-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ok8SYBi4Fc4wImSFXjV1S37VBZka6cXYpzVesSA+VGiyk8ltxT4Cs7WfjTaZWl48 A/Nt7hBOlPJN9kF65QxQLA== 0000893877-98-000690.txt : 19981116 0000893877-98-000690.hdr.sgml : 19981116 ACCESSION NUMBER: 0000893877-98-000690 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGENT ASSISTED LIVING INC CENTRAL INDEX KEY: 0001000693 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 931171049 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-27108 FILM NUMBER: 98749018 BUSINESS ADDRESS: STREET 1: 121 SW MORRISON ST STREET 2: STE 1000 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5032274000 MAIL ADDRESS: STREET 1: 121 SW MORRISON ST STREET 2: STE 1000 CITY: PORTLAND STATE: OR ZIP: 97204 10QSB 1 FORM 10-QSB - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ending September 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ____ to ____ Commission file number 0-27108 REGENT ASSISTED LIVING, INC. (Exact name of registrant as specified in its charter) OREGON 93-1171049 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Suite 1000 121 SW Morrison St. Portland, Oregon 97204 (Address of principle executive offices) 503-227-4000 (Registrant's telephone number, including area code) Indicated by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Shares of Registrant's Common Stock, No par value, outstanding at November 12, 1998 - 4,633,000 - -------------------------------------------------------------------------------- REGENT ASSISTED LIVING, INC. FORM 10-QSB September 30, 1998 INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 .........................................................3 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 1998 and 1997 .............................4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 .............................................5 Notes to Condensed Consolidated Financial Statements ..........................6 Item 2. Management's Discussion and Analysis or Plan of Operation ............9 PART II- OTHER INFORMATION Item 5. Other Information ...................................................18 Item 6. Exhibits and Reports on Form 8-K ....................................18 Page 2
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 1998 December 31, (Unaudited) 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 3,896,252 $ 1,865,576 Accounts receivable 1,128,134 128,110 Prepaid expenses 270,156 249,708 Construction advances receivable 36,546 123,670 ------------- ------------- Total current assets 5,331,088 2,367,064 Property and equipment, net 59,801,798 69,820,324 Investment in joint venture 378,463 401,460 Restricted cash 2,598,831 2,361,993 Other assets 2,294,692 752,932 ------------- ------------- Total assets $ 70,404,872 $ 75,703,773 ============= ============= LIABILITIES Current liabilities: Current portion of long-term debt $ 268,371 $ 218,881 Short-term borrowings - 4,500,000 Construction accounts payable 972,380 583,043 Accounts payable and other accrued expenses 1,821,072 685,136 Accrued payroll 941,493 502,568 Accrued interest 290,533 179,963 ------------- ------------- Total current liabilities 4,293,849 6,669,591 Long-term debt 43,753,762 51,450,545 Convertible subordinated notes 9,000,000 - Deferred gains and development fees, net 5,211,561 898,802 Other liabilities 1,295,085 517,578 ------------- ------------- Total liabilities 63,554,257 59,536,516 ------------- ------------- Minority Interest - 250,000 ------------- ------------- SHAREHOLDERS' EQUITY Preferred stock, no par value, 5,000,000 shares authorized; 1,666,667 shares issued and outstanding 9,349,841 9,349,841 Common stock, no par value, 25,000,000 shares authorized; 4,633,000 shares issued and outstanding 10,808,703 10,808,703 Accumulated deficit (13,307,929) (4,241,287) ------------- ------------- Total shareholders' equity 6,850,615 15,917,257 ------------- ------------- Total liabilities and shareholders' equity $ 70,404,872 $ 75,703,773 ============= ============= The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Unaudited) Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997 --------------- --------------- -------------- ---------------- Revenues: Rental and service $8,864,178 $3,542,710 $19,722,689 $10,082,807 Management fee 42,867 53,370 145,116 141,491 --------------- --------------- -------------- ---------------- Total revenues 8,907,045 3,596,080 19,867,805 10,224,298 --------------- --------------- -------------- ---------------- Operating expenses: Residence operating expenses 7,692,640 2,681,858 17,459,256 7,015,759 General and administrative 1,258,457 871,058 3,213,189 2,233,909 Lease expense 2,687,297 914,776 6,122,196 2,403,127 Depreciation and amortization 409,167 88,646 764,719 235,494 --------------- --------------- -------------- ---------------- Total operating expenses 12,047,561 4,556,338 27,559,360 11,888,289 --------------- --------------- -------------- ---------------- Operating income (loss) (3,140,516) (960,258) (7,691,555) (1,663,991) Interest income 76,634 83,290 232,556 305,881 Interest expense, net (444,328) - (939,340) (101,228) Equity interest in joint venture (170,503) - (203,560) - Other income, net (7,044) (4,764) (14,743) 12,840 --------------- --------------- -------------- ---------------- Income (loss) before income taxes (3,685,757) (881,732) (8,616,642) (1,446,498) Income tax benefit - - - 24,500 --------------- --------------- -------------- ---------------- Net income (loss) ($3,685,757) ($881,732) ($8,616,642) ($1,421,998) =============== =============== ============== ================ Basic earnings (loss) per common share ($0.83) ($0.22) ($1.96) ($0.40) =============== =============== ============== ================ Diluted earnings (loss) per common share ($0.83) ($0.22) ($1.96) ($0.40) =============== =============== ============== ================ Weighted average common shares outstanding: Basic 4,633,000 4,633,000 4,633,000 4,633,000 =============== =============== ============== ================ Diluted 4,633,000 4,633,000 4,633,000 4,633,000 =============== =============== ============== ================ The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4 Page 5 REGENT ASSISTED LIVING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 ---------------- ---------------- Cash flows from operating activities: Net income (loss) ($8,616,642) ($1,421,998) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 764,719 235,494 Amortization of deferred gains and development fees (229,866) (7,320) Equity interest in joint venture 203,560 - Non-cash operating expense 70,506 - Changes in other assets and liabilities: Accounts receivable (170,616) 49,671 Prepaid expenses (48,108) (107,361) Deferred income taxes - 33,100 Other assets (699,007) 19,795 Accounts payable and other accrued expenses 1,685,431 (16,534) Other liabilities 777,507 (20,781) ------------ ------------ Net cash used in operating activities (6,262,516) (1,235,934) ------------ ------------ Cash flows from investing activities: Maturity of investments, net - 2,939,448 Purchases of property and equipment (30,419,542) (31,660,739) Increase in construction related accounts payable 389,337 1,076,157 Investment in joint venture (118,563) (66,340) Deposits to replacement reserve account, net (38,814) (5,482) ------------ ------------ Net cash used in investing activities (30,187,582) (27,716,956) Cash flows from financing activities: Repayment of short-term borrowings (4,500,000) 1,532,205 Proceeds from issuance of long-term debt 23,590,924 22,664,466 Payments on long-term debt (31,488,217) (118,041) Construction advances 87,124 922,038 Prepayments and deposits for financing arrangements, net (762,524) (234,364) Restricted cash for financing arrangements, net (198,024) (724,469) Deferred fees from financing arrangements 180,219 730,000 Proceeds from financing arrangements 43,021,272 - Proceeds from issuance of convertible subordinated notes 9,000,000 - Contributions by minority partner - 250,000 Preferred stock issuance costs - (600,159) Preferred stock dividends (450,000) (476,230) ------------ ----------- Net cash provided by financing activities 38,480,774 23,945,446 ------------ ----------- Net increase (decrease) in cash and cash equivalents 2,030,676 (5,007,444) Cash and cash equivalents, beginning of period 1,865,576 8,650,817 ------------ ----------- Cash and cash equivalents, end of period $3,896,252 $3,643,373 ============ =========== Supplemental disclosure of cash flow information: Cash paid for interest $3,117,091 $997,896 ============ =========== Supplemental disclosure of non-cash investing and financing activities: Long-term debt incurred to acquire minority interest $250,000 - ============ =========== Sale of property and equipment to joint venture $967,408 - ============ =========== The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Operations and Summary of Significant Accounting Policies: The Company Regent Assisted Living, Inc. ("the Company") is an owner, operator, and developer of private-pay assisted living communities including stand-alone Alzheimer's communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. The results of operations for the nine months ended September 30, 1998, reflect the operations of fifteen new assisted living communities, one of which was managed for a portion of the period; five stabilized assisted living communities, one of which was managed for a portion of the period; fees from the management of five communities (two which were converted to leases); and pre-opening costs related to two additional newly developed communities that had not yet commenced rental activities during the period. The results of operations for the nine months ended September 30, 1997, reflect the operations of one new and