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, 2001 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 950
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]
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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 November 7, 2002: $101,421
State the number of shares of Common Stock outstanding at November 7, 2002:
4,507,600
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
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Item of Form 10-K
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Page
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PART I
Item 1 - Description of Business 1
Item 2 - Description of Property 17
Item 3 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 4(a) - Executive Officers of the Registrant 21
PART II
Item 5 - Market for Common Stock and Related Stockholder Matters 23
Item 6. Selected Consolidated Financial Data 24
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 25
Item 7(a) Quantitative and Qualitative Disclosre About Market
Risk 39
Item 8 - Financial Statements and Supplementary Data 39
Item 9 - Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 39
PART III
Item 10 - Directors, Executive Officers and Control Persons;
Compliance with Section 16(a) of the Exchange Act 40
Item 11 - Executive Compensation 41
Item 12 - Security Ownership of Certain Beneficial Owners and
Management 44
Item 13 - Certain Relationships and Related Transactions 45
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 49
SIGNATURES 52
CERTIFICATIONS 53
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview and Background
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The Company is an owner and operator 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 growth strategy had 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.
However, as further discussed below and in item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations," during 2001, as a
result of continuing operating losses and difficulties in obtaining operating
licenses for certain new buildings, the Company was unable to meet certain of
its lease obligations, discontinued all development and construction activities,
reduced the number of communities it operates, downsized its workforce and
entered into an agreement whereby the Company subcontracted a substantial
portion of the management duties for its communities to another assisted living
company, Emeritus Corporation. The Company has also been burdened by the
bankruptcy of its former professional liability claims insurer Reliance
Insurance Company (Reliance). As further explained in item 3 " Legal
Proceedings", Reliance provided professional liability claims insurance for the
Company from March 1, 1998 to March 1, 2001. With Reliance currently in
liquidation and no longer able to pay any losses or claims expenses, the Company
must now defend itself from all claims in which it previously would have been
protected through its insurance program.
In 1996 the Company began an aggressive expansion program of acquiring
sites in select markets in the western United States and began 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. The Company grew
to a resident capacity of 2,996 beds and operated 30 communities at the end of
2000. As of December 31, 2001, the Company had downsized its operations to 20
communities with a resident capacity of 2,067 beds. As of November 7, 2002, the
Company operated 14 communities with a resident capacity of 1,575 beds.
From 1995 to 2000, 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 is primarily the result of competitive factors. Additionally,
in 2001, the Company encountered extraordinary circumstances and difficulties in
obtaining licenses for two new California buildings and in obtaining a
certificate of occupancy for its new Arizona building resulting in significant
time delays in opening these buildings. These delayed
1
openings resulted in significant unanticipated cash expenditures and delayed
revenue generation for the Company.
In an attempt to address the Company's requirement for capital, in
March 2001, the Company's Board of Directors approved and agreed to the
implementation of a financial plan to address the Company's liquidity issues
with the Company's majority shareholder and preferred shareholder. The financial
plan included the conversion of certain debts to equity, a bridge loan provided
by the Company's majority shareholder, the planned disposition of selected
assets and the renegotiation of debt and lease obligations. 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. Although the plan was partially implemented, the Company and the
preferred shareholder did not complete the conversion into common stock and did
not negotiate the final terms and conditions for the dividend waiver. The
Company's Articles of Incorporation and state law prohibit the current payment
of the preferred dividend since in the judgment of the Company's Board of
Directors, the payment of the preferred dividend would jeopardize the on-going
viability of the Company and potentially result in its insolvency. Accordingly,
the accrued dividends are classified as long-term liabilities at December 31,
2001.
In March 2001, the Company was unable to close two conventional loans
with a financial institution in order to refinance two of its California
communities. The inability to complete one loan was due in part to a pending
accusation against the Company by the State of California Department of Social
Services that was subsequently settled in July 2001, see item 3 "Legal
Proceedings". Both loans failed to close due to the inability of the Company to
obtain minimum excess liability coverage limits of five million dollars. As a
result, the Company was unable to recover $195,500 in non-refundable advance
deposits. These funds were advanced to the financing company directly by the
majority shareholder and were included in the June 30, 2001 bridge financing
demand note payable to the majority shareholder as described below.
In March 2001, the Company reached an agreement with Health Care REIT,
Inc. (HCN), the owner of four of the Company's leased communities, to utilize
working capital escrow funds for two of its leased communities beginning in
April 2001. The Company agreed to convert all of its leases with HCN into a
master lease. The agreement was finalized in May 2001 and HCN agreed to transfer
$502,600 from Restricted Cash to a working capital escrow for the purpose of
funding operating deficits generated by the two leased communities. In addition,
both the Company and HCN agreed to fund into the escrow an additional $1
million, if necessary. The first $375,000 was to be derived from the cash flow
generated from two other communities leased from HCN. The next $375,000 was to
be provided by HCN in the form of a loan and the remaining $250,000 was to be
derived from the communities cash flow. Further, HCN agreed to temporarily waive
a requirement for a security deposit in the form of a letter of credit.
In March 2001, the Company failed to pay its March lease payment for
its San Antonio community and received a notice of default from the lessor,
Texas HCP Holding, L.P. (HCPI). In order to address the notice of default, the
Company and HCPI executed a lease amendment to defer the payment of the March
rent until July 2001 and also to defer the April 2001 lease payment until August
2001. These lease deferrals totaled $134,019. The Company did not pay these
lease deferrals and in October 2001, after non-payment of the September and
October 2001 lease payments, the Company received notice of termination from
HCPI. The Company and the
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lessor reinstated the lease effective November 1, 2001 after the lessor agreed
to apply these past due rents against the $1,100,000 letter of credit held by
the lessor.
In April 2001, the Company and a commercial bank, which in December
2000 financed the purchase of four previously leased communities, agreed to a
modification of the terms of their debt financing. The financing had originally
provided 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 six months of the modification, the net
cash flow from the four communities totaled approximately $976,000.
In April 2001, the Company negotiated with LTC West, Inc. (LTC) the
real estate investment trust owner of five of the Company's leased properties,
lease deferrals of its May and June lease payments for four of the leased
properties. The agreement deferred $257,805 in lease payments until July 2001
and $257,805 until August 2001. Additionally, LTC required the Company to amend
its five leases so that all such leases would be cross-colateralized and
cross-defaulted.
On June 12, 2001, the Company's Board of Directors approved entering
into a cross-colateralization and cross-default agreement for the two
communities leased by the Company from entities owned by the majority
shareholder.
Pursuant to the financial plan, the majority shareholder provided cash
advances totaling $750,000 under the bridge financing arrangement through June
30, 2001. On June 30, 2001, such advances were combined with additional amounts
outstanding due to the majority shareholder and an affiliated company, along
with accrued interest, into a demand note in the amount of $1,259,133. On July
3, 2001, the Company's Board of Directors approved a $1 million operating line
of credit to be provided by the majority shareholder. Through September 7, 2001,
the Company drew $1,000,000 under the line.
In July 2001, the Company engaged an investment banking advisor to
evaluate the Company's financial position, to assist in implementation of a
restructuring plan, and to provide strategic alternatives including the raising
of equity or placing of debt. The Company discontinued the investment banking
services in September 2001.
In August 2001, the Company sold one parcel of land it had available
for sale that generated $0.5 million in net proceeds for the Company.
Despite the cash infusion that resulted from these transactions the
Company's liquidity difficulties continued due to recurring operating losses at
certain of its communities and due to extraordinary circumstances and prolonged
licensing issues in California. This resulted in significant unanticipated cash
expenditures and delayed revenue generation for the Company. As a result of the
Company's lack of liquid resources, the Company was unable to meet its September
2001 and October 2001 lease obligations to five lessors of the Company's
assisted living communities: HCN, LTC, HCPI, Meditrust and the majority
shareholder. The Company was issued default notices by the lessors of these
leased communities. The Company entered into a settlement agreement with HCN.
The operations of the four communities leased from HCN were transferred to new
operators and the Company issued notes to HCN for past due rent obligations. The
Company entered into a similar settlement agreement with LTC. The operations of
the five communities leased from LTC were transferred to new operators and the
Company issued notes to LTC for past due rent obligations. These settlement
agreements are in full
3
satisfaction of all claims from cancellation of the lease agreements. The leases
of the two communities leased from entities controlled by the Company's majority
shareholder were terminated by the lessors effective November 1, 2001 due to
non-payment of rent. The Company has recorded the missed lease payments as notes
payable and is attempting to negotiate a settlement with respect to these
properties on terms substantially similar to those agreed to by HCN and LTC.
The Company currently manages these communities on behalf of the entities owned
by the majority shareholder. In June 2002, the Company received a letter from
its preferred shareholder disputing the termination of these leases and claiming
that the terminations are voidable. See item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion of the lease terminations.
In November 2001, the Company entered into a loan workout and
settlement agreement with one of its third party lenders as a result of a
payment default under the loan agreement. The Company deeded one parcel of land
it had available for sale to the lender in satisfaction of $0.9 million of debt,
restructured payment terms on the remaining loan obligation and provided
collateral in other land held for sale. Of the remaining debt due of $0.7
million, the Company paid $73,500 in November 2001, $186,500 in December 2001,
$250,000 in February 2002 and the remaining balance due of $225,000 was paid in
September 2002.
In December 2001, the Company, concerned by the quarterly interest
obligation of its subordinated convertible notes and its operating losses at its
Bakersfield, California community, exchanged its Bakersfield and Vacaville,
California communities for $8.9 million of the convertible notes. An affiliate
of LTC acquired the two properties subject to $18.3 million in mortgage and
local improvement debt. The Company recorded a gain of $12.0 million in
connection with this non-cash transaction.
On December 26, 2001, the Company and its majority shareholder agreed
to a specified distribution of the assets of Regent/Bowen, LLC, a joint venture
formed in December 2000 for the purpose of acquiring four communities that were
previously leased. The venture was dissolved and 100% of the venture's interest
in the Santa Cruz and Clovis, California communities was distributed to the
Company and 100% of the venture's interest in the Eugene, Oregon community was
distributed to the majority shareholder. The remaining community in Boise, Idaho
and other venture assets were distributed 75% to the Company and 25% to the
majority shareholder in accordance with their respective ownership interests. As
a result of the dissolution, the Company distributed cash of $165,091 and
recorded a $31,783 payable to the majority shareholder.
Pursuant to the financial plan agreed to in March 2001, the Company
sold its Santa Cruz, California property to its majority shareholder on December
27, 2001, for a net sales price of $11.7 million. The Company received $5.0
million in cash proceeds of which $2.9 million was retained by the Company and
$2.1 million was used to reduce debt after which $6.7 million of debt was
assumed by the majority shareholder.
Because of the transactions described above, the Company's operations
were reduced from 30 properties to 20 properties in 2001.
As of December 31, 2001, the Company's working capital decreased to a
deficit of $5.9 million and its accumulated deficit increased to $35.0 million.
Included in current liabilities are payables to the Company's majority
shareholder of $2.6 million. Also included in current liabilities is $8.9
million in debt related to the Company's South Ogden, Utah community. The
Company had been declared in default under terms of the South Ogden loan
agreement, and
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accordingly the amount due was included in current portion of long-term debt.
As described below, in May 2002 the Company signed an agreement with the lender
whereby the Company transferred the South Ogden community to the bank in full
satisfaction of the related debt. The Company has classified the net book value
of the South Ogden property of $8.3 million in current assets at December 31,
2001.
The Company continues to address its liquidity issues (see Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
Recent Developments
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The Company is considering various alternatives that may include the
disposition of selected assets and/or the merger or sale of the remaining assets
of the business. The Company believes that the ultimate outcome of these
pursuits, if taken, will not generate any value for the common shareholders.
Commencing January 1, 2002, the Company contracted with Emeritus
Corporation, an unrelated assisted living company, to provide operations
management, consulting and accounting services to its assisted living
communities. Under the terms of the agreement the Company pays a fee to Emeritus
based on the number of communities and subject to the agreement of services
provided. The typical fee is $8,000 per month per community plus potential
performance incentives. The agreement is for a term of three years. As a result
of this agreement, the Company implemented a plan to significantly reduce its
corporate workforce at December 31, 2001 and through the beginning of 2002 to
allow for an orderly transition of services. The Company continues to provide an
oversight management role, partnership administration and asset management
services including continued responsibility for placement of insurance and debt
financing arrangements.
In February 2002, the Company entered into a lease termination
agreement with Meditrust Acquisition Company LLC, (Meditrust) the real estate
investment trust owner of its Alzheimer community in Scottsdale, Arizona and its
assisted living community in Folsom, California. The Company's leases for these
two communities were canceled and the Company was released from all liability
thereunder, including any past due obligations to pay rent under the leases and
any real estate taxes in excess of $25,000. In 2002, the Company realized a
reduction in current liabilities recorded at December 31, 2001, of approximately
$217,200 as a result of this transaction. The new owners of these two
communities are affiliated with Emeritus Corporation.
In May 2002, the Company sold its West Wind community located in Boise,
Idaho to an unrelated third party. The Company received $2.8 million in sales
proceeds and paid down $2.4 million in debt that was classified as current at
December 31, 2001. Accordingly, the Company has classified the net book value of
the West Wind property of $2.6 million in current assets at December 31, 2001.
The Company abandoned its wholly owned subsidiary's Elk Grove,
California construction project in December 2001 as a result of a declaration of
default on the loan agreement by the construction lender. The Company wrote off
$3.8 million in related construction costs and $155,000 in restricted cash
deposits, was released from $3.0 million of construction debt and recorded a
loss for this project of $0.9 million at December 31, 2001. In May 2002, the
Company entered into a settlement agreement with the lender and effective June
3, 2002 transferred its ownership interest in the construction project to a
third party purchaser
5
identified by the lender. No cash proceeds were generated for the Company as a
result of this transaction. The Company and the majority shareholder had
provided guarantees of the construction loan and were relieved of these
guarantees upon closing of the transaction. In addition, the settlement
agreement provided for the transfer of the Company's South Ogden community to
the lender in lieu of foreclosure. The transfer of the South Ogden community
closed May 31, 2002. The Company recorded a gain of $1.1 million in 2002 in
connection with this non-cash transaction. The lender had declared the Company
in default on the $8.9 million loan for the South Ogden facility in 2001 and
accordingly this debt was classified as current at December 31, 2001.
Accordingly, the Company has classified the related South Ogden property of $8.3
million in current assets at December 31, 2001.
In September 2002, the Company sold its 55% co-tenancy interest in its
Modesto community to an unrelated third party for a net sales price of $2.8
million. The Company received $1.0 million in cash proceeds, $0.1 million in
notes receivable and satisfied $1.7 million of co-tenancy debt which was assumed
by the buyer. The Company, its majority shareholder and the unrelated 45%
co-tenant continue to guarantee the full $3.0 million in debt assumed by the
buyer. The Company recorded a gain in 2002 totaling $1.0 million as a result of
this transaction.
In September 2002, the Company assigned its lease of its San Antonio
community to Emeritus Corporation for $408,000. The Company recorded a gain in
2002 of approximately $327,000 as a result of this transaction. In connection
with the assignment the lessor released to the Company the cash deposit held
under a letter of credit arrangement in the amount of $741,752. This deposit was
included in restricted cash at December 31, 2001.
Assisted Living
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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.
Principal Services
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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
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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.
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.
Geographic location, local wages and operating costs also affect the Company's
rates. As of December 31, 2001, the Company charged rates ranging from a monthly
low of $1,200 to a high of $4,812 for its assisted living services and a monthly
low of $3,120 to a high of $6,200 for its dementia-specific care. 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
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The Company currently provides its services in 20 assisted living
communities including stand-alone Alzheimer's care communities. Of these 20
communities, 17 were internally developed. 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 12 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
currently operates one Regent House that was managed by a third party in 2001.
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 four 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.
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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.
