SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999 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 0-27108
REGENT ASSISTED LIVING, INC.
(Name of registrant as specified in its charter)
Oregon 93-1171049
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
121 SW Morrison Street, Suite 1000
Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (503) 227-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 27, 2000: $1,027,000
State the number of shares of Common Stock outstanding at March 28, 2000:
4,507,600
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
- -------- ------------------
Proxy Statement for 2000 Annual Part III
Meeting of Shareholders
TABLE OF CONTENTS
Item of Form
10-K Page
----
PART I
Item 1 - Description of Business 1
Item 2 - Description of Property 13
Item 3 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 4(a) - Executive Officers of the Registrant 16
PART II
Item 5 - Market for Common Stock and Related Stockholder Matters 19
Item 6. Selected Consolidated Financial Data 20
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation 22
Item 7(a) Quantitative and Qualitative Disclosre About Market Risk 30
Item 8 - Financial Statements and Supplementary Data 31
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31
PART III
Item 10 - Directors, Executive Officers and Control Persons;
Compliance with Section 16(a) of the Exchange Act 32
Item 11 - Executive Compensation 32
Item 12 - Security Ownership of Certain Beneficial Owners and Management 32
Item 13 - Certain Relationships and Related Transactions 32
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33
SIGNATURES 37
PART I
Item 1. Description of Business
Overview and Background
- -----------------------
The Company is an owner, operator, and developer of private-pay
assisted living communities including stand-alone Alzheimer's care communities.
Assisted living is part of a spectrum of long-term care services that provide a
combination of housing, personal services, and health care designed to respond
to elderly individuals who require assistance with activities of daily living in
a manner that promotes maximum independence. The Company's senior management,
which includes two of the assisted living industry's pioneers, has extensive
experience in the acquisition, development, and management of assisted living
communities.
The Company continues to enhance its position as a leading provider of
assisted living services in the western United States. During 1999, the Company
increased its revenues by 77.8 percent to $54.1 million and increased resident
census at its communities by 27.8 percent. In 1999, the Company increased its
number of assisted living communities from 25 to 29, or 16 percent, and
increased its number of beds owned, leased, or managed by 252 to 2,867.
Furthermore, during 1999, the Company closed approximately $38.3 million in
project-based financings.
The Company believes that high-quality assisted living services can be
more efficiently and profitably provided in its prototypical communities than in
existing facilities that could be converted to use as an assisted living
community. Thus, in 1996 the Company began an aggressive expansion program of
acquiring sites in select markets in the western United States and beginning the
development and construction of new communities. This program resulted in
dramatic increases in both the number of communities and beds under operation in
both 1997 and 1998. Furthermore, during that time period, the Company continued
making selective acquisitions of existing communities that complement the
Company's planned development of prototypical communities. The Company
internally developed each of the four communities it opened in 1999.
As of March 28, 2000, the Company operated a total of 3,055 beds.
Furthermore, at that time, four additional communities comprising 465 beds were
under construction. The Company has also entered into an agreement to manage a
newly developed 104-bed community. When these communities are completed, the
Company will then operate 3,624 beds. Additionally, the Company has four sites
in various stages of development.
Assisted Living
- ---------------
The assisted living industry has evolved over the past 15 years in
response to pressure from the public to contain spiraling medical and other
health care-related costs and because of the opportunity assisted living
provides to allow senior citizens to "age in place" in a residential
environment. Assisted living offers a combination of housing and personalized
health and support services for senior citizens who cannot live completely
independently but who do not require the 24-hour medical care provided by a
skilled nursing facility. Skilled care typically also costs much more than that
provided at an assisted living community.
1
Generally, assisted living residents require higher levels of care than
residents in congregate care but lower levels of care than patients in skilled
nursing facilities. In addition to housing and meals (the services commonly
provided in a congregate care facility), assisted living communities provide a
range of personal care and support services designed to meet the individual
needs of residents, including instrumental activities of daily living ("IADLs")
such as laundry and transportation services. Additionally, assisted living
residents often require assistance with activities of daily living ("ADLs") such
as bathing, dressing, incontinence care and taking medications, but generally
are not bedridden and can often provide various degrees of self-care. Assisted
living seeks to encourage residents to live as independently as possible,
emphasizing quality care while treating residents with dignity and respect.
Business Strategy
- -----------------
The principal elements of the Company's business strategy are described
below.
Personalized Quality Care. The Company's primary focus is to provide
high-quality personalized care for each resident. The Company seeks to provide a
wide range of high-quality services and care tailored to the needs of its
residents in an attractive, home-like environment. The Company has established
quality assurance programs to ensure that high-quality services are being
provided to every resident in its communities. These programs include periodic
surveys of the residents, their families, and community staff and the formation
at each community of a resident council, consisting of residents and their
families, to assist in evaluating the services provided to residents. The
Company provides a toll-free number that families of residents can use to make
recommendations or register complaints and frequently includes comment cards
with resident billings. The Company also attempts to achieve high-quality care
through the establishment of operational standards and performance goals. These
standards and goals apply to each of the Company's communities and relate to
such matters as health services, food service, housekeeping, maintenance, and
administration.
Dementia-Specific Care. A significant component of the Company's
business is providing services and activities required by residents afflicted
with Alzheimer's disease and other age-related dementia. Each of the Company's
internally developed assisted living communities is designed with a special
"Kingswood" unit located in a separate wing or area of the community that has
its own dining facilities, resident lounge areas, and specially trained staff.
The physical separation of the dementia-specific care unit from the rest of the
community enables dementia residents to receive the unique care they require
with a minimum of disruption to other residents. The Company has also developed
and operates its "Regent Court" stand-alone Alzheimer's care communities that
are specially designed to serve residents with dementia-care needs.
Multiple Levels of Care. By providing graduated levels of care to
residents based on individual need, the Company permits its residents to "age in
place" and retains residents who might otherwise move to other facilities, which
assists the Company in maintaining its occupancy levels at its larger
communities. The Company believes that this high level of personalized quality
care also creates satisfied residents who, along with their families, are key
sources of referrals for the Company.
2
High Quality and Private Payor Focus. The Company seeks private pay
residents to the greatest extent possible. Private pay residents occupied
approximately 96 percent of the Company's units at the end of 1999. The Company
believes that caring for private pay residents is more profitable because the
Company is able to charge market rates for its extensive, high-quality services
without regard to government-imposed cost containment pressures. In 1999 the
Company generated $28,083 of revenue per occupied bed. The Company will continue
to focus its development efforts in communities with median incomes sufficient
to support the Company's full service approach to assisted living.
Professional Management. The Company has developed and uses quality
assurance programs and operating standards to maintain quality and control
costs. This approach is coupled with a decentralized management structure under
which local managers and care coordinators responsively address residents'
individual needs. The relatively larger size of the Company's communities also
permits the Company to recruit and retain more highly paid, experienced managers
and professional staff.
Education and Training. The Company believes that education, training,
and development increase the effectiveness of its employees which in turn
generates enhanced employee and resident satisfaction and decreases employee and
resident turnover. Managers, on-site marketing directors, and other
administrative personnel receive periodic training both at the community and at
the Company's corporate office. The Company, through ongoing in-service
training, maintains a highly trained staff that is responsive to the changing
needs of the Company's residents.
Marketing. The Company's marketing strategy focuses on enhancing the
reputation of the Company's communities and creating awareness of the Company
and its services among potential referral sources. The Company also markets its
services through doctors and other professionals by direct mail and other
methods. The Company's experience is that satisfied residents, resident
families, and professional health care providers are the most important sources
of referrals for the Company. In addition, the Company emphasizes community
outreach through such programs as adult day care and respite care. These
programs permit individuals to use the Company's services on a temporary basis,
which provides the Company with an additional source of revenue and increases
awareness of the Company's communities among potential full-time residents.
Growth and Development. The Company intends to increase the number of
communities it operates primarily through the development of new communities
based upon the Company's three prototypes. See "Principal Product Lines." The
Company will also undertake acquisitions when it locates suitable properties;
however the Company believes that because there are few acceptable stand-alone
assisted living communities, such acquisitions will continue to be limited.
Nonetheless, the Company may pursue opportunistic acquisitions of congregate
care or other facilities that are suitable for conversion to its operating
model. The Company may also in the future acquire or enter businesses ancillary
to the operation of assisted living communities, such as a retail pharmacy or
rehabilitation therapy business.
3
Principal Services
- ------------------
Services provided to residents of the Company's communities are
designed to respond to their individual needs; promote independence, dignity and
choice; and improve their quality of life. Services are available 24 hours a day
to meet both anticipated and unanticipated needs. General services include the
provision of three meals per day, laundry, housekeeping, transportation,
activities, and medication maintenance. Available support services include
personal care and routine nursing care, social and recreational services,
transportation, and other special services needed by the resident. Personal care
includes services such as bathing, dressing and grooming, as well as assistance
with personal hygiene, ambulation, and eating. Other services include assistance
with banking, grocery shopping and pet care.
Each of the Company's communities offers residents services on a
packaged basis. These packages of services are based on three progressively more
comprehensive levels of care and two additional levels of care for
dementia-specific care residents. This approach permits the Company to charge
residents for graduated levels of care. Each level of care is priced to reflect
all services provided at that level. In addition, this approach simplifies the
billing process, which permits residents to plan their personal budgets with
confidence. As the required level of care increases, the Company's revenues per
resident also increase.
4
The following table summarizes the services associated with each level
of care provided by the Company:
Graduated Levels of Care
Assisted Living
Level One o Minimal assistance with ADLs and IADLs
o Services include
- Meals
- Housekeeping and laundry
- Personal care
- Scheduled transportation
Level Two o All Level One services plus moderate
assistance with ADLs and IADLs
- Direct hands-on assistance as needed for:
- Medical treatments (e.g., injections)
- Dressing
- Other daily activities
Level Three o All Level Two services plus routine hands-on
assistance with ADLs and IADLs
o Personal care services include
- Incontinence care
- Bathing and dressing
- Mobility and/or ambulation assistance
o Close supervision as required for residents with
special behavioral conditions
Dementia-Specific Care
Level One o Requires assisted living services
o Direct hands-on assistance, behavioral
intervention and redirection as needed
Level Two o All dementia-specific care Level One services,
plus routine hands-on assistance with ADLs and
personal care, including
- Incontinence care
- Bathing and dressing
- Mobility and/or ambulation assistance
o Increased frequency of certain services and
increased supervision
The Company estimates that, of the current residents in its
communities, 8.8 percent do not require assistance with activities of daily
living, 37.6 percent require assisted living level one care, 20.9 percent
require assisted living level two care, 11 percent require assisted living level
three care, 13.6 percent require dementia-specific care level one care and 8.1
percent require dementia-specific care level two care. The Company charges a
variety of rates depending upon the level of care required and whether the
resident chooses to live alone or in a companion suite.
5
Geographic location, local wages and operating costs also affect the Company's
rates. As of December 31, 1999, the Company charged the following range of
effective monthly rates at its communities:
Low High
Assisted Living ------ ------
---------------
Level One $1,595 $3,345
Level Two $1,795 $3,745
Level Three $1,995 $4,145
Dementia-Specific Care
----------------------
Level One $2,695 $5,495
Level Two $2,995 $5,895
Residents are also required to pay the Company a nonrefundable community fee
prior to admission and, in some locations, also a refundable security deposit.
Principal Product Lines
- -----------------------
The Company currently provides its services in assisted living
communities including stand-alone Alzheimer's care communities. The existing
communities offer numerous services and activities designed to meet the varying
needs of the residents, including the unique services required by residents
afflicted with Alzheimer's disease or other age-related dementia
("dementia-specific care"). This community concept is generally identified by
the Company as a "Regent" community and is the genesis of the Company's
prototypical community. The Company currently operates seventeen Regent
communities. The Company developed a "Regent House" model, a smaller community
than the "Regent", in order to meet differing market demands. The Regent House
maintains the operational efficiencies and resident and service focus of the
Regent model. The first Regent House is currently under construction. The
Company also developed its "Regent Court" community at which it provides
services solely to residents with dementia-specific care needs. The Company
currently operates five Regent Courts.
(i) Regent
The "Regent" is the Company's primary stand-alone
assisted living community model. This prototype design has
been developed and refined through the Company's experience as
an operator of its early assisted living communities, which
also contain a significant portion of the important attributes
of the Regent prototype. Use of this prototype will continue
to allow the Company to control development costs and maintain
efficiency in development and operations.
The prototypical Regent community is a stand-alone
assisted living community containing from 90 to 135 assisted
living beds, with between 10 and 20 percent of the total
generally comprising the Kingswood Alzheimer's unit. A
"stand-alone" assisted living community is a community devoted
entirely to assisted living, as distinct from other models
that may offer assisted living units in a separate wing or
floor as well as other forms of long-term care such as
congregate care or skilled nursing care.
6
Regent communities generally range in size from
60,000 to 86,000 square feet and are generally built on
parcels ranging in size from three to six acres. The buildings
are two or three stories, depending upon site restrictions,
and of wood frame, fire-rated construction. The exterior
features are designed to be compatible with the predominant
architectural designs of the area and with an emphasis on a
residential versus institutional appearance. Individual units
range in size from 320 square feet for a studio to 450 square
feet for a one-bedroom apartment. Two-bedroom units are
approximately 755 square feet in size. In some locations the
Company has developed a small number of 900 square foot
two-bedroom cottages next to the community for occupancy by a
spouse of a community's resident or for those who do not
require the more intensive services offered within the
community.
(ii) Regent House
In addition to the larger Regent prototype, the
Company has developed a smaller version for markets in which
there currently is less demand for assisted living services.
The smaller "Regent House" community will be approximately
40,000 to 55,000 square feet and be comprised of between 72
and 90 beds, generally with at least 22 beds comprising the
Kingswood Alzheimer's unit. The community is designed with the
same operational efficiencies and resident living and service
considerations as the larger model, including similar sized
living units, but with generally smaller lounge, dining, and
recreation areas to reflect the lower resident population.