four stabilized assisted living communities, fees from the management of two communities, and pre-opening costs related to ten additional newly developed communities that had not yet commenced rental activities during the period. As of November 12, 1998, the Company had also commenced operations at its new assisted living community in Austin, Texas; is awaiting licensure of its new Regent Court stand-alone Alzheimer's community in Scottsdale, Arizona; and had an additional 21 assisted living communities (including four Alzheimer's communities) in various stages of construction and development. Basis of Presentation The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation. Page 6 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. Operations and Summary of Significant Accounting Policies, Continued: The accompanying unaudited condensed consolidated financial statements as of September 30, 1998, and for the three month and nine month periods ended September 30, 1998 and 1997, have been prepared in conformity with generally accepted accounting principles. The financial information as of December 31, 1997, is derived from the Company's Form 10-KSB for the year ended December 31, 1997. Certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. The accompanying financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1997, included in the Company's Form 10-KSB for the year ended December 31, 1997. Operating results for the three month and nine month periods ended September 30, 1998, are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending December 31, 1998. 2. Property and Equipment: Property and equipment are stated at cost and consist of the following:
September 30, December 31, 1998 1997 ------------- ------------ Land $3,091,300 $ 1,730,810 Buildings and improvements 29,388,304 12,713,346 Furniture and equipment 2,903,639 1,512,868 Construction in progress 25,592,036 54,429,419 ----------- ---------- 60,975,279 70,386,443 Less accumulated depreciation and amortization 1,173,481 566,119 ----------- ---------- Total property and equipment, net $59,801,798 $69,820,324 =========== ===========
Land, buildings and certain furniture and equipment serve as collateral for long-term debt. Page 7 REGENT ASSISTED LIVING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued 3. Administrative Services Agreement: Pursuant to the terms of an Administrative Services Agreement, the Company provides executive assistance, accounting and financial management services, legal and administrative assistance, insurance, management information services, and other management services as required by Bowen Property Management Co., Bowen Financial Services Corp., Bowen Development Company and Bowen Condominium Marketing, Inc., all of which are Oregon corporations that are wholly owned or controlled by Mr. Bowen, the Company's Chairman, President, and Chief Executive Officer. Under the terms of the agreement, the Company will be reimbursed at its cost on a monthly basis for all services provided. 4. Earnings (Loss) Per Common Share: Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS 128). Basic EPS is calculated using income (loss) attributable to common shares (after deducting preferred dividends) divided by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated using income (loss) attributable to common shares (after deducting preferred dividends and considering the effects of dilutive common equivalent shares) divided by the weighted average number of common shares and dilutive common shares outstanding for the period. Basic and diluted earnings (loss) per common share includes a deduction of preferred stock dividends declared, which totaled $150,000 and $450,000 for the three month and nine month periods ended September 30, 1998, respectively. 5. Accounting Pronouncements: On April 3, 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5). This statement requires that the costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Consistent with its past accounting practices, the Company expenses all start up costs and thus the adoption of this statement will have no impact on the Company's reported results. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities and is effective for all quarters of fiscal years beginning after June 15, 1999. The adoption of this Statement will have no impact on the Company's reported results. Page 8 ITEM 2. Management's Discussion and Analysis or Plan of Operation. Overview The Company The Company reported a net loss of $3,685,757, or $0.83 per diluted share, on revenues of $8,907,045 for the three months ended September 30, 1998. For the nine months ended September 30, 1998, the Company reported a net loss of $8,616,642, or $1.96 per diluted share, on revenues of $19,867,805. Current Communities. The table below sets forth certain information regarding the Company's communities at September 30, 1998.
