-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QX2EzCYvZIqt6qDH8xLGzbVzxChS9K5HUrGP9lUG7OsKeWK8RLr9cgvIOYaRykQM MxFg9Pm3EBXsqIbjtDehuQ== 0001200952-02-000018.txt : 20021107 0001200952-02-000018.hdr.sgml : 20021107 20021107165051 ACCESSION NUMBER: 0001200952-02-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20021107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGENT ASSISTED LIVING INC CENTRAL INDEX KEY: 0001000693 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 931171049 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27108 FILM NUMBER: 02812850 BUSINESS ADDRESS: STREET 1: 121 SW MORRISON ST STREET 2: STE 1000 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: 5032274000 MAIL ADDRESS: STREET 1: 121 SW MORRISON ST STREET 2: STE 1000 CITY: PORTLAND STATE: OR ZIP: 97204 10-K 1 ral_k112.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to ____________ Commission file number 0-27108 REGENT ASSISTED LIVING, INC. (Name of registrant as specified in its charter) Oregon 93-1171049 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 121 SW Morrison Street, Suite 950 Portland, Oregon 97204 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (503) 227-4000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __ No [X] - Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] - State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of November 7, 2002: $101,421 State the number of shares of Common Stock outstanding at November 7, 2002: 4,507,600 Documents Incorporated by Reference ----------------------------------- 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 17 Item 3 - Legal Proceedings 19 Item 4 - Submission of Matters to a Vote of Security Holders 21 Item 4(a) - Executive Officers of the Registrant 21 PART II Item 5 - Market for Common Stock and Related Stockholder Matters 23 Item 6. Selected Consolidated Financial Data 24 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation 25 Item 7(a) Quantitative and Qualitative Disclosre About Market Risk 39 Item 8 - Financial Statements and Supplementary Data 39 Item 9 - Changes in and Disagreements with Accountants On Accounting and Financial Disclosure 39 PART III Item 10 - Directors, Executive Officers and Control Persons; Compliance with Section 16(a) of the Exchange Act 40 Item 11 - Executive Compensation 41 Item 12 - Security Ownership of Certain Beneficial Owners and Management 44 Item 13 - Certain Relationships and Related Transactions 45 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49 SIGNATURES 52 CERTIFICATIONS 53 PART I ITEM 1. DESCRIPTION OF BUSINESS Overview and Background - ----------------------- The Company is an owner and operator of private-pay assisted living communities including stand-alone Alzheimer's care communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. The Company's growth strategy had been based upon the premise that high-quality assisted living services can be more appropriately and efficiently provided in its prototypical designed communities rather than in an existing facility that could be converted to use as an assisted living community. However, as further discussed below and in item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," during 2001, as a result of continuing operating losses and difficulties in obtaining operating licenses for certain new buildings, the Company was unable to meet certain of its lease obligations, discontinued all development and construction activities, reduced the number of communities it operates, downsized its workforce and entered into an agreement whereby the Company subcontracted a substantial portion of the management duties for its communities to another assisted living company, Emeritus Corporation. The Company has also been burdened by the bankruptcy of its former professional liability claims insurer Reliance Insurance Company (Reliance). As further explained in item 3 " Legal Proceedings", Reliance provided professional liability claims insurance for the Company from March 1, 1998 to March 1, 2001. With Reliance currently in liquidation and no longer able to pay any losses or claims expenses, the Company must now defend itself from all claims in which it previously would have been protected through its insurance program. In 1996 the Company began an aggressive expansion program of acquiring sites in select markets in the western United States and began the development and construction of new communities. This program resulted in a dramatic increase in the number of communities and beds under operation in both 1997 and 1998. At the time of the Company's initial public offering in 1995, the Company operated four communities with a resident capacity of 565 beds. The Company grew to a resident capacity of 2,996 beds and operated 30 communities at the end of 2000. As of December 31, 2001, the Company had downsized its operations to 20 communities with a resident capacity of 2,067 beds. As of November 7, 2002, the Company operated 14 communities with a resident capacity of 1,575 beds. From 1995 to 2000, the Company's revenues increased from $12.6 million to $64.9 million. However, in connection with the opening and lease up of its newly developed communities, the Company incurred substantial operating losses. Although initial operating losses were anticipated, the Company did not foresee the extent of such losses. The Company attributes these losses to the extended time required to fill its communities and the difficulty in maintaining occupancy, which is primarily the result of competitive factors. Additionally, in 2001, the Company encountered extraordinary circumstances and difficulties in obtaining licenses for two new California buildings and in obtaining a certificate of occupancy for its new Arizona building resulting in significant time delays in opening these buildings. These delayed 1 openings resulted in significant unanticipated cash expenditures and delayed revenue generation for the Company. In an attempt to address the Company's requirement for capital, in March 2001, the Company's Board of Directors approved and agreed to the implementation of a financial plan to address the Company's liquidity issues with the Company's majority shareholder and preferred shareholder. The financial plan included the conversion of certain debts to equity, a bridge loan provided by the Company's majority shareholder, the planned disposition of selected assets and the renegotiation of debt and lease obligations. The Company's Board of Directors approved the conversion of $750,000 of accrued dividends due to the preferred shareholder and $507,877 of deferred lease payments due to the majority shareholder into 857,143 and 580,431 shares of common stock, respectively. In connection with this transaction, the preferred shareholder agreed to waive its dividend for a period of two years beginning January 1, 2001, and the majority shareholder agreed to provide $1 million in bridge financing. Although the plan was partially implemented, the Company and the preferred shareholder did not complete the conversion into common stock and did not negotiate the final terms and conditions for the dividend waiver. The Company's Articles of Incorporation and state law prohibit the current payment of the preferred dividend since in the judgment of the Company's Board of Directors, the payment of the preferred dividend would jeopardize the on-going viability of the Company and potentially result in its insolvency. Accordingly, the accrued dividends are classified as long-term liabilities at December 31, 2001. In March 2001, the Company was unable to close two conventional loans with a financial institution in order to refinance two of its California communities. The inability to complete one loan was due in part to a pending accusation against the Company by the State of California Department of Social Services that was subsequently settled in July 2001, see item 3 "Legal Proceedings". Both loans failed to close due to the inability of the Company to obtain minimum excess liability coverage limits of five million dollars. As a result, the Company was unable to recover $195,500 in non-refundable advance deposits. These funds were advanced to the financing company directly by the majority shareholder and were included in the June 30, 2001 bridge financing demand note payable to the majority shareholder as described below. In March 2001, the Company reached an agreement with Health Care REIT, Inc. (HCN), the owner of four of the Company's leased communities, to utilize working capital escrow funds for two of its leased communities beginning in April 2001. The Company agreed to convert all of its leases with HCN into a master lease. The agreement was finalized in May 2001 and HCN agreed to transfer $502,600 from Restricted Cash to a working capital escrow for the purpose of funding operating deficits generated by the two leased communities. In addition, both the Company and HCN agreed to fund into the escrow an additional $1 million, if necessary. The first $375,000 was to be derived from the cash flow generated from two other communities leased from HCN. The next $375,000 was to be provided by HCN in the form of a loan and the remaining $250,000 was to be derived from the communities cash flow. Further, HCN agreed to temporarily waive a requirement for a security deposit in the form of a letter of credit. In March 2001, the Company failed to pay its March lease payment for its San Antonio community and received a notice of default from the lessor, Texas HCP Holding, L.P. (HCPI). In order to address the notice of default, the Company and HCPI executed a lease amendment to defer the payment of the March rent until July 2001 and also to defer the April 2001 lease payment until August 2001. These lease deferrals totaled $134,019. The Company did not pay these lease deferrals and in October 2001, after non-payment of the September and October 2001 lease payments, the Company received notice of termination from HCPI. The Company and the 2 lessor reinstated the lease effective November 1, 2001 after the lessor agreed to apply these past due rents against the $1,100,000 letter of credit held by the lessor. In April 2001, the Company and a commercial bank, which in December 2000 financed the purchase of four previously leased communities, agreed to a modification of the terms of their debt financing. The financing had originally provided that all cash flow from the operations of the four repurchased communities be applied against the outstanding principal of a certain portion of the underlying debt. The bank agreed to waive this provision for a period of six months ending September 2001. During the six months of the modification, the net cash flow from the four communities totaled approximately $976,000. In April 2001, the Company negotiated with LTC West, Inc. (LTC) the real estate investment trust owner of five of the Company's leased properties, lease deferrals of its May and June lease payments for four of the leased properties. The agreement deferred $257,805 in lease payments until July 2001 and $257,805 until August 2001. Additionally, LTC required the Company to amend its five leases so that all such leases would be cross-colateralized and cross-defaulted. On June 12, 2001, the Company's Board of Directors approved entering into a cross-colateralization and cross-default agreement for the two communities leased by the Company from entities owned by the majority shareholder. Pursuant to the financial plan, the majority shareholder provided cash advances totaling $750,000 under the bridge financing arrangement through June 30, 2001. On June 30, 2001, such advances were combined with additional amounts outstanding due to the majority shareholder and an affiliated company, along with accrued interest, into a demand note in the amount of $1,259,133. On July 3, 2001, the Company's Board of Directors approved a $1 million operating line of credit to be provided by the majority shareholder. Through September 7, 2001, the Company drew $1,000,000 under the line. In July 2001, the Company engaged an investment banking advisor to evaluate the Company's financial position, to assist in implementation of a restructuring plan, and to provide strategic alternatives including the raising of equity or placing of debt. The Company discontinued the investment banking services in September 2001. In August 2001, the Company sold one parcel of land it had available for sale that generated $0.5 million in net proceeds for the Company. Despite the cash infusion that resulted from these transactions the Company's liquidity difficulties continued due to recurring operating losses at certain of its communities and due to extraordinary circumstances and prolonged licensing issues in California. This resulted in significant unanticipated cash expenditures and delayed revenue generation for the Company. As a result of the Company's lack of liquid resources, the Company was unable to meet its September 2001 and October 2001 lease obligations to five lessors of the Company's assisted living communities: HCN, LTC, HCPI, Meditrust and the majority shareholder. The Company was issued default notices by the lessors of these leased communities. The Company entered into a settlement agreement with HCN. The operations of the four communities leased from HCN were transferred to new operators and the Company issued notes to HCN for past due rent obligations. The Company entered into a similar settlement agreement with LTC. The operations of the five communities leased from LTC were transferred to new operators and the Company issued notes to LTC for past due rent obligations. These settlement agreements are in full 3 satisfaction of all claims from cancellation of the lease agreements. The leases of the two communities leased from entities controlled by the Company's majority shareholder were terminated by the lessors effective November 1, 2001 due to non-payment of rent. The Company has recorded the missed lease payments as notes payable and is attempting to negotiate a settlement with respect to these properties on terms substantially similar to those agreed to by HCN and LTC. The Company currently manages these communities on behalf of the entities owned by the majority shareholder. In June 2002, the Company received a letter from its preferred shareholder disputing the termination of these leases and claiming that the terminations are voidable. See item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of the lease terminations. In November 2001, the Company entered into a loan workout and settlement agreement with one of its third party lenders as a result of a payment default under the loan agreement. The Company deeded one parcel of land it had available for sale to the lender in satisfaction of $0.9 million of debt, restructured payment terms on the remaining loan obligation and provided collateral in other land held for sale. Of the remaining debt due of $0.7 million, the Company paid $73,500 in November 2001, $186,500 in December 2001, $250,000 in February 2002 and the remaining balance due of $225,000 was paid in September 2002. In December 2001, the Company, concerned by the quarterly interest obligation of its subordinated convertible notes and its operating losses at its Bakersfield, California community, exchanged its Bakersfield and Vacaville, California communities for $8.9 million of the convertible notes. An affiliate of LTC acquired the two properties subject to $18.3 million in mortgage and local improvement debt. The Company recorded a gain of $12.0 million in connection with this non-cash transaction. On December 26, 2001, the Company and its majority shareholder agreed to a specified distribution of the assets of Regent/Bowen, LLC, a joint venture formed in December 2000 for the purpose of acquiring four communities that were previously leased. The venture was dissolved and 100% of the venture's interest in the Santa Cruz and Clovis, California communities was distributed to the Company and 100% of the venture's interest in the Eugene, Oregon community was distributed to the majority shareholder. The remaining community in Boise, Idaho and other venture assets were distributed 75% to the Company and 25% to the majority shareholder in accordance with their respective ownership interests. As a result of the dissolution, the Company distributed cash of $165,091 and recorded a $31,783 payable to the majority shareholder. Pursuant to the financial plan agreed to in March 2001, the Company sold its Santa Cruz, California property to its majority shareholder on December 27, 2001, for a net sales price of $11.7 million. The Company received $5.0 million in cash proceeds of which $2.9 million was retained by the Company and $2.1 million was used to reduce debt after which $6.7 million of debt was assumed by the majority shareholder. Because of the transactions described above, the Company's operations were reduced from 30 properties to 20 properties in 2001. As of December 31, 2001, the Company's working capital decreased to a deficit of $5.9 million and its accumulated deficit increased to $35.0 million. Included in current liabilities are payables to the Company's majority shareholder of $2.6 million. Also included in current liabilities is $8.9 million in debt related to the Company's South Ogden, Utah community. The Company had been declared in default under terms of the South Ogden loan agreement, and 4 accordingly the amount due was included in current portion of long-term debt. As described below, in May 2002 the Company signed an agreement with the lender whereby the Company transferred the South Ogden community to the bank in full satisfaction of the related debt. The Company has classified the net book value of the South Ogden property of $8.3 million in current assets at December 31, 2001. The Company continues to address its liquidity issues (see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Recent Developments - ------------------- The Company is considering various alternatives that may include the disposition of selected assets and/or the merger or sale of the remaining assets of the business. The Company believes that the ultimate outcome of these pursuits, if taken, will not generate any value for the common shareholders. Commencing January 1, 2002, the Company contracted with Emeritus Corporation, an unrelated assisted living company, to provide operations management, consulting and accounting services to its assisted living communities. Under the terms of the agreement the Company pays a fee to Emeritus based on the number of communities and subject to the agreement of services provided. The typical fee is $8,000 per month per community plus potential performance incentives. The agreement is for a term of three years. As a result of this agreement, the Company implemented a plan to significantly reduce its corporate workforce at December 31, 2001 and through the beginning of 2002 to allow for an orderly transition of services. The Company continues to provide an oversight management role, partnership administration and asset management services including continued responsibility for placement of insurance and debt financing arrangements. In February 2002, the Company entered into a lease termination agreement with Meditrust Acquisition Company LLC, (Meditrust) the real estate investment trust owner of its Alzheimer community in Scottsdale, Arizona and its assisted living community in Folsom, California. The Company's leases for these two communities were canceled and the Company was released from all liability thereunder, including any past due obligations to pay rent under the leases and any real estate taxes in excess of $25,000. In 2002, the Company realized a reduction in current liabilities recorded at December 31, 2001, of approximately $217,200 as a result of this transaction. The new owners of these two communities are affiliated with Emeritus Corporation. In May 2002, the Company sold its West Wind community located in Boise, Idaho to an unrelated third party. The Company received $2.8 million in sales proceeds and paid down $2.4 million in debt that was classified as current at December 31, 2001. Accordingly, the Company has classified the net book value of the West Wind property of $2.6 million in current assets at December 31, 2001. The Company abandoned its wholly owned subsidiary's Elk Grove, California construction project in December 2001 as a result of a declaration of default on the loan agreement by the construction lender. The Company wrote off $3.8 million in related construction costs and $155,000 in restricted cash deposits, was released from $3.0 million of construction debt and recorded a loss for this project of $0.9 million at December 31, 2001. In May 2002, the Company entered into a settlement agreement with the lender and effective June 3, 2002 transferred its ownership interest in the construction project to a third party purchaser 5 identified by the lender. No cash proceeds were generated for the Company as a result of this transaction. The Company and the majority shareholder had provided guarantees of the construction loan and were relieved of these guarantees upon closing of the transaction. In addition, the settlement agreement provided for the transfer of the Company's South Ogden community to the lender in lieu of foreclosure. The transfer of the South Ogden community closed May 31, 2002. The Company recorded a gain of $1.1 million in 2002 in connection with this non-cash transaction. The lender had declared the Company in default on the $8.9 million loan for the South Ogden facility in 2001 and accordingly this debt was classified as current at December 31, 2001. Accordingly, the Company has classified the related South Ogden property of $8.3 million in current assets at December 31, 2001. In September 2002, the Company sold its 55% co-tenancy interest in its Modesto community to an unrelated third party for a net sales price of $2.8 million. The Company received $1.0 million in cash proceeds, $0.1 million in notes receivable and satisfied $1.7 million of co-tenancy debt which was assumed by the buyer. The Company, its majority shareholder and the unrelated 45% co-tenant continue to guarantee the full $3.0 million in debt assumed by the buyer. The Company recorded a gain in 2002 totaling $1.0 million as a result of this transaction. In September 2002, the Company assigned its lease of its San Antonio community to Emeritus Corporation for $408,000. The Company recorded a gain in 2002 of approximately $327,000 as a result of this transaction. In connection with the assignment the lessor released to the Company the cash deposit held under a letter of credit arrangement in the amount of $741,752. This deposit was included in restricted cash at December 31, 2001. Assisted Living - --------------- The assisted living industry has evolved in response to pressure from the public to contain spiraling medical and other health care-related costs and because of the opportunity assisted living provides to allow senior citizens to "age in place" in a residential environment. Assisted living offers a combination of housing and personalized health and support services for senior citizens who cannot live completely independently but who do not require the 24-hour medical care provided by a skilled nursing facility. Skilled care typically also costs much more than that provided at an assisted living community. Generally, assisted living residents require higher levels of care than residents in congregate care but lower levels of care than patients in skilled nursing facilities. In addition to housing and meals (the services commonly provided in a congregate care facility), assisted living communities provide a range of personal care and support services designed to meet the individual needs of residents, including instrumental activities of daily living ("IADLs") such as laundry and transportation services. Additionally, assisted living residents often require assistance with activities of daily living ("ADLs") such as bathing, dressing, incontinence care and taking medications, but generally are not bedridden and can often provide various degrees of self-care. Assisted living seeks to encourage residents to live as independently as possible, emphasizing quality care while treating residents with dignity and respect. Principal Services - ------------------ 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 6 life. Services are available 24 hours a day to meet both anticipated and unanticipated needs. General services include the provision of three meals per day, laundry, housekeeping, transportation, activities and medication maintenance. Available support services include personal care and routine nursing care, social and recreational services, transportation and other special services needed by the resident. Personal care includes services such as bathing, dressing and grooming, as well as assistance with personal hygiene, ambulation and eating. Other services include assistance with banking, grocery shopping and pet care. Each of the Company's communities offers residents services on a packaged basis. These packages of services are based on three progressively more comprehensive levels of care and two additional levels of care for dementia-specific care residents. This approach permits the Company to charge residents for graduated levels of care. Each level of care is priced to reflect all services provided at that level. In addition, this approach simplifies the billing process, which permits residents to plan their personal budgets with confidence. As the required level of care increases, the Company's revenues per resident also increase. The Company charges a variety of rates depending upon the level of care required and whether the resident chooses to live alone or in a companion suite. Geographic location, local wages and operating costs also affect the Company's rates. As of December 31, 2001, the Company charged rates ranging from a monthly low of $1,200 to a high of $4,812 for its assisted living services and a monthly low of $3,120 to a high of $6,200 for its dementia-specific care. Residents are also required to pay the Company a nonrefundable community fee prior to admission and, in some locations, also a refundable security deposit. Principal Product Lines - ----------------------- The Company currently provides its services in 20 assisted living communities including stand-alone Alzheimer's care communities. Of these 20 communities, 17 were internally developed. The existing communities offer numerous services and activities designed to meet the varying needs of the residents, including the unique services required by residents afflicted with Alzheimer's disease or other age-related dementia ("dementia-specific care"). This community concept is generally identified by the Company as a "Regent" community and is the genesis of the Company's prototypical community. The Company currently operates 12 Regent communities. The Company developed a "Regent House" model, a smaller community than the "Regent", in order to meet differing market demands. The Regent House maintains the operational efficiencies and resident and service focus of the Regent model. The Company currently operates one Regent House that was managed by a third party in 2001. The Company also developed its "Regent Court" community at which it provides services solely to residents with dementia-specific care needs. The Company currently operates four Regent Courts. (i) Regent The "Regent" is the Company's primary stand-alone assisted living community model. This prototype design has been developed and refined through the Company's experience as an operator of its early assisted living communities, which also contain a significant portion of the important attributes of the Regent prototype. Use of this prototype will continue to allow the Company to control development costs and maintain efficiency in development and operations. 