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.
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(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.
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.
Competition
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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.
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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.
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 Texas
community for which the Company has elected to be self-insured. Providing health
care services involves an inherent risk of liability. There can be no assurance
that future claims in excess of insurance coverage 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. As further explained in item 3 "Legal Proceedings" and in the liquidity
discussion of item 7 " Management's Discussion and Analysis of Financial
Condition and Results of Operations", the Company is currently subject to
significant liability losses that are uninsured as a result of the bankruptcy of
its former professional liability claims insurer Reliance Insurance Company.
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
10
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 sanctions. If the
Company fails to comply with applicable requirements, its business and revenues
could be materially and adversely affected. As further described in 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. On June 28, 2001, the parties reached a settlement of the matter
whereby 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 however further violations
could jeopardize the Company licenses in that state.
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 is not
aware of any non-compliance with applicable Medicaid laws.
Employees
- ---------
As of December 31, 2001, the Company employed approximately 891 full
time and 321 part-time employees and the corporate offices employed 19
individuals full time and 1 part-time. This compares to December 31, 2000
whereby 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. As of November 7, 2002, the Company employed approximately 715 full
time and 279 part-time employees and the corporate offices employed four
individuals full time. None of the employees is represented by any labor union.
The Company had managed one community in 2001 and 2000 at which the owner
employed members of a labor union. The Company no longer manages this community.
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.
11
Risk Factors and Forward Looking Statements
- -------------------------------------------
Set forth below are the risks that the Company believes are material.
The information set forth in this report on form 10-K, including the risks
below, contain "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 strategies to address its liquidity issues,
as described in "Description of Business - Recent Developments", the factors
discussed in, "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 MAY NOT COMPLETE ANY OF THE STRATEGIC ALTERNATIVES IT IS EXPLORING.
The Company is exploring strategic alternatives, including the possible
sale of the Company or its assets. The Company cannot assure that it will be
able to complete a transaction on terms satisfactory to the Company or at all.
If the Company does not complete a transaction, and is unable to obtain
additional financing, the Company's business may fail.
THE COMPANY IS HIGHLY LEVERAGED.
The Company is highly leveraged. After completing a number of
settlement arrangements with its lessors and lenders, the Company has total term
debt, including short-term portion, of $35.9 million and a deficit balance in
shareholders' equity of $15.0 million as of December 31, 2001. The Company
obtained some relief through the completion of the settlements with lessors and
lenders, but continues to be highly leveraged. The degree to which the Company
is leveraged could have important consequences, including:
- making it difficult to satisfy debt or lease obligations;
- increasing the Company's vulnerability to general adverse
economic and industry conditions;
- limiting the Company's ability to obtain additional financing;
- requiring dedication of a substantial portion of the Company's
cash flow from operations to the payment of principal and
interest on debt and leases, thereby reducing the availability
of such cash flow to fund working capital, capital expenditures
or other general corporate purposes;
- limiting the Company's flexibility in planning for, or reacting
to, changes in its business or industry; and
- placing the Company at a competitive disadvantage to less
leveraged competitors.
12
Failure to comply with any covenants included in, or make timely
payments on, the Company's debt or lease agreements constitutes an event of
default, which will allow a lessor or lender (at its discretion) to declare any
amounts outstanding under the loan or lease documents, as applicable, to be due
and payable. The Company cannot provide assurance that it will comply in the
future with these covenants included in the loan and lease agreements or have
the ability to make payments in a timely manner. If the Company fails to comply
with any of these debt or lease obligations (after giving effect to any
applicable cure period), the lender or lessor may declare the Company in default
of the underlying obligation and exercise any available remedies, which may
include:
- in the case of debt, declaring the entire amount of the debt
immediately due and payable;
- foreclosing on any residences or other collateral securing the
obligation; and
- in the case of a lease, terminating the lease and suing for
damages.
Accordingly, if enforced, the Company could experience a material
adverse effect on its financial condition.
THE COMPANY IS A PARTY TO SIGNIFICANT LEGAL PROCEEDINGS AND IS LIABLE FOR LOSSES
NOT COVERED BY OR IN EXCESS OF ITS INSURANCE.
Participants in the senior living and long-term care industry,
including the Company, are routinely subject to lawsuits and claims. Many of the
persons who bring these lawsuits and claims seek significant monetary damages,
and these lawsuits and claims often result in significant defense costs. As a
result, the defense and ultimate outcome of lawsuits and claims against the
Company may result in higher operating and administrative expenses. Those higher
operating and administrative expenses could have a material adverse effect on
the Company's business, financial condition, results of operations, cash flow or
liquidity.
In order to protect against the lawsuits and claims made against it,
the Company currently maintains insurance policies in amounts and covering risks
that are consistent with industry practice. However, as further explained in
Item 3 "Legal Proceedings," the Company's previous primary insurance carrier,
Reliance Insurance Company (Reliance), declared bankruptcy and has informed its
customers that it will not be able to cover any claims covered by its policies.
Regent was covered for professional liability claims through Reliance from March
1, 1998 to March 1, 2001. As a result, Regent must now defend itself from all
claims in which it previously would have been protected through its insurance
program. In addition, due to the prohibitive cost for insurance in Texas, the
Company is self-insured in that state. As of December 31, 2001, there were
significant claims against the Company that, if determined adversely to the
Company, will not be covered by insurance, see Item 3 "Legal Proceedings". The
Company is vigorously defending these uncovered claims, but there can be no
assurance that these claims will be resolved in the Company's favor. Unfavorable
outcomes of any of these claims could have a material adverse effect on the
Company's business, financial condition, results of operations, cash flow or
liquidity and may ultimately cause the Company's business to fail.
A number of insurance carriers have stopped providing insurance
coverage to the long-term care industry, and those remaining have increased
premiums and deductibles substantially. While nursing homes have been primarily
affected, assisted living companies, including the
13
Company, have experienced premium and deductible increases. The Company
currently 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 Texas community for which the Company has
elected to be self-insured. From March 1, 2001 to March 1, 2002 the Company's
professional liability insurance was also provided on a claims made basis. The
Company currently has no coverage for any incident during this time period where
the claim is made at future date. There can be no assurance that the Company
will be able to obtain liability insurance in the future or on commercially
reasonable terms or at all. A claim against the Company, covered by, or in
excess of, the Company's insurance, could have a material adverse affect on the
Company's business, financial condition, results of operations, cash flow or
liquidity.
THE COMPANY IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION.
The operation of assisted living facilities and the provision of health
care services are subject to state and federal laws, and state and local
licensure, certification and inspection laws that regulate, among other matters:
- the number of licensed residences and units per residence;
- the provision of services;
- equipment;
- staffing, including professional licensing and criminal
background checks;
- operating policies and procedures;
- fire prevention measures;
- environmental matters;
- resident characteristics;
- physical design and compliance with building and safety codes;
- confidentiality of medical information;
- safe working conditions;
- family leave; and
- disposal of medical waste.
The cost of compliance with these regulations is significant. In
addition, it could adversely affect the Company's financial condition or results
of operations if a court or regulatory tribunal were to determine that the
Company has failed to comply with any of these laws or regulations. Because
these laws and regulations are amended from time to time, the Company cannot
predict when and to what extent liability may arise. In the ordinary course of
business, the
14
Company will receive and has received notices of deficiencies for failure
to comply with various regulatory requirements. The Company reviews such
notices and, in most cases, will agree with the regulator upon the steps to be
taken to bring the facility into compliance with regulatory requirements. From
time to time, the Company may dispute the matter and sometimes will seek a
hearing if it does not agree with the regulator. In some cases or upon repeat
violations, the regulator may take one or more adverse actions against a
facility, such as:
- the imposition of fines
- temporary stop placement of admission of new residents,
or imposition of other conditions to admission of new residents
to a facility
- termination of a facility's Medicaid contract;
- conversion of a facility's license to provisional status; and
- suspension or revocation of a facility's license.
The California Department of Social Services filed an accusation
against Regent on December 15, 2000 seeking to revoke licenses for eight of the
Company's assisted living communities in the state of 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. The Company's
failure to follow these standards could result in further violations and
potentially the revocation of all of the Company's licenses to operate in
California.
MANY ASSISTED LIVING MARKETS HAVE BEEN OVERBUILT.
Many assisted living markets have been overbuilt, including certain
markets in which the Company currently operates. In addition, the barriers to
entry into the assisted living industry are not substantial. The effects of
overbuilding include:
- it takes significantly longer for the Company's residences and
its subsidiaries' residences to fill up,
- newly opened facilities may attract residents from some or all
of the Company's current facilities,
- there is pressure to lower or not increase rates paid by
residents in the Company's residences,
- there is increased competition for workers in already tight
labor markets, and
- the Company's profit margins and the profit margins of its
subsidiaries are lower until vacant units in the Company's
residences are filled.
If the Company is unable to compete effectively in markets as a result
of overbuilding, the Company will suffer lower revenue and may suffer a loss of
market share.
15
THE COMPANY MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES AND
CONTROL LABOR COSTS.
The Company competes with other providers of long-term care with
respect to attracting and retaining qualified personnel. A shortage of qualified
personnel may require the Company to enhance its wage and benefits packages in
order to compete. Some of the states in which the Company operates impose
licensing requirements on individuals serving as administrators at assisted
living residences, and others may adopt similar requirements. The Company also
depends upon the available labor pool of lower-wage employees. The Company
cannot guarantee that its labor costs will not increase, or that, if they do
increase, they can be matched by corresponding increases in revenues.
INCREASES IN UTILITY COSTS MAY REDUCE THE COMPANY'S PROFITABILITY.
Utility costs represent a significant percentage of the Company's
operating costs. 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.
There can be no assurance that the Company will be able to pass the cost of
increased utility rates on to its residents in the form of utility surcharges.
Increases in the cost of utilities that the Company is unable to pass on to its
residents could significantly reduce the Company's profits.
THE COMPANY IS SUBJECT TO VARIABLE INTEREST RATES ON CERTAIN DEBT OBLIGATIONS.
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. If interest rates rise the
Company's profits will decrease. There can be no assurance that the Company will
be able to manage this risk effectively.
16
ITEM 2. DESCRIPTION OF PROPERTY
Current Communities. The table below sets forth certain information
regarding the Company's communities as of December 31, 2001:
Regent
Operations
Community Location Commenced Units(1) Beds(2) Interest
- ---------------------------------------------------------------------------------------------------
OREGON
Regency Park Portland 1987 122 136 Manage(3)
Regent Court Corvallis 2000 24 48 Manage(4)
Sheldon Park Eugene 1998 103 115 Manage(11)
WASHINGTON
Northshore House Kenmore 1998 85 92 Manage(5)
Regent Court Kent 1999 24 48 Manage(6)
Sterling Park Redmond 1990 154 175 Manage(3)
CALIFORNIA
Orchard Park Clovis 1998 112 124 Own(11)
Regent Court Modesto 1999 24 48 Own(7)
Regent House Merced 2001 72 83 Own(12)
Regent Senior West Covina 2001 130 144 Lease(12)
Sunshine Villa Santa Cruz 1990 106 116 Manage(11)
Villa Serra Salinas 1998 150 150 Manage
Willow Creek Folsom 1997 98 113 Lease(9)
IDAHO
West Wind Boise 1997 48 51 Own(8)
Willow Park Boise 1997 106 120 Own(11)
TEXAS
Hamilton House San Antonio 1997 111 123 Lease(15)
ARIZONA
Desert Flower Scottsdale 1999 102 108 Manage(10)
Regent Court Scottsdale 1998 24 44 Lease(9)
UTAH
Regent at Salt Lake City 2001 107 116 Manage(13)
Regent at South Ogden 2001 104 113 Own(14)
--- ---
TOTALS: 1,806 2,067
----- -----
(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.
17
(3) The leases of Regency Park and Sterling Park were terminated by the
lessor for non-payment of rent for September 2001 and October 2001. The
Company leased these buildings from entities owned by the majority
shareholder through October 31, 2001, and continues to manage these
communities on behalf of such entities.
(4) The Company owns a 40 percent interest in a joint venture that owns the
Corvallis community.
(5) The Company owns a 50 percent interest in a joint venture that owns the
Kenmore community.
(6) The Company owns a 10 percent interest in a joint venture that owns the
Kent community.
(7) The Company sold its 55 percent co-tenancy interest in the Modesto
community to an unrelated third party in September 2002.
(8) The Company sold its West Wind community to an unrelated third party in
May 2002.
(9) In February 2002, the Company's entered into a lease termination
agreement with the owner of its Folsom and Regent Court Scottsdale
communities. The leases were canceled and the Company no longer
operates these communities.
(10) This community was sold to the Company's Chairman and Chief Executive
Officer in September 1999 pursuant to a sale-manageback transaction.
The sale was accounted for under the deposit method and in 2001 was
accounted for as a sale. The gain associated with the sale has been
deferred.
(11) In December 2001, the Clovis and Santa Cruz communities were
distributed to the Company and the Eugene community was distributed to
the majority shareholder upon the dissolution of the joint venture
formed by the Company and the majority shareholder in December 2000 to
purchase these communities. The Boise community was distributed 75
percent to the Company and 25 percent to the majority shareholder in
accordance with their ownership interests in the joint venture. The
Company continues to manage the Eugene community. On December 27, 2001,
the Company sold the Santa Cruz community to the majority shareholder
and continues to manage this community.
(12) The Company's West Covina and Merced communities were managed by a
third party in 2001 and in part of 2002. The Company owns a 75 percent
interest in a joint venture that owns the Merced community. The West
Covina community was developed by a third party. West Covina is leased
under a noncancelable lease agreement expiring in the year 2011.
(13) The Company owns a 50 percent interest in a joint venture that owns the
Salt Lake City community.
(14) The Company had been declared in default by its lender on the $8.9
million in debt relating to its South Ogden community. On May 31, 2002,
the Company transferred the South Ogden community to its lender in lieu
of foreclosure. The transfer resulted in the full satisfaction of the
related debt and in full satisfaction of the Company's liabilities
related to this operation.
18
(15) The Company assigned its lease of its San Antonio community to Emeritus
Corporation in September 2002. Under the terms of the assignment of the
lease the Company remains jointly and severally liable for the
performance under the lease until September 18, 2003.
Office Facilities. The Company currently occupies approximately 2,800
square feet of office space in Portland, Oregon that is leased by Bowen Property
Management Company, a corporation owned by the majority shareholder. The Company
is paying the landlord directly for the obligations under that lease. The lease
expires February 15, 2003. As a result of the Company's reduction in corporate
office staff at the end of 2001 and early 2002, the Company vacated
approximately 10,500 square fee of office space in Portland, Oregon in 2002. The
space had been occupied under a lease agreement expiring February 15, 2003. The
Company had been negotiating a lease cancellation agreement with the lessor,
however, the lessor filed suit against the Company for non-payment of rent. The
parties reached a settlement of the matter in September 2002. See item 3 "Legal
Proceedings" for discussion regarding the corporate office lease termination.
ITEM 3. LEGAL PROCEEDINGS
The Company has been burdened by the bankruptcy of its former
professional liability claims insurer Reliance Insurance Company (Reliance).
Reliance provided professional liability claims insurance for the Company from
March 1, 1998 to March 1, 2001. With Reliance now in liquidation and no longer
able to pay any losses or claims expenses, the Company must now defend itself
from all claims in which it previously would have been protected through its
insurance program. As of November 7, 2002, the following lawsuits previously
handled by Reliance have been filed against the Company and either individually
or in the aggregate are material.
Spinola v. Regent Assisted Living, Inc., Case No. 01-018266 filed on or
about August 14, 2001 in the Superior Court for the State of California of
Alameda County. This is a wrongful death action filed October 4, 2001 by the
family of a resident that bled to death in the Company's Sunnyside Court
community in Fremont, California. The plantiff alleges several negligence causes
of action along with fraud, wrongful death and emotional distress.