Operations Community Location Commenced Units(1) Beds(2) Interest - --------- -------- ---------- -------- ------- -------- Oregon Park Place Portland 1986 112 112 Lease(3) Regency Park Portland 1987 122 142 Lease Sheldon Park Eugene 1998 108 124 Lease Washington Northshore House Kenmore 1998 85 98 Manage(4) Sterling Park Redmond 1990 162 192 Lease California Laurel Springs Bakersfield 1998 113 127 Own Orchard Park Clovis 1998 112 128 Lease Summerfield House Vacaville 1998 109 126 Own Sun Oak Citrus Heights 1997 40 50 Manage Sunnyside Court Fremont 1998 40 78 Lease Sunshine Villa Santa Cruz 1990 106 126 Lease The Palms Roseville 1998 93 108 Lease Villa Sera Salinas 1998 150 150 Manage Willow Creek Folsom 1997 104 117 Lease Idaho West Wind Boise 1997 48 52 Lease Willow Park Boise 1997 117 130 Lease Nevada Mira Loma Henderson 1998 115 133 Own New Mexico Sandia Springs Rio Rancho 1998 109 126 Lease Texas Hamilton House San Antonio 1997 116 135 Lease Arizona Canyon Crest Tucson 1998 117 137 Lease Wyoming Aspen Wind Cheyenne 1998 77 77 Lease Meadow Wind Casper 1998 53 53 Lease Spring Wind Laramie 1998 53 53 Lease Totals 2,261 2,574 ===== =====
Page 9 (1) A "unit" is a studio or a one or two bedroom apartment. (2) "Beds" reflects the actual number of beds used by the Company for census purposes, which in no event is a number greater than the maximum number of licensed beds permitted under the community's license. (3) The Company completed a lease-acquisition of Park Place during the second quarter of 1998. The Company had managed the Community prior to this transaction. (4) A limited liability company in which the Company owns a 50 percent interest owns this community. As of November 12, 1998, the Company had also commenced operations at its Austin, Texas community and is awaiting licensure of its Regent Court community in Scottsdale, Arizona:
Location No. of Units No. of Beds Interest -------- ------------ ----------- -------- Austin, Texas 117 137 Own Scottsdale, Arizona 24 48 Lease
Also, as of November 12, 1998, the Company had commenced construction on the following new communities:
Projected Expected Quarter Location No. of Beds Opening Interest -------- ----------- ------- -------- Modesto, California 48 1st-99 Own Clackamas, Oregon 48 2nd-99 Own Kent, Washington 48 2nd-99 Manage(1) Scottsdale, Arizona 115 2nd-99 Own Corvallis, Oregon 48 4th-99 Own Mesa, Arizona 132 1st-00 Own (1) A limited liability company in which the Company owns a 10 percent interest owns this community.
The Company is engaged in various stages of development on 15 additional new communities. If these 15 communities are completed, then, together with the communities currently under construction, total operations of the Company will increase by approximately 1,900 beds to a total of approximately 4,600 beds. The Company continues to pursue its primary strategy of developing new communities and is therefore engaged in negotiations to acquire several additional sites and is pursuing joint venture opportunities with parties who control parcels of land in strategic markets. All costs associated with the development of these communities have been capitalized as "Construction in Progress" as disclosed in Note 2 to the condensed consolidated financial statements. Operating results for the three month and nine month periods ended September 30, 1998, are not necessarily indicative of future financial performance as the Company intends to expand its operating base of communities. Page 10 Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Revenues. For the three month period ended September 30, 1998, revenues were $8,907,045 compared to $3,596,080 in the three month period ended September 30, 1997. The Company operated twenty communities and managed two communities in the third quarter of 1998. The Company operated five communities and managed two in the third quarter of 1997. The increase in revenue of $5,310,965 or 147.7 percent, includes $5,094,471 of revenue from newly opened and acquired communities and an increase in revenue of $226,997 at the Company's three communities that had stabilized occupancy at the beginning of both periods. Overall average occupancy at these three communities increased to 95.6 percent for the three month period ended September 30, 1998, whereas occupancy was 91.0 percent for the same period in 1997. A community is considered "stabilized" for reporting purposes after it first attains occupancy of 95.0 percent. Residence Operating Expenses. Residence operating expenses were $7,692,640 for the three month period ended September 30, 1998, and $2,681,858 for the same period in 1997, an increase of $5,010,782. The current period includes $4,858,937 of start-up and pre-opening costs related to seventeen of the Company's newly developed communities and $668,446 of residence operating expenses related to the acquisition of two stabilized communities, whereas the 1997 period included $559,764 of start-up and pre-opening costs related to eleven newly developed communities and $130,124 of residence operating expenses related to the acquisition of one stabilized community. Residence operating expenses for the Company's five stabilized communities totaled 63.6 percent of rental and service revenues for the three month period ended September 30, 1998, and was 62.7 percent for the three month period ended September 30, 