10-K 3 r_k107.txt ANNUAL REPORT, 12-31-2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________ Commission file number 0-27108 REGENT ASSISTED LIVING, INC. (Name of registrant as specified in its charter) Oregon 93-1171049 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 121 SW Morrison Street, Suite 1000 Portland, Oregon 97204 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (503) 227-4000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of July 23 , 2001: $297,259 State the number of shares of Common Stock outstanding at July 23, 2001: 5,945,174 Documents Incorporated by Reference ----------------------------------- Part of Form 10-K into Document which incorporated -------- ------------------ None
TABLE OF CONTENTS Item of Form 10-K Page ----------------- ---- PART I Item 1 - Description of Business 1 Item 2 - Description of Property 13 Item 3 - Legal Proceedings 16 Item 4 - Submission of Matters to a Vote of Security Holders 17 Item 4(a) - Executive Officers of the Registrant 17 PART II Item 5 - Market for Common Stock and Related Stockholder Matters 19 Item 6. Selected Consolidated Financial Data 20 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation 21 Item 7(a) Quantitative and Qualitative Disclosre About Market Risk 29 Item 8 - Financial Statements and Supplementary Data 29 Item 9 - Changes in and Disagreements with Accountants On Accounting and Financial Disclosure 30 PART III Item 10 - Directors, Executive Officers and Control Persons; Compliance with Section 16(a) of the Exchange Act 31 Item 11 - Executive Compensation 33 Item 12 - Security Ownership of Certain Beneficial Owners and Management 36 Item 13 - Certain Relationships and Related Transactions 38 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41 SIGNATURES 45
PART I Item 1. Description of Business Overview and Background ----------------------- The Company is an owner, operator, and developer of private-pay assisted living communities including stand-alone Alzheimer's care communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services, and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. The Company's senior management, which includes two of the assisted living industry's pioneers, has extensive experience in the management and development of assisted living communities. The Company's growth strategy has been based upon the premise that high-quality assisted living services can be more appropriately and efficiently provided in its prototypical designed communities rather than in an existing facility that could be converted to use as an assisted living community. Thus, in 1996 the Company began an aggressive expansion program of acquiring sites in select markets in the western United States and beginning the development and construction of new communities. This program resulted in a dramatic increase in the number of communities and beds under operation in both 1997 and 1998. At the time of the Company's initial public offering in 1995, the Company operated four communities with a resident capacity of 565 beds. As of December 31, 2000, the Company operated 30 communities with a resident capacity of 2,996 beds. From 1995 to present, the Company's revenues increased from $12.6 million to $64.9 million. However, in connection with the opening and lease up of its newly developed communities, the Company incurred substantial operating losses. Although initial operating losses were anticipated, the Company did not foresee the extent of such losses. The Company attributes these losses to the extended time required to fill its communities and the difficulty in maintaining occupancy, which are primarily the result of competitive factors. Until recently, the Company has been successful at funding its operating losses through a combination of equity, subordinated note, lease and sale-leaseback arrangements with real estate investment trusts and conventional debt financing. As of December 31, 2000, the Company's working capital decreased to a deficit of $3.9 million and its accumulated deficit increased to $32.5 million. Although operating results have continued to improve during the past three years, the Company anticipates that its cash requirements during 2001 will exceed the cash provided by operations. Accordingly, the Company has begun the process of preparing and implementing a Plan (the "Plan") in order to address the Company's liquidity issues (see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Recent Developments ------------------- The Company's Plan includes the conversion of certain debts to equity, a bridge loan and a line of credit provided by the Company's majority shareholder, the planned disposition of selected assets, and the renegotiation of debt and lease obligations. In addition, the Company has engaged an investment banking advisor to evaluate the Company's financial position, to assist in the Plan, and to provide strategic alternatives including the raising of equity or placing of debt. 1 In March 2001, the Company's Board of Directors approved the conversion of $750,000 of accrued dividends due to the preferred shareholder and $507,877 of deferred lease payments due to the majority shareholder into 857,143 and 580,431 shares of common stock, respectively. In connection with this transaction, the preferred shareholder agreed to waive its dividend for a period of two years beginning January 1, 2001, and the majority shareholder agreed to provide $1 million in bridge financing (the "Bridge Loan"). Through June 30, 2001, the majority shareholder provided cash advances totaling $750,000 under the Bridge Loan. At June 30, 2001, such advances were combined with additional outstanding amounts due to the majority shareholder and an affiliated company, along with accrued interest, into a demand note in the amount of $1,259,133. At the sole option of the holder, the note is due upon the sale of certain assets, upon demand or no later than June 30, 2002. The note is secured by land held for sale. On July 3, 2001, the Company's Board of Directors approved a $1 million operating line of credit provided by the majority shareholder. Through July 23, 2001, the Company has drawn $600,000 under the line. At the sole option of the holder, the line is due upon the sale of certain assets, upon demand or no later than June 30, 2002. The line is secured by a deed of trust recorded in a second position against certain real property. During April 2001, the Company and a commercial bank, which in December 2000 financed the purchase of four previously leased communities, agreed to modify the terms of their debt financing. Although the financing provides that all cash flow from the operations of the four repurchased communities be applied against the outstanding principal of a certain portion of the underlying debt, the bank agreed to waive this provision for a period of six months ending September 2001. During the first three months of the modification, the net cash flow from the four communities totaled approximately $540,000. Also during April 2001, the Company and two real estate investment trusts (each a "REIT") agreed to lease deferrals totaling $649,629. Of this amount, $257,805 was paid in July, $257,805 is due in August, and $134,019 is due in October or upon the sale of certain assets. Further, an additional REIT agreed to apply security deposit funds (classified as Restricted Cash) in the amount of $63,639 as a partial offset of lease payments that were due in April and May. During May 2001, the Company and a REIT agreed to transfer $502,600 from Restricted Cash to a working capital escrow for the purpose of funding operating deficits from two leased communities. In addition, both the Company and the REIT agreed to fund into the escrow up to an additional $1 million, if necessary. The first $375,000 of the additional funding is to be derived from the cash flow generated from two other communities which are under the same lease arrangement. The next $375,000 is to be provided by the REIT in the form of a loan and the remaining $250,000 is to be derived from the communities cash flow. Further, the REIT agreed to temporarily waive a requirement for a security deposit to be provided in the form of a letter of credit. As of July 23, 2001, the working capital escrow totaled $696,878. As the Company proceeds with the implementation of the Plan, the Plan will be modified to address issues that arise. The Company anticipates that fully implementing the Plan will take at least six months. 2 Assisted Living --------------- The assisted living industry has evolved in response to pressure from the public to contain spiraling medical and other health care-related costs and because of the opportunity assisted living provides to allow senior citizens to "age in place" in a residential environment. Assisted living offers a combination of housing and personalized health and support services for senior citizens who cannot live completely independently but who do not require the 24-hour medical care provided by a skilled nursing facility. Skilled care typically also costs much more than that provided at an assisted living community. Generally, assisted living residents require higher levels of care than residents in congregate care but lower levels of care than patients in skilled nursing facilities. In addition to housing and meals (the services commonly provided in a congregate care facility), assisted living communities provide a range of personal care and support services designed to meet the individual needs of residents, including instrumental activities of daily living ("IADLs") such as laundry and transportation services. Additionally, assisted living residents often require assistance with activities of daily living ("ADLs") such as bathing, dressing, incontinence care and taking medications, but generally are not bedridden and can often provide various degrees of self-care. Assisted living seeks to encourage residents to live as independently as possible, emphasizing quality care while treating residents with dignity and respect. Business Strategy ----------------- The principal elements of the Company's business strategy are described below. Personalized Quality Care. The Company's primary focus is to provide high-quality personalized care for each resident. The Company seeks to provide a wide range of high-quality services and care tailored to the needs of its residents in an attractive, home-like environment. The Company has established quality assurance programs to ensure that high-quality services are being provided to every resident in its communities. These programs include periodic surveys of the residents, their families, and community staff and the formation at each community of a resident council, consisting of residents and their families, to assist in evaluating the services provided to residents. The Company provides a toll-free number that families of residents can use to make recommendations or register complaints and frequently includes comment cards with resident billings. The Company also attempts to achieve high-quality care through the establishment of operational standards and performance goals. These standards and goals apply to each of the Company's communities and relate to such matters as health services, food service, housekeeping, maintenance, and administration. Dementia-Specific Care. A significant component of the Company's business is providing services and activities required by residents afflicted with Alzheimer's disease and other age-related dementia. Each of the Company's internally developed assisted living communities is designed with a special "Kingswood" unit located in a separate wing or area of the community that has its own dining facilities, resident lounge areas and specially trained staff. The physical separation of the dementia-specific care unit from the rest of the community enables dementia residents to receive the unique care they require with a minimum of disruption to other residents. The Company has also developed and operates its "Regent Court" stand-alone Alzheimer's care communities that are specially designed to serve residents with dementia-care needs. 3 Multiple Levels of Care. By providing graduated levels of care to residents based on individual need, the Company permits its residents to "age in place" and retains residents who might otherwise move to other facilities, which assists the Company in maintaining its occupancy levels at its larger communities. The Company believes that this high level of personalized quality care also creates satisfied residents who, along with their families, are key sources of referrals for the Company. High Quality and Private Payor Focus. The Company seeks private pay residents to the greatest extent possible. Private pay residents occupied approximately 97 percent of the Company's units at the end of 2000. The Company believes that caring for private pay residents is more profitable because the Company is able to charge market rates for its extensive, high-quality services without regard to government-imposed cost containment pressures. In 2000 the Company generated $25,600 of revenue per occupied bed. The Company will continue to focus its development efforts in communities with median incomes sufficient to support the Company's full service approach to assisted living. Professional Management. The Company has developed and uses quality assurance programs and operating standards to maintain quality and control costs. This approach is coupled with a decentralized management structure under which local managers and care coordinators responsively address residents' individual needs. The relatively larger size of the Company's communities also permits the Company to recruit and retain more highly paid, experienced managers and professional staff. Education and Training. The Company believes that education, training, and development increase the effectiveness of its employees which in turn generates enhanced employee and resident satisfaction and decreases employee and resident turnover. Managers, on-site marketing directors, and other administrative personnel receive periodic training both at the community and at the Company's corporate office. The Company, through ongoing in-service training, maintains a highly trained staff that is responsive to the changing needs of the Company's residents. Marketing. The Company's marketing strategy focuses on enhancing the reputation of the Company's communities and creating awareness of the Company and its services among potential referral sources. The Company also markets its services through doctors and other professionals by direct mail and other methods. The Company's experience is that satisfied residents, resident families, and professional health care providers are the most important sources of referrals for the Company. In addition, the Company emphasizes community outreach through such programs as adult day care and respite care. These programs permit individuals to use the Company's services on a temporary basis, which provides the Company with an additional source of revenue and increases awareness of the Company's communities among potential full-time residents. Growth and Development. Historically, the Company has increased the number of communities it operates primarily through the internal development of new communities based upon the Company's three prototypes. See "Principal Product Lines." The Company has at least temporarily discontinued all such development activities for its own account, however, the Company continues to offer its development expertise and management services to third parties. The Company believes that there are many opportunities within its operating region for third party management. 4 The Company may pursue opportunistic acquisitions of assisted living or congregate care communities. The Company may also acquire or enter businesses ancillary to the operation of assisted living communities, such as a retail pharmacy or rehabilitation therapy business. Any such transactions would be subject to available financing. Principal Services ------------------ Services provided to residents of the Company's communities are designed to respond to their individual needs; promote independence, dignity and choice; and improve their quality of life. Services are available 24 hours a day to meet both anticipated and unanticipated needs. General services include the provision of three meals per day, laundry, housekeeping, transportation, activities and medication maintenance. Available support services include personal care and routine nursing care, social and recreational services, transportation and other special services needed by the resident. Personal care includes services such as bathing, dressing and grooming, as well as assistance with personal hygiene, ambulation and eating. Other services include assistance with banking, grocery shopping and pet care. Each of the Company's communities offers residents services on a packaged basis. These packages of services are based on three progressively more comprehensive levels of care and two additional levels of care for dementia-specific care residents. This approach permits the Company to charge residents for graduated levels of care. Each level of care is priced to reflect all services provided at that level. In addition, this approach simplifies the billing process, which permits residents to plan their personal budgets with confidence. As the required level of care increases, the Company's revenues per resident also increase. 5 The following table summarizes the services associated with each level of care provided by the Company: -------------------------------------------------------------------------------- Graduated Levels of Care Assisted Living Level One o Minimal assistance with ADLs and IADLs o Services include - Meals - Housekeeping and laundry - Personal care - Scheduled transportation Level Two o All Level One services plus moderate assistance with ADLs and IADLs - Direct hands-on assistance as needed for: - Medical treatments (e.g., injections) - Dressing - Other daily activities Level Three o All Level Two services plus routine hands-on assistance with ADLs and IADLs o Personal care services include - Incontinence care - Bathing and dressing - Mobility and/or ambulation assistance o Close supervision as required for residents with special behavioral conditions Dementia-Specific Care Level One o Requires assisted living services o Direct hands-on assistance, behavioral intervention and redirection as needed Level Two o All dementia-specific care Level One services, plus routine hands-on assistance with ADLs and personal care, including - Incontinence care - Bathing and dressing - Mobility and/or ambulation assistance o Increased frequency of certain services and increased supervision -------------------------------------------------------------------------------- The Company estimates that, of the current residents in its communities, 8.3 percent do not require assistance with activities of daily living, 38.8 percent require assisted living level one care, 20.6 percent require assisted living level two care, 10.8 percent require assisted living level three care, 10.7 percent require dementia-specific care level one care and 10.8 percent require dementia-specific care level two care. The Company charges a variety of rates depending upon the level of care required and whether the resident chooses to live alone or in a companion suite. 