SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended MARCH 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________
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 (I.R.S. employer identification no.)
of 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 Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Check whether 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 Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes / / No /X/
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. / /
State Registrant's revenues for its most recent fiscal year:
$7,962,433.
State the aggregate market value of Registrant's outstanding voting
Common Stock held by non-affiliates of Registrant: $2,000,000.
As of March 31, 1998, there were 3,309,890 shares outstanding of
Registrant's Common Stock.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format: Yes / / No /X/
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PART I
Item 1. DESCRIPTION OF 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. ALTHOUGH 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 REGISTRANT OR ANY OTHER PERSON
THAT THE OBJECTIVES AND PLANS OF REGISTRANT WILL BE ACHIEVED.
GENERAL
United Vanguard Homes, Inc. ("Registrant"), 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 Registrant is subject to the information
requirements of the Securities Exchange Act of 1934, there are only a few shares
of Registrant's common stock, $.01 par value per share ("Common Stock") in the
public float and there is no public market for the Common Stock. Registrant is
currently a majority-owned subsidiary of Vanguard.
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,
---------------------------
1995 1996 1997
---- ---- ----
Statement of Operations Data:
Revenues:
Resident services $ 4,887,000 $ 4,966,000 $ 5,000,000
Healthcare services 2,491,000 2,555,000 2,682,000
Management Fees 0 0 60,000
Development fees 700,000 1,004,000 220,000
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Total revenues $ 8,078,000 $ 8,525,000 $ 7,962,000
=========== =========== ============
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Senior living facilities provide a combination of housing,
personalized support and healthcare services generally identified as INDEPENDENT
LIVING, ASSISTED LIVING and SKILLED NURSING. INDEPENDENT LIVING facilities are
designed to enable residents to live independently yet remain free from the
chores of home ownership and concerns of daily life, such as transportation,
meal preparation, personal security and housekeeping. ASSISTED LIVING facilities
offer a combination of housing and personal care and healthcare services
designed to respond to the individual needs of those who require help with the
activities of daily living but are not sick or bedridden. SKILLED NURSING
facilities are for those residents who require extensive care. A continuing care
retirement community ("CCRC") provides all three levels of services (independent
living, assisted living and skilled nursing) in the same facility, whereas other
facilities, known as congregate care facilities, provide only independent living
and assisted living services.
As residents of senior living facilities "age-in-place," they
generally require more assistance. In each of 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, Registrant is in the initial stages,
subject to regulatory approval, of converting a number of its independent living
apartments in certain of its properties to assisted living units.
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.
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. 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.
BUSINESS STRATEGY
GENERAL. 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. 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.
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PERSONALIZED RESIDENT CARE AND SERVICES. Registrant believes that
income qualified elderly would choose residential CCRCs and assisted living
facilities over skilled nursing facilities when given the choice. Registrant
believes that the elderly would choose the residential assisted living facility
alternative because of the significant quality of life advantages which they
offer. Consequently, providing a high quality of life for its residents in a
safe, healthy and secure environment is the foundation of Registrant's business
strategy.
In furtherance of this strategy, 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 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. Registrant also provides or makes available routine nursing services
(in addition to its skilled nursing facility services), entertainment, banking
and shopping. Generally, however, 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 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 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 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. 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,
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 Registrant would not be the owner. However, prior to
entering into such agreement, Registrant may incur certain initial expenses
associated with its site selection process. 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 would benefit through the
attainment of a turnkey senior living facility.
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Registrant's development program will initially focus on site
selection and residence size, both of which Registrant believes are essential to
the success of its development projects. In evaluating a prospective development
site, 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, 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. Registrant
believes that the clustering concept will allow it to reduce costs by sharing
certain management, marketing and operational resources within the regional
cluster. 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. 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, 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. While these advances may at times consist of Registrant's
working capital, Registrant may also seek to arrange, through Vanguard or other
sources, short term financing to satisfy the project's initial funding
requirements. Registrant may set up a special purpose wholly-owned subsidiary
which would issue the debt, which debt may then be convertible into Registrant's
Common Stock. It is intended that these advances would be repaid from the
proceeds of construction financing arranged by Registrant on behalf of the
unaffiliated third-party entity. Registrant may be restricted from recording as
a receivable any advances to the unaffiliated third-party entity under certain
circumstances. 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, 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, Registrant may acquire
existing senior living facilities. These acquisitions may be effected either
through the exercise of a purchase option obtained on properties which
Registrant had developed for third parties or through acquisitions in the open
market.
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When a facility managed by 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 Registrant has a purchase option, the exercise of
Registrant's option will be considered.
SERVICES AND AMENITIES
Registrant's senior living facilities offer residents a supportive,
"home-like" setting and availability of assistance with assistance in daily
living (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 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, 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 Registrant's residents age, the level of care required by
particular residents is expected to increase. 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 Registrant is unable to meet such resident's needs, Registrant
maintains relationships with local hospitals and skilled nursing facilities to
facilitate a transfer of the resident. A resident of Registrant's CCRCs would be
transferred to the skilled nursing component at the facility, if there are
available beds at such facility.
Phoenix Lifecare Corp., a 501(c)(3) organization, provides home
healthcare services to residents of Registrant's Whittier and Whitcomb
facilities.
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OPERATIONS
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 Registrant, subject to state regulatory
requirements. The nursing hours vary depending on the residents' needs.
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 Registrant. At The Whitcomb and The Whittier, which
are not licensed to provide personal care or nursing services, such services are
provided by Phoenix Lifecare Corp.
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, if 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 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.
Registrant's executive team has been carefully selected based upon
each member's knowledge and experience in the senior living field and related
areas. Registrant has sought talented self-starters who are capable of handling
many aspects of the senior living business. 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
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, Registrant believes it will be able to achieve high occupancy levels.
Registrant has found an effective niche in the upper middle income market
between the high
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income prospect who can afford to obtain services at home and the low income
prospect who cannot afford to live in Registrant's senior living facilities.
The marketing of independent living facilities is done through a
combination of media and direct mail advertising, referrals from residents and
various centers of influence (e.g., hospital administrators, religious leaders,
service clubs, attorneys, accountants, bankers, etc.) and various types of
social functions at a senior living facility. Marketing assisted living
facilities is better accomplished through networking with major referral
sources. During the rent-up stage of a project, the marketing staff would
consist of a Director of Marketing, two sales persons, and a secretary. The
senior living facility's administrator would also assist with special events and
market-oriented social affairs. After the senior living facility is
substantially rented, the staff can be reduced to a single or part-time
Marketing Director and secretary.
PAYING FOR SENIOR LIVING CARE
The residents of CCRCs and assisted living facilities or their
families generally pay the cost of care from their own financial resources.
Depending on the nature of an individual's health insurance program or long-term
care insurance policy, the individual may receive reimbursement for the costs of
care.
Government payments for assisted living outside of a skilled nursing
facility have been limited. Some state or local governments offer subsidies for
rent or services for low income elderly. Others may provide subsidies in the
form of additional payment for those who receive SSI payments. Medicaid provides
reimbursement for certain financially or medically needy persons, regardless of
age, and is funded jointly by federal, state and local governments. Medicaid
reimbursement varies from state to state. Only a limited number of 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.
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 Certificates of Need (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 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.
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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 Registrant intends to
develop and manage will apply for appropriate licensure.
The facilities owned and managed by 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. Registrant believes that the properties managed by it are in
substantial compliance with all applicable licensing, reimbursement and similar
regulatory requirements.
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. Registrant believes that properties that it
manages are in material compliance with such laws and regulations.
The laws, rules and regulations which govern Registrant, its owned
and managed properties and other persons with whom Registrant has relationships
are very broad and are subject to continuing change and interpretation. Thus, it
is possible that certain of the past or present contractual arrangements or
business practices of Registrant might be challenged. No assurance can be given
that Registrant or the facilities managed by 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 Registrant or a facility managed by 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
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
Registrant's results of operations and financial condition.
COMPETITION
The long-term care industry generally is highly competitive and
Registrant expects that the assisted living business in particular will become
more competitive in the future. 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. 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 Registrant's competitors
are significantly larger than Registrant and have, or may obtain, greater
resources than those of Registrant.
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EMPLOYEES
Registrant has approximately 250 employees of whom approximately 145
are full-time employees.
LITIGATION
Registrant is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of management of Registrant, although
the outcomes of these suits and claims are uncertain in the aggregate, they
should not have a material adverse effect on the Registrant's business,
financial condition, and results of operations.
2.ab Item DESCRIPTION OF PROPERTY.
The table below sets forth certain information regarding the
properties owned or managed by Registrant as of March 31, 1997.
<TABLE>
<CAPTION>
UNITS AS OF MARCH 31, 1997
--------------------------
Independent Assisted Skilled Occupancy
NAME AND LOCATION LIVING LIVING NURSING RATE (%)
----------------- -------------------------------------------------------------
PROPERTIES OWNED:
<S> <C> <C> <C> <C>
Hillside Terrace, Ann Arbor, MI 66 9* 23 93
Olds Manor, Grand Rapids, MI 98 54* 44 78
The Whitcomb, St. Joseph, MI 102 34 98
MANAGED ONLY PROPERTIES:
The Whittier, Detroit, MI 229 52 63
Cottage Grove Place, Cedar Rapids, IA** 135 49 16 67
PROPERTIES UNDER DEVELOPMENT:***
Presidential Place 104
Hollywood, FL
Camelot Village 120
Huntington, NY
Orchard Terrace 64
Ann Arbor, MI
Camelot Village 80
Stroudsburg, PA
Laurelwood Estates 108
Columbus, IN
</TABLE>
*These units currently licensed as Homes for the Aged.
**Occupancy commenced October 15, 1996. Full certified Medicare unit (16 beds).
***Subject to funding being secured.
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The chart excludes the Harvest Village retirement community located
in Atco, New Jersey (consisting of 300 independent living units and 60 skilled
nursing beds and approximately 60 percent occupied at March 31, 1997), which
Registrant had an option to acquire at March 31, 1997. Registrant's right to
purchase Harvest Village expired in July 1997. See Item 12, "Certain
Relationships and Related Transactions."