1997, for four stabilized communities, one of which was acquired during the period. General and Administrative Expenses. General and administrative expenses were $1,258,457 for the three month period ended September 30, 1998, compared to $871,058 for the three month period ended September 30, 1997. The increase of $387,399 is due primarily to an increase in development activities and operations, including payroll, travel, and other overhead related costs related to the implementation of the Company's strategy for rapid growth. Lease Expense. Lease expense for the Company's sixteen leased communities was $2,687,297 for the three month period ended September 30, 1998, and was $914,776 for the Company's four communities leased during the same period in 1997. The increase of $1,772,521 relates primarily to the opening of two newly developed communities, the sale-leaseback of five newly developed communities and the lease-acquisition of five communities, all of which have occurred since the end of the third quarter of 1997. Depreciation and Amortization. Depreciation and amortization expense was $409,167 for the three month period ended September 30, 1998, compared to $88,646 for the three month period ended September 30, 1997. The increase of $320,521 relates primarily to the capitalization of buildings, furniture, equipment and vans for newly developed communities. Interest Income. Interest income decreased slightly in the three month period ended September 30, 1998, to $76,634 from $83,290 for the same period in 1997. Interest income resulted from the investment of cash and cash equivalents in high quality, short term securities placed with institutions with high credit ratings. Page 11 Interest Expense. Interest expense was $444,328 for the three month period ended September 30, 1998. The Company reported no interest expense for the three months ended September 30, 1997. The Company capitalized $531,471 and $523,390 of interest charges incurred during the three months ended September 30, 1998 and 1997, respectively. The capitalized interest offsets substantially higher interest costs incurred by the Company in the current period arising from increased borrowing for construction purposes and interest related to the convertible subordinated notes. Equity Interest in Joint Venture. For the three month period ended September 30, 1998, the Company reported a loss of $170,503 which is the primary result of start-up and pre-opening costs related to one community in which the Company owns less than a majority ownership interest. Net Income (Loss). Net operating results decreased to a loss of $3,685,757 during the three month period ended September 30, 1998, from a loss of $881,732 for the same period in 1997. The decrease in net results is primarily due to an increase in general and administrative expenses (as discussed above), an increase in lease expense (as discussed above), an increase in interest expense (as discussed above), an increase in depreciation expense (as discussed above), offset by an increase in residence operating profits (rental and service revenue less residence operating expenses) of $310,686. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Revenues. For the nine month period ended September 30, 1998, revenues increased by $9,643,507 or 94.3% to $19,867,805 compared to $10,224,298 in the nine month period ended September 30, 1997. The increase in revenue is related primarily to revenue from newly developed and acquired communities. Overall average occupancy at the Company's three communities that had stabilized occupancy at the beginning of both periods decreased to 93.1 percent for the nine month period ended September 30, 1998 from 93.4 percent for the same period in 1997. Residence Operating Expenses. Residence operating expenses were $17,459,256 for the nine month period ended September 30, 1998, and $7,015,759 for the same period in 1997, an increase of $10,443,497. The current period includes $9,799,971 of start-up and pre-opening costs related to seventeen of the Company's new communities and $1,311,271 of residence operating expenses related to the acquisition of two stabilized communities, whereas the 1997 period included $804,892 of start-up and pre-opening costs related to eleven newly developed communities and $130,124 of residence operating expenses related to the acquisition of one stabilized community. Residence operating expenses totaled 64.1 percent of rental and service revenues for the nine month period ended September 30, 1998 for the Company's five stabilized communities, one of which was acquired during the period, and 62.7 percent for the nine month period ended September 30, 1997, for four stabilized communities, one of which was acquired during the period. Page 12 General and Administrative Expenses. General and administrative expenses were $3,213,189 for the nine month period ended September 30, 1998, compared to $2,233,909 for the nine month period ended September 30, 1997. The increase of $979,280 is due primarily to an increase in development activities and operations related to the implementation of the Company's strategy for rapid growth. Lease Expense. Lease expense for the Company's leased communities was $6,122,196 for the nine month period ended September 30, 1998, and was $2,403,127 for the same period in 1997. The increase of $3,719,069 relates