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)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
/ /
For the fiscal year ended March 31, 1999
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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. /X/
State Registrant's revenues for its most recent fiscal year:
$8,896,000.
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/
<PAGE>
PART I
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Item 1. Description of Business
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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.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
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1998 1999
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Statement of Operations Data:
<S> <C> <C>
Revenues:
Resident services $4,705,000 $4,943,000
Healthcare services 2,763,000 2,766,000
Management Fees 120,000 152,000
Development fees 186,000 1,035,000
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Total revenues $7,774,000 $8,896,000
========== ==========
</TABLE>
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Senior living facilities provide a combination of housing, personalized
support and healthcare services generally identified as independent living,
assisted living and skilled nursing. Independent living facilities are designed
to enable residents to live independently yet remain free from the chores of
home ownership and concerns of daily life, such as transportation, meal
preparation, personal security and housekeeping. Assisted living facilities
offer a combination of housing and personal care and healthcare services
designed to respond to the individual needs of those who require help with the
activities of daily living but are not sick or bedridden. Skilled nursing
facilities are for those residents who require extensive care. A continuing care
retirement community ("CCRC") provides all three levels of services (independent
living, assisted living and skilled nursing) in the same facility, whereas other
facilities, known as congregate care facilities, provide only independent living
and assisted living services.
As residents of senior living facilities "age-in-place," they generally
require more assistance. In each of Registrant's currently owned and/or managed
senior living facilities, a significant shift in the needs of residents from
independent living services to assisted living services has taken place, and to
accommodate residents, Registrant is in the initial stages, subject to
regulatory approval, of converting a number of its independent living apartments
in certain of its properties to assisted living units.
Registrant's growth objective is to capitalize on the experience of its
management team in the senior living industry and on the growing demand for
senior living facilities as an increasingly preferred lifestyle for the elderly
by (i) providing a full range of high-quality personalized resident care and
services; (ii) pursuing development opportunities for itself or on behalf of
others; and (iii) acquiring properties in the open market or through the
exercise of purchase options obtained in the development process.
Registrant believes that its business will benefit in the foreseeable
future from significant trends affecting the long-term care industry, including
an increase in the demand for senior care resulting from the aging of the U.S.
population, efforts to contain healthcare costs by both the public and private
sector and the increasing financial net worth of the senior population which
makes the senior living facility an available option to a broader market.
Registrant believes that these trends will result in increasing demand for
senior living facilities that generally offer a more secure, trouble-free
environment and improved quality of life.
BUSINESS STRATEGY
General. Registrant's business strategy is based upon the experience of
its management team in the senior living industry and on the growing demand for
senior living facilities as an increasingly preferred life style for the
elderly. Registrant intends to capitalize on these two factors by (i) providing
a full range of high-quality personalized resident care and services; (ii)
pursuing development opportunities for itself or on behalf of others; and (iii)
acquiring properties in the open market or through the exercise of purchase
options obtained in the development process.
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PERSONALIZED RESIDENT CARE AND SERVICES. Registrant believes that
income qualified elderly would choose residential CCRCs and assisted living
facilities over skilled nursing facilities when given the choice. Registrant
believes that the elderly would choose the residential assisted living facility
alternative because of the significant quality of life advantages which they
offer. Consequently, providing a high quality of life for its residents in a
safe, healthy and secure environment is the foundation of Registrant's business
strategy.
In furtherance of this strategy, Registrant has structured its senior
living facilities to offer residents a supportive, "home-like" setting and
availability of assistance with activities of daily living ("ADLs"). Its
facilities are, in many respects, similar to conventional apartment living with
enhanced services allowing residents a more independent and social lifestyle
than they would receive in a skilled nursing facility or, in most cases, at
home. At the same time, support is provided in a manner sufficient to meet
residents' requirements. General services in Registrant's residences include the
provision of three meals per day, laundry, housekeeping and maintenance.
Available support services include personal and routine nursing care, social and
recreational services and transportation. Personal care includes assistance with
activities such as bathing, dressing, personal hygiene, grooming, and eating and
ambulating. Registrant also provides or makes available routine nursing services
(in addition to its skilled nursing facility services), entertainment, banking
and shopping. Generally, however, Registrant is able to tailor the changing
needs of its residents through the use of individual service contracts and
flexible staffing patterns.
DEVELOPMENT OPPORTUNITIES. Operating revenues and management fees are
generally stable once a facility is fully occupied. At that point, growth in
revenue of Registrant becomes dependent upon development and management fees
received through the development and management of additional senior living
facilities on behalf of others. Consequently, the second part of Registrant's
business strategy is to increase the number of senior living facilities it
develops and manages for itself or on behalf of others, in part through a
strategy whereby Registrant may enter into an agreement with an unaffiliated
third-party entity, which may be a not-for-profit organization exempt from
federal income taxes under ss. 501(c)(3) of the Internal Revenue Code of 1986,
as amended (the "Code") (a "501(c)(3) organization"), to develop a senior living
facility for such entity. Registrant would generally attempt to obtain a
management agreement to operate the facility upon its completion as well as a
fair market value option to purchase the facility at a future time. Through this
type of transaction, if the unaffiliated entity is adequately financed,
Registrant would not incur the start-up development costs and operating losses
typically associated with the development and initial operation of a senior
living facility because Registrant would not be the owner. However, prior to
entering into such agreement, Registrant may incur certain initial expenses
associated with its site selection process. Registrant would earn a development
fee for the development of the senior living facility and a management fee for
its operation and might exercise its option, if any, to purchase the senior
living facility. The unaffiliated third-party entity would benefit through the
attainment of a turnkey senior living facility.
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Registrant's development program will initially focus on site selection
and residence size, both of which Registrant believes are essential to the
success of its development projects. In evaluating a prospective development
site, Registrant will consider primarily the strength of the market demand and
the ability to maximize the efficiency of its management resources in a specific
market or "cluster." Accordingly, Registrant intends to select sites so that it
can strategically place three to five senior living facilities within a 200-mile
radius, creating a regional cluster of senior living facilities. Registrant
believes that the clustering concept will allow it to reduce costs by sharing
certain management, marketing and operational resources within the regional
cluster. Registrant intends to locate its assisted living facilities in
well-established residential neighborhoods in communities where the population
typically ranges from 40,000 to 100,000 people. The size of a typical community
for a CCRC would generally be somewhat larger, ranging between 100,000 and
500,000 people. Registrant intends to pursue the development of senior living
facilities in communities that show a strong need for senior living services and
a higher than average percentage of middle-aged or elderly individuals. Other
factors that are considered in the site selection process include the level of
competition, the local labor market, the state and local legislative and
regulatory environment and the presence of strong community support for senior
living facilities.