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.
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. Registrant estimates that
Olds Manor needs approximately $1 million for deferred maintenance.
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.
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, increasing from a low of 130 apartments
as of October 31, 1995, to 176 as of March 31, 1997, to 199 as of July 31, 1997.
The Whittier was built in the 1920s and renovated in 1972 and 1989. Registrant
has an option to purchase this facility at fair market value. Registrant
estimates that The Whittier needs approximately $1.5 million for deferred
maintenance.
See Item 12, "Certain Relationships and Related Transactions" for
information regarding the possible sale of The Whitcomb, Whittier, and Olds
Manor retirement facilities and the
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proposed Presidential Place, Camelot Village in Huntington, Orchard Terrace, and
Camelot Village at Stroudsburg development projects.
PROJECTS IN DEVELOPMENT
To provide the appropriate level of personal care efficiently and
economically, Registrant intends to develop, subject to the availability of
additional capital resources, for itself or on behalf of others, or acquire
assisted living facilities generally ranging in size from 80 to 120 units.
Registrant has developed a prototype assisted living facility. It is anticipated
that the prototype assisted living facility will be built on the Properties
under Development listed on the preceding page and 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 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.
Resident units in 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. 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.
In order to increase the number of senior living facilities
Registrant develops and manages for itself or on behalf of others, Registrant
may enter into an agreement with an affiliated or unaffiliated third-party
entity, which may be a 501(c)(3) organization, to develop a senior living
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facility for such entity. 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 third-party entity is adequately financed,
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 Registrant would not be the owner. However, prior to
entering into such agreement, Registrant may incur certain initial expenses
associated with its site selection process. 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 third-party entity would benefit through the attainment of
a turnkey senior living facility. To date, neither Registrant nor any of the
501(c)(3) organizations involved with Registrant has received any inquiry or
comment from any regulatory authority with respect to its contractual
arrangements with 501(c)(3) organizations.
MORTGAGE INDEBTEDNESS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
As of March 31, 1997, Hillside Terrace, Inc., a wholly-owned
subsidiary of Registrant and the owner of Hillside Terrace, was indebted to
Great-West Life & Annuity Insurance Company ("GWL") in the aggregate principal
amount of $2,233,461. Such indebtedness is secured by a first mortgage on
Hillside Terrace. As of March 31, 1997, Whitcomb Tower Corporation, a
wholly-owned subsidiary of Registrant and the owner of The Whitcomb, was
indebted to GWL in the aggregate principal amount of $2,084,404. 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 March 31, 1997, Whittier Towers,
Inc., the owner of The Whittier, was indebted to GWL in the aggregate principal
amount $4,058,692. 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 May 1, 1998. 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. The restrictions and cross
collateral provisions of The Whittier mortgage will be eliminated if The
Whittier is sold and the GWL mortgage on the property satisfied. See Item 12
"Certain Transactions and Related Transactions" for information regarding the
proposed sale of The Whittier.
A 12-month extension of the May 1, 1998 due dates of GWL's mortgages
on Whitcomb, Hillside, and Whittier has been requested and granted.
In the event that any of Whittier Towers, Inc., Whitcomb Tower
Corporation, 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
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<PAGE>
of the unpaid principal with accrued and unpaid interest due thereon, plus the
prepayment premium provided in the promissory note related to its mortgage.
Olds Manor, Inc. has agreed that prior to the date on which the
loans of GWL to Whittier Towers, Inc., Whitcomb Tower Corporation, and Hillside
Terrace, Inc. are repaid in full, Olds Manor, Inc. will not, without the prior
written consent of GWL, sell, assign, transfer, or otherwise dispose of or
encumber the Olds Manor retirement facility.
Hillside Terrace, The Whittier, and The Whitcomb are required to
deposit all net operating income from the mortgaged properties into a reserve
account, which account is being used to fund property improvements and certain
other expenditures. The Reserve Account also has been pledged to GWL as
additional security for repayment of the GWL loans.
OLD KENT BANK
As of March 31, 1997, Olds Manor, Inc., a wholly-owned subsidiary of
Registrant and the owner of Olds Manor, was indebted to Old Kent Bank ("Old
Kent") in the aggregate principal amount of $217,957. Such indebtedness is
secured by a first mortgage lien on Olds Manor. The loan bears interest at prime
rate plus 1 percent per annum and is due in 2001.
OLDS MANOR MORTGAGE TRUST
As of March 31, 1997, Olds Manor, Inc. was indebted to Olds Manor
Mortgage Trust in the aggregate principal amount of $360,000. Such obligation is
secured by a mortgage on Olds Manor that is subordinate to the first mortgage on
Olds Manor held by Old Kent. The loan bears interest at prime plus 3 percent per
annum, is due in year 2000, and is convertible into 51,840 shares of
Registrant's Common Stock at $6.94 per share. Registrant is the guarantor of the
Olds Manor Note. The $360,000 Olds Manor Trust mortgage is subordinate to the
$218,000 Old Kent Bank mortgage. The Olds Manor Trust mortgage has routine
covenants respecting payment of taxes, insurance, repairs, etc., except that
Olds Manor, Inc. cannot permit any increase of the principal of the Old Kent
Mortgage without the consent of the trustee of the Olds Manor Mortgage Trust.
The trustee is Carl G. Paffendorf, the Chief Executive Officer of Registrant.
WHITCOMB MORTGAGE TRUST
As of March 31, 1997, Whitcomb Tower Corporation was indebted to The
Whitcomb Mortgage Trust in the aggregate principal amount of $850,000. Such
obligation is secured by a mortgage on The Whitcomb that is subordinate to the
first mortgage on The Whitcomb held by GWL. The loan bears interest at prime
rate plus 3 percent per annum, is due in 1999 and is convertible into 117,692
shares of Registrant's Common Stock at $7.22 per share. Registrant is guarantor
of the Whitcomb Tower Note. The $850,000 Whitcomb Trust mortgage is subordinate
to GWL's $2,084,000 mortgage. The Whitcomb Trust mortgage has routine covenants
respecting payment of taxes, insurance, repairs, etc., except that Whitcomb
Tower Corporation cannot permit
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<PAGE>
any increase of the principal of the GWL mortgage without the consent of the
trustee of the Whitcomb Mortgage Trust. The trustee is Carl G. Paffendorf.
CITIBANK, N.A. AND LLOYDS BANK PLC
As of March 31, 1997, Citibank and Lloyds held 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 March 31 1997, Vanguard had pledged
1,340,573 shares of UVH Common Stock owned by Vanguard as security for its
guarantee. See Item 12, "Certain Transactions and Related Transactions." These
mortgages, guarantee, and pledge were released on July 16, 1997.
Item 3. LEGAL PROCEEDINGS. Registrant is not a party to any material legal
proceedings. Registrant is involved in various lawsuits and claims arising in
the normal course of business. In the opinion of the management of Registrant,
although the outcomes of these suits and claims are uncertain, in the aggregate
they should not have a material adverse effect on Registrant's business or
financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable.
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information. There is currently no public market for the
equity securities of Registrant.
(b) Holders.
Approximate Number of Record
Title of Class Holders (as of March 31, 1997)
-------------- ------------------------------
Common Stock, par value $.01 per share 800
(c) Dividends. 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.
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 Registrant limit future indebtedness of
Registrant as well as the Registrant's ability to pay cash dividends.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Net Revenues increased by $477,000, or 6 percent, in fiscal 1996 and
decreased by $563,000, or 7 percent in fiscal 1997. The fluctuation in revenues
in fiscal 1996 and fiscal 1997 was largely attributable to development fees in
the amount of $1,004,000 to $220,000. Resident and healthcare services increased
$143,000 in fiscal 1996 and $161,000 in 1997. Resident and health care revenues
increased as a result of higher rates. Occupancy rates declined due to a
temporary moratorium on admissions at one of Registrant's facilities. From
January to October 1997 Olds Manor was subject to a moratorium on admissions in
the Home for the Aged due to the allegation that certain services being rendered
were beyond the scope of the facility's Home for the Aged License. As a
consequence of the moritorium, occupancy dropped from 97 percent as of March 31,
1996 to 78 percent as of March 31, 1997. The moratorium was partially released
in June 1997 and was completely lifted on October 14, 1997.
General and administrative expenses decreased $89,000 or 18 percent
in fiscal 1996 primarily due to the closing of the Registrant's Florida office
in fiscal 1995. In fiscal 1997 General and Administrative expenses increased
$467,050, or 113 percent, due to an increase in personnel costs and additional
costs associated with the Registrant's aborted public offering.
Interest expense, net also fluctuated during the reporting period.
In fiscal 1996, interest expense, net decreased by $22,000, or 4 percent, and in
fiscal 1997, interest expense net decreased by $8,000, or 1 percent.
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In fiscal 1996, the net interest expense included interest income of
$78,000 on development advances. In fiscal 1997, interest expense decreased
$95,000 principally due to conversion of debt into stock (see Note I to the
Registrant's financial statement). The interest expense decrease was offset by
interest income reduction of $87,000 resulting in the net decrease of $8,000.
Income from operations declined from $1,523,000 in fiscal 1996 to
$429,000 in fiscal 1997 due to the decline in Development fees earned and the
increase in general and administrative expenses in fiscal 1997. Income before
taxes declined from $1,032,000 in fiscal 1996 to a loss of $1,366,000 due to (i)
the decline in income from operations in fiscal 1997, (ii) debt conversion
expense of $156,000 in fiscal 1997, and (iii) $1,170,000 of costs associated
with the unsuccessful public offering.
Income tax expense increased from $420,000 in fiscal 1996 to
$668,000 in fiscal 1997. The Registrant provided for tax expense in fiscal 1997
despite its loss from operations due to an increase in its deferred tax
valuation allowance of $981,000.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the Registrant used approximately $341,000 for
operating activities compared to providing cash from operating activities of
approximately $1,359,000 in fiscal 1996. The decline in cash flows from
operating activities was principally due to the Registrant's loss in fiscal
1997. During fiscal 1997 cash flows from financing activities were $464,000 due
to a net increase in bank borrowings, $180,000, and proceeds from the exercise
of warrants.