primarily to the opening and sale-leaseback of newly developed communities and the lease-acquisition of several additional communities. Depreciation and Amortization. Depreciation and amortization expense was $764,719 for the nine month period ended September 30, 1998, compared to $235,494 for the nine month period ended September 30, 1997. The increase of $529,225 primarily relates to the capitalization of buildings, furniture and equipment and the purchase of vans for the Company's newly developed communities. Interest Income. Interest income decreased in the nine month period ended September 30, 1998, to $232,556 from $305,881 for the same period in 1997, a decrease of $73,325. Interest Expense. Interest expense increased in the nine month period ended September 30, 1998, to $939,340 from $101,228 for the nine month period ended September 30, 1997. The Company capitalized $2,288,321 and $895,582 of interest charges incurred during the nine months ended September 30, 1998 and 1997, respectively. Equity Interest in Joint Venture. For the nine month period ended September 30, 1998, the Company reported a loss of $203,560 which is the primary result of start-up and pre-opening costs related to one community in which the Company owns less than a majority ownership interest. Net Income (Loss). Net operating results decreased to a loss of $8,616,642 during the nine month period ended September 30, 1998, from a loss of $1,421,998 for the same period in 1997. The decrease in net results is primarily due to an increase in general and administrative expenses (as discussed above), an increase in lease expense (as discussed above), an increase in depreciation expense (as discussed above), an increase in interest expense (as discussed above), and a decrease in residence operating profits (rental and service revenue less residence operating expenses) of $803,615. Liquidity and Capital Resources At September 30, 1998, the Company had approximately $1.0 million of working capital compared to a working capital deficit of approximately $4.3 million at December 31, 1997. The increase of $5.3 million is the result of $9 million in proceeds from the issuance by the Company of convertible subordinated notes, as described below, $10.7 million of net proceeds from financing arrangements, offset by a $7.8 million net loss from operations adjusted for non-cash items and $30.2 million of expenditures related to development activities offset by $23.6 million in additional long term indebtedness. Page 13 Net cash used in operating activities totaled $6,262,516 for the nine month period ended September 30, 1998, which resulted primarily from a net loss of $8,616,642, adjusted for depreciation and amortization of $764,719, and an increase in accounts payable and other accrued expenses of $1,685,431. The increase in accounts payable and other accrued expenses is attributable to the increase in the number of communities under operation. Net cash used in investing activities totaled $30,187,582 for the nine month period ended September 30, 1998, substantially all of which was used for land acquisition, development and construction costs. At September 30, 1998, the aggregate purchase price for the Company's options related to seven parcels of land was approximately $5.5 million. The Company has paid initial deposits relating to these sites and is in the process of completing the demographic analysis and other preliminary due diligence necessary to develop assisted living communities at these sites. Net cash provided by financing activities totaled $38,480,774 during the nine month period ended September 30, 1998, consisting of construction and equipment financing proceeds totaling $23,590,924, proceeds from financing arrangements totaling $43,021,272, proceeds from issuance of convertible subordinated notes of $9,000,000, offset by repayment of short-term borrowings of $4,500,000, repayment of long-term debt of $31,488,217, prepayments and deposits for financing arrangements of $762,524, and payment of preferred stock dividends of $450,000. During the remainder of 1998, the Company intends to utilize current working capital resources to develop and construct assisted living communities including stand-alone Alzheimer's care communities. The Company intends to finance a substantial portion of the cost of developing each new community through additional sale-leaseback transactions with real estate investment trusts ("REIT"), joint venture arrangements, as well as conventional financing with commercial banks and other financial institutions. The Company has an aggregate of $11.2 million in loans from which it will construct the Scottsdale and Modesto communities. As of September 30, 1998, approximately $6.9 million remains to be drawn on these loans to fund construction activities and debt service reserves. The Company has signed a letter of intent with a REIT pursuant to which the Company intends to sell its Clackamas, Corvallis, Las Vegas and Mesa sites to the REIT, construct communities on each site for the REIT, and lease the communities from the REIT upon their completion. The same commitment provides for the sale-leaseback of the Company's Henderson and Austin communities. The Company also is currently discussing with commercial banks and REITs the terms of potential financing with which the Company will construct new