7 The prototypical Regent community is a stand-alone assisted living community containing from 90 to 135 assisted living beds, with between 10 and 20 percent of the total generally comprising the Kingswood Alzheimer's unit. A "stand-alone" assisted living community is a community devoted entirely to assisted living, as distinct from other models that may offer assisted living units in a separate wing or floor as well as other forms of long-term care such as congregate care or skilled nursing care. Regent communities generally range in size from 60,000 to 86,000 square feet and are generally built on parcels ranging in size from three to six acres. The buildings are two or three stories, depending upon site restrictions, and of wood frame, fire-rated construction. The exterior features are designed to be compatible with the predominant architectural designs of the area and with an emphasis on a residential versus institutional appearance. Individual units range in size from 320 square feet for a studio to 450 square feet for a one-bedroom apartment. Two-bedroom units are approximately 755 square feet in size. In some locations the Company has developed a small number of 900 square foot two-bedroom cottages next to the community for occupancy by a spouse of a community's resident or for those who do not require the more intensive services offered within the community. (ii) Regent House In addition to the larger Regent prototype, the Company has developed a smaller version for markets in which there currently is less demand for assisted living services. The smaller "Regent House" community will be approximately 40,000 to 55,000 square feet and be comprised of between 72 and 90 beds, generally with at least 22 beds comprising the Kingswood Alzheimer's unit. The community is designed with the same operational efficiencies and resident living and service considerations as the larger model, including similar sized living units, but with generally smaller lounge, dining, and recreation areas to reflect the lower resident population. The interior layout of each Regent House is designed to promote efficient delivery of services and resident independence. Circulation is organized around a core area on the ground level which contains the kitchen and common dining area, administrative offices, a commercial laundry, a private dining room, lounge, day room and public restrooms. Elevators are conveniently located for easy access to all common areas and resident units. Each Regent House community is expected to contain a Kingswood Alzheimer's unit which is designed to house and address the needs of residents afflicted with Alzheimer's disease and other age-related dementia. The dementia-specific care units are located in a separate wing or area of the community and have their own dining communities, resident lounge areas, and specially trained staff. The physical separation of the Kingswood unit from the rest of the community enables dementia-specific care residents to receive the unique care they require with a minimum of disruption to other residents. 8 (iii) Regent Court The "Regent Court" is a specially designed community solely for residents afflicted with Alzheimer's disease or other age-related dementia. The typical Regent Court resident will have cognitive difficulties, impaired motor functions, may be wander prone, and may have incontinence. Accordingly, as with the Kingswood unit of the Regent community, these communities will be much smaller than the Regent or Regent House, typically 22,000 to 26,000 square feet in a one-story configuration, and typically will service up to 48 residents within its 24 units. The Regent Court's 24 units are divided into four "neighborhoods" of equal size. Both the overall layout and that of each neighborhood are designed to provide an ideal therapeutic living environment and promote the efficient delivery of services. Generally, two neighborhoods are reserved for those residents with a high level of function and two for those with lower levels of function. The community is designed in this manner with the primary goal of providing high-quality care to the dementia-specific care needs of residents who require personalized care while providing for maximum efficiencies of operation. Because the residents generally are easily agitated and confused, organizing care within separate neighborhoods permits the Company to assign staff to a specific neighborhood in caregiver clusters. This permits the Company to minimize each resident's exposure to multiple persons and allows staff to more thoroughly learn about and provide for a resident's specific needs. Each neighborhood is connected to the others and to the main administrative area by a series of hallways, walkways, and a courtyard. Furthermore, due to the propensity of the Regent Court's residents to wander, exterior pathways are secured with fences to provide maximum independence to the residents while also insuring their safety. Some Regent Courts also feature covered walkways to permit residents opportunities for exercise on inclement days. Competition - ----------- 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. 9 Increased Operating Costs - ------------------------- During the past year, the Company has experienced significant increases in labor costs, utility rates and professional liability insurance premiums. The Company faces substantial competition with respect to the hiring and retention of qualified personnel. The Company is dependent upon the existing available labor pool in each market in which it operates. There can be no assurance that labor costs will not continue to increase, or that the Company will be able to attract the necessary personnel at a reasonable cost. The Company has no control over its utility rates. There can be no assurance that utility costs will not continue to increase, or that the Company will be able to buy the power necessary to operate its communities. The Company's professional liability insurance premiums have escalated and the coverages have diminished. The Company maintains coverage limits of $1 million per incident, $3 million community aggregate, and $10 million policy aggregate, on a claims made basis with a $50,000 deductible per incident with a maximum annual deductible of $250,000, except with respect to its Texas community for which the Company has elected to be self-insured. Providing health care services involves an inherent risk of liability. There can be no assurance that future claims in excess of insurance coverage will not have a material adverse effect upon the Company's financial position or operating results. There can be no assurance that the Company will be able to obtain liability insurance in the future, or that such coverage will be available at reasonably acceptable terms. As further explained in item 3 "Legal Proceedings" and in the liquidity discussion of item 7 " Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company is currently subject to significant liability losses that are uninsured as a result of the bankruptcy of its former professional liability claims insurer Reliance Insurance Company. Government Regulation - --------------------- The Company's assisted living communities are subject to regulation and licensing by local and state health and social service agencies and other regulatory authorities. Although regulatory requirements differ from state to state, these requirements generally address, among other things: personnel education, training and records; staffing levels; community services, including administration and assistance with self-administration of medication; community design and specifications; resident characteristics; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities. In order to qualify as a state licensed facility eligible to receive Medicaid funding, the Company's communities must comply with additional regulations in these areas. The Company's communities are also subject to various zoning restrictions, local building codes and other ordinances, including fire safety codes. These requirements vary from state to state and are monitored in varying degrees by state agencies. The Company has obtained all required licenses. Assisted living communities are subject to less regulation than other licensed health care providers, but more regulation than congregate care or independent living retirement residences. However, the Company anticipates that states and the federal government will likely impose additional regulations and licensing requirements. Currently, certain states require licensees to provide the assisted living services offered by the Company. Certain states also require 10 Certificates of Need for assisted living facilities, but this is not a requirement in states where the Company currently conducts business. There can be no assurance that administrative or judicial interpretation of existing laws or regulations or enactment of new laws or regulations will not have a material adverse effect on the Company's results of operations or financial condition. The Company believes that its current communities are in substantial compliance with all applicable regulatory requirements. Similar to other health care facilities, assisted living communities are subject to periodic survey or inspection by governmental authorities. From time to time, in the ordinary course of business, the Company receives deficiency reports which it reviews to take appropriate corrective action. Although most inspection deficiencies are resolved through a plan of correction, the reviewing agency typically is authorized to take action against a licensed community where deficiencies are noted in the inspection process. This action may include imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, or other sanctions. If the Company fails to comply with applicable requirements, its business and revenues could be materially and adversely affected. As further described in item 3 "Legal Proceedings" the California Department of Social Services (DSS) filed an accusation against the Company on December 15, 2000 seeking to revoke licenses for eight of the Company's assisted living communities in the state of California. On June 28, 2001, the parties reached a settlement of the matter whereby the Company agreed to subject three communities to certain conditions of probation, including the maintenance of high quality of care and training standards that exceed regulatory requirements. The Company voluntarily put into place many of these standards prior to the settlement however further violations could jeopardize the Company licenses in that state. Although only a small portion of the Company's revenues are derived from the Medicaid program, the Company is subject to Medicaid fraud and abuse laws which prohibit any bribe, kickback, rebate or remuneration of any kind in return for the referral of Medicaid patients, or to induce the purchasing, leasing, ordering, or arranging of any goods or services to be paid for by Medicaid. Violations of these laws may result in civil and criminal penalties and exclusions from participation in the Medicaid program. The Company is not aware of any non-compliance with applicable Medicaid laws. Employees - --------- As of December 31, 2001, the Company employed approximately 891 full time and 321 part-time employees and the corporate offices employed 19 individuals full time and 1 part-time. This compares to December 31, 2000 whereby the Company employed approximately 1,347 full time and 431 part-time employees and the corporate offices employed 51 individuals full time and 2 part-time. As of November 7, 2002, the Company employed approximately 715 full time and 279 part-time employees and the corporate offices employed four individuals full time. None of the employees is represented by any labor union. The Company had managed one community in 2001 and 2000 at which the owner employed members of a labor union. The Company no longer manages this community. Management believes that its employee relations are good. Trademarks - ---------- The Company has federally registered its "Regent," "Regent Court," "Kingswood," and "Regent House" trade names in addition to the Company's logo. 11 Risk Factors and Forward Looking Statements - ------------------------------------------- Set forth below are the risks that the Company believes are material. The information set forth in this report on form 10-K, including the risks below, contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and are subject to the safe harbor created by that section. From time to time, information provided by the Company, or statements made by the Company's management, may contain other forward-looking statements. The Company's ability to implement strategies to address its liquidity issues, as described in "Description of Business - Recent Developments", the factors discussed in, "Competition", "Increased Operating Costs" and "Government Regulation" and the following additional factors, among others, could cause the Company's actual results to differ materially from those expressed in the Company's forward-looking statements contained in this report and presented elsewhere by management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report. THE COMPANY MAY NOT COMPLETE ANY OF THE STRATEGIC ALTERNATIVES IT IS EXPLORING. The Company is exploring strategic alternatives, including the possible sale of the Company or its assets. The Company cannot assure that it will be able to complete a transaction on terms satisfactory to the Company or at all. If the Company does not complete a transaction, and is unable to obtain additional financing, the Company's business may fail. THE COMPANY IS HIGHLY LEVERAGED. The Company is highly leveraged. After completing a number of settlement arrangements with its lessors and lenders, the Company has total term debt, including short-term portion, of $35.9 million and a deficit balance in shareholders' equity of $15.0 million as of December 31, 2001. The Company obtained some relief through the completion of the settlements with lessors and lenders, but continues to be highly leveraged. The degree to which the Company is leveraged could have important consequences, including: - making it difficult to satisfy debt or lease obligations; - increasing the Company's vulnerability to general adverse economic and industry conditions; - limiting the Company's ability to obtain additional financing; - requiring dedication of a substantial portion of the Company's cash flow from operations to the payment of principal and interest on debt and leases, thereby reducing the availability of such cash flow to fund working capital, capital expenditures or other general corporate purposes; - limiting the Company's flexibility in planning for, or reacting to, changes in its business or industry; and - placing the Company at a competitive disadvantage to less leveraged competitors. 12 Failure to comply with any covenants included in, or make timely payments on, the Company's debt or lease agreements constitutes an event of default, which will allow a lessor or lender (at its discretion) to declare any amounts outstanding under the loan or lease documents, as applicable, to be due and payable. The Company cannot provide assurance that it will comply in the future with these covenants included in the loan and lease agreements or have the ability to make payments in a timely manner. If the Company fails to comply with any of these debt or lease obligations (after giving effect to any applicable cure period), the lender or lessor may declare the Company in default of the underlying obligation and exercise any available remedies, which may include: - in the case of debt, declaring the entire amount of the debt immediately due and payable; - foreclosing on any residences or other collateral securing the obligation; and - in the case of a lease, terminating the lease and suing for damages. Accordingly, if enforced, the Company could experience a material adverse effect on its financial condition. THE COMPANY IS A PARTY TO SIGNIFICANT LEGAL PROCEEDINGS AND IS LIABLE FOR LOSSES NOT COVERED BY OR IN EXCESS OF ITS INSURANCE. Participants in the senior living and long-term care industry, including the Company, are routinely subject to lawsuits and claims. Many of the persons who bring these lawsuits and claims seek significant monetary damages, and these lawsuits and claims often result in significant defense costs. As a result, the defense and ultimate outcome of lawsuits and claims against the Company may result in higher operating and administrative expenses. Those higher operating and administrative expenses could have a material adverse effect on the Company's business, financial condition, results of operations, cash flow or liquidity. In order to protect against the lawsuits and claims made against it, the Company currently maintains insurance policies in amounts and covering risks that are consistent with industry practice. However, as further explained in Item 3 "Legal Proceedings," the Company's previous primary insurance carrier, Reliance Insurance Company (Reliance), declared bankruptcy and has informed its customers that it will not be able to cover any claims covered by its policies. Regent was covered for professional liability claims through Reliance from March 1, 1998 to March 1, 2001. As a result, Regent must now defend itself from all claims in which it previously would have been protected through its insurance program. In addition, due to the prohibitive cost for insurance in Texas, the Company is self-insured in that state. As of December 31, 2001, there were significant claims against the Company that, if determined adversely to the Company, will not be covered by insurance, see Item 3 "Legal Proceedings". The Company is vigorously defending these uncovered claims, but there can be no assurance that these claims will be resolved in the Company's favor. Unfavorable outcomes of any of these claims could have a material adverse effect on the Company's business, financial condition, results of operations, cash flow or liquidity and may ultimately cause the Company's business to fail. A number of insurance carriers have stopped providing insurance coverage to the long-term care industry, and those remaining have increased premiums and deductibles substantially. While nursing homes have been primarily affected, assisted living companies, including the 13 Company, have experienced premium and deductible increases. The Company currently maintains coverage limits of $1 million per incident, $3 million community aggregate, and $10 million policy aggregate, on a claims made basis with a $50,000 deductible per incident with a maximum annual deductible of $250,000, except with respect to its Texas community for which the Company has elected to be self-insured. From March 1, 2001 to March 1, 2002 the Company's professional liability insurance was also provided on a claims made basis. The Company currently has no coverage for any incident during this time period where the claim is made at future date. There can be no assurance that the Company will be able to obtain liability insurance in the future or on commercially reasonable terms or at all. A claim against the Company, covered by, or in excess of, the Company's insurance, could have a material adverse affect on the Company's business, financial condition, results of operations, cash flow or liquidity. THE COMPANY IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION. The operation of assisted living facilities and the provision of health care services are subject to state and federal laws, and state and local licensure, certification and inspection laws that regulate, among other matters: - the number of licensed residences and units per residence; - the provision of services; - equipment; - staffing, including professional licensing and criminal background checks; - operating policies and procedures; - fire prevention measures; - environmental matters; - resident characteristics; - physical design and compliance with building and safety codes; - confidentiality of medical information; - safe working conditions; - family leave; and - disposal of medical waste. The cost of compliance with these regulations is significant. In addition, it could adversely affect the Company's financial condition or results of operations if a court or regulatory tribunal were to determine that the Company has failed to comply with any of these laws or regulations. Because these laws and regulations are amended from time to time, the Company cannot predict when and to what extent liability may arise. In the ordinary course of business, the 14 Company will receive and has received notices of deficiencies for failure to comply with various regulatory requirements. The Company reviews such notices and, in most cases, will agree with the regulator upon the steps to be taken to bring the facility into compliance with regulatory requirements. From time to time, the Company may dispute the matter and sometimes will seek a hearing if it does not agree with the regulator. In some cases or upon repeat violations, the regulator may take one or more adverse actions against a facility, such as: - the imposition of fines - temporary stop placement of admission of new residents, or imposition of other conditions to admission of new residents to a facility - termination of a facility's Medicaid contract; - conversion of a facility's license to provisional status; and - suspension or revocation of a facility's license. The California Department of Social Services filed an accusation against Regent on December 15, 2000 seeking to revoke licenses for eight of the Company's assisted living communities in the state of California. On June 28, 2001, the parties reached a final settlement on the matter. As part of the settlement, the Company agreed to subject three communities to certain conditions of probation, including the maintenance of high quality of care and training standards that exceed regulatory requirements. The Company voluntarily put into place many of these standards prior to the settlement. The Company's failure to follow these standards could result in further violations and potentially the revocation of all of the Company's licenses to operate in California. MANY ASSISTED LIVING MARKETS HAVE BEEN OVERBUILT. Many assisted living markets have been overbuilt, including certain markets in which the Company currently operates. In addition, the barriers to entry into the assisted living industry are not substantial. The effects of overbuilding include: - it takes significantly longer for the Company's residences and its subsidiaries' residences to fill up, - newly opened facilities may attract residents from some or all of the Company's current facilities, - there is pressure to lower or not increase rates paid by residents in the Company's residences, - there is increased competition for workers in already tight labor markets, and - the Company's profit margins and the profit margins of its subsidiaries are lower until vacant units in the Company's residences are filled. If the Company is unable to compete effectively in markets as a result of overbuilding, the Company will suffer lower revenue and may suffer a loss of market share. 15 THE COMPANY MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES AND CONTROL LABOR COSTS. The Company competes with other providers of long-term care with respect to attracting and retaining qualified personnel. A shortage of qualified personnel may require the Company to enhance its wage and benefits packages in order to compete. Some of the states in which the Company operates impose licensing requirements on individuals serving as administrators at assisted living residences, and others may adopt similar requirements. The Company also depends upon the available labor pool of lower-wage employees. The Company cannot guarantee that its labor costs will not increase, or that, if they do increase, they can be matched by corresponding increases in revenues. INCREASES IN UTILITY COSTS MAY REDUCE THE COMPANY'S PROFITABILITY. Utility costs represent a significant percentage of the Company's operating costs. The Company has no control over its utility rates. There can be no assurance that utility costs will not continue to increase, or that the Company will be able to buy the power necessary to operate its communities. There can be no assurance that the Company will be able to pass the cost of increased utility rates on to its residents in the form of utility surcharges. Increases in the cost of utilities that the Company is unable to pass on to its residents could significantly reduce the Company's profits. THE COMPANY IS SUBJECT TO VARIABLE INTEREST RATES ON CERTAIN DEBT OBLIGATIONS. The Company's earnings are affected by changes in interest rates as a result of its variable rate indebtedness. The Company manages this risk by obtaining fixed rate borrowings when possible. If interest rates rise the Company's profits will decrease. There can be no assurance that the Company will be able to manage this risk effectively. 16 ITEM 2. DESCRIPTION OF PROPERTY
Current Communities. The table below sets forth certain information regarding the Company's communities as of December 31, 2001: Regent Operations Community Location Commenced Units(1) Beds(2) Interest - --------------------------------------------------------------------------------------------------- OREGON Regency Park Portland 1987 122 136 Manage(3) Regent Court Corvallis 2000 24 48 Manage(4) Sheldon Park Eugene 1998 103 115 Manage(11) WASHINGTON Northshore House Kenmore 1998 85 92 Manage(5) Regent Court Kent 1999 24 48 Manage(6) Sterling Park Redmond 1990 154 175 Manage(3) CALIFORNIA Orchard Park Clovis 1998 112 124 Own(11) Regent Court Modesto 1999 24 48 Own(7) Regent House Merced 2001 72 83 Own(12) Regent Senior West Covina 2001 130 144 Lease(12) Sunshine Villa Santa Cruz 1990 106 116 Manage(11) Villa Serra Salinas 1998 150 150 Manage Willow Creek Folsom 1997 98 113 Lease(9) IDAHO West Wind Boise 1997 48 51 Own(8) Willow Park Boise 1997 106 120 Own(11) TEXAS Hamilton House San Antonio 1997 111 123 Lease(15) ARIZONA Desert Flower Scottsdale 1999 102 108 Manage(10) Regent Court Scottsdale 1998 24 44 Lease(9) UTAH Regent at Salt Lake City 2001 107 116 Manage(13) Regent at South Ogden 2001 104 113 Own(14) --- --- TOTALS: 1,806 2,067 ----- -----