6 Geographic location, local wages and operating costs also affect the Company's rates. As of December 31, 2000, the Company charged the following range of effective monthly rates at its communities: Low High Assisted Living --- ---- --------------- Level One $1,595 $3,695 Level Two $1,895 $4,095 Level Three $2,195 $4,595 Dementia-Specific Care ---------------------- Level One $2,945 $5,495 Level Two $3,345 $5,895 Residents are also required to pay the Company a nonrefundable community fee prior to admission and, in some locations, also a refundable security deposit. Principal Product Lines ----------------------- The Company currently provides its services in assisted living communities including stand-alone Alzheimer's care communities. The existing communities offer numerous services and activities designed to meet the varying needs of the residents, including the unique services required by residents afflicted with Alzheimer's disease or other age-related dementia ("dementia-specific care"). This community concept is generally identified by the Company as a "Regent" community and is the genesis of the Company's prototypical community. The Company currently operates 17 Regent communities. The Company developed a "Regent House" model, a smaller community than the "Regent", in order to meet differing market demands. The Regent House maintains the operational efficiencies and resident and service focus of the Regent model. The Company also developed its "Regent Court" community at which it provides services solely to residents with dementia-specific care needs. The Company currently operates five Regent Courts. (i) Regent The "Regent" is the Company's primary stand-alone assisted living community model. This prototype design has been developed and refined through the Company's experience as an operator of its early assisted living communities, which also contain a significant portion of the important attributes of the Regent prototype. Use of this prototype will continue to allow the Company to control development costs and maintain efficiency in development and operations. The prototypical Regent community is a stand-alone assisted living community containing from 90 to 135 assisted living beds, with between 10 and 20 percent of the total generally comprising the Kingswood Alzheimer's unit. A "stand-alone" assisted living community is a community devoted entirely to assisted living, as distinct from other models that may offer assisted living units in a separate wing or floor as well as other forms of long-term care such as congregate care or skilled nursing care. 7 Regent communities generally range in size from 60,000 to 86,000 square feet and are generally built on parcels ranging in size from three to six acres. The buildings are two or three stories, depending upon site restrictions, and of wood frame, fire-rated construction. The exterior features are designed to be compatible with the predominant architectural designs of the area and with an emphasis on a residential versus institutional appearance. Individual units range in size from 320 square feet for a studio to 450 square feet for a one-bedroom apartment. Two-bedroom units are approximately 755 square feet in size. In some locations the Company has developed a small number of 900 square foot two-bedroom cottages next to the community for occupancy by a spouse of a community's resident or for those who do not require the more intensive services offered within the community. (ii) Regent House In addition to the larger Regent prototype, the Company has developed a smaller version for markets in which there currently is less demand for assisted living services. The smaller "Regent House" community will be approximately 40,000 to 55,000 square feet and be comprised of between 72 and 90 beds, generally with at least 22 beds comprising the Kingswood Alzheimer's unit. The community is designed with the same operational efficiencies and resident living and service considerations as the larger model, including similar sized living units, but with generally smaller lounge, dining, and recreation areas to reflect the lower resident population. The interior layout of each Regent House is designed to promote efficient delivery of services and resident independence. Circulation is organized around a core area on the ground level which contains the kitchen and common dining area, administrative offices, a commercial laundry, a private dining room, lounge, day room and public restrooms. Elevators are conveniently located for easy access to all common areas and resident units. Each Regent House community is expected to contain a Kingswood Alzheimer's unit which is designed to house and address the needs of residents afflicted with Alzheimer's disease and other age-related dementia. The dementia-specific care units are located in a separate wing or area of the community and have their own dining communities, resident lounge areas, and specially trained staff. The physical separation of the Kingswood unit from the rest of the community enables dementia-specific care residents to receive the unique care they require with a minimum of disruption to other residents. (iii) Regent Court The "Regent Court" is a specially designed community solely for residents afflicted with Alzheimer's disease or other age-related dementia. The typical Regent Court resident will have cognitive difficulties, impaired motor functions, may be wander prone, and may have incontinence. Accordingly, as with the Kingswood unit of the Regent community, these communities will be much smaller than the Regent or Regent House, typically 22,000 to 26,000 square feet in a one-story configuration, and typically will service up to 48 residents within its 24 units. 8 The Regent Court's 24 units are divided into four "neighborhoods" of equal size. Both the overall layout and that of each neighborhood are designed to provide an ideal therapeutic living environment and promote the efficient delivery of services. Generally, two neighborhoods are reserved for those residents with a high level of function and two for those with lower levels of function. The community is designed in this manner with the primary goal of providing high-quality care to the dementia-specific care needs of residents who require personalized care while providing for maximum efficiencies of operation. Because the residents generally are easily agitated and confused, organizing care within separate neighborhoods permits the Company to assign staff to a specific neighborhood in caregiver clusters. This permits the Company to minimize each resident's exposure to multiple persons and allows staff to more thoroughly learn about and provide for a resident's specific needs. Each neighborhood is connected to the others and to the main administrative area by a series of hallways, walkways, and a courtyard. Furthermore, due to the propensity of the Regent Court's residents to wander, exterior pathways are secured with fences to provide maximum independence to the residents while also insuring their safety. Some Regent Courts also feature covered walkways to permit residents opportunities for exercise on inclement days. Development Activities ---------------------- In order to conserve working capital and generate additional working capital, the Company has at least temporarily discontinued development activities for its own account and has listed for sale the parcels of real property previously held for development. During 2000, the Company sold one parcel of real property which generated $2.4 million in net proceeds available to fund its general operations and satisfy certain debt obligations. As of July 23, 2001, the Company has two communities under construction and a third community under development pursuant to a joint venture arrangement. In addition, the Company has entered into a management agreement for a community which is scheduled to open by the first quarter of 2002. The Company continues to pursue joint venture opportunities and third party management arrangements. The Company is targeting areas within the nine western states that it currently operates. Based upon the Company's experience, the expected development time for a prototype community ranges from approximately six months to one year, although it can take longer in some cases. The average construction time for Regent and Regent House communities should typically be between eleven and thirteen months and between eight and ten months for Regent Court communities. Historically, the Company has obtained pre-opening deposits for up to 25 percent of its units. The Company's experience has been that it takes, on average, approximately 18 months after a community moves-in its first resident for the community to achieve breakeven cash flow after satisfying its debt service or lease payment. However, due primarily to increased competition, the Company anticipates fewer pre-opening deposits and potentially a longer initial lease up period. The cost to construct prototypical communities varies from site to site. The Company's average cost per residential unit for Regent communities developed since 1997 is approximately $75,000 per residential unit. The Company expects this cost to increase to between $85,000 to $95,000 for future construction. During 2001, the Company's first Regent House community was 9 completed at a cost of approximately $84,000 per residential unit, however, the Regent House community currently under construction and future projects are expected to cost approximately $90,000 per residential unit. The Company's cost for its Regent Court communities has averaged approximately $85,000 per residential bed. The Company's ability to achieve its development plans will depend upon a variety of factors, many of which are beyond the Company's control. See "Forward Looking Statements." The Company's Markets. In evaluating a prospective development project, the Company will consider primarily the size of the population, income and age demographics, strength of the market demand, and the ability to maximize the efficiency of its management resources in a specific market or "cluster." The Company intends to locate its communities in metropolitan areas of 50,000 or more people with a high percentage of affluent elderly persons and to select sites so that it can strategically place multiple communities within a several hundred mile radius, creating a cluster of communities. With the development of the Regent House community, the Company can locate a larger number of communities within a region and thereby obtain greater operating efficiencies. Furthermore, due to the smaller size of the Company's Regent Court, it is capable of being developed in markets of different sizes depending upon the demand for Alzheimer's care. Other factors that will be considered in the site selection process include the level of competition, the local labor market, the state and local tax structure, and the state and local legislative and regulatory environment. Competition ----------- Providers of assisted living housing and services compete for residents primarily on the basis of quality of care, price, reputation, physical appearance of the communities, services offered, family and physician preferences and location. The Company's current and potential competitors include national, regional and local operators of assisted living communities as well as operators of long-term care residences, rehabilitation hospitals, extended care centers and skilled nursing facilities, retirement communities, independent living centers and home health agencies. Nevertheless, assisted living is a distinct and rapidly growing segment within the long-term care industry that is distinguishable from other long-term care alternatives. The Company believes that it competes favorably in all of the markets in which it operates in regards to the quality of its care and services, community designs and locations. However, many of the markets in which the Company operates have become overbuilt. There are few barriers to entry in the assisted living industry. The effects of such overbuilding include increased lease-up periods, downward pricing pressures and competition for employees. In addition, the competitive factors are having an impact on the Company's ability to maintain occupancy levels at certain locations. There can be no assurance that the Company will be able to compete effectively in those markets where overbuilding exists, or that future overbuilding in other markets in which the Company operates will not adversely affect the Company's operating results. Increased Operating Costs ------------------------- During the past year, the Company has experienced significant increases in labor costs, utility rates and professional liability insurance premiums. The Company faces substantial competition with respect to the hiring and retention of qualified personnel. The Company is dependent upon the existing available labor pool in each market in which it operates. There can be no assurance that labor costs will not continue to increase, or that the Company will be able to attract the necessary personnel at a reasonable cost. 10 The western United States is in the midst of an energy shortage. The Company has no control over its utility rates. There can be no assurance that utility costs will not continue to increase, or that the Company will be able to buy the power necessary to operate its communities. The Company's professional liability insurance premiums have escalated and the coverages have diminished. The Company maintains coverage limits of $1 million per incident, $3 million community aggregate, and $10 million policy aggregate, on a claims made basis with a $50,000 deductible per incident with a maximum annual deductible of $250,000, except with respect to its two Texas communities for which the Company has elected to be self-insured. Providing health care services involves an inherent risk of liability. Although the Company has not been subject to significant liability losses in the past, there can be no assurance that future claims in excess of insurance coverages will not have a material adverse effect upon the Company's financial position or operating results. There can be no assurance that the Company will be able to obtain liability insurance in the future, or that such coverage will be available at reasonably acceptable terms. Government Regulation --------------------- The Company's assisted living communities are subject to regulation and licensing by local and state health and social service agencies and other regulatory authorities. Although regulatory requirements differ from state to state, these requirements generally address, among other things: personnel education, training and records; staffing levels; community services, including administration and assistance with self-administration of medication; community design and specifications; resident characteristics; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities. In order to qualify as a state licensed facility eligible to receive Medicaid funding, the Company's communities must comply with additional regulations in these areas. The Company's communities are also subject to various zoning restrictions, local building codes and other ordinances, including fire safety codes. These requirements vary from state to state and are monitored in varying degrees by state agencies. The Company has obtained all required licenses. Assisted living communities are subject to less regulation than other licensed health care providers, but more regulation than congregate care or independent living retirement residences. However, the Company anticipates that states and the federal government will likely impose additional regulations and licensing requirements. Currently, certain states require licensees to provide the assisted living services offered by the Company. Certain states also require Certificates of Need for assisted living facilities, but this is not a requirement in states where the Company currently conducts business. There can be no assurance that administrative or judicial interpretation of existing laws or regulations or enactment of new laws or regulations will not have a material adverse effect on the Company's results of operations or financial condition. The Company believes that its current communities are in substantial compliance with all applicable regulatory requirements. Similar to other health care facilities, assisted living communities are subject to periodic survey or inspection by governmental authorities. From time to time, in the ordinary course of business, the Company receives deficiency reports which it reviews to take appropriate corrective action. Although most inspection deficiencies are resolved through a plan of correction, the reviewing agency typically is authorized to take action against a licensed community where deficiencies are noted in the inspection process. This action may include imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, or other 11 sanctions. If the Company fails to comply with applicable requirements, its business and revenues could be materially and adversely affected. Although only a small portion of the Company's revenues are derived from the Medicaid program, the Company is subject to Medicaid fraud and abuse laws which prohibit any bribe, kickback, rebate or remuneration of any kind in return for the referral of Medicaid patients, or to induce the purchasing, leasing, ordering, or arranging of any goods or services to be paid for by Medicaid. Violations of these laws may result in civil and criminal penalties and exclusions from participation in the Medicaid program. The Company believes it is in substantial compliance with all applicable Medicaid laws. Employees --------- As of December 31, 2000, the Company employed approximately 1,347 full time and 431 part-time employees and the corporate offices employed 51 individuals full time and 2 part-time. None of these employees is represented by any labor union. The Company manages one community at which the owner employs members of a labor union. Management believes that its employee relations are good. Trademarks ---------- The Company has federally registered its "Regent," "Regent Court," "Kingswood," and "Regent House" trade names in addition to the Company's logo. Risk Factors and Forward Looking Statements ------------------------------------------- The information set forth in this report regarding the Company's development, construction and opening of new assisted living communities, the operation and performance of the Company's new assisted living communities, the Company's plans to develop, construct and operate new communities, and the ability of the Company's newly developed communities to compete for residents constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and are subject to the safe harbor created by that section. From time to time, information provided by the Company, or statements made by the Company's management, may contain other forward-looking statements. The Company's ability to implement its Plan, as described in "Description of Business - Recent Developments", the factors discussed in "Development Activities", "Competition", "Increased Operating Costs" and "Government Regulation" and the following additional factors, among others, could cause the Company's actual results to differ materially from those expressed in the Company's forward-looking statements contained in this report and presented elsewhere by management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report. The Company has a substantial working capital deficit and anticipates that its cash requirements during 2001 will exceed the cash provided by operations. The Company will require a significant amount of capital to fund operating losses, debt and lease obligations and remaining construction costs. The combination of difficult financing and operating environments for the assisted living industry has limited the potential sources for capital. There can be no assurance that the Company will be successful in fully implementing the Plan. 12 The Company's operating strategy is subject to the risk that lease-up and occupancy rates at newly developed communities may not be achieved or sustained at expected levels. This could occur at a particular community for a number of reasons, including competition from other nearby providers of long-term senior care, the failure of management to assess accurately the demand for long-term care in a particular market, and the failure of the Company's prototypical communities to be accepted in a particular market. If expected occupancy levels are not achieved within the expected time-frame, the Company may not be able to repay or refinance a short-term construction loan obtained to construct the relevant community. If occupancy rates at newly-developed communities are not achieved and sustained at expected levels, the Company will experience greater than anticipated operating losses in connection with the opening of new communities and the Company's need for additional financing to meet its growth plans will increase. If the Company is unable to generate sufficient cash flow from operations to satisfy required debt and lease payments, the Company will be required to obtain additional financing to satisfy those obligations. The Company's development, construction and opening of new assisted living communities are subject to the risk that the Company will be unable to obtain, or will experience delays in obtaining, necessary building, occupancy and other required governmental permits and authorizations. The Company's opening of new assisted living communities on schedule is also subject to the risk that the Company or its contractor will experience delays in the construction. The Company's development strategy is also subject to the risk that development and construction costs for new communities may exceed original estimates. The Company's agreements with its contractors generally provide for the contractor to construct a community for a fixed price, although unanticipated development costs and approved construction change orders may increase the overall cost of any community. These additional costs are generally borne by the Company and would accordingly increase the Company's capital requirements and compel the Company to raise additional financing or equity capital. The Company's continuing lease-up efforts place increasing pressure on the Company's management controls and require the Company to locate, train, assimilate, and retain additional community managers and support staff. There is no assurance that the Company will be able to manage this growth successfully. The failure of the Company to manage the growth successfully could have a material adverse effect on the financial performance of the Company and increase the Company's need for additional financing or equity capital. Item 2. Description of Property Current Communities. The table below sets forth certain information regarding the Company's communities as of December 31, 2000: Regent Operations Community Location Commenced Units(1) Beds(2) Interest ---------------------- --------- ---------- -------- ------- -------- Oregon Park Place Portland 1986 112 112 Lease(3) Regency Park Portland 1987 122 136 Lease Regent Court Clackamas 1999 24 48 Lease Regent Court Corvallis 2000 24 48 Manage(4) Sheldon Park Eugene 1998 103 115 Own(11) 13 Regent Operations Community Location Commenced Units(1) Beds(2) Interest ---------------------- --------- ---------- -------- ------- -------- Washington Northshore House Kenmore 1998 85 92 Manage(5) Regent Court Kent 1999 24 48 Manage(6) Sterling Park Redmond 1990 154 175 Lease California Laurel Springs Bakersfield 1998 111 124 Own Orchard Park Clovis 1998 112 124 Own(11) Regent Court Modesto 1999 24 48 Own(7) Summerfield House Vacaville 1998 109 122 Own Sunnyside Court Fremont 1998 39 45 Lease Sunshine Villa Santa Cruz 1990 106 116 Own(11) The Altenheim Oakland 2000 136 140 Manage The Palms Roseville 1998 93 104 Lease Villa Serra Salinas 1998 150 150 Manage Willow Creek Folsom 1997 98 113 Lease Idaho West Wind Boise 1997 48 51 Own(8) Willow Park Boise 1997 106 120 Own(11) Nevada Mira Loma Henderson 1998 113 126 Lease New Mexico Sandia Springs Rio Rancho 1998 107 120 Lease Texas Hamilton House San Antonio 1997 111 123 Lease Parmer Woods Austin 1998 117 133 Lease(9) Arizona Canyon Crest Tucson 1998 115 131 Lease Desert Flower Scottsdale 1999 102 108 Manage(10) Regent Court Scottsdale 1998 24 44 Lease Wyoming Aspen Wind Cheyenne 1998 77 77 Lease(12) Meadow Wind Casper 1998 51 51 Lease(12) Spring Wind Laramie 1998 52 52 Lease(12) ------ ------ Totals: 2,649 2,996 ====== ====== Since December 31, 2000, the Company has opened four additional communities. As of July 23, 2001, two additional communities were under construction. Five of the six communities were internally developed; the West Covina community was developed by a third party. 