Once a site is selected, Registrant may either advance funds to the
unaffiliated third-party owner of the facility, which funds would be secured by
the assets of the unaffiliated third-party entity acquired with the advanced
funds, principally the land for the proposed facility, or expend funds itself,
on behalf of the third parties. To the extent such advances are not secured by
land, they will be reserved as uncollectible until the unaffiliated entity can
repay the advances. While these advances may at times consist of Registrant's
working capital, Registrant may also seek to arrange, through Vanguard or other
sources, short term financing to satisfy the project's initial funding
requirements. Registrant may set up a special purpose wholly-owned subsidiary
which would issue the debt, which debt may then be convertible into Registrant's
Common Stock. It is intended that these advances would be repaid from the
proceeds of construction financing arranged by Registrant on behalf of the
unaffiliated third-party entity. Registrant may be restricted from recording as
a receivable any advances to the unaffiliated third-party entity under certain
circumstances. Registrant would then, pursuant to project development
agreements, act as the project developer for what would typically be a
development fee of 7.5 percent of the project's soft and hard costs. Once the
project is completed, Registrant may act as the manager of the facility pursuant
to a management agreement, which would provide for a management fee of between
four and five percent of the facility's gross revenue, depending on the type of
facility.
ACQUISITION OF PROPERTIES. In addition to the development and
management of senior living facilities for third parties, Registrant may acquire
existing senior living facilities. These acquisitions may be effected either
through the exercise of a purchase option obtained on properties which
Registrant had developed for third parties or through acquisitions in the open
market.
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When a facility managed by Registrant attains a level of profitability
after the payment of debt service and management fees (usually after stabilized
occupancy in excess of 90% and at times lower depending on the level of debt
service) and Registrant has a purchase option, the exercise of Registrant's
option will be considered.
SERVICES AND AMENITIES
Registrant's senior living facilities offer residents a supportive,
"home-like" setting and availability of assistance with assistance in daily
living (ADLs). The independent and assisted living community is very similar in
many respects to conventional apartment living with enhanced services allowing
the residents to live independently but yet socialize in a safe environment.
Residents are individuals who, for a variety of reasons, cannot live alone but
do not typically need the 24-hour skilled medical care provided in skilled
nursing facilities. Services provided or available to these residents are
designed to respond to their individual needs and to improve their quality of
life. This individualized assistance is available 24 hours a day, to meet both
anticipated and unanticipated needs. General services in Registrant's residences
include the provision of three meals per day, laundry, housekeeping and
maintenance. Available support services provided by facility staff or outside
agencies include personal and routine nursing care, social and recreational
services, transportation and special services needed by the resident. Personal
care includes assistance with activities such as bathing, dressing, personal
hygiene, grooming, as well as eating and ambulating assistance. Routine nursing
services, which are made available and are provided according to the resident's
individual need and state regulatory requirements, include assistance with
taking medication, skin care and injections. Organized activities are available
for social interaction and entertainment. Special services available include
banking, grocery shopping and pet care. Although a typical package of basic
services provided to a resident includes meals, housekeeping, laundry and
personal care, Registrant does not have a standard service package for all
residents. Instead, it is able to accommodate the changing needs of its
residents through the use of individual service contracts and flexible staffing
patterns.
As Registrant's residents age, the level of care required by particular
residents is expected to increase. Registrant's multi-tiered rate structure for
the services it provides is based upon the acuity of, or level of services
needed by, each resident. Supplemental and specialized health and personal care
services for those residents requiring 24-hour supervision or more extensive
assistance with ADLs is provided to the residents by third-party providers who
are reimbursed directly by the resident or a third-party payor (such as Medicaid
or Medicare). In the event that a resident's acuity reaches a level such that
Registrant is unable to meet such resident's needs, Registrant maintains
relationships with local hospitals and skilled nursing facilities to facilitate
a transfer of the resident. A resident of Registrant's CCRCs would be
transferred to the skilled nursing component at the facility, if there are
available beds at such facility.
Phoenix Lifecare Corp., a 501(c)(3) organization, provides home
healthcare services to residents of 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)
----------------- ----------- -------- ------- -----------
Properties Owned:
<S> <C> <C> <C> <C>
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 135 58 65
Properties Under Development:
Camelot Cove (c)
North Bergen, NJ 270 30 60
Camelot Village(c) 120
Hicksville, NY
Camelot Village(c)
Huntington, NY 120
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.
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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, 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 $2.2 million. Such indebtedness is secured by a first mortgage on
Hillside Terrace. As of March 31, 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, 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 is due May 1,
2000 and bear interest at 9 percent per annum. 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 51,873 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 117,729
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.
Item 4. 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 1998 vs. March 1999
- ------------------------------------
REVENUES
Net revenues of the Registrant represent its gross consolidated
revenues, less charitable and Supplementary Social Security Income discounts.
Net revenues increased by $1,122,000 or 14 percent, from $7,774,000 in
the 1998 period to $8,896,000 in the 1999 period. Development fees increased
$849,000, or 456 percent, from $186,000 in 1998 to $1,035,000 in the 1999
period. The increase was attributable to the partial fees due on two development
projects.
Resident services Revenues increased $238,000, or 5 percent, from
$4,705,000 in the 1998 period to $4,943,000 in the 1999 period. The increase was
primarily due to rate increases.
Healthcare services remained relatively flat with less than 1 percent
increase.
Management fees increased $32,000, or 26 percent, from $120,000 in the
1998 period to $152,000 in the 1999 period. The increase was primarily due to
recovery of fees fully reserved.
15
<PAGE>
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 $248,000, or 4 percent, from
$6,197,000 in the 1998 period to $6,445,000 in the 1999 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 declined $265,000, or 25 percent,
from $1,076,000 in the 1998 period to $811,000 in the 1999 period, due primarily
to staff reductions.
PROVISION FOR RECOVERY ON ADVANCES TO AFFILIATES
During Fiscal 1999 Registrant recorded a net loss on Advances to
Affiliates aggregating $226,000 compared to a Net Recovery of Advances of
$351,000 in Fiscal 1998. 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 $39,000, or 7 percent, from
$560,000 in the 1998 period to $521,000 in the 1999 period. The decrease is
primarily due to a reduction in Notes and Mortgage payable.
OTHER INCOME
Other income increased $413,000, or 417 percent, from $99,000 in the
1998 period to $512,000 in the 1999 period. The increase is attributable to the
sale of Registrant's Management Contract, forfeitures of deposits on the sale of
Registrant's assets, and fire insurance proceeds.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1999 operating activities provided cash of $1,165,000, an
increase of $898,000 over fiscal 1998. The increase in cash flows from operating
activities was principally due to the collection of development fees receivable
and the Registrant's increase in net profit in fiscal 1999.