(1) A "unit" is a single- or double-occupancy studio or one or two bedroom apartment. (2) "Beds" reflects the actual number of beds used by the Company for census purposes, which in no event is a number greater than the maximum number of licensed beds permitted under the community's license. 17 (3) The leases of Regency Park and Sterling Park were terminated by the lessor for non-payment of rent for September 2001 and October 2001. The Company leased these buildings from entities owned by the majority shareholder through October 31, 2001, and continues to manage these communities on behalf of such entities. (4) The Company owns a 40 percent interest in a joint venture that owns the Corvallis community. (5) The Company owns a 50 percent interest in a joint venture that owns the Kenmore community. (6) The Company owns a 10 percent interest in a joint venture that owns the Kent community. (7) The Company sold its 55 percent co-tenancy interest in the Modesto community to an unrelated third party in September 2002. (8) The Company sold its West Wind community to an unrelated third party in May 2002. (9) In February 2002, the Company's entered into a lease termination agreement with the owner of its Folsom and Regent Court Scottsdale communities. The leases were canceled and the Company no longer operates these communities. (10) This community was sold to the Company's Chairman and Chief Executive Officer in September 1999 pursuant to a sale-manageback transaction. The sale was accounted for under the deposit method and in 2001 was accounted for as a sale. The gain associated with the sale has been deferred. (11) In December 2001, the Clovis and Santa Cruz communities were distributed to the Company and the Eugene community was distributed to the majority shareholder upon the dissolution of the joint venture formed by the Company and the majority shareholder in December 2000 to purchase these communities. The Boise community was distributed 75 percent to the Company and 25 percent to the majority shareholder in accordance with their ownership interests in the joint venture. The Company continues to manage the Eugene community. On December 27, 2001, the Company sold the Santa Cruz community to the majority shareholder and continues to manage this community. (12) The Company's West Covina and Merced communities were managed by a third party in 2001 and in part of 2002. The Company owns a 75 percent interest in a joint venture that owns the Merced community. The West Covina community was developed by a third party. West Covina is leased under a noncancelable lease agreement expiring in the year 2011. (13) The Company owns a 50 percent interest in a joint venture that owns the Salt Lake City community. (14) The Company had been declared in default by its lender on the $8.9 million in debt relating to its South Ogden community. On May 31, 2002, the Company transferred the South Ogden community to its lender in lieu of foreclosure. The transfer resulted in the full satisfaction of the related debt and in full satisfaction of the Company's liabilities related to this operation. 18 (15) The Company assigned its lease of its San Antonio community to Emeritus Corporation in September 2002. Under the terms of the assignment of the lease the Company remains jointly and severally liable for the performance under the lease until September 18, 2003. Office Facilities. The Company currently occupies approximately 2,800 square feet of office space in Portland, Oregon that is leased by Bowen Property Management Company, a corporation owned by the majority shareholder. The Company is paying the landlord directly for the obligations under that lease. The lease expires February 15, 2003. As a result of the Company's reduction in corporate office staff at the end of 2001 and early 2002, the Company vacated approximately 10,500 square fee of office space in Portland, Oregon in 2002. The space had been occupied under a lease agreement expiring February 15, 2003. The Company had been negotiating a lease cancellation agreement with the lessor, however, the lessor filed suit against the Company for non-payment of rent. The parties reached a settlement of the matter in September 2002. See item 3 "Legal Proceedings" for discussion regarding the corporate office lease termination. ITEM 3. LEGAL PROCEEDINGS The Company has been burdened by the bankruptcy of its former professional liability claims insurer Reliance Insurance Company (Reliance). Reliance provided professional liability claims insurance for the Company from March 1, 1998 to March 1, 2001. With Reliance now in liquidation and no longer able to pay any losses or claims expenses, the Company must now defend itself from all claims in which it previously would have been protected through its insurance program. As of November 7, 2002, the following lawsuits previously handled by Reliance have been filed against the Company and either individually or in the aggregate are material. Spinola v. Regent Assisted Living, Inc., Case No. 01-018266 filed on or about August 14, 2001 in the Superior Court for the State of California of Alameda County. This is a wrongful death action filed October 4, 2001 by the family of a resident that bled to death in the Company's Sunnyside Court community in Fremont, California. The plantiff alleges several negligence causes of action along with fraud, wrongful death and emotional distress. Earle v. Regent Assisted Living, Inc. Case No. 01-2-025950-9 SEA filed January 26, 2001 in the Superior Court of Washington in King County. Former resident of the Company's Sterling Park, Redmond, WA community claims that he fell while raising from a chair with wheels while in the lobby of the community and fractured hip. Claim is for medical expenses related to broken hip and compensation for pain and suffering and mental anguish. On August 30, 2002 Plaintiff filed an amended second complaint additionally alleging breach of contract, violation of statutory prohibition against exculpatory clauses, intentional misrepresentation, negligent misrepresentation, violation of RCW 74.34, violation of consumer protection act, and loss of love, companionship and society of parent. Plaintiff requests judgment for special and general damages for pain, suffering, disability, disfigurement, loss of capacity to enjoy life, mental and emotional trauma, distress and anxiety. Plaintiff also seeks to recover attorney and expert fees. Steiner v. Regent Assisted Living, Inc. also cause of action against LaFontaine, Walter C. Bowen and LTC West, Inc. Suit filed on or about May 1, 2001, Case No. CV-2001-02890, in the Second Judicial District Court for the State of New Mexico in Bernalillo County. Resident of Sandia Springs, Rio Rancho, New Mexico fell ill overnight and was transported next morning to 19 hospital and died several days later of aspiration and pneumonia. Complaint alleges numerous negligence causes of action along with wrongful death, breach of contract, conspiracy and violation of trade practices. Plaintiff seeks to recover compensatory and punitive damages. On July 15, 2002, LTC West, Inc. filed a motion to amend its answers to the filed complaint to add cross-claims for breach of contract and indemnification against Regent and Walter Bowen and to add third party claims against several Regent employees in the event that LTC is found liable for damages. The Company believes that the above claims are without merit and is vigorously working to settle the matters. There is no assurance that the Company will be able to settle these claims at a reasonable cost or at all. Even if the Company is successful in defending itself, the attorney fees associated with a defense could jeopardize the ability of the Company to provide a defense. If a judgment is rendered against the Company, the Company may be forced to pursue a court supervised reorganization. Other lawsuits that have been filed against the Company and are unrelated to the Reliance liquidation are as follows: Kuest v. Regent Assisted Living, Inc. Case No. 99-2-09456-5.SEA filed in King County, Washington, Superior Court in 1999. Plaintiff alleges discrimination on the basis of gender, wrongful termination based on violations of express and implied contracts and promissory estoppel. Plaintiff seeks damages, attorney fees and costs. The Court granted in its entirety the Company's motion for summary judgment. Plaintiff appealed with the Washington State Court of Appeals, Case No. 48097-9-1, which reversed the trial court's decision on March 25, 2002. The case was remanded to the trial court. In addition to the matters referred to above, the Company is involved in various other lawsuits and claims which individually are not considered material. The Company believes that the claims are without merit and is vigorously working to settle the matters. However, unfavorable outcomes of these claims, in the aggregate, along with an unfavorable outcome of the claims described above may have a material adverse effect on the Company's financial condition, results of operations, cash flow and liquidity. There is no assurance that the Company will be able to settle these claims at a reasonable cost or at all. Even if the Company is successful in defending itself, the attorney fees associated with a defense could jeopardize the ability of the Company to provide a defense. If a judgment is rendered against the Company, the Company may be forced to pursue a court supervised reorganization. The parties to the following lawsuits reached settlement agreements in 2002. On June 3, 2002, the Company was served with a lawsuit filed by the lessor of the Company's office space that was vacated in 2002. Terrace Tower Group U.S.A. v. Regent Assisted Living, Inc. Case No. 0205-05257 filed in the Circuit Court of the State of Oregon for the County of Multnomah. The complaint was for breach of lease; quantum meruit. On September 10, 2002, the parties reached a settlement of the matter. Carr v. Regent Assisted Living, Inc. Suit filed January 20, 2000, in the Superior Court for the State of California in Sacramento County. Plaintiff, a guest of a resident of the Company's Willow Creek, Folsom California community, slipped and fell. On April 19, 2002, the parties reached a settlement of the matter. 20 Bedbury v. Regent Assisted Living, Inc. Case No. 16-01-112181 Lane County Circuit Court Filed June 28, 2001. The family of a former Alzheimer resident of Sheldon Park in Eugene, Oregon alleged negligence and breach of contract regarding care provided. On June 26, 2002, the parties reached a settlement of the matter. Jerry Graham et al. v. Regent Assisted Living, Inc. et al., Case No. 00AS03608 filed in the Superior Court of Sacramento County. This was a wrongful death action filed on July 1, 2000 by the family of an assisted living resident who walked out of the Company's Willow Creek community and was later found dead. On August 6, 2002, the parties reached a settlement of the matter. Palmrose et al. v. Regency Park Apartments, Limited, et al. Case No. 0204-03852 filed on or about April 19, 2002, in the Circuit Court of the state of Oregon for the county of Multnomah. Alzheimer's resident of Regency Park, Portland, Oregon suffered burns from a baseboard heater in resident's room. On July 18, 2002, the parties reached a conditional settlement of the matter. The California Department of Social Services (DSS) filed an accusation against the Company on December 15, 2000 seeking to revoke licenses for eight of the Company's assisted living communities in the state of California. On June 28, 2001, the parties reached a final settlement on the matter. As part of the settlement, the Company agreed to subject three communities to certain conditions of probation, including the maintenance of high quality of care and training standards that exceed regulatory requirements. The Company voluntarily put into place many of these standards prior to the settlement. The failure of the Company to abide by these standards could potentially result in the revocation of all of the Company's licenses to operate in California. At November 7, 2002, the Company no longer owns or operates the three communities referred to above. With respect to the foregoing cases, at December 31, 2001, the Company has accrued $1.2 million which represents amounts paid in 2002 or agreed to be paid for settled claims and an estimate for claims still pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT As of November 7, 2002, the executive officers of the Company were as set forth below. Name Age Position ---- --- -------- Walter C. Bowen 60 Chairman of the Board, Chief Executive Officer and President Steven L. Gish 44 Chief Financial Officer, Treasurer, Secretary and Director 21 WALTER C. BOWEN. Mr. Bowen is the founder of the Company and became the Chief Executive Officer and a Director of the Company upon its formation. Mr. Bowen also served as President of the Company from its formation through October 31, 1999 and from November 1, 2001 to present. Mr. Bowen has been involved in the development, ownership and management of assisted living communities since 1986, and has devoted a majority of his time to the ownership and operation of those communities over the past six years. Mr. Bowen has also been the Chief Executive Officer of several related companies including Bowen Property Management Company, Bowen Financial Services Corp., a company formed to obtain financing for real estate development projects, and Bowen Development Company, a real estate construction company (collectively, the "Bowen Companies"), since their formation. Mr. Bowen attended the University of Oregon and is a graduate of Portland State University. Mr. Bowen currently serves on the Board of Directors of Ocadian, Inc. (formerly Guardian Care, Inc.). Mr. Bowen also serves on the advisory board for the National Investment Conference for the Senior Living and Long Term Care Industries and is a past member of the Board of Directors of the Assisted Living Communities Association of America. STEVEN L. GISH. Mr. Gish became Chief Financial Officer, Treasurer and Secretary of the Company in August 1995. Mr. Gish joined the Bowen Companies in 1991 as Controller. Prior to that time, Mr. Gish served as Treasurer and Controller of McCormick and Baxter Creosoting Company, an industrial wood preservative company. Mr. Gish received a Bachelor of Science degree in accounting from the University of Oregon in 1980. 22 PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS On September 28, 1999, the Company's Common Stock was deleted from listing on the NASDAQ National Market System ("NASDAQ") for failure to maintain a minimum $4 million tangible net worth, one of the requirements for continued listing. Since that time, trading in the Company's Common Stock has been conducted in the over-the-counter market on an electronic bulletin board established for securities that do not meet the NASDAQ listing requirements, or in what are commonly referred to as the "pink sheets." As a result, an investor will likely find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's Common Stock than when the Company's Common Stock was listed on NASDAQ. In addition, after September 28, 1999, the Company's Common Stock is subject to penny stock rules that impose additional sales practice requirements on broker-dealers who sell such securities. Consequently, the delisting of the Company's Common Stock from NASDAQ could adversely affect the ability or willingness of broker-dealers to sell the Company's Common Stock and the ability of purchasers of the Company's Common Stock to sell their securities in the secondary market. The following table sets forth the high and low closing sale prices as reported on the Over-the-Counter Bulletin Board ("OTC BB") for the periods indicated. Quarter Ended High Low ------------- ---- --- December 31, 1999 2.625 1.75 March 31, 2000 .875 .875 June 30, 2000 1.00 .875 September 30, 2000 1.6875 1.6275 December 31, 2000 1.00 .75 March 31, 2001 .875 .844 June 30, 2001 .05 .05 September 30, 2001 .05 .05 December 31, 2001 .05 .05 The Company had 28 holders of record as of November 7, 2002. Since its initial public offering in December 1995, the Company has not paid cash dividends on its Common Stock. As of December 31, 2001, the Company has an accumulated deficit of approximately $35.0 million, which restricts the Company's ability to pay dividends. The Company's ability to pay dividends may also be limited by the terms of future debt and equity financings and other arrangements. Furthermore, the Company's ability to declare and pay cash dividends on its Common Stock is restricted by the terms of its Preferred Stock. In 2001 and 2000, the Company recorded accrued preferred dividends of $1,125,000 and $750,000, respectively. 23 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data have been derived from the Company's audited consolidated financial statements for the years ended 2001, 2000, 1999, 1998, 1997. The data set forth below should be read in conjunction with the Company's audited consolidated financial statements and related notes thereto included elsewhere in the Form 10-K and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL STATEMENT DATA (dollars in thousands except share and per share data) 2001 2000 1999 1998 1997 -------------- -------------- -------------- -------------- -------------- Consolidated Statement of Operations Data Total revenues $ 64,025 $ 64,909 $ 54,089 $ 30,419 $ 13,958 Total operating expenses 68,494 67,823 60,760 39,859 18,094 -------------- -------------- -------------- -------------- -------------- Operating loss $ (4,469) $ (2,914) $ (6,671) $ (9,440) $ (4,136) Other income (expense), net 3,115 (3,682) (2,141) (1,622) 271 Minority interest 24 130 36 - - Provision for income taxes - - - - (13) Extraordinary loss net of tax benefit - - - - - -------------- -------------- -------------- -------------- -------------- Net loss (1,330) (6,466) (8,776) (11,062) (3,878) Preferred stock dividends (1,125) (750) (600) (600) (600) -------------- -------------- -------------- -------------- -------------- Net loss to common shareholders $ (2,455) $ (7,216) $ (9,376) $ (11,662) $ (4,478) -------------- -------------- -------------- -------------- -------------- Net loss per common share, basic And diluted $ (0.54) $ (1.60) $ (2.03) $ (2.52) $ (0.97) Weighted average number of common shares outstanding Basic 4,507,600 4,507,600 4,615,135 4,633,000 4,633,000 Diluted 4,507,600 4,507,600 4,615,135 4,633,000 4,633,000 2001 2000 1999 1998 1997 -------------- -------------- -------------- -------------- -------------- Consolidated Balance Sheet Data: - -------------------------------- Cash and cash equivalents $ 4,042 $ 2,580 $ 4,538 $ 4,483 $ 1,805 Working capital (deficit) (5,913) (3,943) 1,427 1,562 (4,303) Total assets 42,847 93,058 62,686 66,274 75,704 Long-term debt, less current portion 22,716 65,062 32,275 40,705 51,451 Minority interests 71 1,422 352 - 250 Shareholder's equity (deficit) $ (14,982) $ (12,526) $ (5,311) $ 4,255 $ 15,917
24
Supplementary Financial Information 2001 and 2000 by Quarter (dollars in thousands) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------- --------------- -------------- --------------- 2001 ---- Revenues $ 16,479 $ 16,812 $ 17,645 $ 13,089 Residence operating expenses 12,331 12,605 13,656 9,917 -------------- --------------- -------------- --------------- Gross profit $ 4,148 $ 4,207 $ 3,989 $ 3,172 -------------- --------------- -------------- --------------- Net income (loss) $ (3,038) $ (2,841) $ (2,954) $ 7,503 -------------- --------------- -------------- --------------- Net income (loss) per share $ (0.73) $ (0.69) $ (0.72) $ 1.60 -------------- --------------- -------------- --------------- 2000 ---- Revenues $ 15,523 $ 15,939 $ 16,670 $ 16,777 Residence operating expenses 10,342 10,803 11,520 12,360 -------------- --------------- -------------- --------------- Gross profit $ 5,181 $ 5,136 $ 5,150 $ 4,417 -------------- --------------- -------------- --------------- Net loss $ (937) $ (1,369) (1,918) $ (2,242) -------------- --------------- -------------- --------------- Net loss per share $ (0.24) $ (0.34) $ (0.47) $ (0.55) -------------- --------------- -------------- ---------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview - -------- The Company is an owner and operator of private-pay assisted living communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services, and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. The Company's revenues are derived primarily from resident fees for basic housing, personalized health care services, and other support services. In 1996, the Company began an aggressive expansion program of development and construction of new communities. This program resulted in a dramatic increase in the number of communities and beds under operation in both 1997 and 1998. At the time of the Company's initial public offering in 1995, the Company operated four communities with a resident capacity of 565 beds. The Company grew to a resident capacity of 2,996 beds and operated 30 communities by the end of 2000. At the end of 2000, the Company had a substantial working capital deficit and anticipated that its cash requirements during 2001 would exceed the cash provided by operations. The Company embarked on a strategic plan to address its liquidity issues. Additionally, in 2001, the Company encountered extraordinary circumstances and difficulties in obtaining licenses for two new California buildings and in obtaining a certificate of occupancy for its new Arizona building resulting in significant time delays in opening these buildings. These delayed openings resulted 25 in significant unanticipated cash expenditures and delayed revenue generation for the Company. As a result of continuing operating losses and the difficulties in obtaining operating licenses for certain of its new buildings, the Company was unable to meet certain of its lease obligations, discontinued all development and construction activities, reduced the number of communities it operates, downsized its workforce and entered into an agreement whereby the Company subcontracted a substantial portion of the management duties for its communities to another assisted living company, Emeritus Corporation. As of December 31, 2001, the Company had reduced its operations to 20 communities with a resident capacity of 2,067 beds. The Company has a substantial working capital deficit and anticipates that its cash requirements during 2002 will exceed the cash provided by operations. The Company will require a significant amount of capital to fund operating losses, debt and lease obligations. The Company is exposed to significant liability losses as a result of the bankruptcy of its former professional liability claims insurer that provided professional liability claims insurance to the Company from March 1, 1998 to March 1, 2001. The combination of a difficult financing and operating environment for the assisted living industry has limited the potential sources for capital. The Company is considering various alternatives that may include the potential disposition of selected assets and/or the merger or sale of the remaining assets of the business. There can be no assurance that the Company will be successful in these pursuits. At this time the Company believes that the net proceeds of such transactions after satisfaction of the Company's liabilities and the distribution to the preferred shareholder of its liquidation preference pursuant to the Articles of Incorporation may not be sufficient to permit any distribution to the Company's common shareholders. Recent developments impacting the Company's liquidity and operating results, are summarized under the caption "Description of Business - Recent Developments", which is incorporated in this Item 7 by this reference. Results of Operations - --------------------- The following discussion and analysis should be read in conjunction with the Financial Statements under Item 8. The Company's revenues are derived primarily from resident fees for basic housing, personalized health care services, and other support services. Operating expenses are comprised generally of resident operating expenses, which include community payroll expenses, food, property taxes, utilities, insurance and other direct residence operating expenses; general and administrative expenses, which consist of payroll expenses and overhead for executive, development, operations, and accounting personnel at the Company's main office in addition to support functions such as legal and other administrative expenses; lease expense; and depreciation and amortization expense. Critical Accounting Policies and Estimates - ------------------------------------------ The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including allowance for doubtful accounts, land held for sale, investments in and advances to joint ventures, income taxes, restructuring, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from 26 other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following critical accounting policies are most significant to the judgments and estimates used in the preparation of its consolidated financial statements. Revisions in such estimates are charged to income in the period in which the facts that give rise to the revision become known. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its residents to make required payments. If the financial condition of the Company's residents were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has made land available for sale and adjusts the value of such land to its estimated fair value. Subsequent changes in market conditions may not be reflected in the asset carrying value thereby requiring further adjustment upon ultimate sale of the asset. Joint ventures in which the Company does not have a controlling interest are accounted for under the equity method of accounting. Poor operating results of the properties underlying these investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in this investment's current carrying value, thereby possibly requiring an impairment charge in the future. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized, which at this time shows a net asset valuation of zero. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. The Company regularly reviews all of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that the Company considers important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business and significant negative industry or economic trends. When the Company determines that an impairment review is necessary based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on a projected undiscounted cash flow method. Significant judgment is required in the development of projected cash flows for these purposes including assumptions regarding the appropriate level of aggregation of cash flows, their term as well as the underlying forecasts of expected future revenue and expense. The Company has not recorded significant impairment charges to assets not held for sale; however, to the extent that events or circumstances cause the Company's assumptions to change, the Company may be required to record a charge which would be material. Gains realized on the sale and leaseback of the Company's assisted living communities are deferred and credited to income as rent adjustments over the related lease terms. The Company also defers development fees and amortizes them over the term of the related lease. Gains realized on sales or distributions of the Company's assisted living communities to its 27 majority shareholder are deferred and will not be recognized until such buildings are sold to unrelated third parties. The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items included in the Company's consolidated financial statements.
