U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended March 31, 1998
--------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission file number 0-5097
------
UNITED VANGUARD HOMES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 11-2032899
- ----------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
4 Cedar Swamp Road, Glen Cove, New York 11542
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(516) 759-1188
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / / No / /
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: At March 31, 1999, there
were outstanding 3,313,265 shares of the Registrant's Common Stock, $.01 par
value.
Transitional Small Business Disclosure Format:
Yes / / No /X/
<PAGE>
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 10th day of
August 1999.
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 August 9, 1999
- ------------------------- (Principal Financial
Paul D'Andrea Officer and Principal
Accounting Officer)
* Director August 9, 1999
- -------------------------
Benjamin Frank
* Director August 9, 1999
- -------------------------
Francis S. Gabreski
/S/ CARL G. PAFFENDORF Chairman of the Board August 9, 1999
- ------------------------- and Chief Executive
Carl G. Paffendorf Officer
/S/ ROBERT S. HOSHINO, JR. Director August 9, 1999
- -------------------------
Robert S. Hoshino, Jr.
* Director August 9, 1999
- -------------------------
James E. Eden
*By: /S/ CARL G. PAFFENDORF
----------------------
Attorney-in-fact
<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-31
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 1998 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 1998, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Melville, New York
October 1, 1998 (except for Note E,
as to which the date is May 6, 1999)
F-2
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
<TABLE>
<CAPTION>
ASSETS 1997 1998
---- ----
CURRENT ASSETS
<S> <C> <C>
Cash $ 202,924 $ 256,188
Accounts receivable, less allowance for doubtful
accounts of $40,000 in 1997 and 1998 547,812 620,627
Development fees and advances 981,000
Due from affiliates, net 267,607 179,552
Prepaid expenses and other 518,393 177,123
---------- ----------
Total current assets 1,536,736 2,214,490
PROPERTY AND EQUIPMENT, NET 2,276,651 2,110,610
OTHER ASSETS
Development fees and advances 795,500
Restricted assets 99,600 108,352
Deferred income taxes
Other assets 176,437 203,161
---------- ----------
1,071,537 311,513
---------- ----------
$4,884,924 $4,636,613
========== ==========
</TABLE>
F-3
The accompanying notes are an integral part of these statements.
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' DEFICIENCY 1997 1998
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 264,918 $ 661,466
Accounts payable 487,758 350,244
Accrued expenses 660,084 568,511
Public offering costs 587,000 328,641
Income taxes payable 190,749 156,316
------------ ------------
Total current liabilities 2,190,509 2,065,178
RESIDENT SECURITY DEPOSITS 284,526 282,300
LONG-TERM DEBT, less current portion 6,334,265 5,946,281
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,
3,320,950 shares and 3,309,890 shares in
1997 and 1998, respectively 33,210 33,099
Additional paid-in capital 7,043,226 6,998,957
Accumulated deficit (11,000,812) (10,689,202)
------------ ------------
(3,924,376) (3,657,146)
------------ ------------
$ 4,884,924 $ 4,636,613
============ ============
</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>
1997 1998
---- ----
Operating revenues
<S> <C> <C>
Resident services $ 4,999,025 $ 4,704,992
Health care services 2,682,928 2,763,104
Management fees 60,000 120,000
Development fees 220,480 185,500
----------- -----------
7,962,433 7,773,596
Operating expenses
Residence operating expenses 6,156,088 6,196,474
General and administrative 881,784 1,076,327
Depreciation and amortization 277,096 273,463
Provision for (recovery of) loss
on advances to affiliates 218,146 (351,396)
----------- -----------
7,533,114 7,194,868
----------- -----------
Income from operations 429,319 578,728
Other income (expense)
Interest expense, net (592,552) (560,163)
Other income 123,489 99,109
Debt conversion expense (156,466) --
Public offering costs (1,170,344) --
Adjustment of public offering costs 265,818
----------- -----------
(1,795,873) (195,236)
----------- -----------
(Loss) income before income taxes (1,366,554) 383,492
Income taxes 668,000 71,882
----------- -----------
NET (LOSS) INCOME $(2,034,554) $ 311,610
=========== ===========
Net (loss) income per common share
Basic $ (.81) $ .09
=========== ===========
Diluted (.81) .09
=========== ===========
Weighted-average common shares and
common equivalent shares outstanding
Basic 2,506,511 3,307,214
=========== ===========
Diluted 2,506,511 3,341,414
=========== ===========
</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, 1997 and 1998
<TABLE>
<CAPTION>
Additional
paid-in Accumulated
Shares Amount capital deficit Total
<S> <C> <C> <C> <C> <C>
Balance, April 1, 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)
Shares purchased and simultaneously
retired (19,600) (196) (69,804) (70,000)
Shares issued as compensation 8,540 85 25,535 25,620
Net income 311,610 311,610
---------- ----------- ----------- ------------ -----------
