SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended MARCH 31, 1998
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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
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UNITED VANGUARD HOMES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 11-2032899
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4 Cedar Swamp Road, Glen Cove, New York 11542
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (516) 759-1188
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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: $7,774,000.
State the aggregate market value of Registrant's outstanding voting Common
Stock held by non-affiliates of Registrant: $1,000,000.
As of March 31, 1999, there were 3,313,265 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,
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1997 1998
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Statement of Operations Data:
Revenues:
Resident services . $4,999,000 $4,705,000
Healthcare services 2,683,000 2,763,000
Management Fees ... 60,000 120,000
Development fees .. 220,000 186,000
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Total revenues . $7,962,000 $7,774,000
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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 Section 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 Whittier (which is managed by Registrant) and Whitcomb
(which is owned and managed by Registrant) 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
At March 31, 1999 Registrant had approximately 250 employees of whom
approximately 145 were full-time employees.
Item 2. DESCRIPTION OF PROPERTY.
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The table below sets forth certain information regarding the properties
owned or managed by Registrant:
<TABLE>
<CAPTION>
INDEPENDENT ASSISTED SKILLED OCCUPANCY
NAME AND LOCATION LIVING LIVING NURSING RATE(%)(a)
----------------- ---------------------------------------------
<S> <C> <C> <C> <C>
PROPERTIES OWNED:
Hillside Terrace, Ann Arbor, MI 63 12(b) 23 95
Olds Manor, Grand Rapids, MI 98 54(b) 44 84
The Whitcomb, St. Joseph, MI 102 34 86
MANAGED ONLY PROPERTY:
The Whittier, Detroit, MI 205 58 65
PROPERTIES UNDER DEVELOPMENT:
Camelot Village(c) 120
Hicksville, NY
Camelot Village(c)
Huntington, NY 120
Camelot Cove on the Hudson (c)
North Bergen, NJ 284 30 60
Orchard Terrace(c) 64
Ann Arbor, MI
Presidential Place 104
Hollywood, FL
</TABLE>
(a) As of March 31, 1999.
(b) These units currently licensed as Homes for the Aged.
(c) Subject to funding being secured.
Registrant sold its rights to manage Cottage Grove Place and to develop and
acquire the Stroudsburg site in November and December 1998, respectively.
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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, located in Detroit, Michigan. The Whittier was
built in the 1920s and renovated in 1972 and 1989. Registrant estimates that The
Whittier needs approximately $1.5 million for deferred maintenance.
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
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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 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.
-12-
<PAGE>
MORTGAGE INDEBTEDNESS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
As of March 31, 1998 and 1999, 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 approximately $2 million. Such indebtedness is secured by a first
mortgage on Hillside Terrace. As of March 31, 1998 and 1999, 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 approximately
$2 million. 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, 1998 and 1999,
Whittier Towers, Inc., the owner of The Whittier, was indebted to GWL in the
aggregate principal amount of approximately $4 million. 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 November 1, 1999. 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.
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 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.
-13-
<PAGE>
OLD KENT BANK
As of March 31, 1999, 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 $139,744. 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, 1999, 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
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, 1999, 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 mortgage. The Whitcomb Trust mortgage has routine covenants respecting
payment of taxes, insurance, repairs, etc., except that Whitcomb Tower
Corporation cannot permit 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.
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 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable.
-14-
<PAGE>
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, 1999)
-------------- ------------------------------
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 OF PLAN OF OPERATION.
YEAR ENDED MARCH 1997 VS. MARCH 1998
REVENUES
Net revenues of the Registrant represent its gross consolidated
revenues, less charitable and Supplementary Social Security Income discounts.
Net revenues decreased by $188,000, or 2 percent, from $7,962,000 in
the 1997 period to $7,774,000 in the 1998 period. The primary cause was a
reduction in Resident Services Revenues which decreased by $294,000, or 6
percent, from $4,999,000 in the 1997 period to $4,705,000 in the 1998 period.
The decrease was a result of a reduction in occupancy due to a temporary
moratorium on admissions at one of the Registrant's facilities. From January to
October 1, 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 moratorium, occupancy dropped from 95 percent, as of March
31, 1996, to 65 percent, as of March 31, 1998.