During fiscal 1999 Registrant required $1,116,000 for investing
activities compared to $47,000 in the 1998 period. The increase was primarily
due to the purchase of land for development.
During fiscal 1999 Registrant provided $126,000 cash from financing
activities compared to requiring $166,000 for financing activities in fiscal
1998. The increase in cash flow was due to the financing of land purchased for
development.
Registrant is presently pursuing various strategies to increase working
capital, including (i) refinancing a substantial portion of Registrant's
mortgage indebtedness and (ii) negotiating the sale of some of its assets.
Although there can be no assurance that any of the above strategies will be
successful, Registrant believes that the underlying value of its properties will
allow it to successfully implement its strategies.
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 1999 and 1998, Registrant revised its estimate to
reflect actual costs incurred and, accordingly, recorded other income of $42,920
and $265,818, respectively.
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.
In July 1999, Registrant dismissed Grant Thornton LLP as its
independent accountants. Grant Thornton's accountant's report on the financial
statements of Registrant for the past two years did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. There were no other
reportable events or disagreements with Grant Thornton to report in response to
Item 304(a) of Regulation S-B.
Holtz Rubenstein & Co. LLP has been engaged as new independent
accountants to the Registrant with respect to the fiscal year ended March 31,
1999.
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.
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
19
<PAGE>
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.
BOARD OF DIRECTORS COMPENSATION
Outside Directors are to be compensated at the rate of $6,000 per year
(payable in shares of Common Stock valued at fair market value) plus $1,000 for
each meeting attended. In addition, each non-employee Director is eligible to
participate in the Registrant's 1996 Outside Directors' Stock Option Plan.
Registrant also has an Audit Committee composed of Messrs. Eden, Frank and
Hoshino. Audit Committee members will be compensated at the rate of $1,000 per
meeting, when such meeting is not held in conjunction with a Board of Directors
meeting and $500 per meeting when such meeting is held in conjunction with a
Board of Directors meeting.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Registrant's officers and Directors and persons who own more than five
percent of a registered class of Registrant's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than five percent stockholders are
required by the Commission's regulations to furnish Registrant with copies of
all Section 16(a) forms they file.
Number of Late Reports Number of Transactions Not
In Fiscal 1999 Reported on a Timely Basis
---------------------- --------------------------
Item 10. Executive Compensation
----------------------
The following table sets forth the total compensation for Registrant's
Chief Executive Officer during the fiscal years ended March 31, 1999, 1998, and
1997.
20
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Fiscal Year Ended Annual Compensation
Name and Principal Position March 31, Salary
- --------------------------- ----------------- -------------------
<S> <C> <C>
Carl G. Paffendorf 1999 $100,000
Chief Executive Officer 1998 100,000
1997 100,000
</TABLE>
No stock options were granted to the Chief Executive Officer during the
fiscal year ended March 31, 1999.
The following table sets forth certain information regarding
unexercised stock options held by the Chief Executive Officer as of March 31,
1999. No options were exercised by such person during the fiscal year ended
March 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Unexercised
Options at March 31, 1999
Name Exercisable/Unexercisable
- ---- -------------------------
Carl G. Paffendorf.................................. 17,600/5,400
LONG-TERM INCENTIVE AND PENSION PLANS
Registrant does not have any long-term incentive or defined benefit
pension plans.
EMPLOYMENT AGREEMENT
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.
21
<PAGE>
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, 1999,
options to purchase an aggregate of 101,240 shares of Common Stock were
outstanding under the Incentive Plan. The Incentive Plan is designed as a means
to attract, retain and motivate key employees. The Stock Option Plan Committee
administers and interprets the Plan.
The Incentive Plan provides for the granting of incentive stock options
(as defined in Section 422 of the Code). Options are granted under the Incentive
Plan on such terms and at such prices as determined by the Stock Option Plan
Committee, except that the per share exercise price of options cannot be less
than the fair market value of the Common Stock on the date of grant. Each option
is exercisable after the period or periods specified in the option agreement,
but no option may be exercisable after the expiration of ten years from the date
of grant. Options granted under the Incentive Plan are not transferable other
than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or the Employee
Retirement Income Security Act.
1996 OUTSIDE DIRECTORS' STOCK OPTION PLAN. Registrant's 1996 Outside
Directors' Stock Option Plan (the "Directors' Plan") provides for the grant of
options to purchase Common Stock of Registrant to non-employee directors of
Registrant. The Directors' Plan authorizes the issuance of a maximum of 90,000
shares of Common Stock. As of March 31, 1999, options to purchase an aggregate
of 20,400 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 28,800 shares were
outstanding at March 31, 1999.
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.
22
<PAGE>
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
The goal of the Board of Directors is to establish a motivational
compensation plan for executives that will enable Registrant to attract and
retain those individuals deemed most qualified to improve and enhance its future
performance. As part of its periodic review of executive compensation, the Board
of Directors considers such factors as level of responsibility, Registrant's
general growth, improved financial condition, compensation of executives at
comparable companies and other relevant factors. The Board of Directors strongly
believes that by providing those persons who have substantial responsibility for
the management and growth of Registrant with an opportunity to increase their
ownership of Registrant stock, the best interests of stockholders and executives
will be closely aligned. Therefore, the Board of Directors included executives
as eligible employees under Registrant's Incentive Plan, whereby executives are
eligible to receive stock options that give them the right to purchase shares of
Common Stock of Registrant at specified prices in the future.
The Board of Directors believes executive compensation should be tied
to benefits directly accruing to stockholders from positioning Registrant to
grow through acquisitions, increases in stockholders' equity and improved
operating results. As indicated in the discussion above, the Board of Directors
believes that Registrant's executive compensation should be first and foremost
based on financial performance and returns to stockholder. The compensation
levels of Registrant's officers are based on these two factors.
The Board of Directors will continue to monitor the level and
effectiveness of executive compensation.
PERFORMANCE GRAPH
There has not been a public market for Registrant's Common Stock for
the past five years. Consequently, no performance graph is being filed with this
report.
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, 1999 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.
23
<PAGE>
Percent of
Outstanding
Shares Beneficially Common
Owned Stock
------------------- -----------
Vanguard Ventures, Inc.................... 2,703,862 82%
Carl G. Paffendorf........................ 2,754,843 (1) 83%
Benjamin Frank ........................ 23,932 (2) *
Francis S. Gabreski....................... 39,860 (3) *
Robert S. Hoshino, Jr..................... 31,067 (4) *
James E. Eden ........................ 6,050 (5) *
Directors and Executive Officers,
as a group (9 Persons).................... 2,890,932 (6) 87%
- ------------------------
* 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 17,600
shares of Common Stock issuable upon exercise of options and convertible
securities exercisable within 60 days of March 31, 1999.
