjustments relating to the acquisition of
Harvest Village and the proposed public offering
Additional rental income (3) 861
Reduction of interest expense (4) 2,758
-----
2,661
-----
F-32
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1994, 1995 and 1996
NOTE L (CONTINUED)
(in thousands)
Tax basis depreciation and amortization (5)
The Company $ (378)
Harvest Village (435)
-----
Pro forma estimated taxable net operating income $ 1,848
=======
Estimate of pro forma operating funds available
Pro forma estimated taxable net operating income $ 1,848
Add
Tax basis depreciation and amortization 750
Less
Estimated provision for income taxes (6) (740)
Rental income not received (7) (378)
----
Estimate of pro forma operating funds available (8) $ 1,480
=======
(1) Derived from the historical results of operations of the Company.
(2) Derived from the historical results of operations of Harvest Village.
(3) To adjust rental income to amounts payable by Gateway pursuant to the lease
agreement.
(4) To adjust interest expense to reflect the elimination of preacquisition
Harvest Village debt and to provide for interest expense related to the
proposed convertible debt offering.
(5) Tax basis depreciation expense for the Company is not materially different
than for financial reporting purposes. Tax basis depreciation for Harvest
Village is based upon the purchase price, depreciated on a straight-line
method over a 40-year life.
(6) To provide for estimated income tax expense using a combined Federal and
local rate of 40%.
(7) To reduce funds available from operations for rents not anticipated to be
received until subsequent periods.
(8) Operating funds available do not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
are not necessarily indicative of cash available to fund cash needs.
F-33
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to
Balance at Charged to other Balance at
beginning costs and accounts - Deductions - end of
Description of period expenses describe (a) describe period
----------- --------- -------- ------------ -------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended March 31, 1996 $ 40,550 $(550) $ 40,000
=========== ==== ==============
Year ended March 31, 1995 $ 25,750 $ 14,800 $ 40,550
=========== =========== ==============
Year ended March 31, 1994 $ 10,950 $ 14,800 $ 25,750
=========== =========== ==============
Reserve for losses of affiliates
Year ended March 31, 1996 $13,809,704 $ 296,093 $ 975,908 $ 15,081,705
========== =========== =========== ==============
Year ended March 31, 1995 $11,079,653 $ 1,650,772 $ 1,079,279 $ 13,809,704
========== =========== =========== ==============
Year ended March 31, 1994 $ 8,666,595 $ 828,663 $ 1,584,395 $ 11,079,653
=========== =========== =========== ==============
</TABLE>
(a) Fees and interest charged to affiliates not recognized.
F-34
NUMBER SHARES
UV COMMON STOCK
COMMON STOCK CUSIP NO. 913138 20 2
[LOGO]
UNITED VANGUARD HOMES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT is the owner of
fully paid and non-assessable shares, of the $.01 par value
each of the Common Stock of UNITED VANGUARD HOMES, INC. transferable on the
books of the Corporation by the holder hereof in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/S/THERESA A. GOVIER /S/LARRY L. LAIRD
- ----------------------------------- -----------------------------------
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST
COMPANY (Jersey City, NJ)
TRANSFER AGENT AND REGISTRAR,
BY
---------------------------------
AUTHORIZED OFFICER
<PAGE>
UNITED VANGUARD HOMES, INC.
The Corporation will furnish to any stockholder, upon request and
without charge, (i) a full statement of the designation, relative rights,
preferences and limitations of the shares of each class authorized to be issued,
(ii) the designation, relative rights, preferences and limitations of each such
series so far as the same have been fixed, and (iii) the authority of the Board
of Directors to designate and fix the relative rights, preferences and
limitations of other series.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ____ Custodian ____
(Cust) (Minor)
under Uniform Gifts to Minors
Act__________________________
(State)
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________ hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:
----------------------------
-----------------------------------------------------
NOTICE: The signatures to this assignment and
correspond with the name as written upon the
face of this certificate in every
particular, without alteration or
enlargement of any change whatever.
Signature(s) Guarantee:
- -------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM) PURSUANT TO
S.E.C. RULE 17Ad-15.