Earle v. Regent Assisted Living, Inc. Case No. 01-2-025950-9 SEA filed
January 26, 2001 in the Superior Court of Washington in King County. Former
resident of the Company's Sterling Park, Redmond, WA community claims that he
fell while raising from a chair with wheels while in the lobby of the community
and fractured hip. Claim is for medical expenses related to broken hip and
compensation for pain and suffering and mental anguish. On August 30, 2002
Plaintiff filed an amended second complaint additionally alleging breach of
contract, violation of statutory prohibition against exculpatory clauses,
intentional misrepresentation, negligent misrepresentation, violation of RCW
74.34, violation of consumer protection act, and loss of love, companionship and
society of parent. Plaintiff requests judgment for special and general damages
for pain, suffering, disability, disfigurement, loss of capacity to enjoy life,
mental and emotional trauma, distress and anxiety. Plaintiff also seeks to
recover attorney and expert fees.
Steiner v. Regent Assisted Living, Inc. also cause of action against
LaFontaine, Walter C. Bowen and LTC West, Inc. Suit filed on or about May 1,
2001, Case No. CV-2001-02890, in the Second Judicial District Court for the
State of New Mexico in Bernalillo County. Resident of Sandia Springs, Rio
Rancho, New Mexico fell ill overnight and was transported next morning to
19
hospital and died several days later of aspiration and pneumonia. Complaint
alleges numerous negligence causes of action along with wrongful death, breach
of contract, conspiracy and violation of trade practices. Plaintiff seeks to
recover compensatory and punitive damages. On July 15, 2002, LTC West, Inc.
filed a motion to amend its answers to the filed complaint to add cross-claims
for breach of contract and indemnification against Regent and Walter Bowen and
to add third party claims against several Regent employees in the event that LTC
is found liable for damages.
The Company believes that the above claims are without merit and is
vigorously working to settle the matters. There is no assurance that the Company
will be able to settle these claims at a reasonable cost or at all. Even if the
Company is successful in defending itself, the attorney fees associated with a
defense could jeopardize the ability of the Company to provide a defense. If a
judgment is rendered against the Company, the Company may be forced to pursue a
court supervised reorganization.
Other lawsuits that have been filed against the Company and are
unrelated to the Reliance liquidation are as follows:
Kuest v. Regent Assisted Living, Inc. Case No. 99-2-09456-5.SEA filed
in King County, Washington, Superior Court in 1999. Plaintiff alleges
discrimination on the basis of gender, wrongful termination based on violations
of express and implied contracts and promissory estoppel. Plaintiff seeks
damages, attorney fees and costs. The Court granted in its entirety the
Company's motion for summary judgment. Plaintiff appealed with the Washington
State Court of Appeals, Case No. 48097-9-1, which reversed the trial court's
decision on March 25, 2002. The case was remanded to the trial court.
In addition to the matters referred to above, the Company is involved
in various other lawsuits and claims which individually are not considered
material. The Company believes that the claims are without merit and is
vigorously working to settle the matters. However, unfavorable outcomes of these
claims, in the aggregate, along with an unfavorable outcome of the claims
described above may have a material adverse effect on the Company's financial
condition, results of operations, cash flow and liquidity. There is no assurance
that the Company will be able to settle these claims at a reasonable cost or at
all. Even if the Company is successful in defending itself, the attorney fees
associated with a defense could jeopardize the ability of the Company to provide
a defense. If a judgment is rendered against the Company, the Company may be
forced to pursue a court supervised reorganization.
The parties to the following lawsuits reached settlement agreements in
2002.
On June 3, 2002, the Company was served with a lawsuit filed by the
lessor of the Company's office space that was vacated in 2002. Terrace Tower
Group U.S.A. v. Regent Assisted Living, Inc. Case No. 0205-05257 filed in the
Circuit Court of the State of Oregon for the County of Multnomah. The complaint
was for breach of lease; quantum meruit. On September 10, 2002, the parties
reached a settlement of the matter.
Carr v. Regent Assisted Living, Inc. Suit filed January 20, 2000, in
the Superior Court for the State of California in Sacramento County. Plaintiff,
a guest of a resident of the Company's Willow Creek, Folsom California
community, slipped and fell. On April 19, 2002, the parties reached a settlement
of the matter.
20
Bedbury v. Regent Assisted Living, Inc. Case No. 16-01-112181 Lane
County Circuit Court Filed June 28, 2001. The family of a former Alzheimer
resident of Sheldon Park in Eugene, Oregon alleged negligence and breach of
contract regarding care provided. On June 26, 2002, the parties reached a
settlement of the matter.
Jerry Graham et al. v. Regent Assisted Living, Inc. et al., Case No.
00AS03608 filed in the Superior Court of Sacramento County. This was a wrongful
death action filed on July 1, 2000 by the family of an assisted living resident
who walked out of the Company's Willow Creek community and was later found dead.
On August 6, 2002, the parties reached a settlement of the matter.
Palmrose et al. v. Regency Park Apartments, Limited, et al. Case No.
0204-03852 filed on or about April 19, 2002, in the Circuit Court of the state
of Oregon for the county of Multnomah. Alzheimer's resident of Regency Park,
Portland, Oregon suffered burns from a baseboard heater in resident's room. On
July 18, 2002, the parties reached a conditional settlement of the matter.
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. 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. The failure of
the Company to abide by these standards could potentially result in the
revocation of all of the Company's licenses to operate in California. At
November 7, 2002, the Company no longer owns or operates the three communities
referred to above.
With respect to the foregoing cases, at December 31, 2001, the Company
has accrued $1.2 million which represents amounts paid in 2002 or agreed to be
paid for settled claims and an estimate for claims still pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
As of November 7, 2002, the executive officers of the Company were as
set forth below.
Name Age Position
---- --- --------
Walter C. Bowen 60 Chairman of the Board, Chief
Executive Officer and President
Steven L. Gish 44 Chief Financial Officer, Treasurer,
Secretary and Director
21
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 and from November 1, 2001 to present. 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 six 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 currently serves on the Board of
Directors of Ocadian, Inc. (formerly Guardian Care, Inc.). Mr. Bowen also serves
on the advisory board for the National Investment Conference for the Senior
Living and Long Term Care Industries and is a past member of the Board of
Directors of the Assisted Living Communities Association of America.
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.
22
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 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 the Over-the-Counter Bulletin Board ("OTC BB") for the periods
indicated.
Quarter Ended High Low
------------- ---- ---
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
March 31, 2001 .875 .844
June 30, 2001 .05 .05
September 30, 2001 .05 .05
December 31, 2001 .05 .05
The Company had 28 holders of record as of November 7, 2002.
Since its initial public offering in December 1995, the Company has not
paid cash dividends on its Common Stock. As of December 31, 2001, the Company
has an accumulated deficit of approximately $35.0 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 2001 and 2000, the Company recorded accrued preferred dividends of
$1,125,000 and $750,000, respectively.
23
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
2001, 2000, 1999, 1998, 1997. 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)
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
Consolidated Statement of Operations Data
Total revenues $ 64,025 $ 64,909 $ 54,089 $ 30,419 $ 13,958
Total operating expenses 68,494 67,823 60,760 39,859 18,094
-------------- -------------- -------------- -------------- --------------
Operating loss $ (4,469) $ (2,914) $ (6,671) $ (9,440) $ (4,136)
Other income (expense), net 3,115 (3,682) (2,141) (1,622) 271
Minority interest 24 130 36 - -
Provision for income taxes - - - - (13)
Extraordinary loss net of tax benefit - - - - -
-------------- -------------- -------------- -------------- --------------
Net loss (1,330) (6,466) (8,776) (11,062) (3,878)
Preferred stock dividends (1,125) (750) (600) (600) (600)
-------------- -------------- -------------- -------------- --------------
Net loss to common shareholders $ (2,455) $ (7,216) $ (9,376) $ (11,662) $ (4,478)
-------------- -------------- -------------- -------------- --------------
Net loss per common share, basic
And diluted $ (0.54) $ (1.60) $ (2.03) $ (2.52) $ (0.97)
Weighted average number of common
shares outstanding
Basic 4,507,600 4,507,600 4,615,135 4,633,000 4,633,000
Diluted 4,507,600 4,507,600 4,615,135 4,633,000 4,633,000
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
Consolidated Balance Sheet Data:
- --------------------------------
Cash and cash equivalents $ 4,042 $ 2,580 $ 4,538 $ 4,483 $ 1,805
Working capital (deficit) (5,913) (3,943) 1,427 1,562 (4,303)
Total assets 42,847 93,058 62,686 66,274 75,704
Long-term debt, less current portion 22,716 65,062 32,275 40,705 51,451
Minority interests 71 1,422 352 - 250
Shareholder's equity (deficit) $ (14,982) $ (12,526) $ (5,311) $ 4,255 $ 15,917
24
Supplementary Financial Information
2001 and 2000 by Quarter
(dollars in thousands)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- --------------- -------------- ---------------
2001
----
Revenues $ 16,479 $ 16,812 $ 17,645 $ 13,089
Residence operating expenses 12,331 12,605 13,656 9,917
-------------- --------------- -------------- ---------------
Gross profit $ 4,148 $ 4,207 $ 3,989 $ 3,172
-------------- --------------- -------------- ---------------
Net income (loss) $ (3,038) $ (2,841) $ (2,954) $ 7,503
-------------- --------------- -------------- ---------------
Net income (loss) per share $ (0.73) $ (0.69) $ (0.72) $ 1.60
-------------- --------------- -------------- ---------------
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)
-------------- --------------- -------------- ---------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
- --------
The Company is an owner and operator 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.
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. The
Company grew to a resident capacity of 2,996 beds and operated 30 communities by
the end of 2000.
At the end of 2000, the Company had a substantial working capital
deficit and anticipated that its cash requirements during 2001 would exceed the
cash provided by operations. The Company embarked on a strategic plan to address
its liquidity issues. Additionally, in 2001, the Company encountered
extraordinary circumstances and difficulties in obtaining licenses for two new
California buildings and in obtaining a certificate of occupancy for its new
Arizona building resulting in significant time delays in opening these
buildings. These delayed openings resulted
25
in significant unanticipated cash expenditures and delayed revenue generation
for the Company. As a result of continuing operating losses and the difficulties
in obtaining operating licenses for certain of its new buildings, the Company
was unable to meet certain of its lease obligations, discontinued all
development and construction activities, reduced the number of communities it
operates, downsized its workforce and entered into an agreement whereby the
Company subcontracted a substantial portion of the management duties for its
communities to another assisted living company, Emeritus Corporation. As of
December 31, 2001, the Company had reduced its operations to 20 communities
with a resident capacity of 2,067 beds.
The Company has a substantial working capital deficit and anticipates
that its cash requirements during 2002 will exceed the cash provided by
operations. The Company will require a significant amount of capital to fund
operating losses, debt and lease obligations. The Company is exposed to
significant liability losses as a result of the bankruptcy of its former
professional liability claims insurer that provided professional liability
claims insurance to the Company from March 1, 1998 to March 1, 2001. The
combination of a difficult financing and operating environment for the assisted
living industry has limited the potential sources for capital. The Company is
considering various alternatives that may include the potential disposition of
selected assets and/or the merger or sale of the remaining assets of the
business. There can be no assurance that the Company will be successful in these
pursuits. At this time the Company believes that the net proceeds of such
transactions after satisfaction of the Company's liabilities and the
distribution to the preferred shareholder of its liquidation preference pursuant
to the Articles of Incorporation may not be sufficient to permit any
distribution to the Company's common shareholders. 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.
Critical Accounting Policies and Estimates
- ------------------------------------------
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
the Company evaluates its estimates, including allowance for doubtful accounts,
land held for sale, investments in and advances to joint ventures, income taxes,
restructuring, contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from
26
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes that the following critical accounting policies
are most significant to the judgments and estimates used in the preparation of
its consolidated financial statements. Revisions in such estimates are charged
to income in the period in which the facts that give rise to the revision become
known.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its residents to make required payments.
If the financial condition of the Company's residents were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
The Company has made land available for sale and adjusts the value of
such land to its estimated fair value. Subsequent changes in market conditions
may not be reflected in the asset carrying value thereby requiring further
adjustment upon ultimate sale of the asset.
Joint ventures in which the Company does not have a controlling
interest are accounted for under the equity method of accounting. Poor operating
results of the properties underlying these investments could result in losses or
an inability to recover the carrying value of the investments that may not be
reflected in this investment's current carrying value, thereby possibly
requiring an impairment charge in the future.
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized, which at this
time shows a net asset valuation of zero. While the Company has considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance, in the event the Company were
to determine that it would be able to realize its deferred tax assets in the
future of its net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made.
The Company regularly reviews all of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that the Company considers
important that could trigger an impairment review include, but are not limited
to, significant underperformance relative to historical or projected future
operating results, significant changes in the manner of use of the acquired
assets or the strategy for the Company's overall business and significant
negative industry or economic trends. When the Company determines that an
impairment review is necessary based upon the existence of one or more of the
above indicators of impairment, the Company measures any impairment based on a
projected undiscounted cash flow method. Significant judgment is required in the
development of projected cash flows for these purposes including assumptions
regarding the appropriate level of aggregation of cash flows, their term as well
as the underlying forecasts of expected future revenue and expense. The Company
has not recorded significant impairment charges to assets not held for sale;
however, to the extent that events or circumstances cause the Company's
assumptions to change, the Company may be required to record a charge which
would be material.
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. Gains realized on sales or
distributions of the Company's assisted living communities to its
27
majority shareholder are deferred and will not be recognized until such
buildings are sold to unrelated third parties.
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.
2001 2000 1999
-------------- --------------- -------------
Revenues:
Rental and service 98.6 % 98.9 % 99.2 %
Management fees 1.4 1.1 0.8
Total revenues 100.0 100.0 100.0
Operating expenses:
Residence operating expenses 75.8 69.4 71.3
General and administrative expenses 13.3 10.9 13.4
Lease expense 13.5 21.5 24.8
Depreciation and amortization 4.3 2.7 2.8
Total operating expenses 106.9 104.5 112.3
Operating loss (6.9) (4.5) (12.3)
Interest income 0.5 0.8 0.6
Interest expense (10.9) (6.0) (4.9)
Equity in losses of joint ventures (0.6) (0.5) (0.5)
Other income, net 15.8 0.0 0.8
Loss before minority interests (2.1) (10.2) (16.3)
Minority interests 0.0 0.2 0.1
Loss before income taxes (2.1) (10.0) (16.2)
Provision for income taxes 0.0 0.0 0.0
Net loss (2.1) (10.0) (16.2)
Preferred stock dividends (1.7) (1.1) (1.1)
Net loss available to common shareholders (3.8)% (11.1)% (17.3)%
============ ============ ============
28
Comparison of Years Ended December 31, 2001 and 2000
- ----------------------------------------------------
Revenues. Revenues for 2001 totaled $64.0 million compared to $64.9
million in 2000, a decrease of $0.9 million or 1.4 percent. During 2001, the
Company operated 35 communities comprised of eight stabilized communities, 20
newly developed or acquired communities, and seven communities operated pursuant
to management contracts, of which four were owned in joint ventures and
accounted for under the equity method. During 2001, the Company opened five new
communities of which four were internally developed. Two of these communities
were managed by a third party in 2001. In 2001, the Company assigned its
leasehold interest in three communities to a third party, transferred operations
of four of its leased communities to third party operators as part of a
settlement agreement with the owner of these leased communities, transferred
operations of five of its leased communities to third party operators as part of
a settlement agreement with the owner of these leased communities, exchanged two
communities for cancellation of convertible notes, and canceled the management
contract for one community. Also the leases of two communities, that the Company
leased from entities controlled by the majority shareholder, were terminated by
the lessors. The Company continues to manage these communities. In June 2002,
the Company received a letter from its preferred shareholder disputing the
termination of these leases and claiming that the terminations are voidable. The
Company operated 31 communities during 2000 comprised of seven stabilized
communities, 17 newly developed or acquired communities, and seven communities
operated pursuant to management contracts, of which three were 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."
