---------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended September 30, 2000 [__] TRANSITION REPORT PURSUANT TO SECTION 12 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. (Exact 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 St., Suite 1000 Portland, Oregon 97204 (Address of principal executive offices) (Zip Code) 503-227-4000 (Registrant's telephone number, including area code) Indicate by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] --- --- As of November 14, 2000, there were 4,507,600 shares of the Registrant's Common Stock, no par value, outstanding ---------------------------------------------------- REGENT ASSISTED LIVING, INC. FORM 10-Q September 30, 2000 INDEX ----- Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and 1999. . . . . . 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999. . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements. . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 22 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 22 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 22 Signature 23 Page 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS September 30, December 31, 2000 1999 (Unaudited) Current assets: Cash and cash equivalents $ 2,888,427 $ 4,537,839 Cash held in working capital escrow 327,653 404,598 Accounts receivable, net 610,268 723,081 Prepaid expenses 1,325,559 739,569 Construction advances receivable 250,838 235,706 Land held for sale 4,860,000 2,860,000 ---------------- -------------- Total current assets 10,262,745 9,500,793 Restricted cash 3,190,039 2,916,182 Property and equipment, net 49,809,058 46,900,983 Investment in and advances to joint ventures 667,204 383,114 Other assets 3,347,351 2,985,291 ---------------- -------------- Total assets $ 67,276,397 $ 62,686,363 ================ ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 3,963,811 $ 2,266,919 Construction accounts payable 498,852 463,136 Accounts payable and other accrued expenses 6,935,757 5,343,587 ---------------- -------------- Total current liabilities 11,398,420 8,073,642 Long-term debt 38,578,427 32,275,189 Convertible subordinated notes 9,000,000 9,000,000 Deposits under sales contract 10,346,567 10,194,342 Deferred gains and development fees, net 6,318,822 6,714,156 Other liabilities 1,428,553 1,387,250 ---------------- -------------- Total liabilities 77,070,789 67,644,579 ---------------- -------------- Minority interests in consolidated subsidiaries 266,183 352,389 ---------------- -------------- Commitments Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized; 1,666,667 shares issued and outstanding in 2000 and 1999 9,349,841 9,349,841 Common stock, no par value, 25,000,000 shares authorized; 4,507,600 shares issued and outstanding in 2000 and 1999 10,619,349 10,619,349 Accumulated deficit (30,029,765) (25,279,795) ---------------- -------------- Total shareholders' equity (10,060,575) (5,310,605) ---------------- -------------- Total liabilities and shareholders' equity $ 67,276,397 $ 62,686,363 ================ ============== The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Unaudited) Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 Revenues: Rental and service $ 16,501,524 $ 14,095,095 $ 47,567,533 $ 38,885,648 Management fees 168,266 113,684 564,521 283,290 ---------------- ---------------- ----------------- ----------------- Total revenues 16,669,790 14,208,779 48,132,054 39,168,938 ---------------- ---------------- ----------------- ----------------- Operating expenses: Residence operating expenses 11,520,298 10,249,489 32,666,182 28,301,751 General and administrative 2,126,141 1,358,490 5,410,125 4,098,882 Lease expense 3,455,777 3,403,353 10,358,221 9,994,251 Depreciation and amortization 432,258 394,085 1,258,657 1,116,255 ---------------- ---------------- ----------------- ----------------- Total operating expenses 17,534,474 15,405,417 49,693,185 43,511,139 ---------------- ---------------- ----------------- ----------------- Operating loss (864,684) (1,196,638) (1,561,131) (4,342,201) Interest income 116,384 58,289 342,578 213,585 Interest expense (1,130,400) (771,866) (2,863,022) (1,855,194) Equity in losses of joint ventures (76,146) (80,555) (244,560) (193,898) Other income (loss), net 20,656 (6,140) 14,959 445,129 ---------------- ---------------- ----------------- ----------------- Loss before minority interests (1,934,190) (1,996,910) (4,311,176) (5,732,579) Minority interests 15,692 12,497 86,206 42,479 ---------------- ---------------- ----------------- ----------------- Loss before income taxes (1,918,498) (1,984,413) (4,224,970) (5,690,100) Provision for income taxes - - - - ---------------- ---------------- ----------------- ----------------- Net loss (1,918,498) (1,984,413) (4,224,970) (5,690,100) Preferred stock dividends (200,000) (150,000) (525,000) (450,000) ---------------- ---------------- ----------------- ----------------- Net loss available to common shareholders $ (2,118,498) $ (2,134,413) $ (4,749,970) $ (6,140,100) ================ ================ ================= ================= Basic