14 The table below sets forth certain information regarding the Company's additional communities: Opening Community Location Date Units(1) Beds(2) Interest ------------------ -------------- ---------------- -------- ------- Arizona Citrus Park Mesa February 2001 111 127 Lease California Regent Senior West Covina February 2001 130 144 Lease(13) Regent House Merced July 2001 72 83 Own(13) Regent House Elk Grove 2nd quarter 2002 84 94 Own Utah Regent at Salt Lake City 3rd quarter 2001 107 116 Own(14) Regent at South Ogden January 2001 104 113 Own --- --- 608 677 === === (1) A "unit" is a single- or double-occupancy studio or one or two bedroom apartment. (2) "Beds" reflects the actual number of beds used by the Company for census purposes, which in no event is a number greater than the maximum number of licensed beds permitted under the community's license. (3) The Company completed a lease-acquisition of Park Place during the second quarter of 1998. The Company previously managed this community. (4) The Company owns a 40 percent interest in a joint venture which owns the Corvallis community. (5) The Company owns a 50 percent interest in a joint venture which owns the Kenmore community. (6) The Company owns a 10 percent interest in a joint venture which owns the Kent community. (7) The Company owns a 55 percent co-tenancy interest in the Modesto community. (8) The Company purchased West Wind in June 1999. Previously, this community was operated pursuant to a lease arrangement. (9) The Company completed a sale-leaseback transaction of its Austin community in February 1999. (10) This community was sold to the Company's Chairman and Chief Executive Officer in September 1999 pursuant to a sale-manageback transaction and is accounted for under the deposit method. 15 (11) The Company owns a 75 percent interest in a joint venture which purchased the Eugene, Clovis, Santa Cruz and Boise (Willow Park) communities in December 2000. Previously, these communities were operated pursuant to lease arrangements. The Company's Chairman owns the remaining 25 percent interest in these communities. (12) During February 2001, the Company assigned its leasehold interest in the three Wyoming communities to a third party. (13) The Company's West Covina and Merced communities are managed by a third party. The Company owns a 75 percent interest in a joint venture which owns the Merced community. (14) The Company owns a 50 percent interest in a joint venture which owns the Salt Lake City community. Each community for which the Company's interest is noted as "leased," except for Regency Park and Sterling Park, is leased from a third party pursuant to a long-term lease providing for an initial term of 10 to 15 years from the inception date. Each lease provides for extensions that may permit the lease to continue for a total period of between 25 and 35 years from the inception date. The Company leases Regency Park and Sterling Park from entities controlled by Mr. Bowen. Each lease expires in 2005, has annual base rent payments in addition to percentage rent payments equal to 10 percent of the Company's annual gross revenues from operations in excess of the gross revenues for each property in calendar year 1995, and contains three, ten-year renewal options and a right of first refusal if the lessor proposes to sell the property. Under the leases, the Company is responsible for, among other costs, maintenance, property taxes, capital expenditures and direct operating costs related to the communities. The base yearly lease payments are $1,271,000 and $1,486,250 for Regency Park and Sterling Park, respectively. The payment terms of the leases were based on the fair market values of the underlying properties, as determined by independent appraisals, upon the inception of the leases. The aggregate annual base rent payments under each lease, when expressed as a percentage of the appraised value of that property, reflects a lease rate of approximately 10.25 percent, which the Company believes was typical for leases in the health care industry upon the inception of each lease. In obtaining the consent of the Regency Park ownership entity's lender to the Company's lease on that community, the Company agreed that not less than 25 percent of its outstanding stock will be owned by Mr. Bowen and that Mr. Bowen will continue to control the management of the Company. Office Facilities. The Company currently leases approximately 13,300 square feet of office space in Portland, Oregon. Item 3. Legal Proceedings The California Department of Social Services (DSS) filed an accusation against the Company on December 15, 2000 seeking to revoke licenses for eight of the Company's assisted living communities in the state of California. The Company believes that the accusation was the result of a death at the Company's Sunnyside Court community in Fremont, California. On June 28, 2001, the parties reached a final settlement on the matter. As part of the settlement, the Company agreed to subject three communities to certain conditions of probation, including the 16 maintenance of high quality of care and training standards that exceed regulatory requirements. The Company voluntarily put into place many of these standards prior to the settlement. On March 2, 1999, the Company filed in the United States District Court for the District of Oregon, case no. USDC No. CV99-304 KI, an action entitled Regent Assisted Living, Inc. v. LRS Architects, et al. The Company alleged that the defendant architects negligently performed their services relating to numerous of the Company's internally developed communities. The defendant counterclaimed for approximately $900,000 in damages incurred as a result of the Company's alleged breach of the underlying contracts pursuant to which the architectural services were to be performed. During January 2001, the parties reached final settlement on the matter. The settlement did not have a material adverse effect on the Company's financial position or operating results. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 4(a). Executive Officers of the Registrant As of July 23, 2001, the executive officers of the Company were as set forth below. Name Age Position Walter C. Bowen 59 Chairman of the Board and Chief Executive Officer Louis Swart 62 President and Chief Operating Officer James W. Ekberg 49 Senior Vice President of Finance and Development Steven L. Gish 42 Chief Financial Officer, Treasurer, Secretary and Director Walter C. Bowen. Mr. Bowen is the founder of the Company and became the Chief Executive Officer and a Director of the Company upon its formation. Mr. Bowen also served as President of the Company from its formation through October 31, 1999. Mr. Bowen has been involved in the development, ownership and management of assisted living communities since 1986, and has devoted a majority of his time to the ownership and operation of those communities over the past five years. Mr. Bowen has also been the Chief Executive Officer of several related companies including Bowen Property Management Company, Bowen Financial Services Corp., a company formed to obtain financing for real estate development projects, and Bowen Development Company, a real estate construction company (collectively, the "Bowen Companies"), since their formation. Mr. Bowen attended the University of Oregon and is a graduate of Portland State University. Mr. Bowen serves on the Board of Directors of the Assisted Living Communities Association of America and on the advisory board for the National Investment Conference for the Senior Living and Long Term Care Industries. Louis Swart. Mr. Swart joined Regent in April 1999 as Chief Operating Officer and was promoted to President on November 1, 1999. Over the past 25 years, Mr. Swart has held the positions of Chief Operating Officer of the Hillsdale Group, President of Genesis ElderCare 17 Network Services, Chief Executive Officer of Retirement Corporation of America, and was co-founder and President of Wedgewood Retirement Inns. Mr. Swart has a Bachelor's degree in English from the University of South Africa and a Masters degree in Sociology and English Literature from Texas Christian University. James W. Ekberg. Mr. Ekberg joined Regent in 1995 and is the Senior Vice President for Finance and Development. Mr. Ekberg is responsible for the development and construction of new communities and for strategic acquisitions. Mr. Ekberg joined the Bowen Companies in 1985 as Controller and has served as an executive since 1991, in which capacity he was responsible for the development of numerous projects for the Bowen Real Estate Group and oversaw the operations of Bowen Development Company. Mr. Ekberg holds a Bachelor's degree in accounting from the Honors College of Michigan State University. Steven L. Gish. Mr. Gish became Chief Financial Officer, Treasurer and Secretary of the Company in August 1995. Mr. Gish joined the Bowen Companies in 1991 as Controller. Prior to that time, Mr. Gish served as Treasurer and Controller of McCormick and Baxter Creosoting Company, an industrial wood preservative company. Mr. Gish received a Bachelor of Science degree in accounting from the University of Oregon in 1980. 18 PART II Item 5. Market for Common Stock and Related Stockholder Matters On September 28, 1999, the Company's Common Stock was deleted from listing on the NASDAQ National Market System ("NASDAQ") for failure to maintain a minimum $4 million tangible net worth, one of the requirements for continued listing. Since that time, trading in the Company's Common Stock has been conducted in the over-the-counter market on an electronic bulletin board established for securities that do not meet the NASDAQ listing requirements, or in what are commonly referred to as the "pink sheets." As a result, an investor will likely find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's Common Stock than was the case when the Company's Common Stock was listed on NASDAQ. In addition, after September 28, 1999, the Company's Common Stock is subject to penny stock rules that impose additional sales practice requirements on broker-dealers who sell such securities. Consequently, the delisting of the Company's Common Stock from NASDAQ could adversely affect the ability or willingness of broker-dealers to sell the Company's Common Stock and the ability of purchasers of the Company's Common Stock to sell their securities in the secondary market. The following table sets forth the high and low closing sale prices as reported on NASDAQ and on the Over-the-Counter Bulletin Board ("OTC BB") for the periods indicated. Quarter Ended High Low ------------- ---- --- NASDAQ ------ December 31, 1998 6.50 3.75 March 31, 1999 5.50 2.625 June 30, 1999 4.625 3.00 September 30, 1999 3.9375 2.25 OTC BB ------ December 31, 1999 2.625 1.75 March 31, 2000 .875 .875 June 30, 2000 1.00 .875 September 30, 2000 1.6875 1.6275 December 31, 2000 1.00 .75 The Company has 58 holders of record as of April 6, 2001. Since its initial public offering in December 1995, the Company has not paid cash dividends on its Common Stock. As of December 31, 2000, the Company has an accumulated deficit of approximately $32.5 million, which restricts the Company's ability to pay dividends. The Company's ability to pay dividends may also be limited by the terms of future debt and equity financings and other arrangements. Furthermore, the Company's ability to declare and pay cash dividends on its Common Stock is restricted by the terms of its Preferred Stock. In 2000, the Company recorded $750,000 in preferred dividends. In March 2001, the Company's Board of Directors approved the conversion of the $750,000 of accrued dividends due to the preferred shareholder into 580,431 shares of common stock and the preferred shareholder 19 agreed to waive its dividend for a period of two years beginning January 1, 2001. In 1999, the Company recorded and paid $600,000 in preferred dividends. Item 6. Selected Consolidated Financial Data The following selected consolidated financial data have been derived from the Company's audited consolidated financial statements for the years ended 2000, 1999, 1998, 1997, 1996. The data set forth below should be read in conjunction with the Company's audited consolidated financial statements and related notes thereto included elsewhere in the Form 10-K and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL STATEMENT DATA (dollars in thousands except share and per share data) 2000 1999 1998 1997 1996 -------------- -------------- -------------- -------------- -------------- Consolidated Statement of Operations Data Total revenues $ 64,909 $ 54,089 $ 30,419 $ 13,958 $ 13,260 Total operating expenses 67,823 60,760 39,859 18,094 12,946 -------------- -------------- -------------- -------------- -------------- Operating income (loss) $ (2,914) $ (6,671) $ (9,440) $ (4,136) $ 314 Other income (expense), net (3,682) (2,141) (1,622) 271 (179) Minority interest 130 36 - - - Provision for income taxes - - - (13) (58) Extraordinary loss net of tax benefit - - - - (53) -------------- -------------- -------------- -------------- -------------- Net income (loss) (6,466) (8,776) (11,062) (3,878) 24 Preferred stock dividends (750) (600) (600) (600) (26) -------------- -------------- -------------- -------------- -------------- Net loss to common shareholders $ (7,216) $ (9,376) $ (11,662) $ (4,478) $ (2) ============== ============== ============== ============== ============== Earnings (loss) per common share before extraordinary loss, basic and diluted $ (1.60) $ (2.03) $ (2.52) $ (0.97) $ 0.01 Extraordinary loss per common share, basic and diluted - - - - (0.01) -------------- -------------- -------------- -------------- -------------- Net loss per common share, basic and diluted $ (1.60) $ (2.03) $ (2.52) $ (0.97) $ - ============== ============== ============== ============== ============== Weighted average number of common shares outstanding Basic 4,507,600 4,615,135 4,633,000 4,633,000 4,633,000 diluted 4,507,600 4,615,135 4,633,000 4,633,000 4,633,000 20 2000 1999 1998 1997 1996 -------------- -------------- -------------- -------------- -------------- Consolidated Balance Sheet Data: Cash and cash equivalents $ 2,580 $ 4,538 $ 4,483 $ 1,805 $ 8,597 Working capital (deficit) (3,943) 1,427 1,562 (4,303) 10,326 Total assets 93,058 62,686 66,274 75,704 33,178 Long-term debt, less current portion 65,062 32,275 40,705 51,451 9,981 Minority interests 1,422 352 - 250 - Shareholder's equity (deficit) $ (12,526) $ (5,311) $ 4,255 $ 15,917 $ 20,057
Supplementary Financial Information 2000 and 1999 by Quarter (dollars in thousands) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------- --------------- -------------- --------------- 2000 ---- Revenues $ 15,523 $ 15,939 $ 16,670 $ 16,777 Residence operating expenses 10,342 10,803 11,520 12,360 -------------- --------------- -------------- --------------- Gross profit $ 5,181 $ 5,136 $ 5,150 $ 4,417 ============== =============== ============== =============== Net loss $ (937) $ (1,369) $ (1,918) $ (2,242) ============== =============== ============== =============== Net loss per share $ (0.24) $ (0.34) $ (0.47) $ (0.55) ============== =============== ============== =============== 1999 ---- Revenues $ 11,926 $ 13,034 $ 14,209 $ 14,920 Residence operating expenses 8,586 9,466 10,249 10,304 -------------- --------------- -------------- --------------- Gross profit $ 3,340 $ 3,568 $ 3,960 $ 4,616 ============== =============== ============== =============== Net loss $ (2,001) $ (1,705) $ (1,984) $ (3,086) ============== =============== ============== =============== Net loss per share $ (0.46) $ (0.40) $ (0.46) $ (0.71) ============== =============== ============== ===============
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview -------- The Company is an owner, operator, and developer of private-pay assisted living communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services, and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. The Company's revenues are derived primarily from resident fees for basic housing, personalized health care services, and other support services. 21 In 1996, the Company began an aggressive expansion program of development and construction of new communities. This program resulted in a dramatic increase in the number of communities and beds under operation in both 1997 and 1998. At the time of the Company's initial public offering in 1995, the Company operated four communities with a resident capacity of 565 beds. As of December 31, 2000, the Company operated 30 communities with a resident capacity of 2,996 beds. To date, the Company's growth has been funded by $12.2 million raised from the initial public offering on December 26, 1995, $10 million in 1996 through the issuance of preferred stock, and $9 million in 1998 through a private placement of convertible subordinated notes. The Company has a substantial working capital deficit and anticipates that its cash requirements during 2001 will exceed the cash provided by operations. The Company will require a significant amount of capital to fund operating losses, debt and lease obligations and remaining construction costs. The combination of a difficult financing and operating environment for the assisted living industry has limited the potential sources for capital. There can be no assurance that the Company will be successful in fully implementing the Plan. Given Regent's current liquidity situation, the Company is preparing and implementing a Plan which includes the conversion of certain debts to equity, a bridge loan and a line of credit provided by the Company's majority shareholder, the planned disposition of selected assets, and the renegotiation of debt and lease obligations. The pending Plan, and recent developments impacting the Company's liquidity and operating results, are summarized under the caption "Description of Business - Recent Developments", which is incorporated in this Item 7 by this reference. Results of Operations --------------------- The following discussion and analysis should be read in conjunction with the Financial Statements under Item 8. The Company's revenues are derived primarily from resident fees for basic housing, personalized health care services, and other support services. Operating expenses are comprised generally of resident operating expenses, which include community payroll expenses, food, property taxes, utilities, insurance and other direct residence operating expenses; general and administrative expenses, which consist of payroll expenses and overhead for executive, development, operations, and accounting personnel at the Company's main office in addition to support functions such as legal and other administrative expenses; lease expense; and depreciation and amortization expense. 22 The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items included in the Company's consolidated financial statements.