2001 2000 1999 -------------- --------------- ------------- Revenues: Rental and service 98.6 % 98.9 % 99.2 % Management fees 1.4 1.1 0.8 Total revenues 100.0 100.0 100.0 Operating expenses: Residence operating expenses 75.8 69.4 71.3 General and administrative expenses 13.3 10.9 13.4 Lease expense 13.5 21.5 24.8 Depreciation and amortization 4.3 2.7 2.8 Total operating expenses 106.9 104.5 112.3 Operating loss (6.9) (4.5) (12.3) Interest income 0.5 0.8 0.6 Interest expense (10.9) (6.0) (4.9) Equity in losses of joint ventures (0.6) (0.5) (0.5) Other income, net 15.8 0.0 0.8 Loss before minority interests (2.1) (10.2) (16.3) Minority interests 0.0 0.2 0.1 Loss before income taxes (2.1) (10.0) (16.2) Provision for income taxes 0.0 0.0 0.0 Net loss (2.1) (10.0) (16.2) Preferred stock dividends (1.7) (1.1) (1.1) Net loss available to common shareholders (3.8)% (11.1)% (17.3)% ============ ============ ============
28 Comparison of Years Ended December 31, 2001 and 2000 - ---------------------------------------------------- Revenues. Revenues for 2001 totaled $64.0 million compared to $64.9 million in 2000, a decrease of $0.9 million or 1.4 percent. During 2001, the Company operated 35 communities comprised of eight stabilized communities, 20 newly developed or acquired communities, and seven communities operated pursuant to management contracts, of which four were owned in joint ventures and accounted for under the equity method. During 2001, the Company opened five new communities of which four were internally developed. Two of these communities were managed by a third party in 2001. In 2001, the Company assigned its leasehold interest in three communities to a third party, transferred operations of four of its leased communities to third party operators as part of a settlement agreement with the owner of these leased communities, transferred operations of five of its leased communities to third party operators as part of a settlement agreement with the owner of these leased communities, exchanged two communities for cancellation of convertible notes, and canceled the management contract for one community. Also the leases of two communities, that the Company leased from entities controlled by the majority shareholder, were terminated by the lessors. The Company continues to manage these communities. In June 2002, the Company received a letter from its preferred shareholder disputing the termination of these leases and claiming that the terminations are voidable. The Company operated 31 communities during 2000 comprised of seven stabilized communities, 17 newly developed or acquired communities, and seven communities operated pursuant to management contracts, of which three were owned in joint ventures and accounted for under the equity method. A community is considered "stabilized" for reporting purposes after it first attains occupancy of 95.0 percent and prior to that time is considered "newly developed." Rental and service revenues from the ten communities that the Company continued to operate at December 31, 2001, increased $4.9 million. Of this increase, $2.4 million was from three communities that the Company opened in January, February and July 2001. Two of these communities were internally developed and two were managed by a third party. Average occupancy at the seven residences that the Company operated at the beginning of both 2001 and 2000 was 82.5 percent for 2001 compared to 76.0 percent in 2000. Rental and service revenues from the communities that were disposed of in 2001, decreased $5.9 million. Management fee income increased $0.1 million in 2001. The majority of this increase is attributable to eight of the ten properties that the Company continued to manage at the end of 2001. Residence Operating Expenses. Residence operating expenses were $48.5 million for 2001 and $45.0 million for 2000, an increase of $3.5 million or 7.7 percent. Residence operating expenses from the 10 communities that the Company continued to operate at December 31, 2001 increased by $4.9 million from 2000 to 2001. Of this increase, $1.5 million was from the seven communities that the Company operated at the beginning of both 2000 and 2001 and $3.4 million was from start-up operating expenses and pre-opening costs for the three newly developed communities that opened in 2001. Residence operating expenses decreased $1.4 million from the communities that were disposed of in 2001. Residence operating expenses from the seven communities that the Company operated at the beginning of both 2000 and 2001 totaled 72.2 percent and 73.8 percent of rental and service revenue for 2001 and 2000, respectively. General and Administrative Expenses. General and administrative expenses were $8.6 million for 2001 compared to $7.1 million for 2000, an increase of $1.5 million. In 2001 as compared to 2000, payroll and related costs and expenses decreased $1.1 million of which $0.2 million related to a non-recurring charge in 2000 for the termination of an employment contract, 29 offset by $0.5 million in severance related expenses from the Company's restructuring. Travel expenses decreased $0.1 million offset by an increase in other professional fees of $0.3 million for loan financing and other consulting costs. Development related costs incurred in connection with asset write-downs (land held for sale) and abandoned projects increased $0.7 million. The Company expensed $1.2 million in 2001 for professional liability and other claims paid in 2002 or agreed to be paid for settled claims and an estimate for claims still pending. Lease Expense. Lease expense for the Company's leased communities totaled $8.6 million for 2001 compared to $13.9 million for 2000. The decrease of $5.3 million relates to the acquisition of three previously leased communities in December 2000, the assignment of the Company's leasehold interests in its three Wyoming communities in February 2001, lease cancellations on nine of the Company's properties in November 2001 and the related full recognition of the deferred fees and gain on six of the properties that were subject to sale-leaseback transactions, offset by two newly developed leased communities which opened in 2001, one of which was cancelled and annual lease escalation clauses. Depreciation and Amortization. Depreciation and amortization expense was $2.7 million for 2001, compared to $1.8 million for 2000. The increase of $0.9 million relates primarily to the acquisition of three previously leased communities in December 2000, the opening of two newly developed communities in 2001, plus purchases of property and equipment to support existing operations. Interest Income. Interest income is earned from the Company's investment of cash and cash equivalents in high-quality, short-term securities placed with institutions with high credit ratings. Interest Expense. Interest expense increased in 2001, to $7.0 million from $3.9 million for 2000. Of this increase, $1.8 million was incurred due to the acquisition in December 2000 of four previously leased communities (one of which had been accounted for as a capital lease), $1.1 million was incurred primarily due to the opening and completion of two newly developed communities, and $0.2 million was incurred as a result of short-term borrowings from the majority shareholder. Equity in Losses of Joint Ventures. Equity in losses of joint ventures resulted from the operations of the Company's 50 percent owned Kenmore, Washington community, the Company's 10 percent owned Kent, Washington community, the 40 percent owned Corvallis, Oregon community and pre-opening costs and start-up costs of the 50 percent owned Salt Lake City, Utah community. Other Income (Loss), Net. In 2001, the Company recorded losses of $0.5 million as a result of settlement agreements with the owners of nine of its properties for lease cancellations and exchanged its Bakersfield and Vacaville, California communities for cancellation of convertible notes, recognizing a $12.0 million gain. The Company recorded a $1.5 million loss from the cancellation of leases with entities owned by the majority shareholder. The Company also assigned its leasehold interest in its three Wyoming communities for a $0.1 million gain. Net Loss. Net operating results increased by $5.1 million for 2001, compared to the same period in 2000. The Company reported a loss of $1.3 million for 2001, whereas the Company reported a loss of $6.5 million for 2000. The increase in net results is primarily due to an increase in other income (loss) of $10.1 million and a decrease in lease expense of $5.3 million offset by a decrease in residence operating profits (rental and service revenue less residence operating 30 expenses) of $4.5 million, a decrease in interest income of $0.1 million, and increases in general and administrative expenses, depreciation expense, interest expense and equity in losses of joint ventures, all as discussed above. Comparison of Years Ended December 31, 2000 and 1999 - ---------------------------------------------------- Revenues. Revenues for 2000 totaled $64.9 million compared to $54.1 million in 1999, an increase of $10.8 million or 20.0 percent. During 2000, the Company operated 31 communities comprised of seven stabilized communities, 17 newly developed or acquired communities, and seven communities operated pursuant to management contracts, of which three are owned in joint ventures and accounted for under the equity method. The Company operated 29 communities during 1999 comprised of five stabilized communities, 20 newly developed or acquired communities, including one sold during the year pursuant to a sale-manageback arrangement, and four operated pursuant to management contracts, of which two are owned in joint ventures and accounted for under the equity method. A community is considered "stabilized" for reporting purposes after it first attains occupancy of 95.0 percent and prior to that time is considered "newly developed." During 2000, rental and service revenues from Same Residences, the 22 communities the Company operated at the beginning of both 2000 and 1999, comprised of seven stabilized and 15 newly developed communities, increased by $9.3 million. Of this increase, $1.3 million was from the seven stabilized communities and $8.0 million was from the 15 newly developed communities. Revenues from two additional newly developed communities, one which opened in February 1999 and the other in April 1999, increased $1.2 million. Average occupancy at the 22 same residences was 83.9 percent for 2000 compared to 76.4 percent in 1999. Overall average occupancy at the Company's seven stabilized communities was 94.3 percent for 2000. Residence Operating Expenses. Residence operating expenses were $45.0 million for 2000 and $38.6 million for 1999, an increase of $6.4 million or 16.6 percent. Residence operating expenses from the 22 Same Residences increased by $5.7 million from 1999 to 2000. Of this increase, $0.9 million was from the seven stabilized communities and $4.8 million was from the 15 newly developed communities. Residence operating expenses for all other newly developed communities for 2000 include $2.4 million of start-up operating expenses and pre-opening costs, whereas such expenses totaled $1.7 million in 1999. Residence operating expenses from Same Residences totaled 68.8 percent and 70.2 percent of rental and service revenue for 2000 and 1999, respectively. General and Administrative Expenses. General and administrative expenses were $7.1 million for 2000 compared to $7.3 million for 1999, a decrease of $0.2 million. Payroll and related expenses increased by $0.6 million from 1999 to 2000. Development related costs incurred in connection with asset write-downs (land held for sale) and abandoned projects totaled $1.0 million in 2000 compared to $1.9 million in 1999. Other general and administrative expenses increased by $0.1 million from 1999 to 2000 primarily due to the implementation of the Company's plan for growth. Lease Expense. Lease expense for the Company's leased communities totaled $13.9 million for 2000 compared to $13.4 million for 1999. The increase of $0.5 million relates to annual lease escalation clauses, three newly developed leased communities two of which opened in 1999 and the sale-leaseback of one newly developed community offset by the acquisition of a previously leased community. 31 Depreciation and Amortization. Depreciation and amortization expense was $1.8 million for 2000, compared to $1.5 million for 1999. The increase of $0.3 million relates primarily to purchases of property and equipment to support existing operations. Interest Income. Interest income is earned from the Company's investment of cash and cash equivalents in high-quality, short-term securities placed with institutions with high credit ratings. Interest Expense. Interest expense increased in 2000, to $3.9 million from $2.6 million for 1999. Interest expense related to the operation of communities increased to $0.4 million and interest expense related to land held for sale increased by $0.3 million in 2000 as compared to 1999. The Company capitalized $0.1 million of interest charges in 2000, whereas the Company capitalized $2.0 million of interest charges in 1999. Equity in Losses of Joint Ventures. Equity in losses of joint ventures resulted from the operations of the Company's 50 percent owned Kenmore, Washington community, the Company's 10 percent owned Kent, Washington community, the 40 percent owned Corvallis, Oregon community and pre-opening costs of the 50 percent owned Salt Lake City, Utah community. Other Income (Loss), Net. In 1999, the Company sold a 45 percent co-tenancy interest in its Modesto, California community. The Company recognized a $0.5 million gain as a result of the sale. Net Loss. Net operating results increased by $2.3 million for 2000, compared to the same period in 1999. The Company reported a loss of $6.5 million for 2000, whereas the Company reported a loss of $8.8 million for 1999. The increase in net results is primarily due to an increase in residence operating profits (rental and service revenue less residence operating expenses) of $4.1 million and a decrease of $0.2 million in general and administrative expenses, offset by increases in lease expense, depreciation expense, interest expense and equity in losses of joint ventures and other income (loss), all as discussed above. Liquidity and Capital Resources - ------------------------------- At December 31, 2001, the Company had a $5.9 million working capital deficit, compared to a working capital deficit of $3.9 million at December 31, 2000. The decrease in working capital relates primarily to an increase in cash and cash equivalents of $1.5 million (as described below) and offset by an increase in net current liabilities of $3.5 million. Current liabilities include payables of $2.6 million to the Company's majority shareholder. Also included in current liabilities is $8.9 million in debt related to the Company's South Ogden, Utah community which was opened in January 2001. The Company had been declared in default under terms of the loan agreement and accordingly the amount due was included in current portion of long-term debt. As described below, in May 2002 the Company signed an agreement with the lender whereby the Company transferred the South Ogden community to the bank in full satisfaction of the related debt. Accordingly, the Company has classified the net book value of the South Ogden property of $8.3 million in current assets at December 31, 2001. The Company anticipates that its cash requirements during 2002 will exceed the cash provided by operations. The Company is exposed to significant liability losses that are uninsured as a result of the bankruptcy of its former professional liability claims insurer that provided professional liability claims insurance for the Company from March 1, 1998 to March 1, 2001. 32 With the insurance company currently in liquidation and no longer able to pay any losses or claims expenses, the Company must defend itself from all claims in which it previously would have been protected through its insurance program. The Company is considering various alternatives that may include the disposition of selected assets and/or the merger or sale of the remaining assets of the business. The Company believes that the ultimate outcome of these pursuits, if taken, will not generate any value for the common shareholders. Net cash used in operating activities totaled $4.0 million for 2001, resulting primarily from a net loss of $1.3 million, adjusted $8.4 million for non-cash items (depreciation, amortization, gain on sale of assets, loss on disposal of construction in progress, adjustment of land held for sale to fair value, equity interest in joint ventures, decrease in allowance for doubtful accounts and minority interests), an increase in current liabilities of $3.1 million, the release of cash held in working capital escrow of $1.4 million, a decrease in accounts receivable of $0.4 million and an increase in deferred lease and interest payable to the majority shareholder of $0.8 million. Net cash provided by investing activities totaled $1.0 million consisting primarily of $5.0 million in proceeds from the sale of the Company's Santa Cruz, California community to its majority shareholder, proceeds from the sale of land previously held for sale of $0.5 million, $0.3 million from the assignment of the Company's leasehold interests in three Wyoming communities offset by $4.4 million in construction costs, a reduction in construction accounts payable of $0.2 million and a distribution of $0.2 million to the majority shareholder as a result of the dissolution of the Company's joint venture Regent/Bowen, LLC. Net cash provided by financing activities totaled $4.4 million, primarily consisting of short-term borrowings from the majority shareholder of $1.9 million, property and equipment financing proceeds totaling $5.7 million, a decrease in restricted cash for financing arrangements of $1.1 million, a net decrease in payments and deposits for lease financing arrangements of $0.4 million, offset by repayment of long-term debt of $4.7 million. In February 2001, the Company assigned its leasehold interest in three Wyoming communities to a third party for $325,000. The leasehold interests were assigned as a result of the difficulty in servicing these communities due to logistics and also due to continuing losses at two of the communities. In March 2001, the Company was unable to close two conventional loans with a financial institution in order to refinance two of its California communities. The inability to complete one loan was due in part to a pending accusation against the Company by the State of California Department of Social Services that was subsequently settled in July 2001, see item 3 "Legal Proceedings". Both loans failed to close due to the inability of the Company to obtain minimum excess liability coverage limits of five million dollars. As a result, the Company was unable to recover $195,500 in non-refundable advance deposits. These funds were advanced to the financing company directly by the majority shareholder and were included in the June 30, 2001 bridge financing demand note payable to the majority shareholder as described below. In April 2001, the Company and a commercial bank, which in December 2000 financed the purchase of four previously leased communities, agreed to a modification of the terms of their debt financing. The financing had originally provided that all cash flow from the operations of the four repurchased communities be applied against the outstanding principal of a certain portion of the underlying debt. The bank agreed to waive this provision for a period of six months ending 33 September 2001. During the six months of the modification, the net cash flow from the four communities totaled approximately $976,000 Pursuant to the financial plan the majority shareholder provided cash advances totaling $750,000 under a bridge financing arrangement through June 30, 2001. On June 30, 2001, such advances were combined with additional outstanding amounts due to the majority shareholder and an affiliated company, along with accrued interest, into a demand note in the amount of $1,259,133. The note was due on June 30, 2002, and is now past due. It remains unpaid and the Company is currently attempting to negotiate extensions on these payment obligations. On July 3, 2001, the Company's Board of Directors approved a $1 million operating line of credit provided by the majority shareholder. Through September 7, 2001, the Company drew $1,000,000 under the line. The note was due on June 30, 2002, and is now past due. It remains unpaid and the Company is currently attempting to negotiate extensions on these payment obligations. Effective October 31, 2001, the Company entered into a settlement agreement with HCN the real estate investment trust owner of four of the Company's communities that were leased under a master lease to resolve events of default primarily due to failure of the Company to pay its September and October 2001 lease payments. The settlement included transfer of the operations of the communities to new operators and a note payable to HCN for past due rent obligations totaling $585,709. The note provides for 8% interest payable quarterly and principal and interest payments of $43,232 payable quarterly beginning in January 2003. The note is guaranteed by the majority shareholder and is due November 2006. The Company recorded losses totaling $266,000 as a result of this transaction. Effective November 1, 2001, the Company entered into a settlement agreement with LTC the real estate investment trust owner of five of the Company's leased communities that were cross-defaulted to resolve events of default primarily due to failure of the Company to pay its September and October 2001 lease payments. The settlement included transfer of the operations of the communities to new operators and a note payable to LTC for past due rent obligations. The note was combined with additional amounts outstanding under an existing note payable to LTC to total $650,000. The note provides for 8% interest payable quarterly and monthly installments of principal and interest totaling $15,868 beginning December 2002. The note is guaranteed by the majority shareholder and is due November 2006. The Company recorded losses totaling $343,000 as a result of this transaction. Effective November 1, 2001, the leases of two communities leased from entities under the control of the majority shareholder were terminated by the lessors due to non-payment of the September and October 2001 lease payments. These leases were cross-defaulted. The Company is attempting to negotiate a settlement with the lessors. The Company continues to manage these communities on behalf of the lessors. The Company has recorded the missed lease payments as notes payable in the amount of $473,108 accruing interest at 8% of which $167,108 would be subordinate to dividend payments due to the Company's preferred shareholder. The Company recorded a loss of $1.5 million as a result of the cancellation of the leases and write-off of leasehold improvements. In June 2002, the Company received a letter from its preferred shareholder disputing the termination of these leases and claiming that the terminations are voidable. The lessors have refused to reinstate these leases. Pursuant to terms of the lease agreements, the Company owes the majority shareholder $1,292,199 for deferred lease and interest payments which amounts are subordinate to dividend payments due to the Company's preferred shareholder. 