-2-
CAMELOT VILLAGE AT HUNTINGTON
AMENDED AND RESTATED MANAGEMENT AGREEMENT
AGREEMENT entered into as of the 30th day of September 1996, by and
between CAMELOT RETIREMENT HOMES, INC., a New York corporation ("Sponsor") with
offices at 4 Cedar Swamp Road, Glen Cove, New York 11542; and UVH MANAGEMENT
CORP., a Florida corporation ("Manager"), with offices at 4 Cedar Swamp Road,
Glen Cove, New York 11542.
W I T N E S S E T H:
WHEREAS, Manager is a firm providing advisory and management services
to sponsors of senior retirement facilities; and
WHEREAS, Sponsor wishes to employ the management services of Manager in
connection with the operation of a proposed 122-unit assisted living facility to
be located in Huntington, New York on the land described on Schedule "A" of
First American Title Insurance Company Report No. 151-S-1217 ("Project"), and
Manager wishes to supply such services;
NOW, THEREFORE, the parties do hereby agree as follows:
I. RESPONSIBILITIES.
A. On behalf of Sponsor, Manager shall supervise the operation of the
Project.
1. As owner and operator, it is understood that Sponsor shall
establish policies and objectives for the Project.
2. Manager shall provide consultant and management services,
install operating procedures, and oversee the day-to-day
operations, all subject to and in accordance with the budgets,
policies, and guidelines established by Sponsor, from time to
time.
3. Manager shall recruit and train a Chief Administrative Officer
(who shall serve at the pleasure of Manager) and key department
heads for the Project, and, as needed, shall terminate them and
recruit and train their replacements, all of whom shall be
employees of Sponsor.
4. Manager shall supervise the occupancy development, licensing,
equipping, staffing, and start-up of the Project. Manager shall
develop, install, and maintain operating procedures, systems,
and controls in the Project for the purpose of providing an
efficient operation, on a fiscally sound basis, providing
quality services for the benefit of the residents of the
Project. Manager shall provide recommendations for the safety
and insurance programs for Sponsor.
<PAGE>
5. Manager shall prepare annual budgets for revenue expense and
cash flow for the Project. The first such budget shall be
prepared prior to the commencement of operations of the Project.
A new budget shall be prepared at least one month prior to the
commencement of each new fiscal year for the Project.
B. FINANCIAL CONTROL. Manager shall establish and operate a system of
financial control for the Project as follows:
1. During the period immediately prior to commencement of operation
of the Project, Manager shall assist in setting up the
bookkeeping system in the administrative offices of the Project,
and in training the Project bookkeeper employed by Sponsor.
Subsequent to occupancy of the Project, the receipts and
disbursements for the Project shall be handled at the site of
the Project by the Project's bookkeeper. Manager shall arrange
for computational services to prepare statements for Sponsor of
revenues and expenses, assets and liabilities, and cash flow.
2. Each month Manager shall arrange for the preparation for Sponsor
of operating ratios and other analytical information for the
Project.
C. INDEMNITY. Manager shall indemnify and hold harmless Sponsor and its
officers, directors, agents and employees from and against all claims, damages,
losses, liabilities and expenses, including reasonable attorney's fees arising
out of or resulting from the performance by Manager of its undertakings under
this Agreement, provided that any such claim, damage, loss, liability or expense
is caused in whole or in part by any negligent act or omission of Manager or
anyone for whose acts or omissions Manager may be liable.
II. SPONSOR'S RESPONSIBILITIES.
A. LEGAL SERVICES. Manager shall not perform or have the responsibility
for the performance of legal services in connection with the
obligations arising hereunder. Sponsor shall obtain legal counsel at
its cost to perform such legal services.
B. AUDITORS. Sponsor shall employ a certified public accountant at
Sponsor's cost to perform annual audits, to prepare tax returns, and
to prepare any other reports required for federal or state
bureaucracies which require certification. While Sponsor's certified
public accountant shall be directly responsible to Sponsor, he shall
be expected to cooperate with and assist Manager in the development
and maintenance of the bookkeeping and financial control systems.
C. COORDINATION. In order to assure proper coordination, Sponsor shall
issue orders concerning the Project through Manager.
D. OPERATING COSTS. Sponsor shall be responsible for all operating
costs, wages, salaries, expenses, fees and losses of the Project.