loss per common share $ (.47) $ (.46) $ (1.05) $ (1.33) ================ ================ ================= ================= Diluted loss per common share $ (.47) $ (.46) $ (1.05) $ (1.33) ================ ================ ================= ================= Weighted average common shares outstanding - basic 4,507,600 4,633,000 4,507,600 4,633,000 ================ ================ ================= ================= Weighted average common shares outstanding - diluted 4,507,600 4,633,000 4,507,600 4,633,000 ================ ================ ================= ================= The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended Nine Months Ended September 30, 2000 September 30, 1999 Cash flows from operating activities: Net loss $ (4,224,970) $ (5,690,100) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,258,657 1,116,255 Loss (gain) on sale of assets 104 (462,112) Adjustment on land held for sale to fair value 632,620 - Amortization of deferred gains and development fees (395,334) (378,122) Equity interest in joint ventures 244,560 193,898 Minority interests (86,206) (42,479) Changes in other assets and liabilities: Cash held in working capital escrow 76,945 781,820 Accounts receivable 166,236 (63,052) Prepaid expenses (585,990) (1,182,823) Other assets (41,303) 260,642 Accounts payable and other accrued expenses 1,067,170 1,633,422 Other liabilities 41,303 (260,642) ----------------- ------------------- Net cash used in operating activities (1,846,208) (4,093,293) ----------------- ------------------- Cash flows from investing activities: Purchases of property and equipment (7,467,580) (11,902,040) Increase (decrease) in construction accounts payable 35,716 (69,974) Investment in and advances to joint venture - (67,000) Proceeds from the sale of property and equipment 100,000 740,309 Deposits to replacement reserve account, net (60,817) 34,244 ----------------- ------------------- Net cash used in investing activities (7,392,681) (11,264,461) ----------------- ------------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 15,885,994 19,401,685 Payments on long-term debt (7,885,864) (14,587,818) Construction (advances) payments (15,132) 373,788 Payments and deposits for financing arrangements, net (334,706) (458,143) Restricted cash for financing arrangements, net (213,040) (383,812) Deferred development fees from lease financing arrangements - 243,419 Proceeds from lease financing arrangements - 10,766,814 Proceeds from sales contract 152,225 1,214,325 Contributions by minority interest - 138,277 Preferred stock dividends - (450,000) ----------------- ------------------- Net cash provided by financing activities 7,589,477 16,258,535 ----------------- ------------------- Net (decrease) increase in cash and cash equivalents (1,649,412) 900,781 Cash and cash equivalents, beginning of period 4,537,839 4,483,048 ----------------- ------------------- Cash and cash equivalents, end of period $ 2,888,427 $ 5,383,829 ================= =================== Supplemental disclosure of non-cash investing and financing activities during the nine months ended September 30, 2000: Transfer of property and equipment with a cost of $653,423 in exchange for investment in joint venture of $600,000 and receivable from joint venture of $53,423. Receivable in joint venture of $71,350 for developer fee. Preferred stock dividends accrued $525,000. The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Operations and Summary of Significant Accounting Policies The Company - ----------- 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. As of September 30, 2000, the Company operated 30 assisted living communities in nine western states. Of the 30 communities, three are owned in joint ventures and accounted for under the equity method, and three are operated under management contracts. As of September 30, 1999, the Company operated 29 assisted living communities in nine western states including two owned in joint ventures and accounted for under the equity method and three operated under management contracts. Basis of Presentation - --------------------- The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements as of September 30, 2000, and for the three month and nine month periods ended September 30, 2000 and 1999, have been prepared in conformity with accounting principles generally accepted in the United States. The financial information as of December 31, 1999, is derived from the Company's Form 10-K for the year ended December 31, 1999. Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods Page 6 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. Operations and Summary of Significant Accounting Policies (continued) presented. The accompanying condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1999, included in the Company's Form 10-K for the year ended December 31, 1999. Operating results for the three month and nine month periods ended September 30, 2000, are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending December 31, 2000. 