2000 1999 1998 ------------ ------------ ------------ Revenues: Rental and service 98.9 % 99.2 % 99.3 % Management fees 1.1 0.8 0.7 ------------ ------------ ------------ Total revenues 100.0 100.0 100.0 Operating expenses: Residence operating expenses 69.4 71.3 84.2 General and administrative expenses 10.9 13.4 13.7 Lease expense 21.5 24.8 29.6 Depreciation and amortization 2.7 2.8 3.5 ------------ ------------ ------------ Total operating expenses 104.5 112.3 131.0 Operating loss (4.5) (12.3) (31.0) Interest income 0.8 0.6 1.1 Interest expense (6.0) (4.9) (5.3) Equity in losses of joint ventures (0.5) (0.5) (1.2) Other income, net 0.0 0.8 0.0 ------------ ------------ ------------ Loss before minority interests (10.2) (16.3) (36.4) Minority interests 0.2 0.1 0.0 ------------ ------------ ------------ Loss before income taxes (10.0) (16.2) (36.4) Provision for income taxes 0.0 0.0 0.0 ------------ ------------ ------------ Net loss (10.0) (16.2) (36.4) Preferred stock dividends (1.1) (1.1) (2.0) ------------ ------------ ------------ Net loss available to common shareholders (11.1)% (17.3)% (38.4)% ============ ============ ============
Comparison of Years Ended December 31, 2000 and 1999 ---------------------------------------------------- Revenues. Revenues for 2000 totaled $64.9 million compared to $54.1 million in 1999, an increase of $10.8 million or 20.0 percent. During 2000, the Company operated 31 communities comprised of seven stabilized communities, 17 newly developed or acquired 23 communities, and seven communities operated pursuant to management contracts, of which three are owned in joint ventures and accounted for under the equity method. The Company operated 29 communities during 1999 comprised of five stabilized communities, 20 newly developed or acquired communities, including one sold during the year pursuant to a sale-manageback arrangement, and four operated pursuant to management contracts, of which two are owned in joint ventures and accounted for under the equity method. A community is considered "stabilized" for reporting purposes after it first attains occupancy of 95.0 percent and prior to that time is considered "newly developed." During 2000, rental and service revenues from Same Residences, the 22 communities the Company operated at the beginning of both 2000 and 1999, comprised of seven stabilized and 15 newly developed communities, increased by $9.3 million. Of this increase, $1.3 million was from the seven stabilized communities and $8.0 million was from the 15 newly developed communities. Revenues from two additional newly developed communities, one which opened in February 1999 and the other in April 1999, increased $1.2 million. Average occupancy at the 22 same residences was 83.9 percent for 2000 compared to 76.4 percent in 1999. Overall average occupancy at the Company's seven stabilized communities was 94.3 percent for 2000. Residence Operating Expenses. Residence operating expenses were $45.0 million for 2000 and $38.6 million for 1999, an increase of $6.4 million or 16.6 percent. Residence operating expenses from the 22 Same Residences increased by $5.7 million from 1999 to 2000. Of this increase, $0.9 million was from the seven stabilized communities and $4.8 million was from the 15 newly developed communities. Residence operating expenses for all other newly developed communities for 2000 include $2.4 million of start-up operating expenses and pre-opening costs, whereas such expenses totaled $1.7 million in 1999. Residence operating expenses from Same Residences totaled 68.8 percent and 70.2 percent of rental and service revenue for 2000 and 1999, respectively. General and Administrative Expenses. General and administrative expenses were $7.1 million for 2000 compared to $7.3 million for 1999, a decrease of $0.2 million. Payroll and related expenses increased by $0.6 million from 1999 to 2000. Development related costs incurred in connection with asset write-downs (land held for sale) and abandoned projects totaled $1.0 million in 2000 compared to $1.9 million in 1999. Other general and administrative expenses increased by $0.1 million from 1999 to 2000 primarily due to the implementation of the Company's plan for growth. Lease Expense. Lease expense for the Company's leased communities totaled $13.9 million for 2000 compared to $13.4 million for 1999. The increase of $0.5 million relates to annual lease escalation clauses, three newly developed leased communities two of which opened in 1999 and the sale-leaseback of one newly developed community offset by the acquisition of a previously leased community. Depreciation and Amortization. Depreciation and amortization expense was $1.8 million for 2000, compared to $1.5 million for 1999. The increase of $0.3 million relates primarily to purchases of property and equipment to support existing operations. Interest Income. Interest income is earned from the Company's investment of cash and cash equivalents in high-quality, short-term securities placed with institutions with high credit ratings. 24 Interest Expense. Interest expense increased in 2000, to $3.9 million from $2.6 million for 1999. Interest expense related to the operation of communities increased to $0.4 million and interest expense related to land held for sale increased by $0.3 million in 2000 as compared to 1999. The Company capitalized $0.1 million of interest charges in 2000, whereas the Company capitalized $2.0 million of interest charges in 1999. Equity in Losses of Joint Ventures. Equity in losses of joint ventures resulted from the operations of the Company's 50 percent owned Kenmore, Washington community, the Company's 10 percent owned Kent, Washington community, the 40 percent owned Corvallis, Oregon community and pre-opening costs of the 50 percent owned Salt Lake City, Utah community. Other Income (Loss), Net. In 1999, the Company sold a 45 percent co-tenancy interest in its Modesto, California community. The Company recognized a $0.5 million gain as a result of the sale. Net Loss. Net operating results increased by $2.3 million for 2000, compared to the same period in 1999. The Company reported a loss of $6.5 million for 2000, whereas the Company reported a loss of $8.8 million for 1999. The increase in net results is primarily due to an increase in residence operating profits (rental and service revenue less residence operating expenses) of $4.1 million and a decrease of $0.2 million in general and administrative expenses, offset by increases in lease expense, depreciation expense, interest expense and equity in losses of joint ventures and other income (loss), all as discussed above. Comparison of Years Ended December 31, 1999 and 1998 ---------------------------------------------------- Revenues. Revenues for 1999 totaled $54.1 million compared to $30.4 million in 1998, an increase of $23.7 million or 77.8 percent. During 1999, the Company operated 29 communities comprised of five stabilized communities, 20 newly developed or acquired communities including one sold during the year pursuant to a sale-manageback arrangement, and four communities operated pursuant to management contracts, of which two are owned in joint ventures and accounted for under the equity method. The Company operated 25 communities during 1998 comprised of five stabilized communities, including one acquired in May 1998 which was managed prior to conversion to a lease; 17 newly developed or acquired communities, and three operated pursuant to management contracts. During 1999, rental and service revenues from Same Residences, the six communities the Company operated at the beginning of both 1999 and 1998, comprised of four stabilized and two newly developed communities, increased by $2.7 million. Of this increase, $2.5 million was from the two newly developed communities. Revenues from 18 newly developed or acquired communities in operation during 1999 increased $19.6 million compared to revenue from 15 newly developed or acquired communities in operation during 1998. In addition, revenues for the comparable years increased $1.1 million from the one stabilized community the Company acquired in May 1998, and $0.3 million from communities operating under management agreements. Occupancy at the six Same Residences was 89.0 percent for 1999 compared to 78.4 percent in 1998. Occupancy at the Company's five stabilized communities was 95.0 percent for 1999. Residence Operating Expenses. Residence operating expenses were $38.6 million for 1999 and $25.6 million for 1998, an increase of $13.0 million or 50.8 percent. Residence operating expenses from the six Same Residences increased by $1.3 million from 1998 to 1999. 25 This increase was primarily attributable to the increased level of operations at the two newly developed communities. Residence operating expenses for all other newly developed or acquired communities for 1999 include $23.5 million of start-up operating expenses and pre-opening costs, whereas such expenses totaled $12.5 million in 1998. In addition, operating expenses increased $0.7 million from the stabilized community acquired in May 1998. Residence operating expenses from Same Residences totaled 65.4 percent and 68.0 percent of rental and service revenue for 1999 and 1998, respectively. Residence operating expenses for all stabilized communities totaled 64.8 percent and 63.6 percent of rental and service revenues for 1999 and 1998, respectively. General and Administrative Expenses. General and administrative expenses were $7.3 million for 1999 compared to $4.2 million for 1998, an increase of $3.1 million. Payroll and related expenses increased by $1.1 million from 1998 to 1999. Development related costs incurred in connection with asset write-downs (land held for sale) and abandoned projects totaled $1.9 million in 1999 compared to $0.2 million in 1998. Other general and administrative expenses increased by $0.3 million from 1998 to 1999 primarily due to the implementation of the Company's plan for growth. Lease Expense. Lease expense for the Company's leased communities totaled $13.4 million for 1999 compared to $9.0 million for 1998. The increase of $4.4 million related primarily to the opening and sale-leaseback of newly developed communities and the lease-acquisition of several additional communities. Depreciation and Amortization. Depreciation and amortization expense was $1.5 million for 1999 compared to $1.1 million for 1998. The increase of $0.4 million relates primarily to the Company's newly developed communities. Interest Income. Interest income is earned from the Company's investment of cash and cash equivalents in high-quality, short-term securities placed with institutions with high credit ratings. Interest Expense. Interest expense increased in 1999, to $2.6 million from $1.6 million for 1998. The Company incurred an additional $0.2 million of interest in 1999, as compared to 1998, related to convertible subordinated notes that were issued after the first quarter of 1998. The Company incurred an additional $0.2 million of interest related primarily to the opening of newly developed communities and the acquisition of a previously leased community. The Company capitalized $2.3 million and $2.7 million of interest charges incurred during 1999 and 1998, respectively. Capitalized interest decreased due to a reduction in development and construction activity during 1999 compared to 1998. Equity in Losses of Joint Ventures. Equity in losses of joint ventures decreased in 1999, as a result of improved operating results related to increased occupancy at the Company's 50 percent owned Kenmore, Washington community and the Company's 10 percent owned Kent, Washington community, offset by the pre-opening costs of the 40 percent owned Corvallis, Oregon community. Other Income (Loss), Net. In 1999, the Company sold a 45 percent co-tenancy interest in its Modesto, California community. The Company recognized a $0.5 million gain as a result of the sale. Net Loss. Net operating results increased by $2.3 million for 1999, compared to the same period in 1998. The Company reported a loss of $8.8 million for 1999, whereas the Company 26 reported a loss of $11.1 million for 1998. The increase in net results is primarily due to an increase in residence operating profits (rental and service revenue less residence operating expenses) of $10.4 million offset by increases in general and administrative expenses, lease expense, depreciation expense, other income and interest expense as discussed above. Liquidity and Capital Resources ------------------------------- At December 31, 2000, the Company had a $3.9 million working capital deficit, compared to working capital of $1.4 million at December 31, 1999. The decrease relates primarily to a decrease in cash and cash equivalents of $2.0 million (as described below) and an increase in net current liabilities of $3.7 million including classification of $2.4 million of debt obligations as current due to violations of certain debt covenants that are otherwise not currently due. The Company anticipates that its cash requirements during 2001 will exceed the cash provided by operations. Net cash used in operating activities totaled $3.0 million for 2000, resulting primarily from a net loss of $6.5 million, adjusted $2.2 million for non-cash items (depreciation, amortization, adjustment of land held for sale to fair value, equity interest in joint ventures and minority interests), and an increase in net current liabilities of $1.3 million offset by an increase in dividends payable of $0.8 million, short-term borrowings of $.2 million, an increase in current portion of long-term debt of $1.0 million and the release of cash in working capital escrow of $0.4 million. Net cash used in investing activities totaled $43.6 million consisting primarily of costs to repurchase four of the Company's communities which were previously leased, along with other development and construction costs. Net cash provided by financing activities totaled $44.7 million, primarily consisting of property and equipment financing proceeds totaling $53.3 million, contributions by minority interests of $1.2 million, a decrease in restricted cash for financing arrangements of $0.7 million, and proceeds of $0.2 million from a sale-manageback arrangement with the Company's Chairman and Chief Executive Officer, offset by repayment of long-term debt of $9.3 million, establishment of a new escrow for permanent lease at the Company's Mesa, Arizona location of $1.4 million, and a net increase in payments and deposits for financing arrangements of $0.8 million. During January 2000, the Company obtained an $8.8 million loan, the proceeds of which will be used to construct and fund initial operations at the Company's 113-bed South Ogden, Utah community. As of December 31, 2000, the Company has drawn down approximately $5.8 million on this loan. Also during January 2000, the Company entered into a joint venture arrangement with an independent third party for the purpose of developing a 116-bed assisted living community in Salt Lake City, Utah. The Company's initial capital contribution for its 50 percent joint venture interest totaled $1.1 million, comprised of $0.6 million of incurred development costs and a $0.5 million development fee. The joint venture partner contributed $1.1 million in cash, which was utilized to acquire the land for the project. During July 2000, the Company obtained an $8.0 million loan, the proceeds of which will be used to construct and fund initial operations at this community. As of December 31, 2000, the Company has drawn down approximately $1.5 million on this loan. 27 On August 1, 2000, the Company completed an $8.8 million permanent financing transaction for its Vacaville, California community. As a result of the transaction, the Company repaid construction debt in the amount of $7.5 million and generated approximately $1.1 million of cash available for general working capital requirements. During December 2000, the Company formed a joint venture with Mr. Bowen for the purpose of acquiring four communities for $33.9 million. The four communities, including one formerly accounted for as a capitalized lease, were previously leased from two separate real estate investment trusts. The Company contributed $0.6 million along with its rights to purchase the four communities for a 75% interest in the joint venture. Mr. Bowen contributed $1.2 million for a 25% interest. In addition, the venture obtained $32.2 million in bank financing and $0.5 million of seller provided financing in order to complete the four acquisitions. Also during December 2000, the Company obtained an $6.9 million loan, the proceeds of which will be used to construct and fund initial operations at the Company's 94-bed Elk Grove, California community. As of December 31, 2000, the Company has drawn down approximately $0.8 million on this loan. During 2000, the Company did not pay the quarterly dividends which accrued with respect to its preferred stock. The first quarter dividend rate was 6 percent. For each subsequent quarter in which the dividend was not paid, the dividend rate increased by one percent. The maximum rate that could apply to the dividend is 12 percent or prime plus 300 basis points. As of December 31, 2000, a total of $750,000 was in arrears. In March 2001, the Company's Board of Directors approved the conversion of the $750,000 of accrued dividends into 857,143 shares of common stock. In addition, the preferred shareholder agreed to waive its dividend for a period of two years. At December 31, 2000, the Company has capitalized costs totaling approximately $14.0 million related to communities under construction or development, encumbered by $11.4 million in outstanding debt. Since January 1, 2001, the Company has opened four newly developed communities. The initial operating deficits of these communities is being funded from a combination of construction loan reserves for two of the communities, a working capital escrow financed through a lease arrangement with a REIT for a third community, and thereafter from general working capital. As of July 23, 2001, the Company has two additional communities under construction. The first is scheduled to commence operations in the third quarter of 2001. The second is scheduled to open in the second quarter of 2002. The Company estimates that the construction financing for these communities is sufficient to complete the projects and fund the estimated initial operating deficit for approximately the first year of operations. In order to conserve working capital and generate additional working capital, the Company has at least temporarily discontinued development activities for its own account and has listed for sale three other parcels of real property previously held for development. Certain operating lease agreements and loans contain restrictive covenants. The Company is in violation of certain restrictive covenants pertaining to twelve operating lease agreements and a debt obligation, and the Company is currently attempting to resolve a notice of default. There can be no assurance regarding whether or not any of the Company's lessors or 28 lenders will take aggressive action as a result of the covenant violations; however, should any of the Company's financial partners pursue an action which could jeopardize the Company's assets, liquidity or ongoing operations, the Company may be forced to pursue a court supervised reorganization. Impact of Inflation ------------------- To date, inflation has not had a significant impact on the Company. Inflation could, however, affect the Company's future revenues and operating income due to the Company's dependence on its senior resident population, most of whom rely on relatively fixed incomes to pay for the Company's services. As a result, the Company's ability to increase revenues in proportion to increased operating expenses may be limited. The Company typically does not rely to a significant extent on governmental reimbursement programs. In pricing its services, the Company attempts to anticipate inflation levels, but there can be no assurance that the Company will be able to respond to inflationary pressures in the future. Subsequent Events ----------------- During February 2001, the Company assigned its leasehold interest in the three Wyoming communities to a third party for $325,000. The Company has recently completed several transactions which are summarized under the caption "Description of Business - Recent Developments". Recent Accounting Pronouncements -------------------------------- New accounting pronouncements are discussed in Note 1 of the Notes to Consolidated Financial Statements. Item 7A. Quantitative and Qualitative Disclosure About Market Risk The Company's earnings are affected by changes in interest rates as a result of its variable rate indebtedness. The Company manages this risk by obtaining fixed rate borrowings when possible. At December 31, 2000, the Company's variable rate borrowings totaled $38.2 million. If market interest rates average one percent more in 2001 than in 2000, the Company's interest expense would increase and income before taxes would decrease by $382,000. These amounts are determined by considering the impact of hypothetical interest rates on the Company's outstanding variable rate borrowings as of December 31, 2000, and does not consider changes in the actual level of borrowings which may occur subsequent to December 31, 2000. This analysis also does not consider the effects of the reduced level of overall economic activity that could exist in such an environment nor does it consider likely actions that management could take with respect to the Company's financial structure to mitigate the exposure to such a change. Item 8. Financial Statements The financial statements required by this item are included on pages F-1 to F-25 of this Report. 