2
<PAGE>
E. INDEMNITY. Sponsor shall indemnify and hold harmless Manager and its
officers, directors, agents and employees from and against all
claims, damages, losses and expenses, including reasonable attorney's
fees arising out of or resulting from the performance of this
Agreement, provided that any such claim, damage, loss or expense is
caused in whole or in part by any negligent act or omission of the
Sponsor, or anyone for whose acts or omissions the Sponsor may be
liable.
III. TERM.
This Agreement shall commence on the 1st day of the 1st month of occupancy
of the Project and shall continue until the end of the sixtieth (60th) month
thereafter, and from month to month thereafter unless terminated pursuant to
paragraph A or B below.
A. TERMINATION ON NOTICE. During the period after the aforesaid sixtieth
(60th) month, either party may terminate this Agreement by giving the
other party written notice of its desire to terminate. In the event
of such notice, termination shall take effect at the end of the sixth
month following the month during which the notice to terminate is
received by the party to whom it is addressed.
(Example: If the termination notice is received on December 2, the
termination will take effect on June 30 of the following year.)
B. TERMINATION FOR CAUSE. This Agreement may be terminated by either
party in the event that the other party files or has a petition or
complaint in receivership or bankruptcy filed against it which has
not been dismissed sixty (60) days of such filing, or in the event
that the other party fails to perform the obligations imposed upon it
under this Agreement. In the event that either party elects to
terminate this Agreement as a result of the occurrence of any event
specified in the preceding sentence, it shall give the other party
written notice, and such termination shall be effective fifteen (15)
days after the mailing thereof unless the grounds for termination
have been remedied by the other party prior to that date.
IV. COMPENSATION.
A. AMOUNT. In consideration of the management services contemplated
hereunder, Sponsor shall pay to Manager a fee equal to the greater of
five percent (5%) of the gross operating income of the Project or
Three Thousand Dollars ($3,000), payable on the last day of each
month, commencing with the first month during which residents occupy
the Project and ending on the last day of the month during which this
Agreement is terminated pursuant to Article III.
B. CERTAIN EXPENSES. Sponsor shall pay Manager the net cost of
reasonable transportation and living expense for principals and
employees of Manager or its outside consultants when traveling in
connection with the performance of the services being performed
pursuant to this Agreement, together with any reasonable
long-distance telephone expense, cost of express shipments, or
similar communication costs.
3
<PAGE>
V. GENERAL.
A. INSURANCE SUBROGATION. Each party shall secure at its expense such
liability insurance coverages as are generally available from
responsible insurers covering the operations and the employees of the
Project. No indemnity shall be paid to the other party under this
Agreement where the claim, damage, liability, loss or expense
incurred was or was required to be insured against; and any such
insurance policies obtained by the parties shall contain provisions
waiving any right of subrogation by the insurer of one party against
the other party or its insurer.
B. PROPERTY OF MANAGER. The names "Camelot Retirement Homes" and
"Camelot Village" are owned by Sponsor or its parent company, Phoenix
Lifecare Corp. Ideas and documents, forms, occupancy development
material, computer programs, actuarial statistics, and resident
profile information are to be considered proprietary and will remain
the property of Manager. Sponsor may use such materials and
information in the operation and management of the Project but may
not use such materials or information after termination of this
Agreement for the development of new projects for itself or others
without the written consent of Manager.
C. STATUS OF PARTIES. Manager and Sponsor shall not be considered as
joint venturers or partners of each other, and neither shall have the
power to bind or obligate the other except as set forth in this
Agreement.
D. ADDITIONAL ACTIONS. In order to carry out the intent and spirit of
this Agreement, Sponsor and Manager will do all acts and things
necessary, including the execution of other agreements.
E. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between Manager and Sponsor. Any change or modification of this
Agreement must be in writing and signed by both parties hereto.
F. BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto, their successors, and assigns.
G. CHOICE OF LAW. This Agreement, its interpretations, validity and
performance shall be governed by the laws of the State of New York
applicable to contracts made in and to be performed in such State.
H. NO PERSONAL LIABILITY. This Agreement has been executed on behalf of
Sponsor and UVH/DC by their respective officers solely in the
representative capacities, and no officer, director, agent, employee
or attorney of Sponsor or UVH/DC shall have any personal liability
hereunder to the other or any person claiming by or through the
other, under any circumstances.