2. Property and Equipment Property and equipment are stated at cost and consist of the following: September 30, December 31, 2000 1999 ---- ---- Land $ 5,364,716 $ 5,364,716 Buildings and improvements 33,714,769 33,332,546 Furniture and equipment 4,531,652 4,289,447 Construction in progress 10,025,691 6,572,177 ------------- ------------- 53,636,828 49,558,886 Less accumulated depreciation and amortization (3,827,770) (2,657,903) ------------- ------------- Property and equipment, net $ 49,809,058 $ 46,900,983 ============= ============= Land, buildings and certain furniture and equipment serve as collateral for long-term debt. Page 7 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued 3. Earnings (Loss) Per Common Share Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. 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. Basic and diluted earnings (loss) per common share includes a deduction of preferred stock dividends declared, which totaled $200,000 and $525,000 for the three month and nine month periods ended September 30, 2000, and $150,000 and $450,000 for the three month and nine month periods ended September 30, 1999. 4. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB 101) and further amended it to defer the effective date. This pronouncement summarizes certain of the SEC Staff's views on applying generally accepted accounting principles to revenue recognition. The Company is required to adopt the provisions of SAB 101 no later than December 31, 2000. The Company does not expect the adoption of SAB 101 to have a material impact on its financial statements. In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44) which provides interpretive guidance on several implementation issues related to Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." The Company is required to adopt the provisions of FIN 44 in the third quarter of 2000. The Company does not expect the adoption of FIN 44 to have a material impact on its financial statements. The FASB has issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." This statement amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 requires that every derivative Page 8 instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company believes that the effect of adoption of SFAS No. 133 will not have a material effect on the Company's financial statements. The FASB has issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133." This statement amends SFAS No. 133 for specified transactions. SFAS No. 138 is effective concurrently with SFAS No. 133 if SFAS No. 133 is not adopted prior to June 15, 2000. If SFAS No. 133 is adopted prior to June 15, 2000, SFAS No. 138 is effective for quarters beginning after June 15, 2000. The Company believes that the effect of adoption of SFAS No. 138 will not have a material effect on the Company's financial statements. Page 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company The Company reported revenue of $16.7 million and a net loss of $1.9 million for the quarter ended September 30, 2000. For the nine month period ended September 30, 2000, the Company reported revenue of $48.1 million and a net loss of $4.2 million. After deducting preferred stock dividends, net loss per share available to common shareholders on a diluted basis was $.47 and $1.05 for the three and nine month periods, respectively. Current Communities. The table below sets forth certain information regarding the Company's communities at September 30, 2000: Regent Operations Community Location Commenced Units(1) Beds(2) Interest - --------- ----------- ---------- -------- ------- -------- Oregon Park Place Portland 1986 112 112 Lease Regency Park Portland 1987 122 136 Lease Regent Court Clackamas 1999 24 48 Lease Regent Court Corvallis 2000 24 48 Manage(3) Sheldon Park Eugene 1998 104 116 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 Sunnyside Court Fremont 1998 39 45 Lease Sunshine Villa Santa Cruz 1990 106 124 Lease(7) The Altenheim Oakland 2000 136 140 Manage The Palms Roseville 1998 93 104 Lease Villa Serra Salinas 1998 150 150 Manage Willow Creek Folsom 1997 98 113 Lease Page 10 Regent Operations Community Location Commenced Units(1) Beds(2) Interest - --------- ----------- ---------- -------- ------- -------- 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 115 131 Lease Desert Flower Scottsdale 1999 102 108 Manage(10) Regent Court Scottsdale 1998 24 44 Lease Wyoming Aspen Wind Cheyenne 1998 77 77 Lease Meadow Wind Casper 1998 51 51 Lease Spring Wind Laramie 1998 52 52 Lease ----- ----- Totals: 2,647 3,002 ===== ===== As of November 14, 2000, construction had commenced on the following six communities: Community Location Scheduled Opening Units(1) Beds(2) Interest - --------- -------- ----------------- ----- ---- -------- California Regent Assisted Merced 1st quarter 2001 72 83 Own(11) Living Regent Assisted West Covina 1st quarter 2001 130 144 Lease Living Regent Assisted Elk Grove 4th quarter 2001 84 94 Own Living Page 11 Community Location Scheduled Opening Units(1) Beds(2) Interest - --------- -------- ----------------- ----- ---- -------- Arizona Citrus Park Mesa 4th quarter 2000 111 127 Lease Utah