Rental and service revenues from the ten communities that the Company
continued to operate at December 31, 2001, increased $4.9 million. Of this
increase, $2.4 million was from three communities that the Company opened in
January, February and July 2001. Two of these communities were internally
developed and two were managed by a third party. Average occupancy at the seven
residences that the Company operated at the beginning of both 2001 and 2000 was
82.5 percent for 2001 compared to 76.0 percent in 2000.
Rental and service revenues from the communities that were disposed of
in 2001, decreased $5.9 million. Management fee income increased $0.1 million in
2001. The majority of this increase is attributable to eight of the ten
properties that the Company continued to manage at the end of 2001.
Residence Operating Expenses. Residence operating expenses were $48.5
million for 2001 and $45.0 million for 2000, an increase of $3.5 million or 7.7
percent. Residence operating expenses from the 10 communities that the Company
continued to operate at December 31, 2001 increased by $4.9 million from 2000 to
2001. Of this increase, $1.5 million was from the seven communities that the
Company operated at the beginning of both 2000 and 2001 and $3.4 million was
from start-up operating expenses and pre-opening costs for the three newly
developed communities that opened in 2001. Residence operating expenses
decreased $1.4 million from the communities that were disposed of in 2001.
Residence operating expenses from the seven communities that the Company
operated at the beginning of both 2000 and 2001 totaled 72.2 percent and 73.8
percent of rental and service revenue for 2001 and 2000, respectively.
General and Administrative Expenses. General and administrative
expenses were $8.6 million for 2001 compared to $7.1 million for 2000, an
increase of $1.5 million. In 2001 as compared to 2000, payroll and related costs
and expenses decreased $1.1 million of which $0.2 million related to a
non-recurring charge in 2000 for the termination of an employment contract,
29
offset by $0.5 million in severance related expenses from the Company's
restructuring. Travel expenses decreased $0.1 million offset by an increase in
other professional fees of $0.3 million for loan financing and other consulting
costs. Development related costs incurred in connection with asset write-downs
(land held for sale) and abandoned projects increased $0.7 million. The Company
expensed $1.2 million in 2001 for professional liability and other claims paid
in 2002 or agreed to be paid for settled claims and an estimate for claims still
pending.
Lease Expense. Lease expense for the Company's leased communities
totaled $8.6 million for 2001 compared to $13.9 million for 2000. The decrease
of $5.3 million relates to the acquisition of three previously leased
communities in December 2000, the assignment of the Company's leasehold
interests in its three Wyoming communities in February 2001, lease cancellations
on nine of the Company's properties in November 2001 and the related full
recognition of the deferred fees and gain on six of the properties that were
subject to sale-leaseback transactions, offset by two newly developed leased
communities which opened in 2001, one of which was cancelled and annual lease
escalation clauses.
Depreciation and Amortization. Depreciation and amortization expense
was $2.7 million for 2001, compared to $1.8 million for 2000. The increase of
$0.9 million relates primarily to the acquisition of three previously leased
communities in December 2000, the opening of two newly developed communities in
2001, plus purchases of property and equipment to support existing operations.
Interest Income. Interest income is earned from the Company's
investment of cash and cash equivalents in high-quality, short-term securities
placed with institutions with high credit ratings.
Interest Expense. Interest expense increased in 2001, to $7.0 million
from $3.9 million for 2000. Of this increase, $1.8 million was incurred due to
the acquisition in December 2000 of four previously leased communities (one of
which had been accounted for as a capital lease), $1.1 million was incurred
primarily due to the opening and completion of two newly developed communities,
and $0.2 million was incurred as a result of short-term borrowings from the
majority shareholder.
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 and
start-up costs of the 50 percent owned Salt Lake City, Utah community.
Other Income (Loss), Net. In 2001, the Company recorded losses of $0.5
million as a result of settlement agreements with the owners of nine of its
properties for lease cancellations and exchanged its Bakersfield and Vacaville,
California communities for cancellation of convertible notes, recognizing a
$12.0 million gain. The Company recorded a $1.5 million loss from the
cancellation of leases with entities owned by the majority shareholder. The
Company also assigned its leasehold interest in its three Wyoming communities
for a $0.1 million gain.
Net Loss. Net operating results increased by $5.1 million for 2001,
compared to the same period in 2000. The Company reported a loss of $1.3 million
for 2001, whereas the Company reported a loss of $6.5 million for 2000. The
increase in net results is primarily due to an increase in other income (loss)
of $10.1 million and a decrease in lease expense of $5.3 million offset by a
decrease in residence operating profits (rental and service revenue less
residence operating
30
expenses) of $4.5 million, a decrease in interest income of $0.1 million, and
increases in general and administrative expenses, depreciation expense, interest
expense and equity in losses of joint ventures, all as discussed above.
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 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.
31
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.
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.
Liquidity and Capital Resources
- -------------------------------
At December 31, 2001, the Company had a $5.9 million working capital
deficit, compared to a working capital deficit of $3.9 million at December 31,
2000. The decrease in working capital relates primarily to an increase in cash
and cash equivalents of $1.5 million (as described below) and offset by an
increase in net current liabilities of $3.5 million. Current liabilities include
payables of $2.6 million to the Company's majority shareholder. Also included in
current liabilities is $8.9 million in debt related to the Company's South
Ogden, Utah community which was opened in January 2001. The Company had been
declared in default under terms of the loan agreement and accordingly the amount
due was included in current portion of long-term debt. As described below, in
May 2002 the Company signed an agreement with the lender whereby the Company
transferred the South Ogden community to the bank in full satisfaction of the
related debt. Accordingly, the Company has classified the net book value of the
South Ogden property of $8.3 million in current assets at December 31, 2001.
The Company anticipates that its cash requirements during 2002 will
exceed the cash provided by operations. The Company is exposed to significant
liability losses that are uninsured as a result of the bankruptcy of its former
professional liability claims insurer that provided professional liability
claims insurance for the Company from March 1, 1998 to March 1, 2001.
32
With the insurance company currently in liquidation and no longer able to pay
any losses or claims expenses, the Company must defend itself from all claims in
which it previously would have been protected through its insurance program. The
Company is considering various alternatives that may include the disposition of
selected assets and/or the merger or sale of the remaining assets of the
business. The Company believes that the ultimate outcome of these pursuits, if
taken, will not generate any value for the common shareholders.
Net cash used in operating activities totaled $4.0 million for 2001,
resulting primarily from a net loss of $1.3 million, adjusted $8.4 million for
non-cash items (depreciation, amortization, gain on sale of assets, loss on
disposal of construction in progress, adjustment of land held for sale to fair
value, equity interest in joint ventures, decrease in allowance for doubtful
accounts and minority interests), an increase in current liabilities of $3.1
million, the release of cash held in working capital escrow of $1.4 million, a
decrease in accounts receivable of $0.4 million and an increase in deferred
lease and interest payable to the majority shareholder of $0.8 million.
Net cash provided by investing activities totaled $1.0 million
consisting primarily of $5.0 million in proceeds from the sale of the Company's
Santa Cruz, California community to its majority shareholder, proceeds from the
sale of land previously held for sale of $0.5 million, $0.3 million from the
assignment of the Company's leasehold interests in three Wyoming communities
offset by $4.4 million in construction costs, a reduction in construction
accounts payable of $0.2 million and a distribution of $0.2 million to the
majority shareholder as a result of the dissolution of the Company's joint
venture Regent/Bowen, LLC.
Net cash provided by financing activities totaled $4.4 million,
primarily consisting of short-term borrowings from the majority shareholder of
$1.9 million, property and equipment financing proceeds totaling $5.7 million, a
decrease in restricted cash for financing arrangements of $1.1 million, a net
decrease in payments and deposits for lease financing arrangements of $0.4
million, offset by repayment of long-term debt of $4.7 million.
In February 2001, the Company assigned its leasehold interest in three
Wyoming communities to a third party for $325,000. The leasehold interests were
assigned as a result of the difficulty in servicing these communities due to
logistics and also due to continuing losses at two of the communities.
In March 2001, the Company was unable to close two conventional loans
with a financial institution in order to refinance two of its California
communities. The inability to complete one loan was due in part to a pending
accusation against the Company by the State of California Department of Social
Services that was subsequently settled in July 2001, see item 3 "Legal
Proceedings". Both loans failed to close due to the inability of the Company to
obtain minimum excess liability coverage limits of five million dollars. As a
result, the Company was unable to recover $195,500 in non-refundable advance
deposits. These funds were advanced to the financing company directly by the
majority shareholder and were included in the June 30, 2001 bridge financing
demand note payable to the majority shareholder as described below.
In April 2001, the Company and a commercial bank, which in December
2000 financed the purchase of four previously leased communities, agreed to a
modification of the terms of their debt financing. The financing had originally
provided 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
33
September 2001. During the six months of the modification, the net cash flow
from the four communities totaled approximately $976,000
Pursuant to the financial plan the majority shareholder provided cash
advances totaling $750,000 under a bridge financing arrangement through June 30,
2001. On 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. The note was
due on June 30, 2002, and is now past due. It remains unpaid and the Company is
currently attempting to negotiate extensions on these payment obligations.
On July 3, 2001, the Company's Board of Directors approved a $1 million
operating line of credit provided by the majority shareholder. Through September
7, 2001, the Company drew $1,000,000 under the line. The note was due on June
30, 2002, and is now past due. It remains unpaid and the Company is currently
attempting to negotiate extensions on these payment obligations.
Effective October 31, 2001, the Company entered into a settlement
agreement with HCN the real estate investment trust owner of four of the
Company's communities that were leased under a master lease to resolve events of
default primarily due to failure of the Company to pay its September and October
2001 lease payments. The settlement included transfer of the operations of the
communities to new operators and a note payable to HCN for past due rent
obligations totaling $585,709. The note provides for 8% interest payable
quarterly and principal and interest payments of $43,232 payable quarterly
beginning in January 2003. The note is guaranteed by the majority shareholder
and is due November 2006. The Company recorded losses totaling $266,000 as a
result of this transaction.
Effective November 1, 2001, the Company entered into a settlement
agreement with LTC the real estate investment trust owner of five of the
Company's leased communities that were cross-defaulted to resolve events of
default primarily due to failure of the Company to pay its September and October
2001 lease payments. The settlement included transfer of the operations of the
communities to new operators and a note payable to LTC for past due rent
obligations. The note was combined with additional amounts outstanding under an
existing note payable to LTC to total $650,000. The note provides for 8%
interest payable quarterly and monthly installments of principal and interest
totaling $15,868 beginning December 2002. The note is guaranteed by the majority
shareholder and is due November 2006. The Company recorded losses totaling
$343,000 as a result of this transaction.
Effective November 1, 2001, the leases of two communities leased from
entities under the control of the majority shareholder were terminated by the
lessors due to non-payment of the September and October 2001 lease payments.
These leases were cross-defaulted. The Company is attempting to negotiate a
settlement with the lessors. The Company continues to manage these communities
on behalf of the lessors. The Company has recorded the missed lease payments as
notes payable in the amount of $473,108 accruing interest at 8% of which
$167,108 would be subordinate to dividend payments due to the Company's
preferred shareholder. The Company recorded a loss of $1.5 million as a result
of the cancellation of the leases and write-off of leasehold improvements. In
June 2002, the Company received a letter from its preferred shareholder
disputing the termination of these leases and claiming that the terminations are
voidable. The lessors have refused to reinstate these leases. Pursuant to terms
of the lease agreements, the Company owes the majority shareholder $1,292,199
for deferred lease and interest payments which amounts are subordinate to
dividend payments due to the Company's preferred shareholder.
34
On November 1, 2001, the Company entered into a loan workout and
settlement agreement with one of its third party lenders as a result of a
payment default under the loan agreement. The Company deeded one parcel of land
that it held for sale to the lender in satisfaction of $0.9 million in debt,
restructured the payment terms on the remaining loan obligation and provided
collateral in other land held for sale. Of the remaining debt due of $0.7
million, the Company paid $73,500 in November 2001, $186,500 in December 2001,
$250,000 in February 2002 and the remaining balance due of $225,000 was paid in
September 2002.
In December 2001, the Company, concerned by the quarterly interest
obligation of it's subordinated convertible notes and the operating losses at
its Bakersfield, California community, exchanged its Bakersfield and Vacaville,
California communities for $8.9 million of the convertible notes. An affiliate
of LTC acquired the two properties subject to $18.3 million in mortgage and
local improvement debt. The Company recorded a gain of $12.0 million in
connection with this non-cash transaction.
On December 26, 2001, the Company and its majority shareholder agreed
to a specified distribution of the assets of Regent/Bowen, LLC, a joint venture
formed in December 2000 for the purpose of acquiring four communities that were
previously leased. The Company had contributed $0.6 million along with its
rights to purchase the four communities for a 75% interest in the joint venture.
The majority shareholder had contributed $1.2 million for a 25% interest. In
addition, the venture had obtained $32.2 million in bank financing and $0.5
million of seller provided financing in order to complete the acquisitions. The
venture was dissolved in December 2001 and 100% of the venture's interest in the
Santa Cruz and Clovis, California communities was distributed to the Company and
100% of the venture's interest in the Eugene, Oregon community was distributed
to the majority shareholder. The remaining community located in Boise, Idaho and
other venture assets were distributed 75% to the Company and 25% to the majority
shareholder in accordance with their ownership interests. As a result of the
dissolution, the Company distributed cash of $165,091 and recorded a $31,783
payable to the majority shareholder.
On December 27, 2001, the Company sold its Santa Cruz, California
property to its majority shareholder for a net sales price of $11.7 million. The
Company received $5.0 million in cash proceeds of which $2.9 million was
retained by the Company and $2.1 million was used to reduce debt after which
$6.7 million was assumed by the majority shareholder.
Commencing January 1, 2002, the Company contracted with Emeritus
Corporation, an unrelated assisted living company, to provide operations
management, consulting and accounting services to its assisted living
communities. Accordingly the Company implemented a restructuring plan to reduce
a significant portion of its corporate workforce at December 31, 2001 and in the
first quarter of 2002. The Company continues to provide an oversight management
role, partnership administration and asset management services including
continued responsibility for placement of insurance and debt financing
arrangements.
As of November 7, 2002, the Company has no additional communities under
construction.
During 2000 and 2001, the Company did not pay the quarterly dividends
which accrued with respect to its preferred stock. The first quarter 2000
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, 2001, a total of $1,875,000 was in arrears. The Company's
35
Articles of Incorporation and state law prohibit the current payment of the
preferred dividend since in the judgment of the Company's Board of Directors,
the payment of the preferred dividend would jeopardize the on-going viability of
the Company and potentially result in its insolvency. Accordingly, the Company
has recorded these amounts as long-term liabilities at December 31, 2001.
The Company is subject to significant liability losses that are
uninsured as a result of the bankruptcy of its former professional liability
claims insurer Reliance Insurance Company (Reliance). As further explained in
item 3 " Legal Proceedings", Reliance provided professional liability claims
insurance for the Company from March 1, 1998 to March 1, 2001. With Reliance
currently in liquidation and no longer able to pay any losses or claims
expenses, the Company must now defend itself from all claims in which it
previously would have been protected through its insurance program. At December
31, 2001, the Company has accrued $1.2 million which represents amounts paid in
2002 or agreed to be paid for settled claims and an estimate for claims still
pending.
In order to conserve working capital and generate additional working
capital, the Company has discontinued development activities and has one other
parcel of real property previously held for development listed for sale.