At March 31, 1997 the Registrant had a deficiency in working capital
of $654,000, a decline of $754,000, due to the Registrant's loss in fiscal 1997.
Included in the deficiency or working capital are $587,000 of remaining
liabilities associated with Registrant's unsuccessful public offering.
Management is currently negotiating with these creditors for reductions in
amounts charged and extended payment terms.
The Registrant's capital is not sufficient to fund its
past-operating plans. Given the above, the Registrant is currently negotiating
to sell a substantial portion of its operating and development properties. If
such sales are successful, the Registrant would have adequate capital to fund
future development projects. In addition, the Registrant has received a
commitment letter from a financial institution to refinance substantially all of
the its outstanding mortgages. If the Registrant opts to pursue this financing
alternative, the Registrant believes it will have adequate working capital.
Item 7. FINANCIAL STATEMENTS. See page F-1 for Registrant's financial
statements.
8.ab Item CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act of Registrant.
The following table sets forth information regarding the Directors
and executive officers of Registrant:
NAME AGE Positions(s)
Carl G. Paffendorf 65 Chairman of the Board and Chief Executive
Officer
Larry L. Laird 60 President, Chief Operating Officer and
Director
Paul D'Andrea 65 Vice President - Finance
Craig M. Shields 56 Vice President and
General Counsel
Theresa A. Govier NA Vice President - Administration and
Secretary
Tara O'Sullivan 36 Vice President - Corporate Development
Douglas D. Laird 40 Vice President - Lifecare
Alan Guttman 48 Treasurer
James E. Eden 60 Director
Benjamin Frank 63 Director
Francis S. Gabreski 78 Director
Robert S. Hoshino, Jr. 51 Director
Stanford J. Shuster 56 Director
CARL G. PAFFENDORF has been Chairman of the Board and Chief
Executive Officer of Registrant since 1988 as well as a Director of 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 (LLM).
LARRY L. LAIRD has been President and Chief Operating Officer of
Registrant since 1994 and a Director of 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
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Iowa in Iowa City. Mr. Laird continues to serve as executive director of
Friendship Village, Waterloo, Iowa, a lifecare facility. From October 1986 until
October 1992, Mr. Laird served as president of Forum Lifecare, Inc., a
wholly-owned subsidiary of Forum Group, Inc., and as a vice president of Forum
Group, Inc. From October 1992 until July 1996, Mr. Laird was also president of
Laird Lifecare Ltd., a developer of senior living facilities. Prior to 1986 he
was a co-founder and executive vice president and chief operating officer of
Life Care Services Corporation in Des Moines, Iowa. Mr. Laird is the father of
Douglas D. Laird, Vice President - Lifecare of Registrant.
PAUL D'ANDREA has been Vice President--Finance of 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.
CRAIG M. SHIELDS has been Vice President and General Counsel of
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.
THERESA A. GOVIER has been Vice President--Administration and
Secretary of 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.
DOUGLAS D. LAIRD joined Registrant in 1996 and became Vice President
- - Lifecare in February 1998. Mr. Laird was previously with Iowa Health System as
Vice President at St. Luke's Methodist Hospital. In his capacity at St Luke's,
he was responsible for all surgical, rehabilitation, and facilities services and
served as chairman of the five-person operating council of the Hospital. Mr.
Laird has a B.S. degree in business from Iowa State University and a Masters
degree in Hospital and Healthcare Administration from the University of Iowa. He
is also a Fellow in the American College of Health Care Executives. Mr. Laird is
the son of Larry L. Laird, the President and a Director of Registrant.
TARA O'SULLIVAN joined Registrant in January 1997 and became Vice
President - Corporate Development in June 1997. She was previously with General
Investment & Development Company, a Boston based real estate investment firm,
from 1987 through 1997. Ms. O'Sullivan has experience in all aspects of
multi-family operations and management; and worked on numerous acquisition and
due diligence projects in the industry. Ms. O'Sullivan attended The State
University of New York at Stony Brook and Dowling College, Long Island where she
received a B.S. degree in marketing and management. She is a National Apartment
Association CAPS candidate.
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<PAGE>
ALAN GUTTMAN has been Treasurer of 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 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., a public company
serving the senior living industry.
BENJAMIN FRANK has been a Director of 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 was that of
senior vice president with overall responsibility for real estate, legal and
governmental affairs.
FRANCIS S. GABRESKI is a Director of both UVH and Vanguard. Mr.
Gabreski is retired. He has a B.S. degree from Columbia University. He was the
top American Air Ace in the European Theater during World War II and in the
Korean conflict. 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. During his military career, Mr. Gabreski was awarded 17 United States
decorations and awards. He was also presented with decorations from Great
Britain, Poland, France, the Republic of Korea, and Belgium.
ROBERT S. HOSHINO, JR. has been a Director of Registrant since 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 Registrant since 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
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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.
Messrs. Paffendorf, D'Andrea, Frank, Gabreski, and Shields and Ms.
Govier are also officers and/or directors of Vanguard.
BOARD OF DIRECTORS COMPENSATION
Outside Directors are to be compensated at the rate of $6,000 per
year (payable in shares of Common Stock valued at fair market value) 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.
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 Registrant's officers and Directors and persons who own more than five
percent of a registered class of Registrant's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than five percent stockholders are
required by the Commission's regulations to furnish Registrant with copies of
all Section 16(a) forms they file.
Number of Late Reports Number of Transactions Not
IN FISCAL 1997 REPORTED ON A TIMELY BASIS
---------------------- --------------------------
Carl G. Paffendorf 1 1
Larry L. Laird 2 2
Paul D'Andrea 1 1
Craig M. Shields 1 1
Theresa A. Govier 1 1
Alan Guttman 1 1
Vanguard Ventures, Inc. 1 1
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Item 10. EXECUTIVE COMPENSATION
The following table sets forth the total compensation for
Registrant's Chief Executive Officer and Chief Operating Officer during the
fiscal years ended March 31, 1997, 1996, and 1995. No such officer's salary and
bonus exceeded $100,000 for services rendered to Registrant during 1995, 1996,
or 1997.
SUMMARY COMPENSATION TABLE
Fiscal Year Ended Annual Compensation
Name and Principal Position March 31, Salary
- --------------------------- --------- ------
Carl G. Paffendorf 1997 $100,000*
Chief Executive Officer 1996 -(1)
1995 -(1)
Larry L. Laird 1997 $100,000
Chief Operating Officer 1996 96,000
1995 78,000
* Mr. Paffendorf was paid $75,600 by Vanguard during the fiscal year
ended March 31, 1995 and 1996. Registrant estimates that Mr.
Paffendorf devoted 50% of his time during the fiscal year ended
March 31, 1995 to Registrant and 60% of his time during the fiscal
years ended March 31, 1996 and March 31, 1997 to Registrant.
Registrant paid to Vanguard administrative fees of $50,000 per year
in each of the three fiscal years ended March 31, 1997.
The following table sets forth certain information regarding stock
option grants made to the Chief Executive Officer and the Chief Operating
Officer during the fiscal year ended March 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
% of Total Options
Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/sh) Date
- ---- ---------- ----------- ------ ----
<S> <C> <C> <C> <C>
Carl G. Paffendorf 5,000 12% $4.40 3/7/02
Larry L. Laird 5,000 12% $4.00 3/7/02
</TABLE>
The following table sets forth certain information regarding
unexercised stock options held by the Chief Executive Officer and Chief
Operating Officer as of March 31, 1997. No options were exercised by such
persons during the fiscal year ended March 31, 1997.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Unexercised
Options at March 31, 1997
Name Exercisable/Unexercisable
Carl G. Paffendorf.................... 11,640/11,360
Larry L. Laird........................ 4,800/14,000
LONG-TERM INCENTIVE AND PENSION PLANS
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 Registrant during the
term of his employment and for a period of three years thereafter, and he will
not, without Registrant's written consent, solicit the residents of facilities
owned or managed by Registrant or any management contract owned or being
negotiated by 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. Registrant may terminate the agreement for "cause" (a breach of
the terms and conditions of the agreement) upon 30 days' prior written notice to
Mr. Paffendorf.
Mr. Laird entered into a two-year employment agreement with the
Registrant as of April 1, 1996, pursuant to which he serves as Registrant's
President and Chief Operating Officer. Mr. Laird's annual base salary under the
employment agreement is $100,000. In Fiscal 1997, Mr. Laird received $25,000 in
cash bonuses and 3,000 shares of Common Stock. If Mr. Laird is employed by
Registrant on March 31, 1998, Mr. Laird will receive a cash bonus of $25,000 and
3,000 shares of Common Stock. If Mr. Laird dies prior to March 31,1998, while
employed by Registrant, Mr. Laird's estate will receive the full bonus due on
March 31, 1998.
During the term of his employment agreement and for a period
of three years thereafter, Mr. Laird has agreed not to directly or indirectly
engage in the business of owning or managing retirement facilities for the
elderly, except for the benefit of or on behalf of Registrant (other than as
Executive Director and an employee of Friendship Village, Waterloo, Iowa).
During the three-year noncompetition period after termination of employment, the
covenant not- to-compete applies only to facilities within a 15-mile radius of
facilities owned by Registrant. Mr. Laird has also agreed not to solicit the
residents of facilities owned or managed by Registrant, any management contract
owned or being negotiated by Registrant, or any employees
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<PAGE>
of Registrant for a period of 24 months following the end of the term of his
employment agreement. Mr. Laird's employment 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. Registrant
may terminate the agreement for "cause" (a breach of the terms and conditions of
the agreement) upon 30 days' prior written notice to Mr. Laird. In the event
that Mr. Laird's employment is terminated, Registrant ceases to be manager of
Cottage Grove Place and Mr. Laird becomes its manager, Registrant will receive
one-half of the Cottage Grove Place management fee. In the event that Mr.
Laird's employment is terminated and Registrant ceases to be the developer of
Cottage Grove Place and Mr. Laird becomes its developer, Registrant will receive
90 percent of the development fee.