Regent Assisted South Ogden 1st quarter 2001 104 113 Own Living Regent Assisted Salt Lake City 3rd quarter 2001 107 116 Manage(12) --- --- Living 608 677 === === (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 owns a 40 percent interest in a joint venture which owns the Corvallis community. (4) The Company owns a 50 percent interest in a joint venture which owns the Kenmore community. (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) The Company's Chairman and Chief Executive Officer purchased Desert Flower in September 1999 pursuant to a sale-manageback transaction accounted for under the deposit method. Page 12 (11) The Company owns a 75 percent interest in a joint venture which owns the Merced community. (12) The Company owns a 50 percent interest in a joint venture which owns the Salt Lake City community. As of November 14, 2000, the Company has entered into an agreement to manage a 73-bed community being developed by a third party and has no additional new communities in development. Results of Operations The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items included in the Company's condensed consolidated financial statements. Percentage of Revenues Percentage of Revenues Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues 100.0 % 100.0 % 100.0 % 100.0 % Expenses: Residence operating expenses 69.1 72.1 67.9 72.3 General and administrative expenses 12.8 9.6 11.2 10.5 Lease expense 20.7 24.0 21.5 25.5 Depreciation and amortization 2.6 2.8 2.6 2.8 ----------- ---------- ----------- ----------- Total operating expense 105.2 108.5 103.2 111.1 Operating loss (5.2) (8.5) (3.2) (11.1) Other income (expense): Interest income 0.7 0.4 0.7 0.5 Interest expense, net (6.7) (5.4) (6.0) (4.7) Equity in losses of joint ventures (0.5) (0.6) (0.5) (0.5) Other income, net 0.1 - - 1.1 ----------- ---------- ----------- ----------- Loss before minority interests (11.6) (14.1) (9.0) (14.7) Minority interests 0.1 0.1 0.2 0.1 ----------- ---------- ----------- ----------- Loss before income taxes (11.5) (14.0) (8.8) (14.6) Provision for income taxes - - - - ----------- ---------- ----------- ----------- Net loss (11.5) (14.0) (8.8) (14.6) Preferred stock dividends (1.2) (1.0) (1.1) (1.1) ----------- ---------- ----------- ----------- Net loss available to common shareholders (12.7)% (15.0)% (9.9)% (15.7)% =========== ========== =========== =========== Page 13 Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Revenues. For the three month period ended September 30, 2000, revenues totaled $16.7 million compared to $14.2 million in the three month period ended September 30, 1999, an increase of $2.5 million or 17.3 percent. During the third quarter of 2000, the Company operated 31 communities comprised of eight stabilized communities, 16 newly developed communities, and seven communities operated pursuant to management contracts, three of which are owned in joint ventures and accounted for under the equity method. The Company operated 29 communities during the third quarter of 1999, comprised of six stabilized communities, 19 newly developed communities, and four communities operated pursuant to management contracts, of which two are owned in joint ventures and accounted for under the equity method. 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 the three months ended September 30, 2000, rental and service revenues from "Same Residences", the 24 communities that the Company operated at the beginning of both periods, comprised of eight stabilized and 16 newly developed communities, increased by $2.4 million over the three months ended September 30, 1999. Of this increase, $0.5 million was from the eight stabilized communities and $1.9 million was from the 16 newly developed communities. Overall average occupancy at the Company's eight stabilized communities was 94.5 percent for the three month period ended September 30, 2000, compared to 95.6 percent at the Company's six stabilized communities for the same period in 1999. Residence Operating Expenses. Residence operating expenses were $11.5 million for the three month period ended September 30, 2000, and $10.2 million for the same period in 1999, an increase of $1.3 million or 12.4 percent. Residence operating expenses from the 24 Same Residences increased by $1.3 million over the third quarter of 1999. Of this increase, $0.3 million was from the eight stabilized communities and $1.0 million was from the 16 newly developed communities. Residence operating expenses for all other newly developed communities for the three month period ended September 30, 2000, include $0.1 million of start-up operating expenses and pre-opening costs, whereas such expenses totaled $0.2 million in 1999. Residence operating expenses from Same Residences totaled 69.0 percent and 71.5 percent of rental and service revenue for the three month periods ended September 30, 2000 and 1999, respectively. General and Administrative Expenses. General and administrative expenses were $2.1 million for the three month period ended September 30, 2000, compared to $1.4 million for the three month period ended