Healthcare services revenues increased by $80,000, or 3 percent, from
$2,683,000 in the 1997 period to $2,763,000 in the 1998 period. The increase was
a result of higher rates.
-15-
<PAGE>
Management fees of $120,000 were earned this period on a contract which
began October 1, 1996.
Development Fee income decreased by $35,000 or 16 percent, from
$220,000 in the 1997 period to $185,000 in the 1998 period. These fees are lower
this year since they are based on a 1995 development agreement which is
substantially completed.
RESIDENCE OPERATING EXPENSES
Residence operating expenses include all retirement and healthcare
center operating expenses, including, among other things, payroll and
employments costs, food, utilities, repairs and maintenance, insurance, and
property taxes.
Residence operating expenses increased by $40,000, or 1 percent, from
$6,156,000 in the 1997 period to $6,196,000 in the 1998 period. The increase is
mainly attributable to salary increases.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include all marketing costs, as
well as the general and administrative expenses incurred at the Registrant's
principal executive offices. General and administrative expenses include, among
other things, administrative salaries, rent, utilities, insurance, and related
expenses.
General and administrative expenses increased by $195,000, or 22
percent, from $881,000 in the 1997 period to $1,076,000 in the 1998 period. The
increase is primarily attributable to an increase in personnel costs and an
increase in overhead associated with Registrant's unsuccessful public offering
and plans to expand its development projects.
PROVISION FOR RECOVERY ON ADVANCES TO AFFILIATES
During Fiscal 1998 Registrant recorded a net recovery of Advances to
Affiliates aggregating $351,000 compared to a Net Loss on Advances of $218,000
in Fiscal 1997. The variance is a function of net funds paid out or received
from Registrant's parent (Vanguard) and affiliated companies. Future recoveries
are anticipated as Vanguard plans to liquidate some of its assets.
INTEREST EXPENSE, NET
Interest expense, net, decreased by $32,000, or 5 percent, from
$592,000 in the 1997 period to $560,000 in the 1998 period. The decrease is
primarily attributable to interest accrued on prior years' tax assessment which
was recorded in the fourth quarter of 1997.
-16-
<PAGE>
INCOME TAXES
Income taxes decreased by $596,000, or 89 percent, from $668,000 in the
1997 period to $72,000 in the 1998 period. The decrease is primarily due to a
write-off of $981,000 of deferred income assets in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998 operating activities provided cash of approximately
$267,000 compared to requiring cash of approximately $341,000 from operating
activities in fiscal 1997. The increase in cash flows from operating activities
was principally due to Registrant's net profit in fiscal 1998. Investing
activities required approximately $47,000 in 1998 for fixed asset addition.
During fiscal 1998 Registrant required approximately $166,703 for
financing activities compared to providing cash from financing activities of
approximately $464,000 in 1997. The decline in cash flows from financing
activities was principally due to $225,000 in reduced borrowing for the current
period and approximately $207,000 of proceeds from exercise of warrants which
occurred only in year 1997.
As of March 31, 1998 Registrant had working capital of $149,000, an
improvement of $803,000, attributable to Registrant's profit in fiscal 1998 and
the extensions granted on certain outstanding debt.
Registrant's capital is not sufficient to fund its operating plans, and
Registrant is currently negotiating to sell a substantial portion of its
operating and development properties. If such sales are successful, Registrant
would have adequate capital to fund future development projects. In addition,
Registrant received a commitment from a financial institution to refinance
substantially all of its outstanding mortgages. Although this commitment has
expired, Registrant believes it can successfully renegotiate this financing
alternative, which, in Registrant's opinion, would provide adequate working
capital.
PUBLIC OFFERING COSTS
During fiscal 1997, Registrant recorded a charge to earnings of
$1,170,344 representing the total estimated costs of its aborted public
offering. During fiscal 1998, Registrant revised its estimate to reflect actual
costs incurred and, accordingly, recorded other income of $265,818.
Item 7. FINANCIAL STATEMENTS. See page F-1 for Registrant's financial
statements.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-17-
<PAGE>
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 as of March 31, 1999:
NAME AGE Positions(s)
---- --- -----------------------------------------
Carl G. Paffendorf....... 66 Chairman of the Board and Chief Executive
Officer
Paul D'Andrea............ 66 Vice President - Finance
Craig M. Shields......... 57 Vice President and
General Counsel
Theresa A. Govier........ NA Vice President - Administration and
Secretary
Alan Guttman............. 49 Treasurer
James E. Eden............ 61 Director
Benjamin Frank 65 Director
Francis S. Gabreski 79 Director
Robert S. Hoshino 52 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).