Certain remaining operating lease agreements and loans contain
restrictive covenants. A failure by the Company to comply with the requirements
of these covenants, if not waived or cured, could permit acceleration of the
related indebtedness. Some of the Company's debt instruments contain cross
default provisions pursuant to which a default under one obligation can cause a
default under one or more other obligations to the same lender. At December 31,
2001, such cross default provisions affected two of the Company's owned assisted
living properties and two properties for which it provided a guarantee. At
December 31, 2001, the Company was in compliance with all covenants specified in
its debt or lease obligations for the properties that the Company continued to
own at November 7, 2002.
The following table summarizes the Company's commitments under the
terms of its debt obligations and operating leases as of December 31, 2001:
(Dollars in thousands)
2002 2003 2004 2005 Thereafter
------------ ------------- ------------- ------------- -------------
Long-term debt $13,159 $1,614 $20,174 $456 $471
Operating leases 2,066 1,302 1,224 1,240 6,746
Guarantees 522 19,235 17,203 7,356 -
------------ ------------- ------------- ------------- -------------
Total Obligations $15,747 $22,151 $38,601 $9,052 $7,217
============ ============= ============= ============= =============
Subsequent to December 31, 2001, the Company refinanced $15.2 million
of debt at more favorable terms and as a result the Company's guarantees on
loans to entities owned by the majority shareholder were reduced to $8.1
million. Additionally a result of these transactions was the elimination of the
cross-defaults of the Company's debt and guaranteed debt.
As more fully described in the preceding paragraphs the Company had
several significant transactions with its majority shareholder in 2001. The
Company believes that the transactions
36
were on terms no less favorable to the Company than could be obtained from
unaffiliated parties in arms-length transactions, however, there can be no
assurance that such is the case.
Impact of Inflation
- -------------------
To date, the Company has experienced inflationary pressures in the
areas of wages, insurance and utilities. In pricing its services, the Company
attempts to incorporate and anticipate inflation levels. The Company's ability
to increase revenues in proportion to increased operating expenses is at times
limited 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. The
Company typically does not rely to a significant extent on governmental
reimbursement programs. There can be no assurance that the Company will be able
to respond to inflationary pressures in the future.
Subsequent Events
- -----------------
In February 2002, the Company entered into a lease termination
agreement with Meditrust the real estate investment trust owner of its Alzheimer
community in Scottsdale, Arizona and its assisted living community in Folsom,
California. The Company's leases for these two communities were canceled and the
Company was released from all liability thereunder, including any past due
obligations to pay rent under the leases and any real estate taxes in excess of
$25,000. The Company realized a reduction in current liabilities that were
recorded at December 31, 2001, of approximately $217,200 as a result of this
transaction. The new owners of these two communities are affiliated with
Emeritus Corporation.
In May 2002, the Company sold its West Wind community located in Boise,
Idaho to a third party. The Company received $2.8 million in sales proceeds and
paid down $2.4 million of debt that was classified as current at December 31,
2001, recognizing a gain of $272,000 on the transaction in 2002. Accordingly the
Company has classified the net book value of the West Wind property of $2.6
million in current assets at December 31, 2001.
The Company abandoned its wholly owned subsidiary's Elk Grove,
California construction project in December 2001 as a result of a declaration of
default on the loan agreement by the construction lender. The Company wrote off
$3.8 million in related construction costs, $155,000 in restricted cash
deposits, was released from $3.0 million of construction debt and recorded a
loss for this project of $0.9 million at December 31, 2001. In May 2002, the
Company entered into a settlement agreement with the lender and effective June
3, 2002 transferred its ownership interest in the construction project to a
third party purchaser identified by the lender. No cash proceeds were generated
for the Company as a result of this transaction. The Company and the majority
shareholder had provided guarantees of the construction loan to the lender and
were relieved of these guarantees upon closing of the transaction. In addition,
the settlement agreement provided for the transfer of the Company's South Ogden
community to the lender in lieu of foreclosure. The transfer of the South Ogden
facility and operations closed May 31, 2002. The Company recorded a gain of $1.1
million in 2002 in connection with this non-cash transaction. The lender had
declared the Company in default on the $8.9 million loan for the South Ogden
facility in 2001 and accordingly this debt was classified as current at December
31, 2001. Accordingly, the Company has classified the South Ogden property of
$8.3 million in current assets at December 31, 2001.
In September 2002, the Company sold its 55% co-tenancy interest in its
Modesto community to an unrelated third party for a net sales price of $2.8
million. The Company
37
received $1.0 million in cash proceeds, $0.1 million in notes receivable and
satisfied $1.7 million of co-tenancy debt which was assumed by the buyer. The
Company recorded a gain in 2002 totaling $1.0 million as a result of this
transaction. The Company, its majority shareholder and the unrelated 45%
co-tenant continue to guarantee the full $3.0 million in debt assumed by the
buyer.
In September 2002, the Company assigned its lease of its San Antonio
community to Emeritus Corporation for $408,000. The Company recorded a gain in
2002 of approximately $327,000 as a result of this transaction. In connection
with the assignment the lessor released to the Company the cash deposit held
under a letter of credit arrangement in the amount of $741,752. This amount was
included in restricted cash at December 31, 2001.
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 is
effective for the fiscal years beginning after June 15, 2002. SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
The impact of this pronouncement on the Company's financial statements is not
expected to be material.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 is effective for the fiscal years
beginning after December 15, 2001. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects or Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. SFAS No.
121 did not address the accounting for a segment of a business accounted for as
a discontinued operation under APB Opinion No. 30; accordingly, two accounting
models existed for long-lived assets to be disposed of. SFAS No. 144 establishes
a single accounting model, based on the framework established in SFAS No. 121,
for long-lived assets to be disposed of by sale. In addition, SFAS No. 144
resolves significant implementation issues related to SFAS No. 121. Under SFAS
No. 144 the results of operations of a component of an entity that either has
been disposed of or is classified as held for sale are reported in discontinued
operations if (a) the operations and cash flows of the component have been (or
will be) eliminated from the ongoing operations of the entity as a result of the
disposal transaction and (b) the entity will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
Accordingly, upon adoption of SFAS 144 the Company's operations associated with
and transactions recorded in other income/loss could be reclassified as
discontinued operations.
In 2002, FASB issued SFAS 145, Rescission of SFAS Nos. 4, 44, and 64,
Amendment of SFAS 13, and Technical Corrections as of April 2002. This Statement
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and
an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends SFAS
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain
38
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
has reviewed this pronouncement and will consider its impact on any relevant
transactions.
In July 2002, FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This Statement
applies to costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Those costs include, but are not limited to, the following:
a. Termination benefits provided to current employees that are
involuntarily terminated under the terms of a benefit arrangement
that, in substance, is not an ongoing benefit arrangement or an
individual deferred compensation contract (hereinafter referred to
as one-time termination benefits),
b. Costs to terminate a contract that is not a capital lease, and,
c. Costs to consolidate facilities or relocate employees.
This Statement does not apply to costs associated with the retirement
of a long-lived asset covered by SFAS No. 143, Accounting for Asset Retirement
Obligations. The impact of this pronouncement on the Company's financial
statements has not yet been determined by the Company.
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, 2001, the
Company's variable rate borrowings totaled $28.3 million. If market interest
rates average one percent more in 2002 than in 2001, the Company's interest
expense would increase and income before taxes would decrease by $283,000. These
amounts are determined by considering the impact of hypothetical interest rates
on the Company's outstanding variable rate borrowings as of December 31, 2001,
and does not consider changes in the actual level of borrowings which may occur
subsequent to December 31, 2001. 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-29 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
39
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) 60 March 1995
Steven L. Gish 44 August 1995
(1) Member of Executive Committee
(2) Member of Compensation Committee
Walter C. Bowen has served as Chairman of the Board and Chief Executive
Officer and as a Director of the Company since its formation in March
1995. Mr. Bowen also served as President of the Company until October
31, 1999 and from November 1, 2001 to present. 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 six
years. Mr. Bowen continues to serve as the Chief Executive Officer of
the Bowen Companies.
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
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.
Robert G. Peirce was elected to the board on March 13, 2001 and
resigned from the board in August 2001.
Dana J. O'Brien who served as a director of the Company since December
1996, resigned from the board in September 2002.
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. In prior years, each non-employee director was
also automatically granted an option to purchase 2,000 additional shares of
Common Stock in each subsequent calendar year that the director continued to
serve in that capacity. This practice was discontinued in 2001. The exercise
price for all automatic grants to non-employee directors was the closing sales
price of the Common Stock on the business day immediately preceding the date of
grant.
40
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 2001 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.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth, for the
fiscal years ended December 31, 2001, 2000, and 1999 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(2) 2001 $ 24,000 $ -0- $ 4,765(3)
Chairman of the Board 2000 $ 24,000 $ -0- $ 120,600(3)
Chief Executive Officer and 1999 $ 250,000 $ -0- $ 66,750(3)
President
Louis Swart(4) 2001 $ 193,706 $ -0- $ 5,500
President 2000 $ 225,000 $ -0- $ 1,500
1999 $ 132,901 $ -0- $ 8,830(5)
James W. Ekberg(6) 2001 $ 167,307 $ -0- $ 4,500
Senior Vice President 2000 $ 150,000 $ -0- $ 4,500
of Finance and 1999 $ 150,000 $ -0- $ 1,750
Development
Dale J. Zulauf(7) 2001 $ 87,179 $ -0- $ 36,687
Chief Operating Officer 2000 $ 213,123 $ -0- $ 33,840
1999 $ 33,333 $ -0- $ -0-
41
Steven L. Gish 2001 $ 135,000 $ -0- $ 4,050
Chief Financial Officer 2000 $ 133,750 $ -0- $ 4,013
1999 $ 120,000 $ -0- $ 1,750
(1) Represents the amount of a contribution by the Company to the
officer's 401(k) plan account unless otherwise indicated.
(2) Mr. Bowen served as President of the Company from its inception through
October 31, 1999 and from November 1, 2001 to present. Mr. Bowen claims
he is entitled to an additional salary payment of $226,000 for 2001
plus a bonus of 25% pursuant to the financial plan. The Board of
Directors has not agreed that these amounts are payable and accordingly
these amounts have not been accrued at December 31, 2001.
(3) Other annual compensation includes $4,165 paid by the Company in 2001
for Mr. Bowen's membership dues at Pumpkin Ridge Golf Club.
Additionally, Mr. Bowen was paid guaranty fees totaling $120,000 and
$65,000 in 2000 and 1999, respectively. The guaranty fees were paid for
Mr. Bowen's personal guarantees for repayment and performance of
covenants on Company loan agreements. See item 13.
(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
which was reduced to $175,000 annually effective April 16, 2001. He
resigned as an officer of the Company effective November 1, 2001 and
pursuant to the terms of an employment agreement was entitled to
receive a years salary as severance. The salary disclosed includes
$164,539 paid to Mr. Swart as an employee and $29,167 paid as severance
under the employment agreement. In addition to the amounts disclosed
above Mr. Swart was paid severance benefits totaling $151,233 in 2002.
Mr. Swart's compensation in 1999 also included $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) Mr. Ekberg resigned as an officer of the Company effective December 31,
2001. Under terms of a severance agreement Mr. Ekberg was paid $155,400
in 2002.
(7) 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 in 2001 includes $87,179 paid under
terms of a severance agreement. The salary disclosed in 2000 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 $36,687 and $33,840 for those services in 2001 and 2000,
respectively, which is included in other annual compensation disclosed.
Additionally, Mr. Zulauf was paid $65,000 in 2002 for executive search
services.
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
42
expired in December 2000. The Company entered into executive severance
agreements in 2001 with Messrs. Ekberg and Gish. Mr. Ekberg was paid under this
agreement in 2002. The agreements generally provide that the Company may
terminate any officer without cause by making to such officer a cash payment
equal to one year's base salary and cost of health insurance coverage both at
the rate in effect at the time of termination. The agreements also provide that
the officer may terminate his employment within 12 months after a change in
control of the Company whereby the officer's compensation or job
responsibilities are reduced and receive, upon written notice to the Company, a
cash payment equal to one year's base salary and cost of health insurance
coverage both at the rate in effect at the time of termination. In addition,
each officer has entered into a restrictive covenant agreement containing
noncompetition and nondisclosure provisions.
Stock Option Grants in Fiscal 2001. There were no grants of stock
options made by the Company during fiscal 2001 to the officers of the Company
named in the Summary Compensation Table.
Option Exercises in 2001 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 2001.
Fiscal Year-End Option Values
Value of Unexercised
Number of Unexercised In-the-Money
Acquired Options at Year-End Options at Year-End(1)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Walter C. Bowen -- -- -- -- -- --
Louis Swart -- -- -- -- -- --
James W. Ekberg -- -- -- (2) -- -- --
Steven L. Gish -- -- 110,000(3) -- -- --
- ---------------------------------------------------------------------------------------------------------
(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, 2001,
based on the last sale price of $0.05 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.
43
(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 November 7, 2002,
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.
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner(1) Ownership Class(2)
- ----------------- ------------------- ------------
Walter C. Bowen 3,403,200(3) 54.9%
James W. Ekberg 50,000(4) *
Steven L. Gish 135,000(5) 2.2%
Dana J. O'Brien 10,000(6)(7) *
Prudential Private Equity
Investors III, L.P.
717 Fifth Avenue, Suite 1100
New York, NY 10022 1,400,493(8) 22.6%
All directors and executive officers
as a group (5 persons) 3,698,200 59.6%
* 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 950,
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 85,000 shares held of record by Mr. Bowen that may be
purchased within 60 days by certain officers and two other individuals
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.
44
(5) 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.
(6) Includes 10,000 shares that may be acquired within 60 days
pursuant to options granted under the Company's 1995 Stock
Incentive Plan.
(7) 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.
(8) 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.
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 leased its Regency Park community
located in Portland, Oregon through October 31, 2001. Mr. Bowen also holds a 99
percent ownership interest in Sterling Park, L.L.C., a Washington limited
liability company from which the Company leased its Sterling Park community
located in Redmond, Washington, through October 31, 2001. Mr. Bowen's minor
children hold the remaining one percent interest in the Regency Partnership and
Sterling Park, L.L.C. Mr. Bowen issued a default notice to the Company as a
result of the Company's failure to pay its September and October 2001 lease
payments for both Regency Park and Sterling Park. These leases are
cross-defaulted. Effective November 1, 2001, the leases were terminated by the
lessors as a result of the non-payment of such lease payments. In June 2002, the
Company received a letter from its preferred shareholder disputing the
termination of these leases and claiming that the terminations are voidable. The
lessors have refused to reinstate the leases. Pursuant to the terms of the lease
agreements, the Company owes to Mr. Bowen $1,292,199 for deferred lease and
interest payments which amounts are subordinate to dividend payments due to the
Company's preferred shareholder. Mr. Bowen has a claim against the Company
related to the default under the leases. The Company is attempting to negotiate
a settlement with Mr. Bowen for the lease cancellation and continues to manage
these communities for the majority shareholder. The Company has recorded the
past due rent obligations totaling $225,400 for Regency Park and $247,708 for
Sterling Park as notes payable accruing interest at 8%, of these amounts
$167,108 would be subordinate to dividend payments due to the Company's
preferred shareholder. Interest expense of $10,266 was accrued on these notes in
2001. Management fee income totaled $77,296 in 2001 from these communities. The
Company recorded a loss of $1.5 million as a result of the cancellation of the
leases and write-off of leasehold improvements. In 2001, the Company paid lease
payments totaling $544,000 for Regency Park and $680,000 for Sterling Park and
accrued deferred lease payments due of $357,600 for Regency Park and $310,832
for Sterling Park. In 2000, the Company paid lease payments totaling $1,070,400
for Regency Park and $1,253,124 for Sterling Park and deferred lease payments
due of $257,400 for Regency Park and $233,124 for Sterling Park. For 1999, lease
payments were $1,320,536 for Regency Park and $1,486,248 for Sterling Park.