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 30 PART III Item 10. Directors, Executive Officers, and Control Persons; Compliance with Section 16(a) of the Exchange Act Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this report. The following table sets forth certain information about each of the Company's Directors. Name Age Director Since ---------------------------- ---- -------------- Walter C. Bowen(1)(2) 59 March 1995 Dana J. O'Brien (1)(2)(3)(4) 45 December 1996 Robert G. Peirce (3) 50 March 2001 Steven L. Gish 42 August 1995 (1) Member of Executive Committee (2) Member of Compensation Committee (3) Member of Audit Committee (4) Member of Conflicts Committee Walter C. Bowen has served as Chairman of the Board and Chief Executive Officer and a director of the Company since its formation in March 1995. Mr. Bowen also served as President of the Company until October 31, 1999. Mr. Bowen has been involved in the development, ownership, and management of assisted living facilities since 1986, and has devoted a majority of his time to the ownership and operation of those facilities over the past five years. Mr. Bowen continues to serve as the Chief Executive Officer of the Bowen Companies. Dana J. O'Brien is a Senior Managing Director of Cornerstone Equity Investors, L.L.C., a New York-based investment firm formed in December 1996 to provide investment management services to several investment funds. Cornerstone is the investment advisor to Prudential Private Equity Investors III, L.P., the holder of all of the Company's issued and outstanding Series A and Series B Preferred Stock. During the five year period preceding December 1996, Mr. O'Brien served as Executive Vice President of Prudential Equity Investors, Inc., an investment management firm. Mr. O'Brien currently serves on the Board of Directors of several private companies, including Specialty Hospitals of America, Inc. and Ocadian, Inc. (formerly Guardian Care, Inc.). Mr. O'Brien became a director of the Company in December 1996. Robert G. Peirce was elected to the board on March 13, 2001. Since 1994, he has been the Chairman, President and Chief Executive Officer of Ocadian, Inc. (dba Ocadian Hospitals and Care Centers ). With 24 years of industry experience, he was Vice President of Operations for the Far West Region of Hillhaven Corporation for 18 years prior to joining Ocadian. Mr. Peirce is a member of the American College of Healthcare Administrators. He presently serves on the Regional Multifacility Committee for both the American Healthcare Association and the California Association of Health Facilities. Steven L. Gish has served as Chief Financial Officer, Treasurer, Secretary, and Assistant Secretary in addition to serving as a Director of the Company, since August 1995. In 1991 Mr. Gish became the Controller of the "Bowen Companies," a group of companies and 31 businesses owned or controlled by Mr. Bowen, including the predecessor of the Company. Prior to that time, Mr. Gish served as Treasurer and Controller of McCormick and Baxter Creosoting Company, an industrial wood preserving company. Gary R. Maffei who served as a director of the Company since December 1995, resigned from the board on in April 2000. On March 13, 2001, Robert G. Peirce was elected by the board to serve the balance of Mr. Maffei's term which will expire at the 2001 annual meeting of the shareholders. Stephen A. Gregg who served as a director of the Company since December 1995, resigned from the board in January 2001. Wayne C. Rembold who served as a director of the Company since March 1999, resigned from the board in January 2001. Marvin S. Hausman, M.D. who served as a director of the Company since March 1996, resigned from the board in April 2001. Compensation of Directors The Company pays each non-employee director $500 for attendance in person at each regular meeting of the Board of Directors. In addition, the Company will reimburse the directors for travel expenses incurred in connection with their activities on behalf of the Company. Each non-employee member of the Board of Directors of the Company is automatically granted an option to purchase 2,000 shares of Common Stock when that person becomes a director. Each non-employee director is also automatically granted an option to purchase 2,000 additional shares of Common Stock in each subsequent calendar year that the director continues to serve in that capacity. The exercise price for all automatic grants to non-employee directors will be the closing sales price of the Common Stock on the business day immediately preceding the date of grant. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors, and persons who own more than ten percent of the outstanding Common Stock of the Company to file reports of ownership and changes in ownership of the Common Stock with the Commission. Executive officers, directors and greater than ten percent shareholders are also required by Commission regulations to furnish the Company with copies of all forms they file pursuant to Section 16(a). Based solely on review of the copies of such reports furnished to the Company and written representations from reporting persons, to the Company's knowledge all of the Section 16(a) filing requirements applicable to such persons during fiscal year 2000 were complied with on a timely basis. Information with respect to certain relationships and related transactions are included under Item 13 of Part III of this report. 32 Item 11. Executive Compensation Summary Compensation Table. The following table sets forth, for the fiscal years ended December 31, 2000, 1999, and 1998 compensation information with respect to the Company's chief executive officer and each of its executive officers whose compensation from the Company exceeded $100,000 during the relevant fiscal year. Summary Compensation Table Annual Compensation Other Annual Name and Principal Position Year Salary Bonus Compensation(1) --------------------------- ---- ---------- ------ --------------- Walter C. Bowen 2000 $ 24,000 $ -0- $120,600(10) Chairman of the Board 1999 $250,000 $ -0- $ 66,750(10) Chief Executive Officer 1998(2) $250,000 $ -0- $ 77,384(10) Louis Swart 2000 $225,000 $ -0- $1,500 President 1999(4) $132,901 $ -0- $8,830(5) James W. Ekberg 2000 $150,000 $ -0- $4,500 Senior Vice President 1999 $150,000 $ -0- $1,750 of Finance and 1998 $150,000 $ -0- $2,384 Development(6) Eric W. Jacobsen(7) 2000 $ -0- $ -0- $ -0- Chief Operating Officer 1999 $101,250 $ -0- $1,750 1998 $135,000 $ -0- $2,384 Dale J. Zulauf(8) 2000 $246,963 $ -0- $ -0- Chief Operating Officer 1999 $ 33,333 $ -0- $ -0- 1998 $ -0- $ -0- $ -0- Steven L. Gish 2000 $133,750 $ -0- $4,013 Chief Financial Officer 1999 $120,000 $ -0- $1,750 1998(3) $ 95,000 $ -0- $2,384 David R. Gibson(9) 2000 $113,750 $ -0- $3,413 Vice President for Corporate 1999 $100,000 $ -0- $3,000 Affairs, General Counsel and 1998(3) $ 90,000 $ -0- $3,000 Corporate Secretary (1) Represents the amount of a contribution by the Company to the officer's 401(k) plan account unless otherwise indicated. (2) Mr. Bowen also served as President of the Company from its inception through October 31, 1999. 33 (3) Certain executive officers of the Company fulfill similar executive functions for certain of the Bowen Companies. A portion of the salary expense for these officers is reimbursed to the Company through a general allocation made pursuant to the Administrative Services Agreement. The disclosed salary amount represents the net compensation paid by the Company to the officer for the indicated period after reimbursement by the Bowen Companies for time spent by the officer on Bowen Companies business. (4) Mr. Swart served as Chief Operating Officer of the Company from April 12, 1999, through October 31, 1999, at an annual salary of $175,000 and became President November 1, 1999, at an annual salary of $225,000. Mr. Swart's compensation includes $8,000 paid in connection with his relocation to Portland, Oregon. (5) Mr. Swart received a total of $16,830 in reimbursement of relocation expenses during 1999, a portion of which was treated as compensation. (6) In 1998 Mr. Ekberg served as Executive Vice President of the Company. (7) Mr. Jacobsen resigned as an officer of the Company effective April 12, 1999, but remained an employee through June 30, 1999, and served as an independent contractor to the Company through September 30, 1999. The salary disclosed includes $67,500 paid to Mr. Jacobsen as an employee and $33,750 paid to him as an independent contractor. (8) Mr. Zulauf served as Chief Operating Officer of the Company from November 1, 1999 through June 7, 2000, at an annual salary of $200,000. He resigned as an officer of the Company effective June 7, 2000. Under terms of a severance agreement Mr. Zulauf continued to be paid through June 7, 2001. The salary disclosed includes $72,692 paid to Mr. Zulauf as an employee and $121,154 paid under a severance agreement. Mr. Zulauf also received a total of $13,796 in reimbursement of temporary living and other expenses during 2000, which were treated as compensation. After his resignation from the Company, Mr. Zulauf provided executive search services for the Company and was paid $33,840 for those services in 2000 which is included in the salary disclosed. (9) Mr. Gibson resigned as an officer of the Company effective April 25, 2001. (10) Mr. Bowen was paid guaranty fees totaling $120,000, $65,000 and $75,000 in 2000, 1999 and 1998, respectively. See item 13. Employment Agreements. Each officer of the Company has entered into an employment agreement with the Company. The employment agreements for Messrs. Bowen, Ekberg and Gish expired in December 2000. Mr. Swart's employment agreement expires in March 2004. The agreements generally entitle the officer to benefits customarily provided by the Company and provide for a base salary and eligibility for a bonus. The Company may terminate any officer without cause by making to such officer a cash payment equal to one year's base salary at the rate in effect at the time of termination. Any officer may terminate his employment upon 60 days' prior written notice. In addition, each officer has entered into a restrictive covenant agreement containing noncompetition and nondisclosure provisions. Stock Option Grants in Fiscal 2000. There were four grants of stock options made by the Company during fiscal 2000 to the officers of the Company named in the Summary Compensation Table. 34
Option Grants in Last Fiscal Year ------------------------------------------------------------------------------------------------------- Potential realizable value at Individual Grants assumed annual rates of stock price appreciation for option term(2) ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- ------- Name Number of Percent of Exercise Market Expir- 0% 5% 10% securities Total Price price on ation ($) ($) ($) underlying Options $/share date of date options granted to grant granted employees in fiscal year(1) ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- ------- Louis Swart 75,000(3) 21.3% $0.75 $0.75 06/28/10 -0- 35,375 89,648 ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- ------- James W. Ekberg 75,000(4) 21.3% $0.75 $0.75 06/28/09 -0- 35,375 89,648 ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- ------- Steven L. Gish 50,000(5) 14.2% $0.75 $0.75 06/28/09 -0- 23,584 59,765 ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- ------- David R. Gibson 50,000(6) 14.2% $0.75 $0.75 06/28/09 -0- 23,584 59,765 ---------------- ---------- ---------- ----------- ----------- -------- ----------- ----------- -------
(1) The Company granted a total of 352,000 options to employees in 2000. (2) Future value of current year grants assuming appreciation of 0 percent, 5 percent and 10 percent per year over the life of the option. The actual value realized may be greater or less than the potential realizable values set forth in the table. The assumed rates of growth are prescribed by the Securities and Exchange Commission (the "Commission") for illustrative purposes only and are not intended to predict or forecast future stock prices. (3) The options have a term of ten years and vest 16.67 percent every six months beginning on June 1, 2001. Upon the occurrence of certain corporate transactions, the exercisability of the options may be accelerated. (4) These options have a term of nine years and 50,000 shares vested on the grant date of June 28, 2000. The remaining shares vest 50 percent on June 1, 2001 and 50 percent on December 1, 2001. Upon the occurrence of certain corporate transactions, the exercisability of the options may be accelerated. (5) These options have a term of nine years and 33,333 shares vested on the grant date of June 28, 2000. The remaining shares vest 50 percent on June 1, 2001 and 50 percent on December 1, 2001. Upon the occurrence of certain corporate transactions, the exercisability of the options may be accelerated. (6) These options have a term of nine years and 16,666 shares vested on the grant date of June 28, 2000. The remaining shares vest 16.67 percent every six months beginning on June 1, 2001. Upon certain corporate transactions, the exercisability of the options may be accelerated. Option Exercises in 2000 and Fiscal Year-End Option Values. The following table sets forth information (on an aggregated basis) concerning the fiscal year-end value of unexercised options held by each of the officers of the Company named in the Summary Compensation Table. None of the officers named below exercised any stock options during fiscal 2000. 35
Fiscal Year-End Option Values Value of Unexercised Acquired Number of Unexercised In-the-Money on Value Options at Year-End Options at Year-End(1) ------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- -------- -------- ----------- ------------- ----------- ------------- Walter C. Bowen -- -- -- -- -- -- Louis Swart -- -- 10,000 115,000 $ -0- $ -0- James W. Ekberg -- -- 165,000(2) 35,000 $ -0- $ -0- Eric W. Jacobsen -- -- 95,000 5,000 $ -0- $ -0- Steven L. Gish -- -- 86,333(3) 23,667 $ -0- $ -0- David R. Gibson -- -- 31,666 43,334 $ -0- $ -0- ------------------------------------------------------------------------------------------------
(1) Options are "in-the money" if the fair market value of the underlying securities on that date exceeds the exercise price of the option. The amount set forth represents the difference between the fair market value of the securities underlying the options on December 31, 2000, based on the last sale price of $0.75 per share of Common Stock on the date (as reported on the Over-the-Counter Market) and the exercise price of the options, multiplied by the applicable number of options. (2) Does not include an option to purchase 50,000 shares of Common Stock, which is immediately exercisable at an exercise price of $6.00 a share, granted to Mr. Ekberg by Mr. Bowen in 1995. (3) Does not include an option to purchase 25,000 shares of Common Stock, which is immediately exercisable at an exercise price of $6.00 a share, granted to Mr. Gish by Mr. Bowen in 1995. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information, as of June 30, 2001, with respect to the beneficial ownership of the Company's Common Stock by each director, by each executive officer of the Company named in the Summary Compensation Table, by all directors and executive officers as a group, and by each person who is known to the Company to be the beneficial owner of more than five percent of the Company's outstanding Common Stock. Unless otherwise indicated in the Table, each person has sole voting power and sole investment power with respect to all outstanding shares of Common Stock shown as beneficially owned by them. 36 Amount and Nature Name and Address of of Beneficial Percent of Beneficial Owner(1) Ownership Class(2) --------------------- ----------------- -------- Walter C. Bowen 3,983,631(3) 67.0% Louis Swart 32,500 * James W. Ekberg 232,500(4) 3.8% Eric W. Jacobsen 95,000 1.6% Steven L. Gish 121,666(4) 2.0% Dana J. O'Brien 10,000(5)(6) * Robert G. Peirce 6,500(7) * Prudential Private Equity Investors III, L.P. 717 Fifth Avenue, Suite 1100 New York, NY 10022 2,257,636(8) 30.7% LTC Healthcare, Inc. 300 Esplanade Drive, Suite 1860 Oxnard, CA 93030 1,133,333(9) 16.0% All directors and executive officers as a group (7 persons) 4,481,797 69.6% * Less than one percent. (1) Unless otherwise indicated, the address of each person named is c/o Regent Assisted Living, Inc., 121 S. W. Morrison Street, Suite 1000, Portland, Oregon 97204. (2) Assumes the exercise of solely that individual's options, or conversion of solely that party's underlying instruments, and issuance by the Company of the related number of shares of Common Stock. (3) Includes 580,431 shares of common stock approved by the Company's Board of Directors in March 2001 in connection with the Plan. Includes 80,000 shares held of record by Mr. Bowen that may be purchased within 60 days by certain officers and one other individual pursuant to options granted by Mr. Bowen. Mr. Bowen has granted options to purchase a portion of his shares to Messrs. Ekberg (50,000 shares) and Gish (25,000 shares). (4) Includes shares that may be acquired within 60 days pursuant to options granted by Mr. Bowen to purchase a portion of his shares and those shares that may be purchased pursuant to options granted under the Company's 1995 Stock Incentive Plan. (5) Includes 10,000 shares that may be acquired within 60 days pursuant to options granted under the Company's 1995 Stock Incentive Plan. (6) Does not include shares of Series A or Series B Preferred Stock owned by Prudential Private Equity Investors III, L.P. ("PPEI"), an investment fund managed by Cornerstone Equity Investors, L.L.C., the employer of Mr. O'Brien. 37 (7) Includes 2,000 shares that may be acquired within 60 days pursuant to options granted under the Company's 1995 Stock Incentive Plan. (8) Includes 857,143 shares of common stock approved by the Company's Board of Directors in March 2001 in connection with the Plan. Includes the number of shares that may be acquired within 60 days pursuant to the holder's right to convert its Series A Preferred Stock into shares of Common Stock. PPEI also owns 382,882 shares of Series B Preferred stock, each share of which can be converted into one share of Series A Preferred Stock or into a total of 417,690 shares of Common Stock upon the occurrence of specified conversion events. (9) This number comprises the 1,133,333 shares that may be acquired by LTC Healthcare, Inc. within 60 days pursuant to its right to convert its currently outstanding subordinated convertible notes into shares of the Company's Common Stock at a rate of $7.50 per share. Item 13. Certain Relationships and Related Transactions Mr. Bowen holds a 99 percent general partnership interest in the Regency Park Apartments Limited Partnership ("Regency Partnership"), an Oregon limited partnership from which the Company leases its Regency Park community located in Portland, Oregon. Mr. Bowen also holds a 99 percent ownership interest in Sterling Park, L.L.C., a Washington limited liability company from which the Company leases its Sterling Park community located in Redmond, Washington. Mr. Bowen's minor children hold the remaining one percent interest in the Regency Partnership and Sterling Park, L.L.C. As a result, Mr. Bowen may be deemed to receive the portion of the lease payments remaining after service of the debt to which the properties are subject. For 2000, these lease payments were $1,070,400 for Regency Park and $1,253,124 for Sterling Park of which $257,400 for Regency Park and $233,124 for Sterling Park were deferred at December 31, 2000. For 1999, these lease payments were $1,320,536 for Regency Park and $1,486,248 for Sterling Park. For 1998, these lease payments were $1,312,400 for Regency Park and $1,486,250 for Sterling Park. In March 2001, the Company's Board of Directors approved the conversion of the $507,877 of deferred lease payments due to Mr. Bowen into 580,431 shares of common stock. Mr. Bowen holds a 90 percent interest in Desert Flower, LLC, an Oregon limited liability company that owns the Desert Flower Assisted Living community in Scottsdale, Arizona. Mr. Bowen's minor children hold the remaining ten percent interest in Desert Flower, LLC. In 1999, the Company developed the community and sold it to Desert Flower, LLC in a transaction through which the Company received proceeds of $1.2 million and Desert Flower, LLC assumed $8.8 million in debt. The terms of the agreement contain a guaranteed return which constitutes continuing involvement under SFAS No. 66, Accounting for Sales of Real Estate and accordingly, the Company has accounted for the sale under the deposit method. Under this method, the Company continues to report the asset, depreciation and related debt in the Company's financial statements and does not recognize profit from the sale. Upon satisfaction of the continuing involvement criteria, the transaction will be accounted for as a sale. The Company manages the community for Desert Flower, LLC, subject to a net operating income guaranty provided by the Company. In 2000, the Company recorded $39,009 as management fee income and $142,070 as an increase in deposits under sales contract. During December 2000, the company formed with Mr. Bowen a joint venture, Regent/Bowen, LLC, for the purpose of acquiring four communities for $33.9 million. The four communities were previously leased from two separate real estate investment trusts. The Company 38 contributed $0.6 million along with its rights to purchase the four communities for a 75% interest in the joint venture. Mr. Bowen contributed $1.2 million for a 25% interest. In addition, the venture obtained $32.2 million in bank financing and $0.5 million of seller provided financing in order to complete the four acquisitions. In March 2001, as part of the Plan, Mr. Bowen agreed to provide $1 million in bridge financing (the Bridge Loan) to the Company. Through July 23, 2001, Mr. Bowen has provided cash advances totaling $750,000 under the Bridge Loan and earned fees totaling $15,000 as a result of providing this financing. At June 30, 2001, the advances under the Bridge Loan were combined with additional amounts due to Mr. Bowen and an affiliated Company, Bowen Development Company, along with accrued interest, into a demand note in the amount of $1,259,133. At the sole option of the holder, the note is due upon the sale of certain assets, upon demand or no later than June 30, 2002. The note is secured by land held for sale. On July 3, 2001, the Company's Board of Directors approved a $1 million operating line of credit provided by Mr. Bowen. Through July 23, 2001, the Company has drawn $600,000 under the line. The line is secured by a deed of trust recorded in a second position against certain real property. At the sole option of the holder, the line of credit is due upon the sale of certain assets, upon demand or no later than June 30, 2002. The line of credit bears interest at 18 percent. Mr. Bowen earned a $50,000 fee as a result of providing