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, 2000 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 No X
--- ---
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 July 23 , 2001: $297,259
State the number of shares of Common Stock outstanding at July 23, 2001:
5,945,174
Documents Incorporated by Reference
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Part of Form 10-K into
Document which incorporated
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None
TABLE OF CONTENTS
Item of Form 10-K Page
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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 17
Item 4(a) - Executive Officers of the Registrant 17
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 21
Item 7(a) Quantitative and Qualitative Disclosre About Market Risk 29
Item 8 - Financial Statements and Supplementary Data 29
Item 9 - Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 30
PART III
Item 10 - Directors, Executive Officers and Control Persons;
Compliance with Section 16(a) of the Exchange Act 31
Item 11 - Executive Compensation 33
Item 12 - Security Ownership of Certain Beneficial Owners and Management 36
Item 13 - Certain Relationships and Related Transactions 38
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
SIGNATURES 45
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 management and development of assisted living communities.
The Company's growth strategy has been based upon the premise that
high-quality assisted living services can be more appropriately and efficiently
provided in its prototypical designed communities rather than in an existing
facility 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 a dramatic increase in
the number of communities and beds under operation in both 1997 and 1998. At the
time of the Company's initial public offering in 1995, the Company operated four
communities with a resident capacity of 565 beds. As of December 31, 2000, the
Company operated 30 communities with a resident capacity of 2,996 beds.
From 1995 to present, the Company's revenues increased from $12.6
million to $64.9 million. However, in connection with the opening and lease up
of its newly developed communities, the Company incurred substantial operating
losses. Although initial operating losses were anticipated, the Company did not
foresee the extent of such losses. The Company attributes these losses to the
extended time required to fill its communities and the difficulty in maintaining
occupancy, which are primarily the result of competitive factors. Until
recently, the Company has been successful at funding its operating losses
through a combination of equity, subordinated note, lease and sale-leaseback
arrangements with real estate investment trusts and conventional debt financing.
As of December 31, 2000, the Company's working capital decreased to a deficit of
$3.9 million and its accumulated deficit increased to $32.5 million. Although
operating results have continued to improve during the past three years, the
Company anticipates that its cash requirements during 2001 will exceed the cash
provided by operations. Accordingly, the Company has begun the process of
preparing and implementing a Plan (the "Plan") in order to address the Company's
liquidity issues (see Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
Recent Developments
- -------------------
The Company's Plan includes the conversion of certain debts to equity,
a bridge loan and a line of credit provided by the Company's majority
shareholder, the planned disposition of selected assets, and the renegotiation
of debt and lease obligations. In addition, the Company has engaged an
investment banking advisor to evaluate the Company's financial position, to
assist in the Plan, and to provide strategic alternatives including the raising
of equity or placing of debt.
1
In March 2001, the Company's Board of Directors approved the conversion
of $750,000 of accrued dividends due to the preferred shareholder and $507,877
of deferred lease payments due to the majority shareholder into 857,143 and
580,431 shares of common stock, respectively. In connection with this
transaction, the preferred shareholder agreed to waive its dividend for a period
of two years beginning January 1, 2001, and the majority shareholder agreed to
provide $1 million in bridge financing (the "Bridge Loan").
Through June 30, 2001, the majority shareholder provided cash advances
totaling $750,000 under the Bridge Loan. At June 30, 2001, such advances were
combined with additional outstanding amounts due to the majority shareholder and
an affiliated company, along with accrued interest, into a demand note in the
amount of $1,259,133. At the sole option of the holder, the note is due upon the
sale of certain assets, upon demand or no later than June 30, 2002. The note is
secured by land held for sale.
On July 3, 2001, the Company's Board of Directors approved a $1 million
operating line of credit provided by the majority shareholder. Through July 23,
2001, the Company has drawn $600,000 under the line. At the sole option of the
holder, the line is due upon the sale of certain assets, upon demand or no later
than June 30, 2002. The line is secured by a deed of trust recorded in a second
position against certain real property.
During April 2001, the Company and a commercial bank, which in December
2000 financed the purchase of four previously leased communities, agreed to
modify the terms of their debt financing. Although the financing provides that
all cash flow from the operations of the four repurchased communities be applied
against the outstanding principal of a certain portion of the underlying debt,
the bank agreed to waive this provision for a period of six months ending
September 2001. During the first three months of the modification, the net cash
flow from the four communities totaled approximately $540,000.
Also during April 2001, the Company and two real estate investment
trusts (each a "REIT") agreed to lease deferrals totaling $649,629. Of this
amount, $257,805 was paid in July, $257,805 is due in August, and $134,019 is
due in October or upon the sale of certain assets. Further, an additional REIT
agreed to apply security deposit funds (classified as Restricted Cash) in the
amount of $63,639 as a partial offset of lease payments that were due in April
and May.
During May 2001, the Company and a REIT agreed to transfer $502,600
from Restricted Cash to a working capital escrow for the purpose of funding
operating deficits from two leased communities. In addition, both the Company
and the REIT agreed to fund into the escrow up to an additional $1 million, if
necessary. The first $375,000 of the additional funding is to be derived from
the cash flow generated from two other communities which are under the same
lease arrangement. The next $375,000 is to be provided by the REIT in the form
of a loan and the remaining $250,000 is to be derived from the communities cash
flow. Further, the REIT agreed to temporarily waive a requirement for a security
deposit to be provided in the form of a letter of credit. As of July 23, 2001,
the working capital escrow totaled $696,878.
As the Company proceeds with the implementation of the Plan, the Plan
will be modified to address issues that arise. The Company anticipates that
fully implementing the Plan will take at least six months.
2
Assisted Living
- ---------------
The assisted living industry has evolved 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.
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
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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.
3
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.
High Quality and Private Payor Focus. The Company seeks private pay
residents to the greatest extent possible. Private pay residents occupied
approximately 97 percent of the Company's units at the end of 2000. 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 2000 the
Company generated $25,600 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. Historically, the Company has increased the
number of communities it operates primarily through the internal development of
new communities based upon the Company's three prototypes. See "Principal
Product Lines." The Company has at least temporarily discontinued all such
development activities for its own account, however, the Company continues to
offer its development expertise and management services to third parties.
The Company believes that there are many opportunities within its operating
region for third party management.
4
The Company may pursue opportunistic acquisitions of assisted living or
congregate care communities. The Company may also acquire or enter businesses
ancillary to the operation of assisted living communities, such as a retail
pharmacy or rehabilitation therapy business. Any such transactions would be
subject to available financing.
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.
5
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, 8.3 percent do not require assistance with activities of daily
living, 38.8 percent require assisted living level one care, 20.6 percent
require assisted living level two care, 10.8 percent require assisted living
level three care, 10.7 percent require dementia-specific care level one care and
10.8 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.
6
Geographic location, local wages and operating costs also affect the Company's
rates. As of December 31, 2000, the Company charged the following range of
effective monthly rates at its communities:
Low High
Assisted Living --- ----
---------------
Level One $1,595 $3,695
Level Two $1,895 $4,095
Level Three $2,195 $4,595
Dementia-Specific Care
----------------------
Level One $2,945 $5,495
Level Two $3,345 $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 17 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 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.
7
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.
8
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 Activities
- ----------------------
In order to conserve working capital and generate additional working
capital, the Company has at least temporarily discontinued development
activities for its own account and has listed for sale the parcels of real
property previously held for development. During 2000, the Company sold one
parcel of real property which generated $2.4 million in net proceeds available
to fund its general operations and satisfy certain debt obligations.
As of July 23, 2001, the Company has two communities under construction
and a third community under development pursuant to a joint venture arrangement.
In addition, the Company has entered into a management agreement for a community
which is scheduled to open by the first quarter of 2002. The Company continues
to pursue joint venture opportunities and third party management arrangements.
The Company is targeting areas within the nine western states that it currently
operates.
Based upon the Company's experience, the expected development time for
a prototype community ranges from approximately six months to one year, although
it can take longer in some cases. The average construction time for Regent and
Regent House communities should typically be between eleven and thirteen months
and between eight and ten months for Regent Court communities. Historically, the
Company has obtained pre-opening deposits for up to 25 percent of its units. The
Company's experience has been that it takes, on average, approximately 18 months
after a community moves-in its first resident for the community to achieve
breakeven cash flow after satisfying its debt service or lease payment. However,
due primarily to increased competition, the Company anticipates fewer
pre-opening deposits and potentially a longer initial lease up period.
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. The Company
expects this cost to increase to between $85,000 to $95,000 for future
construction. During 2001, the Company's first Regent House community was
9
completed at a cost of approximately $84,000 per residential unit, however, the
Regent House community currently under construction and future projects are
expected to cost approximately $90,000 per residential unit. The Company's cost
for its Regent Court communities has averaged approximately $85,000 per
residential bed.
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. 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.
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 assisted living communities as
well as operators of long-term care residences, rehabilitation hospitals,
extended care centers and skilled nursing facilities, retirement communities,
independent living centers and home health agencies. Nevertheless, assisted
living is a distinct and rapidly growing segment within the long-term care
industry that is distinguishable from other long-term care alternatives. The
Company believes that it competes favorably in all of the markets in which it
operates in regards to the quality of its care and services, community designs
and locations. However, many of the markets in which the Company operates have
become overbuilt. There are few barriers to entry in the assisted living
industry. The effects of such overbuilding include increased lease-up periods,
downward pricing pressures and competition for employees. In addition, the
competitive factors are having an impact on the Company's ability to maintain
occupancy levels at certain locations. There can be no assurance that the
Company will be able to compete effectively in those markets where overbuilding
exists, or that future overbuilding in other markets in which the Company
operates will not adversely affect the Company's operating results.
Increased Operating Costs
- -------------------------
During the past year, the Company has experienced significant increases
in labor costs, utility rates and professional liability insurance premiums.
The Company faces substantial competition with respect to the hiring
and retention of qualified personnel. The Company is dependent upon the existing
available labor pool in each market in which it operates. There can be no
assurance that labor costs will not continue to increase, or that the Company
will be able to attract the necessary personnel at a reasonable cost.
10
The western United States is in the midst of an energy shortage. The
Company has no control over its utility rates. There can be no assurance that
utility costs will not continue to increase, or that the Company will be able to
buy the power necessary to operate its communities.
The Company's professional liability insurance premiums have escalated
and the coverages have diminished. The Company maintains coverage limits of $1
million per incident, $3 million community aggregate, and $10 million policy
aggregate, on a claims made basis with a $50,000 deductible per incident with a
maximum annual deductible of $250,000, except with respect to its two Texas
communities for which the Company has elected to be self-insured. Providing
health care services involves an inherent risk of liability. Although the
Company has not been subject to significant liability losses in the past, there
can be no assurance that future claims in excess of insurance coverages will not
have a material adverse effect upon the Company's financial position or
operating results. There can be no assurance that the Company will be able to
obtain liability insurance in the future, or that such coverage will be
available at reasonably acceptable terms.