The interior layout of each Regent House is designed
to promote efficient delivery of services and resident
independence. Circulation is organized around a core area on
the ground level which contains the kitchen and common dining
area, administrative offices, a commercial laundry, a private
dining room, lounge, day room and public restrooms. Elevators
are conveniently located for easy access to all common areas
and resident units. Each Regent House community is expected to
contain a Kingswood Alzheimer's unit which is designed to
house and address the needs of residents afflicted with
Alzheimer's disease and other age-related dementia. The
dementia-specific care units are located in a separate wing or
area of the community and have their own dining communities,
resident lounge areas, and specially trained staff. The
physical separation of the Kingswood unit from the rest of the
community enables dementia-specific care residents to receive
the unique care they require with a minimum of disruption to
other residents.
(iii) Regent Court
The "Regent Court" is a specially designed community
solely for residents afflicted with Alzheimer's disease or
other age-related dementia. The typical Regent Court resident
will have cognitive difficulties, impaired motor functions,
may be wander prone, and may have incontinence. Accordingly,
as with the Kingswood unit of the Regent community, these
communities will be much smaller than the Regent or Regent
House, typically 22,000 to 26,000 square feet in a one-story
configuration, and typically will service up to 48 residents
within its 24 units.
7
The Regent Court's 24 units are divided into four
"neighborhoods" of equal size. Both the overall layout and
that of each neighborhood are designed to provide an ideal
therapeutic living environment and promote the efficient
delivery of services. Generally, two neighborhoods are
reserved for those residents with a high level of function and
two for those with lower levels of function. The community is
designed in this manner with the primary goal of providing
high-quality care to the dementia-specific care needs of
residents who require personalized care while providing for
maximum efficiencies of operation. Because the residents
generally are easily agitated and confused, organizing care
within separate neighborhoods permits the Company to assign
staff to a specific neighborhood in caregiver clusters. This
permits the Company to minimize each resident's exposure to
multiple persons and allows staff to more thoroughly learn
about and provide for a resident's specific needs. Each
neighborhood is connected to the others and to the main
administrative area by a series of hallways, walkways, and a
courtyard. Furthermore, due to the propensity of the Regent
Court's residents to wander, exterior pathways are secured
with fences to provide maximum independence to the residents
while also insuring their safety. Some Regent Courts also
feature covered walkways to permit residents opportunities for
exercise on inclement days.
Development of Additional Communities
- -------------------------------------
The Company plans to continue its growth primarily through construction
of new Regent, Regent House, and Regent Court prototype communities in selected
markets in the western United States. In March 2000, the Company began operating
its fifth Regent Court community. During the remainder of 2000, the Company
plans to begin operating two Regent communities, both of which will be operated
under long term leases. In addition, the Company has entered into an agreement
to manage a newly developed 104-bed community scheduled to commence operation in
June 2000. Upon completion of these transactions, the Company will have a total
of approximately 3,428 beds under operation by December 31, 2000. The Company is
currently constructing one Regent and one Regent House communities that are
scheduled to commence operation during the first quarter of 2001 and which
comprise approximately 196 beds. Furthermore, during 2000, the Company plans to
commence construction on up to four additional communities comprising
approximately 411 beds.
The Company surpassed its initial development goal, expressed at the
time of its initial public offering, to develop twelve Regent communities by
December 31, 1998. However, for several reasons, the Company will not realize
its subsequent, restated, goal of opening an additional 1,250 beds by the end of
the second quarter of 2000 and instead expects to achieve that goal by the end
of the first quarter of 2001. The primary reasons for this delay are the
continued tightening in the credit and equity markets and the related slowing of
the Company's development efforts.
The Company owns four parcels of undeveloped real property on which it
plans to construct assisted living communities, has obtained the right to
purchase one additional parcel, and is working with a third party developer on
an additional site. Assuming all necessary governmental approvals are obtained,
the Company could construct an additional six communities on these sites. The
Company has completed various degrees of development activities on each of these
sites.
8
The Company continues to pursue new development and joint venture
opportunities, in addition to third party management arrangements. The Company
is targeting areas in eleven western states with favorable demographics in which
to accomplish its growth plan. The Company believes that each site acquired or
under consideration would accommodate one of the Company's prototype assisted
living communities and fit well with the Company's growth strategy.
The Company's experience is that the development time for a prototype
community ranges from approximately six months to one year, although it can take
longer in some cases. The Company's average construction time for Regent
communities is between eleven and thirteen months and between eight and ten
months for Regent Court communities. The Company expects the average
construction time for Regent House communities to be ten to twelve months. In
general, the Company obtains pre-opening deposits on approximately 25 percent of
its units. The Company's experience is that it takes, on average, approximately
18 months after a community moves-in its first resident for the community to
achieve break even cash flow after satisfying its debt service or lease payment.
The cost to construct prototypical communities varies from site to
site. The Company's average cost per residential unit for Regent communities
developed since 1997 is approximately $75,000 per residential unit and the
Company expects this cost to increase to approximately $80-85,000 for future
construction. The Company's average cost per residential bed is $85,000 for its
Regent Court communities. The Company expects that the average construction cost
per residential unit in its Regent House communities will be approximately
$90,000.
The Company's ability to achieve its development plans will depend upon
a variety of factors, many of which are beyond the Company's control.
Furthermore, there is also no assurance that the Company will elect to acquire
the site it has under option or that the Company will be able to develop
successfully any of the sites its has acquired or will in the future acquire.
See "Forward Looking Statements."
The Company's Markets. In evaluating a prospective development project,
the Company will consider primarily the size of the population, income and age
demographics, strength of the market demand, and the ability to maximize the
efficiency of its management resources in a specific market or "cluster." The
Company intends to locate its communities in metropolitan areas of 50,000 or
more people with a high percentage of affluent elderly persons and to select
sites so that it can strategically place multiple communities within a several
hundred mile radius, creating a cluster of communities. With the development of
the Regent House community, the Company can locate a larger number of
communities within a region and thereby obtain greater operating efficiencies.
Furthermore, due to the smaller size of the Company's Regent Court, it is
capable of being developed in markets of different sizes depending upon the
demand for Alzheimer's care. Other factors that will be considered in the site
selection process include the level of competition, the local labor market, the
state and local tax structure, and the state and local legislative and
regulatory environment.
9
Competition
- -----------
Providers of assisted living housing and services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the communities, services offered, family and physician
preferences, and location. The Company's current and potential competitors
include national, regional, and local operators of long-term care residences,
rehabilitation hospitals, extended care centers and skilled nursing facilities,
assisted and independent living centers, retirement communities, home health
agencies and similar institutions. The Company believes that assisted living is
a distinct and rapidly growing segment within the long-term care industry and
that it is distinguishable from other long-term care alternatives on the basis
of price, physical appearance, and range of services offered. Moreover, the
Company believes its communities are distinguishable from assisted living
facilities that do not cater primarily to private pay residents. Therefore,
although some of the Company's competitors have significantly greater resources
than those of the Company, the Company believes that it competes favorably in
all of the markets in which it operates due to the quality of its care and
services, operating systems, community designs, and community locations in the
market.
Government Regulation
- ---------------------
The Company's assisted living communities are subject to regulation and
licensing by local and state health and social service agencies and other
regulatory authorities. Although regulatory requirements differ from state to
state, these requirements generally address, among other things: personnel
education, training and records; staffing levels; community services, including
administration and assistance with self-administration of medication; community
design and specifications; resident characteristics; food and housekeeping
services; emergency evacuation plans; and resident rights and responsibilities.
In order to qualify as a state licensed facility eligible to receive Medicaid
funding, the Company's communities must comply with additional regulations in
these areas. The Company's communities are also subject to various zoning
restrictions, local building codes and other ordinances, including fire safety
codes. These requirements vary from state to state and are monitored in varying
degrees by state agencies. Licenses have been obtained for the Company's current
communities in Arizona, California, Idaho, Nevada, New Mexico, Oregon, Texas,
Washington, and Wyoming. The Company expects that it will be able to obtain
licenses in other states as required.
Assisted living communities are subject to less regulation than other
licensed health care providers, but more regulation than congregate care or
independent living retirement residences. However, the Company anticipates that
states and the federal government will likely impose additional regulations and
licensing requirements. Currently, certain states require licensees to provide
the assisted living services offered by the Company. Certain states also require
Certificates of Need for assisted living facilities, but this is not a
requirement in states where the Company currently conducts business. There can
be no assurance that administrative or judicial interpretation of existing laws
or regulations or enactment of new laws or regulations will not have a material
adverse effect on the Company's results of operations or financial condition.
The Company believes that its current communities are in substantial compliance
with all applicable regulatory requirements.
Similar to other health care facilities, assisted living communities
are subject to periodic survey or inspection by governmental authorities. From
time to time, in the ordinary course of business, the Company receives
deficiency reports which it reviews to take appropriate corrective action.
Although most inspection deficiencies are resolved through a plan of correction,
the
10
reviewing agency typically is authorized to take action against a licensed
community where deficiencies are noted in the inspection process. This action
may include imposition of fines, imposition of a provisional or conditional
license, suspension or revocation of a license, or other sanctions. If the
Company fails to comply with applicable requirements, its business and revenues
could be materially and adversely affected. To date, none of the deficiency
reports received by the Company has resulted in a suspension, fine, or other
disposition that has, or may have, a material adverse effect on the Company's
revenues.
Although only a small portion of the Company's revenues are derived
from the Medicaid program, the Company is subject to Medicaid fraud and abuse
laws which prohibit any bribe, kickback, rebate or remuneration of any kind in
return for the referral of Medicaid patients, or to induce the purchasing,
leasing, ordering, or arranging of any goods or services to be paid for by
Medicaid. Violations of these laws may result in civil and criminal penalties
and exclusions from participation in the Medicaid program. The Company believes
it is in substantial compliance with all applicable Medicaid laws.
Employees
- ---------
As of December 31, 1999, the Company employed approximately 1,328 full
time and 576 part-time employees and the corporate offices employed 48
individuals full time and 1 part-time. None of these employees is represented by
any labor union. The Company manages one community at which the owner employs
members of a labor union. Management believes that its employee relations are
good.
Trademarks
- ----------
The Company has federally registered its "Regent," "Regent Court,"
"Kingswood," and "Regent House" trade names in addition to the Company's logo.
Forward Looking Statements and Risks Affecting the Company
- ----------------------------------------------------------
The information set forth in this report regarding the Company's
acquisition of sites for development, the Company's development, construction
and opening of new assisted living communities, the operation and performance of
the Company's new assisted living communities, the Company's plans to develop,
construct and operate new communities, and the ability of the Company's newly
developed communities to compete for residents constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
are subject to the safe harbor created by that section. From time to time,
information provided by the Company, or statements made by the Company's
management, may contain other forward-looking statements. The following
important factors, among others, could cause the Company's actual results to
differ materially from those expressed in the Company's forward-looking
statements contained in this report and presented elsewhere by management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date they are made. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report.
There is no assurance that the Company will be able to achieve its plan
to develop, construct, and open the stated number of communities by the end of
any specified period, or that any newly opened community will be profitable. The
Company's development, construction and opening of new assisted living
communities are subject to the risk that the Company will be
11
unable to obtain, or will experience delays in obtaining, necessary zoning, land
use, building, occupancy and other required governmental permits and
authorizations. The Company's opening of new assisted living communities on
schedule is also subject to the risk that the Company or its contractor will
experience delays in the construction of one or more communities.
The achievement by the Company of its planned growth is subject to a
number of financing risks. The Company expects to incur significant debt and
lease obligations in connection with financing its growth plan. The Company
currently does not have commitments for all of the financing necessary to
finance its growth plan. If the Company were unable to obtain additional
required financing, or if such financing were not available on acceptable terms,
the Company believes that its plan to commence construction on additional
communities by the end of 2000 would likely be delayed or curtailed.
Furthermore, if the Company is unable to generate sufficient cash flow from
operations to satisfy required debt and lease payments, the Company will be
required to obtain additional financing to satisfy those obligations.
The Company's growth strategy is subject to the risk that lease-up and
occupancy rates at newly developed communities may not be achieved or sustained
at expected levels. This could result at a particular community for a number of
reasons, including competition from other nearby providers of long-term senior
care, the failure of management to assess accurately the demand for long-term
care in a particular market, and the failure of the Company's prototypical
communities to be accepted in a particular market. If expected occupancy levels
are not achieved within the expected time frame, the Company may not be able to
repay or refinance a short-term construction loan obtained to construct the
relevant community. If occupancy rates at newly-developed communities are not
achieved and sustained at expected levels, the Company will experience greater
than anticipated operating losses in connection with the opening of new
communities and the Company's need for additional financing to meet its growth
plans will increase.
The Company's growth strategy is also subject to the risk that
development and construction costs for new communities may exceed original
estimates. The Company's agreements with its contractors generally provide for
the contractor to construct a community for a fixed price, although anticipated
development costs and approved construction change orders may increase the
overall cost of any community. These additional costs are generally borne by the
Company and would accordingly increase the Company's capital requirements and
compel the Company to raise additional financing, beyond what is currently
anticipated, in order to achieve its growth plans.
The Company's planned growth will place increasing pressure on the
Company's management controls and require the Company to locate, train,
assimilate, and retain additional community managers and support staff. There is
no assurance that the Company will be able to manage this growth successfully.
The failure of the Company to manage its planned growth successfully could have
a material adverse effect on the financial performance of the Company and
increase the Company's need for additional financing.