Balance, March 31, 1998 3,309,890 $ 33,099 $ 6,998,957 $(10,689,202) $(3,657,146)
========== =========== =========== ============ ===========
</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>
1997 1998
---- ----
Cash flows from operating activities
<S> <C> <C>
Net (loss) income $(2,034,554) $ 311,610
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities
Depreciation and amortization 277,096 273,463
Debt conversion expense 156,466
Common stock issued for services 2,781 25,620
Income taxes 669,000
Changes in operating assets and liabilities
Accounts receivable, advances and other
receivables 256,837 22,957
Prepaid expenses and other (243,739) 357,836
Development fees and advances 50,381 (185,500)
Other assets (25,591) (7,358)
Accounts payable 52,001 (137,514)
Accrued expenses and public offering costs 780,041 (357,649)
Income taxes payable (251,622) (34,433)
Resident security deposits (30,179) (2,226)
----------- ---------
Net cash (used in) provided by operating
activities (341,082) 266,806
----------- ---------
Cash flows from investing activities
Purchases of property and equipment (129,851) (47,339)
----------- ---------
Net cash used in investing activities (129,851) (47,339)
----------- ---------
Cash flows from financing activities
Proceeds from borrowings on mortgages and
notes payable 450,000 225,000
Principal repayments of mortgages and notes payable (270,214) (312,451)
Decrease (increase) in restricted cash financing 76,752 (8,752)
Proceeds from exercised warrants 207,074
Common stock purchased and simultaneously retired (70,000)
----------- ---------
Net cash provided by (used in) financing activities 463,612 (166,203)
----------- ---------
NET (DECREASE) INCREASE IN CASH (7,321) 53,264
Cash at beginning of year 210,245 202,924
----------- ---------
Cash at end of year $ 202,924 $ 256,188
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 612,000 $ 529,529
=========== =========
Income taxes $ 112,000 $ 85,138
=========== =========
</TABLE>
Schedule of noncash investing and financing activities:
During 1997and 1998, the Company entered into capital leases for furniture
and equipment aggregating $47,591 and $48,136, respectively. 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, 1997 and 1998
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. Liquidity
As of March 31, 1998, the Company had a deficiency in Stockholders'
Equity of $3,657,146 and has limited working capital. In addition,
approximately $5,000,000 of mortgage debt is due November 1999.
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 increase available working
capital, including (i) refinancing a substantial portion of the
Company's mortgage indebtedness and (ii) 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, 1997 and 1998
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 at March 31, 1998 consists of cash of $108,352
that collateralizes an insurance bond required by Michigan State law
for resident security deposits. In addition, restricted use cash
accounts totaling approximately $107,000 and $151,000 and included
in other assets at March 31, 1997 and 1998, 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, 1997 and 1998
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.
Basic earnings (loss) per common share is computed using the
weighted average number of common shares outstanding during the
period. Diluted earnings per common share is computed using the
combination of dilutive common share equivalents and the weighted
average number of common shares outstanding during the period.
Incremental shares of 24,200 during the year ended March 31, 1998
were used in the calculation of diluted earnings per common share.
Diluted loss per common share for the year ended March 31, 1997 is
based only on the weighted average number of common shares
outstanding during the period, as the inclusion of 27,792 common
share equivalents would have been antidilutive.
8. Stock-Based Compensation
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 are determined
and disclosed in the notes to the financial statements as if the
fair value based method had been applied.
F-10
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
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. Financial Instruments and Concentrations of Credit Risk
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. Concentration of credit risk with respect to
accounts receivable is generally mitigated as management believes
its acceptance, billing and collection policies are adequate to
minimize potential credit risk.
The Company's financial instruments recorded on the balance sheet
include cash, accounts receivable, accounts payable, and debt.
Because of their short maturities, the carrying amount of cash,
accounts receivable and accounts payable approximates fair market
value. The fair value of the Company's long-term debt approximates
carrying value based on quoted market prices of similar issues or on
the current rates offered to the Company for debt of similar terms.
A concentration of credit risk exists with respect to development
fees and advances and amounts due from affiliates.
F-11
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE A (continued)
11. Use of Estimates and Other Matters
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.