this financing. Bowen Development Company, which is wholly owned by Mr. Bowen, completed construction of one of the Company's new Regent Court communities in 2000. Additionally, Bowen Development Company completed one more community during 2001. Each of these projects is contracted for a fixed price that includes "contractor's overhead and profit" which is paid on a percentage of completion basis. Bowen Development Company lost approximately $414,000 in 2000 and earned fees totaling approximately $526,100 in 1999 on these two projects. The Company's Conflicts Committee or independent directors approved these two contracts after solicitation and review of competitive bids from unaffiliated general contractors. The Company believes that each of the foregoing transactions was on terms no less favorable to the Company than could have been obtained from unaffiliated parties in arm's-length transactions; however, there can be no assurance that such is the case. The Company and the Bowen Companies are all controlled by Mr. Bowen. Certain executive officers of the Company, including Messrs. Bowen and Gish, fulfill similar executive functions for other Bowen Companies and spend significant amounts of time on the business of other Bowen Companies. The Company provides management and administrative services to, and from time to time may obtain services or the use of certain equipment from, certain of the Bowen Companies pursuant to an Administrative Services Agreement. Under that agreement, the Bowen Companies and the Company reimburse each other for the actual cost of services received under the Administrative Services Agreement. The Company believes that the sharing of executive management and other resources (such as data processing, accounting, legal, financial, tax, treasury, risk management and human resources) provides benefits to the Company by giving it access to a level of experience and expertise that can only be supported by a larger organization. The Administrative Services Agreement is cancelable by any party, including the Company, on 60 days' notice. Pursuant to the terms of the Administrative Services Agreement, reimbursement of costs will be reviewed at least annually by the Audit Committee of the Board of Directors. The Administrative Services Agreement requires the Bowen Companies to offer first to the Company any opportunities received by or originated with the Bowen Companies relating to the 39 assisted living business. The Administrative Services Agreement also requires all transactions between the Company and the Bowen Companies to be on an arm's length basis containing terms no less favorable to the Company than could have been obtained from an unrelated third party and requires any such transaction to be approved by a majority of the Company's directors unaffiliated with the Bowen Companies. In 2000, Regent charged the Bowen Companies $10,300 under the Administrative Services Agreement. In 1999, Regent charged the Bowen Companies $78,000 under the Administrative Services Agreement. In 1998, Regent charged the Bowen Companies $145,000 under the Administrative Services Agreement. As of June 30, 2001, Mr. Bowen had provided personal guarantees for repayment and performance of covenants on Company loan agreements in an aggregate amount of $40,795,700. Mr. Bowen was paid $120,000, $65,000 and $75,000 in 2000, 1999 and 1998, respectively, in exchange for his personal guaranties. 40 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The financial statements are listed in the Index to Financial Statements on page F-1 of this Report. (a)(2) Exhibits Exhibit Number ------ (1)3.1 Restated Articles of Incorporation, as amended effective December 13, 1996 (2)3.2 Restated Bylaws, as amended effective December 12, 1996 4.1 See Article II of Exhibit 3.1 and Articles I and VI of Exhibit 3.2 (4)4.2 Letter of Commitment, dated March 30, 1998, by and among LTC Properties, Inc., LTC West, Inc. and the Registrant relating to the agreement to purchase and lease assisted living residences (4)4.3 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and LTC Equity Holding Company, Inc (4)4.4 Note No. 1998-1 issued to LTC Equity Holding Company, Inc. in the principal amount of $4,000,000, due March 31, 2008 (4)4.5 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Andre C. Dimitriadis (4)4.6 Note No. 1998-2 issued to Andre C. Dimitriadis in the principal amount of $160,000, due March 31, 2008 (4)4.7 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and James J. Pieczynski (4)4.8 Note No. 1998-3 issued to James J. Pieczynski in the principal amount of $160,000, due March 31, 2008 (4)4.9 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Christopher T. Ishikawa (4)4.10 Note No. 1998-4 issued to Christopher T. Ishikawa in the principal amount of $90,000, due March 31, 2008 (4)4.11 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Pamela J. Privett 41 (4)4.12 Note No. 1998-5 issued to Pamela J. Privett in the principal amount of $90,000, due March 31, 2008 (4)4.13 Registration Rights Agreement, dated as of March 30, 1998, by and between LTC Equity Holding Company, Inc. and the Registrant (4)4.14 Registration Rights Agreement, dated as of March 30, 1998, by and between Andre C. Dimitriadis and the Registrant (4)4.15 Registration Rights Agreement, dated as of March 30, 1998, by and between James J. Pieczynski and the Registrant (4)4.16 Registration Rights Agreement, dated as of March 30, 1998, by and between Christopher T. Ishikawa and the Registrant (4)4.17 Registration Rights Agreement, dated as of March 30, 1998, by and between Pamela J. Privett and the Registrant (1)10.1 Lease Agreement between the Company and Regency Park Apartments Limited Partnership (1)10.2 Lease Agreement between the Company and the Bowen-Gionet Joint Venture (1)10.4 Employment Agreement between the Company and James W. Ekberg (1)10.6 Employment Agreement between the Company and Steven L. Gish (1)10.8 Restrictive Covenant Agreement between the Company and Walter C. Bowen (1)10.9 Restrictive Covenant Agreement between the Company and James W. Ekberg (1)10.11 Restrictive Covenant Agreement between the Company and Steven L. Gish (5)10.13 1995 Stock Incentive Plan, as amended effective December 4, 1997 (1)10.14 Form of Incentive Stock Option Agreement (1)10.15 Form of Nonqualified Stock Option Agreement (1)10.16 Administrative Services Agreement among the Company and certain of the Bowen companies (1)10.17 Indemnity Agreement between the Company and Walter C. Bowen (1)10.18 Indemnity Agreement between the Company and James W. Ekberg (1)10.19 Indemnity Agreement between the Company and Eric W. Jacobsen (1)10.20 Indemnity Agreement between the Company and Steven L. Gish 42 (2)10.21 Employment Agreement, effective as of March 20, 1996, between David R. Gibson and the Company (2)10.22 Restrictive Covenant Agreement, effective as of March 20, 1996, between David R. Gibson and the Company (3)10.23 Preferred Stock and Warrant Agreement between Prudential Private Equity Investors III, L.P. ("PPEI") and the Company dated as of December 16, 1996 (3)10.24 Stockholders Agreement among the Company, PPEI, and Walter C. Bowen dated as of December 16, 1996 (3)10.25 Registration Agreement between the Company and PPEI dated as of December 16, 1996 (3)10.26 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of Common Stock. (3)10.27 First Amendment to Lease between the Company and Regency Park Apartments Limited Partnership dated December 16, 1996 (3)10.28 Second Amendment to Lease between the Company and Sterling Park, L.L.C. dated December 16, 1996 (3)10.29 Form of Indemnity Agreement between the Company and directors (3)10.30 Employment Agreement between Eric W. Jacobsen and the Company (6)10.32 Employment Agreement between Louis Swart and the Company (6)10.33 Restrictive Covenant Agreement between Louis Swart and the Company (7)10.34 Employment Agreement, effective as of November 1, 1999, between Dale J. Zulauf and the Company (7)10.35 Restrictive Covenant Agreement, effective as of November 1, 1999, between Dale J. Zulauf and the Company (8)21 List of Subsidiaries (8)23.1 Consent of PricewaterhouseCoopers LLP ------------------- (1) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-1, effective December 20, 1995 (Registration No. 33-96912) (2) Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 43 (3) Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996 (4) Incorporated by reference to the Exhibits to the Company's Form 10-QSB dated May 14, 1998 (5) Incorporated by reference to the Exhibits to the Company's Form 8-K dated December 22, 1998 (6) Incorporated by reference to the Exhibits to the Company's Form 10-QSB dated May 12, 1999 (7) Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 (8) Filed herewith All other schedules and exhibits are omitted because the required information is not applicable or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. (a)(3) Form 8-K There were no Reports on Form 8-K filed for the year ended December 31, 2000. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Portland, State of Oregon, on the 25th day of July, 2001. REGENT ASSISTED LIVING, INC. By: /s/ Walter C. Bowen --------------------- Walter C. Bowen Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the following persons in the capacities indicated have signed this report below on the 25th day of July, 2001. Signature Title --------- ----- /s/ Walter C. Bowen Chief Executive Officer, ------------------------------- Chairman of the Board and Director Walter C. Bowen (Principal Executive Officer) /s/ Steven L. Gish Chief Financial Officer, Treasurer, ------------------------------- Secretary and Director Steven L. Gish (Principal Financial and Accounting Officer) /s/ Robert G. Peirce ------------------------------- Robert G. Peirce, Director /s/ Dana J. O'Brien ------------------------------- Dana J. O'Brien, Director 45 Regent Assisted Living, Inc. and Subsidiaries Consolidated Financial Statements For the Years Ended December 31, 2000 and 1999 Regent Assisted Living, Inc. and Subsidiaries Table of Contents Page Report of Independent Accountants - PricewaterhouseCoopers LLP .............F-1 Financial Statements: Consolidated Balance Sheets............................................F-2 Consolidated Statements of Operations..................................F-3 Consolidated Statements of Changes in Shareholders' Equity.............F-4 Consolidated Statements of Cash Flows..................................F-5 Notes to Consolidated Financial Statements .................................F-6 Report of Independent Accountants To the Board of Directors and Shareholders Regent Assisted Living, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Regent Assisted Living, Inc. and Subsidiaries (the Company) at December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 12 and 13 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Notes 12 and 13. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Portland, Oregon March 30, 2001, except for Notes 12 and 13, as to which the date is July 10, 2001 F-1 Regent Assisted Living, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2000 and 1999
2000 1999 ASSETS Current assets: Cash and cash equivalents $ 2,580,004 $ 4,537,839 Cash held in working capital escrow 1,381,781 404,598 Accounts receivable, net 557,355 723,081 Prepaid expenses 931,506 739,569 Construction advances receivable - 235,706 Land held for sale 2,400,000 2,860,000 ------------ ------------ Total current assets 7,850,646 9,500,793 Restricted cash 2,292,269 2,916,182 Property and equipment, net 78,546,940 46,900,983 Investment in and advances to joint venture 629,061 383,114 Other assets 3,738,642 2,985,291 ------------ ------------ Total assets $93,057,558 $62,686,363 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 5,917,043 $ 2,266,919 Construction accounts payable 324,572 463,136 Accounts payable and other accrued expenses 3,188,962 3,414,976 Accrued payroll 1,810,907 1,490,594 Accrued interest 551,892 438,017 ------------ ------------ Total current liabilities 11,793,376 8,073,642 Long-term debt 65,061,708 32,275,189 Convertible subordinated notes 9,000,000 9,000,000 Deposits under sales contract 10,297,381 10,194,342 Deferred gains and development fees, net 5,268,468 6,714,156 Other liabilities 2,740,764 1,387,250 ------------ ------------ Total liabilities 104,161,697 67,644,579 Minority interest in consolidated subsidiaries 1,422,226 352,389 ------------ ------------ Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized; 1,666,667 shares issued and outstanding in 2000 and 1999 9,349,841 9,349,841 Common stock, no par value, 25,000,000 shares authorized; 4,507,600 shares issued and outstanding in 2000 and 1999 10,619,349 10,619,349 Accumulated deficit (32,495,555) (25,279,795) ------------ ------------ Total shareholders' equity (12,526,365) (5,310,605) ------------ ------------ Total liabilities and shareholders' equity $93,057,558 $62,686,363 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-2 Regent Assisted Living, Inc. and Subsidiaries Consolidated Statements of Operations For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 Revenues: Rental and service $ 64,180,365 $ 53,635,079 $ 30,217,379 Management fees 728,374 453,936 201,816 ------------ ------------ ------------ Total revenues 64,908,739 54,089,015 30,419,195 Operating expenses: Residence operating expenses 45,025,215 38,605,500 25,602,709 General and administrative 7,071,740 7,251,337 4,161,981 Lease expense 13,941,519 13,390,695 9,014,483 Depreciation and amortization 1,784,031 1,512,835 1,080,050 ------------ ------------ ------------ Total operating expenses 67,822,505 60,760,367 39,859,223 ------------ ------------ ------------ Operating loss (2,913,766) (6,671,352) (9,440,028) Interest income 507,641 305,656 336,168 Interest expense (3,908,366) (2,645,863) (1,594,777) Equity in losses of joint ventures (296,817) (246,565) (360,028) Other income (loss), net 15,385 445,860 (3,467) ------------ ------------ ------------ Loss before minority interests (6,595,923) (8,812,264) (11,062,132) Minority interests 130,163 35,888 - ------------ ------------ ------------ Loss before income taxes (6,465,760) (8,776,376) (11,062,132) Provision for income taxes - - - ------------ ------------ ------------ Net loss (6,465,760) (8,776,376) (11,062,132) Preferred stock dividends (750,000) (600,000) (600,000) ------------ ------------ ------------ Net loss available to common shareholders $ (7,215,760) $ (9,376,376) $(11,662,132) ============ ============ ============ Basic loss per common share $ (1.60) $ (2.03) $ (2.52) ============ ============ ============ Diluted loss per common share $ (1.60) $ (2.03) $ (2.52) ============ ============ ============ Weighted average common shares outstanding - basic 4,507,600 4,615,135 4,633,000 ============ ============ ============ Weighted average common shares outstanding - diluted 4,507,600 4,615,135 4,633,000 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 Regent Assisted Living, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2000, 1999 and 1998
Preferred Stock -------------------------------------------- Series A Series B Common Stock Total ---------------------- ------------------- ---------------------- Accumulated Shareholders' Shares Amount Shares Amount Shares Amount Deficit Equity --------- ----------- ------- ---------- --------- ----------- ------------- -------------- Balance, December 31, 1997 1,283,785 $ 7,201,910 382,882 $2,147,931 4,633,000 $10,808,703 $ (4,241,287) $ 15,917,257 Preferred stock dividends (600,000) (600,000) Net loss (11,062,132) (11,062,132) --------- ----------- ------- ---------- --------- ----------- ------------- -------------- Balance, December 31, 1998 1,283,785 7,201,910 382,882 2,147,931 4,633,000 10,808,703 (15,903,419) 4,255,125 Preferred stock dividends (600,000) (600,000) Shares repurchased and retired (125,400) (189,354) (189,354) Net loss (8,776,376) (8,776,376) --------- ----------- ------- ---------- --------- ----------- ------------- -------------- Balance, December 31, 1999 1,283,785 7,201,910 382,882 2,147,931 4,507,600 10,619,349 (25,279,795) (5,310,605) Preferred stock dividends (750,000) (750,000) Net loss (6,465,760) (6,465,760) --------- ----------- ------- ---------- --------- ----------- ------------- -------------- Balance, December 31, 2000 1,283,785 $ 7,201,910 382,882 $2,147,931 4,507,600 $10,619,349 $(32,495,555) $(12,526,365) ========= =========== ======= ========== ========= =========== ============= ==============
The accompanying notes are an integral part of the consolidated financial statements. F-4 Regent Assisted Living, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 Cash flows from operating activities: Net loss $ (6,465,760) $ (8,776,376) $(11,062,132) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,784,031 1,512,835 1,080,050 Loss (gain) on sale of assets 104 (462,113) - Adjustment on land held for sale to estimated fair value 791,245 1,489,197 - Amortization of deferred gains and development fees (522,177) (509,738) (350,564) Equity interest in joint ventures 296,817 246,565 360,028 Non-cash operating expense - - 128,957 Increase in allowance for doubtful accounts 23,000 - 10,000 Minority interests (130,163) (35,888) - Changes in other assets and liabilities: Cash held in working capital escrow 413,608 1,181,027 (10,925) Accounts receivable 196,149 (435,598) (169,373) Prepaid expenses (191,937) (494,245) (145,523) Other assets (103,637) 198,914 (990,086) Accounts payable and other accrued expenses (226,014) 1,134,746 1,595,094 Accrued payroll 320,313 276,964 711,062 Accrued interest 169,933 119,816 138,238 Other liabilities 603,514 (198,914) 1,068,586 ------------- ------------- ------------- Net cash used in operating activities (3,040,974) (4,752,808) (7,636,588) ------------- ------------- ------------- Cash flows from investing activities: Purchases of property and equipment (45,812,247) (13,248,696) (36,267,398) Increase (decrease) in construction accounts payable (138,564) (145,449) 25,542 Investment in and advances to joint ventures (14,114) (12,400) (158,563) Proceeds from sale of property and equipment 2,401,375 740,309 829,408 Proceeds from sale of equity interest - 725,000 - Withdrawals from (deposits to) replacement reserve account, net (72,937) 20,555 (80,186) ------------- ------------- ------------- Net cash used in investing activities (43,636,487) (11,920,681) (35,651,197) ------------- ------------- ------------- Cash flows from financing activities: Short-term borrowings - - (4,500,000) Proceeds from issuance of long-term debt 53,275,199 19,986,691 27,490,812 Payments on long-term debt (9,278,775) (14,688,127) (38,421,190) Construction (advances) payments 235,706 368,200 (110,625) Payments and deposits for lease financing arrangements, net (759,432) (551,638) (897,484) Restricted cash for lease financing arrangements, net 696,850 (415,344) (315,802) Deferred development fees from lease financing arrangements 637,830 243,419 497,218 Proceeds from lease financing arrangements (1,390,791) 10,766,814 53,822,808 Proceeds from issuance of convertible subordinated notes - - 9,000,000 Proceeds from sales contract 103,039 1,419,342 - Contributions by minority interests 1,200,000 388,277 - Preferred stock dividends - (600,000) (600,000) Payments to repurchase common stock (189,354) - ------------- ------------- ------------- Net cash provided by financing activities 44,719,626 16,728,280 45,965,737 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents (1,957,835) 54,791 2,677,952 Cash and cash equivalents, beginning of period 4,537,839 4,483,048 1,805,096 ------------- ------------- ------------- Cash and cash equivalents, end of period $ 2,580,004 $ 4,537,839 $ 4,483,048 ============= ============= ============= The accompanying notes are an integral part of the consolidated financial statements. F-5a Regent Assisted Living, Inc. and Subsidiaries Consolidated Statements of Cash Flows - continued For the Years Ended December 31, 2000, 1999 and 1998 Supplemental disclosure of non-cash investing and financing activities: Assumption of debt by minority interests $ - $ 1,291,448 $ - ============= ============= ============= Assumption of debt by joint venture $ - $ 1,692,467 $ - ============= ============= ============= Debt assumed pursuant to sales contract $ - $ 8,775,000 $ - ============= ============= ============= Long-term debt incurred to acquire minority interest in consolidated subsidiary $ - $ - $ 250,000 ============= ============= ============= Contribution of property and equipment in exchange for investment in and advances to joint venture $ 653,423 $ - $ 138,000 ============= ============= ============= Receivable in joint venture in exchange for developer fee $ 71,350 $ - $ - ============= ============= ============= Preferred stock dividends accrued $ 750,000 $ - $ - ============= ============= =============