12
Item 2. Description of Property
Current Communities. The table below sets forth certain information
regarding the Company's communities as of December 31, 1999:
Regent
Operations
Community Location Commenced Units(1) Beds(2) Interest
- --------------------- ------------ --------- -------- ------- --------
Oregon
Park Place Portland 1986 112 112 Lease(3)
Regency Park Portland 1987 122 136 Lease
Regent Court Clackamas 1999 24 48 Lease
Sheldon Park Eugene 1998 105 117 Lease
Washington
Northshore House Kenmore 1998 85 92 Manage(4)
Regent Court Kent 1999 24 48 Manage(5)
Sterling Park Redmond 1990 154 175 Lease
California
Laurel Springs Bakersfield 1998 111 124 Own
Orchard Park Clovis 1998 112 124 Lease
Regent Court Modesto 1999 24 48 Own(6)
Summerfield House Vacaville 1998 109 122 Own
Sun Oak Citrus Heights 1997 40 50 Manage
Sunnyside Court Fremont 1998 39 45 Lease
Sunshine Villa Santa Cruz 1990 106 124 Lease(7)
The Palms Roseville 1998 93 104 Lease
Villa Serra Salinas 1998 150 150 Manage
Willow Creek Folsom 1997 98 113 Lease
Idaho
West Wind Boise 1997 48 51 Own(8)
Willow Park Boise 1997 106 120 Lease
Nevada
Mira Loma Henderson 1998 113 126 Lease
New Mexico
Sandia Springs Rio Rancho 1998 107 120 Lease
Texas
Hamilton House San Antonio 1997 111 123 Lease
Parmer Woods Austin 1998 114 130 Lease(9)
Arizona
Canyon Crest Tucson 1998 116 132 Lease
Desert Flower Scottsdale 1999 102 108 Manage(10)
Regent Court Scottsdale 1998 24 44 Lease
13
Wyoming
Aspen Wind Cheyenne 1998 77 77 Lease
Meadow Wind Casper 1998 51 51 Lease
Spring Wind Laramie 1998 53 53 Lease
---- ----
Totals: 2,530 2,867
===== =====
In January 2000, the Company assumed management of a 136-unit, 140-bed
community in Oakland, California and in March 2000 the Company opened a 24-unit,
48-bed Regent Court community in Corvallis, Oregon which it manages for a joint
venture in which the Company owns a 40 percent interest.
As of March 28, construction had commenced on the following four communities:
Scheduled
Community Location Opening Units(1) Beds(2) Interest
California
Autumn Park Merced 1st quarter 2001 72 83 Own(11)
West Covina West Covina 4th quarter 2000 130 142 Lease
Gardens
Arizona
Citrus Park Mesa 3rd quarter 2000 111 127 Lease
Utah
Birch Creek South Ogden 1st quarter 2001 104 113 Own
--- ---
417 465
=== ===
- ----------
(1) A "unit" is a single- or double-occupancy studio or one or two bedroom
apartment.
(2) "Beds" reflects the actual number of beds used by the Company for
census purposes, which in no event is a number greater than the maximum
number of licensed beds permitted under the community's license.
(3) The Company completed a lease-acquisition of Park Place during the
second quarter of 1998. The Company previously managed this community.
(4) The Company owns a 50 percent interest in a joint venture which owns
the Kenmore community.
14
(5) The Company owns a 10 percent interest in a joint venture which owns
the Kent community.
(6) The Company owns a 55 percent co-tenancy interest in the Modesto
community.
(7) The Company sold the Santa Cruz community in a prior period pursuant to
a sale-leaseback transaction and is accounted for as a capital lease.
(8) The Company purchased West Wind in June 1999. Previously, this
community was operated pursuant to a lease arrangement.
(9) The Company completed a sale-leaseback transaction of its Austin
community in February 1999.
(10) This community was sold to the Company's Chairman and Chief Executive
Officer in September 1999 pursuant to a sale-manageback transaction and
is accounted for under the deposit method.
(11) The Company owns a 75 percent interest in a joint venture which owns
the Merced community.
Each community for which the Company's interest is noted as "leased,"
except for Regency Park and Sterling Park, is leased from a third party pursuant
to a long-term lease providing for an initial term of 10 to 15 years from the
inception date. Each lease provides for extensions that may permit the lease to
continue for a total period of between 25 and 35 years from the inception date.
The Company leases Regency Park and Sterling Park from entities
controlled by Mr. Bowen. Each lease expires in 2005, has annual base rent
payments in addition to percentage rent payments equal to 10 percent of the
Company's annual gross revenues from operations in excess of the gross revenues
for each property in calendar year 1995, and contains three, ten-year renewal
options and a right of first refusal if the lessor proposes to sell the
property. Under the leases, the Company is responsible for, among other costs,
maintenance, property taxes, capital expenditures and direct operating costs
related to the communities. The base yearly lease payments are $1,271,000 and
$1,486,250 for Regency Park and Sterling Park, respectively. The payment terms
of the leases were based on the fair market values of the underlying properties,
as determined by independent appraisals, upon the inception of the leases. The
aggregate annual base rent payments under each lease, when expressed as a
percentage of the appraised value of that property, reflects a lease rate of
approximately 10.25 percent, which the Company believes was typical for leases
in the health care industry upon the inception of each lease. In obtaining the
consent of the Regency Park ownership entity's lender to the Company's lease on
that community, the Company agreed that not less than 25 percent of its
outstanding stock will be owned by Mr. Bowen and that Mr. Bowen will continue to
control the management of the Company.
Development Sites. The Company continues to evaluate opportunities to
acquire additional sites in several western states. In considering a prospective
site for development of a Regent or Regent House community, the Company
generally seeks a 3 to 6 acre parcel of undeveloped land located within a
metropolitan area of 50,000 persons or more. A site of 1.5 to 3.0 acres is
generally acquired for a Regent Court community. The Company generally also
seeks relatively flat parcels of land zoned for multi-family residences with
reasonable access to
15
utilities and streets. In the course of its evaluation, the Company generally
will conduct a geotechnical study of a site to determine if the soils have
proper compaction for the Company's development. The Company conducts "level
one" environmental assessments of each new property prior to acquisition.
In addition to the land for each of the communities under construction,
as of March 28, 2000, the Company has entered into an agreement to manage a
104-bed community being developed by a third party and has four additional new
communities under varying stages of development. These communities will be
located in Elk Grove, Redlands and Visalia, California; and Salt Lake City,
Utah. If all four communities are developed, total operations of the Company
will increase by approximately 411 beds to a total of approximately 4,035 beds.
The Company continues to pursue its primary strategy of developing new
communities and is therefore engaged in negotiations to acquire several
additional sites and is pursuing joint venture opportunities with parties who
control parcels of land in strategic markets. There is no assurance that the
Company will elect to acquire the site it has under option or that the Company
will be able to develop successfully any of the sites it has acquired or will in
the future acquire.
Office Facilities. The Company currently leases approximately 10,500
square feet of office space in one location in Portland, Oregon.
Item 3. Legal Proceedings
On March 2, 1999, the Company filed in the United States District Court
for the District of Oregon, case no. USDC No. CV99-304 KI, an action entitled
Regent Assisted Living, Inc. v. LRS Architects, et al. The Company alleges that
the defendant architects negligently performed their services relating to
numerous of the Company's internally developed communities. The defendant
counterclaimed for approximately $900,000 in damages incurred as a result of the
Company's alleged breach of the underlying contracts pursuant to which the
architectural services were to be performed. The Company is seeking damages in
excess of the defendants' counterclaim. The Company is aggressively pursuing its
claims and is defending the counterclaims.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
As of March 28, 2000, the executive officers of the Company were as set
forth below.
Name Age Position
Walter C. Bowen 57 Chairman of the Board and Chief Executive
Officer
Louis Swart 62 President
James W. Ekberg 47 Senior Vice President of Finance and
Development
16
Dale J. Zulauf 49 Chief Operating Officer
Steven L. Gish 41 Chief Financial Officer, Treasurer, and
Director
David R. Gibson 38 Vice President for Corporate Affairs, General
Counsel and Secretary
Walter C. Bowen. Mr. Bowen is the founder of the Company and became the
Chief Executive Officer, and a Director of the Company upon its formation. Mr.
Bowen also served as President of the Company from its formation through October
31, 1999. Mr. Bowen has been involved in the development, ownership, and
management of assisted living communities since 1986, and has devoted a majority
of his time to the ownership and operation of those communities over the past
five years. Mr. Bowen has also been the Chief Executive Officer of several
related companies including Bowen Property Management Company, Bowen Financial
Services Corp., a company formed to obtain financing for real estate development
projects, and Bowen Development Company, a real estate construction company
(collectively, the "Bowen Companies"), since their formation. Mr. Bowen attended
the University of Oregon and is a graduate of Portland State University. Mr.
Bowen serves on the Board of Directors of the Assisted Living Communities
Association of America and on the advisory board for the National Investment
Conference for the Senior Living and Long Term Care Industries.
Louis Swart. Mr. Swart joined Regent in April 1999 as Chief Operating
Officer and was promoted to President on November 1, 1999. Over the past 24
years, Mr. Swart has held the positions of Chief Operating Officer of the
Hillsdale Group, President of Genesis ElderCare Network Services, Chief
Executive Officer of Retirement Corporation of America, and was co-founder and
President of Wedgewood Retirement Inns. Mr. Swart has a Bachelor's degree in
English from the University of South Africa and a Masters degree in Sociology
and English Literature from Texas Christian University.
James W. Ekberg. Mr. Ekberg joined Regent in 1995 and is the Senior
Vice President for Finance and Development. Mr. Ekberg is responsible for the
development and construction of new communities and for strategic acquisitions.
Mr. Ekberg joined the Bowen Companies in 1985 as Controller and has served as an
executive since 1991, in which capacity he was responsible for the development
of numerous projects for the Bowen Real Estate Group and oversaw the operations
of Bowen Development Company. Mr. Ekberg holds a Bachelor's degree in accounting
from the Honors College of Michigan State University.
Dale J. Zulauf. Mr. Zulauf became the Chief Operating Officer of the
Company on November 1, 1999. Prior to joining Regent, Mr. Zulauf served as the
Senior Vice President of Operations at Care Matrix. Previous positions in the
senior care field include as President and CEO of SunBridge Healthcare
Corporation and Regional Vice President of Operations at Hillhaven Corporation.
Mr. Zulauf holds a Bachelor of Arts degree in Sociology from Western Washington
University and a Masters degree in Business Administration from Golden Gate
University.
Steven L. Gish. Mr. Gish became Chief Financial Officer and Treasurer
of the Company in August 1995. Mr. Gish joined the Bowen Companies in 1991 as
Controller. Prior to that time, Mr. Gish served as Treasurer and Controller of
McCormick and Baxter Creosoting Company, an industrial wood preservative
company. Mr. Gish received a Bachelor of Science degree in accounting from the
University of Oregon in 1980.
17
David R. Gibson. Mr. Gibson became Vice President for Corporate Affairs
and General Counsel of the Company in 1996 and also serves as Corporate
Secretary. Mr. Gibson's primary responsibility with the Company is to oversee
its legal affairs. Prior to joining the Company, Mr. Gibson practiced law for
over eight years, the last seven with the law firm of Bogle & Gates where he was
a Senior Attorney in the firm's business department, assisting clients in real
estate, commercial finance, and business transactions. Mr. Gibson received his
law degree, cum laude, from Northwestern School of Law of Lewis and Clark
College in 1987 and his Bachelor of Science degree in accounting from the
University of Oregon in 1984.
18
PART II
Item 5. Market for Common Stock and Related Stockholder Matters
On September 28, 1999, the Company's Common Stock was deleted from
listing on the NASDAQ National Market System ("NASDAQ") for failure to maintain
a minimum $4 million tangible net worth, one of the requirements for continued
listing.
Since that time, trading in the Company's Common Stock has been
conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the NASDAQ listing requirements, or
in what are commonly referred to as the "pink sheets." As a result, an investor
will likely find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's Common Stock than was the case when
the Company's Common Stock was listed on NASDAQ. In addition, after September
28, 1999, the Company's Common Stock will be subject to penny stock rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. Consequently, the delisting of the Company's Common Stock from
NASDAQ could adversely affect the ability or willingness of broker-dealers to
sell the Company's Common Stock and the ability of purchasers of the Company's
Common Stock to sell their securities in the secondary market.
The following table sets forth the high and low closing sale prices as
reported on NASDAQ and on the Over-the-Counter Bulletin Board ("OTC BB") for the
periods indicated.
Quarter Ended High Low
------------- ---- ---
NASDAQ
------
March 31, 1998 8 1/8 4 1/4
June 30, 1998 8 1/2 6
September 30, 1998 6 1/4 4 1/8
December 31, 1998 6 1/2 3 3/4
March 31, 1999 5 1/2 2 5/8
June 30, 1999 4 5/8 3
September 30, 1999 3 15/16 2 1/4
OTC BB
------
December 31, 1999 2 5/8 1 3/4
The Company believes it has approximately 30 holders of record as of
March 28, 2000.
Since its initial public offering in December 1995, the Company has not
paid cash dividends on its Common Stock and presently intends to continue this
policy in order to retain its earnings for the development of the Company's
business. The Company's ability to pay dividends may be limited by the terms of
future debt and equity financings and other arrangements. Furthermore, the
Company's ability to declare and pay cash dividends on its Common Stock is
restricted by the terms of its Preferred Stock.
19
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data have been derived
from the Company's audited consolidated financial statements for the years ended
1999, 1998, 1997, 1996, and 1995 (unaudited pro forma). The data set forth below
should be read in conjunction with the Company's audited consolidated financial
statements and related notes thereto included elsewhere in the Form 10-K and the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
SELECTED CONSOLIDATED FINANCIAL STATEMENT DATA
(dollars in thousands except share and per share data)
(Unaudited)
1995
1999 1998 1997 1996 Pro Forma
---- ---- ---- ---- ---------
Consolidated Statement of
Operations Data:
Total revenues $ 54,089 $ 30,419 $ 13,958 $ 13,260 $ 12,648
Total operating expenses 60,760 39,859 18,094 12,946 12,446
------------ ------------ ------------ ------------- ------------
Operating income (loss) $ (6,671) $ (9,440) $ (4,136) $ 314 $ 202
Other income (expense), net (2,141) (1,622) 271 (179) (325)
Minority interest 36 - - - -
Provision for income taxes - - (13) (58) -
Extraordinary loss net of
tax benefit - - - (53) -
------------ ------------ ------------ ------------- ------------
Net income (loss) (8,776) (11,062) (3,878) 24 (123)
Preferred stock dividends (600) (600) (600) (26) -
- --------------
Net Loss to Common
Shareholders $ (9,376) $ (11,662) $ (4,478) $ (2) $ (123)
============ ============ ============= ============= ============
Earnings (loss) per common
share before extraordinary
loss, basic and diluted $ (2.03) $ (2.52) $ (0.97) $ 0.01 $ (0.03)
Extraordinary loss per common
share, basic and diluted - - - (0.01) -
Net loss per common
share, basic and diluted $ (2.03) $ (2.52) $ (0.97) $ - $ (0.03)
============ ============ ============= ============= ============
Weighted average number of
common shares outstanding
basic 4,615,135 4,633,000 4,633,000 4,633,000 4,633,000
diluted 4,615,135 4,633,000 4,633,000 4,666,800 4,633,000
20
(Unaudited)
1995
1999 1998 1997 1996 Pro Forma
---- ---- ---- ---- ---------
Consolidated Balance Sheet Data:
- -------------------------------
Cash and cash equivalents $ 4,538 $ 4,483 $ 1,805 $ 8,597 $ 7,586
Working capital (deficit) 1,427 1,562 (4,303) 10,326 8,646
Total assets 62,686 66,274 75,704 33,178 18,187
Long-term debt, less
current portion 32,275 40,705 51,451 9,981 6,024
Minority interests 352 - 250 - -
Shareholder's equity (deficit) (5,311) 4,255 15,917 20,057 10,660
The 1995 unaudited pro forma statement of operations includes the results
of operations of the Company and certain other transactions related to the
Company's initial public offering as if such transactions had occurred as of
January 1, 1995.