During fiscal 1997, the Company recorded a charge to earnings of
$1,170,344 representing the total estimated costs of its aborted
public offering. During fiscal 1998, the Company revised its
estimate to reflect actual costs incurred and, accordingly, recorded
other income of $265,818.
12. Future Effects of Recently Issued Accounting Pronouncements
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
1999, which will require the Company to report and display as
applicable, 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.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment at March 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Land $ 632,408 $ 632,408
Buildings and improvements 4,492,987 4,522,649
Equipment 940,841 1,006,654
---------- ---------
6,066,236 6,161,711
Less accumulated depreciation and amortization 3,789,585 4,051,101
--------- ---------
Property and equipment, net $2,276,651 $2,110,610
========= =========
</TABLE>
F-12
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
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>
1997 1998
---- ----
<S> <C> <C>
Due from VVI $2,207,653 $1,552,570
Due from the Whittier, VVI affiliated company 2,793,766 2,978,538
Due from VVI affiliated limited partnerships (VVI is
general partner) 1,219,670 169,171
Management fees and cash advances due from
affiliated companies 770,103 906,300
---------- ----------
6,991,192 5,606,579
Less reserve for losses 6,723,585 5,427,027
---------- ----------
Due from affiliates, net $ 267,607 $ 179,552
========== ==========
</TABLE>
At March 31, 1997 and 1998, the unreserved amounts due from affiliates
represent development fees and advances from the following:
1997 1998
---- ----
Presidential Care Corp. ("Presidential") $ 27,646 $ 24,315
Camelot Village at Huntington, Inc. 102,718
Camelot Village at Stroudsburg, LLC 137,243 155,237
-------- --------
$267,607 $179,552
======== ========
F-13
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE C (continued)
1. Presidential
The unreserved amount at March 31, 1998 represented development fees
of $24,315 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 not
recognized fees in fiscal 1997 and 1998. Presidential received
interim financing through a private placement and is awaiting
approval on its construction financing.
2. Camelot Village at Huntington ("Camelot - Huntington")
During fiscal 1997, advances of $102,718 to Camelot - Huntington, a
corporation affiliated with the Company, were fully paid. During
fiscal 1998, additional advances of $53,836 were made and
subsequently paid. 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 obtaining additional financing.
The purchase price and related costs of the land, at March 31, 1997,
totaled 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, which was collected from the
proceeds Camelot - Huntington received from private investors in its
sale of stock.
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
F-14
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE C (continued)
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 during fiscal
1997 were primarily for the purchase of real estate intended for
development of an assisted living facility. Additional advances of
$92,994 were made in fiscal 1998. During fiscal 1998, Camelot -
Stroudsburg entered into a sales contract to sell the property and
has recovered $75,000 paid by Camelot - Stroudsburg from deposits
received by the buyer. An additional $50,000 has subsequently been
paid, with the balance to be paid when the sale closes.
4. Phoenix Lifecare Corp. ("Phoenix")
Phoenix, a not-for-profit corporation affiliated with 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 $502,496 and $726,748 at March 31,
1997 and 1998, respectively, have been fully reserved and no
management fees have been recognized during fiscal 1997 and 1998.
F-15
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE C (continued)
5. Receivables From Gateway Communities, Inc. ("Gateway")
Receivables from Gateway at March 31 were:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Note receivable, including accrued interest
at 9% $7,481,953 $ -
Management fees and advances 1,076,197 -
--------- ---------
8,558,150 -
Less reserve for losses 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, had been fully reserved by the Company as
Gateway historically suffered losses and did 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. As an
integral part of this transaction, the Company released Gateway's
obligation in the amount of $8,558,150 due to the Company. (See Note
G-3.)
F-16
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE D - DEVELOPMENT FEES AND ADVANCES
The Company developed a residential retirement center in the State of Iowa
known as Cottage Grove Place, an unaffiliated entity. Pursuant to the
development agreement, the Company was obligated to plan, design, develop
and construct the property, arrange financing and supervise marketing of
the retirement center for a total fee of $2,270,000. During the years
ended 1997 and 1998, the Company recognized $220,480 and $185,500,
respectively, of such development fee. An 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 was paid in
monthly installments during construction, 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 related 10% fee payable by the Company is
netted against the amount due.