(2) Includes 14,760 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31, 1999.
(3) Includes 28,610 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31, 1999.
(4) Includes 11,000 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31, 1999.
(5) Includes 3,800 shares of Common Stock issuable upon exercise of options and
convertible securities exercisable within 60 days of March 31, 1999.
(6) Includes 110,950 shares of Common Stock issuable upon exercise of options
and convertible securities exercisable within 60 days of March 31, 1999.
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, 1999:
24
<PAGE>
Due from Vanguard $3,835,393
Due from Whittier Towers, Inc. 374,951
Due from Vanguard Affiliated Limited
Partnerships (Vanguard is General Partner) 166,871
Management fees and cash
advances due from affiliated
companies 2,976,917
----------
$7,354,132
==========
See Footnote 3 to Registrant's financial statements for additional
information. Registrant anticipates that these types of transactions will
continue in the future.
GUARANTEES
Registrant and affiliates guaranteed certain debt as of March 31, 1999,
as follows:
<TABLE>
<CAPTION>
Amount As of
Guarantor(s) Maker(s) Lender/Obligee March 31, 1999
- ----------------------- --------------------- ------------------------- --------------
<S> <C>
Registrant CBF Building Company Apple Savings Bank $38,731
Registrant, Vanguard, Camelot Village at State Bank of Long Island 271,900
Phoenix Lifecare Corp. Huntington, Inc.
and Paffendorf
Vanguard and Paffendorf Registrant State Bank of Long Island 62,500
Vanguard Hillside Terrace, Inc. Great-West Life 2,182,092
Vanguard Whitcomb Tower Corp. Great-West Life 2,036,475
</TABLE>
The Great-West mortgage on The Whittier was $3,962,640 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 November 1999 CBF Building Company closed a $1,200,000 mortgage loan
with State Bank of Long Island, which loan is secured by CBF Building Company's
Glen Cove property (in which Registrant has its offices) and guaranteed by
Vanguard, Mr. Paffendorf, and Registrant. At the closing, the Apple Savings Bank
loan referred to in the above chart was satisfied. Registrant anticipates
increasing this mortgage to $1,500,000 in December 1999 with the same collateral
and guarantees.
See also "Camelot Village at Huntington, Inc.," discussed below, for
information regarding additional guarantees of Registrant.
25
<PAGE>
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 calendar year base rent is $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 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.
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.
26
<PAGE>
PRESIDENTIAL CARE CORP.
Presidential Care Corp. is a 501(c)(3) corporation organized to acquire
land in Hollywood, Florida, upon which an assisted living facility is being
built. 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
facility to be built on the Hollywood, Florida site, Registrant will receive a
sum equal to 50 percent of the net proceeds from the sale of the assisted living
facility.
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 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 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 $23,000,000 in construction financing from
the Suffolk County (New York) Industrial Development Agency, for which a project
completion guarantee may be required from Registrant.
Carl G. Paffendorf, Registrant's Chief Executive Officer, Robert S.
Hoshino, Jr., and Benjamin Frank, Directors of Registrant, 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 $1,000 per share. Camelot shareholders are entitled
to 100 percent of the net cash flow from the Huntington facility's operations
and 50 percent of the net proceeds from the sale of the property.
27
<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.
Camelot anticipates selling its Huntington, New York property to
Registrant for $3,800,000, with a closing scheduled for December 30, 1999.
CAMELOT COVE/UNITED VANGUARD HOMES, LLC
United Vanguard Homes, LLC ("UVHLLC") is a New York limited liability
company which plans to build and operate a 360-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, which is anticipated to be named "Camelot Cove."
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. December 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.
Registrant will develop the North Bergen, New Jersey Facility and will
provide services, including: oversight of zoning matters, architectural floor
plans and design, project financing, marketing, creation and implementation of
computer programs, records, budgets, the Facility's furnishings and fixtures,
and rent-up for the period prior to the completion of construction and
28
<PAGE>
occupancy. Registrant shall be paid a fee equal to 7.5 percent of the total
costs for such development services.
After the Facility is constructed, a subsidiary of Registrant will
manage the Facility for an annual fee of 5 percent of gross revenues from
operations.
It is anticipated that Registrant will have an option to acquire the
Facility at fair market value at any time during the five-year period after it
attains stabilized occupancy (85 percent). The option price will be at appraised
fair market value, provided that in no event shall the purchase price be less
than mortgage debt on the property, plus (i) a sum equal to amounts originally
paid for then outstanding Membership Interests less any return of capital
previously paid and (ii) all accumulated but unpaid dividends.
29
<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 9th day of
December 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 December 9, 1999
- ------------------------- (Principal Financial
Paul D'Andrea Officer and Principal
Accounting Officer)
/s/ Benjamin Frank Director December 9, 1999
- -------------------------
Benjamin Frank
/s/ Francis S. Gabreski Director December 9, 1999
- -------------------------
Francis S. Gabreski
/s/ Carl G. Paffendorf Chairman of the Board December 9, 1999
- ------------------------- and Chief Executive
Carl G. Paffendorf Officer
/s/ Robert S. Hoshino, Jr. Director December 9, 1999
- -------------------------
Robert S. Hoshino, Jr.
/s/ James E. Eden Director December 9, 1999
- -------------------------
James E. Eden
<PAGE>
PART IV
-------
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
Registrant filed no reports on Form 8-K during the quarter ended March
31, 1999.
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
--------------------------------------------
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
YEARS ENDED MARCH 31, 1999 AND 1998
-----------------------------------
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
--------------------------------------------
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
YEARS ENDED MARCH 31, 1999 AND 1998
-----------------------------------
CONTENTS
--------
Page
----
Report of Holtz Rubenstein & Co., LLP, Certified Public Accountants F-2
Report of Grant Thornton LLP, Independent Certified Public Accountants F-3
Consolidated balance sheets at March 31, 1999 and 1998 F-4
Consolidated statements of operations for the
years ended March 31, 1999 and 1998 F-5
Consolidated statement of stockholders' deficiency
for the years ended March 31, 1999 and 1998 F-6
Consolidated statements of cash flows for the years
ended March 31, 1999 and 1998 F-7
Notes to consolidated financial statements F-8 - F-19
<PAGE>
Independent Auditors' Report
----------------------------
Board of Directors
United Vanguard Homes, Inc.