Supplementary Financial Information
1999 and 1998 by Quarter
(dollars in thousands)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1999
Revenues $ 11,926 $ 13,034 $ 14,209 $ 14,920
Residence operating expenses 8,586 9,466 10,249 10,304
----------- ----------- ----------- -----------
Gross profit $ 3,340 $ 3,568 $ 3,960 $ 4,616
=========== =========== =========== ===========
Net loss $ (2,001) $ (1,705) $ (1,984) $ (3,086)
=========== =========== =========== ===========
Net loss per share $ (0.46) $ (0.40) $ (0.46) $ (0.71)
=========== =========== =========== ===========
1998
Revenues $ 4,288 $ 6,672 $ 8,907 $ 10,551
Residence operating expenses 4,190 5,576 7,693 8,143
----------- ----------- ----------- -----------
Gross profit $ 98 $ 1,096 $ 1,214 $ 2,408
=========== =========== =========== ===========
Net loss $ (2,396) $ (2,535) $ (3,686) $ (2,445)
=========== =========== =========== ===========
Net loss per share $ (0.55) $ (0.58) $ (0.83) $ (0.56)
=========== =========== =========== ===========
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
- --------
The Company is an owner, operator, and developer of private-pay
assisted living communities. Assisted living is part of a spectrum of long-term
care services that provide a combination of housing, personal services, and
health care designed to respond to elderly individuals who require assistance
with activities of daily living in a manner that promotes maximum independence.
The Company's revenues are derived primarily from resident fees for basic
housing, personalized health care services, and other support services.
Since its initial public offering on December 26, 1995, the Company has
embarked upon a strategy of aggressive growth primarily through internal
development of prototypical assisted living communities. This report covers the
fourth full year of the Company's operations following its initial public
offering and describes in detail the Company's rapid growth that began in 1997
and continued into 1999. To date, the Company's growth has been funded by the
gross proceeds of $12.2 million from the initial public offering, $10 million in
1996 through the issuance of preferred stock, and $9 million raised in 1998
through a private placement of convertible subordinated notes.
From January 1, 1999, through March 28, 2000, the Company completed a
Regent community in Scottsdale, Arizona and four stand-alone Regent Court
Alzheimer's communities located in Clackamas and Corvallis, Oregon; Modesto,
California; and Kent, Washington. The Company also began managing The Altenheim,
a 140-bed community in Oakland, California, entered into an agreement to manage
a newly developed 104-bed community in Las Vegas, Nevada, and commenced
construction on four additional communities comprised of 465 beds. Upon
completion of these four communities, the Company will have 3,624 beds under
operation compared to the 570 beds operated at the time of the initial public
offering. The Company is engaged in development activities related to four
additional communities.
Recognizing the importance of internal controls, systems and
procedures, during 1999, the Company increased and refined its human resources
functions, employee training, marketing efforts, strategic planning, financial
reporting, and information systems. The Company's efforts in this regard will be
of great benefit as the Company continues to add a significant number of beds to
its operations in 2000 and beyond. Another essential element to such growth will
be the continued development of the Company's relationships with its commercial
banking and real estate investment trust financing partners.
Development and Acquisition of Additional Communities
- -----------------------------------------------------
The Company's current growth plan anticipates completion of two Regent
communities by December 31, 2000. In addition, the Company is currently
constructing one Regent community and one Regent House community that are
scheduled to commence operation during the first quarter of 2001. The Company
has an additional four communities currently under development. As the Company
continues to conduct its preliminary development activities on these sites it
will determine whether to proceed with construction of a new community.
Currently, the Company believes each of these communities could be completed
during 2001 provided the Company obtains the necessary governmental approvals
and financing. As the Company continues to expand its operations, the expenses
associated with development, construction, and operation of these communities
are expected to be significant.
22
The Company's experience is that its new communities, on average,
generate losses during the pre-opening period and during the initial eighteen
months of operations, at which time such communities, on average, have achieved
approximately 65-75 percent occupancy and have reached break-even cash flow.
The Company expects that it will be able to increase income from its
communities as a result of management's continuing efforts to maximize
occupancy, align resident rates with services provided, and control expenses. If
the Company expands its growth plan through the development of additional new
communities or if a significant number of newly developed communities fail to
reach break-even cash flow within the expected time period, the Company may
continue to incur operating losses beyond 1999.
Results of Operations
- ---------------------
The following discussion and analysis should be read in conjunction
with the Financial Statements under Item 8. The Company's revenues are derived
primarily from resident fees for basic housing, personalized health care
services, and other support services. Operating expenses are comprised generally
of resident operating expenses, which include community payroll expenses, food,
property taxes, utilities, insurance and other direct residence operating
expenses; general and administrative expenses, which consist of payroll expenses
and overhead for executive, development, operations, and accounting personnel at
the Company's main office in addition to support functions such as legal and
other administrative expenses; lease expense; and depreciation and amortization
expense.
The following table sets forth, for the periods indicated, the
percentage of total revenues represented by certain items included in the
Company's consolidated financial statements.
1999 1998 1997
------- ------- -------
Revenues:
Rental and service 99.2 % 99.3 % 98.5 %
Management fees .8 .7 1.5
------- ------- -------
Total revenues 100.0 100.0 100.0
Operating expenses:
Residence operating expenses 71.3 84.2 76.6
General and administrative
expenses 13.4 13.7 25.6
Lease expense 24.8 29.6 24.9
Depreciation and amortization 2.8 3.5 2.5
------- ------- -------
Total operating expenses 112.3 131.0 129.6
Operating loss (12.3) (31.0) (29.6)
Interest income .6 1.1 2.7
Interest expense (4.9) (5.3) (1.0)
Equity in losses of joint ventures (.5) (1.2) -
Other income, net .8 - .2
------- ------- -------
Loss before minority interest (16.3) (36.4) (27.7)
23
1999 1998 1997
------- ------- -------
Minority interest .1 - (.1)
------- ------- -------
Loss before income taxes (16.2) (36.4) (27.8)
Provision for income taxes - - -
------- ------- -------
Net loss (16.2) (36.4) (27.8)
Preferred stock dividends (1.1) (2.0) (4.3)
------- ------- -------
Net loss available to common
shareholders (17.3)% (38.4)% (32.1)%
======= ======= =======
Comparison of Years Ended December 31, 1999 and 1998
- ----------------------------------------------------
Revenues. Revenues for 1999 totaled $54.1 million compared to $30.4
million in 1998, an increase of $23.7 million or 77.8 percent. During 1999, the
Company operated 29 communities comprised of five stabilized communities, 20
newly developed or acquired communities including one sold during the year
pursuant to a sale-manageback arrangement, and four communities operated
pursuant to management contracts, of which two are owned in joint ventures and
accounted for under the equity method. The Company operated 25 communities
during 1998 comprised of five stabilized communities, including one acquired in
May 1998 which was managed prior to conversion to a lease; 17 newly developed or
acquired communities, and three operated pursuant to management contracts. A
community is considered "stabilized" for reporting purposes after it first
attains occupancy of 95.0 percent and prior to that time is considered "newly
developed."
During 1999, rental and service revenues from "Same Residences", the
six communities the Company operated at the beginning of both 1999 and 1998,
comprised of four stabilized and two newly developed communities, increased by
$2.7 million. Of this increase, $2.5 million was from the two newly developed
communities. Revenues from 18 newly developed or acquired communities in
operation during 1999 increased $19.6 million compared to revenue from 15 newly
developed or acquired communities in operation during 1998. In addition,
revenues for the comparable years increased $1.1 million from the one stabilized
community the Company acquired in May 1998, and $0.3 million from the
communities operating under management agreements. Occupancy at the six same
residences was 89.0 percent for 1999 compared to 78.4 percent in 1998. Occupancy
at the Company's five stabilized communities was 95.0 percent for 1999.
Residence Operating Expenses. Residence operating expenses were $38.6
million for 1999 and $25.6 million for 1998, an increase of $13.0 million or
50.8 percent. Residence operating expenses from the six Same Residences
increased by $1.3 million from 1998 to 1999. This increase was primarily
attributable to the increased level of operations at the two newly developed
communities. Residence operating expenses for all other newly developed or
acquired communities for 1999 include $23.5 million of start-up operating
expenses and pre-opening costs, whereas such expenses totaled $12.5 million in
1998. In addition, operating expenses increased $0.7 million from the stabilized
community acquired in May 1998. Residence operating expenses from Same
Residences totaled 65.4 percent and 68.0 percent of rental and service revenue
for
24
1999 and 1998, respectively. Residence operating expenses for all stabilized
communities, totaled 64.8 percent and 63.6 percent of rental and service
revenues for 1999 and 1998, respectively.
General and Administrative Expenses. General and administrative
expenses were $7.3 million for 1999 compared to $4.2 million for 1998, an
increase of $3.1 million. Payroll and related expenses increased by $1.1 million
from 1998 to 1999. Development related costs incurred in connection with asset
write-downs (land held for sale) and abandoned projects totaled $1.9 million in
1999 compared to $0.2 million in 1998. Other general and administrative expenses
increased by $0.3 million from 1998 to 1999 primarily due to the implementation
of the Company's plan for growth.
Lease Expense. Lease expense for the Company's leased communities
totaled $13.4 million for 1999 compared to $9.0 million for 1998. The increase
of $4.4 million relates primarily to the opening and sale-leaseback of newly
developed communities and the lease-acquisition of several additional
communities.
Depreciation and Amortization. Depreciation and amortization expense
was $1.5 million for 1999, compared to $1.1 million for 1998. The increase of
$0.4 million relates primarily to the Company's newly developed communities.
Interest Income. Interest income is earned from the Company's
investment of cash and cash equivalents in high-quality, short-term securities
placed with institutions with high credit ratings.
Interest Expense. Interest expense increased in 1999, to $2.6 million
from $1.6 million for 1998. The Company incurred an additional $0.2 million of
interest in 1999, as compared to 1998, related to convertible subordinated notes
that were issued after the first quarter of 1998. The Company incurred an
additional $0.2 million of interest related primarily to the opening of newly
developed communities and the acquisition of a previously leased community. The
Company capitalized $2.3 million and $2.7 million of interest charges incurred
during 1999 and 1998, respectively. Capitalized interest decreased due to a
reduction in development and construction activity during 1999 compared to 1998.
Equity in Losses of Joint Ventures. Equity in losses of joint ventures
decreased in 1999, as a result of improved operating results related to
increased occupancy at the Company's 50 percent owned Kenmore, Washington
community and the Company's 10 percent owned Kent, Washington community, offset
by the pre-opening costs of the 40 percent owned Corvallis, Oregon community.
Other Income (Loss), Net. In 1999, the Company sold a 45 percent
co-tenancy interest in its Modesto, California community. The Company recognized
a $0.5 million gain as a result of the sale.
Net Loss. Net operating results increased by $2.3 million for 1999,
compared to the same period in 1998. The Company reported a loss of $8.8 million
for 1999, whereas the Company reported a loss of $11.1 million for 1998. The
increase in net results is primarily due to an increase in residence operating
profits (rental and service revenue less residence operating expenses) of $10.4
million offset by increases in general and administrative expenses, lease
expense, depreciation expense, other income and interest expense as discussed
above.
25
Comparison of Years Ended December 31, 1998 and 1997
- ----------------------------------------------------
Revenues. Revenues for 1998 totaled $30.4 million compared to $14.0
million in 1997, an increase of $16.4 million or 117.9 percent. In 1998, the
Company operated 25 communities, two of which were managed. The Company operated
seven communities and managed two communities in 1997. From 1997 to 1998,
revenues from Same Residences, the three stabilized communities that the Company
operated at the beginning of both periods, increased by $0.4 million. Revenue
increased by $2.7 million from 1997 to 1998 as a result of the acquisition of
one stabilized community in each of July 1997 and May 1998. The Company began
operating three newly developed communities in 1997, whereas in 1998 the Company
added eleven newly developed communities, acquired four non-stabilized
communities and added a management contract, which in the aggregate accounted
for a $13.3 million increase in revenues. Overall average occupancy at the
Company's stabilized Same Residences increased to 93.9 percent for 1998, from
92.4 percent for the same period in 1997. A community is considered "stabilized"
for reporting purposes after it first attains occupancy of 95.0 percent.
Residence Operating Expenses. Residence operating expenses were $25.6
million for 1998 and $10.7 million for 1997, an increase of $14.9 million or
139.5 percent. The current year includes $15.2 million of start-up operating
expenses and pre-opening costs related to eighteen of the Company's newly
developed or acquired communities. Residence operating expenses, excluding the
effect of the newly developed communities, totaled 63.7 percent and 63.3 percent
of rental and service revenues for 1998 and 1997, respectively.
General and Administrative Expenses. General and administrative
expenses were $4.2 million for 1998 compared to $3.6 million for 1997. The
increase of $0.6 million or 16.6 percent is due primarily to an increase in
development activities and operations related to the implementation of the
Company's plan for growth.
Lease Expense. Lease expense for the Company's leased communities
totaled $9.0 million for 1998 compared to $3.5 million for 1997. The increase of
$5.5 million related primarily to the opening and sale-leaseback of newly
developed communities and the lease-acquisition of several additional
communities.
Depreciation and Amortization. Depreciation and amortization expense
was $1.1 million for 1998 compared to $0.4 million for 1997. The increase of
$0.7 million relates primarily to the Company's newly developed communities.