34 On November 1, 2001, the Company entered into a loan workout and settlement agreement with one of its third party lenders as a result of a payment default under the loan agreement. The Company deeded one parcel of land that it held for sale to the lender in satisfaction of $0.9 million in debt, restructured the payment terms on the remaining loan obligation and provided collateral in other land held for sale. Of the remaining debt due of $0.7 million, the Company paid $73,500 in November 2001, $186,500 in December 2001, $250,000 in February 2002 and the remaining balance due of $225,000 was paid in September 2002. In December 2001, the Company, concerned by the quarterly interest obligation of it's subordinated convertible notes and the operating losses at its Bakersfield, California community, exchanged its Bakersfield and Vacaville, California communities for $8.9 million of the convertible notes. An affiliate of LTC acquired the two properties subject to $18.3 million in mortgage and local improvement debt. The Company recorded a gain of $12.0 million in connection with this non-cash transaction. On December 26, 2001, the Company and its majority shareholder agreed to a specified distribution of the assets of Regent/Bowen, LLC, a joint venture formed in December 2000 for the purpose of acquiring four communities that were previously leased. The Company had contributed $0.6 million along with its rights to purchase the four communities for a 75% interest in the joint venture. The majority shareholder had contributed $1.2 million for a 25% interest. In addition, the venture had obtained $32.2 million in bank financing and $0.5 million of seller provided financing in order to complete the acquisitions. The venture was dissolved in December 2001 and 100% of the venture's interest in the Santa Cruz and Clovis, California communities was distributed to the Company and 100% of the venture's interest in the Eugene, Oregon community was distributed to the majority shareholder. The remaining community located in Boise, Idaho and other venture assets were distributed 75% to the Company and 25% to the majority shareholder in accordance with their ownership interests. As a result of the dissolution, the Company distributed cash of $165,091 and recorded a $31,783 payable to the majority shareholder. On December 27, 2001, the Company sold its Santa Cruz, California property to its majority shareholder for a net sales price of $11.7 million. The Company received $5.0 million in cash proceeds of which $2.9 million was retained by the Company and $2.1 million was used to reduce debt after which $6.7 million was assumed by the majority shareholder. Commencing January 1, 2002, the Company contracted with Emeritus Corporation, an unrelated assisted living company, to provide operations management, consulting and accounting services to its assisted living communities. Accordingly the Company implemented a restructuring plan to reduce a significant portion of its corporate workforce at December 31, 2001 and in the first quarter of 2002. The Company continues to provide an oversight management role, partnership administration and asset management services including continued responsibility for placement of insurance and debt financing arrangements. As of November 7, 2002, the Company has no additional communities under construction. During 2000 and 2001, the Company did not pay the quarterly dividends which accrued with respect to its preferred stock. The first quarter 2000 dividend rate was 6 percent. For each subsequent quarter in which the dividend was not paid, the dividend rate increased by one percent. The maximum rate that could apply to the dividend is 12 percent or prime plus 300 basis points. As of December 31, 2001, a total of $1,875,000 was in arrears. The Company's 35 Articles of Incorporation and state law prohibit the current payment of the preferred dividend since in the judgment of the Company's Board of Directors, the payment of the preferred dividend would jeopardize the on-going viability of the Company and potentially result in its insolvency. Accordingly, the Company has recorded these amounts as long-term liabilities at December 31, 2001. The Company is subject to significant liability losses that are uninsured as a result of the bankruptcy of its former professional liability claims insurer Reliance Insurance Company (Reliance). As further explained in item 3 " Legal Proceedings", Reliance provided professional liability claims insurance for the Company from March 1, 1998 to March 1, 2001. With Reliance currently in liquidation and no longer able to pay any losses or claims expenses, the Company must now defend itself from all claims in which it previously would have been protected through its insurance program. At December 31, 2001, the Company has accrued $1.2 million which represents amounts paid in 2002 or agreed to be paid for settled claims and an estimate for claims still pending. In order to conserve working capital and generate additional working capital, the Company has discontinued development activities and has one other parcel of real property previously held for development listed for sale. Certain remaining operating lease agreements and loans contain restrictive covenants. A failure by the Company to comply with the requirements of these covenants, if not waived or cured, could permit acceleration of the related indebtedness. Some of the Company's debt instruments contain cross default provisions pursuant to which a default under one obligation can cause a default under one or more other obligations to the same lender. At December 31, 2001, such cross default provisions affected two of the Company's owned assisted living properties and two properties for which it provided a guarantee. At December 31, 2001, the Company was in compliance with all covenants specified in its debt or lease obligations for the properties that the Company continued to own at November 7, 2002. The following table summarizes the Company's commitments under the terms of its debt obligations and operating leases as of December 31, 2001:
(Dollars in thousands) 2002 2003 2004 2005 Thereafter ------------ ------------- ------------- ------------- ------------- Long-term debt $13,159 $1,614 $20,174 $456 $471 Operating leases 2,066 1,302 1,224 1,240 6,746 Guarantees 522 19,235 17,203 7,356 - ------------ ------------- ------------- ------------- ------------- Total Obligations $15,747 $22,151 $38,601 $9,052 $7,217 ============ ============= ============= ============= =============
Subsequent to December 31, 2001, the Company refinanced $15.2 million of debt at more favorable terms and as a result the Company's guarantees on loans to entities owned by the majority shareholder were reduced to $8.1 million. Additionally a result of these transactions was the elimination of the cross-defaults of the Company's debt and guaranteed debt. As more fully described in the preceding paragraphs the Company had several significant transactions with its majority shareholder in 2001. The Company believes that the transactions 36 were on terms no less favorable to the Company than could be obtained from unaffiliated parties in arms-length transactions, however, there can be no assurance that such is the case. Impact of Inflation - ------------------- To date, the Company has experienced inflationary pressures in the areas of wages, insurance and utilities. In pricing its services, the Company attempts to incorporate and anticipate inflation levels. The Company's ability to increase revenues in proportion to increased operating expenses is at times limited due to the Company's dependence on its senior resident population, most of whom rely on relatively fixed incomes to pay for the Company's services. The Company typically does not rely to a significant extent on governmental reimbursement programs. There can be no assurance that the Company will be able to respond to inflationary pressures in the future. Subsequent Events - ----------------- In February 2002, the Company entered into a lease termination agreement with Meditrust the real estate investment trust owner of its Alzheimer community in Scottsdale, Arizona and its assisted living community in Folsom, California. The Company's leases for these two communities were canceled and the Company was released from all liability thereunder, including any past due obligations to pay rent under the leases and any real estate taxes in excess of $25,000. The Company realized a reduction in current liabilities that were recorded at December 31, 2001, of approximately $217,200 as a result of this transaction. The new owners of these two communities are affiliated with Emeritus Corporation. In May 2002, the Company sold its West Wind community located in Boise, Idaho to a third party. The Company received $2.8 million in sales proceeds and paid down $2.4 million of debt that was classified as current at December 31, 2001, recognizing a gain of $272,000 on the transaction in 2002. Accordingly the Company has classified the net book value of the West Wind property of $2.6 million in current assets at December 31, 2001. The Company abandoned its wholly owned subsidiary's Elk Grove, California construction project in December 2001 as a result of a declaration of default on the loan agreement by the construction lender. The Company wrote off $3.8 million in related construction costs, $155,000 in restricted cash deposits, was released from $3.0 million of construction debt and recorded a loss for this project of $0.9 million at December 31, 2001. In May 2002, the Company entered into a settlement agreement with the lender and effective June 3, 2002 transferred its ownership interest in the construction project to a third party purchaser identified by the lender. No cash proceeds were generated for the Company as a result of this transaction. The Company and the majority shareholder had provided guarantees of the construction loan to the lender and were relieved of these guarantees upon closing of the transaction. In addition, the settlement agreement provided for the transfer of the Company's South Ogden community to the lender in lieu of foreclosure. The transfer of the South Ogden facility and operations closed May 31, 2002. The Company recorded a gain of $1.1 million in 2002 in connection with this non-cash transaction. The lender had declared the Company in default on the $8.9 million loan for the South Ogden facility in 2001 and accordingly this debt was classified as current at December 31, 2001. Accordingly, the Company has classified the South Ogden property of $8.3 million in current assets at December 31, 2001. In September 2002, the Company sold its 55% co-tenancy interest in its Modesto community to an unrelated third party for a net sales price of $2.8 million. The Company 37 received $1.0 million in cash proceeds, $0.1 million in notes receivable and satisfied $1.7 million of co-tenancy debt which was assumed by the buyer. The Company recorded a gain in 2002 totaling $1.0 million as a result of this transaction. The Company, its majority shareholder and the unrelated 45% co-tenant continue to guarantee the full $3.0 million in debt assumed by the buyer. In September 2002, the Company assigned its lease of its San Antonio community to Emeritus Corporation for $408,000. The Company recorded a gain in 2002 of approximately $327,000 as a result of this transaction. In connection with the assignment the lessor released to the Company the cash deposit held under a letter of credit arrangement in the amount of $741,752. This amount was included in restricted cash at December 31, 2001. Recent Accounting Pronouncements - -------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 is effective for the fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The impact of this pronouncement on the Company's financial statements is not expected to be material. In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 is effective for the fiscal years beginning after December 15, 2001. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects or Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB Opinion No. 30; accordingly, two accounting models existed for long-lived assets to be disposed of. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. In addition, SFAS No. 144 resolves significant implementation issues related to SFAS No. 121. Under SFAS No. 144 the results of operations of a component of an entity that either has been disposed of or is classified as held for sale are reported in discontinued operations if (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Accordingly, upon adoption of SFAS 144 the Company's operations associated with and transactions recorded in other income/loss could be reclassified as discontinued operations. In 2002, FASB issued SFAS 145, Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain 38 lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company has reviewed this pronouncement and will consider its impact on any relevant transactions. In July 2002, FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This Statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Those costs include, but are not limited to, the following: a. Termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (hereinafter referred to as one-time termination benefits), b. Costs to terminate a contract that is not a capital lease, and, c. Costs to consolidate facilities or relocate employees. This Statement does not apply to costs associated with the retirement of a long-lived asset covered by SFAS No. 143, Accounting for Asset Retirement Obligations. The impact of this pronouncement on the Company's financial statements has not yet been determined by the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's earnings are affected by changes in interest rates as a result of its variable rate indebtedness. The Company manages this risk by obtaining fixed rate borrowings when possible. At December 31, 2001, the Company's variable rate borrowings totaled $28.3 million. If market interest rates average one percent more in 2002 than in 2001, the Company's interest expense would increase and income before taxes would decrease by $283,000. These amounts are determined by considering the impact of hypothetical interest rates on the Company's outstanding variable rate borrowings as of December 31, 2001, and does not consider changes in the actual level of borrowings which may occur subsequent to December 31, 2001. This analysis also does not consider the effects of the reduced level of overall economic activity that could exist in such an environment nor does it consider likely actions that management could take with respect to the Company's financial structure to mitigate the exposure to such a change. ITEM 8. FINANCIAL STATEMENTS The financial statements required by this item are included on pages F-1 to F-29 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 39 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this report. The following table sets forth certain information about each of the Company's Directors. Name Age Director Since ----------------------- ---- -------------- Walter C. Bowen(1)(2) 60 March 1995 Steven L. Gish 44 August 1995 (1) Member of Executive Committee (2) Member of Compensation Committee Walter C. Bowen has served as Chairman of the Board and Chief Executive Officer and as a Director of the Company since its formation in March 1995. Mr. Bowen also served as President of the Company until October 31, 1999 and from November 1, 2001 to present. Mr. Bowen has been involved in the development, ownership, and management of assisted living facilities since 1986, and has devoted a majority of his time to the ownership and operation of those facilities over the past six years. Mr. Bowen continues to serve as the Chief Executive Officer of the Bowen Companies. Steven L. Gish has served as Chief Financial Officer, Treasurer, Secretary, and Assistant Secretary in addition to serving as a Director of the Company, since August 1995. In 1991 Mr. Gish became the Controller of the "Bowen Companies," a group of companies and businesses owned or controlled by Mr. Bowen, including the predecessor of the Company. Prior to that time, Mr. Gish served as Treasurer and Controller of McCormick and Baxter Creosoting Company, an industrial wood preserving company. Robert G. Peirce was elected to the board on March 13, 2001 and resigned from the board in August 2001. Dana J. O'Brien who served as a director of the Company since December 1996, resigned from the board in September 2002. COMPENSATION OF DIRECTORS The Company pays each non-employee director $500 for attendance in person at each regular meeting of the Board of Directors. In addition, the Company will reimburse the directors for travel expenses incurred in connection with their activities on behalf of the Company. Each non-employee member of the Board of Directors of the Company is automatically granted an option to purchase 2,000 shares of Common Stock when that person becomes a director. In prior years, each non-employee director was also automatically granted an option to purchase 2,000 additional shares of Common Stock in each subsequent calendar year that the director continued to serve in that capacity. This practice was discontinued in 2001. The exercise price for all automatic grants to non-employee directors was the closing sales price of the Common Stock on the business day immediately preceding the date of grant. 40 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors, and persons who own more than ten percent of the outstanding Common Stock of the Company to file reports of ownership and changes in ownership of the Common Stock with the Commission. Executive officers, directors and greater than ten percent shareholders are also required by Commission regulations to furnish the Company with copies of all forms they file pursuant to Section 16(a). Based solely on review of the copies of such reports furnished to the Company and written representations from reporting persons, to the Company's knowledge all of the Section 16(a) filing requirements applicable to such persons during fiscal year 2001 were complied with on a timely basis. Information with respect to certain relationships and related transactions are included under Item 13 of Part III of this report. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth, for the fiscal years ended December 31, 2001, 2000, and 1999 compensation information with respect to the Company's chief executive officer and each of its executive officers whose compensation from the Company exceeded $100,000 during the relevant fiscal year.
Summary Compensation Table Annual Compensation Other Annual Name and Principal Position Year Salary Bonus Compensation(1) - --------------------------- ---- ------------ ----------- --------------- Walter C. Bowen(2) 2001 $ 24,000 $ -0- $ 4,765(3) Chairman of the Board 2000 $ 24,000 $ -0- $ 120,600(3) Chief Executive Officer and 1999 $ 250,000 $ -0- $ 66,750(3) President Louis Swart(4) 2001 $ 193,706 $ -0- $ 5,500 President 2000 $ 225,000 $ -0- $ 1,500 1999 $ 132,901 $ -0- $ 8,830(5) James W. Ekberg(6) 2001 $ 167,307 $ -0- $ 4,500 Senior Vice President 2000 $ 150,000 $ -0- $ 4,500 of Finance and 1999 $ 150,000 $ -0- $ 1,750 Development Dale J. Zulauf(7) 2001 $ 87,179 $ -0- $ 36,687 Chief Operating Officer 2000 $ 213,123 $ -0- $ 33,840 1999 $ 33,333 $ -0- $ -0- 41 Steven L. Gish 2001 $ 135,000 $ -0- $ 4,050 Chief Financial Officer 2000 $ 133,750 $ -0- $ 4,013 1999 $ 120,000 $ -0- $ 1,750
(1) Represents the amount of a contribution by the Company to the officer's 401(k) plan account unless otherwise indicated. (2) Mr. Bowen served as President of the Company from its inception through October 31, 1999 and from November 1, 2001 to present. Mr. Bowen claims he is entitled to an additional salary payment of $226,000 for 2001 plus a bonus of 25% pursuant to the financial plan. The Board of Directors has not agreed that these amounts are payable and accordingly these amounts have not been accrued at December 31, 2001. (3) Other annual compensation includes $4,165 paid by the Company in 2001 for Mr. Bowen's membership dues at Pumpkin Ridge Golf Club. Additionally, Mr. Bowen was paid guaranty fees totaling $120,000 and $65,000 in 2000 and 1999, respectively. The guaranty fees were paid for Mr. Bowen's personal guarantees for repayment and performance of covenants on Company loan agreements. See item 13. (4) Mr. Swart served as Chief Operating Officer of the Company from April 12, 1999, through October 31, 1999, at an annual salary of $175,000 and became President November 1, 1999, at an annual salary of $225,000 which was reduced to $175,000 annually effective April 16, 2001. He resigned as an officer of the Company effective November 1, 2001 and pursuant to the terms of an employment agreement was entitled to receive a years salary as severance. The salary disclosed includes $164,539 paid to Mr. Swart as an employee and $29,167 paid as severance under the employment agreement. In addition to the amounts disclosed above Mr. Swart was paid severance benefits totaling $151,233 in 2002. Mr. Swart's compensation in 1999 also included $8,000 paid in connection with his relocation to Portland, Oregon. (5) Mr. Swart received a total of $16,830 in reimbursement of relocation expenses during 1999, a portion of which was treated as compensation. (6) Mr. Ekberg resigned as an officer of the Company effective December 31, 2001. Under terms of a severance agreement Mr. Ekberg was paid $155,400 in 2002. (7) Mr. Zulauf served as Chief Operating Officer of the Company from November 1, 1999 through June 7, 2000, at an annual salary of $200,000. He resigned as an officer of the Company effective June 7, 2000. Under terms of a severance agreement Mr. Zulauf continued to be paid through June 7, 2001. The salary disclosed in 2001 includes $87,179 paid under terms of a severance agreement. The salary disclosed in 2000 includes $72,692 paid to Mr. Zulauf as an employee and $121,154 paid under a severance agreement. Mr. Zulauf also received a total of $13,796 in reimbursement of temporary living and other expenses during 2000, which were treated as compensation. After his resignation from the Company, Mr. Zulauf provided executive search services for the Company and was paid $36,687 and $33,840 for those services in 2001 and 2000, respectively, which is included in other annual compensation disclosed. Additionally, Mr. Zulauf was paid $65,000 in 2002 for executive search services. Employment Agreements. Each officer of the Company has entered into an employment agreement with the Company. The employment agreements for Messrs. Bowen, Ekberg and Gish 42 expired in December 2000. The Company entered into executive severance agreements in 2001 with Messrs. Ekberg and Gish. Mr. Ekberg was paid under this agreement in 2002. The agreements generally provide that the Company may terminate any officer without cause by making to such officer a cash payment equal to one year's base salary and cost of health insurance coverage both at the rate in effect at the time of termination. The agreements also provide that the officer may terminate his employment within 12 months after a change in control of the Company whereby the officer's compensation or job responsibilities are reduced and receive, upon written notice to the Company, a cash payment equal to one year's base salary and cost of health insurance coverage both at the rate in effect at the time of termination. In addition, each officer has entered into a restrictive covenant agreement containing noncompetition and nondisclosure provisions. Stock Option Grants in Fiscal 2001. There were no grants of stock options made by the Company during fiscal 2001 to the officers of the Company named in the Summary Compensation Table. Option Exercises in 2001 and Fiscal Year-End Option Values. The following table sets forth information (on an aggregated basis) concerning the fiscal year-end value of unexercised options held by each of the officers of the Company named in the Summary Compensation Table. None of the officers named below exercised any stock options during fiscal 2001.