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. The Company has obtained all required licenses.
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 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
11
sanctions. If the Company fails to comply with applicable requirements, its
business and revenues could be materially and adversely affected.
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, 2000, the Company employed approximately 1,347 full
time and 431 part-time employees and the corporate offices employed 51
individuals full time and 2 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.
Risk Factors and Forward Looking Statements
- -------------------------------------------
The information set forth in this report regarding 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 Company's ability to implement its Plan, as described in "Description of
Business - Recent Developments", the factors discussed in "Development
Activities", "Competition", "Increased Operating Costs" and "Government
Regulation" and the following additional 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.
The Company has a substantial working capital deficit and anticipates
that its cash requirements during 2001 will exceed the cash provided by
operations. The Company will require a significant amount of capital to fund
operating losses, debt and lease obligations and remaining construction costs.
The combination of difficult financing and operating environments for the
assisted living industry has limited the potential sources for capital. There
can be no assurance that the Company will be successful in fully implementing
the Plan.
12
The Company's operating 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 occur 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. 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 development, construction and opening of new assisted
living communities are subject to the risk that the Company will be unable to
obtain, or will experience delays in obtaining, necessary 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.
The Company's development 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
unanticipated 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 or equity
capital.
The Company's continuing lease-up efforts 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 the growth successfully could have a
material adverse effect on the financial performance of the Company and increase
the Company's need for additional financing or equity capital.
Item 2. Description of Property
Current Communities. The table below sets forth certain information
regarding the Company's communities as of December 31, 2000:
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
Regent Court Corvallis 2000 24 48 Manage(4)
Sheldon Park Eugene 1998 103 115 Own(11)
13
Regent
Operations
Community Location Commenced Units(1) Beds(2) Interest
- ---------------------- --------- ---------- -------- ------- --------
Washington
Northshore House Kenmore 1998 85 92 Manage(5)
Regent Court Kent 1999 24 48 Manage(6)
Sterling Park Redmond 1990 154 175 Lease
California
Laurel Springs Bakersfield 1998 111 124 Own
Orchard Park Clovis 1998 112 124 Own(11)
Regent Court Modesto 1999 24 48 Own(7)
Summerfield House Vacaville 1998 109 122 Own
Sunnyside Court Fremont 1998 39 45 Lease
Sunshine Villa Santa Cruz 1990 106 116 Own(11)
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
Idaho
West Wind Boise 1997 48 51 Own(8)
Willow Park Boise 1997 106 120 Own(11)
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 117 133 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(12)
Meadow Wind Casper 1998 51 51 Lease(12)
Spring Wind Laramie 1998 52 52 Lease(12)
------ ------
Totals: 2,649 2,996
====== ======
Since December 31, 2000, the Company has opened four additional
communities. As of July 23, 2001, two additional communities were under
construction. Five of the six communities were internally developed; the West
Covina community was developed by a third party.
14
The table below sets forth certain information regarding the Company's
additional communities:
Opening
Community Location Date Units(1) Beds(2) Interest
- ------------------ -------------- ---------------- -------- -------
Arizona
Citrus Park Mesa February 2001 111 127 Lease
California
Regent Senior West Covina February 2001 130 144 Lease(13)
Regent House Merced July 2001 72 83 Own(13)
Regent House Elk Grove 2nd quarter 2002 84 94 Own
Utah
Regent at Salt Lake City 3rd quarter 2001 107 116 Own(14)
Regent at South Ogden January 2001 104 113 Own
--- ---
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 completed a lease-acquisition of Park Place during the
second quarter of 1998. The Company previously managed this community.
(4) The Company owns a 40 percent interest in a joint venture which owns
the Corvallis community.
(5) The Company owns a 50 percent interest in a joint venture which owns
the Kenmore community.
(6) The Company owns a 10 percent interest in a joint venture which owns
the Kent community.
(7) The Company owns a 55 percent co-tenancy interest in the Modesto
community.
(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.
15
(11) The Company owns a 75 percent interest in a joint venture which
purchased the Eugene, Clovis, Santa Cruz and Boise (Willow Park)
communities in December 2000. Previously, these communities were
operated pursuant to lease arrangements. The Company's Chairman owns
the remaining 25 percent interest in these communities.
(12) During February 2001, the Company assigned its leasehold interest in
the three Wyoming communities to a third party.
(13) The Company's West Covina and Merced communities are managed by a third
party. The Company owns a 75 percent interest in a joint venture which
owns the Merced community.
(14) The Company owns a 50 percent interest in a joint venture which owns
the Salt Lake City 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.
Office Facilities. The Company currently leases approximately 13,300
square feet of office space in Portland, Oregon.
Item 3. Legal Proceedings
The California Department of Social Services (DSS) filed an accusation
against the Company on December 15, 2000 seeking to revoke licenses for eight of
the Company's assisted living communities in the state of California. The
Company believes that the accusation was the result of a death at the Company's
Sunnyside Court community in Fremont, California. On June 28, 2001, the parties
reached a final settlement on the matter. As part of the settlement, the Company
agreed to subject three communities to certain conditions of probation,
including the
16
maintenance of high quality of care and training standards that exceed
regulatory requirements. The Company voluntarily put into place many of these
standards prior to the settlement.
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 alleged 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. During January 2001, the parties
reached final settlement on the matter. The settlement did not have a material
adverse effect on the Company's financial position or operating results.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
As of July 23, 2001, the executive officers of the Company were as set
forth below.
Name Age Position
Walter C. Bowen 59 Chairman of the Board and Chief Executive Officer
Louis Swart 62 President and Chief Operating Officer
James W. Ekberg 49 Senior Vice President of Finance and Development
Steven L. Gish 42 Chief Financial Officer, Treasurer, Secretary and
Director
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 25
years, Mr. Swart has held the positions of Chief Operating Officer of the
Hillsdale Group, President of Genesis ElderCare
17
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.
Steven L. Gish. Mr. Gish became Chief Financial Officer, Treasurer and
Secretary 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.
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 is 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
------
December 31, 1998 6.50 3.75
March 31, 1999 5.50 2.625
June 30, 1999 4.625 3.00
September 30, 1999 3.9375 2.25
OTC BB
------
December 31, 1999 2.625 1.75
March 31, 2000 .875 .875
June 30, 2000 1.00 .875
September 30, 2000 1.6875 1.6275
December 31, 2000 1.00 .75
The Company has 58 holders of record as of April 6, 2001.
Since its initial public offering in December 1995, the Company has not
paid cash dividends on its Common Stock. As of December 31, 2000, the Company
has an accumulated deficit of approximately $32.5 million, which restricts the
Company's ability to pay dividends. The Company's ability to pay dividends may
also 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.
In 2000, the Company recorded $750,000 in preferred dividends. In March
2001, the Company's Board of Directors approved the conversion of the $750,000
of accrued dividends due to the preferred shareholder into 580,431 shares of
common stock and the preferred shareholder
19
agreed to waive its dividend for a period of two years beginning January 1,
2001. In 1999, the Company recorded and paid $600,000 in preferred dividends.
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
2000, 1999, 1998, 1997, 1996. 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)
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
Consolidated Statement of Operations Data
Total revenues $ 64,909 $ 54,089 $ 30,419 $ 13,958 $ 13,260
Total operating expenses 67,823 60,760 39,859 18,094 12,946
-------------- -------------- -------------- -------------- --------------
Operating income (loss) $ (2,914) $ (6,671) $ (9,440) $ (4,136) $ 314
Other income (expense), net (3,682) (2,141) (1,622) 271 (179)
Minority interest 130 36 - - -
Provision for income taxes - - - (13) (58)
Extraordinary loss net of tax benefit - - - - (53)
-------------- -------------- -------------- -------------- --------------
Net income (loss) (6,466) (8,776) (11,062) (3,878) 24
Preferred stock dividends (750) (600) (600) (600) (26)
-------------- -------------- -------------- -------------- --------------
Net loss to common shareholders $ (7,216) $ (9,376) $ (11,662) $ (4,478) $ (2)
============== ============== ============== ============== ==============
Earnings (loss) per common share before
extraordinary loss, basic and diluted $ (1.60) $ (2.03) $ (2.52) $ (0.97) $ 0.01
Extraordinary loss per common share,
basic and diluted - - - - (0.01)
-------------- -------------- -------------- -------------- --------------
Net loss per common share, basic
and diluted $ (1.60) $ (2.03) $ (2.52) $ (0.97) $ -
============== ============== ============== ============== ==============
Weighted average number of common
shares outstanding
Basic 4,507,600 4,615,135 4,633,000 4,633,000 4,633,000
diluted 4,507,600 4,615,135 4,633,000 4,633,000 4,633,000
20
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 2,580 $ 4,538 $ 4,483 $ 1,805 $ 8,597
Working capital (deficit) (3,943) 1,427 1,562 (4,303) 10,326
Total assets 93,058 62,686 66,274 75,704 33,178
Long-term debt, less current portion 65,062 32,275 40,705 51,451 9,981
Minority interests 1,422 352 - 250 -
Shareholder's equity (deficit) $ (12,526) $ (5,311) $ 4,255 $ 15,917 $ 20,057
Supplementary Financial Information
2000 and 1999 by Quarter
(dollars in thousands)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- --------------- -------------- ---------------
2000
----
Revenues $ 15,523 $ 15,939 $ 16,670 $ 16,777
Residence operating expenses 10,342 10,803 11,520 12,360
-------------- --------------- -------------- ---------------
Gross profit $ 5,181 $ 5,136 $ 5,150 $ 4,417
============== =============== ============== ===============
Net loss $ (937) $ (1,369) $ (1,918) $ (2,242)
============== =============== ============== ===============
Net loss per share $ (0.24) $ (0.34) $ (0.47) $ (0.55)
============== =============== ============== ===============
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)
============== =============== ============== ===============
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.
21
In 1996, the Company began an aggressive expansion program of
development and construction of new communities. This program resulted in a
dramatic increase in the number of communities and beds under operation in both
1997 and 1998. At the time of the Company's initial public offering in 1995, the
Company operated four communities with a resident capacity of 565 beds. As of
December 31, 2000, the Company operated 30 communities with a resident capacity
of 2,996 beds.
To date, the Company's growth has been funded by $12.2 million raised
from the initial public offering on December 26, 1995, $10 million in 1996
through the issuance of preferred stock, and $9 million in 1998 through a
private placement of convertible subordinated notes.