STOCK OPTION PLANS
1991 INCENTIVE STOCK OPTION PLAN. Under 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 March
31, 1997, options to purchase an aggregate of 138,020 shares of Common Stock
were 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 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. Registrant's 1996
Outside Directors' Stock Option Plan (the "Directors' Plan") provides for the
grant of options to purchase Common Stock of Registrant to non-employee
directors of Registrant. The Directors' Plan authorizes the issuance of a
maximum of 90,000 shares of Common Stock. As of March 31, 1997, options to
purchase an aggregate of 9,000 shares of Common Stock were 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
-24-
<PAGE>
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, Registrant's Chief Executive Officer,
participated in the decisions of Registrant's Board of Directors concerning
executive office compensation. However, Mr. Paffendorf abstained from decisions
concerning his own compensation.
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 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, 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 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 Registrant's Incentive Plan, whereby executives are
eligible to receive stock options that give them the right to purchase shares of
Common Stock of Registrant at specified prices in the future.
The Board of Directors believes executive compensation should be
tied to benefits directly accruing to stockholders from positioning 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 Registrant's executive compensation should be first and foremost
based on financial performance and returns to stockholder. The compensation
levels of 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 Registrant's Common Stock for
the past five years. Consequently, no performance graph is being filed with this
report.
-25-
<PAGE>
Item 11. 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 March 31, 1997 by
(i) each person who is known by Registrant to be the beneficial owner of more
than 5% of Registrant's Common Stock, (ii) each director and each executive
officer (including shares owned by spouse or in trust), 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.
Percent of
Shares Beneficially Outstanding
Owned Common Stock
----- ------------
Vanguard Ventures, Inc. 2,711,662 (1) 82%
Carl G. Paffendorf 2,776,903 (2) 84%
Larry L. Laird 22,800 (3) *
Benjamin Frank 15,562 (4) *
Francis S. Gabreski 31,486 (5) *
Robert S. Hoshino, Jr. 17,817 (5) *
James E. Eden 0
Stanford J. Shuster 0
Directors and Executive Officers, 2,882,148 (6)
as a Group (11 Persons)
- -----------------
* Less than 1%.
(1) As of March 31, 1997, 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 Item 13,
"Certain Relationships and Related Transactions." This pledge has
been released.
(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 8,400 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of
March 31, 1997.
Footnotes contd. next page
-26-
<PAGE>
(3) Includes 4,800 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of
March 31, 1997.
(4) Includes 8,640 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of
March 31, 1997.
(5) Includes 8,640 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of
March 31, 1997.
(6) Includes 48,060 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of
March 31, 1997.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DUE FROM AFFILIATES
Registrant is owed by Vanguard and affiliates cash advances, unpaid
management fees, interest and other revenues. These amounts consisted of the
following as of March 31, 1997:
Due from Vanguard $2,207,653
Due from Whittier Towers, Inc.. . . 2,793,766
Due from Vanguard Affiliated
Limited Partnerships (Vanguard is
General Partner)................... 1,219,670
Management fees and cash
advances due from affiliated
companies ......................... 770,103
----------
$6,991,192
==========
At March 31, 1997, the unreserved amounts due fom affiliates
represent development fees and advances from the following:
Presidential Care Corp....................$ 27,646
Camelot Village at Huntington, Inc........ 102,718
Camelot Village at Stroudsburg, LLC....... 137,243
----------
$ 267,607
==========
See Note C to the Consolidated Financial Statements.
HARVEST VILLAGE
In Fiscal 1997, Registrant had the right to purchase the
300-unit/60-skilled nursing bed Harvest Village retirement community located in
Atco, New Jersey ("Harvest Village") from an affiliate of Vanguard for $17.4
million, consisting of (i) $13,500,000, (ii) the cancellation of $6,094,000 of
indebtedness due to Registrant from Vanguard, and (iii) the assignment to
Vanguard of the $7.5 million Promissory Note due from the Harvest Village lessee
Gateway
-27-
<PAGE>
Communities, Inc. ("GCI Note"). The intercompany debt and assignment of the GCI
Note was valued by the parties based upon an appraisal, at $3.9 million.
In connection with the restructuring of the construction loan for
Harvest Village in 1990, the construction lenders (Citibank, N.A. and Lloyds
Bank Plc) required Vanguard to make a $7 million loan guaranty. This guaranty,
$6,350,000 as of March 31, 1997, was 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 was cross-collateralized with
subordinate mortgages on Hillside Terrace and The Whitcomb. As of March 31,
1997, the guaranty was also secured by 1,340,573 shares of Registrant's stock
owned by Vanguard. Carl G. Paffendorf, Registrant's Chief Executive Officer
("Paffendorf"), had guaranteed $1.00 of the Harvest Village construction loan
(to increase to the amount of the Vanguard guaranty if Harvest Village Partners,
L.P., the owner of the Harvest Village retirement community, filed for
bankruptcy or certain other events occurred).
In July 1997, (i) Registrant's right to purchase the Harvest Village
retirement facility terminated, (ii) Vanguard contributed substantially all of
its equity interest in Harvest Village Partners, L.P. to Registrant, (iii)
Registrant and Vanguard transferred 100 percent of Harvest Village Partners,
L.P. to unaffiliated purchasers, and (iv) the Harvest Village construction
lenders, Citibank, N.A, and Lloyds Bank Plc, assigned their mortgage on the
Harvest Village retirement facility to a company not affiliated with Registrant,
released their liens and security interests in Registrant's properties and the
stock of Registrant owned by Vanguard, and released Vanguard and Paffendorf from
their guarantees.
GUARANTEES
Reference is made to the Harvest Village guarantees discussed above,
which have terminated. In addition, Registrant and affiliates guaranteed certain
debt as of March 31, 1997, as follows:
<TABLE>
<CAPTION>
Amount As of
Guarantor(s) Maker(s) Lender/Obligee March 31, 1997
------------ -------- -------------- --------------
<S> <C> <C> <C>
Registrant CBF Building Company Apple Savings Bank $ 95,689
Registrant, Vanguard, Phoenix Lifecare Camelot Village at Huntington, Inc. State Bank of Long Island 450,000
Corp. and Paffendorf
Vanguard and Paffendorf Registrant State Bank of Long Island 362,500
Vanguard Hillside Terrace, Inc. Great-West Life 2,233,461
Vanguard Whitcomb Tower Corp. Great-West Life 2,084,404
Vanguard Registrant Cedar Rapids CGP, L.C. 450,000
Registrant Vanguard Kevin O'Sullivan 125,000
</TABLE>
The Great-West Life mortgage on The Whittier was $4,058,692 at March
31, 1997. A default under The Whittier mortgage is a default under the Hillside
Terrace and Whitcomb mortgages. See Item 2, "Description of Property - Mortgage
Debt" and "Whittier Towers, Inc.," discussed below.
-28-
<PAGE>
In Fiscal 1998, Registrant borrowed $75,000 from State Bank, which
indebtedness has been guaranteed by Vanguard and Mr. Paffendorf.
In Fiscal 1998 Registrant entered into a $52,000 equipment lease
financing with First Sierra Financial, Inc. Mr. Paffendorf personally guaranteed
the lease for which he is to receive 1,040 shares of Registrant's Common Stock
valued at $5.00 per share. These shares are subject to investment restrictions.
See also "Camelot Village at Huntington, Inc.," discussed below, for
information regarding additional guarantees of Registrant agreed to in Fiscal
1998.
LEASE OF CORPORATE OFFICE
Registrant leases its offices in Glen Cove, New York, 2,500 square
feet, from CBF Building Company, a limited partnership in which Vanguard is the
general partner. Registrant has sublet 550 square feet of its space to Vanguard
on the same terms as Registrant's lease with CBF.
ISSUANCE OF SHARES TO VANGUARD
Effective March 31, 1995 Vanguard contributed 1.2 million shares of
Registrant's common Stock owned by Vanguard to Registrant in order to enhance
Registrant's proposed initial public offering ("IPO") (SEC Registration Nos.
33-80812 and 333-09037) by increasing Registrant's earnings per share, increase
investor interest, and increase the likelihood that an IPO overallotment option
would be exercised. The capital contribution was premised on the fact that
Registrant was going to complete the public offering by September 30, 1996. The
IPO aborted in October 1996, and, effective December 31, 1996, Registrant
reissued 1,080,000 shares of Common Stock to Vanguard.
WHITTIER TOWERS, INC.
Registrant has an option, exercisable until December 31, 2002, to
purchase The Whittier from Whittier Towers, Inc. at a purchase price equal to
the appraised fair market value but not less than the current outstanding
balance of the first mortgage. Against the purchase price shall be credited (i)
management fees relating to management of the premises since April 1, 1996,
payable to Registrant, accrued but unpaid (ii) sums paid by Registrant to fund
capital improvements at the premises since April 1, 1996, (iii) sums spent by
Registrant on or after April 1, 1996 to fund negative cash flow of The Whittier
and (iv) interest at 12 percent per annum on the sums referred to in items (ii)
and (iii). In the event that Vanguard receives a written offer from an
unaffilited prospective purchaser to purchase the premises (or the stock of
Whittier Towers, Inc.), Registrant has agreed to either (i) relinquish its
option rights or (ii) change the purchase price set forth in the option to be
the same as offered in the bona fide offer and promptly exercise the option per
the bona fide offer's price and terms. If the option is relinquished and the
premises (or Whittier Tower, Inc. stock) are sold, then the net proceeds shall
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<PAGE>
be applied as follows: (i) payment of accrued since April 1, 1996 but unpaid
management fees, (ii) sums paid by Registrant on or after April 1, 1996 to fund
capital improvements at the premises, (iii) sums spent by Registrant to fund
negative cash flow of The Whittier on or after April 1, 1996, and (iv) interest
at 12 percent per annum on the sums referred to in items (i) through (iii). The
remaining net profit (i.e., net of brokerage fees, closing costs, mortgage debt,
etc.) shall be split 50 percent to Registrant and 50 percent to Vanguard. On
December 24, 1997, a letter of intent to sell The Whittier was executed under
which unaffiliated persons have the right to purchase the facility for
approximately $6.3 million. If closing is held, Registrant will receive a
portion of the net proceeds referred to above, estimated at $1.2 million, and
apply such sum to GWL mortgages on Whitcomb and Hillside. See Item 2 Description
of Property - Mortgage Indebtedness.