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.
-18-
<PAGE>
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.
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, Inc. since 1992, a consulting
business active in both the senior living and 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 private long-term care company which owns and
operates geriatric and rehabilitative nursing beds in Massachussets. In 1996 Mr.
Eden became Chairman of the Board and Chief Executive Officer of Senior Living
Properties, LLC, a private long-term care company which owns and operates
nursing homes and assisted living facilities in Texas and Illinois. From 1988 to
1992, Mr. Eden was employed by Marriott Corporation, as Executive Vice President
and General Manager, Senior Living Services Division, which acquired and
developed senior living facilities. Mr. Eden is a trustee of the Alliance for
Aging Research and a director of both Omega Healthcare Investors, Inc. and Omega
Worldwide, Inc., public companies serving the senior living and long-term care
industries.
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.
-19-
<PAGE>
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.
Messrs. Paffendorf, D'Andrea, Frank, Gabreski, and Shields and Ms. Govier
are also officers and/or directors of Vanguard.
In Fiscal 1998, Messrs. Larry L. Laird, Douglas D. Laird, and Ms. Tara
O'Sullivan, then officers of Registrant, left Registrant's employ and became
employees of Churchill Estates, Inc. See Item 12 "Certain Relationships and
Related Transactions."
Messrs. Larry L. Laird and Stanley J. Shuster resigned as directors of
Registrant in September 1998.
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.
-20-
<PAGE>
NUMBER OF LATE REPORTS NUMBER OF TRANSACTIONS NOT
IN FISCAL 1998 REPORTED ON A TIMELY BASIS
----------------------- --------------------------
James E. Eden 1 1
Carl G. Paffendorf 1 1
Stanford J. Shuster 1 1
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, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
FISCAL YEAR ENDED ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION MARCH 31, SALARY
- --------------------------- ----------------- -------------------
<S> <C> <C>
Carl G. Paffendorf 1998 $100,000
Chief Executive Officer 1997 100,000
1996 75,600
Larry L. Laird 1998 $100,000
Chief Operating Officer 1997 100,000
1996 96,000
</TABLE>
No stock options were granted to the Chief Executive Officer and the Chief
Operating Officer during the fiscal year ended March 31, 1998.
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, 1998. No options were exercised by such persons during the fiscal
year ended March 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED
OPTIONS AT MARCH 31, 1998
NAME EXERCISABLE/UNEXERCISABLE
- ---- --------------------------
Carl G. Paffendorf............................. 13,000/10,000
Larry L. Laird................................. 9,640/9,160
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<PAGE>
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 Registrant, pursuant to which he serves as its Chief
Executive Officer. Mr. Paffendorf's annual cash compensation under the
employment agreement is $100,000. 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 Registrant as
of April 1, 1996, pursuant to which he served as Registrant's President and
Chief Operating Officer until November 1, 1998. Mr. Laird's annual base salary
under the employment agreement was $100,000. In Fiscal 1997, Mr. Laird received
a $25,000 cash bonus and 3,000 shares of Registrant's Common Stock. Mr. Laird
received a bonus of $25,000 and 3,000 shares of Common Stock for Fiscal 1998.
Mr. Laird's employment with Registrant ended as of November 1, 1998. During
the three-year period commencing November 1, 1998, Mr. Laird has agreed not to
directly or indirectly engage in the business of owning or managing retirement
facilities for the elderly 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 of Registrant for a period of 24
months following the end of the term of his employment agreement.
STOCK OPTION PLANS
1991 INCENTIVE STOCK OPTION PLAN. Under Registrant's 1991 Incentive Stock
Option Plan (the "Incentive Plan"), 210,000 shares of Common Stock are reserved
for issuance upon the exercise of stock options. As of March 31, 1998, options
to purchase an aggregate of 130,040 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.
-22-
<PAGE>
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, 1998, options to purchase an aggregate
of 18,000 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 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 each
non-employee director will be granted an option to purchase 1,800 shares of
Common Stock. The exercise price per share for all options granted under the
Directors' Plan will be equal to the fair market value of the Common Stock as of
the date preceding the date of grant. All options vest in three equal annual
installments beginning on the first anniversary of the date of grant. Each
option will be for a ten-year term, subject to earlier termination in the event
of death or permanent disability.