Fiscal Year-End Option Values Value of Unexercised Number of Unexercised In-the-Money Acquired Options at Year-End Options at Year-End(1) on Value ------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- -------- -------- ----------- ------------- ----------- ------------- Walter C. Bowen -- -- -- -- -- -- Louis Swart -- -- -- -- -- -- James W. Ekberg -- -- -- (2) -- -- -- Steven L. Gish -- -- 110,000(3) -- -- -- - ---------------------------------------------------------------------------------------------------------
(1) Options are "in-the money" if the fair market value of the underlying securities on that date exceeds the exercise price of the option. The amount set forth represents the difference between the fair market value of the securities underlying the options on December 31, 2001, based on the last sale price of $0.05 per share of Common Stock on the date (as reported on the Over-the-Counter Market) and the exercise price of the options, multiplied by the applicable number of options. (2) Does not include an option to purchase 50,000 shares of Common Stock, which is immediately exercisable at an exercise price of $6.00 a share, granted to Mr. Ekberg by Mr. Bowen in 1995. 43 (3) Does not include an option to purchase 25,000 shares of Common Stock, which is immediately exercisable at an exercise price of $6.00 a share, granted to Mr. Gish by Mr. Bowen in 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, as of November 7, 2002, with respect to the beneficial ownership of the Company's Common Stock by each director, by each executive officer of the Company named in the Summary Compensation Table, by all directors and executive officers as a group, and by each person who is known to the Company to be the beneficial owner of more than five percent of the Company's outstanding Common Stock. Unless otherwise indicated in the Table, each person has sole voting power and sole investment power with respect to all outstanding shares of Common Stock shown as beneficially owned by them.
Amount and Nature Name and Address of of Beneficial Percent of Beneficial Owner(1) Ownership Class(2) - ----------------- ------------------- ------------ Walter C. Bowen 3,403,200(3) 54.9% James W. Ekberg 50,000(4) * Steven L. Gish 135,000(5) 2.2% Dana J. O'Brien 10,000(6)(7) * Prudential Private Equity Investors III, L.P. 717 Fifth Avenue, Suite 1100 New York, NY 10022 1,400,493(8) 22.6% All directors and executive officers as a group (5 persons) 3,698,200 59.6% * Less than one percent.
(1) Unless otherwise indicated, the address of each person named is c/o Regent Assisted Living, Inc., 121 S.W. Morrison Street, Suite 950, Portland, Oregon 97204. (2) Assumes the exercise of solely that individual's options, or conversion of solely that party's underlying instruments, and issuance by the Company of the related number of shares of Common Stock. (3) Includes 85,000 shares held of record by Mr. Bowen that may be purchased within 60 days by certain officers and two other individuals pursuant to options granted by Mr. Bowen. Mr. Bowen has granted options to purchase a portion of his shares to Messrs. Ekberg (50,000 shares) and Gish (25,000 shares). (4) Includes shares that may be acquired within 60 days pursuant to options granted by Mr. Bowen to purchase a portion of his shares. 44 (5) Includes shares that may be acquired within 60 days pursuant to options granted by Mr. Bowen to purchase a portion of his shares and those shares that may be purchased pursuant to options granted under the Company's 1995 Stock Incentive Plan. (6) Includes 10,000 shares that may be acquired within 60 days pursuant to options granted under the Company's 1995 Stock Incentive Plan. (7) Does not include shares of Series A or Series B Preferred Stock owned by Prudential Private Equity Investors III, L.P. ("PPEI"), an investment fund managed by Cornerstone Equity Investors, L.L.C., the employer of Mr. O'Brien. (8) Includes the number of shares that may be acquired within 60 days pursuant to the holder's right to convert its Series A Preferred Stock into shares of Common Stock. PPEI also owns 382,882 shares of Series B Preferred stock, each share of which can be converted into one share of Series A Preferred Stock or into a total of 417,690 shares of Common Stock upon the occurrence of specified conversion events. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Bowen holds a 99 percent general partnership interest in the Regency Park Apartments Limited Partnership ("Regency Partnership"), an Oregon limited partnership from which the Company leased its Regency Park community located in Portland, Oregon through October 31, 2001. Mr. Bowen also holds a 99 percent ownership interest in Sterling Park, L.L.C., a Washington limited liability company from which the Company leased its Sterling Park community located in Redmond, Washington, through October 31, 2001. Mr. Bowen's minor children hold the remaining one percent interest in the Regency Partnership and Sterling Park, L.L.C. Mr. Bowen issued a default notice to the Company as a result of the Company's failure to pay its September and October 2001 lease payments for both Regency Park and Sterling Park. These leases are cross-defaulted. Effective November 1, 2001, the leases were terminated by the lessors as a result of the non-payment of such lease payments. In June 2002, the Company received a letter from its preferred shareholder disputing the termination of these leases and claiming that the terminations are voidable. The lessors have refused to reinstate the leases. Pursuant to the terms of the lease agreements, the Company owes to Mr. Bowen $1,292,199 for deferred lease and interest payments which amounts are subordinate to dividend payments due to the Company's preferred shareholder. Mr. Bowen has a claim against the Company related to the default under the leases. The Company is attempting to negotiate a settlement with Mr. Bowen for the lease cancellation and continues to manage these communities for the majority shareholder. The Company has recorded the past due rent obligations totaling $225,400 for Regency Park and $247,708 for Sterling Park as notes payable accruing interest at 8%, of these amounts $167,108 would be subordinate to dividend payments due to the Company's preferred shareholder. Interest expense of $10,266 was accrued on these notes in 2001. Management fee income totaled $77,296 in 2001 from these communities. The Company recorded a loss of $1.5 million as a result of the cancellation of the leases and write-off of leasehold improvements. In 2001, the Company paid lease payments totaling $544,000 for Regency Park and $680,000 for Sterling Park and accrued deferred lease payments due of $357,600 for Regency Park and $310,832 for Sterling Park. In 2000, the Company paid lease payments totaling $1,070,400 for Regency Park and $1,253,124 for Sterling Park and deferred lease payments due of $257,400 for Regency Park and $233,124 for Sterling Park. For 1999, lease payments were $1,320,536 for Regency Park and $1,486,248 for Sterling Park. Total lease payments deferred at December 31, 2001 were $1,158,956 and interest accruing on these deferrals was $133,243. 45 Mr. Bowen holds a 90 percent interest in Desert Flower, LLC, an Oregon limited liability company that owns the Desert Flower Assisted Living community in Scottsdale, Arizona. Mr. Bowen's minor children hold the remaining ten percent interest in Desert Flower, LLC. In 1999, the Company developed the community and sold it to Desert Flower, LLC in a transaction through which the Company received proceeds of $1.2 million and Desert Flower, LLC assumed $8.8 million in debt. The terms of the agreement contained a guaranteed return which constitutes continuing involvement under SFAS No. 66, Accounting for Sales of Real Estate and accordingly, the Company accounted for the sale under the deposit method. Under this method, the Company continues to report the asset, depreciation and related debt in the Company's financial statements and does not recognize profit from the sale. In 2001, the continuing involvement was satisfied and the transaction was accounted for as a sale. However, the gain has been deferred at December 31, 2001, and will not be recognized until it is realized from transactions with outside parties. The Company manages the community for Desert Flower, LLC. In 2001, the Company recorded $51,701 as management fee income and $68,977 as a decrease in deposits under sales contract. In 2000, the Company recorded $39,009 as management fee income and $142,070 as an increase in deposits under sales contract. During December 2000, the Company formed with Mr. Bowen a joint venture, Regent/Bowen, LLC, for the purpose of acquiring four communities for $33.9 million. The four communities were previously leased from two separate real estate investment trusts. The Company contributed $0.6 million along with its rights to purchase the four communities for a 75% interest in the joint venture. Mr. Bowen contributed $1.2 million for a 25% interest. In addition, the venture obtained $32.2 million in bank financing and $0.5 million of seller provided financing in order to complete the four acquisitions. On December 26, 2001, the Company and Mr. Bowen agreed to a specified distribution of the assets of Regent/Bowen, LLC upon its dissolution. Accordingly, the venture was dissolved and 100% of the venture's interest in the Santa Cruz and Clovis, California communities was distributed to the Company and 100% of the venture's interest in the Eugene, Oregon community was distributed to Mr. Bowen. The remaining community located in Boise, Idaho and other venture assets were distributed 75% to the Company and 25% to Mr. Bowen. As a result of the dissolution, the Company distributed cash of $165,091 and recorded a $31,783 payable to Mr. Bowen. This amount is included in current liabilities at December 31, 2001. In March 2001, the Company was unable to close two conventional loans with a financial institution in order to refinance two of its California communities. The inability to complete one loan was due in part to a pending accusation against the Company by the State of California Department of Social Services that was subsequently settled in July 2001, see item 3 "Legal Proceedings". Both loans failed to close due to the inability of the Company to obtain minimum excess liability coverage limits of five million dollars. As a result, the Company was unable to recover $195,500 in non-refundable advance deposits. These funds had been advanced directly to the financing company by the majority shareholder and are included in the June 30, 2001 bridge financing demand note payable to the majority shareholder as described below. In March 2001, as part of the financial plan to address the Company's lack of liquidity, Mr. Bowen agreed to provide $1 million in bridge financing (the Bridge Loan) to the Company. Through June 30, 2001, Mr. Bowen had provided cash advances totaling $750,000 under the Bridge Loan and earned fees totaling $15,000 as a result of providing this financing. At June 30, 2001, the advances under the Bridge Loan were combined with additional amounts due to Mr. Bowen and an affiliated Company, Bowen Development Company, along with accrued interest, into a demand note in the amount of $1,259,133. This note was due June 30, 2002, and is past due. The note remains unpaid and the Company is attempting to negotiate extensions on these payment obligations. 46 On July 3, 2001, the Company's Board of Directors approved a $1 million operating line of credit provided by Mr. Bowen. Through September 7, 2001, the Company drew $1,000,000 under the line. The line of credit bears interest at 18 percent. Mr. Bowen earned a $50,000 fee as a result of providing this financing. The line of credit was due June 30, 2002, and is past due. The line remains unpaid and the Company is attempting to negotiate extensions on these payment obligations. On December 27, 2001, the Company sold its Santa Cruz, California property to Cornell Springs Partners, an Oregon joint venture, in which Mr. Bowen directly holds a 40% interest and owns a 95% interest in its General Partner, Cornell Springs Apartments Limited Partnership which holds a 60% interest. The property was sold for a net sales price of $11.7 million. The Company received $5.0 million in cash proceeds of which $2.9 million was retained by the Company and $2.1 million was used to reduce debt after which $6.7 million of debt was assumed by Cornell Springs Partners. Bowen Development Company, which is wholly owned by Mr. Bowen, completed construction of one of the Company's new Regent Court communities in 2000. Additionally, Bowen Development Company completed one more community during 2001. Each of these projects is contracted for a fixed price that includes "contractor's overhead and profit" which is paid on a percentage of completion basis. Bowen Development Company lost approximately $171,000 in 2001 and $414,000 in 2000 and earned fees totaling approximately $526,100 in 1999 on these two projects. The Company's Conflicts Committee or independent directors approved these two contracts after solicitation and review of competitive bids from unaffiliated general contractors. The Company believes that each of the foregoing transactions was on terms no less favorable to the Company than could have been obtained from unaffiliated parties in arm's-length transactions; however, there can be no assurance that such is the case. The Company and the Bowen Companies are all controlled by Mr. Bowen. Certain executive officers of the Company, including Messrs. Bowen and Gish, fulfill similar executive functions for other Bowen Companies and spend significant amounts of time on the business of other Bowen Companies. The Company provides management and administrative services to, and from time to time may obtain services or the use of certain equipment from, certain of the Bowen Companies pursuant to an Administrative Services Agreement. Under that agreement, the Bowen Companies and the Company reimburse each other for the actual cost of services received under the Administrative Services Agreement. The Company believes that the sharing of executive management and other resources (such as data processing, accounting, legal, financial, tax, treasury, risk management and human resources) provides benefits to the Company by giving it access to a level of experience and expertise that can only be supported by a larger organization. The Administrative Services Agreement is cancelable by any party, including the Company, on 60 days' notice. The Administrative Services Agreement requires the Bowen Companies to offer first to the Company any opportunities received by or originated with the Bowen Companies relating to the assisted living business. The Administrative Services Agreement also requires all transactions between the Company and the Bowen Companies to be on an arm's length basis containing terms no less favorable to the Company than could have been obtained from an unrelated third party and requires any such transaction to be approved by a majority of the Company's directors unaffiliated with the Bowen Companies. In 2001, 2000 and 1999, Regent charged the Bowen Companies $10,100, 10,300 and $78,000, respectively, under the Administrative Services Agreement. 47 As of November 7, 2002, Mr. Bowen had provided personal guarantees for repayment and performance of covenants on Company loan agreements in an aggregate amount of $46,789,209. Mr. Bowen was paid $120,000 and $65,000 in 2000, and 1999, respectively, in exchange for his personal guaranties. The Company has also guaranteed loans to entities owned by the majority shareholder of which approximately $22.8 million is outstanding at December 31, 2001. Refinancing transactions in 2002 resulted in a reduction in the amount of loans guaranteed by the Company for entities owned by the majority shareholder to $8.1 million. 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The financial statements are listed in the Index to Financial Statements on page F-1 of this Report. (a)(2) Exhibits Exhibit Number (1)3.1 Restated Articles of Incorporation, as amended effective December 13, 1996 (2)3.2 Restated Bylaws, as amended effective December 12, 1996 4.1 See Article II of Exhibit 3.1 and Articles I and VI of Exhibit 3.2 (4)4.11 Convertible Subordinated Note Purchase Agreement, dated as of March 30, 1998, by and between the Registrant and Pamela J. Privett (4)4.12 Note No. 1998-5 issued to Pamela J. Privett in the principal amount of $90,000, due March 31, 2008 (4)4.17 Registration Rights Agreement, dated as of March 30, 1998, by and between Pamela J. Privett and the Registrant (1)10.1 Lease Agreement between the Company and Regency Park Apartments Limited Partnership (1)10.2 Lease Agreement between the Company and the Bowen-Gionet Joint Venture (1)10.6 Employment Agreement between the Company and Steven L. Gish (1)10.8 Restrictive Covenant Agreement between the Company and Walter C. Bowen (1)10.11 Restrictive Covenant Agreement between the Company and Steven L. Gish (5)10.13 1995 Stock Incentive Plan, as amended effective December 4, 1997 (1)10.14 Form of Incentive Stock Option Agreement (1)10.15 Form of Nonqualified Stock Option Agreement (1)10.16 Administrative Services Agreement among the Company and certain of the Bowen companies (1)10.17 Indemnity Agreement between the Company and Walter C. Bowen 49 (1)10.18 Indemnity Agreement between the Company and James W. Ekberg (1)10.20 Indemnity Agreement between the Company and Steven L. Gish (3)10.23 Preferred Stock and Warrant Agreement between Prudential Private Equity Investors III, L.P.("PPEI") and the Company dated as of December 16, 1996 (3)10.24 Stockholders Agreement among the Company, PPEI, and Walter C. Bowen dated as of December 16, 1996 (3)10.25 Registration Agreement between the Company and PPEI dated as of December 16, 1996 (3)10.26 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of Common Stock. (3)10.27 First Amendment to Lease between the Company and Regency Park Apartments Limited Partnership dated December 16, 1996 (3)10.28 Second Amendment to Lease between the Company and Sterling Park, L.L.C. dated December 16, 1996 (3)10.29 Form of Indemnity Agreement between the Company and directors (6)10.32 Employment Agreement between Louis Swart and the Company (6)10.33 Restrictive Covenant Agreement between Louis Swart and the Company (7)10.34 Employment Agreement, effective as of November 1, 1999, between Dale J. Zulauf and the Company (7)10.35 Restrictive Covenant Agreement, effective as of November 1, 1999, between Dale J. Zulauf and the Company (8)10.36 Executive Severance Agreement between the Company and James W. Ekberg (8)10.37 Executive Severance Agreement between the Company and Steven L. Gish (8)10.38 Amended and Restated Agreement between Emeritus Corporation and the Company to Provide Accounting and Consulting Services to California Assisted Living Facilities effective December 31, 2001 (8)10.39 Agreement between Emeritus Corporation and the Company to Provide Management Services to Washington Assisted Living Facilities effective December 31, 2001 (8)10.40 Amended and Restated Agreement between Emeritus Corporation and the Company to Provide Management Services to Assisted Living Facilities effective December 31, 2001 (8)21 List of Subsidiaries 50 (8)23.1 Consent of PricewaterhouseCoopers LLP (8)99.1 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) (8)99.2 Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) - ------------------------ (1) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-1, effective December 20, 1995 (Registration No. 33-96912) (2) Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 (3) Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996 (4) Incorporated by reference to the Exhibits to the Company's Form 10-QSB dated May 14, 1998 (5) Incorporated by reference to the Exhibits to the Company's Form 8-K dated December 22, 1998 (6) Incorporated by reference to the Exhibits to the Company's Form 10-QSB dated May 12, 1999 (7) Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 (8) Filed herewith All other schedules and exhibits are omitted because the required information is not applicable or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. (a)(3) Form 8-K There were no Reports on Form 8-K filed for the year ended December 31, 2001. 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Portland, State of Oregon, on the 7th day of November, 2002. REGENT ASSISTED LIVING, INC. By: /s/ WALTER C. BOWEN --------------------- Walter C. Bowen President, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the following persons in the capacities indicated have signed this report below on the 7th day of November, 2002. Signature Title --------- ----- /s/ WALTER C. BOWEN President, Chief Executive Officer, - ---------------------------------------- Chairman of the Board and Director Walter C. Bowen (Principal Executive Officer) /s/ STEVEN L. GISH Chief Financial Officer, Treasurer, - ---------------------------------------- Secretary and Director Steven L. Gish (Principal Financial and Accounting Officer) 52 CERTIFICATIONS I, Walter C. Bowen, President Chief Executive Officer, Chairman of the Board and Director of Regent Assisted Living, Inc., certify that: (1) I have reviewed this annual report on Form 10-K of Regent Assisted Living, Inc.; (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: November 7, 2002 By: /s/ WALTER C. BOWEN --------------------- --------------------------------- Walter C. Bowen President, Chief Executive Officer and Chairman of the Board and Director 53 CERTIFICATIONS I, Steven L. Gish, Chief Financial Officer, Treasurer, Secretary and Director of Regent Assisted Living, Inc., certify that: (1) I have reviewed this annual report on Form 10-K of Regent Assisted Living, Inc.; (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: November 7, 2002 By: /s/ Steven L. Gish --------------------- -------------------------------- Steven L. Gish Chief Financial Officer, Treasurer, Secretary and Director 54 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES Consolidated Financial Statements For the Years Ended December 31, 2001 and 2000 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES TABLE OF CONTENTS PAGE Report of Independent Accountants - PricewaterhouseCoopers LLP ..............F-1 Financial Statements: Consolidated Balance Sheets.............................................F-2 Consolidated Statements of Operations...................................F-3 Consolidated Statements of Changes in Shareholders' Equity..............F-4 Consolidated Statements of Cash Flows...................................F-5 Notes to Consolidated Financial Statements .............................F-7 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Regent Assisted Living, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Regent Assisted Living, Inc. and Subsidiaries (the Company) at December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Portland, Oregon May 10, 2002, except for Note 5 as to which the date is October 1, 2002; Notes 7, 10 and 12 as to which the date is November 7, 2002; Note 8 as to which the date is September 10, 2002; and Note 15, as to which the date is September 18, 2002. F-1 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