communities currently under development. Each of the pending financing transactions is subject to a number of conditions, including the negotiation and execution of definitive documents and the satisfactory completion of due diligence on the related properties, and there is no assurance that any of these financing transactions will be completed on the terms proposed, or at all. Page 14 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 November 12, 1998, a total of $9.0 million of convertible subordinated notes have been issued under this facility. Subject to final documentation, the Company and the purchasers have agreed that no additional notes will be issued. The notes bear interest at 7.5 percent per annum and are convertible into the Company's common stock at an effective price of $7.50 per share. Interest on the notes is payable quarterly and all principal and unpaid interest on the notes is due March 31, 2008. The Company anticipates capital expenditures for the remainder of 1998 will include additional land acquisition costs, architectural fees, and other development costs related to at least 19 assisted living communities and construction costs related to at least six new assisted living communities. The Company currently anticipates completing construction on three new Regent communities and four new Regent Court communities in 1999. Previously, the Company announced that it intended to complete construction on nine new Regent communities and five new Regent Court communities in 1999. The Company has revised its plan due to delays experienced with obtaining building permits and other governmental approvals for some of its sites, and delays in closing construction financing. The total cost to develop and construct the seven communities planned for 1999, including the estimated initial operating deficits, will be approximately $41 million. The Company has obtained financing, or commitments for financing, necessary to complete five of these communities. The Company anticipates that it will be able to obtain the financing, upon acceptable terms, necessary to complete the remaining two communities planned for 1999. Provided that the Company can obtain financing upon acceptable terms, the Company estimates that it has the necessary equity capital to complete construction and to fund the initial operating deficits of the seven communities planned for 1999. The Company may enter into additional arrangements with one or more unrelated parties regarding the joint development and ownership of one or more of the Company's communities currently under construction or development in order to further leverage the Company's growth. Furthermore, the Company may utilize various forms of financing that would permit a community to be sold to or initially be developed by a third party who would incur the initial operating deficits and permit the Company to manage the community for a customary fee. The Company, under such financing methods, would likely have the option to either purchase the community or enter into a long-term lease at such time as the Company deems appropriate. The Company has not obtained any commitments for this form of financing. If the Company were unable to obtain additional required financing, or if such financing is not available on acceptable terms, the Company expects that its plan to develop an additional five Regent Communities and four Regent Court communities by the end of 1999 would likely be delayed or curtailed. Furthermore, if the Company expands its growth plan, development activities do not result in the construction of a community on the site, the Company experiences a decline in the operations of its current communities or the Company does not achieve and sustain anticipated occupancy levels at its new communities, then the Company may require additional financing to complete its growth plan. Page 15 Year 2000 Disclosure "Year 2000 issues" relate to the result of computer programs having been written using two digits rather than four to define the applicable year. Computer programs and electronic devices that utilize date sensitive software or information may recognize a date using the "00" as the year 1900 rather than the year 2000. This recognition could result in a system failure or miscalculations causing disruptions of operations or the inability of suppliers of material services and products to continue supporting the Company's operations. The Company has assessed its readiness in regard to Year 2000 issues. The Company believes that all material hardware and software utilized in its operations and, specifically, in its accounting systems, is Year 2000 compliant or that Year 2000 compliant versions are available to the Company for installation during the normal course of replacing or updating such systems prior to November 30, 1999. The financial impact of any change is not anticipated to be material to the financial position or results of the Company's operations. The Company believes it has adequate alternatives to counteract potential Year 2000 issues that may arise with its internally utilized software and hardware if the assurances of relevant vendors are incorrect. The Company believes the primary risks from Year 2000 issues to its operations and prospects are the potential inability of the Company's commercial banks to permit access to the Company's accounts