Total lease payments deferred at December 31, 2001 were $1,158,956 and interest
accruing on these deferrals was $133,243.
45
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 contained a guaranteed return which
constitutes continuing involvement under SFAS No. 66, Accounting for Sales of
Real Estate and accordingly, the Company 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. In 2001, the continuing involvement was
satisfied and the transaction was accounted for as a sale. However, the gain has
been deferred at December 31, 2001, and will not be recognized until it is
realized from transactions with outside parties. The Company manages the
community for Desert Flower, LLC. In 2001, the Company recorded $51,701 as
management fee income and $68,977 as a decrease in deposits under sales
contract. 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 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. On December 26,
2001, the Company and Mr. Bowen agreed to a specified distribution of the assets
of Regent/Bowen, LLC upon its dissolution. Accordingly, the venture was
dissolved and 100% of the venture's interest in the Santa Cruz and Clovis,
California communities was distributed to the Company and 100% of the venture's
interest in the Eugene, Oregon community was distributed to Mr. Bowen. The
remaining community located in Boise, Idaho and other venture assets were
distributed 75% to the Company and 25% to Mr. Bowen. As a result of the
dissolution, the Company distributed cash of $165,091 and recorded a $31,783
payable to Mr. Bowen. This amount is included in current liabilities at December
31, 2001.
In March 2001, the Company was unable to close two conventional loans
with a financial institution in order to refinance two of its California
communities. The inability to complete one loan was due in part to a pending
accusation against the Company by the State of California Department of Social
Services that was subsequently settled in July 2001, see item 3 "Legal
Proceedings". Both loans failed to close due to the inability of the Company to
obtain minimum excess liability coverage limits of five million dollars. As a
result, the Company was unable to recover $195,500 in non-refundable advance
deposits. These funds had been advanced directly to the financing company by the
majority shareholder and are included in the June 30, 2001 bridge financing
demand note payable to the majority shareholder as described below.
In March 2001, as part of the financial plan to address the Company's
lack of liquidity, Mr. Bowen agreed to provide $1 million in bridge financing
(the Bridge Loan) to the Company. Through June 30, 2001, Mr. Bowen had 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. This note was due June 30, 2002,
and is past due. The note remains unpaid and the Company is attempting to
negotiate extensions on these payment obligations.
46
On July 3, 2001, the Company's Board of Directors approved a $1 million
operating line of credit provided by Mr. Bowen. Through September 7, 2001, the
Company drew $1,000,000 under the line. The line of credit bears interest at 18
percent. Mr. Bowen earned a $50,000 fee as a result of providing this financing.
The line of credit was due June 30, 2002, and is past due. The line remains
unpaid and the Company is attempting to negotiate extensions on these payment
obligations.
On December 27, 2001, the Company sold its Santa Cruz, California
property to Cornell Springs Partners, an Oregon joint venture, in which Mr.
Bowen directly holds a 40% interest and owns a 95% interest in its General
Partner, Cornell Springs Apartments Limited Partnership which holds a 60%
interest. The property was sold for a net sales price of $11.7 million. The
Company received $5.0 million in cash proceeds of which $2.9 million was
retained by the Company and $2.1 million was used to reduce debt after which
$6.7 million of debt was assumed by Cornell Springs Partners.
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 $171,000 in 2001
and $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.
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 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 2001, 2000 and
1999, Regent charged the Bowen Companies $10,100, 10,300 and $78,000,
respectively, under the Administrative Services Agreement.
47
As of November 7, 2002, Mr. Bowen had provided personal guarantees for
repayment and performance of covenants on Company loan agreements in an
aggregate amount of $46,789,209. Mr. Bowen was paid $120,000 and $65,000 in
2000, and 1999, respectively, in exchange for his personal guaranties. The
Company has also guaranteed loans to entities owned by the majority shareholder
of which approximately $22.8 million is outstanding at December 31, 2001.
Refinancing transactions in 2002 resulted in a reduction in the amount of loans
guaranteed by the Company for entities owned by the majority shareholder to $8.1
million.
48
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)4.11 Convertible Subordinated Note Purchase Agreement, dated as
of March 30, 1998, by and between the Registrant and
Pamela J. Privett
(4)4.12 Note No. 1998-5 issued to Pamela J. Privett in the
principal amount of $90,000, due March 31, 2008
(4)4.17 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)10.6 Employment Agreement between the Company and Steven L.
Gish
(1)10.8 Restrictive Covenant Agreement between the Company and
Walter C. Bowen
(1)10.11 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
49
(1)10.18 Indemnity Agreement between the Company and James W.
Ekberg
(1)10.20 Indemnity Agreement between the Company and Steven L. Gish
(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
(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)10.36 Executive Severance Agreement between the Company and
James W. Ekberg
(8)10.37 Executive Severance Agreement between the Company and
Steven L. Gish
(8)10.38 Amended and Restated Agreement between Emeritus
Corporation and the Company to Provide Accounting and
Consulting Services to California Assisted Living
Facilities effective December 31, 2001
(8)10.39 Agreement between Emeritus Corporation and the Company to
Provide Management Services to Washington Assisted Living
Facilities effective December 31, 2001
(8)10.40 Amended and Restated Agreement between Emeritus
Corporation and the Company to Provide Management Services
to Assisted Living Facilities effective December 31, 2001
(8)21 List of Subsidiaries
50
(8)23.1 Consent of PricewaterhouseCoopers LLP
(8)99.1 Certification Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Executive Officer)
(8)99.2 Certification Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Financial Officer)
- ------------------------
(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
(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,
2001.
51
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 7th day of November, 2002.
REGENT ASSISTED LIVING, INC.
By: /s/ WALTER C. BOWEN
---------------------
Walter C. Bowen
President, 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 7th day of November, 2002.
Signature Title
--------- -----
/s/ WALTER C. BOWEN President, 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)
52
CERTIFICATIONS
I, Walter C. Bowen, President Chief Executive Officer, Chairman of the Board and
Director of Regent Assisted Living, Inc., certify that:
(1) I have reviewed this annual report on Form 10-K of Regent Assisted
Living, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: November 7, 2002 By: /s/ WALTER C. BOWEN
--------------------- ---------------------------------
Walter C. Bowen
President, Chief Executive Officer and
Chairman of the Board and Director
53
CERTIFICATIONS
I, Steven L. Gish, Chief Financial Officer, Treasurer, Secretary and Director of
Regent Assisted Living, Inc., certify that:
(1) I have reviewed this annual report on Form 10-K of Regent Assisted
Living, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: November 7, 2002 By: /s/ Steven L. Gish
--------------------- --------------------------------
Steven L. Gish
Chief Financial Officer, Treasurer,
Secretary and Director
54
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
For the Years Ended December 31, 2001 and 2000
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-7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Regent Assisted Living, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Regent Assisted Living, Inc. and Subsidiaries (the Company) at December 31, 2001
and 2000 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, 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 Note 14 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 Note 14. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
Portland, Oregon
May 10, 2002, except for Note 5 as to which the
date is October 1, 2002; Notes 7, 10 and 12 as to which
the date is November 7, 2002; Note 8 as to which the date
is September 10, 2002; and Note 15, as to which the date is
September 18, 2002.
F-1
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 4,041,764 $ 2,580,004
Cash held in working capital escrow 7,722 1,381,781
Accounts receivable, net 66,272 557,355
Prepaid expenses 686,768 931,506
Land and property held for sale 11,218,209 2,400,000
------------- -------------
Total current assets 16,020,735 7,850,646
Restricted cash 967,421 2,292,269
Property and equipment, net 23,763,453 78,546,940
Investment in and advances to joint venture 490,639 629,061
Other assets 1,604,439 3,738,642
------------- -------------
Total assets $42,846,687 $93,057,558
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings from and payables to majority shareholder $ 2,477,480 $ -
Current portion of long-term debt 13,158,653 5,917,043
Construction accounts payable 68,550 324,572
Accounts payable and other accrued expenses 5,033,361 3,188,962
Accrued payroll 1,025,817 1,810,907
Accrued interest 169,682 551,892
------------- -------------
Total current liabilities 21,933,543 11,793,376
Long-term debt 22,715,670 65,061,708
Convertible subordinated notes 90,000 9,000,000
Accrued preferred dividends payable 1,875,000 750,000
Deferred lease and interest payable to majority shareholder 1,292,199 507,877
Deposits under sales contract - 10,297,381
Deferred gains and development fees, net 9,258,100 5,268,468
Other liabilities 592,697 1,482,887
------------- -------------
Total liabilities 57,757,209 104,161,697
------------- -------------
Minority interest in consolidated subsidiaries 71,225 1,422,226
------------- -------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized; 1,666,667
shares issued and outstanding in 2001 and 2000 9,349,841 9,349,841
Common stock, no par value, 25,000,000 shares authorized; 4,507,600
shares issued and outstanding in 2001 and 2000 10,619,349 10,619,349
Accumulated deficit (34,950,937) (32,495,555)
------------- -------------
Total shareholders' equity (14,981,747) (12,526,365)
------------- -------------
Total liabilities and shareholders' equity $42,846,687 $93,057,558
============= =============
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, 2001, 2000 AND 1999
2001 2000 1999
Revenues:
Rental and service $ 63,138,319 $ 64,180,365 $ 53,635,079
Management fees 887,113 728,374 453,936
---------------- ---------------- ----------------
Total revenues 64,025,432 64,908,739 54,089,015
---------------- ---------------- ----------------
Operating expenses:
Residence operating expenses 48,509,085 45,025,215 38,605,500
General and administrative 8,560,552 7,071,740 7,251,337
Lease expense 8,642,146 13,941,519 13,390,695
Depreciation and amortization 2,782,901 1,784,031 1,512,835
---------------- ---------------- ----------------
Total operating expenses 68,494,684 67,822,505 60,760,367
---------------- ---------------- ----------------
Operating loss (4,469,252) (2,913,766) (6,671,352)
Interest income 368,598 507,641 305,656
Interest expense (6,996,909) (3,908,366) (2,645,863)
Equity in losses of joint ventures (404,525) (296,817) (246,565)
Other income, net 10,148,122 15,385 445,860
---------------- ---------------- ----------------
Loss before minority interests (1,353,966) (6,595,923) (8,812,264)
Minority interests 23,584 130,163 35,888
---------------- ---------------- ----------------
Loss before income taxes (1,330,382) (6,465,760) (8,776,376)
Provision for income taxes - - -
---------------- ---------------- ----------------
Net loss (1,330,382) (6,465,760) (8,776,376)
Preferred stock dividends (1,125,000) (750,000) (600,000)
---------------- ---------------- ----------------
Net loss available to common shareholders $ (2,455,382) $ (7,215,760) $ (9,376,376)
================ ================ ================
Basic loss per common share $ (0.54) $ (1.60) $ (2.03)
================ ================ ================
Diluted loss per common share $ (0.54) $ (1.60) $ (2.03)
================ ================ ================
Weighted average common shares
outstanding - basic 4,507,600 4,507,600 4,615,135
================ ================ ================
Weighted average common shares
outstanding - diluted 4,507,600 4,507,600 4,615,135
================ ================ ================
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, 2001, 2000 AND 1999
Preferred Stock
----------------------------------------------
Series A Series B Common Stock Total
---------------------- ---------------------- ---------------------- Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Deficit Equity
---------- ---------- ---------- ---------- ---------- ---------- ---------------- -------------
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)
Preferred stock dividends - - - - - - (1,125,000) (1,125,000)
Net loss - - - - - - (1,330,382) (1,330,382)
---------- ---------- ---------- ---------- ---------- ---------- ---------------- -------------
Balance, December 31, 2001 1,283,785 $7,201,910 382,882 $2,147,931 4,507,600 $10,619,349 $(34,950,937) $(14,981,747)
========== ========== ========== ========== ========== ========== ================ =============
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, 2001, 2000 AND 1999
2001 2000 1999
Cash flows from operating activities:
Net loss $ (1,330,382) $ (6,465,760) $ (8,776,376)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,782,901 1,784,031 1,512,835
(Gain) loss on sale of assets (10,142,706) 104 (462,113)
Loss on disposal of construction in progress 914,364 - -
Adjustment on land held for sale to estimated fair value 633,775 791,245 1,489,197
Amortization of deferred gains and development fees (2,896,907) (522,177) (509,738)
Equity interest in joint ventures 404,525 296,817 246,565
(Decrease) increase in allowance for doubtful accounts (57,000) 23,000 -
Minority interests (23,584) (130,163) (35,888)
Changes in other assets and liabilities:
Cash held in working capital escrow 1,374,059 413,608 1,181,027
Accounts receivable 450,489 196,149 (435,598)
Prepaid expenses 161,547 (191,937) (494,245)
Other assets 722,717 (103,637) 198,914
Accounts payable and other accrued expenses 3,789,921 (226,014) 1,134,746
Accrued payroll (688,599) 320,313 276,964
Accrued interest 23,550 169,933 119,816
Deferred lease and interest payable to majority shareholder 784,322 507,877 -
Other liabilities (890,190) 95,637 (198,914)
------------- ------------- -------------
Net cash used in operating activities (3,987,198) (3,040,974) (4,752,808)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (4,373,393) (45,812,247) (13,248,696)
Decrease in construction accounts payable (228,787) (138,564) (145,449)
Investment in and advances to joint ventures (193,622) (14,114) (12,400)
Proceeds from sale of property and equipment 5,910,949 2,401,375 740,309
Proceeds from sale of equity interest - - 725,000
Distribution upon dissolution of joint venture (165,091) - -
Withdrawals from (deposits to) replacement reserve account, net 87,378 (72,937) 20,555
------------- ------------- -------------
Net cash provided by (used in) investing activities 1,037,434 (43,636,487) (11,920,681)
------------- ------------- -------------
Cash flows from financing activities:
Short-term borrowings 1,945,500 - -
Proceeds from issuance of long-term debt 5,722,771 53,275,199 19,986,691
Payments on long-term debt (4,666,850) (9,278,775) (14,688,127)
Construction (advances) payments - 235,706 368,200
Payments and deposits for lease financing arrangements, net 443,741 (759,432) (551,638)
Restricted cash for lease financing arrangements, net 1,051,956 696,850 (415,344)
Deferred development fees from lease financing arrangements (16,618) 637,830 243,419
Proceeds from lease financing arrangements - (1,390,791) 10,766,814
(Payment on) proceeds from sales contract (68,976) 103,039 1,419,342
Contributions by minority interests - 1,200,000 388,277
Preferred stock dividends - - (600,000)
Payments to repurchase common stock - - (189,354)
------------- ------------- -------------
Net cash provided by financing activities 4,411,524 44,719,626 16,728,280
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 1,461,760 (1,957,835) 54,791
Cash and cash equivalents, beginning of period 2,580,004 4,537,839 4,483,048
------------- ------------- -------------
Cash and cash equivalents, end of period $ 4,041,764 $ 2,580,004 $ 4,537,839
------------- ------------- -------------
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
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 $ 6,706,000 $ - $ 8,775,000
------------- ------------- -------------
Debt canceled and assumed pursuant to settlement agreement $ 27,361,339 $ - $ -
------------- ------------- -------------
Debt assumed pursuant to distribution of property from joint
venture $ 8,488,129 $ - $ -
------------- ------------- -------------
Contribution of property and equipment in exchange for
investment in and advances to joint venture $ - $ 653,423 $ -
------------- ------------- -------------
Receivable in joint venture in exchange for developer fee $ - $ 71,350 $ -
------------- ------------- -------------
Preferred stock dividends accrued $ 1,125,000 $ 750,000 $ -
------------- ------------- -------------
Cancelation of capital lease due to settlement agreement $ 1,186,361 $ - $ -
------------- ------------- -------------
Contribution of property in satisfaction of debt $ 3,945,676 $ - $ -
------------- ------------- -------------
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
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 and operator 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, 2001, the Company operated 20 assisted living
communities in 7 western states. During 2001, the Company commenced
operations at 5 new assisted living communities of which 4 were internally
developed (including 1 owned by a joint venture and 2 managed by a
third-party) and discontinued operations at 15 communities.