The Company has a substantial working capital deficit and anticipates
that its cash requirements during 2001 will exceed the cash provided by
operations. The Company will require a significant amount of capital to fund
operating losses, debt and lease obligations and remaining construction costs.
The combination of a difficult financing and operating environment for the
assisted living industry has limited the potential sources for capital. There
can be no assurance that the Company will be successful in fully implementing
the Plan.
Given Regent's current liquidity situation, the Company is preparing
and implementing a Plan which includes the conversion of certain debts to
equity, a bridge loan and a line of credit provided by the Company's majority
shareholder, the planned disposition of selected assets, and the renegotiation
of debt and lease obligations. The pending Plan, and recent developments
impacting the Company's liquidity and operating results, are summarized under
the caption "Description of Business - Recent Developments", which is
incorporated in this Item 7 by this reference.
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.
22
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.
2000 1999 1998
------------ ------------ ------------
Revenues:
Rental and service 98.9 % 99.2 % 99.3 %
Management fees 1.1 0.8 0.7
------------ ------------ ------------
Total revenues 100.0 100.0 100.0
Operating expenses:
Residence operating expenses 69.4 71.3 84.2
General and administrative expenses 10.9 13.4 13.7
Lease expense 21.5 24.8 29.6
Depreciation and amortization 2.7 2.8 3.5
------------ ------------ ------------
Total operating expenses 104.5 112.3 131.0
Operating loss (4.5) (12.3) (31.0)
Interest income 0.8 0.6 1.1
Interest expense (6.0) (4.9) (5.3)
Equity in losses of joint ventures (0.5) (0.5) (1.2)
Other income, net 0.0 0.8 0.0
------------ ------------ ------------
Loss before minority interests (10.2) (16.3) (36.4)
Minority interests 0.2 0.1 0.0
------------ ------------ ------------
Loss before income taxes (10.0) (16.2) (36.4)
Provision for income taxes 0.0 0.0 0.0
------------ ------------ ------------
Net loss (10.0) (16.2) (36.4)
Preferred stock dividends (1.1) (1.1) (2.0)
------------ ------------ ------------
Net loss available to common shareholders (11.1)% (17.3)% (38.4)%
============ ============ ============
Comparison of Years Ended December 31, 2000 and 1999
- ----------------------------------------------------
Revenues. Revenues for 2000 totaled $64.9 million compared to $54.1
million in 1999, an increase of $10.8 million or 20.0 percent. During 2000, the
Company operated 31 communities comprised of seven stabilized communities, 17
newly developed or acquired
23
communities, and seven communities operated pursuant to management contracts, of
which three are owned in joint ventures and accounted for under the equity
method. The Company operated 29 communities during 1999 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
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 2000, rental and service revenues from Same Residences, the 22
communities the Company operated at the beginning of both 2000 and 1999,
comprised of seven stabilized and 15 newly developed communities, increased by
$9.3 million. Of this increase, $1.3 million was from the seven stabilized
communities and $8.0 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 $1.2 million. Average
occupancy at the 22 same residences was 83.9 percent for 2000 compared to 76.4
percent in 1999. Overall average occupancy at the Company's seven stabilized
communities was 94.3 percent for 2000.
Residence Operating Expenses. Residence operating expenses were $45.0
million for 2000 and $38.6 million for 1999, an increase of $6.4 million or 16.6
percent. Residence operating expenses from the 22 Same Residences increased by
$5.7 million from 1999 to 2000. Of this increase, $0.9 million was from the
seven stabilized communities and $4.8 million was from the 15 newly developed
communities. Residence operating expenses for all other newly developed
communities for 2000 include $2.4 million of start-up operating expenses and
pre-opening costs, whereas such expenses totaled $1.7 million in 1999. Residence
operating expenses from Same Residences totaled 68.8 percent and 70.2 percent of
rental and service revenue for 2000 and 1999, respectively.
General and Administrative Expenses. General and administrative
expenses were $7.1 million for 2000 compared to $7.3 million for 1999, a
decrease of $0.2 million. Payroll and related expenses increased by $0.6 million
from 1999 to 2000. Development related costs incurred in connection with asset
write-downs (land held for sale) and abandoned projects totaled $1.0 million in
2000 compared to $1.9 million in 1999. Other general and administrative expenses
increased by $0.1 million from 1999 to 2000 primarily due to the implementation
of the Company's plan for growth.
Lease Expense. Lease expense for the Company's leased communities
totaled $13.9 million for 2000 compared to $13.4 million for 1999. The increase
of $0.5 million relates to annual lease escalation clauses, three newly
developed leased communities two of which opened in 1999 and the sale-leaseback
of one newly developed community offset by the acquisition of a previously
leased community.
Depreciation and Amortization. Depreciation and amortization expense
was $1.8 million for 2000, compared to $1.5 million for 1999. The increase of
$0.3 million 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.
24
Interest Expense. Interest expense increased in 2000, to $3.9 million
from $2.6 million for 1999. Interest expense related to the operation of
communities increased to $0.4 million and interest expense related to land held
for sale increased by $0.3 million in 2000 as compared to 1999. The Company
capitalized $0.1 million of interest charges in 2000, whereas the Company
capitalized $2.0 million of interest charges in 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 Company's 10 percent owned Kent, Washington community,
the 40 percent owned Corvallis, Oregon community and pre-opening costs of the 50
percent owned Salt Lake City, Utah 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 2000,
compared to the same period in 1999. The Company reported a loss of $6.5 million
for 2000, whereas the Company reported a loss of $8.8 million for 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 $4.1
million and a decrease of $0.2 million in general and administrative expenses,
offset by increases in lease expense, depreciation expense, interest expense and
equity in losses of joint ventures and other income (loss), all as discussed
above.
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.
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 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.
25
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 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 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 $1.5 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
26
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.
Liquidity and Capital Resources
- -------------------------------
At December 31, 2000, the Company had a $3.9 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 $2.0
million (as described below) and an increase in net current liabilities of $3.7
million including classification of $2.4 million of debt obligations as current
due to violations of certain debt covenants that are otherwise not currently
due. The Company anticipates that its cash requirements during 2001 will exceed
the cash provided by operations.
Net cash used in operating activities totaled $3.0 million for 2000,
resulting primarily from a net loss of $6.5 million, adjusted $2.2 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 $1.3 million offset by an increase in
dividends payable of $0.8 million, short-term borrowings of $.2 million, an
increase in current portion of long-term debt of $1.0 million and the release of
cash in working capital escrow of $0.4 million.
Net cash used in investing activities totaled $43.6 million consisting
primarily of costs to repurchase four of the Company's communities which were
previously leased, along with other development and construction costs.
Net cash provided by financing activities totaled $44.7 million,
primarily consisting of property and equipment financing proceeds totaling $53.3
million, contributions by minority interests of $1.2 million, a decrease in
restricted cash for financing arrangements of $0.7 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 $9.3 million,
establishment of a new escrow for permanent lease at the Company's Mesa, Arizona
location of $1.4 million, and a net increase in payments and deposits for
financing arrangements of $0.8 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 December 31, 2000, the
Company has drawn down approximately $5.8 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 December 31,
2000, the Company has drawn down approximately $1.5 million on this loan.
27
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.
During December 2000, the Company formed a joint venture with Mr. Bowen
for the purpose of acquiring four communities for $33.9 million. The four
communities, including one formerly accounted for as a capitalized lease, were
previously leased from two separate real estate investment trusts. The Company
contributed $0.6 million along with its rights to purchase the four communities
for a 75% interest in the joint venture. Mr. Bowen contributed $1.2 million for
a 25% interest. In addition, the venture obtained $32.2 million in bank
financing and $0.5 million of seller provided financing in order to complete the
four acquisitions.
Also during December 2000, the Company obtained an $6.9 million loan,
the proceeds of which will be used to construct and fund initial operations at
the Company's 94-bed Elk Grove, California community. As of December 31, 2000,
the Company has drawn down approximately $0.8 million on this loan.
During 2000, the Company did not pay the quarterly dividends which
accrued with respect to its preferred stock. The first quarter dividend rate was
6 percent. For each subsequent quarter in which the dividend was not paid, the
dividend rate increased by one percent. The maximum rate that could apply to the
dividend is 12 percent or prime plus 300 basis points. As of December 31, 2000,
a total of $750,000 was in arrears. In March 2001, the Company's Board of
Directors approved the conversion of the $750,000 of accrued dividends into
857,143 shares of common stock. In addition, the preferred shareholder agreed to
waive its dividend for a period of two years.
At December 31, 2000, the Company has capitalized costs totaling
approximately $14.0 million related to communities under construction or
development, encumbered by $11.4 million in outstanding debt.
Since January 1, 2001, the Company has opened four newly developed
communities. The initial operating deficits of these communities is being funded
from a combination of construction loan reserves for two of the communities, a
working capital escrow financed through a lease arrangement with a REIT for a
third community, and thereafter from general working capital.
As of July 23, 2001, the Company has two additional communities under
construction. The first is scheduled to commence operations in the third quarter
of 2001. The second is scheduled to open in the second quarter of 2002. The
Company estimates that the construction financing for these communities is
sufficient to complete the projects and fund the estimated initial operating
deficit for approximately the first year of operations.
In order to conserve working capital and generate additional working
capital, the Company has at least temporarily discontinued development
activities for its own account and has listed for sale three other parcels of
real property previously held for development.
Certain operating lease agreements and loans contain restrictive
covenants. The Company is in violation of certain restrictive covenants
pertaining to twelve operating lease agreements and a debt obligation, and the
Company is currently attempting to resolve a notice of default. There can be no
assurance regarding whether or not any of the Company's lessors or
28
lenders will take aggressive action as a result of the covenant violations;
however, should any of the Company's financial partners pursue an action which
could jeopardize the Company's assets, liquidity or ongoing operations, the
Company may be forced to pursue a court supervised reorganization.
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 February 2001, the Company assigned its leasehold interest in
the three Wyoming communities to a third party for $325,000.
The Company has recently completed several transactions which are
summarized under the caption "Description of Business - Recent Developments".
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, 2000, the
Company's variable rate borrowings totaled $38.2 million. If market interest
rates average one percent more in 2001 than in 2000, the Company's interest
expense would increase and income before taxes would decrease by $382,000. These
amounts are determined by considering the impact of hypothetical interest rates
on the Company's outstanding variable rate borrowings as of December 31, 2000,
and does not consider changes in the actual level of borrowings which may occur
subsequent to December 31, 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.