I. CONSENT TO JURISDICTION. The parties consent to the personal
jurisdiction of the Federal Courts located in the State of New York
and of the New York State Supreme Court, and to venue in Nassau
County, New York.
4
<PAGE>
J. ASSIGNMENT. Manager may not assign this Agreement without the prior
written consent of Sponsor.
K. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties with respect to the management of the Project and amends and
supersedes the Camelot Village at West Hills Management Agreement dated March
18, 1996 between Sponsor and Manager (K/N/A Vanguard Realty and Management
Company, Inc.).
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first written above.
CAMELOT RETIREMENT HOMES, INC.
by /s/ Carl G. Paffendorf
-------------------------------
Carl G. Paffendorf, Chairman
UVH MANAGEMENT CORP.
by /s/ Larry L. Laird
-------------------------------
Larry L. Laird, President
5
RESTATED AND AMENDED
OPTION AGREEMENT
BETWEEN
WHITTIER TOWERS, INC.
A MICHIGAN CORPORATION, AS OPTIONOR
AND
UNITED VANGUARD HOMES, INC.
A DELAWARE CORPORATION OR ITS ASSIGNEE, AS OPTIONEE
RELATING TO THE BUILDING(S) AND LAND IN DETROIT, MICHIGAN DESCRIBED ON EXHIBIT A
(THE "PREMISES")
FOR VALUE RECEIVED:
1. OPTION Subject to the terms and conditions of this Option
Agreement, Optionor hereby grants to Optionee the
exclusive right, at Optionee's option at any time
during the period commencing April 1, 1996 and ending
on December 31, 2001.
2. PURCHASE PRICE: Purchase price for the Premises shall be a sum equal to
the lesser of:
a. Appraised fair market value of the Premises, as
ascertained by the method set forth below but not
less than the current outstanding balance of the
first mortgage; and
b. The amount at date of closing of (i) the mortgage
debt on the Premises, (ii) management fees
relating to management of the Premises since April
1, 1996, payable to UVH Management Corp. ("UVM"),
accrued but unpaid (which may be offset against
the purchase price), (iii) sums paid by Vanguard
Ventures, Inc. ("Vanguard") or Optionor on or
after April 1, 1996 for capital
<PAGE>
improvements at the Premises, (iv) sums spent by
Vanguard on or after April 1, 1996 to fund
negative cash flow of Optionor and (v) interest at
12 percent per annum on the sums referred to in
items (iii) and (iv),
subject to adjustment as provided in this Option.
Optionee's election to purchase the Premises shall
be by written notice served upon Optionor either
personally or by Certified Mail or Registered
Mail, Return Receipt Requested, at 4 Cedar Swamp
Road, Glen Cove, New York 11542 (or such other
address as Optionor has advised Optionee by like
notice), not later than June 30, 2001.
3. BONA FIDE OFFEREE: In the event that Vanguard or Optionor receives a
written offer from an unaffiliated prospective
purchaser ("Bona Fide Offeree") to purchase the
Premises (or the stock of Optionor), Optionee
agrees to either (i) relinquish this Option or
(ii) change the purchase price set forth in
paragraph 2 to be the same as offered in writing
by the Bona Fide Offeree and promptly exercise
this Option per said Bona Fide Offeree price and
terms. If this Option is relinquished per item (i)
above and the Premises (or Whittier Tower, Inc.
stock) are sold to the Bona Fide Offeree, then the
net proceeds shall be applied as follows: (i)
payment of accrued since April 1, 1996 but unpaid
management fees due UVM, (ii) sums paid by
Vanguard or Optionor on or after April 1, 1996 for
capital improvements at the Premises, (iii) sums
spent by Vanguard to fund negative cash flow of
Optionor and (iv) interest at 12 percent per annum
on the sums referred to in items (iii)
2
<PAGE>
and (iv). The remaining net profit (i.e., net of
brokerage fees, closing costs, mortgage debt,
etc.) shall be split 50 percent to Optionee and 50
percent to Vanguard.
4. CHECK AT OPTION
EXERCISE: A certified or bank check for $25,000 to be
applied to the purchase price shall be delivered
to Optionor along with the aforesaid election to
exercise this Option. If for any reason, other
than Optionor's default, Optionee defaults in the
purchase of the Premises, Optionor shall be
entitled to retain said $25,000 as liquidated
damages.