We have audited the consolidated balance sheet of United Vanguard Homes, Inc.
and Subsidiaries as of March 31, 1999 and the related consolidated statements of
operations, stockholders' deficiency and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Vanguard
Homes, Inc. and Subsidiaries as of March 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Holtz Rubenstein & Co., LLP
Melville, New York
August 31, 1999 (except for Note 5, as to
which the date is October 11, 1999)
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
United Vanguard Homes, Inc.
We have audited the accompanying consolidated balance sheet of United Vanguard
Homes, Inc. and Subsidiaries as of March 31, 1998 and the related consolidated
statements of operaitons, stockholders' deficiency, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidencing
supporting the amounts and disclosure in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Vanguard
HOmes, Inc. and Subsidiaries as of March 31, 1998, and the consolidated results
of their operations and their consolidated cash flows for the year then ended,
in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Melville, New York
October 1, 1998 (except for Note E,
as to which the date is May 6, 1999)
F-3
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
--------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
March 31,
------ ------------------------------------------
ASSETS 1999 1998
------ ------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 430,711 $ 256,188
Accounts receivable, less allowance for doubtful accounts
of $91,000 and $40,000 in 1999 and 1998, respectively 452,042 620,627
Development fees and advances (Note 4) -- 981,000
Due from affiliates, net (Note 3) 763,952 179,552
Prepaid expenses and other 157,514 177,123
----------- ------------
Total current assets 1,804,219 2,214,490
----------- ------------
PROPERTY AND EQUIPMENT, net (Note 2) 2,985,652 2,110,610
----------- ------------
OTHER ASSETS:
Restricted assets (Note 1) 166,000 108,352
Due from affiliates, net (Note 3) 729,117 --
Other assets 188,271 203,161
----------- ------------
1,083,388 311,513
----------- ------------
$ 5,873,259 $ 4,636,613
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 482,512 $ 661,466
Accounts payable 389,711 350,244
Accrued expenses 604,561 568,511
Public offering costs 198,721 328,641
Deferred income 7,200 --
Income taxes payable 131,368 156,316
----------- ------------
Total current liabilities 1,814,073 2,065,178
----------- ------------
RESIDENT SECURITY DEPOSITS 289,870 282,300
----------- ------------
LONG-TERM DEBT, less current portion (Note 5) 6,308,936 5,946,281
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' DEFICIENCY: (Note 8)
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, 3,313,265 shares
and 3,309,890 shares in 1999 and 1998, respectively 33,133 33,099
Additional paid-in capital 7,009,048 6,998,957
Deficit (9,581,801) (10,689,202)
----------- ------------
(2,539,620) (3,657,146)
----------- ------------
$ 5,873,259 $ 4,636,613
=========== ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------------------------------
1999 1998
--------- -------
<S> <C> <C>
OPERATING REVENUES: (Notes 1 and 4)
Resident services $ 4,943,342 $ 4,704,992
Health care services 2,765,919 2,763,104
Management fees 151,562 120,000
Development fees 1,034,585 185,500
----------- -----------
8,895,408 7,773,596
----------- -----------
OPERATING EXPENSES: (Note 7)
Residence operating expenses 6,444,584 6,196,474
General and administrative 811,420 1,076,327
Depreciation and amortization 258,242 273,463
Provision for (recovery of) loss on advances to affiliates 226,424 (351,396)
----------- -----------
7,740,670 7,194,868
----------- -----------
Income from operations 1,154,738 578,728
----------- -----------
OTHER INCOME (EXPENSES):
Interest expense, net (521,173) (560,163)
Other income (Note 9) 511,702 99,109
Adjustment of public offering costs 42,920 265,818
----------- -----------
33,449 (195,236)
----------- -----------
Income before income taxes 1,188,187 383,492
INCOME TAXES (Note 6) 80,786 71,882
----------- -----------
NET INCOME $ 1,107,401 $ 311,610
=========== ===========
NET INCOME PER COMMON SHARE:
Basic .33 .09
=========== ===========
Diluted .33 .09
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 3,311,890 3,307,214
=========== ===========
Diluted 3,346,090 3,341,414
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
--------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
--------------------------------------------------
YEARS ENDED MARCH 31, 1999 AND 1998
-----------------------------------
<TABLE>
<CAPTION>
Additional
Paid-in
Shares Amount Capital Deficit Total
--------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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)
Shares issued as compensation 3,375 34 10,091 -- 10,125
Net income -- -- -- 1,107,401 1,107,401
---------- -------- ----------- ------------ -----------
BALANCE, March 31, 1999 3,313,265 $ 33,133 $ 7,009,048 $ (9,581,801) $(2,539,620)
========== ======== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
--------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended
March 31,
-----------------------------------
1999 1998
----------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,107,401 $ 311,610
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 258,242 273,463
Common stock issued for services 10,125 25,620
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 168,585 (65,098)
Due from affiliates (1,313,517) 88,055
Prepaid expenses and other current assets 19,609 357,836
Development fees and advances 981,000 (185,500)
Other assets (2,256) (7,358)
Increase (decrease) in liabilities:
Accounts payable 39,467 (137,514)
Accrued expenses and public offering costs (93,870) (357,649)
Income taxes payable (24,948) (34,433)
Deferred income 7,200 --
Resident security deposits 7,570 (2,226)
----------- ---------
Net cash provided by operating activities 1,164,608 266,806
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,116,138) (47,339)
----------- ---------
Net cash used in investing activities (1,116,138) (47,339)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on mortgages and notes payable 750,000 225,000
Principal repayments of mortgages and notes payable (566,299) (312,451)
Decrease (increase) in restricted cash financing (57,648) (8,752)
Common stock purchased and simultaneously retired -- (70,000)
----------- ---------
Net cash provided by (used in) financing activities 126,053 (166,203)
----------- ---------
Net increase in cash 174,523 53,264
Cash, beginning of year 256,188 202,924
----------- ---------
Cash, end of year $ 430,711 $ 256,188
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 604,991 $ 529,529
=========== =========
Income taxes $ 105,734 $ 85,138
=========== =========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1998 the Company entered into capital leases
for furniture and equipment aggregating $48,000
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
UNITED VANGUARD HOMES, INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED MARCH 31, 1999 AND 1998
-----------------------------------
1. Basis of Presentation and Summary of Significant Accounting Policies:
a. Nature of 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 engaged in providing assisted living services.
b. Basis of presentation
As of March 31, 1999, the Company has a deficiency in
stockholders' equity of $2,540,000 and a deficiency in working capital. 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 refinancing a substantial
portion of the Company's mortgage indebtedness. Although there can be no
assurance that any of the strategies will be successful, the Company believes
that the underlying value of its properties will allow the Company to
successfully implement its strategies.
c. Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary corporations. All significant
intercompany balances and transactions have been eliminated in consolidation.
d. Restricted assets
Restricted assets at March 31, 1999 and 1998 consist of cash of
$166,000 and $108,352, respectively, which collateralizes an insurance bond
required by Michigan State law for resident security deposits. In addition,
restricted use cash accounts totaling approximately $154,000 and $151,000 at
March 31, 1999 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.
e. Property and equipment
Machinery and equipment is stated at cost and is depreciated using
accelerated methods over useful lives established under Federal income tax laws.