Item 8. Financial Statements
The financial statements required by this item are included on pages
F-1 to F-25 of this Report.
29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
30
PART III
Item 10. Directors, Executive Officers, and Control Persons; Compliance with
Section 16(a)
of the Exchange Act
Information with respect to executive officers of the Company is
included under Item 4(a) of Part I of this report. The following table sets
forth certain information about each of the Company's Directors.
Name Age Director Since
---------------------------- ---- --------------
Walter C. Bowen(1)(2) 59 March 1995
Dana J. O'Brien (1)(2)(3)(4) 45 December 1996
Robert G. Peirce (3) 50 March 2001
Steven L. Gish 42 August 1995
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Conflicts Committee
Walter C. Bowen has served as Chairman of the Board and Chief Executive
Officer and a director of the Company since its formation in March
1995. Mr. Bowen also served as President of the Company until October
31, 1999. Mr. Bowen has been involved in the development, ownership,
and management of assisted living facilities since 1986, and has
devoted a majority of his time to the ownership and operation of those
facilities over the past five years. Mr. Bowen continues to serve as
the Chief Executive Officer of the Bowen Companies.
Dana J. O'Brien is a Senior Managing Director of Cornerstone Equity
Investors, L.L.C., a New York-based investment firm formed in December
1996 to provide investment management services to several investment
funds. Cornerstone is the investment advisor to Prudential Private
Equity Investors III, L.P., the holder of all of the Company's issued
and outstanding Series A and Series B Preferred Stock. During the five
year period preceding December 1996, Mr. O'Brien served as Executive
Vice President of Prudential Equity Investors, Inc., an investment
management firm. Mr. O'Brien currently serves on the Board of Directors
of several private companies, including Specialty Hospitals of America,
Inc. and Ocadian, Inc. (formerly Guardian Care, Inc.). Mr. O'Brien
became a director of the Company in December 1996.
Robert G. Peirce was elected to the board on March 13, 2001. Since
1994, he has been the Chairman, President and Chief Executive Officer
of Ocadian, Inc. (dba Ocadian Hospitals and Care Centers ). With 24
years of industry experience, he was Vice President of Operations for
the Far West Region of Hillhaven Corporation for 18 years prior to
joining Ocadian. Mr. Peirce is a member of the American College of
Healthcare Administrators. He presently serves on the Regional
Multifacility Committee for both the American Healthcare Association
and the California Association of Health Facilities.
Steven L. Gish has served as Chief Financial Officer, Treasurer,
Secretary, and Assistant Secretary in addition to serving as a Director
of the Company, since August 1995. In 1991 Mr. Gish became the
Controller of the "Bowen Companies," a group of companies and
31
businesses owned or controlled by Mr. Bowen, including the predecessor
of the Company. Prior to that time, Mr. Gish served as Treasurer and
Controller of McCormick and Baxter Creosoting Company, an industrial
wood preserving company.
Gary R. Maffei who served as a director of the Company since December
1995, resigned from the board on in April 2000. On March 13, 2001,
Robert G. Peirce was elected by the board to serve the balance of Mr.
Maffei's term which will expire at the 2001 annual meeting of the
shareholders.
Stephen A. Gregg who served as a director of the Company since December
1995, resigned from the board in January 2001.
Wayne C. Rembold who served as a director of the Company since March
1999, resigned from the board in January 2001.
Marvin S. Hausman, M.D. who served as a director of the Company since
March 1996, resigned from the board in April 2001.
Compensation of Directors
The Company pays each non-employee director $500 for attendance in
person at each regular meeting of the Board of Directors. In addition, the
Company will reimburse the directors for travel expenses incurred in connection
with their activities on behalf of the Company.
Each non-employee member of the Board of Directors of the Company is
automatically granted an option to purchase 2,000 shares of Common Stock when
that person becomes a director. Each non-employee director is also 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 all automatic grants to non-employee directors will be
the closing sales price of the Common Stock on the business day immediately
preceding the date of grant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors, and persons who own more than ten
percent of the outstanding Common Stock of the Company to file reports of
ownership and changes in ownership of the Common Stock with the Commission.
Executive officers, directors and greater than ten percent shareholders are also
required by Commission regulations to furnish the Company with copies of all
forms they file pursuant to Section 16(a). Based solely on review of the copies
of such reports furnished to the Company and written representations from
reporting persons, to the Company's knowledge all of the Section 16(a) filing
requirements applicable to such persons during fiscal year 2000 were complied
with on a timely basis.
Information with respect to certain relationships and related
transactions are included under Item 13 of Part III of this report.
32
Item 11. Executive Compensation
Summary Compensation Table. The following table sets forth, for the
fiscal years ended December 31, 2000, 1999, and 1998 compensation information
with respect to the Company's chief executive officer and each of its executive
officers whose compensation from the Company exceeded $100,000 during the
relevant fiscal year.
Summary Compensation Table
Annual Compensation
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
- --------------------------- ---- ---------- ------ ---------------
Walter C. Bowen 2000 $ 24,000 $ -0- $120,600(10)
Chairman of the Board 1999 $250,000 $ -0- $ 66,750(10)
Chief Executive Officer 1998(2) $250,000 $ -0- $ 77,384(10)
Louis Swart 2000 $225,000 $ -0- $1,500
President 1999(4) $132,901 $ -0- $8,830(5)
James W. Ekberg 2000 $150,000 $ -0- $4,500
Senior Vice President 1999 $150,000 $ -0- $1,750
of Finance and 1998 $150,000 $ -0- $2,384
Development(6)
Eric W. Jacobsen(7) 2000 $ -0- $ -0- $ -0-
Chief Operating Officer 1999 $101,250 $ -0- $1,750
1998 $135,000 $ -0- $2,384
Dale J. Zulauf(8) 2000 $246,963 $ -0- $ -0-
Chief Operating Officer 1999 $ 33,333 $ -0- $ -0-
1998 $ -0- $ -0- $ -0-
Steven L. Gish 2000 $133,750 $ -0- $4,013
Chief Financial Officer 1999 $120,000 $ -0- $1,750
1998(3) $ 95,000 $ -0- $2,384
David R. Gibson(9) 2000 $113,750 $ -0- $3,413
Vice President for Corporate 1999 $100,000 $ -0- $3,000
Affairs, General Counsel and 1998(3) $ 90,000 $ -0- $3,000
Corporate Secretary
(1) Represents the amount of a contribution by the Company to the officer's
401(k) plan account unless otherwise indicated.
(2) Mr. Bowen also served as President of the Company from its inception
through October 31, 1999.
33
(3) Certain executive officers of the Company fulfill similar executive
functions for certain of the Bowen Companies. A portion of the salary
expense for these officers is reimbursed to the Company through a
general allocation made pursuant to the Administrative Services
Agreement. The disclosed salary amount represents the net compensation
paid by the Company to the officer for the indicated period after
reimbursement by the Bowen Companies for time spent by the officer on
Bowen Companies business.
(4) Mr. Swart served as Chief Operating Officer of the Company from April
12, 1999, through October 31, 1999, at an annual salary of $175,000 and
became President November 1, 1999, at an annual salary of $225,000. Mr.
Swart's compensation includes $8,000 paid in connection with his
relocation to Portland, Oregon.
(5) Mr. Swart received a total of $16,830 in reimbursement of relocation
expenses during 1999, a portion of which was treated as compensation.
(6) In 1998 Mr. Ekberg served as Executive Vice President of the Company.
(7) Mr. Jacobsen resigned as an officer of the Company effective April 12,
1999, but remained an employee through June 30, 1999, and served as an
independent contractor to the Company through September 30, 1999. The
salary disclosed includes $67,500 paid to Mr. Jacobsen as an employee
and $33,750 paid to him as an independent contractor.
(8) Mr. Zulauf served as Chief Operating Officer of the Company from
November 1, 1999 through June 7, 2000, at an annual salary of $200,000.
He resigned as an officer of the Company effective June 7, 2000. Under
terms of a severance agreement Mr. Zulauf continued to be paid through
June 7, 2001. The salary disclosed includes $72,692 paid to Mr. Zulauf
as an employee and $121,154 paid under a severance agreement. Mr.
Zulauf also received a total of $13,796 in reimbursement of temporary
living and other expenses during 2000, which were treated as
compensation. After his resignation from the Company, Mr. Zulauf
provided executive search services for the Company and was paid $33,840
for those services in 2000 which is included in the salary disclosed.
(9) Mr. Gibson resigned as an officer of the Company effective April 25,
2001.
(10) Mr. Bowen was paid guaranty fees totaling $120,000, $65,000 and $75,000
in 2000, 1999 and 1998, respectively. See item 13.
Employment Agreements. Each officer of the Company has entered into an
employment agreement with the Company. The employment agreements for Messrs.
Bowen, Ekberg and Gish expired in December 2000. Mr. Swart's employment
agreement expires in March 2004. The agreements generally entitle the officer to
benefits customarily provided by the Company and provide for a base salary and
eligibility for a bonus. The Company may terminate any officer without cause by
making to such officer a cash payment equal to one year's base salary at the
rate in effect at the time of termination. Any officer may terminate his
employment upon 60 days' prior written notice. In addition, each officer has
entered into a restrictive covenant agreement containing noncompetition and
nondisclosure provisions.
Stock Option Grants in Fiscal 2000. There were four grants of stock
options made by the Company during fiscal 2000 to the officers of the Company
named in the Summary Compensation Table.
34
Option Grants in Last Fiscal Year
- -------------------------------------------------------------------------------------------------------
Potential realizable value at
Individual Grants assumed annual rates of stock
price appreciation for option
term(2)
- ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- -------
Name Number of Percent of Exercise Market Expir- 0% 5% 10%
securities Total Price price on ation ($) ($) ($)
underlying Options $/share date of date
options granted to grant
granted employees
in fiscal
year(1)
- ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- -------
Louis Swart 75,000(3) 21.3% $0.75 $0.75 06/28/10 -0- 35,375 89,648
- ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- -------
James W. Ekberg 75,000(4) 21.3% $0.75 $0.75 06/28/09 -0- 35,375 89,648
- ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- -------
Steven L. Gish 50,000(5) 14.2% $0.75 $0.75 06/28/09 -0- 23,584 59,765
- ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- -------
David R. Gibson 50,000(6) 14.2% $0.75 $0.75 06/28/09 -0- 23,584 59,765
- ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- -------
(1) The Company granted a total of 352,000 options to employees in 2000.
(2) Future value of current year grants assuming appreciation of 0 percent,
5 percent and 10 percent per year over the life of the option. The
actual value realized may be greater or less than the potential
realizable values set forth in the table. The assumed rates of growth
are prescribed by the Securities and Exchange Commission (the
"Commission") for illustrative purposes only and are not intended to
predict or forecast future stock prices.