Interest Income. Interest income is earned from the Company's
investment of cash and cash equivalents in high-quality, short-term securities
placed with institutions with high credit ratings.
Interest Expense. Interest expense increased for the year ended
December 31, 1998 to $1.6 million, from $0.1 million for 1997. In 1998, the
Company incurred $1.5 million in interest expense related to the operation of
nine newly developed communities, whereas only a nominal interest charge was
incurred in 1997 related to the operation of one newly developed community. The
Company incurred $0.4 million of interest in 1998 related to the convertible
subordinated notes that were issued during 1998. The Company capitalized $2.7
million of interest charges incurred during 1998, compared to $1.8 million in
1997 due to increased borrowing for construction purposes.
26
Equity in Losses of Joint Ventures. Losses of joint venture resulted
from the initial operations of the Company's 50 percent owned Kenmore,
Washington community.
Net Loss. Net operating results decreased to a loss of $11.1 million
during 1998, from a net loss of $3.9 million for the same period in 1997. The
$7.2 million decrease in net operating results is primarily due to an increase
in residence operating profit (rental and service revenue less residence
operating expenses) of $1.6 million, offset by increases in general and
administrative expenses, lease expense, depreciation, interest expense and
equity in losses of joint venture, all as discussed above.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1999, the Company had $1.4 million of working capital,
compared to working capital of $1.5 million at December 31, 1998, a decrease of
$0.1 million. Cash and cash equivalents increased by a nominal amount (as
described below) and cash held in working capital escrow decreased by $0.3
million. In 1999, two parcels of land previously acquired for development were
reclassified as land held for sale. The effect, net of related debt, increased
working capital by $1.6 million. In addition, working capital decreased by $0.5
million related to unsecured term debt that is scheduled to mature in December
2000. The net increase in working capital was offset by an increase in net
current liabilities of $0.9 million resulting from the Company's growth in
operating capacity.
Net cash used in operating activities totaled $5.0 million for 1999,
resulting primarily from a net loss of $8.8 million, adjusted $2.0 million for
non-cash items (depreciation, amortization, gain on sale of assets, adjustment
on land held for sale to estimated fair value, equity interest in joint ventures
and minority interests), offset by the release of $1.2 million of cash held in
working capital escrow and an increase in net current liabilities of $0.6
million.
Net cash used in investing activities totaled $11.9 million for 1999,
consisting primarily of land acquisition, development, and construction costs
offset by the proceeds from the sale of a 45 percent interest and a 60 percent
interest, respectively, in two communities totaling $1.4 million.
Net cash provided by financing activities totaled $17.0 million for
1999, primarily consisting of property and equipment financing proceeds totaling
$20.2 million, net proceeds from lease-financing arrangements totaling $10.8
million, proceeds from a sale-manageback arrangement with the Company's Chairman
and Chief Executive Officer of $1.4 million, offset by repayment of long-term
debt of $14.7 million, payment of preferred stock dividends of $0.6 million and
payments to repurchase common stock of $0.2 million.
During February 1999, the Company completed a $10.4 million
sale-leaseback transaction involving its Austin, Texas community. As a result,
the Company generated approximately $3.0 million in net proceeds, repaid
approximately $7.2 million of its mortgage indebtedness, and recorded a deferred
gain of approximately $1.0 million.
During June 1999, the Company entered into a $10.1 million arrangement
with a real estate investment trust ("REIT") pursuant to which the Company is
constructing its Mesa, Arizona community. The sale of the land has been recorded
as a capital lease. Upon completion, the Company will lease the community
pursuant to a long-term lease arrangement. The Company
27
generated $1.5 million of cash available for general working capital
requirements as a result of the sale.
During September 1999, the Company sold to its Chairman and Chief
Executive Officer its 108-bed Scottsdale, Arizona community under terms of a
sale-manageback agreement. The terms of the agreement contain a guaranteed
return which constitutes continuing involvement and, accordingly, the Company
has accounted for the sale under the deposit method. Under this method, the
Company continues to report the asset, depreciation, and related debt in the
Company's financial statements and does not recognize profit from the sale. The
Company received $1.2 million in sales proceeds and the purchaser assumed $8.8
million of underlying debt. These amounts are recorded as liabilities captioned
"deposits under sales contract" in the Company's balance sheet. The net book
value of the asset subject to the sales contract totaled $8.9 million at
December 31, 1999. Upon satisfaction of the continuing involvement criteria, the
transaction will be accounted for as a sale.
Also during September 1999, Regent completed a $9.5 million permanent
financing transaction for its Bakersfield, California community. As a result of
the transaction, the Company repaid construction debt in the amount of $7.2
million and generated approximately $2.0 million of cash available for general
working capital requirements.
During November 1999, the Company repurchased 125,400 shares of the
Company's Common Stock in a private transaction for the price of $1.50 per
share.
During December 1999, the Company sold equity interests in its
Corvallis and Merced assisted living communities for $725,000 and $250,000,
respectively. The Company has an aggregate of $8.4 million in loans from which
to complete construction of the Corvallis and Merced communities. As of December
31, 1999, approximately $6.7 million remained to be drawn on these loans to fund
construction activities and debt service reserves. The Company has sufficient
financing to complete these communities and to fund their anticipated initial
operating deficits.
The Company intends to utilize current working capital resources
primarily for operating requirements. The Company has experienced significant
growth since 1995, including opening 15 newly developed or acquired communities
in 1998 and four in 1999. The Company incurred significant losses during these
years as a result of pre-marketing and start-up costs as the communities
commenced operations. During 1999, the Company's resident census increased by
27.8 percent and the number of additional newly opened communities decreased as
did the Company's operating losses. During 1998 and 1999, the Company
experienced eight consecutive quarterly increases in gross profits from
community operations. The Company anticipates continued gains in both resident
census and gross profit during 2000, although at a smaller percentage than in
1999, and the Company will substantially decrease its development-related
activities. Accordingly, the Company believes that it has sufficient working
capital, including land held for sale, to meet its anticipated cash requirements
during 2000. Furthermore, during 2000 the Company may generate additional
working capital through the refinance of one or more of its communities,
although it is not certain the Company will complete any such transaction.
At December 31, 1999, the Company had capitalized costs totaling
approximately $6.6 million related to communities under construction or
development, encumbered by $1.6 million in outstanding debt. The Company intends
to finance substantially all of the remaining costs of developing each new
community through joint venture arrangements as well as conventional financing
with commercial banks and other financial institutions.
28
In addition to one Regent Court community that began operations in
March 2000, the Company anticipates completing construction of one Regent
community in 2000. The Company has entered into a sale-leaseback arrangement
with a REIT for this community and anticipates operations will commence during
the third quarter of 2000. The Company has two additional communities under
construction that are anticipated to commence operations in 2001. The Company
has obtained financing necessary to complete these communities. The Company has
entered into a long-term lease for an assisted living community being
constructed by an unrelated third party and expects to commence operation of
this community during the fourth quarter of 2000.
The Company anticipates capital expenditures for 2000 will include
additional architectural fees and other development costs related to at least
four assisted living communities and construction costs related to at least
three new assisted living communities. During 2000, the Company anticipates
commencing construction on the four communities currently under development. The
total cost to develop and construct these four communities, including the
estimated initial operating deficits, will likely be between $31.0 million to
$35.0 million. A substantial portion of these costs may be incurred during 2000.
The Company is currently discussing with commercial banks and other
financing sources the terms of potential financing with which the Company will
construct new communities currently under development. Each of the pending
financing transactions is subject to a number of conditions, including the
negotiation and execution of definitive documents and the satisfactory
completion of due diligence on the related properties, and there is no assurance
that any of these financing transactions will be completed on the terms
proposed, or at all. Provided that the Company can obtain financing upon
acceptable terms, the Company estimates that it has the necessary equity capital
invested in one of these four communities in order to complete construction and
to fund the initial operating deficits. Additional equity capital will be
required prior to commencing construction on the remaining three communities.
To finance additional growth, the Company may enter into additional
arrangements with one or more unrelated parties regarding the joint development
and ownership of one or more of the Company's communities currently under
construction or development. Furthermore, the Company may utilize various forms
of financing that would permit a community to be sold to or initially developed
by a third party who would incur the initial operating deficits and permit the
Company to manage the community for a customary fee. The Company, under such
financing methods, would likely have the option to either purchase the community
or enter into a long-term lease at such time as the Company deems appropriate.
The Company has not obtained any commitments for this form of financing.
If the Company is unable to obtain additional required financing, or if
such financing is not available on acceptable terms, the Company expects that
its plan to commence construction of up to four additional communities by the
end of 2000 would likely be delayed or curtailed. Furthermore, if the Company
expands its growth plan, development activities do not result in the
construction of a community on a site, the Company experiences a decline in the
operations of its current communities or the Company does not achieve and
sustain anticipated occupancy levels at its new communities, then the Company
may require additional financing to complete its growth plan.
Certain operating lease agreements contain restrictive covenants. As of
December 31, 1999, the Company was in compliance with the covenants of all lease
agreements except for two
29
covenants relating to the Company's Willow Creek assisted living community in
Folsom, California and Regent Court community in Scottsdale, Arizona. The
Company believes the ultimate resolution of this matter will not have a material
adverse impact on the Company's financial position, results of operations, or
cash flows.
The Company does not presently intend to pay dividends to holders of
its Common Stock and intends to retain future earnings to finance the
development of assisted living communities and expand its business.
Impact of Inflation
- -------------------
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and operating
income due to the Company's dependence on its senior resident population, most
of whom rely on relatively fixed incomes to pay for the Company's services. As a
result, the Company's ability to increase revenues in proportion to increased
operating expenses may be limited. The Company typically does not rely to a
significant extent on governmental reimbursement programs. In pricing its
services, the Company attempts to anticipate inflation levels, but there can be
no assurance that the Company will be able to respond to inflationary pressures
in the future.
Subsequent Events
- -----------------
During January 2000, the Company obtained an $8.8 million loan the
proceeds of which will be used to construct and fund initial operations at the
Company's 113-bed South Ogden, Utah community.
Also during January 2000, the Company entered into a joint venture
arrangement with an independent third party for the purpose of developing a
116-bed assisted living community in Salt Lake City, Utah. The Company's initial
capital contribution for its 50 percent joint venture interest totaled $1.1
million, comprised of $600,000 of incurred development costs and a $500,000
development fee. The joint venture partner contributed $1.1 million in cash,
which was utilized to acquire the land for the project.
Recent Accounting Pronouncements
- --------------------------------
New accounting pronouncements are discussed in Note 1 of the Notes to
Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company's earnings are affected by changes in interest rates as a
result of its variable rate indebtedness. The Company manages this risk by
obtaining fixed rate borrowings when possible. At December 31, 1999, the
Company's variable rate borrowings totaled $10.7 million. If market interest
rates average one percent more in 2000 than in 1999, the Company's interest
expense would increase and income before taxes would decrease by $107,000. These
amounts are determined by considering the impact of hypothetical interest rates
on the Company's outstanding variable rate borrowings as of December 31, 1999,
and does not consider changes in the actual level of borrowings which may occur
subsequent to December 31, 1999. This analysis also does not consider the
effects of the reduced level of overall economic activity
30
that could exist in such an environment nor does it consider likely actions that
management could take with respect to the Company's financial structure to
mitigate the exposure to such a change.
Item 8. Financial Statements
The financial statements required by this item are included on pages
F-1 to F-22 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 15, 1998, the Company dismissed its previous certifying
accountant, KPMG LLP, and retained its new certifying accountant,
PricewaterhouseCoopers LLP. The decision to change accountants was approved by
the Audit Committee of the Company's Board of Directors. The report of KPMG LLP
on the Company's financial statements for 1997 contained no adverse opinion or
disclaimer of opinion and was not modified as to uncertainty, audit scope, or
accounting principles. Furthermore, during fiscal year 1997 and during the
subsequent interim periods to December 15, 1998, there were no disagreements
with KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of KPMG LLP would have caused it to make reference
thereto in connection with its report on the financial statements for such year.
31
PART III
Item 10. Directors, Executive Officers, and Control Persons; Compliance with
Section 16(a) of the Exchange Act
Information with respect to directors of the Company will be included
under "Election of Directors" in the Company's definitive proxy statement for
its 2000 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this report and is incorporated
herein by reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this report. Information
required by Item 405 of Regulation S-K is included under "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's
definitive proxy statement for its 2000 annual meeting of shareholders to be
filed not later than 120 days after the end of the fiscal year covered by this
report and is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to executive compensation will be included
under "Executive Compensation" in the Company's definitive proxy statement for
its 2000 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this report and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management will be included under "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 2000 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this report and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions with management will be included under "Compensation Committee
Interlocks and Insider Participation " in the Company's definitive proxy
statement for its 2000 annual meeting of shareholders to be filed not later than
120 days after the end of the fiscal year covered by this report and is
incorporated herein by reference.
32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements are listed in the Index to Financial
Statements on page F-1 of this Report.