Such methods differ from generally accepted accounting principles, however, such
differences are not considered material. The cost and accumulated depreciation
for machinery and equipment sold, or otherwise disposed of, is relieved from the
accounts and resulting gains or losses are reflected in income.
Leasehold improvements are amortized over the shorter of the
remaining life of the lease or the life of the improvements.
F-8
<PAGE>
1. Basis of Presentation and Summary of Significant Accounting Policies:
(Cont'd)
f. Income taxes
The Company is included in the consolidated Federal income tax
return of VVI. It is the policy of VVI to allocate income taxes to the Company
pro rata on a separate return basis, charging or crediting the Company with its
proportionate share of expense or reduction in taxes.
Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and liabilities and
loss carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance has been established to reduce the deferred
tax assets, as it is more likely than not, that a portion 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.
g. Per share information
Basic earnings 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 34,200 during the year ended March 31, 1999
and 1998 were used in the calculation of diluted earnings per common shares.
h. Stock-based compensation
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 consolidated
financial statements as if the fair value based method had been applied.
i. 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.
Under Medicare and Medicaid cost reimbursement programs, the
Company is reimbursed for services rendered to covered patients. Revenues
derived from these programs are based in part on cost reimbursement principles
and are subject to examination and retroactive adjustment. Management
continuously evaluates the outcome of these reimbursement examinations and
provides allowances for any potential adjustments. In the opinion of management,
retoactive adjustments, if any, would not be material to the financial position
or results of operations of the Company.
Management fee revenues are recognized monthly, based upon a
contractual rate of compensation.
F-9
<PAGE>
1. Basis of Presentation and Summary of Significant Accounting Policies:
(Cont'd)
i. Revenue recognition (Cont'd)
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.
j. 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. 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.
k. Use of estimates and other matters
The preparation of financial statements in conformity with
generally accepted accounting principles requires management 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 consolidated
financial statements and 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 1999 and 1998, the Company revised its estimate to
reflect actual costs incurred and, accordingly, recorded other income of $42,920
and $265,818, respectively.
The Company recorded revenue for development fees services
provided to affiliates, based upon a service completion schedule. As of March
31, 1999 and 1998, revenues recorded amounted to approximately $1,034,000 and
$186,000, respectively.
The Company is self-insured for health insurance. Losses are
accrued based upon the Company's estimates of the aggregate liability for claims
incurred based on prior experience. As of March 31, 1999 and 1998,
self-insurance liabilities amounts to approximately $143,000 and $112,000,
respectively.
F-10
<PAGE>
2. Property and Equipment, Net:
Property and equipment, at cost, is summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------
1999 1998
------ ------
<S> <C> <C>
Land $1,622,408 $ 632,408
Buildings and improvements 4,601,776 4,522,649
Equipment 1,053,665 1,006,654
---------- ----------
7,277,849 6,161,711
Less accumulated depreciation and amortization 4,292,197 4,051,101
---------- ----------
$2,985,652 $2,110,610
========== ==========
</TABLE>
3. Related Party Transactions:
a. 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>
March 31,
---------------------------
1999 1998
--------- ----------
<S> <C> <C>
Due from VVI $3,835,393 $1,552,570
Due from the Whittier, Phoenix Lifecare Corp.
affiliated company 374,951 2,978,538
Due from VVI affiliated limited partnership
(VVI is general partner) 166,871 169,171
Management fees and cash advances
due from affiliated companies 2,976,917 906,300
---------- ----------
7,354,132 5,606,579
Less reserve for losses 5,861,063 5,427,027
---------- ----------
Due from affiliates, net $1,493,069 $ 179,552
========== ==========
</TABLE>
At March 31, 1999 and 1998, the unreserved amounts due from
affiliates represent development fees and advances from the following:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
United Vanguard Homes, LLC $ 4,079 $ --
Presidential Care Corp. 729,117 24,315
Camelot Village at Huntington, Inc. 759,873 --
Camelot Village at Stroudsburg, LLC -- 155,237
---------- --------
1,493,069 179,552
Less non-current 729,117 --
---------- --------
$ 763,952 $179,552
========== ========
</TABLE>
F-11
<PAGE>
3. Related Party Transactions: (Cont'd)
a. Due from affiliates, net (Cont'd)
The Company is currently providing development services to two
related parties, Presidential Care Corp. and Camelot Village at Huntington.
Development fees to be earned on these projects aggregate approximately $2.1
million. As of March 31, 1999, total development fees earned approximate $1.1
million. Development fees are earned upon completion of each contract phase,
which consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Forlocating the land, securing an option on the site, zoning
application work, architectural, engineering, environmental and
decorating
matters, and formation of model 25%
For arranging equity financing 5
For obtaining zoning approval
for assisted living facility 20
For construction management 25
For marketing and hiring the initial operation staff 25
-----
100%
======
</TABLE>
b. Presidential
The unreserved amount at March 31, 1999 represents development
fees of $729,117 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. During fiscal 1999, the Company recognized
$367,702 of development fees and made advances of $337,100 primarily related to
the closing of the construction financing. Presidential received interim
financing through a private placement and had closed on its construction
financing as of March 31, 1999.
c. Camelot Village at Huntington ("Camelot - Huntington")
During fiscal 1999, advances of $133,490 were made to Camelot -
Huntington, a corporation affiliated with the Company. The Company has entered
into a development agreement with Camelot - Huntington and has obtained an
option to purchase the underlying property. Construction of an assisted living
facility is planned to commence in the beginning of fiscal 2000. The Company
recognized $626,383 of development fees in fiscal 1999.
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.
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.
F-12
<PAGE>
3. Related Party Transactions: (Cont'd)
d. Camelot Village at Stroudsburg ("Camelot - Stroudsburg")
Additional advances of $6,406 were made in fiscal 1999. The sale
of the property closed during fiscal 1999 and all advances were fully paid.
e. Phoenix Lifecare Corp. ("Phoenix")
Phoenix, a not-for-profit corporation affiliated with the Company,
provides health care services to residents of the Whitcomb Tower on behalf of
the Company. The Company earns a management fee from Phoenix for services
rendered. The amounts due from Phoenix of $1,483,848 and $726,748 at March 31,
1999 and 1998, respectively, have been fully reserved and no management fees
have been recognized during fiscal 1999 and 1998.
f. United Vanguard Homes, LLC
United Vanguard Homes, LLC, a limited liability company affiliated
with the Company, is negotiating to enter into a 99 year ground lease on land
located in North Bergen, N.J. for the purpose of developing a continuing care
retirement community.