(3) The options have a term of ten years and vest 16.67 percent every six
months beginning on June 1, 2001. Upon the occurrence of certain
corporate transactions, the exercisability of the options may be
accelerated.
(4) These options have a term of nine years and 50,000 shares vested on the
grant date of June 28, 2000. The remaining shares vest 50 percent on
June 1, 2001 and 50 percent on December 1, 2001. Upon the occurrence of
certain corporate transactions, the exercisability of the options may
be accelerated.
(5) These options have a term of nine years and 33,333 shares vested on the
grant date of June 28, 2000. The remaining shares vest 50 percent on
June 1, 2001 and 50 percent on December 1, 2001. Upon the occurrence of
certain corporate transactions, the exercisability of the options may
be accelerated.
(6) These options have a term of nine years and 16,666 shares vested on the
grant date of June 28, 2000. The remaining shares vest 16.67 percent
every six months beginning on June 1, 2001. Upon certain corporate
transactions, the exercisability of the options may be accelerated.
Option Exercises in 2000 and Fiscal Year-End Option Values. The
following table sets forth information (on an aggregated basis) concerning the
fiscal year-end value of unexercised options held by each of the officers of the
Company named in the Summary Compensation Table. None of the officers named
below exercised any stock options during fiscal 2000.
35
Fiscal Year-End Option Values
Value of Unexercised
Acquired Number of Unexercised In-the-Money
on Value Options at Year-End Options at Year-End(1)
------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Walter C. Bowen -- -- -- -- -- --
Louis Swart -- -- 10,000 115,000 $ -0- $ -0-
James W. Ekberg -- -- 165,000(2) 35,000 $ -0- $ -0-
Eric W. Jacobsen -- -- 95,000 5,000 $ -0- $ -0-
Steven L. Gish -- -- 86,333(3) 23,667 $ -0- $ -0-
David R. Gibson -- -- 31,666 43,334 $ -0- $ -0-
- ------------------------------------------------------------------------------------------------
(1) Options are "in-the money" if the fair market value of the underlying
securities on that date exceeds the exercise price of the option. The
amount set forth represents the difference between the fair market
value of the securities underlying the options on December 31, 2000,
based on the last sale price of $0.75 per share of Common Stock on the
date (as reported on the Over-the-Counter Market) and the exercise
price of the options, multiplied by the applicable number of options.
(2) Does not include an option to purchase 50,000 shares of Common Stock,
which is immediately exercisable at an exercise price of $6.00 a share,
granted to Mr. Ekberg by Mr. Bowen in 1995.
(3) Does not include an option to purchase 25,000 shares of Common Stock,
which is immediately exercisable at an exercise price of $6.00 a share,
granted to Mr. Gish by Mr. Bowen in 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of June 30, 2001, with
respect to the beneficial ownership of the Company's Common Stock by each
director, by each executive officer of the Company named in the Summary
Compensation Table, by all directors and executive officers as a group, and by
each person who is known to the Company to be the beneficial owner of more than
five percent of the Company's outstanding Common Stock. Unless otherwise
indicated in the Table, each person has sole voting power and sole investment
power with respect to all outstanding shares of Common Stock shown as
beneficially owned by them.
36
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner(1) Ownership Class(2)
- --------------------- ----------------- --------
Walter C. Bowen 3,983,631(3) 67.0%
Louis Swart 32,500 *
James W. Ekberg 232,500(4) 3.8%
Eric W. Jacobsen 95,000 1.6%
Steven L. Gish 121,666(4) 2.0%
Dana J. O'Brien 10,000(5)(6) *
Robert G. Peirce 6,500(7) *
Prudential Private Equity
Investors III, L.P.
717 Fifth Avenue, Suite 1100
New York, NY 10022 2,257,636(8) 30.7%
LTC Healthcare, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, CA 93030 1,133,333(9) 16.0%
All directors and executive officers
as a group (7 persons) 4,481,797 69.6%
* Less than one percent.
(1) Unless otherwise indicated, the address of each person named is c/o
Regent Assisted Living, Inc., 121 S. W. Morrison Street, Suite 1000,
Portland, Oregon 97204.
(2) Assumes the exercise of solely that individual's options, or conversion
of solely that party's underlying instruments, and issuance by the
Company of the related number of shares of Common Stock.
(3) Includes 580,431 shares of common stock approved by the Company's Board
of Directors in March 2001 in connection with the Plan. Includes 80,000
shares held of record by Mr. Bowen that may be purchased within 60 days
by certain officers and one other individual pursuant to options
granted by Mr. Bowen. Mr. Bowen has granted options to purchase a
portion of his shares to Messrs. Ekberg (50,000 shares) and Gish
(25,000 shares).
(4) Includes shares that may be acquired within 60 days pursuant to options
granted by Mr. Bowen to purchase a portion of his shares and those
shares that may be purchased pursuant to options granted under the
Company's 1995 Stock Incentive Plan.
(5) Includes 10,000 shares that may be acquired within 60 days pursuant to
options granted under the Company's 1995 Stock Incentive Plan.
(6) Does not include shares of Series A or Series B Preferred Stock owned
by Prudential Private Equity Investors III, L.P. ("PPEI"), an
investment fund managed by Cornerstone Equity Investors, L.L.C., the
employer of Mr. O'Brien.
37
(7) Includes 2,000 shares that may be acquired within 60 days pursuant to
options granted under the Company's 1995 Stock Incentive Plan.
(8) Includes 857,143 shares of common stock approved by the Company's Board
of Directors in March 2001 in connection with the Plan. Includes the
number of shares that may be acquired within 60 days pursuant to the
holder's right to convert its Series A Preferred Stock into shares of
Common Stock. PPEI also owns 382,882 shares of Series B Preferred
stock, each share of which can be converted into one share of Series A
Preferred Stock or into a total of 417,690 shares of Common Stock upon
the occurrence of specified conversion events.
(9) This number comprises the 1,133,333 shares that may be acquired by LTC
Healthcare, Inc. within 60 days pursuant to its right to convert its
currently outstanding subordinated convertible notes into shares of the
Company's Common Stock at a rate of $7.50 per share.
Item 13. Certain Relationships and Related Transactions
Mr. Bowen holds a 99 percent general partnership interest in the
Regency Park Apartments Limited Partnership ("Regency Partnership"), an Oregon
limited partnership from which the Company leases its Regency Park community
located in Portland, Oregon. Mr. Bowen also holds a 99 percent ownership
interest in Sterling Park, L.L.C., a Washington limited liability company from
which the Company leases its Sterling Park community located in Redmond,
Washington. Mr. Bowen's minor children hold the remaining one percent interest
in the Regency Partnership and Sterling Park, L.L.C. As a result, Mr. Bowen may
be deemed to receive the portion of the lease payments remaining after service
of the debt to which the properties are subject. For 2000, these lease payments
were $1,070,400 for Regency Park and $1,253,124 for Sterling Park of which
$257,400 for Regency Park and $233,124 for Sterling Park were deferred at
December 31, 2000. For 1999, these lease payments were $1,320,536 for Regency
Park and $1,486,248 for Sterling Park. For 1998, these lease payments were
$1,312,400 for Regency Park and $1,486,250 for Sterling Park. In March 2001, the
Company's Board of Directors approved the conversion of the $507,877 of deferred
lease payments due to Mr. Bowen into 580,431 shares of common stock.
Mr. Bowen holds a 90 percent interest in Desert Flower, LLC, an Oregon
limited liability company that owns the Desert Flower Assisted Living community
in Scottsdale, Arizona. Mr. Bowen's minor children hold the remaining ten
percent interest in Desert Flower, LLC. In 1999, the Company developed the
community and sold it to Desert Flower, LLC in a transaction through which the
Company received proceeds of $1.2 million and Desert Flower, LLC assumed $8.8
million in debt. 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. Upon satisfaction of the continuing involvement
criteria, the transaction will be accounted for as a sale. The Company manages
the community for Desert Flower, LLC, subject to a net operating income guaranty
provided by the Company. In 2000, the Company recorded $39,009 as management fee
income and $142,070 as an increase in deposits under sales contract.
During December 2000, the company formed with Mr. Bowen a joint
venture, Regent/Bowen, LLC, for the purpose of acquiring four communities for
$33.9 million. The four communities were previously leased from two separate
real estate investment trusts. The Company
38
contributed $0.6 million along with its rights to purchase the four communities
for a 75% interest in the joint venture. Mr. Bowen contributed $1.2 million for
a 25% interest. In addition, the venture obtained $32.2 million in bank
financing and $0.5 million of seller provided financing in order to complete the
four acquisitions.
In March 2001, as part of the Plan, Mr. Bowen agreed to provide $1
million in bridge financing (the Bridge Loan) to the Company. Through July 23,
2001, Mr. Bowen has provided cash advances totaling $750,000 under the Bridge
Loan and earned fees totaling $15,000 as a result of providing this financing.
At June 30, 2001, the advances under the Bridge Loan were combined with
additional amounts due to Mr. Bowen and an affiliated Company, Bowen Development
Company, along with accrued interest, into a demand note in the amount of
$1,259,133. At the sole option of the holder, the note is due upon the sale of
certain assets, upon demand or no later than June 30, 2002. The note is secured
by land held for sale.
On July 3, 2001, the Company's Board of Directors approved a $1 million
operating line of credit provided by Mr. Bowen. Through July 23, 2001, the
Company has drawn $600,000 under the line. The line is secured by a deed of
trust recorded in a second position against certain real property. At the sole
option of the holder, the line of credit is due upon the sale of certain assets,
upon demand or no later than June 30, 2002. The line of credit bears interest at
18 percent. Mr. Bowen earned a $50,000 fee as a result of providing this
financing.
Bowen Development Company, which is wholly owned by Mr. Bowen,
completed construction of one of the Company's new Regent Court communities in
2000. Additionally, Bowen Development Company completed one more community
during 2001. Each of these projects is contracted for a fixed price that
includes "contractor's overhead and profit" which is paid on a percentage of
completion basis. Bowen Development Company lost approximately $414,000 in 2000
and earned fees totaling approximately $526,100 in 1999 on these two projects.
The Company's Conflicts Committee or independent directors approved these two
contracts after solicitation and review of competitive bids from unaffiliated
general contractors.
The Company believes that each of the foregoing transactions was on
terms no less favorable to the Company than could have been obtained from
unaffiliated parties in arm's-length transactions; however, there can be no
assurance that such is the case.
The Company and the Bowen Companies are all controlled by Mr. Bowen.