September 30, 1999. Development-related costs incurred in connection with asset write-downs (land held for sale) and abandoned projects totaled $0.7 million compared to $0.1 million in 1999. Other general and administrative expenses increased by $0.2 million from 1999 to 2000, primarily related to the growth of the Company. Page 14 Lease Expense. Lease expense for the Company's leased communities was $3.5 million for the three month period ended September 30, 2000, compared to $3.4 million for the same period in 1999. The increase of $0.1 million relates primarily to annual lease escalation clauses and the commencement of an additional lease. Depreciation and Amortization. Depreciation and amortization expense was $0.4 million for the three month periods ended September 30, 2000 and September 30, 1999. 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 three month period ended September 30, 2000, to $1.1 million from $0.8 million for the three month period ended September 30, 1999. Interest expense related to the operation of communities increased a nominal amount in the current period as compared to the same period in the prior year. The Company capitalized a nominal amount of interest during the three months ended September 30, 2000, whereas the Company capitalized $0.1 million of interest charges during the three months ended September 30, 1999. Additionally, during the current period, the Company expensed $0.2 million of interest incurred in conjunction with land held for sale. Equity in Losses of Joint Ventures. Equity in losses of joint ventures resulted from the operations of the Company's 50 percent owned Kenmore, Washington community; the 10 percent owned Kent, Washington community; and the 40 percent owned Corvallis, Oregon community. Net Loss. Net operating results increased by $0.1 million during the three month period ended September 30, 2000, compared to the same period in 1999. The Company reported a loss of $1.9 million for the third quarter of 2000, whereas the Company reported a loss of $2.0 million for the third quarter of 1999. The increase in net results is primarily due to an increase in residence operating profits (rental and service revenue less residence operating expenses) of $1.1 million, offset by increases in general and administrative expenses, lease expense, interest expense and equity in losses of joint ventures, all as discussed above. Nine Months ended September 30, 2000 Compared to Nine Months ended September 30, 1999 Revenues. For the nine month period ended September 30, 2000, revenues totaled $48.1 million compared to $39.2 million in the nine month period ended September 30, 1999, an increase of $8.9 million or 22.9 percent. During the first nine months of 2000, the Company operated 31 communities comprised of seven stabilized communities, 17 newly developed communities, and seven communities operated pursuant to management contracts, three of which are owned in joint ventures and accounted for under the equity Page 15 method. The Company operated 29 communities during the first nine months of 1999, comprised of five stabilized communities, 20 newly developed communities, and four communities operated pursuant to management contracts, including two owned in joint ventures and accounted for under the equity method. During the nine months ended September 30, 2000, rental and service revenues from Same Residences, the 22 communities that the Company operated at the beginning of both periods, comprised of seven stabilized and 15 newly developed communities, increased by $7.7 million over the nine months ended September 30, 1999. Of this increase, $1.1 million was from the seven stabilized communities and $6.6 million was from the 15 newly developed communities. Revenues from two additional newly developed communities, one which opened in February 1999 and the other in April 1999, increased by $0.9 million. Average occupancy at the 22 Same Residences was 83.4 percent for the nine month period ended September 30, 2000, compared to 78.1 percent for the same period in 1999. Overall average occupancy at the Company's seven stabilized communities was 94.9 percent for the nine month period ended September 30, 2000, compared to 95.1 percent at the Company's five stabilized communities for the same period in 1999. Residence Operating Expenses. Residence operating expenses were $32.7 million for the nine month period ended September 30, 2000, and $28.3 million for the same period in 1999, an increase of $4.4 million or 15.4 percent. Residence operating expenses from the 22 Same Residences increased by $4.2 million over the first nine months of 1999. Of this increase, $0.6 million was from the seven stabilized communities and $3.6 million was from the 15 newly developed communities. Residence operating expenses for all other newly developed communities for the nine month period ended September 30, 2000, include $1.5 million of start-up operating expenses and pre-opening costs, whereas such expenses totaled $1.3 million in 1999. Residence operating expenses from Same Residences totaled 67.8 percent and 