4. Development Fees and Advances:
The Company developed and completed 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 1999 and 1998, the Company recognized $45,000 and $185,500,
respectively, of such development fee. All remaining unpaid development fees
were fully paid in 1999.
5. Long-Term Debt:
<TABLE>
<CAPTION>
a. Mortgages payable March 31,
----------------- -------------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Mortgages, guaranteed by VVI, bearing interest at 7.5% payable in
monthly installments of principal and interest of $30,429 are
due May 1, 2000, as extended on October 11, 1999; restricted
use cash accounts have
been pledged as additional collateral (Note 1). $ 4,218,567 $ 4,275,364
Convertible mortgages with interest at prime, plus
3% (10.75% at March 31, 1999), payable in interest only
installments quarterly, maturity dates are April 30, 2000, as
extended, and August 2000, net of original issued discount of
$42,789 and $26,223, respectively. Convertible into 169,602
shares of UVH common stock, as of March 31,
1999, subject to adjustment, as defined. 1,200,343 1,183,777
Mortgage with interest at prime plus 1% (8.75% at
March 31, 1999) payable in monthly installments of
$4,818 including interest, balance due August 2001. 139,744 180,947
Mortgage, with interest only payable monthly
at 7.5% per annum, due July 1, 2000. 750,000 -
------------ -------------
6,308,654 5,640,088
------------ -------------
</TABLE>
F-13
<PAGE>
5. Long-Term Debt: (Cont'd)
b. Notes payabl
------------
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Note payable in monthly installments of $5,000 plus interest at
prime plus 2% (9.75% at March 31, 1999). The note is pursuant
to a line of credit which expires April 7, 2000. 147,470 274,000
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% (9.25% at March 31, 1999). 62,500 212,500
Notes payable, with interest only payable monthly
at prime plus 1 1/2% (9.25% at March 31, 1999)
due June 1999. 50,000 75,000
Equipment notes payable, with interest ranging from
3% to 15%, payable in monthly installments of
principal and interest of $1,428 until November 2002. 62,824 96,159
Notes payable, with interest at 20%, due June 30, 1998. - 150,000
------------------ ------------------
482,794 967,659
------------------ ------------------
6,791,448 6,607,747
Less current portion 482,512 661,466
------------------ ------------------
$ 6,308,936 $ 5,946,281
================== ==================
</TABLE>
The approximate aggregate maturities of mortgages and notes
payable are as follows:
Fiscal Year
Ending
March 31,
-----------
2000 $ 482,000
2001 6,111,000
2002 139,000
2003 58,000
------------------
$ 6,790,000
==================
6. Income Taxes:
The consolidated provision for income taxes consists of the following
at March 31:
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Current:
Federal $ - $ -
State and local 80,786 71,882
------------- -------------
80,786 71,882
------------- -------------
Deferred:
Federal - -
State and local - -
------------- -------------
- -
------------- -------------
$ 80,786 $ 71,882
============= =============
</TABLE>
F-14
<PAGE>
6. Income Taxes: (Cont'd)
The Company files its Federal consolidated tax return with its parent,
VVI. To the extent the Company's Federal tax attributes are utilized by VVI, the
Company records the result as either an increase or decrease to additional
paid-in capital.
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------
1999 1998
-------- ------
<S> <C> <C>
Statutory Federal tax rate 34.00% 34.00%
State income taxes, net of Federal income tax benefit 6.80 18.74
Valuation allowance (34.00) (34.00)
----- -----
Effective tax rate 6.80% 18.74%
===== =====
</TABLE>
Temporary differences which give rise to deferred tax assets are as
follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------
1999 1998
--------- -----------
<S> <C> <C>
Net operating loss carryover $ 507,000 $ 641,000
Due from affiliates 2,344,000 2,171,000
Fixed assets 895,000 895,000
Accrued expenses and other 116,000 190,000
---------- ----------
3,862,000 3,897,000
Valuation allowance 3,862,000 3,897,000
---------- ----------
$ - $ -
========== ==========
</TABLE>
The Company has net operating loss carryforwards for Federal income tax
purposes as of March 31, 1999 of approximately $1,268,000. 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 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.
7. Commitments and Contingencies:
a. Operating leases
Aggregate rental expense under operating leases was approximately
$33,000 in both years ended March 31, 1999 and 1998. UVH rents its
administrative office facilities from CBF Building Company, an affiliate of VVI,
under a lease expiring December 31, 2000, at an approximate annual rental as
follows:
Fiscal Year
Ending
March 31,
2000 $ 39,000
2001 40,000
-------------
$ 79,000
F-15
<PAGE>
7. Commitments and Contingencies: (Cont'd)
b. Guarantees
The Company guaranteed a bank loan to CBF Building Company. The
balance outstanding on this loan is approximately $39,000 at March 31, 1999.
The Company guaranteed a bank loan to an affiliate with a balance
of $271,900 at March 31, 1999.
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, 1999 and
1998 was approximately $62,500 and $212,500, respectively.
c. Self-insurance
The Company partially self-insures for health and medical
liability costs up to a maximum of $300,000 in claims. The Company has insurance
coverage for claims above the aforementioned limit. The self-insurance claim
liability is determined on a nondiscounted basis based on claims filed and an
estimate of claims incurred but not yet reported. The amount accrued at March
31, 1999 was approximately $143,000.
d. Possibility of cross default
An affiliate of Phoenix Lifecare Corp. was indebted under a first
mortgage in the principal amount of $3,962,641 at March 31, 1999. 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 Phoenix Life Care Corp. default on this affiliate's loan could result in the
foreclosure of Hillside Terrace and Whitcomb Tower.
g. Government regulation
Healthcare and senior living facilities are areas of extensive and
frequent regulatory change. Changes in the laws or new interpretations of
existing laws can have a significant effect on methods of doing business, costs
of doing business and amounts of reimbursement from governmental and other
payors. The Company at all times attempts to comply with all applicable fraud
and abuse laws; however, there can be no assurance that administrative or
judicial interpretation of existing laws or regulations will not have a material
adverse effect on the Company's operations or financial condition.
8. Stockholders' Equity:
a. Common stock
During the fiscal year ended March 31, 1998 there were 19,600
shares of common stock purchased and simultaneously retired at a price of $3.57
per share. In June 1997 and January 1998 there were 7,500 and 1,040 shares of
common stock, respectively, issued to investors at a price of $3.00 per share.