Prior to the adoption of the Directors' Plan, options had been issued to
outside directors, of which options to purchase 26,040 shares were outstanding
at March 31, 1998.
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
-23-
<PAGE>
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.
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, 1998 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.
-24-
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
SHARES BENEFICIALLY COMMON
OWNED STOCK
------------------ -----------
<S> <C> <C>
Vanguard Ventures, Inc...........................2,711,662 82%
Carl G. Paffendorf...............................2,764,829(1) 84%
Larry L. Laird .....................................27,640(2) *
Benjamin Frank......................................20,542(3) *
Francis S. Gabreski.................................36,466(4) *
Robert S. Hoshino, Jr...............................28,117(5) *
James E. Eden ...................................... 1,600(6) *
Stanford J. Shuster.................................1,600(7) *
Directors and Executive Officers,
as a group (13 Persons)..........................2,907,934(8) 88%
</TABLE>
..............
* Less than 1%.
(1) 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 19,786 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of March
31, 1998.
(2) Includes 9,640 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31,
1998.
(3) Includes 12,120 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of March
31, 1998.
(4) Includes 25,966 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of March
31, 1998.
(5) Includes 8,800 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31,
1998.
(6) Includes 600 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31,
1998.
(7) Includes 600 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31,
1998.
(8) Includes 77,512 shares of Common Stock issuable upon exercise of
options and convertible securities exercisable within 60 days of March
31, 1998.
-25-
<PAGE>
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, 1998:
Due from Vanguard ................. $1,552,570
Due from Whittier Towers, Inc. .... 2,978,538
Due from Vanguard Affiliated
Limited Partnerships (Vanguard is
General Partner) ................. 169,171
Management fees and cash
advances due from affiliated
companies ........................ 906,300
Registrant anticipates that these types of transactions will continue in
the future.
GUARANTEES
Registrant and affiliates guaranteed certain debt as of March 31, 1998, as
follows:
Amount As of
Guarantor(s) Maker(s) Lender/Obligee March 31, 1998
- ----------------------- -------------------- ------------------ --------------
Registrant CBF Building Company Apple Savings Bank $ 68,350
Registrant, Vanguard, Camelot Village at State Bank of Long 350,000
Phoenix Lifecare Corp. Huntington, Inc. Island
and Paffendorf
Vanguard and Paffendorf Registrant State Bank of Long 212,500
Island
Vanguard Hillside Terrace, Inc. Great-West Life 2,211,474
Vanguard Whitcomb Tower Corp. Great-West Life 2,063,890
Vanguard Registrant Cedar Rapids CGP, L.C. 450,000
The Whitcomb and Hillside Great-West Life mortgages were $2,035,047 and
$2,180,561 at March 31, 1999. The Great-West mortgage on The Whittier was
$4,016,076 at March 31, 1998 and $3,959,860 at March 31, 1999. A default under
The Whittier mortgage is a default under the Hillside Terrace and Whitcomb
mortgages. See Item 2, "Description of Property Mortgage Debt."
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 received 1,040 shares of Registrant's Common Stock valued at $5.00
per share. These shares are subject to investment restrictions.
-26-
<PAGE>
CBF Building Company is discussing a $1,200,000 mortgage loan from State
Bank of Long Island which, if made, would be secured by CBF Building Company's
Glen Cove property (in which Registrant has its offices) and guaranteed by
Vanguard, Mr. Paffendorf, and Registrant.
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. Annual rent is $38,625 in 1998, $39,784 in 1999, $40,977 in
2000. The lease expires on December 31, 2000. Registrant has sublet 550 square
feet of its space to Vanguard on the same terms as Registrant's lease with CBF.
WHITTIER TOWERS, INC.
Whittier Towers, Inc., owned by Phoenix Lifecare Corp. (discussed below)
has agreed to pay to Registrant a management fee of 5 percent 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.
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. In Fiscal 1998 Registrant agreed to relinquish its option
rights effective upon the sale of The Whittier facility to an unaffiliated buyer
and payment to Registrant: (i) payment of accrued but unpaid management fees
since April 1, 1996, (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 (1) through
(iii). In addition, 50 percent of the remaining net profit (i.e., net of
brokerage fees, closing costs, mortgage debt, etc.), if any, shall be paid to
Registrant.