Whittier Towers, Inc. has agreed to pay to Registrant a management
fee of 5% of the gross operating income of The Whittier. The term of the
agreement is 60 months (until March 31, 2001) and will continue on a
month-to-month basis thereafter. The agreement may be terminated by either party
upon 30 days' prior written notice.
In March 1998, Vanguard sold all of the stock of Whittier Towers,
Inc. to Phoenix Lifecare Corp. This sale does not adversely affect the rights of
Registrant described above.
PHOENIX LIFECARE CORP.
Larry L. Laird, Registrant's President, is also President of Phoenix
Lifecare Corp. ("Phoenix"), a 501(c)(3) corporation which provides home health
care services to residents of The Whittier and The Whitcomb. No director,
officer, employee, or agent of Registrant or Vanguard, or any of their
respective affiliates, is a director of Phoenix.
Phoenix employs Registrant for management and administrative
services required in connection with Phoenix's home health care operations for a
fee equal to 5 percent of the gross operating income of Phoenix.
There is a lease between Whitcomb Tower Corporation ("Whitcomb"), a
subsidiary of Registrant, whereby Whitcomb leases to Phoenix a portion of the
second and third floors and a portion of the basement of The Whitcomb, located
at 509 Ship Street, St. Joseph, Michigan, consisting, in the aggregate, of
approximately 450 square feet, for the term of one year from November 1, 1996 at
the monthly rental rate of $2,000 (which includes food service cost for tenant's
staff) per month for the first 12 months, and in the event that tenant shall
exercise the options as provided for in the Lease, $2,000 per month for each of
the two option terms (each for one year).
Phoenix provides health care services to residents of The Whitcomb
and The Whittier. Registrant earns a management fee from Phoenix for services
rendered. At March 31, 1997, the amounts due from Phoenix, for both unpaid
management fees and loans, aggregated $502,496; and loans from Registrant to
Phoenix' subsidiaries, Presidential Care Corp. and Camelot Village
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<PAGE>
at Stroudsburg, LLC ("Stroudsburg"), aggregated $164,889. Registrant loaned an
additional $75,000 to Stroudsburg in Fiscal 1998.
PRESIDENTIAL CARE CORP.
Presidential Care Corp. is a 501(c)(3) corporation organized to
acquire land in Hollywood, Florida, upon which an assisted living facility will
be built subject to financing being obtained. An application is pending with the
United States Department of Housing and Urban Development (HUD) for a
$10,000,000 (approximate) mortgage loan guarantee. Registrant has the
development and management contracts on this property, for which it will be paid
a 7 1/2 percent development fee and a 5 percent management fee. Registrant has
an option to purchase at fair market value. The option is exercisable at any
time during the period January 1, 2000 through December 31, 2005.
In consideration of the commitment of Vanguard to advance up to
$800,000 to fund the acquisition and development costs of an assisted living
faciity to be built on the Hollywood, Florida site, Vanguard will receive a sum
equal to 50 percent of the net proceeds from the sale of the assisted living
facility. Vanguard has assigned this right to Registrant.
CAMELOT VILLAGE AT STROUDSBURG, LLC
Stroudsburg is a limited liability company organized to acquire land
in Stroudsburg, Pennsylvania, upon which an assisted living facility will be
built, subject to financing being obtained. Registrant has the development and
management contracts on this property, for which it will be paid a 7 1/2 percent
development fee and a 4 percent management fee. Registrant has an option to
purchase at fair market value. The option is exercisable at any time until June
30, 2006.
In consideration of the commitment of Vanguard to advance up to
$300,000 to fund the acquisition and development costs of an assisted living
faciity to be built on the Stroudsburg, Pennsylvania site, Vanguard will receive
a sum equal to 50 percent of the net proceeds from the sale of the assisted
living facility. Vanguard has assigned this right to Registrant.
Stroudsburg has entered into a letter of intent to sell its rights
to an unaffiliated 501(c)(3) organization. If this transaction closes, most of
the net proceeds will be due to Registrant.
CAMELOT VILLAGE AT HUNTINGTON, INC.
Effective January 1, 1997 all of the outstanding shares of the
Common Stock of Camelot Village at Huntington, Inc. were transferred by Phoenix
to Carl G. Paffendorf, Registrant's Chief Executive Officer, at Phoenix' cost
plus Mr. Paffendorf's agreement to save Phoenix harmless from its guarantee of
mortgage debt due State Bank of Long Island. As discussed above under
"Guarantees," Registrant, Phoenix, and others have guaranteed a $450,000 bank
loan to Camelot
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<PAGE>
Village at Huntington, Inc., the proceeds of which were used as part of the
purchase price for the Huntington, New York property. This mortgage has been
reduced to $300,000 and is due June 30, 1998.
Camelot Village at Huntington, Inc. ("Camelot") is a New York
corporation organized in 1996 to acquire land in Huntington, New York upon which
an assisted living facility will be built, subject to zoning approval and
construction financing being obtained. The purchase price, closing costs, market
studies, and various zoning expenses as of March 31, 1997 totalled approximately
$1,050,000, of which $450,000 was borrowed from State Bank of Long Island, which
loan is secured by the Huntington property. The balance of $600,000 was advanced
by Registrant. Registrant has the development and management contracts on this
property, for which it will be paid a 7 1/2 percent development fee (not to
exceed $1,100,000) and a 5 percent management fee. Registrant has an option to
purchase at fair market value. In the event Registrant does not exercise its
purchase option, Camelot will have the right to sell the Huntington facility to
the highest bidder. Alternatively, Camelot will have the right to sell the
facility to Registrant and Registrant must purchase the facility, at fair market
value, exercisable for 90 days at the end of the fifth year from the date of the
issuance of the Certificate of Occupancy on the facility, but in all events not
later than March 31, 2007.
Construction of the facility requires the issuance of a special use
permit by the Huntington Zoning Board of Appeals. In the event that zoning
approval is not received and all appeals have been exhausted, each Camelot
investor will have the right : (1) to receive the return of his investment plus
10 percent annual dividends (to the extent not paid). If Camelot's available
cash and the net proceeds from the sale of the land are insufficient to pay
investors electing this option, then Registrant will be required to make up the
shortfall. (2) Alternatively, each investor may exchange his Camelot stock for
shares of Registrant's Common Stock at the lesser of (a) 80 percent of its fair
market value and (b) $7.00 per share.
Carl G. Paffendorf, Registrant's Chief Executive Officer, owns all
of the Class A voting stock of Camelot. Larry L. Laird, Registrant's Chief
Operating Officer, Benjamin Frank, a Director of Registrant, and Mr. Paffendorf
comprise the Board of Directors of Camelot. Mr. Paffendorf owns 140 shares of
Class B stock of Camelot (out of a total of 2,800 shares to be issued), for an
investment of $140,000. Unaffiliated persons own or will own the balance of the
Class B shares at the same price paid by Mr. Paffendorf, $1,000 per share.
Camelot shareholders are entitled to 100 percent of the net cash flow from the
Huntington facility's operations and 50 percent of the net proceeds from the
sale of the facility.
Registrant has guaranteed to Camelot investors the payment of
dividends and distributions of up to $1,500,000 in the aggregate. In
consideration of Registrant's guarantee of $1.5 million of the investors'
investment in Camelot stock, Registrant will receive 50 percent of the net
proceeds from the sale of the facility.
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<PAGE>
LAURELWOOD ESTATES AT COLUMBUS, LLC
Laurelwood Estates at Columbus, LLC ("Laurelwood") is a New York
limited liability company organized in 1997 to acquire land in Columbus, Indiana
upon which an assisted living facility will be built, subject to the closing of
title and financing being obtained. Zoning has been obtained. Sums paid under
the contract to purchase, market studies, and various zoning expenses as of
March 31, 1997 totalled approximately $18,648, of which sum was advanced by
Registrant. If Laurelwood acquires the Columbus, IN property, Registrant will
have the development and management contracts on this property for which it will
be paid a 7 1/2 percent development fee and a 5 percent management fee, and
Registrant will be granted an option to purchase at fair market value. Carl G.
Paffendorf, Registrant's Chief Executive Officer, owns all of the outstanding
interests of Laurelwood, which he purchased from Registrant in January 1998 for
$1,000, Registrant's cost.
POSSIBLE SALE OF SUBSTANTIAL ASSETS
In April 1998 Registrant entered into a letter of intent with a
company affiliated with one of Registrant's outside directors to sell the
Whitcomb and Hillside Terrace retirement facilities, Registrant's rights with
respect to the proposed Hollywood, Florida and Huntington, New York assisted
living projects owned by Presidential Care Corp. and Camelot Village at
Huntington, Inc., the Orchard Terrace assisted living project, the Cottage Grove
Management Agreement, and certain other assets for a gross sales price of
approximately $17 million.
If the various transactions close, which closings will be subject to
numerous conditions and contingencies, the net proceeds to Registrant are
expected to be approximately $10 million.
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<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 26th day of May,
1998.
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 May 26, 1998
- ------------------------ (Principal Financial
Paul D'Andrea Officer and Principal
Accounting Officer)
/S/ BENJAMIN FRANK Director May 26, 1998
- -----------------------
Benjamin Frank
/S/ FRANCIS S. GABRESKI Director May 26, 1998
- -----------------------
Francis S. Gabreski
/S/ LARRY L. LAIRD President, Chief May 26, 1998
- ------------------------- Operating Officer
Larry L. Laird and Director
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<PAGE>
/S/ Carl G. Paffendorf Chairman of the Board May 26, 1998
- ------------------------- and Chief Executive
Carl G. Paffendorf Officer
/S/ ROBERT S. HOSHINO, JR. Director May 26, 1998
- --------------------------
Robert S. Hoshino, Jr
/S/ JAMES E. EDEN Director May 26, 1998
- --------------------------
James E. Eden
/S/ STANFORD J. SHUSTER Director May 26, 1998
- --------------------------
Stanford J. Shuster
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<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
1 List of active subsidiaries of Registrant
(b) REPORTS ON FORM 8-K
Registrant filed no reports on Form 8-K during the quarter ended March 31,
1997.