and of utility companies to continuing supplying utilities to the Company's communities. The Company does not have a contingency plan in effect at this time to guard against such events. The Company is in the process of obtaining Year 2000 compliance letters and reports from suppliers of material services and products. To date, no such supplier has indicated an inability to continue supplying material products and services to the Company after January 1, 2000, although most are in the process of evaluating and updating their internal systems and cannot yet assure the Company that their systems are Year 2000 compliant. Accordingly, the Company does not expect that Year 2000 issues will have a material adverse effect upon the Company's operations or prospects. However, there can be no assurances that the systems of other companies on which the Company's operations or systems rely will be timely remediated or that a failure by another company to remediate its systems in a timely manner would not have a material adverse effect on the Company. Page 16 Forward-Looking Statements The information set forth in this report in the sections entitled "Overview" and "Liquidity and Capital Resources" regarding the Company's acquisition of sites for development, the Company's development, construction, financing and opening of new assisted living communities, and the Company's plans to develop, construct and operate new Regent Court communities constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and is subject to the safe harbor created by that section. The development of additional assisted living communities will involve a number of risks including, without limitation, the risk that the Company will be unable to locate suitable sites, risks relating to the inability to obtain, or delays in obtaining, necessary zoning, land use, building, occupancy and other required governmental permits and authorizations, environmental risks, risks that construction costs may exceed original estimates, risks that construction and lease-up may not be completed on schedule, and risks relating to the competitive environment for development. The foregoing risks could cause the Company to significantly delay or curtail its planned growth and could cause one or more of the Company's new communities to not be profitable. Additional factors that could cause results to differ materially from those projected in the forward-looking statements include, without limitation, the ability of the Company to raise additional financing upon terms acceptable to the Company, the extent to which the Company's efforts to obtain financing are affected by current liquidity issues that have adversely impacted national and international financial markets, increases in the costs associated with new construction, competition, and acceptance of the Company's prototype community in new geographic markets. The Company's growth strategy is subject to the risk that occupancy rates at newly-developed communities may not be achieved or sustained at expected levels, in which case, the Company will experience greater than anticipated operating losses in connection with the opening of new communities and the Company's need for additional financing to meet its growth plans will likely increase. Furthermore, the Company's growth will place increasing pressure on the Company's management controls and require the Company to locate, train, assimilate, and retain additional community managers and support staff. There is no assurance that the Company will be able to manage this growth successfully. Page 17 PART II - OTHER INFORMATION Item 5. Other Information. In accordance with amendments adopted on May 21, 1998 to Rule 14a-4 under the Securities Exchange Act of 1934, if notice of a shareholder proposal to be raised at the annual meeting of shareholders is received at the principal executive offices of the Company after March 15, 1999 (45 days prior to the month and date in 1999 corresponding to the date on which the Company mailed its proxy materials for the 1998 annual meeting), proxy voting on that proposal when and if raised at the 1999 annual meeting will be subject to the discretionary voting authority of the designated proxy holders. Any shareholder proposal to be considered for the inclusion in proxy materials for the Company's 1999 annual meeting must be received at the principal executive offices of the Company no later than December 2, 1998. Item 6. Exhibits and Reports on Form 8-K. Exhibits: 27 Financial Data Schedule Reports on Form 8-K None SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGENT ASSISTED LIVING, INC. By:------------------------------ Date: November 12, 1998 Steven L. Gish Chief Financial Officer Page 18 EXHIBIT INDEX EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 27. Financial Data Schedule EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET OF REGENT ASSISTED LIVING, INC. AS OF JUNE 30, 1998, AND THE RELATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS IN THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 3,896,252 0 1,191,680 27,000 0 5,331,088 60,975,279 1,173,481 70,404,872 4,293,849 52,753,762 10,808,703 0 9,349,841 (13,307,929) 70,404,872 19,722,689 19,867,805 17,459,256 27,559,360 0 0 939,340 (8,616,642) 0 (8,616,642) 0 0 0 (8,616,642) (1.96) (1.96)
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