5. APPRAISAL: Appraised fair market value referred to in
paragraph 2(a) shall be established by a panel of
independent, unaffiliated appraisers experienced
in real estate appraisal, one selected by
Optionor, one selected by Optionee, and the third
selected by the other two appraisers. The cost of
Optionor's appraiser shall be borne by Optionor.
The cost of Optionee's appraiser shall be borne by
Optionee. The cost of the third appraiser shall be
borne by Optionor and Optionee, equally.
6. MORTGAGES: At closing, Optionor shall pay or otherwise
satisfy all mortgages on the Premises.
7. TENANTS: The sale shall be subject to the rights to occupy
of tenants and/or residents in possession at
closing. Leases and security deposits shall be
assigned by Optionor to Optionee at closing; and
rent adjusted.
3
<PAGE>
8. CLOSING: Closing for the purchase of the Premises shall be
held at 10:00 AM at Vanguard's offices at 4 Cedar
Swamp Road, Glen Cove N.Y. 11442, on the 60th day
following the giving of the notice as provided
above, or on such other date and place as the
parties may agree.
9. INSPECTIONS: During the term of this Option, Optionee and its
agents and consultants, at Optionee's expense,
shall be entitled to a review of the Premises'
financial performance and make such physical
inspections and other investigations of and
concerning the Premises, including, without
limitation, surveys, soil borings, percolation,
engineering and environmental studies, zoning
review, and other tests as Optionee considers
necessary for Optionee and its consultants to
review and evaluate the physical and fiscal
characteristics of the Premises and condition and
structural soundness of Improvements and to
perform certain work or inspections in connection
with such evaluation.
10. PAYMENT OF
PURCHASE PRICE: The purchase price shall be payable by Optionee to
Optionor by certified or bank check, at the
closing or, if mutually agreed by Optionor and
Optionee, in cash and financing on mutually agreed
terms.
11. DOCUMENTARY
STAMPS: Optionor and Optionee each pay one half of the
cost of any realty transfer taxes and recording
costs relating to this conveyance.
12. TITLE: Optionor shall convey to Optionee a good and
marketable fee simple title to the Premises, free
and clear of all liens, encumbrances, easements,
restrictions, and other title objections other
than those approved by Optionee. Occupancy by
Optionor's tenants or residents
4
<PAGE>
shall not be an objection to title. Optionee's
title shall be insurable as aforesaid at ordinary
rates by any reputable title company of Optionee's
choice.
13. INSURANCE, ETC.: Possession of the Premises shall be surrendered by
Optionor to Optionee at the time of closing.
During the term of this Option and prior to the
surrender of possession, Optionor shall commit no
waste nor permit waste, deterioration or
destruction of the Premises, normal wear and tear
excepted, and shall bear the risk of loss. During
the term of this Option, Optionor shall maintain
insurance against loss by fire and all perils
included within the term "extended coverage
endorsements" on all improvements in an amount not
less than the highest insurable value.
14. WAIVER: If title to any part of the Premises shall not be
in accordance with the requirements of paragraph
12 above, Optionee shall have the option of taking
such title to the Premises as Optionor can give
with abatement of the purchase price for liens of
fixed or ascertainable amounts.
15. APPROVAL: This Option has been duly approved by the Board of
Directors of Optionor and shareholders of
Optionor.
16. PRIOR AGREEMENT: This Option supercedes the Option Agreement among
the parties dated March 29, 1996, as amended by
Amendment No. 1 thereto dated July 15, 1996.
17. CONTRACT To the extent not provided for in this Option, the
OF SALE: provision of the Contract of Sale annexed hereto
as Exhibit B shall apply.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Option this 23rd day of
October 1996.