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<PAGE>
MARCH 31, 1997
FORM 10-K
EXHIBIT 1
ACTIVE SUBSIDIARIES OF UNITED VANGUARD HOMES, INC.
<TABLE>
<CAPTION>
STATE &
DATE OF
NAME INC. OWNER BUSINESS
---- ---- ----- --------
<S> <C> <C> <C>
Hillside Terrace, Inc. 1/10/89 UVH Owns 98-unit Hillside Terrace retirement
MI facility, Ann Arbor, MI.
Olds Manor, Inc. 8/26/88 UVH Owns 196-unit Olds Manor retirement
MI facility, Grand Rapids, MI.
Orchard Terrace, Inc. 7/5/95 UVH Owns site for 64-unit expansion of
MI the Hillside Terrace facility.
UVH Development Corp. 3/26/86 UVH Developer of senior living facilities.
MI
UVH Management Corp. 2/6/86 UVH Real estate manager.
FL
Vanguard Homes of N.J., Inc. 7/29/86 UVH Former General Partner of Harvest
NY Village retirement facility.
Whitcomb Tower Corporation 9/23/88 UVH Owns 136-unit Whitcomb Tower
MI retirement facility, St. Joseph, MI.
</TABLE>
<PAGE>
C O N T E N T S
PAGE
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Deficiency F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-39
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
UNITED VANGUARD HOMES, INC.
We have audited the accompanying consolidated balance sheets of United Vanguard
Homes, Inc. and Subsidiaries as of March 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial position of United Vanguard
Homes, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Melville, New York
August 5, 1997, except for Note E, as to
which the date is October 15, 1997
F-2
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
<TABLE>
<CAPTION>
ASSETS 1996 1997
---------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash ........................................... $ 210,245 $ 202,924
Accounts receivable, less allowance for doubtful
accounts of $40,000 in 1996 and 1997 ........... 413,539 547,812
Development fees and advances .................. 270,864
Due from affiliates, net ....................... 658,717 267,607
Prepaid expenses and other ..................... 274,654 518,393
---------- ----------
Total current assets ........................... 1,828,019 1,536,736
PROPERTY AND EQUIPMENT, NET .................... 2,361,698 2,276,651
OTHER ASSETS
Development fees and advances .................. 575,017 795,500
Restricted assets .............................. 176,352 99,600
Deferred income taxes .......................... 981,000
Other assets ................................... 165,453 176,437
---------- ----------
1,897,822 1,071,537
---------- ----------
$6,087,539 $4,884,924
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' DEFICIENCY 1996 1997
---------- ------------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt .................. $ 432,756 $ 264,918
Accounts payable ................................... 435,757 487,758
Accrued expenses ................................... 617,043 660,084
Public offering costs .............................. 587,000
Income taxes payable ............................... 442,371 190,749
----------- ------------
Total current liabilities .......................... 1,927,927 2,190,509
RESIDENT SECURITY DEPOSITS ......................... 314,705 284,526
LONG-TERM DEBT, less current portion ............... 7,172,982 6,334,265
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock $.001 par value; 1,000,000 shares
authorized; none issued and outstanding
Common stock $.01 par value; authorized,
14,000,000 shares; issued and outstanding,
1,827,833 shares and 3,320,950 shares in
1996 and 1997, respectively .................... 18,278 33,210
Additional paid-in capital ......................... 5,619,905 7,043,226
Accumulated deficit ................................ (8,966,258) (11,000,812)
----------- ------------
(3,328,075) (3,924,376)
----------- ------------
$ 6,087,539 $ 4,884,924
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
<TABLE>
<CAPTION>
1996 1997
------------ ------------
Operating revenues
<S> <C> <C>
Resident services $ 4,966,058 $ 4,999,025
Health care services 2,555,138 2,682,928
Management fees 60,000
Development fees 1,003,955 220,480
----------- -----------
8,525,151 7,962,433
Operating expenses
Residence operating expenses 5,912,624 6,156,088
General and administrative 414,703 881,784
Depreciation and amortization 378,215 277,096
Provision for loss on advances to
affiliates, net of recoveries 296,093 218,146
----------- -----------
7,001,635 7,533,114
----------- -----------
Income from operations 1,523,516 429,319
Other income (expense)
Interest expense, net (600,871) (592,552)
Other income 109,022 123,489
Debt conversion expense (156,466)
Public offering costs (1,170,344)
----------- -----------
(491,849) (1,795,873)
----------- -----------
Income (loss) before income taxes 1,031,667 (1,366,554)
Income taxes 420,000 668,000
----------- -----------
NET INCOME (LOSS) $ 611,667 $(2,034,554)
=========== ===========
Income (loss) per share $ .35 $ (.81)
=========== ===========
Common shares and equivalents outstanding 1,739,830 2,506,511
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
Years ended March 31, 1996 and 1997
<TABLE>
<CAPTION>
Additional
paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, April 1, 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
Allocation of Federal tax
attributed to Parent company 771,000 771,000
Net income .................. 611,667 611,667
---------- ----------- ----------- ------------ -----------
Balance, March 31, 1996 ..... 1,827,833 18,278 5,619,905 (8,966,258) (3,328,075)
Shares issued upon conversion
of debt ..................... 347,996 3,480 1,386,918 1,390,398
Exercise of warrants ........ 62,121 622 206,452 207,074
Shares issued as compensation 3,000 30 2,751 2,781
Shares reissued to VVI
previously cancelled
conditional on completion of
public offering ............. 1,080,000 10,800 (10,800)
Allocation of Federal tax
attributed to Parent company (162,000) (162,000)
Net loss .................... (2,034,554) (2,034,554)
---------- ----------- ----------- ------------ -----------
BALANCE, MARCH 31, 1997 ..... 3,320,950 $ 33,210 $ 7,043,226 $(11,000,812) $(3,924,376)
========== =========== =========== ============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-6
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ................................. $ 611,667 $(2,034,554)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities
Depreciation and amortization ..................... 378,215 277,096
Debt conversion expense ........................... -- 156,466
Common stock issued for services .................. 49,950 2,781
Income taxes ...................................... 190,000 669,000
Changes in operating assets and liabilities
Accounts receivable, advances and other
receivables ....................................... 977,180 256,837
Prepaid expenses and other ........................ (84,746) (243,739)
Development fees and advances ..................... (575,017) 50,381
Other assets ...................................... (34,232) (25,591)
Accounts payable .................................. (32,238) 52,001
Accrued expenses and public offering costs ........ (267,102) 780,041
Income taxes payable .............................. 310,621 (251,622)
Resident security deposits ........................ 12,731 (30,179)
Deferred revenue .................................. (177,221) --
----------- -----------
Net cash provided by (used in) operating
activities ........................................ 1,359,808 (341,082)
----------- -----------
Cash flows used in investing activities
Purchases of property and equipment ............... (79,121) (129,851)
----------- -----------
Cash flows from financing activities
Proceeds from borrowings on mortgages and
notes payable ..................................... 249,880 450,000
Principal repayments of mortgages and notes payable (1,543,131) (270,214)
Decrease (increase) in restricted cash financing .. (26,752) 76,752
Proceeds from exercised warrants .................. -- 207,074
----------- -----------
Net cash used in financing activities ............. (1,320,003) 463,612
----------- -----------
NET DECREASE IN CASH .............................. (39,316) (7,321)
Cash at beginning of year ......................... 249,561 210,245
----------- -----------
Cash at end of year ............................... $ 210,245 $ 202,924
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest .......................................... $ 619,000 $ 612,000
=========== ===========
Income taxes ...................................... $ 57,000 $ 112,000
=========== ===========
</TABLE>
Schedule of noncash investing and financing activities:
During 1997, the Company entered into capital leases for furniture and
equipment totalling $47,591. During 1997, debt of $1,390,398 was converted to
equity.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1997
NOTE A - BASIS OF PRESENTATION AND 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 assisted
living 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 wholly-owned subsidiaries, provides
management and development services for affiliated and unaffiliated
companies.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.
During fiscal 1997, the Company incurred a loss of $2,034,554 and,
as of March 31, 1997, had a deficiency in working capital and
stockholders' equity of $653,773 and $3,924,376, respectively.
Further, the Company's lack of working capital has limited the
Company's ability to pursue its development projects. The Company is
presently pursuing various strategies to alleviate its deficiency in
working capital. Such strategies include (i) negotiating with
professionals and other vendors associated with the Company's
unsuccessful public offering to further defer or forgive payment of
the remaining balances due, (ii) refinancing a substantial portion
of the Company's mortgage indebtedness and (iii) a sale of a
substantial portion of the Company's operating and development
projects which would allow the Company to pursue other development
opportunities. The Company has received a letter of intent to
refinance the Company's mortgage indebtedness and has received
several offers to purchase a substantial portion of the Company's
properties. Although there can be no assurance that any of the above
strategies will be successful, the Company believes that the
underlying value of its properties will allow the Company to
successfully implement its strategies.
F-8
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE A (CONTINUED)
3. 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.
4. RESTRICTED ASSETS
Restricted assets include cash of $99,600 that collateralizes an
insurance bond required by Michigan State law for resident security
deposits. In addition, restricted use cash accounts totalling
approximately $76,000 and $107,000 at March 31, 1996 and 1997,
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.
5. 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
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.
F-9
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE A (CONTINUED)
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 or all 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 all share and per share amounts have been retroactively
restated. In addition, as a result of the Company terminating its
proposed public offering, certain shares previously excluded from
earnings per share have been retroactively reinstated.
Earnings (loss) per common share are calculated by dividing net
income (loss) applicable to common stock by the weighted average
number of common shares outstanding during the year and common stock
equivalents. On a fully-diluted basis, both net income (loss) and
shares outstanding are adjusted to assume the conversion of mortgage
indebtedness from the date of issuance. Fully-diluted amounts are
not presented as the effect would be immaterial or antidilutive.