Certain executive officers of the Company, including Messrs. Bowen and Gish,
fulfill similar executive functions for other Bowen Companies and spend
significant amounts of time on the business of other Bowen Companies. The
Company provides management and administrative services to, and from time to
time may obtain services or the use of certain equipment from, certain of the
Bowen Companies pursuant to an Administrative Services Agreement. Under that
agreement, the Bowen Companies and the Company reimburse each other for the
actual cost of services received under the Administrative Services Agreement.
The Company believes that the sharing of executive management and other
resources (such as data processing, accounting, legal, financial, tax, treasury,
risk management and human resources) provides benefits to the Company by giving
it access to a level of experience and expertise that can only be supported by a
larger organization. The Administrative Services Agreement is cancelable by any
party, including the Company, on 60 days' notice. Pursuant to the terms of the
Administrative Services Agreement, reimbursement of costs will be reviewed at
least annually by the Audit Committee of the Board of Directors.
The Administrative Services Agreement requires the Bowen Companies to
offer first to the Company any opportunities received by or originated with the
Bowen Companies relating to the
39
assisted living business. The Administrative Services Agreement also requires
all transactions between the Company and the Bowen Companies to be on an arm's
length basis containing terms no less favorable to the Company than could have
been obtained from an unrelated third party and requires any such transaction to
be approved by a majority of the Company's directors unaffiliated with the Bowen
Companies. In 2000, Regent charged the Bowen Companies $10,300 under the
Administrative Services Agreement. In 1999, Regent charged the Bowen Companies
$78,000 under the Administrative Services Agreement. In 1998, Regent charged the
Bowen Companies $145,000 under the Administrative Services Agreement.
As of June 30, 2001, Mr. Bowen had provided personal guarantees for
repayment and performance of covenants on Company loan agreements in an
aggregate amount of $40,795,700. Mr. Bowen was paid $120,000, $65,000 and
$75,000 in 2000, 1999 and 1998, respectively, in exchange for his personal
guaranties.
40
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
41
(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
42
(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
(8)21 List of Subsidiaries
(8)23.1 Consent of PricewaterhouseCoopers LLP
- -------------------
(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)
(2) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995
43
(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) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999
(8) 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,
2000.
44
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 25th day of July, 2001.
REGENT ASSISTED LIVING, INC.
By: /s/ 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 25th day of July, 2001.
Signature Title
--------- -----
/s/ Walter C. Bowen Chief Executive Officer,
- ------------------------------- Chairman of the Board and Director
Walter C. Bowen (Principal Executive Officer)
/s/ Steven L. Gish Chief Financial Officer, Treasurer,
- ------------------------------- Secretary and Director
Steven L. Gish (Principal Financial and Accounting Officer)
/s/ Robert G. Peirce
- -------------------------------
Robert G. Peirce, Director
/s/ Dana J. O'Brien
- -------------------------------
Dana J. O'Brien, Director
45
Regent Assisted Living, Inc.
and Subsidiaries
Consolidated Financial Statements
For the Years Ended December 31, 2000 and 1999
Regent Assisted Living, Inc. and Subsidiaries
Table of Contents
Page
Report of Independent Accountants - PricewaterhouseCoopers LLP .............F-1
Financial Statements:
Consolidated Balance Sheets............................................F-2
Consolidated Statements of Operations..................................F-3
Consolidated Statements of Changes in Shareholders' Equity.............F-4
Consolidated Statements of Cash Flows..................................F-5
Notes to Consolidated Financial Statements .................................F-6
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, 2000
and 1999 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 12 and
13 to the financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Notes 12 and 13. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Portland, Oregon
March 30, 2001, except for Notes 12 and 13,
as to which the date is July 10,
2001
F-1
Regent Assisted Living, Inc. and Subsidiaries Consolidated
Balance Sheets December 31, 2000 and 1999
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 2,580,004 $ 4,537,839
Cash held in working capital escrow 1,381,781 404,598
Accounts receivable, net 557,355 723,081
Prepaid expenses 931,506 739,569
Construction advances receivable - 235,706
Land held for sale 2,400,000 2,860,000
------------ ------------
Total current assets 7,850,646 9,500,793
Restricted cash 2,292,269 2,916,182
Property and equipment, net 78,546,940 46,900,983
Investment in and advances to joint venture 629,061 383,114
Other assets 3,738,642 2,985,291
------------ ------------
Total assets $93,057,558 $62,686,363
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,917,043 $ 2,266,919
Construction accounts payable 324,572 463,136
Accounts payable and other accrued expenses 3,188,962 3,414,976
Accrued payroll 1,810,907 1,490,594
Accrued interest 551,892 438,017
------------ ------------
Total current liabilities 11,793,376 8,073,642
Long-term debt 65,061,708 32,275,189
Convertible subordinated notes 9,000,000 9,000,000
Deposits under sales contract 10,297,381 10,194,342
Deferred gains and development fees, net 5,268,468 6,714,156
Other liabilities 2,740,764 1,387,250
------------ ------------
Total liabilities 104,161,697 67,644,579
Minority interest in consolidated subsidiaries 1,422,226 352,389
------------ ------------
Commitments and contingencies
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 (32,495,555) (25,279,795)
------------ ------------
Total shareholders' equity (12,526,365) (5,310,605)
------------ ------------
Total liabilities and shareholders' equity $93,057,558 $62,686,363
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Revenues:
Rental and service $ 64,180,365 $ 53,635,079 $ 30,217,379
Management fees 728,374 453,936 201,816
------------ ------------ ------------
Total revenues 64,908,739 54,089,015 30,419,195
Operating expenses:
Residence operating expenses 45,025,215 38,605,500 25,602,709
General and administrative 7,071,740 7,251,337 4,161,981
Lease expense 13,941,519 13,390,695 9,014,483
Depreciation and amortization 1,784,031 1,512,835 1,080,050
------------ ------------ ------------
Total operating expenses 67,822,505 60,760,367 39,859,223
------------ ------------ ------------
Operating loss (2,913,766) (6,671,352) (9,440,028)
Interest income 507,641 305,656 336,168
Interest expense (3,908,366) (2,645,863) (1,594,777)
Equity in losses of joint ventures (296,817) (246,565) (360,028)
Other income (loss), net 15,385 445,860 (3,467)
------------ ------------ ------------
Loss before minority interests (6,595,923) (8,812,264) (11,062,132)
Minority interests 130,163 35,888 -
------------ ------------ ------------
Loss before income taxes (6,465,760) (8,776,376) (11,062,132)
Provision for income taxes - - -
------------ ------------ ------------
Net loss (6,465,760) (8,776,376) (11,062,132)
Preferred stock dividends (750,000) (600,000) (600,000)
------------ ------------ ------------
Net loss available to common shareholders $ (7,215,760) $ (9,376,376) $(11,662,132)
============ ============ ============
Basic loss per common share $ (1.60) $ (2.03) $ (2.52)
============ ============ ============
Diluted loss per common share $ (1.60) $ (2.03) $ (2.52)
============ ============ ============
Weighted average common shares
outstanding - basic 4,507,600 4,615,135 4,633,000
============ ============ ============
Weighted average common shares
outstanding - diluted 4,507,600 4,615,135 4,633,000
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
Preferred Stock
--------------------------------------------
Series A Series B Common Stock Total
---------------------- ------------------- ---------------------- Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Deficit Equity
--------- ----------- ------- ---------- --------- ----------- ------------- --------------
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)
Preferred stock dividends (750,000) (750,000)
Net loss (6,465,760) (6,465,760)
--------- ----------- ------- ---------- --------- ----------- ------------- --------------
Balance, December 31, 2000 1,283,785 $ 7,201,910 382,882 $2,147,931 4,507,600 $10,619,349 $(32,495,555) $(12,526,365)
========= =========== ======= ========== ========= =========== ============= ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Cash flows from operating activities:
Net loss $ (6,465,760) $ (8,776,376) $(11,062,132)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,784,031 1,512,835 1,080,050
Loss (gain) on sale of assets 104 (462,113) -
Adjustment on land held for sale to estimated fair value 791,245 1,489,197 -
Amortization of deferred gains and development fees (522,177) (509,738) (350,564)
Equity interest in joint ventures 296,817 246,565 360,028
Non-cash operating expense - - 128,957
Increase in allowance for doubtful accounts 23,000 - 10,000
Minority interests (130,163) (35,888) -
Changes in other assets and liabilities:
Cash held in working capital escrow 413,608 1,181,027 (10,925)
Accounts receivable 196,149 (435,598) (169,373)
Prepaid expenses (191,937) (494,245) (145,523)
Other assets (103,637) 198,914 (990,086)
Accounts payable and other accrued expenses (226,014) 1,134,746 1,595,094
Accrued payroll 320,313 276,964 711,062
Accrued interest 169,933 119,816 138,238
Other liabilities 603,514 (198,914) 1,068,586
------------- ------------- -------------
Net cash used in operating activities (3,040,974) (4,752,808) (7,636,588)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (45,812,247) (13,248,696) (36,267,398)
Increase (decrease) in construction accounts payable (138,564) (145,449) 25,542
Investment in and advances to joint ventures (14,114) (12,400) (158,563)
Proceeds from sale of property and equipment 2,401,375 740,309 829,408
Proceeds from sale of equity interest - 725,000 -
Withdrawals from (deposits to) replacement reserve account, net (72,937) 20,555 (80,186)
------------- ------------- -------------
Net cash used in investing activities (43,636,487) (11,920,681) (35,651,197)
------------- ------------- -------------
Cash flows from financing activities:
Short-term borrowings - - (4,500,000)
Proceeds from issuance of long-term debt 53,275,199 19,986,691 27,490,812
Payments on long-term debt (9,278,775) (14,688,127) (38,421,190)
Construction (advances) payments 235,706 368,200 (110,625)
Payments and deposits for lease financing arrangements, net (759,432) (551,638) (897,484)
Restricted cash for lease financing arrangements, net 696,850 (415,344) (315,802)
Deferred development fees from lease financing arrangements 637,830 243,419 497,218
Proceeds from lease financing arrangements (1,390,791) 10,766,814 53,822,808
Proceeds from issuance of convertible subordinated notes - - 9,000,000
Proceeds from sales contract 103,039 1,419,342 -
Contributions by minority interests 1,200,000 388,277 -
Preferred stock dividends - (600,000) (600,000)
Payments to repurchase common stock (189,354) -
------------- ------------- -------------
Net cash provided by financing activities 44,719,626 16,728,280 45,965,737
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,957,835) 54,791 2,677,952
Cash and cash equivalents, beginning of period 4,537,839 4,483,048 1,805,096
------------- ------------- -------------
Cash and cash equivalents, end of period $ 2,580,004 $ 4,537,839 $ 4,483,048
============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5a
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - continued
For the Years Ended December 31, 2000, 1999 and 1998
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 $ 653,423 $ - $ 138,000
============= ============= =============
Receivable in joint venture in exchange for developer fee $ 71,350 $ - $ -
============= ============= =============
Preferred stock dividends accrued $ 750,000 $ - $ -
============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5b
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, 2000, the Company operated thirty assisted living
communities in nine western states. In addition, the Company had five
communities under construction and two under development. During 2000, the
Company commenced operations at one internally developed stand-alone
Alzheimer care community, which is owned by a joint venture, and entered
into one additional management contract.