As of December 31, 2000, the Company operated 30 assisted living
communities in 9 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 29 assisted living
communities in 9 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.
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.
F-7
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 one parcel of land and has classified two communities
as available for sale at December 31, 2001 and three parcels of land at
December 31, 2000. The land was previously acquired for development. Of the
land held for sale at December 31, 2000, one parcel was sold in 2001 for
net proceeds of $496,225 and one parcel was deeded to a third party in
satisfaction of $900,000 of debt. The Company recorded an expense of
$633,775 and $791,245 in 2001 and 2000, respectively, to adjust the land
held for sale to its estimated fair market value. Of the two communities
classified as held for sale at December 31, 2001, one community located in
Boise, Idaho was sold in May 2002 for net proceeds of $2.8 million from
which the Company paid down $2.4 million of debt that was classified as
current at December 31, 2001. The other community located in South Ogden,
Utah and classified as held for sale at December 31, 2001, was transferred
to the lender on May 31, 2002 in lieu of foreclosure. The lender had
declared the Company in default of the $8.9 million loan for this community
in 2001 and, accordingly, this debt was classified as current at December
31, 2001. The transfer resulted in the full satisfaction of the related
debt (see Notes 5, 14 and 15).
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 $741,752 and $1,718,973 as of December 31, 2001
and 2000, respectively. Restricted cash also includes a replacement reserve
required to be maintained for two of the communities and cash collateral
reserve required for one community opened in 2001.
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, other than land held for sale,
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 the
long-lived assets, the recoverability test is performed using undiscounted
net cash flows of the individual communities. There have been no
significant impairment charges to assets not held for sale.
F-8
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. Gains realized on sales
or distributions of the Company's assisted living communities to its
majority shareholder are deferred and will not be recognized until such
buildings are sold to unrelated third parties. As of December 31, 2001,
there are deferred gains of $8.7 million and development fees of $0.6
million of which $6.9 million of deferred gains resulted from transactions
with the Company's majority shareholder.
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.
F-9
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 related 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. On
an ongoing basis, the Company evaluates its estimates, including allowance
for doubtful accounts, land held for sale, investments in and advances to
joint ventures, income taxes, restructuring, contingencies and litigation.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
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 June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 is
effective for the fiscal years beginning after June 15, 2002. SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The impact of this pronouncement on the
Company's financial statements is not expected to be material.
F-10
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 August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 is effective for the fiscal
years beginning after December 15, 2001. This statement supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects or Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a discontinued operation under APB
Opinion No. 30; accordingly, two accounting models existed for long-lived
assets to be disposed of. SFAS No. 144 establishes a single accounting
model, based on the framework established in SFAS No. 121, for long-lived
assets to be disposed of by sale. In addition, SFAS No. 144 resolves
significant implementation issues related to SFAS No. 121. Under SFAS No.
144 the results of operations of a component of an entity that either has
been disposed of or is classified as held for sale are reported in
discontinued operations if (a) the operations and cash flows of the
component have been (or will be) eliminated from the ongoing operations of
the entity as a result of the disposal transaction and (b) the entity will
not have any significant continuing involvement in the operations of the
component after the disposal transaction. Accordingly, upon adoption of
SFAS No. 144 the Company's operations associated with and transactions
recorded in previous periods as other income/loss could be reclassified as
discontinued operations.
In 2002, FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections as of April 2002. This
Statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This Statement amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The Company has
reviewed this pronouncement and will consider its impact on any relevant
transactions.
In July 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).
F-11
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)
This Statement applies to costs associated with an exit activity that does
not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Those costs include, but are not limited to,
the following:
o Termination benefits provided to current employees that are
involuntarily terminated under the terms of a benefit arrangement that,
in substance, is not an ongoing benefit arrangement or an individual
deferred compensation contract (hereinafter referred to as one-time
termination benefits),
o Costs to terminate a contract that is not a capital lease, and
o Costs to consolidate facilities or relocate employees.
This Statement does not apply to costs associated with the retirement of a
long-lived asset covered by SFAS No. 143, Accounting for Asset Retirement
Obligations. The impact of this pronouncement on the Company's financial
statements has not yet been determined by the Company.
2. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
2001 2000
Land $ 1,367,757 $ 7,054,444
Buildings and improvements 21,400,674 55,383,869
Furniture and equipment 2,672,736 5,148,211
Construction in progress 1,178 14,073,406
---------------- -----------------
25,442,345 81,659,930
Less accumulated depreciation and amortization 1,678,892 3,112,990
---------------- -----------------
Property and equipment, net $ 23,763,453 $ 78,546,940
================ =================
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. There
were no capital leases as of December 31, 2001.
F-12
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. OTHER ASSETS
Other assets consist of the following:
2001 2000
Resident security and trust deposits $ 592,697 $1,482,887
Deferred financing costs, net 630,287 1,663,618
Other 381,455 592,137
-------------- --------------
Total other assets $1,604,439 $3,738,642
============== ==============
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.
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURE
Investments in 10% to 50% owned joint ventures accounted for under the
equity method amounted to $490,639 and $629,061 at December 31, 2001 and
2000, respectively.
The combined results of operations and financial position of the Company's
joint ventures are summarized below:
2001 2000
Condensed income statement information:
Gross revenues $6,813,982 $5,396,609
Income from operations 1,152,729 1,156,922
Net loss (721,882) (693,935)
Condensed balance sheet information:
Current assets 652,459 413,190
Noncurrent assets 23,764,733 19,191,202
Current liabilities 1,177,374 1,043,984
Noncurrent liabilities 21,707,769 16,497,893
Equity 1,532,049 2,062,515
F-13
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. LONG-TERM DEBT, CONVERTIBLE SUBORDINATED NOTES AND DEPOSITS UNDER SALES
CONTRACT
Long-term debt consists of:
2001 2000
Notes payable to a financial institution, interest only payments at the
commercial based rate plus 1.5% (floor of 7%) and/or one or more LIBOR
based rates (5.25% at December 31, 2001) due January 2004, collateralized
by real property in Boise, Idaho and Clovis, California $ 12,840,000 $ 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
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 January 2004, collateralized by real property in Boise, Idaho
and Clovis, California 2,311,058 5,085,000
Construction loans, totaling $20,654,000, interest varies between 9.00%
and 16.0%, maturities vary from December 2004 through January 2005,
collateralized by real property in Merced, California and South Ogden, Utah 13,759,111 11,401,557
Note payable to a bank, due in monthly installments of $20,670, including
interest at 8.71%, due June 2002, collateralized by real property in Boise, Idaho 2,413,973 2,447,201
Capital lease obligation, monthly interest only payments at 10.14%
beginning upon completion of building, due approximately August 2015 - 1,186,361
Note payable to a corporation, quarterly payments of interest only at 8%,
due in monthly installments of $15,868 including interest at 8% beginning
December 2002, due November 2006 650,000 500,000
Note payable to a corporation, monthly payments of interest only at 8%,
due in quarterly installments of $43,232 including interest at 8% beginning
January 2003, due November 2006 585,709 -
Notes payable to the majority shareholder, interest only payments at 8%,
due in monthly installments of $10,793, including interest at 8% beginning
January 2003, due December 2006 473,108 -
Note payable to a corporation, monthly payments of interest only at 9%,
$50,000 principal only due May 2002, due in August 2002 250,000 500,000
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 2003, collateralized by equipment 100,949 271,354
Note payable to a financial institution due in monthly installments beginning
March 2002 of $11,836, including interest at 7.0% or prime plus 1% if higher,
due January 2004, collateralized by real property in Modesto, California 1,674,663 1,674,662
Note payable to a corporation, monthly interest only payments at 12%,
$250,000 principal payment due February 2002 and $225,000 principal
payment due August 2002, collateralized by real property in Visalia, California 475,000 1,625,000
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) - 250,000
Other 340,752 786,447
-------------- --------------
35,874,323 70,978,751
Less amounts due within one year 13,158,653 5,917,043
-------------- --------------
$ 22,715,670 $ 65,061,708
============== ==============
F-14
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. 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:
2002 $13,158,653
2003 1,613,936
2004 20,173,897
2005 456,268
2006 471,569
----------------
$35,874,323
================
The Company incurred total interest costs of approximately $7,373,348,
$4,342,388 and $4,900,800 in 2001, 2000 and 1999, respectively, of which
approximately $376,439, $434,022 and $2,255,000 has been capitalized as
part of construction in progress. Interest costs paid by the Company in
2001, 2000 and 1999 totaled approximately $7,389,471, $4,211,160 and
$4,781,000, respectively.
The Company, along with its joint venture partners, has guaranteed
construction loans totaling approximately $20.5 million at December 31,
2001. The carrying value of the underlying venture assets that
collateralize these loans was $23.7 million at December 31, 2001. The
Company has also guaranteed loans to entities owned by the majority
shareholder of approximately $22.8 million. As of October 1, 2002, the
Company refinanced $15,151,058 of debt at more favorable terms and as a
result the Company's guarantees on loans to entities owned by the majority
shareholder were reduced to $8.1 million. The carrying value of the
underlying entity assets that collateralize these loans was $8.8 million at
October 1, 2002.
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, 2001 and 2000, a total of $90 thousand and $9
million of convertible notes were issued under this facility, respectively.
In December 2001, the Company exchanged its Bakersfield and Vacaville
communities for cancellation of $8.9 million in convertible notes. The two
properties were acquired subject to $18.3 million in mortgage and local
improvement debt, which was assumed by the new owner. The Company recorded
a gain of $12.0 million as a result of this non-cash transaction as of
December 31, 2001. The remaining outstanding notes bear interest at 7.5%
per annum and are convertible into 12,000 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, 2001, 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.
F-15
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. LONG-TERM DEBT, CONVERTIBLE SUBORDINATED NOTES AND DEPOSITS UNDER SALES
CONTRACT (CONTINUED)
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 contained a guaranteed return, which constitutes
continuing involvement under SFAS No. 66, Accounting for Sales of Real
Estate, and, accordingly, the Company accounted for the sale under the
deposit method. Under this method, the Company continues to report the
asset, depreciation and related debt in the Company's financial statements
and does not recognize profit from the sale. The Company received $1.2
million in sales proceeds and the purchaser assumed $8.8 million of
underlying debt. These amounts are recorded as liabilities captioned
"deposits under sales contract" in the Company's balance sheet at December
31, 2000. The net book value of the asset subject to the sales contract
totaled $8.9 million at December 31, 2000. In 2001, the continuing
involvement criteria was satisfied and the transaction was accounted for as
a sale. The realized gain has been deferred and will be recognized when the
building is sold to an unrelated third party.
The Company had been declared in default under terms of an $8.9 million
construction note payable to a bank related to its South Ogden, Utah
community and, accordingly, such amount has been included in current
portion of long-term debt at December 31, 2001. The community was
transferred to the bank as part of a settlement agreement in lieu of
foreclosure in May 2002, which resulted in the full satisfaction of the
related debt. Accordingly, the Company has classified the related South
Ogden, Utah property of $8.3 million under the caption land and property
held for sale at December 31, 2001 (see Notes 1, 14 and 15).
6. 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.
F-16
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. SHAREHOLDERS' EQUITY (CONTINUED)
Dividends on the preferred stock accrue at an annual rate ranging from 6%
to 12% of the liquidation value of $5.50 per common equivalent share. The
total liquidation value of the preferred stock at December 31, 2001 was
$10,000,000.
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.
7. 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, 2001,
options to purchase 247,000 shares had been granted and were outstanding
pursuant to the Stock Incentive Plan. As of November 7, 2002, options to
purchase 235,200 shares were still outstanding.
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. In prior years each non-employee director was
automatically granted an option to purchase 2,000 additional shares of
common stock in each subsequent calendar year that the director continued
to serve in that capacity. This practice was discontinued in 2001.
F-17
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. STOCK OPTIONS (CONTINUED)
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.
A summary of the Company's stock option activity and related information
for the years ended December 31 are presented below:
2001 2000 1999
------------------------ ------------------------- ------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options Shares price Shares price Shares price
------- --------- ------------- --------- -------------- ---------- ------------
Outstanding-beginning of year 877,000 $ 2.99 672,500 $ 4.23 604,000 $ 4.77
Granted 2,000 0.84 360,000 0.89 285,000 3.35
Exercised - - - - - -
Cancelled (547,000) 2.56 (155,500) 3.35 (216,500) 4.59
--------- --------- ----------
Outstanding-end of year 332,000 3.74 877,000 2.99 672,500 4.23
========= ========= ==========
Weighted-average fair value
of options granted during
the year $ 0.59 $ 0.57 $ 2.13
The following table summarizes information about stock options outstanding
as of December 31, 2001:
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 3.7 years $ 6.24 85,000 $ 6.24
0.75 - 7.13 247,000 6.2 years 2.88 234,665 2.95
---------------------- --------------
332,000 319,665
====================== ==============
The total value of options granted during 2001, 2000 and 1999 was computed
as approximately $1,200, $203,800 and $605,300, respectively, which would
be amortized on a pro forma basis over the vesting period of the options.
F-18
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. STOCK OPTIONS (CONTINUED)
OPTIONS GRANTED BY SHAREHOLDER (CONTINUED)
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:
2001 2000 1999
Net loss:
As reported $(1,330,382) $(6,465,760) $(8,776,376)
Pro forma (1,424,192) (6,788,093) (9,265,466)
Diluted loss per common share:
As reported (0.54) (1.60) (2.03)
Pro forma (0.57) (1.67) (2.14)
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:
2001 2000 1999
Risk-free interest rate 4.69% 5.16% 5.63%
Expected life 5.53 years 7.32 years 7.6 years
Expected volatility 121% 70% 54%
Expected dividend yield 0% 0% 0%
8. COMMITMENTS
OPERATING LEASES
The Company leases one community under a noncancelable lease agreement
expiring in the year 2011. The Company is responsible for all costs
including repairs, property taxes and other direct operating costs.
The Company currently occupies approximately 2,800 square feet of office
space in Portland, Oregon that is leased by a corporation owned by the
majority shareholder. The Company is paying the landlord directly for the
obligations under that lease. The lease expires February 15, 2003. The
Company vacated approximately 10,500 square feet of office space in
Portland, Oregon in 2002 that it had occupied under a lease agreement
expiring February 15, 2003. The Company had been negotiating a lease
cancellation agreement with the lessor, however, the lessor filed suit
against the Company for non-payment of rent. The parties reached a
settlement of the matter on September 10, 2002.
F-19
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. COMMITMENTS (CONTINUED)
OPERATING LEASES (CONTINUED)
Future minimum lease payments required under these leases for the years
ending December 31 are as follows:
2002 $ 2,066,527
2003 1,301,994
2004 1,223,951
2005 1,239,740
2006 1,264,686
Thereafter 5,481,110
-----------------
$12,578,008
=================
Lease and rent expense for the Company totaled $11,793,393, $14,952,974 and
$14,233,400 in 2001, 2000 and 1999, respectively.
Effective October 31, 2001, the Company entered into a settlement agreement
with the real estate investment trust (REIT) owner of four of its leased
communities under a master lease to resolve events of default primarily due
to failure of the Company to pay its lease payments. The settlement
included transfer of the operations of the communities to new operators and
a note payable to the REIT for past due rent obligations totaling $585,709.
The note provides for payment of quarterly interest at 8% and quarterly
installments beginning in January 2003 of $43,232 including interest at 8%
and is due November 2006. The Company's majority shareholder guaranteed
this note. The Company recorded losses totaling $266,000 as a result of
this transaction as of December 31, 2001.