PHOENIX LIFECARE CORP.
Certain officers of Registrant are also officers 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.
-27-
<PAGE>
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.
Whitcomb Tower Corporation ("Whitcomb"), a subsidiary of Registrant, leases
to Phoenix approximately 450 square feet at The Whitcomb, located at 509 Ship
Street, St. Joseph, Michigan, for rent of $2,000 (which includes food service
cost for tenant's staff) per month.
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, 1998, $726,748 was due from Phoenix for unpaid management fees.
PRESIDENTIAL CARE CORP.
Presidential 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. Presidential's application with the United States
Department of Housing and Urban Development (HUD) for a $10,362,000 mortgage
loan guarantee closed in March 1999, and financing is in place.
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.
At March 31, 1998, Presidential owed Registrant $71,500 for various fees
and loans. An additional $86,600 was loaned to Presidential in November 1998.
In March 1999, Registrant agreed to pay $90,915 to Presidential's architect
for services rendered in connection with the Hollywood, Florida project.
CAMELOT VILLAGE AT STROUDSBURG, LLC
Stroudsburg is a limited liability company organized to acquire land in
Stroudsburg, Pennsylvania, upon which an assisted living facility was to have
been built, subject to financing being obtained. Until December 1998 Registrant
had development and management contracts on this property, for which it was to
have been paid a 7 1/2 percent development fee and a 4 percent management fee.
Registrant had an option to purchase at fair market value, exercisable at any
-28-
<PAGE>
time until June 30, 2006. This option terminated on December 4, 1998 with the
sale of the property to an unaffiliated buyer.
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 have
been built on the Stroudsburg, Pennsylvania site, Vanguard had the right to
receive a sum equal to 50 percent of the net proceeds from the sale of the
property. Vanguard has assigned this right to Registrant.
At March 31, 1998, Stroudsburg owed Registrant $155,237 for sums lent, of
which $50,000 was repaid in April 1998 and the balance repaid in December 1998.
CAMELOT VILLAGE AT HUNTINGTON, INC.
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 construction 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 (not to exceed $1,100,000)
and a 5 percent management fee. Registrant has an option to purchase at fair
market value at any time during the five-year period after completion of
construction of the facility and issuance of a certificate of occupancy, but not
before the facility becomes 85 percent occupied. 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.
Camelot is currently seeking construction financing.
Carl G. Paffendorf, Registrant's Chief Executive Officer, owns all of the
Class A voting stock of Camelot. Robert S. Hoshino, Jr. and Benjamin Frank,
Directors of Registrant, and Mr. Paffendorf comprise the Board of Directors of
Camelot. Mr. Paffendorf owns 872 shares of Class B stock of Camelot (out of a
total of 2,800 shares issued) for an investment of $872,000, the same price paid
by unaffiliated persons, $1,000 per share. Mr. Hoshino owns 70 Class B shares,
also purchased at $1000 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 property.
-29-
<PAGE>
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 property.
UNITED VANGUARD HOMES, LLC
United Vanguard Homes, LLC ("UVHLLC") is a New York limited liability
company which plans to build and operate a 374-unit continuing care retirement
community on a 5-acre site located in North Bergen, New Jersey between River
Road and the Hudson River overlooking Manhattan to the East. Registrant located
the site on behalf of UVHLLC, and UVHLLC has entered into a long-term ground
lease of the site, with option to purchase. Registrant will develop the
facility, including supervision of construction, marketing, and arranging
financing. After construction has been completed, Registrant will be the
managing agent and will have an option to buy the facility. UVHLLC is controlled
by Carl G. Paffendorf, its sole member, pending the sale of a syndication for
the project.
Under Ground Lease dated April 19, 1999, as amended, L.P.M. Associates,
L.L.C., an unaffiliated company ("LPM"), agreed to lease UVHLLC a 5-acre parcel
of land on River Road, North Bergen, New Jersey. UVHLLC has issued LPM a $75,000
promissory note in lieu of a cash security deposit under the Ground Lease. The
note becomes due the earlier of:
1. Ninety days of receipt of final and unappealable site plan
approval for the facility from the Planning Board of the
Township of North Bergen and the County of Hudson, together
with all necessary variances and site waivers; or
2. November 1, 1999.
The Promissory Note provided by UVHLLC pursuant to the security deposit
provision of the Ground Lease has been personally guaranteed by Carl G.