70.5 percent of rental and service revenue for the nine month periods ended September 30, 2000 and 1999, respectively. General and Administrative Expenses. General and administrative expenses were $5.4 million for the nine month period ended September 30, 2000, compared to $4.1 million for the nine month period ended September 30, 1999. Development-related costs incurred in connection with asset write-downs (land held for sale) and abandoned projects totaled $0.7 million compared to $0.3 million for the nine month periods ended September 30, 2000 and 1999, respectively. Other general and administrative expenses increased by $0.9 million primarily due to the growth of the Company. Lease Expense. Lease expense for the Company's leased communities was $10.4 million for the nine month period ended September 30, 2000, compared to $10.0 million for the same period in 1999. The increase of $0.4 million relates to annual lease escalation clauses, the opening of two newly developed leased communities and the sale-leaseback of one newly developed community offset by the acquisition of a previously leased community. Page 16 Depreciation and Amortization. Depreciation and amortization expense was $1.3 million for the nine month period ended September 30, 2000, compared to $1.1 million for the nine month period ended September 30, 1999. The increase relates primarily to purchases of property and equipment to support existing operations. 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 nine month period ended September 30, 2000, to $2.9 million from $1.9 million for the nine month period ended September 30, 1999. Interest expense related to the operation of communities increased $0.3 million and interest expense related to land held for sale increased by $ 0.2 million in the current period as compared to the same period in the prior year. The Company capitalized $0.1 million of interest charges during the nine months ended September 30, 2000, whereas the Company capitalized $0.6 million of interest charges during the nine months ended September 30, 1999. Equity in Losses of Joint Ventures. Equity in losses of joint ventures resulted from the operations of the Company's 50 percent owned Kenmore, Washington community; the 10 percent owned Kent, Washington community; and the 40 percent owned Corvallis, Oregon community. Other Income (Loss), Net. In the second quarter of 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 $1.5 million during the nine month period ended September 30, 2000, compared to the same period in 1999. The Company reported a loss of $4.2 million for the nine month period ended September 30, 2000, whereas the Company reported a loss of $5.7 million for the nine month period ended September 30, 1999. The increase in net results is primarily due to an increase in residence operating profits (rental and service revenue less residence operating expenses) of $4.3 million and an increase in management fees of $0.3 million, offset by increases in general and administrative expenses, lease expense, depreciation, interest expense and equity in losses of joint ventures and other income (loss), all as discussed above. Liquidity and Capital Resources At September 30, 2000, the Company had a $1.1 million working capital deficit, compared to working capital of $1.4 million at December 31, 1999. The decrease relates primarily to a decrease in cash and cash equivalents of $1.6 million (as described below) and an increase in net current liabilities of $0.9 million. Page 17 Net cash used in operating activities totaled $1.8 million for the nine month period ended September 30, 2000, resulting primarily from a net loss of $4.2 million, adjusted $1.7 million for non-cash items (depreciation, amortization, adjustment of land held for sale to fair value, equity interest in joint ventures and minority interests), and an increase in net current liabilities of $0.9 million offset by an increase in dividends payable of $0.5 million, an increase in land held for sale of $2.0 million, and an increase in current portion of long-term debt of $1.7 million. Net cash used in investing activities totaled $7.4 million for the nine month period ended September 30, 2000, consisting primarily of development and construction costs. Net cash provided by financing activities totaled $7.6 million during the nine month period ended September 30, 2000, consisting of property and equipment financing proceeds totaling $15.9 million, and proceeds of $0.2 million from a sale-manageback arrangement with the Company's Chairman and Chief Executive Officer, offset by repayment of long-term debt of $7.9 million, an increase in restricted cash for financing arrangements of $0.2 million and a net increase in payments and deposits for financing arrangements of $0.3 million. 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. As of September 30, 2000, the Company has drawn down approximately $3.8 million on this loan. 