(a)(2) Exhibits
Exhibit
Number
(1)3.1 Restated Articles of Incorporation, as amended effective
December 13, 1996
(2)3.2 Restated Bylaws, as amended effective December 12, 1996
4.1 See Article II of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2
(4)4.2 Letter of Commitment, dated March 30, 1998, by and among
LTC Properties, Inc., LTC West, Inc. and the Registrant
relating to the agreement to purchase and lease assisted
living residences
(4)4.3 Convertible Subordinated Note Purchase Agreement, dated as
of March 30, 1998, by and between the Registrant and LTC
Equity Holding Company, Inc
(4)4.4 Note No. 1998-1 issued to LTC Equity Holding Company, Inc.
in the principal amount of $4,000,000, due March 31, 2008
(4)4.5 Convertible Subordinated Note Purchase Agreement, dated as
of March 30, 1998, by and between the Registrant and Andre
C. Dimitriadis
(4)4.6 Note No. 1998-2 issued to Andre C. Dimitriadis in the
principal amount of $160,000, due March 31, 2008
(4)4.7 Convertible Subordinated Note Purchase Agreement, dated as
of March 30, 1998, by and between the Registrant and James
J. Pieczynski
(4)4.8 Note No. 1998-3 issued to James J. Pieczynski in the
principal amount of $160,000, due March 31, 2008
(4)4.9 Convertible Subordinated Note Purchase Agreement, dated as
of March 30, 1998, by and between the Registrant and
Christopher T. Ishikawa
(4)4.10 Note No. 1998-4 issued to Christopher T. Ishikawa in the
principal amount of $90,000, due
March 31, 2008
(4)4.11 Convertible Subordinated Note Purchase Agreement, dated as
of March 30, 1998, by and between the Registrant and
Pamela J. Privett
33
(4)4.12 Note No. 1998-5 issued to Pamela J. Privett in the
principal amount of $90,000, due March 31, 2008
(4)4.13 Registration Rights Agreement, dated as of March 30, 1998,
by and between LTC Equity Holding Company, Inc. and the
Registrant
(4)4.14 Registration Rights Agreement, dated as of March 30, 1998,
by and between Andre C. Dimitriadis and the Registrant
(4)4.15 Registration Rights Agreement, dated as of March 30, 1998,
by and between James J. Pieczynski and the Registrant
(4)4.16 Registration Rights Agreement, dated as of March 30, 1998,
by and between Christopher T. Ishikawa and the Registrant
(4)4.17 Registration Rights Agreement, dated as of March 30, 1998,
by and between Pamela J. Privett and the Registrant
(1)10.1 Lease Agreement between the Company and Regency Park
Apartments Limited Partnership
(1)10.2 Lease Agreement between the Company and the Bowen-Gionet
Joint Venture
(1)10.4 Employment Agreement between the Company and James W.
Ekberg
(1)10.6 Employment Agreement between the Company and Steven L.
Gish
(1)10.8 Restrictive Covenant Agreement between the Company and
Walter C. Bowen
(1)10.9 Restrictive Covenant Agreement between the Company and
James W. Ekberg
(1)10.11 Restrictive Covenant Agreement between the Company and
Steven L. Gish
(5)10.13 1995 Stock Incentive Plan, as amended effective December
4, 1997
(1)10.14 Form of Incentive Stock Option Agreement
(1)10.15 Form of Nonqualified Stock Option Agreement
(1)10.16 Administrative Services Agreement among the Company and
certain of the Bowen companies
(1)10.17 Indemnity Agreement between the Company and Walter C.
Bowen
(1)10.18 Indemnity Agreement between the Company and James W.
Ekberg
(1)10.19 Indemnity Agreement between the Company and Eric W.
Jacobsen
(1)10.20 Indemnity Agreement between the Company and Steven L. Gish
34
(2)10.21 Employment Agreement, effective as of March 20, 1996,
between David R. Gibson and the Company
(2)10.22 Restrictive Covenant Agreement, effective as of March 20,
1996, between David R. Gibson and the Company
(3)10.23 Preferred Stock and Warrant Agreement between Prudential
Private Equity Investors III, L.P. ("PPEI") and the
Company dated as of December 16, 1996
(3)10.24 Stockholders Agreement among the Company, PPEI, and Walter
C. Bowen dated as of December 16, 1996
(3)10.25 Registration Agreement between the Company and PPEI dated
as of December 16, 1996
(3)10.26 Stock Purchase Warrant in favor of PPEI for 200,000 Shares
of Common Stock.
(3) 10.27 First Amendment to lease between the Company and Regency
Park Apartments Limited Partnership dated December 16,
1996
(3) 10.28 Second Amendment to Lease between the Company and Sterling
Park, L.L.C. dated December 16, 1996
(3) 10.29 Form of Indemnity Agreement between the Company and
directors
(3) 10.30 Employment Agreement between Eric W. Jacobsen and the
Company
(6) 10.32 Employment Agreement between Louis Swart and the Company
(6) 10.33 Restrictive Covenant Agreement between Louis Swart and the
Company
(7) 10.34 Employment Agreement, effective as of November 1, 1999,
between Dale J. Zulauf and the Company
(7) 10.35 Restrictive Covenant Agreement, effective as of November
1, 1999, between Dale J. Zulauf and the Company
(7) 21 List of Subsidiaries
(7) 23.1 Consent of PricewaterhouseCoopers LLP
(7) 23.2 Consent of KPMG LLP
(7) 27.1 Financial Data Schedule
- -------------------
(1) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1, effective December 20, 1995 (Registration No.
33-96912)
35
(2) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995
(3) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996
(4) Incorporated by reference to the Exhibits to the Company's Form 10-QSB
dated May 14, 1998
(5) Incorporated by reference to the Exhibits to the Company's Form 8-K
dated December 22, 1998
(6) Incorporated by reference to the Exhibits to the Company's Form 10-QSB
dated May 12, 1999
(7) Filed herewith
All other schedules and exhibits are omitted because the required
information is not applicable or is not present in amounts sufficient to require
submission of the schedule or because the information required is included in
the financial statements and notes thereto.
(a)(3) Form 8-K
There were no Reports on Form 8-K filed for the year ended December 31,
1999.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Portland, State of Oregon, on the 28th day of March, 2000.
REGENT ASSISTED LIVING, INC.
By: Walter C. Bowen
------------------
Walter C. Bowen
Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the following persons in the capacities indicated have signed this
report below on the 28th day of March, 2000.
Signature Title
Walter C. Bowen Chief Executive Officer,
- --------------------------- Chairman of the Board and Director
Walter C. Bowen (Principal Executive Officer)
Steven L. Gish Chief Financial Officer, Treasurer,
- --------------------------- Assistant Secretary and Director
Steven L. Gish (Principal Financial and Accounting Officer)
Wayne C. Rembold Marvin S. Hausman *
- --------------------------- ---------------------------
Wayne C. Rembold, Director Marvin S. Hausman, M.D., Director
Stephen A. Gregg Gary R. Maffei
- --------------------------- ---------------------------
Stephen A. Gregg, Director Gary R. Maffei, Director
Dana J. O'Brien * By: Steven L. Gish
- --------------------------- ---------------------------
Dana J. O'Brien, Director Steven L. Gish
Attorney-In-Fact
37
Regent Assisted Living, Inc.
and Subsidiaries
Consolidated Financial Statements
For the Years Ended December 31, 1999 and 1998
Regent Assisted Living, Inc. and Subsidiaries
Table of Contents
Page
Report of Independent Accountants - PricewaterhouseCoopers LLP .........F-1
Independent Auditors' Report - KPMG LLP ................................F-2
Financial Statements:
Consolidated Balance Sheets........................................F-3
Consolidated Statements of Operations..............................F-4
Consolidated Statements of Changes in Shareholders' Equity.........F-5
Consolidated Statements of Cash Flows..............................F-6
Notes to Consolidated Financial Statements .............................F-7
Report of Independent Accountants
To the Board of Directors and Shareholders
Regent Assisted Living, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Regent Assisted Living, Inc. and Subsidiaries (the Company) at December 31, 1999
and 1998 and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Portland, Oregon
March 28, 2000, except for the last paragraph of
Note 4, as to which the date is April 20, 2000
F-1
Independent Auditor's Report
The Board of Directors and Shareholders
Regent Assisted Living, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Regent Assisted Living, Inc. and
subsidiaries for the year ended December 31, 1997. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and the
consolidated cash flows of Regent Assisted Living, Inc. and subsidiaries of the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Portland, Oregon
February 13, 1998
F-2
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 4,537,839 $ 4,483,048
Cash held in working capital escrow 404,598 734,408
Accounts receivable, net 723,081 287,483
Prepaid expenses 739,569 280,324
Construction advances receivable 235,706 481,819
Land held for sale 2,860,000 -
--------------- -------------
Total current assets 9,500,793 6,267,082
Restricted cash 2,916,182 2,757,981
Property and equipment, net 46,900,983 54,191,324
Investment in and advances to joint venture 383,114 261,995
Other assets 2,985,291 2,795,374
--------------- -------------
Total assets $62,686,363 $ 66,273,756
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,266,919 $ 284,481
Construction accounts payable 463,136 608,585
Accounts payable and other accrued expenses 3,414,976 2,280,230
Accrued payroll 1,490,594 1,213,630
Accrued interest 438,017 318,201
--------------- -------------
Total current liabilities 8,073,642 4,705,127
Long-term debt 32,275,189 40,704,567
Convertible subordinated notes 9,000,000 9,000,000
Deposits under sales contract 10,194,342 -
Deferred gains and development fees, net 6,714,156 6,022,773
Other liabilities 1,387,250 1,586,164
--------------- -------------
Total liabilities 67,644,579 62,018,631
--------------- -------------
Minority interest in consolidated subsidiaries 352,389 -
--------------- -------------
Commitments
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized; 1,666,667
shares issued and outstanding in 1999 and 1998 9,349,841 9,349,841
Common stock, no par value, 25,000,000 shares authorized; 4,507,600
shares issued and outstanding in 1999 and 4,633,000 shares in 1998 10,619,349 10,808,703
Accumulated deficit (25,279,795) (15,903,419)
--------------- -------------
Total shareholders' equity (5,310,605) 4,255,125
--------------- -------------
Total liabilities and shareholders' equity $62,686,363 $ 66,273,756
=============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Revenues:
Rental and service $ 53,635,079 $30,217,379 $ 13,751,027
Management fees 453,936 201,816 207,255
---------------- ----------------- ----------------
Total revenues 54,089,015 30,419,195 13,958,282
---------------- ----------------- ----------------
Operating expenses:
Residence operating expenses 38,605,500 25,602,709 10,689,905
General and administrative 7,251,337 4,161,981 3,568,382
Lease expense 13,390,695 9,014,483 3,479,176
Depreciation and amortization 1,512,835 1,080,050 356,852
---------------- ----------------- ----------------
Total operating expenses 60,760,367 39,859,223 18,094,315
---------------- ----------------- ----------------
Operating loss (6,671,352) (9,440,028) (4,136,033)
Interest income 305,656 336,168 381,326
Interest expense (2,645,863) (1,594,777) (136,636)
Equity in losses of joint ventures (246,565) (360,028) -
Other income (loss), net 445,860 (3,467) 26,566
---------------- ----------------- ----------------
Loss before minority interests (8,812,264) (11,062,132) (3,864,777)
Minority interests 35,888 - -
---------------- ----------------- ----------------
Loss before income taxes (8,776,376) (11,062,132) (3,864,777)
Provision for income taxes - - 12,877
---------------- ----------------- ----------------
Net loss (8,776,376) (11,062,132) (3,877,654)
Preferred stock dividends (600,000) (600,000) (600,000)
---------------- ----------------- ----------------
Net loss available to common shareholders $ (9,376,376) $(11,662,132) $ (4,477,654)
---------------- ----------------- ----------------
Basic loss per common share $ (2.03) $ (2.52) $ (.97)
---------------- ----------------- ----------------
Diluted loss per common share $ (2.03) $ (2.52) $ (.97)
---------------- ----------------- ----------------
Weighted average common shares
outstanding - basic 4,615,135 4,633,000 4,633,000
---------------- ----------------- ----------------
Weighted average common shares
outstanding - diluted 4,615,135 4,633,000 4,633,000
---------------- ----------------- ----------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
Preferred Stock
-------------------------------------------
Series A Series B Common Stock Total
--------------------- -------------------- ----------------------- Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Deficit Equity
--------- ---------- -------- ----------- ---------- ------------ ------------- -------------
Balance, December 31, 1996 1,283,785 $7,201,910 382,882 $2,147,931 4,633,000 $10,808,703 $ (101,133) $ 20,057,411
Preferred stock dividends (600,000) (600,000)
Non-cash compensation
charge 337,500 337,500
Net loss (3,877,654) (3,877,654)
--------- ---------- -------- ----------- ---------- ------------ ------------- -------------
Balance, December 31, 1997 1,283,785 7,201,910 382,882 2,147,931 4,633,000 10,808,703 (4,241,287) 15,917,257
Preferred stock dividends (600,000) (600,000)
Net loss (11,062,132) (11,062,132)
--------- ---------- -------- ----------- ---------- ------------ ------------- -------------
Balance, December 31, 1998 1,283,785 7,201,910 382,882 2,147,931 4,633,000 10,808,703 (15,903,419) 4,255,125
Preferred stock dividends (600,000) (600,000)
Shares repurchased and
retired (125,400) (189,354) (189,354)
Net loss (8,776,376) (8,776,376)
--------- ---------- -------- ----------- ---------- ------------ ------------- -------------
Balance, December 31, 1999 1,283,785 $7,201,910 382,882 $2,147,931 4,507,600 $10,619,349 $(25,279,795) $ (5,310,605)
========= ========== ======== =========== ========== ============ ============= ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Cash flows from operating activities:
Net loss $ (8,776,376) $ (11,062,132) $ (3,877,654)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,512,835 1,080,050 356,852
Gain on sale of assets (462,113) - -
Adjustment on land held for sale to estimated fair value 1,489,197 - -
Non-cash compensation charge - - 337,500
Amortization of deferred gains and development fees (509,738) (350,564) (21,198)
Equity interest in joint ventures 246,565 360,028 -
Non-cash operating expense - 128,957 -
Increase in allowance for doubtful accounts - 10,000 -
Minority interests (35,888) - -
Deferred income taxes - - 304,300
Changes in other assets and liabilities:
Cash held in working capital escrow 1,181,027 (10,925) (7,054)
Accounts receivable (435,598) (169,373) 20,866
Prepaid expenses (494,245) (145,523) (61,560)
Other assets 198,914 (990,086) (67,141)
Accounts payable and other accrued expenses 1,134,746 1,595,094 38,418
Accrued payroll 276,964 711,062 167,413
Accrued interest 119,816 138,238 122,433
Other liabilities (198,914) 1,068,586 43,155
--------------- -------------- ---------------
Net cash used in operating activities (4,752,808) (7,636,588) (2,643,670)
--------------- -------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (13,248,696) (36,267,398) (52,898,548)
Increase (decrease) in construction accounts payable (145,449) 25,542 (84,269)
Maturity of investments, net - - 2,939,448
Investment in and advances to joint ventures (12,400) (158,563) (137,881)
Proceeds from sale of property and equipment 740,309 829,408 -
Proceeds from sale of equity interest 725,000 - -
Withdrawals from (deposits to) replacement reserve account, net 20,555 (80,186) (7,909)
--------------- -------------- ---------------
Net cash used in investing activities (11,920,681) (35,651,197) (50,189,159)
--------------- -------------- ---------------
Cash flows from financing activities:
Short-term borrowings - (4,500,000) 4,500,000
Proceeds from issuance of long-term debt 19,986,691 27,490,812 41,700,424
Payments on long-term debt (14,688,127) (38,421,190) (163,183)
Construction (advances) payments 368,200 (110,625) 1,001,645
Payments and deposits for lease financing arrangements, net (551,638) (897,484) (234,364)
Restricted cash for lease financing arrangements, net (415,344) (315,802) (707,599)
Deferred development fees from lease financing arrangements 243,419 497,218 920,000
Proceeds from lease financing arrangements 10,766,814 53,822,808 -
Proceeds from issuance of convertible subordinated notes - 9,000,000 -
Proceeds from sales contract 1,419,342 - -
Contributions by minority interests 388,277 - 250,000
Preferred stock issuance costs - - (600,159)
Preferred stock dividends (600,000) (600,000) (626,230)
Payments to repurchase common stock (189,354) - -
--------------- -------------- ---------------
Net cash provided by financing activities 16,728,280 45,965,737 46,040,534
--------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 54,791 2,677,952 (6,792,295)
Cash and cash equivalents, beginning of period 4,483,048 1,805,096 8,597,391
--------------- -------------- ---------------
Cash and cash equivalents, end of period $ 4,537,839 $ 4,483,048 $ 1,805,096
=============== ============== ===============
F-6a
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
For the Years Ended December 31, 1999, 1998 and 1997
Supplemental disclosure of non-cash investing and financing activities:
Assumption of debt by minority interests $ 1,291,448 $ - $ -
=============== ============== ===============
Assumption of debt by joint venture $ 1,692,467 $ - $ -
=============== ============== ===============
Debt assumed pursuant to sales contract $ 8,775,000 $ - $ -
=============== ============== ===============
Long-term debt incurred to acquire minority interest in
consolidated subsidiary $ - $ 250,000 $ -
=============== ============== ===============
Contribution of property and equipment in exchange for
investment in and advances to joint venture $ - $ 138,000 $ -
=============== ============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
December 31, 1999 and 1998
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Operations and Summary of Significant Accounting Policies
Regent Assisted Living, Inc. (the Company) is an owner, operator and
developer of private-pay assisted living communities including stand-alone
Alzheimer's communities. Assisted living is part of a spectrum of long-term
care services that provide a combination of housing, personal services and
health care designed to respond to elderly individuals who require
assistance with activities of daily living in a manner that promotes
maximum independence.