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.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries and entities in which it has a
controlling interest. 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 the related agreements (see Note 13).
F-6
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies (Continued)
Land held for sale
The Company has made three parcels of land available for sale at December
31, 2000 and two parcels at December 31, 1999. This land was previously
acquired for development. Of the land held for sale at December 31, 1999,
one parcel was sold in 2000 for net proceeds of $2,401,375. Two additional
parcels were made available for sale during 2000. The Company recorded an
expense of $791,245 and $1,489,197 in 2000 and 1999, respectively, to
adjust the land held for sale to its estimated fair market value.
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 $1,718,973 and $2,721,758 as of December 31,
2000 and 1999, respectively. Restricted cash also includes a replacement
reserve required to be maintained for two of the communities and a cash
collateral reserve required for two of the communities under development
and construction (see Note 13).
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.
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.
F-7
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated 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. The measurement
of deferred tax assets is reduced, if necessary, by a valuation allowance.
Computation of per share amounts
Basic Earnings Per Share (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. The
weighted average shares issuable upon the exercise of stock options were
not included in the calculation because they were antidilutive.
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-8
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies (Continued)
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. SAB 101 provided guidance on the recognition, presentation and
disclosure of revenues in financial statements. The Company adopted SAB 101
as of December 31, 2000. The adoption did not have a material effect on the
previously reported quarterly financial results or the annual financial
results, as the Company's revenue recognition policies were already
consistent with SAB 101.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44)
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25 which provides interpretive guidance
on several implementation issues related to Accounting Principles Board
Opinion No. 25 Accounting for Stock issued to Employees. FIN 44 is
effective July 1, 2000, but certain conclusions must be applied earlier.
The adoption of FIN 44 did not have a material impact on the Company's
consolidated 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.
F-9
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements (continued)
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. It
revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of Statement 125's provisions without
reconsideration. The Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers that are secured
borrowings.
SFAS No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. It is
effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Disclosures about
securitization accepted need not be reported for periods ending on or
before December 15, 2000, for which financial statements are presented for
comparative purposes. The Company believes that the adoption of this
statement will not have a material impact on the Company's consolidated
financial statements.
In June 2001, the FASB unanimously approved both SFAS No. 141 and No. 142.
It is anticipated that both statements will be issued in July 2001. The
Company does not anticipate the adoption of these statements to have a
material impact on the Company's consolidated financial statements.
2. Property and Equipment
Property and equipment are stated at cost and consist of the following:
2000 1999
Land $ 7,054,444 $ 5,364,716
Buildings and improvements 55,383,869 33,332,546
Furniture and equipment 5,148,211 4,289,447
Construction in progress 14,073,406 6,572,177
------------ ------------
81,659,930 49,558,886
Less accumulated depreciation and amortization 3,112,990 2,657,903
------------ ------------
Property and equipment, net $ 78,546,940 $ 46,900,983
============ ============
F-10
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. Property and Equipment (Continued)
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 $1,186,361 (land only) at December 31, 2000 and
$8,910,539 at December 31, 1999. Accumulated amortization related to these
leases was $771,000 at December 31, 1999.
3. Other Assets
Other assets consist of the following:
2000 1999
Resident security and trust deposits $1,482,887 $1,387,250
Deferred financing costs, net 1,663,618 1,063,771
Other 592,137 534,270
----------- -----------
Total other assets $3,738,642 $2,985,291
=========== ===========
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 Consolidated Financial Statements, Continued
4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales
Contract
Long-term debt consists of:
2000 1999
Notes payable to a financial institution, interest only payments at the
commercial based rate and/or one or more LIBOR based rates (10% at
December 31, 2000) due December 2002 $ 27,120,000 $ -
Note payable to a financial institution due in monthly installments
of $74,208 including interest at 8.43%, due October 2009 9,357,418 9,454,584
Note payable to a financial institution, due in monthly installments of
$70,218, including interest at 8.69%, due August 2010 8,773,751 -
Notes payable to a financial institution, due in monthly installments
equal to net cash flow from the mortgaged property and interest
payments at 16%, due December 2002 (Note 13) 5,085,000 -
Construction loans, totaling $23,953,750, interest varies between 9.08%
and 17.5%, maturities vary from June 2001 through December 2005 14,701,219 10,842,797
Note payable to a bank, due in monthly installments of $20,670,
including interest at 8.71%, due June 2002 2,447,201 2,477,038
Capital lease obligation, monthly interest only payments at 10.14%
beginning upon completion of building, due approximately
August 2015 (Note 7) 1,186,361 1,186,361
Note payable to a corporation, due in monthly installments of $50,000,
plus interest at 12%, due October 2001 500,000 -
Note payable to a corporation, quarterly payments of interest
only at 9%, due in December 2000 500,000 500,000
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 between 2002 and 2004 271,354 385,047
Capital lease obligation, due in monthly installments of $69,100,
including interest at 8.4%, repaid - 7,745,271
Note payable to a financial institution, interest only payments
at prime plus 4% (12.5% at December 31, 1999), repaid - 1,263,411
Notes payable to construction company owned by the majority
shareholder, annual payments of interest only at prime plus
1% (10.5% at December 31, 2000) (Note 13) at December 31,
2000 (Note 9) 250,000 250,000
Other 786,447 437,599
------------ ------------
70,978,751 34,542,108
Less amounts due within one year 5,917,043 2,266,919
------------ ------------
$ 65,061,708 $ 32,275,189
============ ============
F-12
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales
Contract (Continued)
Principal payments on long-term debt for the years ending December 31 are
as follows:
2001 $5,917,043
2002 32,700,129
2003 302,963
2004 5,076,553
2005 8,484,256
Thereafter 18,497,807
-----------
$70,978,751
===========
The Company incurred total interest costs of approximately $4,342,388,
$4,900,800 and $4,246,600 in 2000, 1999 and 1998, respectively, of which
approximately $434,022, $2,255,000 and $2,651,800 has been capitalized as
part of construction in progress. Interest costs paid by the Company in
2000, 1999 and 1998 totaled approximately $4,211,160, $4,781,000 and
$4,108,400, respectively.
The Company, along with its joint venture partners, has guaranteed
construction loans totaling approximately $14.7 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, 2000 and 1999, 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 with a 10%
adjustment for failure to quote on Nasdaq national market. As of December
31, 2000, the exercise price is $6.75 per share as the conversion shares
have not been approved for quotation on Nasdaq. 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
F-13
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales
Contract (Continued)
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, 2000 and
1999. Upon satisfaction of the continuing involvement criteria, the
transaction will be accounted for as a sale.
As further discussed in Notes 7 and 12, the Company is in violation of a
debt service ratio covenant relating to the $2,447,201 note payable to a
bank, and accordingly, such amount has been included in current portion of
long-term debt.
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.
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 (see Note
13).
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.
F-14
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
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 800,000 shares of common stock may
be issued under the 1995 Stock Incentive Plan. As of December 31, 2000,
options to purchase 792,000 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.
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.
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 Consolidated 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:
2000 1999 1998
--------------------- ----------------------- ------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options Shares price Shares price Shares price
------- ---------- -------- ---------- --------- ---------- --------
Outstanding-beginning of year 672,500 $ 4.23 604,000 $ 4.77 563,000 $ 4.73
Granted 360,000 0.89 285,000 3.35 43,500 5.35
Exercised - - - - - -
Cancelled (155,500) 3.35 (216,500) 4.59 (2,500) 6.59
---------- ----------- ----------
Outstanding-end of year 877,000 2.99 672,500 4.23 604,000 4.77
---------- ----------- ----------
Weighted-average fair value
of options granted during
the year $ 0.57 $ 2.13 $ 3.23
The following table summarizes information about stock options outstanding
as of December 31, 2000:
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 4.7 years $ 6.24 85,000 $ 6.24
0.75 - 7.13 792,000 7.6 years 2.65 466,599 3.24
------------ -----------
877,000 551,599
============ ===========
The total value of options granted during 2000, 1999 and 1998 was computed
as approximately $203,800, $605,300 and $140,400, 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 Consolidated Financial Statements, Continued
6. Stock Options (Continued)
2000 1999 1998
Net loss:
As reported $(6,465,760) $(8,776,376) $(11,062,132)
Pro forma (6,788,093) (9,265,466) (11,333,132)
Diluted loss per common share:
As reported (1.60) (2.03) (2.52)
Pro forma (1.67) (2.14) (2.58)
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.
2000 1999 1998
Risk-free interest rate 5.16% 5.63% 6.0%
Expected life 7.32 years 7.6 years 7.1 years
Expected volatility 70% 54% 50%
Expected dividend yield 0% 0% 0%
7. Commitments
Operating leases
The Company leases nineteen 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
(see Note 13).
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:
2001 $ 14,060,580
2002 14,538,521
2003 14,254,289
2004 14,215,563
2005 13,000,258
Thereafter 85,967,280
-------------
$156,036,491
-------------
F-17
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
7. Commitments (Continued)
Operating leases (continued)
Lease and rent expense for the Company totaled $14,952,974, $14,233,400 and
$9,679,100 in 2000, 1999 and 1998, respectively.
Certain operating lease agreements and loans contain restrictive covenants.
As of December 31, 2000, the Company is in violation of certain restrictive
covenants, including certain coverage ratios, net worth calculations and
financial reporting, pertaining to twelve operating lease agreements and a
debt obligation (see Note 4). The Company is currently attempting to
resolve a notice of default. There can be no assurance regarding whether or
not any of the Company's lessors or lenders will take aggressive action as
a result of the covenant violations; however, should any of the Company's
financial partners pursue an action which could jeopardize the Company's
assets, liquidity or ongoing operations, the Company may be forced to
pursue a court supervised reorganization (see Notes 12 and 13).
Capital leases
During 1996, the Company entered into a sale leaseback transaction with a
real estate investment trust (REIT) for the Santa Cruz, California
community. The total consideration for the sale was $8,300,000, which was
recorded as a capital lease obligation by the Company (Note 4). The Company
repurchased this community from the lessor on December 26, 2000.