The accompanying notes are an integral part of the consolidated financial statements. F-5b Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Operations and Summary of Significant Accounting Policies Regent Assisted Living, Inc. (the Company) is an owner, operator and developer of private-pay assisted living communities including stand-alone Alzheimer's communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. The Company As of December 31, 2000, the Company operated thirty assisted living communities in nine western states. In addition, the Company had five communities under construction and two under development. During 2000, the Company commenced operations at one internally developed stand-alone Alzheimer care community, which is owned by a joint venture, and entered into one additional management contract. As of December 31, 1999, the Company operated twenty-nine assisted living communities in nine western states. In addition, the Company had four communities under construction and four under development. During 1999, the Company commenced operations at three new internally developed stand-alone Alzheimer's care communities (including two owned by joint ventures) and also opened a new internally developed assisted living community which was sold to the Company's Chairman and Chief Executive Officer in a sale-manageback agreement. As of December 31, 1998, the Company operated twenty-five assisted living communities in nine western states. During 1998, the Company opened eleven new internally developed communities (including one owned in a joint venture), completed the lease-acquisition of five communities (including one that was previously managed), and entered into one additional management contract. Principles of consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries and entities in which it has a controlling interest. All significant intercompany transactions and balances have been eliminated in consolidation. Cash and cash equivalents The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. Cash equivalents consist of highly liquid debt instruments purchased with an original maturity of three months or less. The Company's cash equivalents are in high quality securities placed with institutions with high credit ratings. This investment policy limits the Company's exposure to concentrations of credit risk, and the Company has not experienced any credit related losses. Cash held in working capital escrow Cash is held in the Company's name in bank accounts in the custody of financial institutions. This cash is available for release in accordance with the related agreements (see Note 13). F-6 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 1. Operations and Summary of Significant Accounting Policies (Continued) Land held for sale The Company has made three parcels of land available for sale at December 31, 2000 and two parcels at December 31, 1999. This land was previously acquired for development. Of the land held for sale at December 31, 1999, one parcel was sold in 2000 for net proceeds of $2,401,375. Two additional parcels were made available for sale during 2000. The Company recorded an expense of $791,245 and $1,489,197 in 2000 and 1999, respectively, to adjust the land held for sale to its estimated fair market value. Restricted cash The Company is required to provide letters of credit to lenders in connection with certain financing arrangements. Financial institutions providing the letters of credit have required cash collateral for the letters of credit, totaling $1,718,973 and $2,721,758 as of December 31, 2000 and 1999, respectively. Restricted cash also includes a replacement reserve required to be maintained for two of the communities and a cash collateral reserve required for two of the communities under development and construction (see Note 13). Property and equipment Property and equipment are stated at cost with depreciation being provided over the assets' estimated useful lives using straight-line and accelerated methods as follows: Buildings 40 years Land improvements 15 years Furniture and equipment 5 - 10 years Interest incurred during construction periods is capitalized as part of the building costs. Maintenance and repairs are expensed as incurred; renewals and improvements are capitalized. Upon disposal of property and equipment subject to depreciation, the related costs and accumulated depreciation are removed and resulting gains and losses are reflected in operations. Management reviews all long-lived assets held and used by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of the individual communities. Investment in joint ventures Joint ventures in which the Company does not have a controlling interest are accounted for under the equity method of accounting. F-7 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 1. Operations and Summary of Significant Accounting Policies (Continued) Pre-opening and start-up costs The Company expenses pre-opening and start-up costs as incurred. Deferred gains and development fees Gains realized on the sale and leaseback of the Company's assisted living communities are deferred and credited to income as rent adjustments over the related lease terms. The Company also defers development fees and amortizes them over the term of the related lease. Revenue recognition Revenue from owned or leased assisted living communities is recorded when services are rendered and consist of resident fees for basic housing, personalized health care and management fees from other assisted living communities. Income taxes Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance. Computation of per share amounts Basic Earnings Per Share (EPS) is calculated using income (loss) attributable to common shares (after deducting preferred dividends) divided by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated using income (loss) attributable to common shares (after deducting preferred dividends and considering the effects of dilutive common equivalent shares) divided by the weighted-average number of common shares and dilutive common shares outstanding for the period. The weighted average shares issuable upon the exercise of stock options were not included in the calculation because they were antidilutive. Stock-based compensation plan The Company accounts for its stock-based compensation plan under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Effective January 1, 1996, the Company adopted the disclosure requirements of Statement of Financial and Accounting Standards (SFAS) SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires that companies that do not choose to account for stock-based compensation as prescribed by this statement shall disclose the pro forma effect on earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. F-8 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 1. Operations and Summary of Significant Accounting Policies (Continued) Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial instruments The carrying amounts of cash and cash equivalents, investments, accounts receivable, construction advances receivable and restricted cash approximate fair value because of the short-term nature of these accounts and because amounts are invested in accounts earning market rates of interest. The carrying amount of debt approximates fair value inasmuch as the interest rates approximate the current rates available to the Company. Recent accounting pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. SAB 101 provided guidance on the recognition, presentation and disclosure of revenues in financial statements. The Company adopted SAB 101 as of December 31, 2000. The adoption did not have a material effect on the previously reported quarterly financial results or the annual financial results, as the Company's revenue recognition policies were already consistent with SAB 101. In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44) Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25 which provides interpretive guidance on several implementation issues related to Accounting Principles Board Opinion No. 25 Accounting for Stock issued to Employees. FIN 44 is effective July 1, 2000, but certain conclusions must be applied earlier. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial statements. The FASB has issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133. This statement amends SFAS No. 133 for specified transactions. SFAS No. 138 is effective concurrently with SFAS No. 133 if SFAS No. 133 is not adopted prior to June 15, 2000. If SFAS No. 133 is adopted prior to June 15, 2000, SFAS No. 138 is effective for quarters beginning after June 15, 2000. The Company believes that the effect of adoption of SFAS No. 138 will not have a material effect on the Company's financial statements. F-9 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 1. Operations and Summary of Significant Accounting Policies (Continued) Recent accounting pronouncements (continued) In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125's provisions without reconsideration. The Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers that are secured borrowings. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitization accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. The Company believes that the adoption of this statement will not have a material impact on the Company's consolidated financial statements. In June 2001, the FASB unanimously approved both SFAS No. 141 and No. 142. It is anticipated that both statements will be issued in July 2001. The Company does not anticipate the adoption of these statements to have a material impact on the Company's consolidated financial statements. 2. Property and Equipment Property and equipment are stated at cost and consist of the following: 2000 1999 Land $ 7,054,444 $ 5,364,716 Buildings and improvements 55,383,869 33,332,546 Furniture and equipment 5,148,211 4,289,447 Construction in progress 14,073,406 6,572,177 ------------ ------------ 81,659,930 49,558,886 Less accumulated depreciation and amortization 3,112,990 2,657,903 ------------ ------------ Property and equipment, net $ 78,546,940 $ 46,900,983 ============ ============ F-10 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 2. Property and Equipment (Continued) Land, buildings and certain furniture and equipment serve as collateral for long-term debt. Construction in progress includes land, development and building costs incurred in connection with the construction of the Company's new communities and the cost of land held for development. Property and equipment includes the asset value attributable to capital leases in the amount of $1,186,361 (land only) at December 31, 2000 and $8,910,539 at December 31, 1999. Accumulated amortization related to these leases was $771,000 at December 31, 1999. 3. Other Assets Other assets consist of the following: 2000 1999 Resident security and trust deposits $1,482,887 $1,387,250 Deferred financing costs, net 1,663,618 1,063,771 Other 592,137 534,270 ----------- ----------- Total other assets $3,738,642 $2,985,291 =========== =========== Pursuant to rental agreements, residents are required to provide security deposits, and in certain cases, the last month's rent. A liability for these deposits is recorded in other liabilities in the consolidated financial statements. Deferred financing costs are amortized over the original term of the related financing agreement. F-11 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales Contract
Long-term debt consists of: 2000 1999 Notes payable to a financial institution, interest only payments at the commercial based rate and/or one or more LIBOR based rates (10% at December 31, 2000) due December 2002 $ 27,120,000 $ - Note payable to a financial institution due in monthly installments of $74,208 including interest at 8.43%, due October 2009 9,357,418 9,454,584 Note payable to a financial institution, due in monthly installments of $70,218, including interest at 8.69%, due August 2010 8,773,751 - Notes payable to a financial institution, due in monthly installments equal to net cash flow from the mortgaged property and interest payments at 16%, due December 2002 (Note 13) 5,085,000 - Construction loans, totaling $23,953,750, interest varies between 9.08% and 17.5%, maturities vary from June 2001 through December 2005 14,701,219 10,842,797 Note payable to a bank, due in monthly installments of $20,670, including interest at 8.71%, due June 2002 2,447,201 2,477,038 Capital lease obligation, monthly interest only payments at 10.14% beginning upon completion of building, due approximately August 2015 (Note 7) 1,186,361 1,186,361 Note payable to a corporation, due in monthly installments of $50,000, plus interest at 12%, due October 2001 500,000 - Note payable to a corporation, quarterly payments of interest only at 9%, due in December 2000 500,000 500,000 Notes payable to a bank, due in monthly installments of $11,920, including interest at various rates between 8.75% and 8.88%, all maturing at various dates between 2002 and 2004 271,354 385,047 Capital lease obligation, due in monthly installments of $69,100, including interest at 8.4%, repaid - 7,745,271 Note payable to a financial institution, interest only payments at prime plus 4% (12.5% at December 31, 1999), repaid - 1,263,411 Notes payable to construction company owned by the majority shareholder, annual payments of interest only at prime plus 1% (10.5% at December 31, 2000) (Note 13) at December 31, 2000 (Note 9) 250,000 250,000 Other 786,447 437,599 ------------ ------------ 70,978,751 34,542,108 Less amounts due within one year 5,917,043 2,266,919 ------------ ------------ $ 65,061,708 $ 32,275,189 ============ ============
F-12 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales Contract (Continued) Principal payments on long-term debt for the years ending December 31 are as follows: 2001 $5,917,043 2002 32,700,129 2003 302,963 2004 5,076,553 2005 8,484,256 Thereafter 18,497,807 ----------- $70,978,751 =========== The Company incurred total interest costs of approximately $4,342,388, $4,900,800 and $4,246,600 in 2000, 1999 and 1998, respectively, of which approximately $434,022, $2,255,000 and $2,651,800 has been capitalized as part of construction in progress. Interest costs paid by the Company in 2000, 1999 and 1998 totaled approximately $4,211,160, $4,781,000 and $4,108,400, respectively. The Company, along with its joint venture partners, has guaranteed construction loans totaling approximately $14.7 million. On March 30, 1998, the Company completed a private placement pursuant to which parties purchased an aggregate of $4.5 million of convertible subordinated notes of the Company and agreed to purchase up to an additional aggregate amount of $6 million of convertible subordinated notes. As of December 31, 2000 and 1999, a total of $9 million of convertible notes were issued under this facility. The Company and the purchasers have agreed that no additional notes will be issued. The notes bear interest at 7.5% per annum and are convertible into 1,200,000 shares of common stock at an exercise price of $7.50 per share with a 10% adjustment for failure to quote on Nasdaq national market. As of December 31, 2000, the exercise price is $6.75 per share as the conversion shares have not been approved for quotation on Nasdaq. Interest on the notes is payable quarterly and all principal and unpaid interest on the notes is due March 31, 2008. The notes may be converted at the option of the holder at any time prior to the maturity date of the notes. The Company also has the right to force a conversion of the notes if the average trading price of the common stock equals or exceeds $12 per share over thirty consecutive trading days. During September 1999, the Company sold to its majority shareholder its Scottsdale, Arizona community under terms of a sale-manageback agreement. The terms of the agreement contain a guaranteed return which constitutes continuing involvement under SFAS No. 66, Accounting for Sales of Real Estate and, accordingly, the Company has accounted for the sale under the deposit method. Under this method, the Company continues to report the asset, depreciation and related debt in the Company's financial statements and does not F-13 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 4. Long-Term Debt, Convertible Subordinated Notes and Deposits Under Sales Contract (Continued) recognize profit from the sale. The Company received $1.2 million in sales proceeds and the purchaser assumed $8.8 million of underlying debt. These amounts are recorded as liabilities captioned "deposits under sales contract" in the Company's balance sheet. The net book value of the asset subject to the sales contract totaled $8.9 million at December 31, 2000 and 1999. Upon satisfaction of the continuing involvement criteria, the transaction will be accounted for as a sale. As further discussed in Notes 7 and 12, the Company is in violation of a debt service ratio covenant relating to the $2,447,201 note payable to a bank, and accordingly, such amount has been included in current portion of long-term debt. 5. Shareholders' Equity The Company is authorized to issue 5,000,000 shares of preferred stock. The Board of Directors has the authority to issue preferred stock in one or more series and to fix the number of shares constituting any such series, and the preferences, limitations and relative rights, including the dividend rights, dividend rate, voting rights, terms of redemption, redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by the shareholders of the Company. On December 16, 1996, the Company issued 1,283,785 shares of Series A preferred stock and 382,882 shares of Series B preferred stock (collectively, the Preferred Stock) for a total of $9,950,000. In connection with this transaction, a warrant was issued to the holders of the preferred stock for $50,000, allowing the warrant holder to purchase 200,000 shares of common stock at an exercise price of $5.50 per share. Each share of preferred stock is convertible into 1.091 shares of common stock. The Series A preferred shares are convertible at any time at the option of the holder. The Series B preferred shares are convertible upon the occurrence of certain "Conversion Events" as defined in the Company's amended articles of incorporation. Dividends on the preferred stock accrue and are paid at an annual rate of 6% of the liquidation value of $5.50 per common equivalent share (see Note 13). In connection with the sale of the preferred stock, the Company also entered into a stockholders' agreement with the preferred shareholder and the founding shareholder regarding the voting and disposition of shares held by the preferred shareholder and the founding shareholder, and an agreement providing the preferred shareholder with rights to require the Company to register shares of common stock upon conversion of the preferred stock. F-14 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 6. Stock Options 1995 stock incentive plan The Company adopted a stock incentive plan (the 1995 Stock Incentive Plan), which provides for the award of incentive stock options to key employees and the award of nonqualified stock options, stock appreciation rights, bonus rights and other incentive grants to employees, independent contractors and consultants. A total of 800,000 shares of common stock may be issued under the 1995 Stock Incentive Plan. As of December 31, 2000, options to purchase 792,000 shares had been granted and are outstanding pursuant to the Stock Incentive Plan. The 1995 Stock Incentive Plan is administered by the Board of Directors, which has the authority, subject to the terms of the Stock Incentive Plan, to determine the persons to whom options or rights may be granted, the exercise price and number of shares subject to each option or right, the character of grant, the time or times at which all or a portion of each option or right may be exercised and certain other provisions of each option or right. Options are exercisable over a period of time in accordance with the terms or option agreements entered into at the time of grant. Generally, options expire 10 years from date of grant and are expected to become exercisable over a five-year period. Options granted under the 1995 Stock Incentive Plan are generally nontransferable by the optionee and, unless otherwise determined by the Board of Directors, must be exercised by the optionee during the period of the optionee's employment or service with the Company or within a specified period following termination of employment or service. Non-employee members of the Board of Directors of the Company are automatically granted an option to purchase 2,000 shares of common stock when they become a director. Each non-employee director is automatically granted an option to purchase 2,000 additional shares of common stock in each subsequent calendar year that the director continues to serve in that capacity. The exercise price for these options will generally be the fair market value of the common stock at the date of grant. Options granted by shareholder In August 1995, the Company's founding shareholder granted options to purchase an aggregate of 170,000 shares of common stock, of which 165,000 were to certain officers of the Company. During 1999, options for 85,000 of these shares were cancelled. These options vest and become immediately exercisable, and are subject to the terms of option agreements that contain terms similar to those governing the options granted under the 1995 Stock Incentive Plan. F-15 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 6. Stock Options (Continued) A summary of the Company's stock option activity and related information for the years ended December 31 are presented below:
2000 1999 1998 --------------------- ----------------------- ------------------------ Weighted- Weighted- Weighted- average average average exercise exercise exercise Options Shares price Shares price Shares price ------- ---------- -------- ---------- --------- ---------- -------- Outstanding-beginning of year 672,500 $ 4.23 604,000 $ 4.77 563,000 $ 4.73 Granted 360,000 0.89 285,000 3.35 43,500 5.35 Exercised - - - - - - Cancelled (155,500) 3.35 (216,500) 4.59 (2,500) 6.59 ---------- ----------- ---------- Outstanding-end of year 877,000 2.99 672,500 4.23 604,000 4.77 ---------- ----------- ---------- Weighted-average fair value of options granted during the year $ 0.57 $ 2.13 $ 3.23
The following table summarizes information about stock options outstanding as of December 31, 2000: Options Exercisable Weighted- ---------------------- average Weighted- Weighted- Range of remaining average average exercise Number contractual exercise Number exercise price outstanding life price exercisable price -------------- ------------ ------------ -------- ----------- --------- $6.00 - $8.00 85,000 4.7 years $ 6.24 85,000 $ 6.24 0.75 - 7.13 792,000 7.6 years 2.65 466,599 3.24 ------------ ----------- 877,000 551,599 ============ =========== The total value of options granted during 2000, 1999 and 1998 was computed as approximately $203,800, $605,300 and $140,400, respectively, which would be amortized on a pro forma basis over the vesting period of the options. The Company has adopted the disclosure-only provisions of SFAS No. 123. The following table presents the Company's net loss and loss per share, assuming compensation cost had been determined based on the fair value at the date of grant, and recognized as expense on a straight-line basis over the vesting period of the options, consistent with the provisions of SFAS No. 123. F-16 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 6. Stock Options (Continued)
2000 1999 1998 Net loss: As reported $(6,465,760) $(8,776,376) $(11,062,132) Pro forma (6,788,093) (9,265,466) (11,333,132) Diluted loss per common share: As reported (1.60) (2.03) (2.52) Pro forma (1.67) (2.14) (2.58)
For purposes of the above pro forma information, the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions.