WITNESS: WHITTIER TOWERS, INC., Optionor
/s/ Alan Guttman by: /s/ Carl G. Paffendorf
- -------------------------------- -----------------------------------
Alan Guttman Carl G. Paffendorf, President
/s/ Theresa A. Govier
- -------------------------------
Theresa A. Govier
WITNESS: UNITED VANGUARD HOMES, INC., Optionee
/s/ Alan Guttman /s/ Paul D'Andrea
- ------------------------------- ----------------------------------------
Alan Guttman Paul D'Andrea, Vice President - Finance
/s/ Theresa A. Govier
- ------------------------------
Theresa A. Govier
APPROVED:
Vanguard Ventures, Inc., sole shareholder of Optionor
/s/ Carl G. Paffendorf
by -----------------------------
Carl G. Paffendorf, President
6
<PAGE>
STATE OF NEW YORK
COUNTY OF NASSAU
The foregoing instrument was acknowledged before me this 23rd day of
October 1996, by Carl G. Paffendorf, the President of WHITTIER TOWERS, INC., a
Michigan corporation, on its behalf.
/s/ Craig M. Shields
-----------------------------------------
Craig M. Shields, Notary Public
Craig M. Shields
Notary Public, State of New York
No. 31-8972175
Qualified in New York County
Commission Expires Aug. 31, 1998
STATE OF NEW YORK
COUNTY OF NASSAU
The foregoing instrument was acknowledged before me this 23rd day of
October 1996, by Paul d'Andrea, the Vice President - Finance of UNITED VANGUARD
HOMES, INC., a Delaware corporation, on its behalf.
/s/ Craig M. Shields
-----------------------------------------
Craig M. Shields, Notary Public
Craig M. Shields
Notary Public, State of New York
No. 31-8972175
Qualified in New York County
Commission Expires Aug. 31, 1998
STATE OF NEW YORK
COUNTY OF NASSAU
The foregoing instrument was acknowledged before me this 23rd day of
October 1996, by Carl G. Paffendorf, the President of VANGUARD VENTURES, INC., a
New York corporation, on its behalf.
/s/ Craig M. Shields
------------------------------------------
Craig M. Shields, Notary Public
Craig M. Shields
Notary Public, State of New York
No. 31-8972175
Qualified in New York County
Commission Expires Aug. 31, 1998
7
Exhibit 11
United Vanguard Homes, Inc.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Primary earnings per share
Year ended March 31,
----------------------------------------
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
Earnings (loss) $ (581,723) $ (626,651) $ 611,667
=========== =========== ==========
Shares
Weighted average shares outstanding (1) 2,443,974 2,355,077 1,169,105
Dilutive stock options and warrants 30,041
----------- ----------- ----------
Weighted average common and equivalent
shares outstanding 2,443,974 2,355,077 1,199,146
=========== =========== ==========
Primary earnings (loss) per share $ (.24) $ (.27) $ .51
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fully diluted earnings per share
Year ended March 31,
----------------------------------------
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
Earnings (loss) $ (581,723) $ (626,651) $ 611,667
Net interest expense related to convertible
debt 177,135 234,066 164,225
----------- ----------- ----------
Adjusted net earnings (loss) $ (404,588) $ (392,585) $ 775,892
=========== =========== ==========
Shares
Weighted average shares outstanding (1) 2,443,974 2,355,077 1,169,105
Dilutive stock options and warrants 30,041
Common shares issuable upon conversion 397,266 400,280 383,373
----------- ----------- ----------
Weighted average common and equivalent
shares outstanding 2,841,240 2,755,357 1,582,519
=========== =========== ==========
Fully diluted earnings (loss) per share $ (.14) $ (.14) $ .49
=========== =========== ==========
</TABLE>
(1) Excluded from the weighted average shares outstanding are 46,936 common
shares to be held in escrow, for which the condition for release are not
currently being met.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 210,245
<SECURITIES> 0
<RECEIVABLES> 1,383,120
<ALLOWANCES> (40,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,828,019
<PP&E> 5,888,794
<DEPRECIATION> (3,527,096)
<TOTAL-ASSETS> 6,087,539
<CURRENT-LIABILITIES> 1,927,927
<BONDS> 7,172,982
0
0
<COMMON> 18,278
<OTHER-SE> 5,619,905
<TOTAL-LIABILITY-AND-EQUITY> 6,087,539
<SALES> 0
<TOTAL-REVENUES> 8,525,151
<CGS> 0
<TOTAL-COSTS> 7,001,635
<OTHER-EXPENSES> 109,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 600,871
<INCOME-PRETAX> 1,031,667
<INCOME-TAX> 420,000
<INCOME-CONTINUING> 611,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 611,667
<EPS-PRIMARY> .36
<EPS-DILUTED> 0
</TABLE>