8. STOCK-BASED COMPENSATION
In 1997, Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation," has been
adopted 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 accounts 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-10
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE A (CONTINUED)
9. 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.
10. FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which
is effective for financial statements ending after December 15,
1997. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share
together with disclosure of how the per share amounts were computed.
The effect of adopting this new standard is not expected to have a
material impact on the disclosure of earnings per share in the
financial statements.
F-11
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE A (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The Company
will implement SFAS No. 130 and SFAS No. 131 as required in fiscal
1998, which will require the Company to report and display certain
information related to comprehensive income and operating segments,
respectively. Adoption of SFAS No. 130 and SFAS No. 131 will not
impact the Company's financial position or results of operations.
11. 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.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment at March 31 consist of the following:
1996 1997
----------- --------------
Land $ 632,408 $ 632,408
Buildings and improvements 4,405,417 4,492,987
Equipment 850,969 940,841
----------- ----------
5,888,794 6,066,236
Less accumulated depreciation
and amortization 3,527,096 3,789,585
----------- ----------
Property and equipment, net $2,361,698 $2,276,651
=========== ==========
F-12
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE C - RELATED PARTY TRANSACTIONS
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:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Due from VVI $2,452,137 $2,207,653
Due from the Whittier, VVI affiliated company 2,406,266 2,793,766
Due from VVI affiliated limited partnerships (VVI is
general partner) 1,235,661 1,219,670
Management fees and cash advances due from
affiliated companies 1,088,208 770,103
---------- ----------
7,182,272 6,991,192
Less reserve for losses 6,523,555 6,723,585
---------- ----------
Due from affiliates, net $ 658,717 $ 267,607
========== ==========
</TABLE>
At March 31, 1996 and 1997, the unreserved amounts due from affiliates
represent development fees and advances from the following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Presidential Care Corp. ("Presidential") $658,717 $ 27,646
Camelot Village at Huntington, Inc. 102,718
Camelot Village at Stroudsburg, LLC 137,243
-------- ---------
$658,717 $ 267,607
======= =========
</TABLE>
F-13
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE C (CONTINUED)
1. PRESIDENTIAL
The unreserved amount at March 31, 1996 represented 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 primarily related to the
purchase of land. Presidential received interim financing through a
private placement and is awaiting approval on its construction
financing. All amounts due from Presidential at March 31, 1997 have
been subsequently paid.
2. CAMELOT VILLAGE AT HUNTINGTON ("CAMELOT - HUNTINGTON")
During fiscal 1996, the Company advanced $73,449 to Camelot -
Huntington, a corporation affiliated with the Company, which was
fully reserved in 1996 and recovered in fiscal 1997. At March 31,
1997, the advances of $102,718 have subsequently been repaid. The
Company has entered into a development agreement with Camelot -
Huntington and has obtained an option to purchase the underlying
property. An assisted living facility is planned for construction,
subject to zoning and financing.
The purchase price and related costs of the land, at March 31, 1997,
totalled approximately $1,050,000, of which $450,000 was borrowed
from a bank. The loan is secured by the property. The Company
advanced the remaining $600,000, of which approximately $497,000 was
collected from the proceeds Camelot - Huntington received from
private investors in its sale of stock.
F-14
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE C (CONTINUED)
Construction of the facility requires the issuance of a special use
permit by the Huntington Zoning Board of Appeals. In the event that
zoning approval is not received and all appeals have been exhausted,
each Camelot - Huntington investor will have the right to receive
the return of his investment plus 10 percent annual dividends (to
the extent not paid). If Camelot - Huntington's available cash and
the net proceeds from the sale of the land are insufficient to pay
investors electing this option, then the Company will be required to
make up the shortfall. The Company has guaranteed to Camelot -
Huntington investors the payment of dividends and distributions of
up to $1,500,000 in the aggregate. In consideration of the Company's
guarantee, the Company will receive 50% of the net proceeds, if any,
from the sale of the facility. Alternatively, each investor may
exchange his Camelot - Huntington stock for shares of the Company's
common stock at the lesser of: (a) 80 percent of its fair market
value or (b) $7.00 per share.
Management believes that Camelot - Huntington is still in its
preliminary phases of obtaining zoning approval and any potential
future loss to the Company under its commitments and guarantees is
not probable or estimable at this time for recognition purposes.
3. CAMELOT VILLAGE AT STROUDSBURG ("CAMELOT - STROUDSBURG")
The advances of $137,243 made to Camelot - Stroudsburg were
primarily for the purchase of real estate intended for development
of an assisted living facility. These advances were not reserved at
March 31, 1997 since management believes the amount will be
recovered in the near future either from a sale of the property or
interim financing for project development.
4. PHOENIX LIFECARE CORP. ("PHOENIX")
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 $355,942 and $502,496 at March 31,
1996 and 1997, respectively, have been fully reserved and no
management fees have been recognized during fiscal 1996 and 1997.
F-15
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE C (CONTINUED)
5. RECEIVABLES FROM GATEWAY COMMUNITIES, INC. ("GATEWAY")
Receivables from Gateway at March 31 were:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C> <C>
Note receivable, including accrued interest
at 9% $7,481,953 $7,481,953
Management fees and advances 1,076,197 1,076,197
---------- ----------
8,558,150 8,558,150
Less reserve for losses 8,558,150 8,558,150
---------- ----------
$ - $ -
========== ==========
</TABLE>
Receivables from Gateway, a not-for-profit and formerly affiliated
company and lessee and operator of Harvest Village, a continuing
care retirement community, 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.
The Company intended to acquire Harvest Village from an entity
indirectly owned by VVI. In July 1997, (i) the Company's right to
purchase the Harvest Village retirement facility terminated, (ii)
VVI contributed substantially all of its equity interest in Harvest
Village Partners, L.P. to the Company, (iii) the Company and VVI
transferred 100 percent of Harvest Village Partners, L.P. to
unaffiliated purchasers, and (iv) the Harvest Village construction
lenders assigned their mortgage on the Harvest Village retirement
facility to a company not affiliated with the Company, released
their liens and security interests in the Company's properties and
the stock of the Company owned by VVI, and released VVI and the
Company's Chief Executive Officer from their guarantees. (See Note
G-3.)
F-16
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
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 1995, 1996 and 1997, the Company recognized $700,000,
$1,003,955 and $220,480 (net of financing discount of $144,500 in 1996 and
1997), respectively, of such development fee. The initial installment of
$750,000 was paid upon the bond closing, which provided Cottage Grove
Place with its construction financing in 1995. An additional $385,005 will
be paid in monthly installments during construction provided construction
is on time and on budget, and the remaining $1,135,000 will be paid upon
the later of: (i) 90% occupancy achieved by the project or (ii) the
payment in full of the short-term bonds of Cottage Grove Place, which
mature on or before July 1, 2001, and the satisfaction of the Debt Service
Coverage Ratio and the Reserve Ratio (as defined) after giving effect to
the repayment of such short-term bonds. While the Company has earned and
recognized a majority of the development fee, the terms of the agreement
defer payment. A portion of the fee has been discounted at 10% to give
effect to the estimated payment during the first quarter of fiscal 1999.
The components of fees and advances receivable from Cottage Grove Place
are as follows:
1996 1997
---------- ---------
Advances $ 39,861 $ -
Development fees, net 806,020 795,500
------- -------
845,881 795,500
Less long-term portion, net 575,017 795,500
------- -------
$270,864 $ -
======= =======
F-17
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE E - MORTGAGES AND NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1997
------------- ---------------
1. MORTGAGES PAYABLE
<S> <C> <C>
Mortgages, guaranteed by VVI, bearing interest at
7.5% payable in monthly installments of
principal and interest of $30,429 are due
May 1, 1998, as extended on October 15, 1997;
restricted use cash accounts have been pledged
as additional collateral (Note A). $4,351,862 $4,317,865
Convertible mortgages with interest at prime, plus
3% (11.5% at March 31, 1997), payable in
interest only installments quarterly, maturity
dates are March 1999 and August 2000, net of
original issue discount of $59,356 and $42,789,
respectively. Convertible into 169,602 shares of
UVH common stock, as of March 31, 1997,
subject to adjustment, as defined. 1,820,643 1,167,211
Mortgage with interest at prime plus 1% (9.5% at
March 31, 1997) payable in monthly installments of
$4,700; including interest balance due August 2001. 252,433 217,957
---------- ----------
6,424,938 5,703,033
---------- ---------
</TABLE>
F-18
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE E (CONTINUED)
<TABLE>
<CAPTION>
1996 1997
------------ ---------
2. NOTES PAYABLE
<S> <C> <C>
Note payable in monthly installments of $5,000
plus interest at prime plus 2% (10.5% at
March 31, 1997). The note is pursuant to a line of
credit which expires April 7, 1998 ............. $ 356,000 $ 334,000
Convertible 7% promissory notes, interest payable
quarterly, compounded annually, maturity on
December 31, 2000; convertible into 19,208
shares of the Company's common stock at $8.33
per share .......................................... 795,000 160,000
Note payable in monthly installments of $12,500
plus interest until August 1999 at prime plus
1.5% (10% at March 31, 1997) ...................... 362,500
Equipment notes payable, with interest ranging from
3% to 15% payable in monthly installments of
principal and interest of $1,469 until July 1999 .. 6,467 39,650
Promissory note payable, with interest at prime plus
1% (9.25% at March 31, 1996) payable in monthly
principal installments of $2,917, plus interest
until December 1996 23,333
---------- ----------
1,180,800 896,150
---------- ----------
7,605,738 6,599,183
Less current portion 432,756 264,918
---------- ----------
$7,172,982 $6,334,265
========== ==========
</TABLE>
F-19
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE E (CONTINUED)
The aggregate maturities of mortgages and notes payable are as follows:
Fiscal year ending March 31,
1998 $ 264,918
1999 5,627,698
2000 104,184
2001 373,586
2002 197,290
Thereafter 31,507
-----------
$6,599,183
==========
NOTE F - INCOME TAXES
The consolidated provision (benefit) for income taxes consists of the
following at March 31:
1996 1997
---------- ------------
Current
Federal $ 771,000 $(162,000)
State and local 230,000 (151,000)
----------- ----------
1,001,000 (313,000)
----------- ----------
Deferred
Federal (449,000) 760,000
State and local (132,000) 221,000
----------- ---------
(581,000) 981,000
----------- ---------
$ 420,000 $ 668,000
=========== =========
F-20
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE F (CONTINUED)
The Company files its Federal consolidated tax return with its parent,
VVI. To the extent the Company's Federal tax attributes are utilized by
VVI, the Company records the result as either an increase or decrease to
additional paid-in capital.