F-17
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE E - MORTGAGES AND NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1998
---- ----
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 November 1, 1999, as extended on May 6,
1999; restricted use cash accounts have been pledged
as additional collateral (Note A). $4,317,865 $4,275,364
Convertible mortgages with interest at prime, plus
3% (11.50% at March 31, 1998), payable in interest only
installments quarterly, maturity
dates are April 30, 1999, as extended, and August 2000, net
of original issue discount of $42,789 and $26,223,
respectively. Convertible into 169,602 shares of UVH common
stock, as of March 31, 1998,
subject to adjustment, as defined. 1,167,211 1,183,777
Mortgage with interest at prime plus 1% (9.5% at
March 31, 1998) payable in monthly installments of
$4,700; including interest balance due August 2001. 217,957 180,947
---------- ----------
5,703,033 5,640,088
---------- ----------
</TABLE>
F-18
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE E (continued)
<TABLE>
<CAPTION>
1997 1998
---- ----
2. Notes Payable
<S> <C> <C>
Note payable in monthly installments of $5,000 plus interest at
prime plus 2% (10.50% at
March 31, 1998). The note is pursuant to a line of
credit which expires May 7, 1999 $ 334,000 $274,000
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 160,000 160,000
Note payable in monthly installments of $12,500
plus interest until August 1999 at prime plus
1.5% (10% at March 31, 1998) 362,500 212,500
Notes payable, with interest only payable monthly
at prime plus 1-1/2% (10% at March 31, 1998)
due September 28, 1998 75,000
Equipment notes payable, with interest ranging from
3% to 15% payable in monthly installments of principal and
interest of $2,788 until November
2002 39,650 96,159
Notes payable, with interest at 20%, due June 30,
1998 150,000
896,150 967,659
---------- -----------
6,599,183 6,607,747
Less current portion 264,918 661,466
---------- -----------
$6,334,265 $5,946,281
========== ===========
</TABLE>
F-19
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE E (continued)
The aggregate maturities of mortgages and notes payable are as follows:
Fiscal year ending March 31,
1999 $ 661,466
2000 5,299,801
2001 559,150
2002 55,830
2003 31,500
----------
$6,607,747
==========
NOTE F - INCOME TAXES
The consolidated provision (benefit) for income taxes consists of the
following at March 31:
1997 1998
---- ----
Current
Federal $(162,000) $ -
State and local (151,000) 71,882
--------- --------
(313,000) 71,882
--------- --------
Deferred
Federal 760,000 -
State and local 221,000 -
---------- -------
981,000 -
---------- --------
$ 668,000 $ 71,882
========== ========
F-20
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
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:
1997 1998
---- ----
Statutory Federal tax rate (34.00%) 34.00%
State income taxes, net of Federal
income tax benefit (6.50) 18.74
Other 4.5
Reduction in valuation allowance (34.00)
Losses for which no future tax benefit
has been recorded 84.88 --
----- -----
Effective tax rate 48.88% 18.74%
===== =====
Temporary differences which give rise to deferred tax assets are as
follows:
1997 1998
---- ----
Net operating loss carryover $1,047,000 $ 641,000
Due from affiliates 5,296,000 2,171,000
Fixed assets 902,000 895,000
Accrued expenses and other 190,000 190,000
---------- ----------
7,435,000 3,897,000
Valuation allowance 7,435,000 3,897,000
---------- ----------
$ - $ -
========== ==========
F-21
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE F (continued)
The Company has net operating loss carryforwards for Federal income tax
purposes as of March 31, 1998 of approximately $1,603,000. 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. During 1998, the Company reduced its deferred tax
valuation allowance to reflect deductions utilized by its parent Company,
VVI, and to recognized utilization of net operating loss carryforwards.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
Aggregate rental expense under operating leases was approximately
$66,900 and $33,000 for the years ended March 31, 1997 and 1998,
respectively. UVH rents its administrative office facilities from
CBF Building Company, an affiliate of VVI, under a lease expiring
December 31, 2000, at an annual rental as follows:
Fiscal year ending March 31,
1999 $ 38,526
2000 39,209
2001 39,727
---------
$117,462
========
2. Purchase Commitment
The Company could have been 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. In August 1998, Cottage Grove
Place exercised its options and purchased the land.
F-22
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE G (continued)
3. Guarantees
The Company guaranteed a bank loan to CBF Building Company. The
balance outstanding on this loan is $68,350 at March 31, 1998.
The Company guaranteed a bank loan to an affiliate with a balance of
$350,000 at March 31, 1998 (Note C-2).
On August 20, 1996, the line of credit was renewed and increased to
$450,000, of which $150,000 was used to pay in full the old line of
credit. The Company is the borrower and VVI is Guarantor. The
balance outstanding at March 31, 1997 and 1998 was approximately
$362,000 and $212,500, respectively.