The Company
As of December 31, 1999, the Company operated twenty-nine assisted living
communities in nine western states. In addition, the Company had four
communities under construction and four under development. During 1999, the
Company commenced operations at three new internally developed stand-alone
Alzheimer's care communities (including two owned by joint ventures) and
also opened a new internally developed assisted living community which was
sold to the Company's Chairman and Chief Executive Officer in a
sale-manageback agreement.
As of December 31, 1998, the Company operated twenty-five assisted living
communities in nine western states. During 1998, the Company opened eleven
new internally developed communities (including one owned in a joint
venture), completed the lease-acquisition of five communities (including
one that was previously managed), and entered into one additional
management contract.
As of December 31, 1997, the Company operated nine assisted living
communities in five states, including two under management contracts.
During 1997, the Company opened three new internally developed communities,
completed the lease-acquisition of one community, and entered into one
management contract.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash and cash equivalents
The Company maintains its cash in bank deposit accounts that, at times, may
exceed federally insured limits. Cash equivalents consist of highly liquid
debt instruments purchased with an original maturity of three months or
less. The Company's cash equivalents are in high quality securities placed
with institutions with high credit ratings. This investment policy limits
the Company's exposure to concentrations of credit risk, and the Company
has not experienced any credit related losses.
Cash held in working capital escrow
Cash is held in the Company's name in bank accounts in the custody of
financial institutions. This cash is available for release in accordance
with a predetermined monthly draw schedule and upon the respective
community's initial achievement of a 1.25 to 1.00 coverage ratio.
F-7
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies (Continued)
Land held for sale
The Company has made two parcels of land available for sale that were
previously acquired for development. The Company has a signed letter of
intent on one parcel and a signed sales agreement on the other. As of
December 31, 1999, the Company recorded an expense of approximately $1.5
million to adjust the land held for sale to its estimated fair market
value.
Property and equipment
Property and equipment are stated at cost with depreciation being provided
over the assets' estimated useful lives using straight-line and accelerated
methods as follows:
Buildings 40 years
Land improvements 15 years
Furniture and equipment 5 - 10 years
Interest incurred during construction periods is capitalized as part of the
building costs. Maintenance and repairs are expensed as incurred; renewals
and improvements are capitalized. Upon disposal of property and equipment
subject to depreciation, the related costs and accumulated depreciation are
removed and resulting gains and losses are reflected in operations.
Management reviews all long-lived assets held and used by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test
is performed using undiscounted net cash flows of the individual
communities.
Restricted cash
The Company is required to provide letters of credit to lenders in
connection with certain financing arrangements. Financial institutions
providing the letters of credit have required cash collateral for the
letters of credit, totaling $2,721,758 and $2,315,733 as of December 31,
1999 and 1998, respectively. Restricted cash also includes a replacement
reserve required to be maintained for two of the communities.
Investment in joint ventures
Joint ventures in which the Company does not have a controlling interest
are accounted for under the equity method of accounting. The Company has a
50% investment in a joint venture organized to develop an assisted living
community in Kenmore, Washington. This community commenced operations on
August 25, 1998. The Company has a 10% investment in a joint venture
organized to develop an Alzheimer's community in Kent, Washington. This
community commenced operations on July 29, 1999. The Company has a 40%
investment in a joint venture organized to develop an Alzheimer's community
in Corvallis, Oregon. As of December 31, 1999, this community was under
construction and had not commenced operations. This community commenced
operations in March 2000.
F-8
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies (Continued)
Pre-opening and start-up costs
The Company expenses pre-opening and start-up costs as incurred.
Deferred gains and development fees
Gains realized on the sale and leaseback of the Company's assisted living
communities are deferred and credited to income as rent adjustments over
the related lease terms. The Company also defers development fees and
amortizes them over the term of the related lease.
Revenue recognition
Revenue from owned or leased assisted living communities is recorded when
services are rendered and consist of resident fees for basic housing,
personalized health care and management fees from other assisted living
communities.
Income taxes
Under the asset and liability method, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of changes in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
Computation of per share amounts
Basic EPS is calculated using income (loss) attributable to common shares
(after deducting preferred dividends) divided by the weighted-average
number of common shares outstanding for the period. Diluted EPS is
calculated using income (loss) attributable to common shares (after
deducting preferred dividends and considering the effects of dilutive
common equivalent shares) divided by the weighted-average number of common
shares and dilutive common shares outstanding for the period.
Stock-based compensation plan
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). Effective January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial and Accounting Standards (SFAS) SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires
that companies that do not choose to account for stock-based compensation
as prescribed by this statement shall disclose the pro forma effect on
earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock compensation
and the assumptions used to determine the pro forma effects of SFAS No.
123.
F-9
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies (Continued)
Use of estimates
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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial instruments
The carrying amounts of cash and cash equivalents, investments, accounts
receivable, construction advances receivable and restricted cash
approximate fair value because of the short-term nature of these accounts
and because amounts are invested in accounts earning market rates of
interest. The carrying amount of debt approximates fair value inasmuch as
the interest rates approximate the current rates available to the Company.
Financial results and liquidity
The Company has experienced significant growth since 1995, including
opening 15 newly developed or acquired communities in 1998 and 4 in 1999.
The Company incurred significant losses during 1998 and 1999 primarily as a
result of pre-marketing and start-up costs as the communities commenced
operations. During 1999, the Company's resident census increased by 27.8
percent and the number of additional newly opened communities decreased as
did the Company's operating losses. The Company anticipates continued gains
in resident census, although at a smaller percentage than in 1999. The
Company has also decreased its development-related activities. Accordingly,
management believes that the Company has sufficient working capital,
including land held for sale, to meet its anticipated cash requirements
during 2000. Additionally, the Company may generate additional working
capital during 2000 through the refinance of one or more of its
communities, although it is not certain the Company will complete any such
transaction.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. SFAS No. 133,
as amended by SFAS No. 137, is effective for fiscal years beginning after
June 15, 2000. The Company's management has studied the implications of
SFAS No. 133 and based on the initial evaluation, expects the adoption to
have no impact on the Company's financial condition or results of
operations.
F-10
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
2. Property and Equipment
Property and equipment are stated at cost and consist of the following:
1999 1998
Land $ 5,364,716 $ 3,057,756
Buildings and improvements 33,332,546 29,747,219
Furniture and equipment 4,289,447 3,452,579
Construction in progress 6,572,177 19,375,174
---------------- ----------------
49,558,886 55,632,728
Less accumulated depreciation and amortization 2,657,903 1,441,404
---------------- ----------------
Property and equipment, net $ 46,900,983 $ 54,191,324
================ ================
Land, buildings and certain furniture and equipment serve as collateral for
long-term debt. Construction in progress includes land, development and
building costs incurred in connection with the construction of the
Company's new communities and the cost of land held for development.
Property and equipment includes the asset value attributable to capital
leases in the amount of $8,910,539 at December 31, 1999 and $7,724,177 at
December 31, 1998. Accumulated amortization related to these leases was
$771,000 and $581,000 at December 31, 1999 and 1998, respectively.
3. Other Assets
Other assets consist of the following:
1999 1998
Resident security and trust deposits $1,387,250 $1,586,164
Deferred financing costs, net 1,063,771 899,629
Other 534,270 309,581
-------------- --------------
Total other assets $2,985,291 $2,795,374
============== ==============
Pursuant to rental agreements, residents are required to provide security
deposits, and in certain cases, the last month's rent. A liability for
these deposits is recorded in other liabilities in the consolidated
financial statements.
Deferred financing costs are amortized over the original term of the
related financing agreement.
F-11
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales
Contract
Long-term debt consists of:
1999 1998
Capital lease obligation, due in monthly installments of $69,100,
including interest at 8.4%, due in November 2012 (Note 7) $ 7,745,271 $ 7,915,863
Notes payable to a bank, due in monthly installments of $11,920,
including interest at various rates between 8.75% and 8.88%,
all maturing at various dates in 2002 and 2004 385,047 451,477
Note payable to a corporation, quarterly payments of interest
only at 9%, due in December 2000 500,000 500,000
Note payable to a financial institution, interest only payments
at prime plus 4% (12.5% at December 31, 1999) collateralized
by land held for sale and due upon sale of the collateral 1,263,411 1,500,000
Construction loans, totaling $15,899,750, interest varies between 8.88%
and 16.00%, maturities vary from July 2001 through December 2004 10,842,797 29,168,688
Capital lease obligation, monthly interest only payments at 10.14%
beginning upon completion of building, due approximately
August 2015 (Note 7) 1,186,361 -
Note payable to a bank, due in monthly installments of $20,670,
including interest at 8.71%, due June 2002 2,477,038 -
Note payable to a financial institution due in monthly installments
of $74,208 including interest at 8.43%, due October 2009 9,454,584 -
Notes payable to construction company owned by the majority
shareholder, annual payments of interest only at prime plus
1% (9.5% at December 31, 1999) due January 2002 (Note 9) 250,000 1,000,000
Other 437,599 453,020
-------------- ---------------
34,542,108 40,989,048
Less amounts due within one year 2,266,919 284,481
-------------- ---------------
$32,275,189 $ 40,704,567
============== ===============
Principal payments on long-term debt for the years ending December 31 are
as follows:
2000 $2,266,919
2001 2,236,402
2002 3,250,729
2003 7,735,216
2004 2,020,474
Thereafter 17,032,368
---------------
$34,542,108
===============
The Company incurred total interest costs of approximately $4,900,800,
$4,246,600 and $1,926,200 in 1999, 1998 and 1997, respectively, of which
approximately $2,255,000, $2,651,800 and $1,789,500 has been capitalized as
part of construction in progress. Interest costs paid by the Company in
1999, 1998 and 1997 totaled approximately $4,781,000, $4,108,400 and
$1,803,800, respectively.
F-12
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales
Contract (Continued)
The Company, along with its joint venture partners, has guaranteed
construction loans totaling approximately $13.3 million.
On March 30, 1998, the Company completed a private placement pursuant to
which parties purchased an aggregate of $4.5 million of convertible
subordinated notes of the Company and agreed to purchase up to an
additional aggregate amount of $6 million of convertible subordinated
notes. As of December 31, 1999 and 1998, a total of $9 million of
convertible notes were issued under this facility. The Company and the
purchasers have agreed that no additional notes will be issued. The notes
bear interest at 7.5% per annum and are convertible into 1,200,000 shares
of common stock at an exercise price of $7.50 per share. Interest on the
notes is payable quarterly and all principal and unpaid interest on the
notes is due March 31, 2008. The notes may be converted at the option of
the holder at any time prior to the maturity date of the notes. The Company
also has the right to force a conversion of the notes if the average
trading price of the common stock equals or exceeds $12 per share over
thirty consecutive trading days.
During September 1999, the Company sold to its majority shareholder its
Scottsdale, Arizona community under terms of a sale-manageback agreement.
The terms of the agreement contain a guaranteed return which constitutes
continuing involvement under SFAS No. 66, Accounting for Sales of Real
Estate and, accordingly, the Company has accounted for the sale under the
deposit method. Under this method, the Company continues to report the
asset, depreciation and related debt in the Company's financial statements
and does not recognize profit from the sale. The Company received $1.2
million in sales proceeds and the purchaser assumed $8.8 million of
underlying debt. These amounts are recorded as liabilities captioned
"deposits under sales contract" in the Company's balance sheet. The net
book value of the asset subject to the sales contract totaled $8.9 million
at December 31, 1999. Upon satisfaction of the continuing involvement
criteria, the transaction will be accounted for as a sale.
On April 20, 2000, the maturity date on approximately $1,625,000 of
construction loans was extended to July 31, 2001 from November 30, 2000.