During June 1999, the Company entered into a $10.1 million arrangement with
a REIT pursuant to which the Company is constructing its Mesa, Arizona
community. The sale of the land has been recorded as a capital lease (Note
4). Upon completion, the Company will lease the community pursuant to a
long-term lease arrangement.
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,
2000 there were no advances of reimbursable construction costs from the
Company on behalf of the REITs. As of December 31, 1999, the Company
advanced approximately $236,000 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 $24
million for the construction of five of its communities of which $14.7
million has been advanced as of December 31, 2000 (Note 4). The Company,
along with its joint venture partners, has entered into four additional
construction loans in the aggregate of $21.3 million of which $14.5 million
has been advanced as of December 31, 2000. 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 Consolidated Financial Statements, Continued
8. Income Taxes
The components of the provision for income taxes for the year ended
December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
Current:
Federal $ - $ - $ -
State - - -
------- ------- -------
- - -
------- ------- -------
Deferred:
Federal - - -
State - - -
------- ------- -------
- - -
------- ------- -------
$ - $ - $ -
------- ------- -------
Income tax provision for the year ended December 31, 2000, 1999 and 1998
differs from the amounts computed by applying the U.S. Federal income tax
rate of 34% to pretax income before extraordinary loss as follows:
2000 1999 1998
Computed expected tax benefit $(2,198,358) $(2,983,255) $(3,758,507)
Increase (decrease) in income taxes resulting from:
State taxes, net of federal benefit (267,343) (365,059) (467,000)
Increase in valuation allowance 2,404,107 3,167,657 4,226,514
Other, net 61,594 180,657 (1,007)
----------- ----------- -----------
Actual income tax benefit $ - $ - $ -
=========== =========== ===========
F-19
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated 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:
2000 1999
Capital lease obligation $ 453,005 $3,410,490
Accrued expenses 390,782 297,027
Federal and state operating loss carryforwards 7,345,904 4,834,449
Deferred gains and development fees 1,768,181 2,563,760
Deposits under sales contract 3,931,993 3,892,648
Depreciation and amortization (3,498,320) (6,883,218)
Other 920,025 792,307
------------ ------------
11,311,570 8,907,463
Less valuation allowance (11,311,570) (8,907,463)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
At December 31, 2000, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $19,495,727 and
$17,143,594, respectively, which are available to offset future federal and
state taxable income, if any, through 2020.
The Company has established a valuation allowance against the net deferred
tax asset as the ultimate realization is uncertain.
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.
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
$10,300, $78,000 and $145,000 in 2000, 1999 and 1998, respectively.
Construction contracts
During 2000 and 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. On a percentage
of completion basis, the construction company lost $414,000 in 2000 and
earned fees totaling approximately $526,100 in 1999.
F-20
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
9. Related Party Transactions (Continued)
Construction contracts (continued)
Throughout 1998, 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 in 1998.
Guaranty fees
In 2000, the Company paid fees totaling $120,000 to its majority
shareholder for guaranteeing two of the Company's construction loans. In
1999, $65,000 was paid to the 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.
Collateral
At December 31, 2000, the Company's majority shareholder has provided a
$1,000,000 cash deposit to a lender as additional collateral with respect
to a real estate loan. The Company agreed to reimburse the majority
shareholder for the carrying cost of the above mentioned deposit.
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 $2,323,524, $2,806,784 and
$2,798,650 in 2000, 1999 and 1998, 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.
As of December 31, 2000, $490,524 of the lease payments were deferred.
Total interest expense of $19,700 was accrued on these lease deferrals
during 2000.
Management fees
For a portion of 1998, 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 in 1998. 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 2000, the Company recorded $39,009 as management fee income and $142,070
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).
F-21
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
9. Related Party Transactions (Continued)
Interest paid to related party
Interest paid to a construction company owned by the majority shareholder
was $18,900, $49,000 and $25,000 in 2000, 1999 and 1998, respectively.
During December 2000, the Company formed a joint venture with the majority
shareholder for the purpose of acquiring four communities for $33.9
million. The four communities, including one formerly accounted for as a
capitalized lease, were previously leased from two separate real estate
investment trusts. The Company contributed $0.6 million along with its
rights to purchase the four communities for a 75% interest in the joint
venture. The majority shareholder contributed $1.2 million for a 25%
interest. In addition, the venture obtained $32.2 million in bank financing
and $0.5 million of seller provided financing in order to complete the four
acquisitions.
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 $154,166, $137,100 and $85,900 in 2000, 1999
and 1998, 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.
12. Financial Results and Liquidity
From 1995 to present, the Company's revenues increased from $12.6 million
to $64.9 million. However, in connection with the opening and lease up of
its newly developed communities, the Company incurred substantial operating
losses. Although initial operating losses were anticipated, the Company did
not foresee the extent of such losses. The Company attributes these losses
to the extended time required to fill its communities and the difficulty in
maintaining occupancy, which are primarily the result of competitive
factors. Until recently, the Company has been successful at funding its
operating losses through a combination of equity, subordinated note, lease
and sale-leaseback arrangements with real estate investment trusts and
conventional debt financing. As of December 31, 2000, the Company's working
capital decreased to a deficit of $3.9 million and its accumulated deficit
increased to $32.5 million. Although operating results have continued to
improve during the
F-22
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
12. Financial Results and Liquidity (Continued)
past three years, the Company anticipates that its cash requirements during
2001 will exceed the cash provided by operations. Accordingly, the Company
has begun the process of preparing and implementing a Plan (the Plan) to
address the Company's liquidity issued. The Plan involves the conversion of
certain debts to equity, a bridge loan from the Company's majority
shareholder, the planned disposition of selected assets, and the
renegotiations of certain debt and lease obligations (see Note 13). In
addition, the Company has engaged an investment banking advisor to evaluate
the Company's financial position, to assist in the Plan, and to provide
strategic alternatives including the raising of equity or placing of debt.
Certain operating lease agreements and loans contain restrictive covenants.
As of December 31, 2000, the Company is in violation of certain restrictive
covenants including certain coverage ratios, net worth calculations and
financial reporting pertaining to twelve operating lease agreements and a
debt obligation (see Notes 4 and 7). The Company is currently attempting to
resolve a notice of default. There can be no assurance regarding whether or
not any of the Company's lessor or lenders will take aggressive action as a
result of the covenant violations.
As the Company proceeds with the implementation of the Plan, including
negotiations with its various financial partners, the Plan will be modified
to address issues that arise. Should the Company's working capital continue
to deteriorate before a Plan is fully implemented or should any of the
Company's financial partners take aggressive action, which could jeopardize
the Company's assets, liquidity or ongoing operations, the Company may be
forced to pursue a court supervised reorganization.
The matters discussed above raise substantial doubt regarding the Company's
ability to continue as a going concern.
The consolidated financial statements do not include any adjustments to
reflect possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may be
necessary if the Company is unable to continue as a going concern.
13. Subsequent Events
During February 2001, the Company assigned its leasehold interest in the
three Wyoming communities to a third-party for $325,000.
In March 2001, the Company's Board of Directors approved the conversion of
$750,000 of accrued dividends due to the preferred shareholder and $507,877
of deferred lease payments due to the majority shareholder into 857,143 and
580,431 shares of common stock, respectively. Such amounts were included in
other noncurrent liabilities at December 31, 2000. In connection with this
transaction, the preferred shareholder agreed to waive its dividend for a
period of two years and the majority shareholder agreed to provide
$1,000,000 in bridge financing (the Bridge Loan).
F-23
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
13. Subsequent Events (Continued)
Through June 30, 2001, the majority shareholder provided cash advances
totaling $750,000 under the Bridge Loan. At June 30, 2001, such advances
were combined with additional outstanding amounts due to the majority
shareholder and an affiliated company, along with accrued interest, into a
demand note in the amount of $1,259,133. At the sole option of the holder,
the note is due upon the sale of certain assets, upon demand or no later
than June 30, 2002. The note is secured by land held for sale.
On July 3, 2001, the Company's Board of Directors approved a $1,000,000
operating line of credit provided by the majority shareholder. Through July
10, 2001, the Company has drawn $600,000 under the line. At the sole option
of the holder, the line is due upon the sale of certain assets, upon demand
or no later than June 30, 2002. The line is secured by a deed of trust
recorded in a second position against certain real property. The line of
credit bears interest at 18%. The majority shareholder earned a $50,000 fee
as a result of providing this financing.
During April 2001, the Company and a commercial bank, which in December
2000 financed the purchase of four previously leased communities, agreed to
modify the terms of their debt financing. Although the financing provides
that all cash flow from the operations of the four repurchased communities
be applied against the outstanding principal of a certain portion of the
underlying debt, the bank agreed to waive this provision for a period of
six months ending September 2001. During the first three months of the
modification, the net cash flow from the four communities totaled
approximately $540,000.
Also during April 2001, the Company and two real estate investment trusts
(each a REIT) agreed to lease deferrals totaling $649,629. Of this amount,
$257,805 was paid in July, $257,805 is due in August, and $134,019 is due
in October or upon the sale of certain assets. Further, an additional REIT
agreed to apply security deposit funds (classified as Restricted Cash) in
the amount of $63,639 as a partial offset of lease payments that were due
in April and May.
During May 2001, the Company and a REIT agreed to transfer $502,600 from
Restricted Cash to a working capital escrow for the purpose of funding
operating deficits from two leased communities. In addition, both the
Company and the REIT agreed to fund into the escrow up to an additional $1
million, if necessary. The first $375,000 of additional funding is to be
derived from the cash flow generated from two other communities which are
under the same lease arrangement. The next $375,000 is to be provided by
the REIT in the form of a loan and the remaining $250,000 is to be derived
from the communities cash flow. Further, the REIT agreed to temporarily
waive a security deposit to be provided in the form of a letter of credit.
As of July 2001, the working capital escrow totaled $696,878.
F-24
Regent Assisted Living, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
13. Subsequent Events (Continued)
The California Department of Social Services (DSS) filed an accusation
against the Company on December 15, 2000 seeking to revoke licenses for
eight of the Company's assisted living communities in the state of
California. The Company believes that the accusation was the result of a
death at the Company's Sunnyside Court community in Fremont, California.
On June 28, 2001, the parties reached a final settlement on the matter. As
part of the settlement, the Company agreed to subject three communities to
certain conditions of probation, including the maintenance of high quality
of care and training standards that exceed regulatory requirements. The
Company voluntarily put into place many of these standards prior to the
settlement.
F-25