2000 1999 1998 Risk-free interest rate 5.16% 5.63% 6.0% Expected life 7.32 years 7.6 years 7.1 years Expected volatility 70% 54% 50% Expected dividend yield 0% 0% 0%
7. Commitments Operating leases The Company leases nineteen communities under noncancelable lease agreements expiring in the years 2005 through 2033. The leases are subject to additional rent payments based on a percentage of the increase in annual revenue of the respective facility. The Company is responsible for all costs including repairs, property taxes and other direct operating costs (see Note 13). The Company leases its corporate offices under a noncancelable operating lease expiring February 2003. Future minimum lease payments required under these leases for the years ending December 31 are as follows: 2001 $ 14,060,580 2002 14,538,521 2003 14,254,289 2004 14,215,563 2005 13,000,258 Thereafter 85,967,280 ------------- $156,036,491 ------------- F-17 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 7. Commitments (Continued) Operating leases (continued) Lease and rent expense for the Company totaled $14,952,974, $14,233,400 and $9,679,100 in 2000, 1999 and 1998, respectively. Certain operating lease agreements and loans contain restrictive covenants. As of December 31, 2000, the Company is in violation of certain restrictive covenants, including certain coverage ratios, net worth calculations and financial reporting, pertaining to twelve operating lease agreements and a debt obligation (see Note 4). The Company is currently attempting to resolve a notice of default. There can be no assurance regarding whether or not any of the Company's lessors or lenders will take aggressive action as a result of the covenant violations; however, should any of the Company's financial partners pursue an action which could jeopardize the Company's assets, liquidity or ongoing operations, the Company may be forced to pursue a court supervised reorganization (see Notes 12 and 13). Capital leases During 1996, the Company entered into a sale leaseback transaction with a real estate investment trust (REIT) for the Santa Cruz, California community. The total consideration for the sale was $8,300,000, which was recorded as a capital lease obligation by the Company (Note 4). The Company repurchased this community from the lessor on December 26, 2000. During June 1999, the Company entered into a $10.1 million arrangement with a REIT pursuant to which the Company is constructing its Mesa, Arizona community. The sale of the land has been recorded as a capital lease (Note 4). Upon completion, the Company will lease the community pursuant to a long-term lease arrangement. Other lease financing The Company entered into arrangements pursuant to which REITs specializing in health care properties agreed to provide lease financing for the construction of several of the Company's communities. As of December 31, 2000 there were no advances of reimbursable construction costs from the Company on behalf of the REITs. As of December 31, 1999, the Company advanced approximately $236,000 of reimbursable construction costs on behalf of the REITs. Upon commencement of operations at the communities, payments begin under the leases, which are accounted for as operating leases. Construction financing The Company has entered into construction loans in the aggregate of $24 million for the construction of five of its communities of which $14.7 million has been advanced as of December 31, 2000 (Note 4). The Company, along with its joint venture partners, has entered into four additional construction loans in the aggregate of $21.3 million of which $14.5 million has been advanced as of December 31, 2000. All of these loans are generally for a term of three to five years, are collateralized by the underlying construction project, and are guaranteed by the Company and the majority shareholder. F-18 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 8. Income Taxes The components of the provision for income taxes for the year ended December 31, 2000, 1999 and 1998 are as follows: 2000 1999 1998 Current: Federal $ - $ - $ - State - - - ------- ------- ------- - - - ------- ------- ------- Deferred: Federal - - - State - - - ------- ------- ------- - - - ------- ------- ------- $ - $ - $ - ------- ------- ------- Income tax provision for the year ended December 31, 2000, 1999 and 1998 differs from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax income before extraordinary loss as follows:
2000 1999 1998 Computed expected tax benefit $(2,198,358) $(2,983,255) $(3,758,507) Increase (decrease) in income taxes resulting from: State taxes, net of federal benefit (267,343) (365,059) (467,000) Increase in valuation allowance 2,404,107 3,167,657 4,226,514 Other, net 61,594 180,657 (1,007) ----------- ----------- ----------- Actual income tax benefit $ - $ - $ - =========== =========== ===========
F-19 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 8. Income Taxes (Continued) The tax effects of temporary differences that give rise to the deferred tax assets at December 31 are as follows:
2000 1999 Capital lease obligation $ 453,005 $3,410,490 Accrued expenses 390,782 297,027 Federal and state operating loss carryforwards 7,345,904 4,834,449 Deferred gains and development fees 1,768,181 2,563,760 Deposits under sales contract 3,931,993 3,892,648 Depreciation and amortization (3,498,320) (6,883,218) Other 920,025 792,307 ------------ ------------ 11,311,570 8,907,463 Less valuation allowance (11,311,570) (8,907,463) ------------ ------------ Net deferred tax assets $ - $ - ============ ============
At December 31, 2000, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $19,495,727 and $17,143,594, respectively, which are available to offset future federal and state taxable income, if any, through 2020. The Company has established a valuation allowance against the net deferred tax asset as the ultimate realization is uncertain. 9. Related Party Transactions Certain executive officers of the Company fulfill similar executive functions for other companies, which are owned or controlled by the majority shareholder. Administrative services agreement The Company has entered into agreements with companies owned by the majority shareholder, whereby the Company will provide each of these entities executive assistance, accounting and financial management services, legal and administrative assistance, insurance, management information services and other management services as required. Under the terms of the agreement, the Company is reimbursed at its cost on a monthly basis for all services provided. Such reimbursements totaled approximately $10,300, $78,000 and $145,000 in 2000, 1999 and 1998, respectively. Construction contracts During 2000 and 1999, the construction of two of the Company's new communities has been performed pursuant to fixed price construction contracts with a company owned by the majority shareholder. On a percentage of completion basis, the construction company lost $414,000 in 2000 and earned fees totaling approximately $526,100 in 1999. F-20 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 9. Related Party Transactions (Continued) Construction contracts (continued) Throughout 1998, construction of thirteen of the Company's new communities was performed pursuant to cost plus construction contracts with the related contractor. The terms of these contracts provide for, among other things, contractor's profit and overhead of 3% to 5% of the construction costs. Such fees totaled approximately $1,430,000 in 1998. Guaranty fees In 2000, the Company paid fees totaling $120,000 to its majority shareholder for guaranteeing two of the Company's construction loans. In 1999, $65,000 was paid to the majority shareholder for guaranteeing three of the Company's loans. $75,000 was paid in 1998 to the majority shareholder for the guarantee of two of the Company's construction loans. Collateral At December 31, 2000, the Company's majority shareholder has provided a $1,000,000 cash deposit to a lender as additional collateral with respect to a real estate loan. The Company agreed to reimburse the majority shareholder for the carrying cost of the above mentioned deposit. Lease arrangements The Company leases two assisted living communities from entities controlled by the majority shareholder. The leases, expiring in 2005, are for 10 year terms at annual base rentals of $2,757,250 and are subject to additional rent payments based on a percentage of the increase in annual revenue of the respective community. Lease payments totaled $2,323,524, $2,806,784 and $2,798,650 in 2000, 1999 and 1998, respectively. The Company is responsible for all costs including repairs to the facilities, property taxes and other direct operating costs of the communities. The underlying mortgage lender for one of the leased communities requires that not less than 25% of the outstanding stock of the Company be owned by the current majority shareholder and that the current majority shareholder continue to control the management of the Company. As of December 31, 2000, $490,524 of the lease payments were deferred. Total interest expense of $19,700 was accrued on these lease deferrals during 2000. Management fees For a portion of 1998, the Company managed one assisted living community from an entity controlled by the majority shareholder. The Company received a management fee equal to 5% of the gross revenues of the community which amounted to approximately $53,300 in 1998. The community was sold to a REIT in 1998 and the Company entered into a lease agreement with the REIT and continues to operate the community. In 2000, the Company recorded $39,009 as management fee income and $142,070 as an increase in deposits under sales contract in connection with a sale manageback arrangement related to a community owned by its majority shareholder (Note 4). F-21 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 9. Related Party Transactions (Continued) Interest paid to related party Interest paid to a construction company owned by the majority shareholder was $18,900, $49,000 and $25,000 in 2000, 1999 and 1998, respectively. During December 2000, the Company formed a joint venture with the majority shareholder for the purpose of acquiring four communities for $33.9 million. The four communities, including one formerly accounted for as a capitalized lease, were previously leased from two separate real estate investment trusts. The Company contributed $0.6 million along with its rights to purchase the four communities for a 75% interest in the joint venture. The majority shareholder contributed $1.2 million for a 25% interest. In addition, the venture obtained $32.2 million in bank financing and $0.5 million of seller provided financing in order to complete the four acquisitions. 10. Retirement Plan Employees of the Company participate in a salary deferral plan under the provisions of Section 401(k) of the Internal Revenue Code whereby they may defer a portion of their gross wages. The employer may make additional contributions to the Retirement Plan. Employer contributions made by the Company totaled approximately $154,166, $137,100 and $85,900 in 2000, 1999 and 1998, respectively. 11. Contingencies The Company is involved in certain litigation relating to claims arising out of its operations in the normal course of business. The Company maintains insurance coverage against potential claims in amounts, which it believes to be adequate. Management believes that it is not presently a party to any litigation, the outcome of which would have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. 12. Financial Results and Liquidity From 1995 to present, the Company's revenues increased from $12.6 million to $64.9 million. However, in connection with the opening and lease up of its newly developed communities, the Company incurred substantial operating losses. Although initial operating losses were anticipated, the Company did not foresee the extent of such losses. The Company attributes these losses to the extended time required to fill its communities and the difficulty in maintaining occupancy, which are primarily the result of competitive factors. Until recently, the Company has been successful at funding its operating losses through a combination of equity, subordinated note, lease and sale-leaseback arrangements with real estate investment trusts and conventional debt financing. As of December 31, 2000, the Company's working capital decreased to a deficit of $3.9 million and its accumulated deficit increased to $32.5 million. Although operating results have continued to improve during the F-22 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 12. Financial Results and Liquidity (Continued) past three years, the Company anticipates that its cash requirements during 2001 will exceed the cash provided by operations. Accordingly, the Company has begun the process of preparing and implementing a Plan (the Plan) to address the Company's liquidity issued. The Plan involves the conversion of certain debts to equity, a bridge loan from the Company's majority shareholder, the planned disposition of selected assets, and the renegotiations of certain debt and lease obligations (see Note 13). In addition, the Company has engaged an investment banking advisor to evaluate the Company's financial position, to assist in the Plan, and to provide strategic alternatives including the raising of equity or placing of debt. Certain operating lease agreements and loans contain restrictive covenants. As of December 31, 2000, the Company is in violation of certain restrictive covenants including certain coverage ratios, net worth calculations and financial reporting pertaining to twelve operating lease agreements and a debt obligation (see Notes 4 and 7). The Company is currently attempting to resolve a notice of default. There can be no assurance regarding whether or not any of the Company's lessor or lenders will take aggressive action as a result of the covenant violations. As the Company proceeds with the implementation of the Plan, including negotiations with its various financial partners, the Plan will be modified to address issues that arise. Should the Company's working capital continue to deteriorate before a Plan is fully implemented or should any of the Company's financial partners take aggressive action, which could jeopardize the Company's assets, liquidity or ongoing operations, the Company may be forced to pursue a court supervised reorganization. The matters discussed above raise substantial doubt regarding the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern. 13. Subsequent Events During February 2001, the Company assigned its leasehold interest in the three Wyoming communities to a third-party for $325,000. In March 2001, the Company's Board of Directors approved the conversion of $750,000 of accrued dividends due to the preferred shareholder and $507,877 of deferred lease payments due to the majority shareholder into 857,143 and 580,431 shares of common stock, respectively. Such amounts were included in other noncurrent liabilities at December 31, 2000. In connection with this transaction, the preferred shareholder agreed to waive its dividend for a period of two years and the majority shareholder agreed to provide $1,000,000 in bridge financing (the Bridge Loan). F-23 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 13. Subsequent Events (Continued) Through June 30, 2001, the majority shareholder provided cash advances totaling $750,000 under the Bridge Loan. At June 30, 2001, such advances were combined with additional outstanding amounts due to the majority shareholder and an affiliated company, along with accrued interest, into a demand note in the amount of $1,259,133. At the sole option of the holder, the note is due upon the sale of certain assets, upon demand or no later than June 30, 2002. The note is secured by land held for sale. On July 3, 2001, the Company's Board of Directors approved a $1,000,000 operating line of credit provided by the majority shareholder. Through July 10, 2001, the Company has drawn $600,000 under the line. At the sole option of the holder, the line is due upon the sale of certain assets, upon demand or no later than June 30, 2002. The line is secured by a deed of trust recorded in a second position against certain real property. The line of credit bears interest at 18%. The majority shareholder earned a $50,000 fee as a result of providing this financing. During April 2001, the Company and a commercial bank, which in December 2000 financed the purchase of four previously leased communities, agreed to modify the terms of their debt financing. Although the financing provides that all cash flow from the operations of the four repurchased communities be applied against the outstanding principal of a certain portion of the underlying debt, the bank agreed to waive this provision for a period of six months ending September 2001. During the first three months of the modification, the net cash flow from the four communities totaled approximately $540,000. Also during April 2001, the Company and two real estate investment trusts (each a REIT) agreed to lease deferrals totaling $649,629. Of this amount, $257,805 was paid in July, $257,805 is due in August, and $134,019 is due in October or upon the sale of certain assets. Further, an additional REIT agreed to apply security deposit funds (classified as Restricted Cash) in the amount of $63,639 as a partial offset of lease payments that were due in April and May. During May 2001, the Company and a REIT agreed to transfer $502,600 from Restricted Cash to a working capital escrow for the purpose of funding operating deficits from two leased communities. In addition, both the Company and the REIT agreed to fund into the escrow up to an additional $1 million, if necessary. The first $375,000 of additional funding is to be derived from the cash flow generated from two other communities which are under the same lease arrangement. The next $375,000 is to be provided by the REIT in the form of a loan and the remaining $250,000 is to be derived from the communities cash flow. Further, the REIT agreed to temporarily waive a security deposit to be provided in the form of a letter of credit. As of July 2001, the working capital escrow totaled $696,878. F-24 Regent Assisted Living, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued 13. Subsequent Events (Continued) The California Department of Social Services (DSS) filed an accusation against the Company on December 15, 2000 seeking to revoke licenses for eight of the Company's assisted living communities in the state of California. The Company believes that the accusation was the result of a death at the Company's Sunnyside Court community in Fremont, California. On June 28, 2001, the parties reached a final settlement on the matter. As part of the settlement, the Company agreed to subject three communities to certain conditions of probation, including the maintenance of high quality of care and training standards that exceed regulatory requirements. The Company voluntarily put into place many of these standards prior to the settlement. F-25