In August 1998 and October 1998, there were 1,875 and 1,500 shares
of common stock, respectively, issued to directors as compensation at a price of
$3.00 per share.
F-16
<PAGE>
8. Stockholders' Equity: (Cont'd)
b. 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>
Balance, April 1, 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
Terminated 4.77 $3.33 to $6.00 (28,800) 28,800
-------- -------
Balance, March 31, 1999 3.98 $1.33 to $6.00 101,240 108,760
======== =======
</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 72,224 shares are exercisable at March 31, 1999.
In June 1996, the Company adopted the 1996 Outside Directors'
Stock Option Plan (the "Directors' Plan"), which provides for the granting of
options to purchase common stock of the Company to nonemployee directors of the
Company. The Directors' Plan authorizes the issuance of a maximum of 90,000
shares of common stock.
The Directors' Plan is administered by the Board of Directors.
Under the Directors' Plan, each nonemployee director elected after April 1, 1996
will receive options for 3,000 shares of common stock upon election. To the
extent that shares of common stock remain available for the grant of options
under the Directors' Plan, each year on April 1, commencing April 1, 1997, each
nonemployee director will be granted an option to purchase 1,800 shares of
common stock. The exercise price per share for all options granted under the
Directors' Plan will be equal to the fair market value of the common stock as of
the date preceding the date of grant. All options vest in three equal annual
installments beginning on the first anniversary of the date of grant. Each
option is for a ten-year term, subject to earlier termination in the event of
death or permanent disability. Options for an aggregate of 6,400 shares are
exercisable at March 31, 1999.
A summary of activity within the 1996 Plan is a follows:
<TABLE>
<CAPTION>
Weighted
Average Price Option Price
Per Share Per Share Granted Available
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Balance, April 1, 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 to $5.55 18,000 72,000
Granted 4.00 $4.00 9,000 (9,000)
Terminated 4.70 $4.00 to $5.55 (6,600) 6,600
------- -------
Balance, March 31, 1999 4.46 $4.00 to $5.55 20,400 69,600
======= =======
</TABLE>
F-17
<PAGE>
8. Stockholders' Equity: (Cont'd)
b. Incentive stock option plan (Cont'd)
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, 1999. These
options were granted in addition to those outstanding under the 1991 Plan and
the Directors' Plan. Options for an aggregate of 28,920 shares are exercisable
at March 31, 1999.
The following table summarizes significant ranges of all
outstanding and exercisable stock options at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------------
Weighted Weighted- Weighted-
Ranges of Average Average Average
Exercise Remaining Exercise Exercise
Exercise Prices Shares Life in Years Price Shares Price
--------------- ------ ------------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.33 34,200 3.78 $ 1.33 34,200 $ 1.33
$3.33 to $4.40 63,740 5.75 3.97 27,404 3.67
$5.55 to $6.10 55,500 4.76 5.87 45,940 5.78
</TABLE>
The weighted-average option fair value on the grant date was $1.02
and $1.11 for options issued during the years ended March 31, 1999 and 1998.
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 per share would be adjusted to the pro forma amount indicated below:
<TABLE>
<CAPTION>
Year Ended
March 31,
------------------------------------------------
1999 1998
------------------ ---------------
<S> <C> <C>
Net income:
As reported $ 1,107,401 $ 311,610
Pro forma 1,100,014 309,280
Net income per common share - basic:
As reported $.33 $.09
Pro forma .33 .09
Net income per common share - diluted:
As reported $.33 $.09
Pro forma .33 .09
</TABLE>
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 using the Black-Scholes pricing model and 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 1999 and 1998.
9. Other Income:
For the year ended March 31, 1999, the Company recorded approximately
$512,000 of other income. This amount primarily consists of revenues from the
sale of a management contract in the amount of $150,000 and the forfeiture of
deposits related to the sale of certain properties which amounted to
approximately $218,000. In addition, the Company received a workers'
compensation refund and a fire insurance recovery which aggregated approximately
$82,000.
F-18
<PAGE>
10. Business Segments:
The Company owns and operates its three residential retirement centers
in Michigan to provide living and extended care services to the elderly. In
addition to a room, the Company provides significant personal services,
including, among other things, meal preparation and health care. The Company's
management provides the requisite day-to-day supervision and administration
services to various affiliates and nonaffiliated companies. Losses and
recoveries have been stated separately.
Intersegment revenues are not significant. Operating profit is defined
as sales and other income directly related to a segment's operations, less
operating expenses.
The following summaries set forth certain financial information
classified as described above:
<TABLE>
<CAPTION>
Year Ended
March 31,
------------------------------------
<S> <C> <C>
1999 1998
----------- -----------
Revenues:
Resident centers $ 7,709,261 $ 7,468,096
Management and development companies 1,186,147 305,500
----------- -----------
$ 8,895,408 $ 7,773,596
=========== ===========
Operating profits:
Resident centers $ 1,018,579 $ 1,012,106
Management and development companies 362,584 (784,774)
(Loss) recovery on advances to affiliates (226,425) 351,396
----------- -----------
Income from operations $ 1,154,738 $ 578,728
=========== ===========
</TABLE>
Corporate assets are principally cash, and corporate office equipment,
furnishings and related assets.
March 31,
--------------------------
1999 1998
----------- -----------
Identifiable assets are as follows:
Retirement centers $ 2,835,567 $ 3,093,815
Management and development companies 2,752,836 1,395,170
Corporate 284,856 139,912
----------- -----------
$ 5,873,259 $ 4,628,897
=========== ===========
11. Subsequent Events:
The Company has listed one of their assisted living facilities with a
real estate broker.
In June 1999, the Company was awarded their bid to purchase property
located in Mineola, New York for approximately $2.7 million.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 430,711
<SECURITIES> 0
<RECEIVABLES> 543,042
<ALLOWANCES> 91,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,804,219
<PP&E> 7,277,849
<DEPRECIATION> (4,292,197)
<TOTAL-ASSETS> 5,873,259
<CURRENT-LIABILITIES> 1,814,073
<BONDS> 0
<COMMON> 33,133
0
0
<OTHER-SE> 2,572,753
<TOTAL-LIABILITY-AND-EQUITY> 5,873,259
<SALES> 8,895,408
<TOTAL-REVENUES> 8,895,408
<CGS> 7,740,670
<TOTAL-COSTS> 7,740,670
<OTHER-EXPENSES> 33,449
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (521,173)
<INCOME-PRETAX> 1,188,187
<INCOME-TAX> 80,786
<INCOME-CONTINUING> 1,107,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,107,401
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
</TABLE>