5. Shareholders' Equity
The Company is authorized to issue 5,000,000 shares of preferred stock. The
Board of Directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series,
and the preferences, limitations and relative rights, including the
dividend rights, dividend rate, voting rights, terms of redemption,
redemption price or prices, conversion rights and liquidation preferences
of the shares constituting any series, without any further vote or action
by the shareholders of the Company.
F-13
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
Shareholders' Equity (Continued)
On December 16, 1996, the Company issued 1,283,785 shares of Series A
preferred stock and 382,882 shares of Series B preferred stock
(collectively, the Preferred Stock) for a total of $9,950,000. In
connection with this transaction, a warrant was issued to the holders of
the preferred stock for $50,000, allowing the warrant holder to purchase
200,000 shares of common stock at an exercise price of $5.50 per share.
Each share of preferred stock is convertible into 1.091 shares of common
stock. The Series A preferred shares are convertible at any time at the
option of the holder. The Series B preferred shares are convertible upon
the occurrence of certain "Conversion Events" as defined in the Company's
amended articles of incorporation.
Dividends on the preferred stock accrue and are paid at an annual rate of
6% of the liquidation value of $5.50 per common equivalent share.
In connection with the sale of the preferred stock, the Company also
entered into a stockholders' agreement with the preferred shareholder and
the founding shareholder regarding the voting and disposition of shares
held by the preferred shareholder and the founding shareholder, and an
agreement providing the preferred shareholder with rights to require the
Company to register shares of common stock upon conversion of the preferred
stock.
6. Stock Options
1995 stock incentive plan
The Company adopted a stock incentive plan (the 1995 Stock Incentive Plan),
which provides for the award of incentive stock options to key employees
and the award of nonqualified stock options, stock appreciation rights,
bonus rights and other incentive grants to employees, independent
contractors and consultants. A total of 600,000 shares of common stock may
be issued under the 1995 Stock Incentive Plan. As of December 31, 1999,
options to purchase 587,500 shares had been granted and are outstanding
pursuant to the Stock Incentive Plan.
The 1995 Stock Incentive Plan is administered by the Board of Directors,
which has the authority, subject to the terms of the Stock Incentive Plan,
to determine the persons to whom options or rights may be granted, the
exercise price and number of shares subject to each option or right, the
character of grant, the time or times at which all or a portion of each
option or right may be exercised and certain other provisions of each
option or right.
F-14
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
6. Stock Options (Continued)
1995 stock incentive plan (continued)
Options are exercisable over a period of time in accordance with the terms
or option agreements entered into at the time of grant. Generally, options
expire 10 years from date of grant and are expected to become exercisable
over a five-year period. Options granted under the 1995 Stock Incentive
Plan are generally nontransferable by the optionee and, unless otherwise
determined by the Board of Directors, must be exercised by the optionee
during the period of the optionee's employment or service with the Company
or within a specified period following termination of employment or
service.
Non-employee members of the Board of Directors of the Company are
automatically granted an option to purchase 2,000 shares of common stock
when they become a director. Each non-employee director is automatically
granted an option to purchase 2,000 additional shares of common stock in
each subsequent calendar year that the director continues to serve in that
capacity. The exercise price for these options will generally be the fair
market value of the common stock at the date of grant.
During the year ended December 31, 1997, the Company recognized
compensation expense in the amount of $337,500 for employee options granted
below fair value on the grant date.
Options granted by shareholder
In August 1995, the Company's founding shareholder granted options to
purchase an aggregate of 170,000 shares of common stock, of which 165,000
were to certain officers of the Company. During 1999, options for 85,000 of
these shares were cancelled. These options vest and become immediately
exercisable, and are subject to the terms of option agreements that contain
terms similar to those governing the options granted under the 1995 Stock
Incentive Plan.
F-15
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
6. Stock Options (Continued)
A summary of the Company's stock option activity and related information
for the years ended December 31 are presented below:
1999 1998 1997
------------------------ ----------------------- ------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options Shares price Shares price Shares price
------- ---------- ------------ ---------- ----------- ---------- ------------
Outstanding-beginning of year 604,000 $ 4.77 563,000 $ 4.73 538,500 $ 6.15
Granted 285,000 3.35 43,500 5.35 239,500 3.55
Exercised - - - - - -
Cancelled (216,500) 4.59 (2,500) 6.59 (215,000) 6.97
---------- ---------- ----------
Outstanding-end of year 672,500 4.23 604,000 4.77 563,000 4.73
---------- ---------- ----------
Weighted-average fair value
of options granted during
the year $ 2.13 $ 3.23 $ 5.22
The following table summarizes information about stock options outstanding
as of December 31, 1999:
Options Exercisable
Weighted- --------------------------------
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
price outstanding life price exercisable price
--------------- ---------------- -------------- -------------- --------------- ---------------
$6.00 - $8.00 85,000 5.7 years $ 6.24 85,000 $ 6.24
$2.25 - $7.50 587,500 7.9 years 3.94 305,600 4.12
---------------- ---------------
672,500 390,600
================ ===============
The total value of options granted during 1999, 1998 and 1997 was computed
as approximately $605,321, $140,417 and $1,250,000, respectively, which
would be amortized on a pro forma basis over the vesting period of the
options.
The Company has adopted the disclosure-only provisions of SFAS No. 123. The
following table presents the Company's net loss and loss per share,
assuming compensation cost had been determined based on the fair value at
the date of grant, and recognized as expense on a straight-line basis over
the vesting period of the options, consistent with the provisions of SFAS
No. 123.
F-16
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
6. Stock Options (Continued)
1999 1998 1997
Net loss:
As reported $(8,776,376) $(11,062,132) $ (3,877,654)
Pro forma (9,265,466) (11,333,132) (4,235,654)
Diluted loss per common share:
As reported (2.03) (2.52) (0.97)
Pro forma (2.14) (2.58) (1.04)
For purposes of the above pro forma information, the fair value of each
option grant was estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions.
1999 1998 1997
Risk-free interest rate 5.63% 6.0% 6.25%
Expected life 7.6 years 7.1 years 6.5 years
Expected volatility 54% 50% 43.1%
Expected dividend yield 0% 0% 0%
7. Commitments
Operating leases
The Company leases twenty-two communities under noncancelable lease
agreements expiring in the years 2005 through 2033. The leases are subject
to additional rent payments based on a percentage of the increase in annual
revenue of the respective facility. The Company is responsible for all
costs including repairs, property taxes and other direct operating costs.
The Company leases its corporate offices under a noncancelable operating
lease expiring February 2003.
Future minimum lease payments required under these leases for the years
ending December 31 are as follows:
2000 $14,997,000
2001 16,246,000
2002 16,648,000
2003 16,443,000
2004 16,466,000
Thereafter 116,443,000
-----------------
$197,243,000
=================
F-17
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
7. Commitments (Continued)
Operating leases (continued)
Lease and rent expense for the Company totaled $14,233,400, $9,679,100 and
$3,648,700 in 1999, 1998 and 1997, respectively.
Certain operating lease agreements contain restrictive covenants. As of
December 31, 1999, the Company was in compliance with the covenants for all
lease agreements, except for two covenants related to the Company's Folsom,
California and Regent Court Scottsdale, Arizona communities. The Company
believes the ultimate resolution of this matter will not have a material
adverse impact on the Company's financial position, results of operations
or cash flows.
Capital leases
During 1996, the Company entered into a sale leaseback transaction
accounting for this transaction as a financing. The total consideration for
the sale was $8,300,000, which was recorded as a capital lease obligation
by the Company (see Note 4). The Company has continued to operate this
community pursuant to a lease agreement that expires in 2012. This lease is
subject to additional rent payments based on a percentage of the increase
in annual revenue of the community. The Company is also responsible for all
costs including property taxes, maintenance and other direct operating
costs.
During June 1999, the Company entered into a $10.1 million arrangement with
a real estate investment trust (REIT) pursuant to which the Company is
constructing its Mesa, Arizona community. The sale of the land has been
recorded as a capital lease (see Note 4). Upon completion, the Company will
lease the community pursuant to a long-term lease arrangement. The Company
generated $1.5 million of cash available for general working capital
requirements as a result of the sale leaseback transaction.
Other lease financing
The Company entered into arrangements pursuant to which REITs specializing
in health care properties agreed to provide lease financing for the
construction of several of the Company's communities. As of December 31,
1999 and 1998, the Company advanced approximately $236,000 and $482,000 of
reimbursable construction costs on behalf of the REITs. Upon commencement
of operations at the communities, payments begin under the leases, which
are accounted for as operating leases.
Construction financing
The Company has entered into construction loans in the aggregate of $15.9
million for the construction of four of its communities of which $10.8
million has been advanced as of December 31, 1999. The Company, along with
its joint venture partners, has entered into three additional construction
loans in the aggregate of $13.3 million of which $11.5 million has been
advanced as of December 31, 1999. All of these loans are generally for a
term of three to five years, are collateralized by the underlying
construction project, and are guaranteed by the Company and the majority
shareholder.
F-18
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
8. Income Taxes
The components of the provision for income taxes for the year ended
December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
Current:
Federal $ - $ - $ (271,194)
State - - (20,229)
--------------- --------------- ---------------
- - (291,423)
--------------- --------------- ---------------
Deferred:
Federal - - 257,370
State - - 46,930
--------------- --------------- ---------------
- - 304,300
--------------- --------------- ---------------
$ - $ - $ 12,877
=============== =============== ===============
Income tax expense for the year ended December 31, 1999, 1998 and 1997
differs from the amounts computed by applying the U.S. Federal income tax
rate of 34% to pretax income before extraordinary loss as follows:
1999 1998 1997
Computed expected tax expense (benefit) $(2,983,255) $(3,758,507) $(1,314,024)
Increase (decrease) in income taxes resulting from:
State taxes, net of federal benefit (365,059) (467,000) (151,973)
Increase in valuation allowance 3,167,657 4,226,514 1,513,097
Other, net 180,657 (1,007) (34,223)
------------ ------------ ------------
Actual income tax expense $ - $ - $ 12,877
============ ============ ============
F-19
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to the deferred tax
assets at December 31 are as follows:
1999 1998
Capital lease obligation $ 3,410,490 $ 3,026,804
Accrued expenses 297,027 193,331
Federal and state operating loss carryforwards 4,834,449 2,940,648
Deferred gains and development fees 2,563,760 2,241,321
Deposits under sales contract 3,892,648 -
Depreciation and amortization (6,883,218) (2,939,661)
Other 792,307 277,168
--------------- ---------------
8,907,463 5,739,611
Less valuation allowance (8,907,463) (5,739,611)
--------------- ---------------
Net deferred tax assets $ - $ -
=============== ===============
At December 31, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $12,800,000 and
$11,532,000, respectively, which are available to offset future federal and
state taxable income, if any, through the years 2012 and 2014.
9. Related Party Transactions
Certain executive officers of the Company fulfill similar executive
functions for other companies, which are owned or controlled by the
majority shareholder, and spend significant amounts of time on the business
of such companies.
Administrative services agreement
The Company has entered into agreements with companies owned by the
majority shareholder, whereby the Company will provide each of these
entities executive assistance, accounting and financial management
services, legal and administrative assistance, insurance, management
information services and other management services as required. Under the
terms of the agreement, the Company is reimbursed at its cost on a monthly
basis for all services provided. Such reimbursements totaled approximately
$78,000, $145,000 and $408,000 in 1999, 1998 and 1997, respectively.
Construction contracts
During 1999, the construction of two of the Company's new communities has
been performed pursuant to fixed price construction contracts with a
company owned by the majority shareholder. Fees earned on a percentage of
completion basis totaled approximately $526,000 in 1999.
F-20
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
9. Related Party Transactions (Continued)
Construction contracts (continued)
Throughout 1998 and 1997, construction of thirteen of the Company's new
communities was performed pursuant to cost plus construction contracts with
the related contractor. The terms of these contracts provide for, among
other things, contractor's profit and overhead of 3% to 5% of the
construction costs. Such fees totaled approximately $1,430,000 and
$1,058,000 in 1998 and 1997, respectively.
Guaranty fees
In 1999, the Company paid fees totaling $65,000 to its majority shareholder
for guaranteeing three of the Company's loans. $75,000 was paid in 1998 to
the majority shareholder for the guarantee of two of the Company's
construction loans.
Lease arrangements
The Company leases two assisted living communities from entities controlled
by the majority shareholder. The leases, expiring in 2005, are for 10 year
terms at annual base rentals of $2,757,250 and are subject to additional
rent payments based on a percentage of the increase in annual revenue of
the respective community. Lease payments totaled $2,806,784, $2,798,650 and
$2,776,250 in 1999, 1998 and 1997, respectively. The Company is responsible
for all costs including repairs to the facilities, property taxes and other
direct operating costs of the communities. The underlying mortgage lender
for one of the leased communities requires that not less than 25% of the
outstanding stock of the Company be owned by the current majority
shareholder and that the current majority shareholder continue to control
the management of the Company.
Management fees
For a portion of 1998 and for all of 1997, the Company managed one assisted
living community from an entity controlled by the majority shareholder. The
Company received a management fee equal to 5% of the gross revenues of the
community which amounted to approximately $53,300 and $151,800 in 1998 and
1997, respectively. The community was sold to a REIT in 1998 and the
Company entered into a lease agreement with the REIT and continues to
operate the community.
In 1999, the Company recorded $18,300 as management fee income and $128,200
as an increase in deposits under sales contract in connection with a sale
manageback arrangement related to a community owned by its majority
shareholder (Note 4).
Interest paid to related party
Interest paid to a construction company owned by the majority shareholder
was $49,000 in 1999 and $25,500 in 1998.
F-21
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
10. Retirement Plan
Employees of the Company participate in a salary deferral plan under the
provisions of Section 401(k) of the Internal Revenue Code whereby they may
defer a portion of their gross wages. The employer may make additional
contributions to the Retirement Plan. Employer contributions made by the
Company totaled approximately $137,100, $85,900 and $66,500 in 1999, 1998
and 1997, respectively.
11. Contingencies
The Company is involved in certain litigation relating to claims arising
out of its operations in the normal course of business. The Company
maintains insurance coverage against potential claims in amounts, which it
believes to be adequate. Management believes that it is not presently a
party to any litigation, the outcome of which would have a material adverse
effect on the Company's business, financial condition, results of
operations or cash flows.
F-22