Effective November 1, 2001, the Company entered into a settlement agreement
with the REIT owner of five of its leased communities that were
cross-defaulted to resolve events of default primarily due to failure of
the Company to pay its lease payments. The settlement included transfer of
the operations of the communities to new operators and a note payable to
the REIT for past due rent obligations. The note amount was combined with
additional amounts outstanding under an existing note payable to the REIT
to total $650,000. The new note provides for payment of quarterly interest
at 8% and monthly installments beginning in December 2002 of $15,868
including interest at 8% and is due November 2006. The Company's majority
shareholder guaranteed this note. The Company recorded losses totaling
$343,000 as a result of this transaction as of December 31, 2001.
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. The Company
repurchased this community from the lessor on December 26, 2000. In
December 2001, this community was sold to an entity primarily owned by the
majority shareholder (see Note 10).
F-20
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. COMMITMENTS (CONTINUED)
CAPITAL LEASES (CONTINUED)
During June 1999, the Company entered into a $10.1 million arrangement with
a REIT pursuant to which the Company constructed its Mesa, Arizona
community. The sale of the land was recorded as a capital lease. In
November 2001, the Company completed a settlement agreement with the REIT
whereby the Company was released from its lease commitment associated with
the Mesa community.
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, 2001 (see Note 5). 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, 2001. 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.
9. INCOME TAXES
The components of the provision for income taxes for the year ended
December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
Current:
Federal $ - $ - $ -
State - - -
--------------- ---------------- ---------------
- - -
--------------- ---------------- ---------------
Deferred:
Federal - - -
State - - -
--------------- ---------------- ---------------
- - -
--------------- ---------------- ---------------
$ - $ - $ -
=============== ================ ===============
F-21
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES (CONTINUED)
Income tax provision for the year ended December 31, 2001, 2000 and 1999
differs from the amounts computed by applying the U.S. Federal income tax
rate of 34% to pretax income before extraordinary loss as follows:
2001 2000 1999
Computed expected tax benefit $ (452,330) $(2,198,358) $(2,983,255)
Increase (decrease) in income taxes resulting from:
State taxes, net of federal benefit (53,086) (267,343) (365,059)
Increase in valuation allowance 528,783 2,404,107 3,167,657
Other, net (23,367) 61,594 180,657
--------------- ---------------- ---------------
Actual income tax benefit $ - $ - $ -
=============== ================ ===============
The tax effects of temporary differences that give rise to the deferred tax
assets at December 31 are as follows:
2001 2000
Capital lease obligation $ - $ 453,005
Accrued expenses 1,483,152 390,782
Federal and state operating loss carryforwards 6,540,456 7,345,904
Deferred gains and development fees 3,404,385 1,768,181
Deposits under sales contract - 3,931,993
Depreciation and amortization 32,832 (3,498,320)
Other 379,527 920,025
---------------- ---------------
11,840,352 11,311,570
Less valuation allowance (11,840,352) (11,311,570)
---------------- ---------------
Net deferred tax assets $ - $ -
================ ===============
At December 31, 2001, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $17,484,270 and
$14,238,696, 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.
10. 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.
F-22
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED-PARTY TRANSACTIONS (CONTINUED)
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
$10,100, $10,300 and $78,000 in 2001, 2000 and 1999, respectively.
CONSTRUCTION CONTRACTS
During 2001 and 2000, the construction of two of the Company's new
communities was 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 $171,000 in 2001and
$414,000 in 2000 and earned fees totaling approximately $526,100 in 1999.
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. There were no guaranty fees paid to the majority
shareholder in 2001.
COLLATERAL
At December 31, 2000, the Company's majority shareholder provided a
$1,000,000 cash deposit to a lender as additional collateral with respect
to a real estate loan. The Company reimbursed the majority shareholder
approximately $17,700 for the carrying cost of the above mentioned deposit
in 2001. The lender released this additional collateral requirement on July
2, 2001.
LEASE ARRANGEMENTS
Through October 31, 2001, the Company leased two assisted living
communities from entities controlled by the majority shareholder. Effective
November 1, 2001, the leases were terminated by the lessors due to
non-payment of the September and October 2001 lease payments. These leases
were cross-defaulted. The Company is attempting to negotiate a settlement
with the lessors. The Company recorded a loss of $1.5 million as a result
of the cancellation of the leases and write-off of leasehold improvements.
The Company has recorded the past due rent obligations in the amount of
$473,108 as notes payable, accruing interest at 8%, of which $167,108 would
be subordinated to dividend payments due the Company's preferred
shareholder. Interest expense of $10,266 was accrued on these notes during
2001. The Company continues to manage the communities on behalf of the
lessors and recorded management fees totaling $77,296 in 2001 from these
two communities. Lease payments totaled $1,224,000, $2,323,524 and
$2,806,784 in 2001, 2000 and 1999, respectively.
F-23
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED-PARTY TRANSACTIONS (CONTINUED)
LEASE ARRANGEMENTS (CONTINUED)
Lease payments deferred in 2001 and 2000 were $668,432 and $490,524,
respectively. Total lease payments deferred at December 31, 2001 were
$1,158,956. Total interest expense of $113,543 was accrued on these lease
deferrals during 2001 and $19,700 was accrued during 2000. Total deferred
interest payable on these deferred lease payments was $133,243 at December
31, 2001. The deferred lease and interest payments are subordinate to
dividend payments due to the Company's preferred shareholder.
MANAGEMENT FEES
In 2001, the Company recorded $51,701 as management fee income and $68,977
as a decrease in deposits under sales contract in connection with a sale
manageback arrangement related to a community owned by its majority
shareholder.
SHORT-TERM BORROWINGS
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 classified
as 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). The Company and the
preferred shareholder did not complete the conversion into common stock and
did not negotiate the final terms and conditions for the dividend waiver.
The Company's Articles of Incorporation and state law prohibit the current
payment of the preferred dividend since in the judgment of the Company's
Board of Directors, the payment of the preferred dividend would jeopardize
the ongoing viability of the Company and potentially result in its
insolvency. Accordingly, the preferred dividends are classified as
long-term liabilities at December 31, 2001. The deferred lease payments are
subordinate to the preferred dividends and, accordingly, they are
classified as noncurrent liabilities at December 31, 2001.
Through June 30, 2001, the majority shareholder provided cash advances
totaling $750,000 under the Bridge Loan. The majority shareholder earned a
$15,000 fee as a result of providing this financing. 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 December 31,
2001, the note plus accrued interest totaled $1,368,716. The note was due
on June 30, 2002 and is past due. As of November 7, 2002 this note remains
unpaid and the Company is attempting to negotiate extensions on these
payment obligations.
On July 3, 2001, the Company's Board of Directors approved a $1,000,000
operating line of credit provided by the majority shareholder. The Company
drew $1,000,000 under the line in 2001. The line of credit bears interest
at 18%. The majority shareholder earned a $50,000 fee as a result of
providing this financing. At December 31, 2001, the note payable plus
F-24
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED-PARTY TRANSACTIONS (CONTINUED)
SHORT-TERM BORROWINGS (CONTINUED)
accrued interest totaled $1,076,981. The line was due June 30, 2002 and is
past due. As of November 7, 2002 this note remains unpaid and the Company
is attempting to negotiate extensions on these payment obligations.
INTEREST PAID TO RELATED-PARTY
Interest paid to a construction company owned by the majority shareholder
was $18,900 and $49,000 in 2000 and 1999, respectively.
OTHER
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.
On December 26, 2001, the Company and the majority shareholder agreed to a
specified distribution of the assets of the joint venture upon its
dissolution. Accordingly, the venture was dissolved and 100% of the
venture's interest in the Santa Cruz and Clovis, California communities was
distributed to the Company and 100% of the venture's interest in the
Eugene, Oregon community was distributed to the majority shareholder. The
remaining community located in Boise, Idaho and other venture assets were
distributed 75% to the Company and 25% to the majority shareholder. As a
result of the dissolution, the Company distributed cash of $165,091 and
recorded a $31,783 payable to the majority shareholder. This amount is
included in current liabilities at December 31, 2001.
On December 27, 2001, the Company sold to its majority shareholder its
Santa Cruz, California community for a net sales price of $11.7 million.
The Company received $5.0 million in cash proceeds, of which $2.9 million
was retained by the Company, and $2.1 million was used to pay down debt
after which $6.7 million of debt was assumed by the majority shareholder.
The Company recorded a gain of $2.5 million on the transaction, which has
been deferred at December 31, 2001, in accordance with SFAS No. 66,
Accounting for Sales of Real Estate, which requires that no profit shall be
recognized until it is realized from transactions with outside parties.
F-25
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. 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 $277,153, $154,166 and $137,100 in 2001, 2000
and 1999, respectively.
12. CONTINGENCIES
The Company has been burdened by the bankruptcy of its former professional
liability claims insurer, Reliance Insurance Company (Reliance). Reliance
provided professional liability claims insurance for the Company from March
1, 1998 to March 1, 2001. With Reliance now in liquidation and no longer
able to pay any losses or claims expenses, the Company must now defend
itself from all claims in which it previously would have been protected
through its insurance program.
As of November 7, 2002, there are several such claims that have been filed
against the Company. In addition, the Company is involved in various other
lawsuits and claims, including various employment matters arising in the
normal course of business.
The Company believes that the claims are without merit and is vigorously
working to settle the matters. However unfavorable outcomes of these claims
may have a material adverse effect on the Company's financial condition,
results of operations, cash flow and liquidity. There is no assurance that
the Company will be able to settle these claims at a reasonable cost or at
all. Even if the Company is successful in defending itself, the attorney
fees associated with a defense could jeopardize the ability of the Company
to provide a defense. If a judgment is rendered against the Company, the
Company may be forced to pursue a court-supervised reorganization.
At December 31, 2001, the Company has accrued $1.2 million, which
represents amounts paid in 2002 or agreed to be paid for settled claims and
an estimate for claims still pending.
The California Department of Social Services 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. 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. At November 7, 2002, the Company no longer operates the three
communities referred to above.
The majority shareholder has a claim against the Company for additional
salary for 2001 of $226,000 plus a bonus of 25%. The Board of Directors has
not agreed that these amounts are payable and, accordingly, these amounts
have not been accrued at December 31, 2001.
F-26
REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. OTHER INCOME, NET
In 2001, the Company recorded losses of $0.5 million as a result of
settlement agreements with the owners of nine of its properties for lease
cancellations and exchanged its Bakersfield and Vacaville, California
communities for cancellation of convertible notes, recognizing a $12.0
million gain. The Company recorded a $1.5 million loss from the
cancellation of leases with entities owned by the majority shareholder. The
Company also assigned its leasehold interest in its three Wyoming
communities for a $0.1 million gain. 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.
14. FINANCIAL RESULTS AND LIQUIDITY
From 1995 to 2000, 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 is primarily the result of competitive
factors. In 2001, as a result of continuing operating losses and
difficulties in obtaining operating licenses for certain of its new
buildings, the Company was unable to meet certain of its lease obligations,
discontinued all development and construction activities, reduced the
number of communities it operates, downsized its workforce and entered into
an agreement whereby the Company subcontracted a substantial portion of the
management duties for its communities to another unrelated assisted living
company. As of December 31, 2001, the Company had reduced its operations to
20 communities with a resident capacity of 2,067 beds.
As of December 31, 2001, the Company's working capital decreased to a
deficit of $5.9 million and its accumulated deficit increased to $35.0
million. Included in current liabilities are payables to the Company's
majority shareholder of $2.6 million. Also included in current liabilities,
is $8.9 million in debt related to the Company's South Ogden, Utah
community, which was opened in January 2001. The Company had been declared
in default under terms of the loan agreement and, accordingly, the amount
due has been included in current portion of long-term debt at December 31,
2001. In May 2002, the Company transferred the South Ogden, Utah community
to the bank in full satisfaction of the related debt. Accordingly, the
Company has classified the related South Ogden, Utah property of $8.3
million in current assets as assets held for sale at December 31, 2001.
Commencing January 1, 2002, the Company subcontracted with an unrelated
assisted living company to provide operations management, consulting and
accounting services to its assisted living communities. Accordingly, the
Company implemented a corporate restructuring plan and laid-off a
significant portion of its corporate workforce at December 31, 2001 and in
the first quarter of 2002. The Company continues to provide an oversight
management role, partnership administration and asset management services,
including continued responsibility for placement of insurance and debt
financing arrangements.
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REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. FINANCIAL RESULTS AND LIQUIDITY (CONTINUED)
The Company anticipates that its cash requirements during 2002 will exceed
the cash provided by operations. The Company is exposed to significant
liability losses that are uninsured as a result of the bankruptcy of its
former professional liability claims insurer that provided professional
liability claims insurance for the Company from March 1, 1998 to March 1,
2001. With the insurance company now in liquidation and no longer able to
pay any losses or claims expenses, the Company must defend itself from all
claims in which it previously would have been protected through its
insurance program.
Given Regent's current liquidity situation, the Company is considering
various alternatives that may include the disposition of selected assets
and/or the merger or sale of the remaining assets of the business. There
can be no assurance the Company will be successful in these pursuits. 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.
15. SUBSEQUENT EVENTS
In February 2002, the Company entered into a lease termination agreement
with the REIT owner of its Scottsdale, Arizona Alzheimer community and its
assisted living community located in Folsom, California. The Company's
leases for these two communities were canceled and the Company was released
from all liability thereunder, including any past due obligations to pay
rent under the leases and any real estate taxes in excess of $25,000. In
2002, the Company realized a reduction in current liabilities that were
recorded at December 31, 2001, of approximately $217,200 as a result of
this transaction.
In May 2002, the Company sold its West Wind community located in Boise,
Idaho to a third-party. The Company received $2.8 million in sales proceeds
and paid down $2.4 million in debt, recognizing a gain of $272,000 on the
transaction.
The Company abandoned its wholly-owned subsidiary's Elk Grove, California
construction project in December 2001 as a result of a declaration of
default on the loan agreement by the construction lender. The Company
wrote-off $3.8 million in related construction costs and $155,000 in
restricted cash deposits, was released from $3.0 million of construction
debt and recorded a loss for this project of $0.9 million at December 31,
2001. In May 2002, the Company entered into a settlement agreement with the
lender and effective June 3, 2002 transferred its ownership interest in the
construction project to a third-party purchaser
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REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUBSEQUENT EVENTS (CONTINUED)
identified by the lender. No cash proceeds were generated for the Company
as a result of this transaction. The Company and the majority shareholder
had provided guarantees of the construction loan and were relieved of these
guarantees upon closing of the transaction. In addition, the settlement
agreement provided for the transfer of the Company's South Ogden, Utah
community to the lender in lieu of foreclosure. The transfer of the South
Ogden, Utah community closed May 31, 2002. The Company recorded a gain in
2002 totaling $1.1 million as a result of this transaction. The lender had
declared the Company in default on the $8.9 million loan for the South
Ogden, Utah facility in 2001 and, accordingly, this debt was classified as
current at December 31, 2001. Accordingly, the related South Ogden, Utah
property of $8.3 million was classified as current at December 31, 2001.
On September 3, 2002, the Company sold its 55% co-tenancy interest in its
Modesto community to an unrelated third party for a net sales price of $2.8
million. The Company received $1.0 million in cash proceeds, $0.1 million
in notes receivable and satisfied $1.7 million of co-tenancy debt, which
was assumed by the buyer. The Company, it's majority shareholder and the
unrelated 45% co-tenant continue to guarantee the full $3.0 million in debt
assumed by the buyer. The Company recorded a gain in 2002 totaling $1.0
million as a result of this transaction.
On September 18, 2002, the Company assigned its lease of its San Antonio
community to an unrelated assisted living company for $408,000. The Company
recorded a gain in 2002 of approximately $327,000 as a result of this
transaction. In connection with the assignment, the lessor released to the
Company the cash deposit held under a letter of credit arrangement in the
amount of $741,752, which amount is included in restricted cash at December
31, 2001.
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