Paffendorf. Registrant has agreed to indemnify and hold Mr. Paffendorf harmless
from any loss he may incur as a result of this personal guarantee.
Pending the funding of UVHLLC by a private placement, the Board of
Directors of Registrant has authorized loans to UVHLLC for sums required to
enter into the Ground Lease and to fund costs of zoning approval and related
costs.
POSSIBLE SALE OF SUBSTANTIAL ASSETS
In Fiscal 1999 Registrant agreed with Churchill Estates, Inc.
("Churchill"), a company affiliated with one of Registrant's former directors,
Stanford J. Shuster, to sell to Churchill the Whitcomb and Hillside Terrace
retirement facilities, Registrant's rights with respect to the proposed
Hollywood, Florida assisted living project owned by Presidential, Registrant's
rights with respect to the proposed Huntington, New York assisted living project
owned by Camelot,
-30-
<PAGE>
the proposed Orchard Terrace assisted living project, the Cottage Grove
Management Agreement, and certain other assets for a gross sales price of
approximately $17.6 million.
The Cottage Grove Place Management Agreement was assigned to a Churchill
subsidiary in November 1998, for which Registrant received $150,000.
The contracts with respect to the Whitcomb, Hillside, and Orchard Terrace
were terminated in February 1999. The contract relating to Hollywood, Florida
was terminated in March 1999.
-31-
<PAGE>
POWERS OF ATTORNEY
United Vanguard Homes, Inc. and each of the undersigned do hereby appoint
Paul D'Andrea, Alan Guttman, 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 22nd day of June,
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 June 22, 1999
- ------------------------- (Principal Financial
Paul D'Andrea Officer and Principal
Accounting Officer)
/S/ BENJAMIN FRANK Director June 22, 1999
- -------------------------
Benjamin Frank
/S/ FRANCIS S. GABRESKI Director June 22, 1999
- -------------------------
Francis S. Gabreski
/S/ CARL G. PAFFENDORF Chairman of the Board June 22, 1999
- ------------------------- and Chief Executive
Carl G. Paffendorf Officer
/S/ ROBERT S. HOSHINO, JR. Director June 22, 1999
- -------------------------
Robert S. Hoshino, Jr.
/S/ JAMES E. EDEN Director June 22, 1999
- -------------------------
James E. Eden
-32-
<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,
1998.
-33-
<PAGE>
MARCH 31, 1998
FORM 10-K
EXHIBIT 1
ACTIVE SUBSIDIARIES OF UNITED VANGUARD HOMES, INC.
STATE &
DATE OF
NAME INC. OWNER BUSINESS
---- ------- ----- --------
Hillside Terrace, Inc. 1/10/89 UVH Owns 98-unit Hillside
MI Terrace retirement
facility, Ann Arbor, MI.
Olds Manor, Inc. 8/26/88 UVH Owns 196-unit Olds Manor
MI retirement facility, Grand
Rapids, MI.
Orchard Terrace, Inc. 7/5/95 UVH Owns site for 64-unit
MI expansion of the Hillside
Terrace facility.
UVH Management Corp. 2/6/86 UVH Real estate manager.
FL
Whitcomb Tower Corporation 9/23/88 UVH Owns 136-unit Whitcomb Tower
MI retirement facility,
St. Joseph, MI.
-34-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 256,188
<SECURITIES> 0
<RECEIVABLES> 1,641,627
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,214,490
<PP&E> 6,161,711
<DEPRECIATION> 4,051,101
<TOTAL-ASSETS> 4,636,613
<CURRENT-LIABILITIES> 2,065,178
<BONDS> 5,216,281
0
0
<COMMON> 33,099
<OTHER-SE> (3,690,345)
<TOTAL-LIABILITY-AND-EQUITY> 4,636,613
<SALES> 0
<TOTAL-REVENUES> 7,773,596
<CGS> 0
<TOTAL-COSTS> 7,194,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 560,163
<INCOME-PRETAX> 383,492
<INCOME-TAX> 71,882
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311,610
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