4. 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 non-discounted basis based on claims filed and an
estimate of claims incurred but not yet reported. The amount of said
liability accrued at March 31, 1998 was approximately $112,000.
5. Possibility of Cross Default
An affiliate of VVI is 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 VVI default on this affiliate's loan could result in
the foreclosure of Hillside Terrace and Whitcomb Tower.
6. Government Regulation
Health-care and senior living facilities are areas of extensive and
frequent regulatory change. Changes in the laws or new
interpretations of existing laws can have a significant effect on
methods of doing business, costs of doing business and amounts of
reimbursement from governmental and other payors. The Company at all
times attempts to comply with all applicable fraud and abuse laws;
however, there can be no assurance that administrative or judicial
interpretation of existing laws or regulations will not have a
material adverse effect on the Company's operations or financial
condition.
F-23
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE H - 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.
F-24
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
Note H - 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, 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
Terminated 3.81 $1.33 to $5.55 (7,980) 7,980
Balance, March 31, 1998 4.16 $1.33 to $6.00 130,040 79,960
======== ========
</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 67,576 shares are exercisable at March 31, 1998.
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-25
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE H (continued)
The Directors' Plan is administered by the Board of Directors. Under
the Directors' Plan, each non-employee director elected after April
1, 1996 will receive options for 3,000 shares of common stock upon
election. To the extent that shares of common stock remain available
for the grant of options under the Directors' Plan, each year on
April 1, commencing April 1, 1997, each non-employee director will
be granted an option to purchase 1,800 shares of common stock. The
exercise price per share for all options granted under the
Directors' Plan will be equal to the fair market value of the common
stock as of the date preceding the date of grant. All options vest
in three equal annual installments beginning on the first
anniversary of the date of grant. Each option is 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, 1998.
A summary of activity within the 1996 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, 1996 - - - 90,000
Granted $5.55 $5.55 9,000 (9,000)
Balance, March 31, 1997 $5.55 $5.55 9,000 81,000
------ ------
Granted 4.00 4.00 9,000 (9,000)
Balance, March 31, 1998 $4.78 $4.00 - $5.55 18,000 72,000
====== ======
</TABLE>
In addition, there are options outstanding, at prices ranging from
$1.33 to $6.00, for 31,800 shares of common stock at March 31, 1998.
These options were granted in addition to those outstanding under
the 1991 Plan and the Directors' Plan. Options for an aggregate of
26,040 shares are exercisable at March 31, 1998.
F-26
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE H (continued)
The following table summarizes significant ranges of all outstanding
and exercisable stock options at March 31, 1998:
<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> <C>
$1.33 34,200 4.70 $1.33 34,200 $1.33
3.33 - 4.40 72,540 7.42 3.77 18,816 3.62
5.55 - 6.10 73,100 5.64 5.70 43,600 5.72
</TABLE>
The weighted-average option fair value on the grant date was $4.68
and $1.11 for options issued during the years ended March 31, 1997
and 1998.
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:
<TABLE>
<CAPTION>
1997 1998
---- ----
Net (loss) income
<S> <C> <C>
As reported $(2,034,554) $311,610
Pro forma (2,103,235) 309,280
Net (loss) income per common share - basic
As reported $(.81) $.09
Pro forma (.84) .09
Net (loss) income per common share - diluted
As reported $(.81) $.09
Pro forma (.84) .09
</TABLE>
F-27
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE H (continued)
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 calculated by applying the minimum value
method, as trading in the Company's common stock is extremely
limited. In applying the minimum value method, the Company assumed
an expected life of five years and an interest rate of 6.7% in 1997
and 1998.
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 non-affiliated
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:
1997 1998
---- ----
Revenues
Resident centers $ 7,681,953 $ 7,468,096
Management and development
companies 280,480 305,500
----------- -----------
$ 7,962,433 $ 7,773,596
=========== ===========
Operating profits
Resident centers $ 1,261,079 $ 1,012,106
Management and development
companies (613,614) (784,774)
(Loss) recovery on advances
to affiliates (218,146) 351,396
----------- -----------
Income from operations $ 429,319 $ 578,728
=========== ===========
F-28
<PAGE>
United Vanguard Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 1997 and 1998
NOTE J (continued)
Corporate assets are principally cash, and corporate office equipment,
furnishings and related assets.
1997 1998
---- ----
Identifiable assets are as follows:
Retirement centers $3,331,635 $3,093,815
Management and development companies 1,393,615 1,395,170
Corporate 159,674 139,912
---------- ----------
$4,884,924 $4,628,897
========== ==========
F-29