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 $0.6 million of incurred development costs and a $0.5 million development fee. The joint venture partner contributed $1.1 million in cash, which was utilized to acquire the land for the project. During July 2000, the Company obtained an $8.0 million loan, the proceeds of which will be used to construct and fund initial operations at this community. As of September 30, 2000, the Company has drawn down approximately $0.5 million on this loan. On August 1, 2000, the Company completed an $8.8 million permanent financing transaction for its Vacaville, California community. As a result of the transaction, the Company repaid construction debt in the amount of $7.5 million and generated approximately $1.1 million of cash available for general working capital requirements. At September 30, 2000, the Company has capitalized costs totaling approximately $10.0 million related to communities under construction or development, encumbered by $7.1 million in outstanding debt. The Company anticipates completing construction and commencing operations at the Mesa community in the fourth quarter of 2000. The total project cost, including the estimated initial operating deficit during approximately the first six months of operations Page 18 is being financed through a lease arrangement with a REIT; thereafter, the deficit will be funded from general working capital. The Company has four additional communities under construction that are anticipated to commence operations in 2001. The Company has obtained financing necessary to complete three of these communities and anticipates completing the financing for the fourth community during the fourth quarter of 2000. The Company estimates that the financing for these four construction projects is sufficient to complete the projects and fund the estimated initial operating deficit for the first year of operations. The Company's remaining capital expenditures for 2000 will be primarily related to these construction activities. The Company has entered into a long-term lease for the West Covina assisted living community being constructed by an unrelated third party and expects to commence operation at this community during the first quarter of 2001. The Company intends to fund operating deficits from its general working capital. In order to conserve working capital and generate additional working capital, the Company has discontinued development activities and has listed for sale the four parcels of real property previously held for development. The Company has entered into an agreement to sell one parcel of real property and this transaction is scheduled to close in the fourth quarter of 2000. The Company expects to generate $2.2 million in additional working capital available to fund its general operations and satisfy certain debt obligations. Completion of this transaction is subject to certain conditions that may not be satisfied and thus is not certain. Notwithstanding the Company's position related to selling land previously held for development, the Company has not abandoned its intent to grow. The Company believes there are many opportunities for growth in the assisted living industry and, accordingly, has engaged an investment banking advisor to evaluate the Company's financial prospects and assist with raising additional equity or placing additional debt. The Company intends that it would use the proceeds from any such transaction to acquire third party assisted living operating companies, acquire from third parties individual assisted living communities, repurchase communities leased by the Company, or commence its internal development activities. The Company has not received a letter of intent from any potential investor and the continued viability of the Company is not dependent upon the success of this activity. The Company has entered into agreements with two separate REITs to purchase a total of four communities the Company currently leases. The Company has obtained an expression of interest from a commercial bank to provide the financing with which to effect these transactions. Additional equity is required to complete the transactions. Mr. Bowen has offered to provide the required equity and the Company's Board of Directors has approved a transaction by which the Company will form a joint venture with Mr. Bowen to complete the transactions. A material term of the proposed joint venture is that the Company has the option to purchase Mr. Bowen's interest in the venture. Provided Page 19 that the Company can complete these transactions, the Company will generate approximately $500,000 of additional working capital to fund its general operations. Completion of these transactions is subject to a number of conditions, including the negotiation and execution of definitive documents. There is no assurance that any of these transactions will be completed on the terms proposed, or at all. During the remainder of 2000, the Company expects to meet its working capital requirements through cash on hand. The Company estimates that it will have sufficient resources available to meet all operating needs through the first quarter of 2001. The Company is working to generate additional working capital through