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Statutory Federal tax rate 34.00% (34.00%)
State income taxes, net of Federal
income tax benefit 6.23 (6.50)
Other .48 4.5
Losses for which no future tax benefit
has been recorded - 76.88
----- -------
Effective tax rate 40.71% 40.88%
===== =======
</TABLE>
Temporary differences which give rise to deferred tax assets are as
follows:
1996 1997
---------- -----------
Net operating loss carryover $ 838,000 $1,047,000
Due from affiliate 5,274,000 5,296,000
Fixed assets 902,000 902,000
Accrued expenses and other 57,000 190,000
---------- ----------
7,071,000 7,435,000
Valuation allowance 6,090,000 7,435,000
---------- ----------
$ 981,000 $ -
========== ==========
F-21
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE F (CONTINUED)
The Company has net operating loss carryforwards for Federal income tax
purposes as of March 31, 1997 of approximately $3,081,000. The net
operating loss carryforwards expire during fiscal 1998 through 2012,
$2,083,000 of which expire in fiscal 1998. Such net operating loss
carryforwards are subject to several statutory limitations which limit
their utilization. Accordingly, no benefit from such utilization has been
provided for. Any ownership changes could limit the use of some or all of
the net operating loss carryforwards. During 1997, the Company increased
its deferred tax valuation allowance due to losses incurred in 1997 and
uncertainty as to the Company's ability to realize future tax benefits.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. OPERATING LEASES
Aggregate rental expense under operating leases was approximately
$35,000 and $66,900 for the years ended March 31, 1996 and 1997,
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,
1998 $ 84,630
1999 87,168
2000 89,781
2001 92,478
2002 95,256
Thereafter 173,335
-------
$ 622,648
=======
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-22
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
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. On July 16, 1997, these mortgages, guarantees and pledges
were released due to the sale of Harvest Village Partners L.P. to
third parties. See Note C-5.
4. GUARANTEES
The Company guaranteed a bank loan to CBF Building Company. The
balance outstanding on this loan is $95,689 at March 31, 1997.
The Company guaranteed a bank loan to an affiliate with a balance of
$450,000 at March 31, 1997 (Note C-2).
The Company is a co-borrower on a line of credit given to VVI in the
original amount of $300,000. The balance outstanding at March 31,
1996 and 1997 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, 1997 was $131,625.
F-23
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
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. A
bonus of $25,000 and 3,000 shares of the Company's common stock was
paid on June 30, 1996 and $25,000 and 3,000 shares is payable on
March 31, 1998, subject to continued employment.
8. POSSIBILITY OF CROSS DEFAULT
An affiliate of VVI was indebted under a first mortgage in the
principal amount of $4,087,500. 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-24
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE G (CONTINUED)
9. GOVERNMENT REGULATION
Healthcare and senior living facilities are areas of extensive and
frequent regulatory change. Changes in the laws or new
interpretations of existing laws can have a significant effect on
methods of doing business, costs of doing business and amounts of
reimbursement from governmental and other payors. The Company at all
times attempts to comply with all applicable fraud and abuse laws;
however, there can be no assurance that administrative or judicial
interpretation of existing laws or regulations will not have a
material adverse effect on the Company's operations or financial
condition.
NOTE H - ACCRUED EXPENSES
Accrued expenses consist of the following at March 31:
1996 1997
--------- ---------------
Interest $ 95,551 $ 79,465
Real estate taxes 1,814 14,713
Payroll and related taxes 220,234 242,291
Insurance 192,244 131,625
Professional fees 107,200 155,056
Other 36,934
-------- --------
$617,043 $ 660,084
======== ========
F-25
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE I - STOCKHOLDERS' EQUITY
1. COMMON STOCK
On March 31, 1995, VVI contributed 1,200,000 shares of the Company's
common stock to the Company, which the Company then simultaneously
retired. As consideration for such contribution, VVI was entitled to
be issued one share of common stock for each $5.73 received by the
Company in payment of amounts due from Gateway. In 1996, VVI
received 120,000 shares as consideration for relinquishing the right
to receive such shares upon collection. As the amounts due from
Gateway had been fully reserved for by the Company (Note C), the net
contribution of shares by the Company has been accounted for in a
manner similar to a recapitalization. The capital contribution was
premised on the fact that the Company was going to complete the
public offering by September 30, 1996. The public offering was
terminated in October 1996, and in December 1996 the Company
reissued the remaining 1,080,000 shares of common stock to VVI.
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 1997. 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.
F-26
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE I (CONTINUED)
2. INCENTIVE STOCK OPTION PLAN
The Company has reserved 210,000 shares of common stock for issue to
key employees under the Company's Employee Incentive Stock Option
Plan (the "1991 Plan"), as amended. A summary of the activity within
the 1991 Plan is as follows:
<TABLE>
<CAPTION>
Weighted
average price Option price
per share per share Granted Available
--------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1995 $4.06 $1.33 to $6.10 54,600 155,400
Terminated 1.33 $1.33 (2,700) 2,700
Granted 4.08 $3.33 to $6.10 46,680 (46,680)
-------- --------
Balance, March 31, 1996 4.07 $1.33 to $6.10 98,580 111,420
======== =======
Terminated 4.35 $1.33 to $5.55 (1,260) 1,260
Granted 4.29 $4.00 to $4.40 40,700 (40,700)
-------- ---------
BALANCE, MARCH 31, 1997 4.14 $1.33 TO $6.00 138,020 71,980
======== =========
</TABLE>
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 43.668 shares are exercisable at March 31, 1997.
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.
F-27
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE I (CONTINUED)
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. Options for an aggregate of 3,000 shares are
exercisable at March 31, 1997.
A summary of activity within the 1996 Plan is as follows:
Option price
per share Granted Available
--------- ------- ---------
Balance, April 1, 1996 - - -
Granted $6.00 9,000 81,000
In addition, there are options outstanding, at prices ranging from
$1.33 to $6.00, for 28,800 and 31,800 shares of common stock at
March 31, 1996 and 1997, respectively. These options were granted in
addition to those outstanding under the 1991 Plan and the Directors'
Plan. Options for an aggregate of 20,280 shares are exercisable at
March 31, 1997.
The following table summarizes significant ranges of all outstanding
and exercisable stock options at March 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted- Weighted- Weighted-
Ranges of average average average
exercise remaining exercise exercise
prices Shares life in years price Shares price
- ------ ------ ------------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.33 34,740 5.86 $1.33 27,792 $1.33
3.33 - 4.40 69,600 9.51 3.72 6,780 3.37
5.55 - 6.10 74,480 7.65 5.75 32,376 5.76
</TABLE>
F-28
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE I (CONTINUED)
The weighted-average option fair value on the grant date was $4.20
and $4.68 for options issued during the years ended March 31, 1996 and 1997.
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"); it applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for the Plans and does not recognize
compensation expense for such Plans. If the Company had elected to
recognize compensation expense based upon the fair value at the
grant dates for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's reported net
income (loss) per share would be adjusted to the pro forma amount
indicated below for the years ended March 31:
1996 1997
-------- -----------
Net income (loss)
As reported $611,667 $(2,034,554)
Pro forma 548,720 (2,103,235)
Income (loss) per share
As reported $.35 $(.81)
Pro forma .32 (.84)
These pro forma amounts may not be representative of future
disclosures because they do not take into effect pro forma
compensation expense related to grants made before 1996. The fair
value of options issued was estimated by applying the minimum value
method, as the Company's common stock is not actively traded. In
applying the minimum value method, the Company assumed an expected
life of five years and an interest rate of 6.7% in 1996 and 1997.
F-29
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
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 stated separately.
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:
1996 1997
------------ ------------
Revenues
Resident centers $7,521,196 $7,681,953
Management and development
companies 1,003,955 280,480
--------- ---------
$8,525,151 $7,962,433
========= =========
Operating profits
Resident centers $1,268,361 $1,261,079
Management and development
companies 551,248 (613,614)
(Loss) recovery on advances
to affiliates (296,093) (218,146)
---------- ----------
Income from operations $1,523,516 $ 429,319
========= ==========
F-30
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 1996 and 1997
NOTE J (CONTINUED)
Corporate assets are principally cash, and corporate office equipment,
furnishings and related assets.
1996 1997
----------- -----------
Identifiable assets are as follows:
Retirement centers $3,656,272 $3,331,635
Management and development companies 2,250,917 1,393,615
Corporate 180,350 159,674
---------- ----------
$6,087,539 $4,884,924
========== ==========
F-31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-KSB for the quarter ended March 31, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> APR-01-1996
<PERIOD-START> MAR-31-1997
<CASH> 264,918
<SECURITIES> 0
<RECEIVABLES> 1,383,312
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,536,736
<PP&E> 6,066,236
<DEPRECIATION> 3,789,585
<TOTAL-ASSETS> 4,884,924
<CURRENT-LIABILITIES> 2,190,509
<BONDS> 5,640,088
0
0
<COMMON> 33,210
<OTHER-SE> (3,957,586)
<TOTAL-LIABILITY-AND-EQUITY> 4,884,924
<SALES> 0
<TOTAL-REVENUES> 7,962,433
<CGS> 0
<TOTAL-COSTS> 7,001,635
<OTHER-EXPENSES> (156,466)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 592,558
<INCOME-PRETAX> (1,366,554)
<INCOME-TAX> (668,000)
<INCOME-CONTINUING> (2,034,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,034,554)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