increasing occupancy and operating efficiencies at its communities, selling land previously held for development, divesting from unprofitable operations, refinancing or restructuring the financing secured by some properties, and possibly through issuing additional equity and/or debt instruments. Certain operating lease agreements and loans contain restrictive covenants. As of September 30, 2000, the Company was not in compliance with at least one covenant relating to leases on five of the Company's communities and a loan on one of the Company's communities. The Company believes the ultimate resolution of this matter for each of the leases and the loan 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 operation of its business. Forward Looking Statements The information set forth in this report in the sections entitled "Overview" and "Liquidity and Capital Resources" regarding the Company's acquisition of sites for development, the Company's development, construction, financing and opening of new assisted living communities, the Company's plans to construct and operate new communities, and the Company's ability to generate sufficient working capital to meet its operating needs constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and is subject to the safe harbor created by that section. Completion of the company's current construction activities and operation of the those communities will involve a number of risks including, without limitation, the risk that the Company will be unable to obtain, or delays in obtaining, necessary occupancy and other required governmental permits and authorizations, risks that financing terms may change, environmental risks, risks that construction costs may exceed original estimates, risks that construction and lease-up may not be completed on schedule, and risks relating to the competitive environment for operations. The foregoing risks could cause the Company to significantly delay or curtail its planned growth and could cause one or more of the Company's new communities to not be profitable. Additional factors that could cause results to differ materially from those projected in the forward-looking Page 20 statements include, without limitation, the ability of the Company to raise additional financing upon terms acceptable to the Company, increases in the costs associated with new construction, competition, and acceptance of the Company's prototype community in new geographic markets. The Company's financial operating strategy is subject to the risk that occupancy rates at newly-developed communities may not be achieved or sustained at expected levels, in which case, 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 likely increase. Furthermore, the Company's 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 Company's ability to generate working capital sufficient to meet its operating needs is subject to a number of risks. One such risk is the ability of the Company to increase resident census and generate additional revenue. This can be negatively impacted by increased competition and regulation, instability in community staffing, and the effectiveness of the Company's marketing and care programs. Additional risks include whether the Company can successfully negotiate changes to current obligations to improve their terms, replace maturing obligations with more favorable terms, and restructure other obligations. Item 3. Quantitative and Qualitative Disclosures 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 September 30, 2000, the Company's variable rate borrowings totaled $8.6 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 $86,000. These amounts are determined by considering the impact of hypothetical interest rate on the Company's outstanding variable rate borrowings as of September 30, 2000, and does not consider changes in the actual level of borrowings which may occur subsequent to September 30, 2000. This analysis also does not consider the effects of the reduced level of overall economic activity 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. Page 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings A discussion of the Company's material legal proceeding appears in Item 3 of the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. Item 3. Defaults Upon Senior Securities The Company has not paid the first, second and third quarterly dividends which were accrued with respect to its preferred stock. A total of $525,000 was in arrears at September 30, 2000. The first quarter dividend rate was 6 percent. For each subsequent quarter in which the dividend is not paid, the dividend rate increases by one percent to a maximum of 12 percent or a specific prime rate plus 300 basis points. Item 6. Exhibits and Reports on Form 8-K. Exhibits: 27 Financial Data Schedule. Reports on Form 8-K There were no reports on Form 8-K for the period ended September 30, 2000. Page 22 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGENT ASSISTED LIVING, INC. By:______________________________________ Date: November 14, 2000 Steven L. Gish Chief Financial Officer Page 23