2001 2000 ASSETS Current assets: Cash and cash equivalents $ 4,041,764 $ 2,580,004 Cash held in working capital escrow 7,722 1,381,781 Accounts receivable, net 66,272 557,355 Prepaid expenses 686,768 931,506 Land and property held for sale 11,218,209 2,400,000 ------------- ------------- Total current assets 16,020,735 7,850,646 Restricted cash 967,421 2,292,269 Property and equipment, net 23,763,453 78,546,940 Investment in and advances to joint venture 490,639 629,061 Other assets 1,604,439 3,738,642 ------------- ------------- Total assets $42,846,687 $93,057,558 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings from and payables to majority shareholder $ 2,477,480 $ - Current portion of long-term debt 13,158,653 5,917,043 Construction accounts payable 68,550 324,572 Accounts payable and other accrued expenses 5,033,361 3,188,962 Accrued payroll 1,025,817 1,810,907 Accrued interest 169,682 551,892 ------------- ------------- Total current liabilities 21,933,543 11,793,376 Long-term debt 22,715,670 65,061,708 Convertible subordinated notes 90,000 9,000,000 Accrued preferred dividends payable 1,875,000 750,000 Deferred lease and interest payable to majority shareholder 1,292,199 507,877 Deposits under sales contract - 10,297,381 Deferred gains and development fees, net 9,258,100 5,268,468 Other liabilities 592,697 1,482,887 ------------- ------------- Total liabilities 57,757,209 104,161,697 ------------- ------------- Minority interest in consolidated subsidiaries 71,225 1,422,226 ------------- ------------- Commitments and contingencies (Note 8) Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized; 1,666,667 shares issued and outstanding in 2001 and 2000 9,349,841 9,349,841 Common stock, no par value, 25,000,000 shares authorized; 4,507,600 shares issued and outstanding in 2001 and 2000 10,619,349 10,619,349 Accumulated deficit (34,950,937) (32,495,555) ------------- ------------- Total shareholders' equity (14,981,747) (12,526,365) ------------- ------------- Total liabilities and shareholders' equity $42,846,687 $93,057,558 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. F-2 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 Revenues: Rental and service $ 63,138,319 $ 64,180,365 $ 53,635,079 Management fees 887,113 728,374 453,936 ---------------- ---------------- ---------------- Total revenues 64,025,432 64,908,739 54,089,015 ---------------- ---------------- ---------------- Operating expenses: Residence operating expenses 48,509,085 45,025,215 38,605,500 General and administrative 8,560,552 7,071,740 7,251,337 Lease expense 8,642,146 13,941,519 13,390,695 Depreciation and amortization 2,782,901 1,784,031 1,512,835 ---------------- ---------------- ---------------- Total operating expenses 68,494,684 67,822,505 60,760,367 ---------------- ---------------- ---------------- Operating loss (4,469,252) (2,913,766) (6,671,352) Interest income 368,598 507,641 305,656 Interest expense (6,996,909) (3,908,366) (2,645,863) Equity in losses of joint ventures (404,525) (296,817) (246,565) Other income, net 10,148,122 15,385 445,860 ---------------- ---------------- ---------------- Loss before minority interests (1,353,966) (6,595,923) (8,812,264) Minority interests 23,584 130,163 35,888 ---------------- ---------------- ---------------- Loss before income taxes (1,330,382) (6,465,760) (8,776,376) Provision for income taxes - - - ---------------- ---------------- ---------------- Net loss (1,330,382) (6,465,760) (8,776,376) Preferred stock dividends (1,125,000) (750,000) (600,000) ---------------- ---------------- ---------------- Net loss available to common shareholders $ (2,455,382) $ (7,215,760) $ (9,376,376) ================ ================ ================ Basic loss per common share $ (0.54) $ (1.60) $ (2.03) ================ ================ ================ Diluted loss per common share $ (0.54) $ (1.60) $ (2.03) ================ ================ ================ Weighted average common shares outstanding - basic 4,507,600 4,507,600 4,615,135 ================ ================ ================ Weighted average common shares outstanding - diluted 4,507,600 4,507,600 4,615,135 ================ ================ ================
The accompanying notes are an integral part of the consolidated financial statements. F-3 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Preferred Stock ---------------------------------------------- Series A Series B Common Stock Total ---------------------- ---------------------- ---------------------- Accumulated Shareholders' Shares Amount Shares Amount Shares Amount Deficit Equity ---------- ---------- ---------- ---------- ---------- ---------- ---------------- ------------- Balance, December 31, 1998 1,283,785 $7,201,910 382,882 $2,147,931 4,633,000 $10,808,703 $(15,903,419) $ 4,255,125 Preferred stock dividends - - - - - - (600,000) (600,000) Shares repurchased and retired - - - - (125,400) (189,354) - (189,354) Net loss - - - - - - (8,776,376) (8,776,376) ---------- ---------- ---------- ---------- ---------- ---------- ---------------- ------------- Balance, December 31, 1999 1,283,785 7,201,910 382,882 2,147,931 4,507,600 10,619,349 (25,279,795) (5,310,605) Preferred stock dividends - - - - - - (750,000) (750,000) Net loss - - - - - - (6,465,760) (6,465,760) ---------- ---------- ---------- ---------- ---------- ---------- ---------------- ------------- Balance, December 31, 2000 1,283,785 7,201,910 382,882 2,147,931 4,507,600 10,619,349 (32,495,555) 12,526,365) Preferred stock dividends - - - - - - (1,125,000) (1,125,000) Net loss - - - - - - (1,330,382) (1,330,382) ---------- ---------- ---------- ---------- ---------- ---------- ---------------- ------------- Balance, December 31, 2001 1,283,785 $7,201,910 382,882 $2,147,931 4,507,600 $10,619,349 $(34,950,937) $(14,981,747) ========== ========== ========== ========== ========== ========== ================ =============
The accompanying notes are an integral part of the consolidated financial statements. F-4 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 Cash flows from operating activities: Net loss $ (1,330,382) $ (6,465,760) $ (8,776,376) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,782,901 1,784,031 1,512,835 (Gain) loss on sale of assets (10,142,706) 104 (462,113) Loss on disposal of construction in progress 914,364 - - Adjustment on land held for sale to estimated fair value 633,775 791,245 1,489,197 Amortization of deferred gains and development fees (2,896,907) (522,177) (509,738) Equity interest in joint ventures 404,525 296,817 246,565 (Decrease) increase in allowance for doubtful accounts (57,000) 23,000 - Minority interests (23,584) (130,163) (35,888) Changes in other assets and liabilities: Cash held in working capital escrow 1,374,059 413,608 1,181,027 Accounts receivable 450,489 196,149 (435,598) Prepaid expenses 161,547 (191,937) (494,245) Other assets 722,717 (103,637) 198,914 Accounts payable and other accrued expenses 3,789,921 (226,014) 1,134,746 Accrued payroll (688,599) 320,313 276,964 Accrued interest 23,550 169,933 119,816 Deferred lease and interest payable to majority shareholder 784,322 507,877 - Other liabilities (890,190) 95,637 (198,914) ------------- ------------- ------------- Net cash used in operating activities (3,987,198) (3,040,974) (4,752,808) ------------- ------------- ------------- Cash flows from investing activities: Purchases of property and equipment (4,373,393) (45,812,247) (13,248,696) Decrease in construction accounts payable (228,787) (138,564) (145,449) Investment in and advances to joint ventures (193,622) (14,114) (12,400) Proceeds from sale of property and equipment 5,910,949 2,401,375 740,309 Proceeds from sale of equity interest - - 725,000 Distribution upon dissolution of joint venture (165,091) - - Withdrawals from (deposits to) replacement reserve account, net 87,378 (72,937) 20,555 ------------- ------------- ------------- Net cash provided by (used in) investing activities 1,037,434 (43,636,487) (11,920,681) ------------- ------------- ------------- Cash flows from financing activities: Short-term borrowings 1,945,500 - - Proceeds from issuance of long-term debt 5,722,771 53,275,199 19,986,691 Payments on long-term debt (4,666,850) (9,278,775) (14,688,127) Construction (advances) payments - 235,706 368,200 Payments and deposits for lease financing arrangements, net 443,741 (759,432) (551,638) Restricted cash for lease financing arrangements, net 1,051,956 696,850 (415,344) Deferred development fees from lease financing arrangements (16,618) 637,830 243,419 Proceeds from lease financing arrangements - (1,390,791) 10,766,814 (Payment on) proceeds from sales contract (68,976) 103,039 1,419,342 Contributions by minority interests - 1,200,000 388,277 Preferred stock dividends - - (600,000) Payments to repurchase common stock - - (189,354) ------------- ------------- ------------- Net cash provided by financing activities 4,411,524 44,719,626 16,728,280 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 1,461,760 (1,957,835) 54,791 Cash and cash equivalents, beginning of period 2,580,004 4,537,839 4,483,048 ------------- ------------- ------------- Cash and cash equivalents, end of period $ 4,041,764 $ 2,580,004 $ 4,537,839 ------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements. F-5 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 Supplemental disclosure of non-cash investing and financing activities: Assumption of debt by minority interests $ - $ - $ 1,291,448 ------------- ------------- ------------- Assumption of debt by joint venture $ - $ - $ 1,692,467 ------------- ------------- ------------- Debt assumed pursuant to sales contract $ 6,706,000 $ - $ 8,775,000 ------------- ------------- ------------- Debt canceled and assumed pursuant to settlement agreement $ 27,361,339 $ - $ - ------------- ------------- ------------- Debt assumed pursuant to distribution of property from joint venture $ 8,488,129 $ - $ - ------------- ------------- ------------- Contribution of property and equipment in exchange for investment in and advances to joint venture $ - $ 653,423 $ - ------------- ------------- ------------- Receivable in joint venture in exchange for developer fee $ - $ 71,350 $ - ------------- ------------- ------------- Preferred stock dividends accrued $ 1,125,000 $ 750,000 $ - ------------- ------------- ------------- Cancelation of capital lease due to settlement agreement $ 1,186,361 $ - $ - ------------- ------------- ------------- Contribution of property in satisfaction of debt $ 3,945,676 $ - $ - ------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements. F-6 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Regent Assisted Living, Inc. (the Company) is an owner and operator of private-pay assisted living communities including stand-alone Alzheimer's communities. Assisted living is part of a spectrum of long-term care services that provide a combination of housing, personal services and health care designed to respond to elderly individuals who require assistance with activities of daily living in a manner that promotes maximum independence. THE COMPANY As of December 31, 2001, the Company operated 20 assisted living communities in 7 western states. During 2001, the Company commenced operations at 5 new assisted living communities of which 4 were internally developed (including 1 owned by a joint venture and 2 managed by a third-party) and discontinued operations at 15 communities. As of December 31, 2000, the Company operated 30 assisted living communities in 9 western states. In addition, the Company had five communities under construction and two under development. During 2000, the Company commenced operations at one internally developed stand-alone Alzheimer care community, which is owned by a joint venture, and entered into one additional management contract. As of December 31, 1999, the Company operated 29 assisted living communities in 9 western states. In addition, the Company had four communities under construction and four under development. During 1999, the Company commenced operations at three new internally developed stand-alone Alzheimer's care communities (including two owned by joint ventures) and also opened a new internally developed assisted living community which was sold to the Company's Chairman and Chief Executive Officer in a sale-manageback agreement. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries and entities in which it has a controlling interest. All significant intercompany transactions and balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. Cash equivalents consist of highly liquid debt instruments purchased with an original maturity of three months or less. The Company's cash equivalents are in high quality securities placed with institutions with high credit ratings. This investment policy limits the Company's exposure to concentrations of credit risk, and the Company has not experienced any credit related losses. CASH HELD IN WORKING CAPITAL ESCROW Cash is held in the Company's name in bank accounts in the custody of financial institutions. This cash is available for release in accordance with the related agreements. F-7 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LAND HELD FOR SALE The Company has made one parcel of land and has classified two communities as available for sale at December 31, 2001 and three parcels of land at December 31, 2000. The land was previously acquired for development. Of the land held for sale at December 31, 2000, one parcel was sold in 2001 for net proceeds of $496,225 and one parcel was deeded to a third party in satisfaction of $900,000 of debt. The Company recorded an expense of $633,775 and $791,245 in 2001 and 2000, respectively, to adjust the land held for sale to its estimated fair market value. Of the two communities classified as held for sale at December 31, 2001, one community located in Boise, Idaho was sold in May 2002 for net proceeds of $2.8 million from which the Company paid down $2.4 million of debt that was classified as current at December 31, 2001. The other community located in South Ogden, Utah and classified as held for sale at December 31, 2001, was transferred to the lender on May 31, 2002 in lieu of foreclosure. The lender had declared the Company in default of the $8.9 million loan for this community in 2001 and, accordingly, this debt was classified as current at December 31, 2001. The transfer resulted in the full satisfaction of the related debt (see Notes 5, 14 and 15). RESTRICTED CASH The Company is required to provide letters of credit to lenders in connection with certain financing arrangements. Financial institutions providing the letters of credit have required cash collateral for the letters of credit, totaling $741,752 and $1,718,973 as of December 31, 2001 and 2000, respectively. Restricted cash also includes a replacement reserve required to be maintained for two of the communities and cash collateral reserve required for one community opened in 2001. PROPERTY AND EQUIPMENT Property and equipment are stated at cost with depreciation being provided over the assets' estimated useful lives using straight-line and accelerated methods as follows: Buildings 40 years Land improvements 15 years Furniture and equipment 5 - 10 years Interest incurred during construction periods is capitalized as part of the building costs. Maintenance and repairs are expensed as incurred; renewals and improvements are capitalized. Upon disposal of property and equipment subject to depreciation, the related costs and accumulated depreciation are removed and resulting gains and losses are reflected in operations. Management reviews all long-lived assets, other than land held for sale, held and used by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of the long-lived assets, the recoverability test is performed using undiscounted net cash flows of the individual communities. There have been no significant impairment charges to assets not held for sale. F-8 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENT IN JOINT VENTURES Joint ventures in which the Company does not have a controlling interest are accounted for under the equity method of accounting. PRE-OPENING AND START-UP COSTS The Company expenses pre-opening and start-up costs as incurred. DEFERRED GAINS AND DEVELOPMENT FEES Gains realized on the sale and leaseback of the Company's assisted living communities are deferred and credited to income as rent adjustments over the related lease terms. The Company also defers development fees and amortizes them over the term of the related lease. Gains realized on sales or distributions of the Company's assisted living communities to its majority shareholder are deferred and will not be recognized until such buildings are sold to unrelated third parties. As of December 31, 2001, there are deferred gains of $8.7 million and development fees of $0.6 million of which $6.9 million of deferred gains resulted from transactions with the Company's majority shareholder. REVENUE RECOGNITION Revenue from owned or leased assisted living communities is recorded when services are rendered and consist of resident fees for basic housing, personalized health care and management fees from other assisted living communities. INCOME TAXES Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance. COMPUTATION OF PER SHARE AMOUNTS Basic Earnings Per Share (EPS) is calculated using income (loss) attributable to common shares (after deducting preferred dividends) divided by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated using income (loss) attributable to common shares (after deducting preferred dividends and considering the effects of dilutive common equivalent shares) divided by the weighted-average number of common shares and dilutive common shares outstanding for the period. The weighted average shares issuable upon the exercise of stock options were not included in the calculation because they were antidilutive. F-9 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION PLAN The Company accounts for its stock-based compensation plan under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Effective January 1, 1996, the Company adopted the disclosure requirements of Statement of Financial and Accounting Standards (SFAS) SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires that companies that do not choose to account for stock-based compensation as prescribed by this statement shall disclose the pro forma effect on earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including allowance for doubtful accounts, land held for sale, investments in and advances to joint ventures, income taxes, restructuring, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, investments, accounts receivable, construction advances receivable and restricted cash approximate fair value because of the short-term nature of these accounts and because amounts are invested in accounts earning market rates of interest. The carrying amount of debt approximates fair value inasmuch as the interest rates approximate the current rates available to the Company. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 is effective for the fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The impact of this pronouncement on the Company's financial statements is not expected to be material. F-10 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 is effective for the fiscal years beginning after December 15, 2001. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects or Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB Opinion No. 30; accordingly, two accounting models existed for long-lived assets to be disposed of. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. In addition, SFAS No. 144 resolves significant implementation issues related to SFAS No. 121. Under SFAS No. 144 the results of operations of a component of an entity that either has been disposed of or is classified as held for sale are reported in discontinued operations if (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Accordingly, upon adoption of SFAS No. 144 the Company's operations associated with and transactions recorded in previous periods as other income/loss could be reclassified as discontinued operations. In 2002, FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections as of April 2002. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company has reviewed this pronouncement and will consider its impact on any relevant transactions. In July 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). F-11 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) This Statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Those costs include, but are not limited to, the following: o Termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (hereinafter referred to as one-time termination benefits), o Costs to terminate a contract that is not a capital lease, and o Costs to consolidate facilities or relocate employees. This Statement does not apply to costs associated with the retirement of a long-lived asset covered by SFAS No. 143, Accounting for Asset Retirement Obligations. The impact of this pronouncement on the Company's financial statements has not yet been determined by the Company. 2. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist of the following:
2001 2000 Land $ 1,367,757 $ 7,054,444 Buildings and improvements 21,400,674 55,383,869 Furniture and equipment 2,672,736 5,148,211 Construction in progress 1,178 14,073,406 ---------------- ----------------- 25,442,345 81,659,930 Less accumulated depreciation and amortization 1,678,892 3,112,990 ---------------- ----------------- Property and equipment, net $ 23,763,453 $ 78,546,940 ================ =================
Land, buildings and certain furniture and equipment serve as collateral for long-term debt. Construction in progress includes land, development and building costs incurred in connection with the construction of the Company's new communities and the cost of land held for development. Property and equipment includes the asset value attributable to capital leases in the amount of $1,186,361 (land only) at December 31, 2000. There were no capital leases as of December 31, 2001. F-12 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. OTHER ASSETS Other assets consist of the following:
2001 2000 Resident security and trust deposits $ 592,697 $1,482,887 Deferred financing costs, net 630,287 1,663,618 Other 381,455 592,137 -------------- -------------- Total other assets $1,604,439 $3,738,642 ============== ==============
Pursuant to rental agreements, residents are required to provide security deposits, and in certain cases, the last month's rent. A liability for these deposits is recorded in other liabilities in the consolidated financial statements. Deferred financing costs are amortized over the original term of the related financing agreement. 4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURE Investments in 10% to 50% owned joint ventures accounted for under the equity method amounted to $490,639 and $629,061 at December 31, 2001 and 2000, respectively. The combined results of operations and financial position of the Company's joint ventures are summarized below:
2001 2000 Condensed income statement information: Gross revenues $6,813,982 $5,396,609 Income from operations 1,152,729 1,156,922 Net loss (721,882) (693,935) Condensed balance sheet information: Current assets 652,459 413,190 Noncurrent assets 23,764,733 19,191,202 Current liabilities 1,177,374 1,043,984 Noncurrent liabilities 21,707,769 16,497,893 Equity 1,532,049 2,062,515
F-13 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. LONG-TERM DEBT, CONVERTIBLE SUBORDINATED NOTES AND DEPOSITS UNDER SALES CONTRACT Long-term debt consists of:
2001 2000 Notes payable to a financial institution, interest only payments at the commercial based rate plus 1.5% (floor of 7%) and/or one or more LIBOR based rates (5.25% at December 31, 2001) due January 2004, collateralized by real property in Boise, Idaho and Clovis, California $ 12,840,000 $ 27,120,000 Note payable to a financial institution due in monthly installments of $74,208 including interest at 8.43%, due October 2009 - 9,357,418 Note payable to a financial institution, due in monthly installments of $70,218, including interest at 8.69%, due August 2010 - 8,773,751 Notes payable to a financial institution, due in monthly installments equal to net cash flow from the mortgaged property and interest payments at 16%, due January 2004, collateralized by real property in Boise, Idaho and Clovis, California 2,311,058 5,085,000 Construction loans, totaling $20,654,000, interest varies between 9.00% and 16.0%, maturities vary from December 2004 through January 2005, collateralized by real property in Merced, California and South Ogden, Utah 13,759,111 11,401,557 Note payable to a bank, due in monthly installments of $20,670, including interest at 8.71%, due June 2002, collateralized by real property in Boise, Idaho 2,413,973 2,447,201 Capital lease obligation, monthly interest only payments at 10.14% beginning upon completion of building, due approximately August 2015 - 1,186,361 Note payable to a corporation, quarterly payments of interest only at 8%, due in monthly installments of $15,868 including interest at 8% beginning December 2002, due November 2006 650,000 500,000 Note payable to a corporation, monthly payments of interest only at 8%, due in quarterly installments of $43,232 including interest at 8% beginning January 2003, due November 2006 585,709 - Notes payable to the majority shareholder, interest only payments at 8%, due in monthly installments of $10,793, including interest at 8% beginning January 2003, due December 2006 473,108 - Note payable to a corporation, monthly payments of interest only at 9%, $50,000 principal only due May 2002, due in August 2002 250,000 500,000 Notes payable to a bank, due in monthly installments of $11,920, including interest at various rates between 8.75% and 8.88%, all maturing at various dates between 2002 and 2003, collateralized by equipment 100,949 271,354 Note payable to a financial institution due in monthly installments beginning March 2002 of $11,836, including interest at 7.0% or prime plus 1% if higher, due January 2004, collateralized by real property in Modesto, California 1,674,663 1,674,662 Note payable to a corporation, monthly interest only payments at 12%, $250,000 principal payment due February 2002 and $225,000 principal payment due August 2002, collateralized by real property in Visalia, California 475,000 1,625,000 Notes payable to construction company owned by the majority shareholder, annual payments of interest only at prime plus 1% (10.5% at December 31, 2000) - 250,000 Other 340,752 786,447 -------------- -------------- 35,874,323 70,978,751 Less amounts due within one year 13,158,653 5,917,043 -------------- -------------- $ 22,715,670 $ 65,061,708 ============== ==============
F-14 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. LONG-TERM DEBT, CONVERTIBLE SUBORDINATED NOTES AND DEPOSITS UNDER SALES CONTRACT (CONTINUED) Principal payments on long-term debt for the years ending December 31 are as follows: 2002 $13,158,653 2003 1,613,936 2004 20,173,897 2005 456,268 2006 471,569 ---------------- $35,874,323 ================ The Company incurred total interest costs of approximately $7,373,348, $4,342,388 and $4,900,800 in 2001, 2000 and 1999, respectively, of which approximately $376,439, $434,022 and $2,255,000 has been capitalized as part of construction in progress. Interest costs paid by the Company in 2001, 2000 and 1999 totaled approximately $7,389,471, $4,211,160 and $4,781,000, respectively. The Company, along with its joint venture partners, has guaranteed construction loans totaling approximately $20.5 million at December 31, 2001. The carrying value of the underlying venture assets that collateralize these loans was $23.7 million at December 31, 2001. The Company has also guaranteed loans to entities owned by the majority shareholder of approximately $22.8 million. As of October 1, 2002, the Company refinanced $15,151,058 of debt at more favorable terms and as a result the Company's guarantees on loans to entities owned by the majority shareholder were reduced to $8.1 million. The carrying value of the underlying entity assets that collateralize these loans was $8.8 million at October 1, 2002. On March 30, 1998, the Company completed a private placement pursuant to which parties purchased an aggregate of $4.5 million of convertible subordinated notes of the Company and agreed to purchase up to an additional aggregate amount of $6 million of convertible subordinated notes. As of December 31, 2001 and 2000, a total of $90 thousand and $9 million of convertible notes were issued under this facility, respectively. In December 2001, the Company exchanged its Bakersfield and Vacaville communities for cancellation of $8.9 million in convertible notes. The two properties were acquired subject to $18.3 million in mortgage and local improvement debt, which was assumed by the new owner. The Company recorded a gain of $12.0 million as a result of this non-cash transaction as of December 31, 2001. The remaining outstanding notes bear interest at 7.5% per annum and are convertible into 12,000 shares of common stock at an exercise price of $7.50 per share with a 10% adjustment for failure to quote on Nasdaq national market. As of December 31, 2001, the exercise price is $6.75 per share as the conversion shares have not been approved for quotation on Nasdaq. Interest on the notes is payable quarterly and all principal and unpaid interest on the notes is due March 31, 2008. The notes may be converted at the option of the holder at any time prior to the maturity date of the notes. The Company also has the right to force a conversion of the notes if the average trading price of the common stock equals or exceeds $12 per share over thirty consecutive trading days. F-15 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. LONG-TERM DEBT, CONVERTIBLE SUBORDINATED NOTES AND DEPOSITS UNDER SALES CONTRACT (CONTINUED) During September 1999, the Company sold to its majority shareholder its Scottsdale, Arizona community under terms of a sale-manageback agreement. The terms of the agreement contained a guaranteed return, which constitutes continuing involvement under SFAS No. 66, Accounting for Sales of Real Estate, and, accordingly, the Company accounted for the sale under the deposit method. Under this method, the Company continues to report the asset, depreciation and related debt in the Company's financial statements and does not recognize profit from the sale. The Company received $1.2 million in sales proceeds and the purchaser assumed $8.8 million of underlying debt. These amounts are recorded as liabilities captioned "deposits under sales contract" in the Company's balance sheet at December 31, 2000. The net book value of the asset subject to the sales contract totaled $8.9 million at December 31, 2000. In 2001, the continuing involvement criteria was satisfied and the transaction was accounted for as a sale. The realized gain has been deferred and will be recognized when the building is sold to an unrelated third party. The Company had been declared in default under terms of an $8.9 million construction note payable to a bank related to its South Ogden, Utah community and, accordingly, such amount has been included in current portion of long-term debt at December 31, 2001. The community was transferred to the bank as part of a settlement agreement in lieu of foreclosure in May 2002, which resulted in the full satisfaction of the related debt. Accordingly, the Company has classified the related South Ogden, Utah property of $8.3 million under the caption land and property held for sale at December 31, 2001 (see Notes 1, 14 and 15). 6. SHAREHOLDERS' EQUITY The Company is authorized to issue 5,000,000 shares of preferred stock. The Board of Directors has the authority to issue preferred stock in one or more series and to fix the number of shares constituting any such series, and the preferences, limitations and relative rights, including the dividend rights, dividend rate, voting rights, terms of redemption, redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by the shareholders of the Company. On December 16, 1996, the Company issued 1,283,785 shares of Series A preferred stock and 382,882 shares of Series B preferred stock (collectively, the Preferred Stock) for a total of $9,950,000. In connection with this transaction, a warrant was issued to the holders of the preferred stock for $50,000, allowing the warrant holder to purchase 200,000 shares of common stock at an exercise price of $5.50 per share. Each share of preferred stock is convertible into 1.091 shares of common stock. The Series A preferred shares are convertible at any time at the option of the holder. The Series B preferred shares are convertible upon the occurrence of certain "Conversion Events" as defined in the Company's amended articles of incorporation. F-16 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. SHAREHOLDERS' EQUITY (CONTINUED) Dividends on the preferred stock accrue at an annual rate ranging from 6% to 12% of the liquidation value of $5.50 per common equivalent share. The total liquidation value of the preferred stock at December 31, 2001 was $10,000,000. In connection with the sale of the preferred stock, the Company also entered into a stockholders' agreement with the preferred shareholder and the founding shareholder regarding the voting and disposition of shares held by the preferred shareholder and the founding shareholder, and an agreement providing the preferred shareholder with rights to require the Company to register shares of common stock upon conversion of the preferred stock. 7. STOCK OPTIONS 1995 STOCK INCENTIVE PLAN The Company adopted a stock incentive plan (the 1995 Stock Incentive Plan), which provides for the award of incentive stock options to key employees and the award of nonqualified stock options, stock appreciation rights, bonus rights and other incentive grants to employees, independent contractors and consultants. A total of 800,000 shares of common stock may be issued under the 1995 Stock Incentive Plan. As of December 31, 2001, options to purchase 247,000 shares had been granted and were outstanding pursuant to the Stock Incentive Plan. As of November 7, 2002, options to purchase 235,200 shares were still outstanding. The 1995 Stock Incentive Plan is administered by the Board of Directors, which has the authority, subject to the terms of the Stock Incentive Plan, to determine the persons to whom options or rights may be granted, the exercise price and number of shares subject to each option or right, the character of grant, the time or times at which all or a portion of each option or right may be exercised and certain other provisions of each option or right. Options are exercisable over a period of time in accordance with the terms or option agreements entered into at the time of grant. Generally, options expire 10 years from date of grant and are expected to become exercisable over a five-year period. Options granted under the 1995 Stock Incentive Plan are generally nontransferable by the optionee and, unless otherwise determined by the Board of Directors, must be exercised by the optionee during the period of the optionee's employment or service with the Company or within a specified period following termination of employment or service. Non-employee members of the Board of Directors of the Company are automatically granted an option to purchase 2,000 shares of common stock when they become a director. In prior years each non-employee director was automatically granted an option to purchase 2,000 additional shares of common stock in each subsequent calendar year that the director continued to serve in that capacity. This practice was discontinued in 2001. F-17 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. STOCK OPTIONS (CONTINUED) OPTIONS GRANTED BY SHAREHOLDER In August 1995, the Company's founding shareholder granted options to purchase an aggregate of 170,000 shares of common stock, of which 165,000 were to certain officers of the Company. During 1999, options for 85,000 of these shares were cancelled. These options vest and become immediately exercisable, and are subject to the terms of option agreements that contain terms similar to those governing the options granted under the 1995 Stock Incentive Plan. A summary of the Company's stock option activity and related information for the years ended December 31 are presented below:
2001 2000 1999 ------------------------ ------------------------- ------------------------ Weighted- Weighted- Weighted- average average average exercise exercise exercise Options Shares price Shares price Shares price ------- --------- ------------- --------- -------------- ---------- ------------ Outstanding-beginning of year 877,000 $ 2.99 672,500 $ 4.23 604,000 $ 4.77 Granted 2,000 0.84 360,000 0.89 285,000 3.35 Exercised - - - - - - Cancelled (547,000) 2.56 (155,500) 3.35 (216,500) 4.59 --------- --------- ---------- Outstanding-end of year 332,000 3.74 877,000 2.99 672,500 4.23 ========= ========= ========== Weighted-average fair value of options granted during the year $ 0.59 $ 0.57 $ 2.13
The following table summarizes information about stock options outstanding as of December 31, 2001:
Options Exercisable ----------------------------- Weighted- average Weighted- Weighted- Range of remaining average average exercise Number contractual exercise Number exercise price outstanding life price exercisable price ------------ ---------------------- ---------------- ----------- -------------- ------------- $6.00 - $8.00 85,000 3.7 years $ 6.24 85,000 $ 6.24 0.75 - 7.13 247,000 6.2 years 2.88 234,665 2.95 ---------------------- -------------- 332,000 319,665 ====================== ==============
The total value of options granted during 2001, 2000 and 1999 was computed as approximately $1,200, $203,800 and $605,300, respectively, which would be amortized on a pro forma basis over the vesting period of the options. F-18 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. STOCK OPTIONS (CONTINUED) OPTIONS GRANTED BY SHAREHOLDER (CONTINUED) The Company has adopted the disclosure-only provisions of SFAS No. 123. The following table presents the Company's net loss and loss per share, assuming compensation cost had been determined based on the fair value at the date of grant, and recognized as expense on a straight-line basis over the vesting period of the options, consistent with the provisions of SFAS No. 123:
2001 2000 1999 Net loss: As reported $(1,330,382) $(6,465,760) $(8,776,376) Pro forma (1,424,192) (6,788,093) (9,265,466) Diluted loss per common share: As reported (0.54) (1.60) (2.03) Pro forma (0.57) (1.67) (2.14)
For purposes of the above pro forma information, the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2001 2000 1999 Risk-free interest rate 4.69% 5.16% 5.63% Expected life 5.53 years 7.32 years 7.6 years Expected volatility 121% 70% 54% Expected dividend yield 0% 0% 0%
8. COMMITMENTS OPERATING LEASES The Company leases one community under a noncancelable lease agreement expiring in the year 2011. The Company is responsible for all costs including repairs, property taxes and other direct operating costs. The Company currently occupies approximately 2,800 square feet of office space in Portland, Oregon that is leased by a corporation owned by the majority shareholder. The Company is paying the landlord directly for the obligations under that lease. The lease expires February 15, 2003. The Company vacated approximately 10,500 square feet of office space in Portland, Oregon in 2002 that it had occupied under a lease agreement expiring February 15, 2003. The Company had been negotiating a lease cancellation agreement with the lessor, however, the lessor filed suit against the Company for non-payment of rent. The parties reached a settlement of the matter on September 10, 2002. F-19 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. COMMITMENTS (CONTINUED) OPERATING LEASES (CONTINUED) Future minimum lease payments required under these leases for the years ending December 31 are as follows: 2002 $ 2,066,527 2003 1,301,994 2004 1,223,951 2005 1,239,740 2006 1,264,686 Thereafter 5,481,110 ----------------- $12,578,008 ================= Lease and rent expense for the Company totaled $11,793,393, $14,952,974 and $14,233,400 in 2001, 2000 and 1999, respectively. Effective October 31, 2001, the Company entered into a settlement agreement with the real estate investment trust (REIT) owner of four of its leased communities under a master lease to resolve events of default primarily due to failure of the Company to pay its lease payments. The settlement included transfer of the operations of the communities to new operators and a note payable to the REIT for past due rent obligations totaling $585,709. The note provides for payment of quarterly interest at 8% and quarterly installments beginning in January 2003 of $43,232 including interest at 8% and is due November 2006. The Company's majority shareholder guaranteed this note. The Company recorded losses totaling $266,000 as a result of this transaction as of December 31, 2001. Effective November 1, 2001, the Company entered into a settlement agreement with the REIT owner of five of its leased communities that were cross-defaulted to resolve events of default primarily due to failure of the Company to pay its lease payments. The settlement included transfer of the operations of the communities to new operators and a note payable to the REIT for past due rent obligations. The note amount was combined with additional amounts outstanding under an existing note payable to the REIT to total $650,000. The new note provides for payment of quarterly interest at 8% and monthly installments beginning in December 2002 of $15,868 including interest at 8% and is due November 2006. The Company's majority shareholder guaranteed this note. The Company recorded losses totaling $343,000 as a result of this transaction as of December 31, 2001. CAPITAL LEASES During 1996, the Company entered into a sale-leaseback transaction with a real estate investment trust (REIT) for the Santa Cruz, California community. The total consideration for the sale was $8,300,000, which was recorded as a capital lease obligation by the Company. The Company repurchased this community from the lessor on December 26, 2000. In December 2001, this community was sold to an entity primarily owned by the majority shareholder (see Note 10). F-20 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. COMMITMENTS (CONTINUED) CAPITAL LEASES (CONTINUED) During June 1999, the Company entered into a $10.1 million arrangement with a REIT pursuant to which the Company constructed its Mesa, Arizona community. The sale of the land was recorded as a capital lease. In November 2001, the Company completed a settlement agreement with the REIT whereby the Company was released from its lease commitment associated with the Mesa community. CONSTRUCTION FINANCING The Company has entered into construction loans in the aggregate of $24 million for the construction of five of its communities of which $14.7 million has been advanced as of December 31, 2001 (see Note 5). The Company, along with its joint venture partners, has entered into four additional construction loans in the aggregate of $21.3 million of which $14.5 million has been advanced as of December 31, 2001. All of these loans are generally for a term of three to five years, are collateralized by the underlying construction project, and are guaranteed by the Company and the majority shareholder. 9. INCOME TAXES The components of the provision for income taxes for the year ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 Current: Federal $ - $ - $ - State - - - --------------- ---------------- --------------- - - - --------------- ---------------- --------------- Deferred: Federal - - - State - - - --------------- ---------------- --------------- - - - --------------- ---------------- --------------- $ - $ - $ - =============== ================ ===============
F-21 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. INCOME TAXES (CONTINUED) Income tax provision for the year ended December 31, 2001, 2000 and 1999 differs from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax income before extraordinary loss as follows:
2001 2000 1999 Computed expected tax benefit $ (452,330) $(2,198,358) $(2,983,255) Increase (decrease) in income taxes resulting from: State taxes, net of federal benefit (53,086) (267,343) (365,059) Increase in valuation allowance 528,783 2,404,107 3,167,657 Other, net (23,367) 61,594 180,657 --------------- ---------------- --------------- Actual income tax benefit $ - $ - $ - =============== ================ ===============
The tax effects of temporary differences that give rise to the deferred tax assets at December 31 are as follows:
2001 2000 Capital lease obligation $ - $ 453,005 Accrued expenses 1,483,152 390,782 Federal and state operating loss carryforwards 6,540,456 7,345,904 Deferred gains and development fees 3,404,385 1,768,181 Deposits under sales contract - 3,931,993 Depreciation and amortization 32,832 (3,498,320) Other 379,527 920,025 ---------------- --------------- 11,840,352 11,311,570 Less valuation allowance (11,840,352) (11,311,570) ---------------- --------------- Net deferred tax assets $ - $ - ================ ===============
At December 31, 2001, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $17,484,270 and $14,238,696, respectively, which are available to offset future federal and state taxable income, if any, through 2020. The Company has established a valuation allowance against the net deferred tax asset as the ultimate realization is uncertain. 10. RELATED-PARTY TRANSACTIONS Certain executive officers of the Company fulfill similar executive functions for other companies, which are owned or controlled by the majority shareholder. F-22 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. RELATED-PARTY TRANSACTIONS (CONTINUED) ADMINISTRATIVE SERVICES AGREEMENT The Company has entered into agreements with companies owned by the majority shareholder, whereby the Company will provide each of these entities executive assistance, accounting and financial management services, legal and administrative assistance, insurance, management information services and other management services as required. Under the terms of the agreement, the Company is reimbursed at its cost on a monthly basis for all services provided. Such reimbursements totaled approximately $10,100, $10,300 and $78,000 in 2001, 2000 and 1999, respectively. CONSTRUCTION CONTRACTS During 2001 and 2000, the construction of two of the Company's new communities was performed pursuant to fixed price construction contracts with a company owned by the majority shareholder. On a percentage of completion basis, the construction company lost $171,000 in 2001and $414,000 in 2000 and earned fees totaling approximately $526,100 in 1999. GUARANTY FEES In 2000, the Company paid fees totaling $120,000 to its majority shareholder for guaranteeing two of the Company's construction loans. In 1999, $65,000 was paid to the majority shareholder for guaranteeing three of the Company's loans. There were no guaranty fees paid to the majority shareholder in 2001. COLLATERAL At December 31, 2000, the Company's majority shareholder provided a $1,000,000 cash deposit to a lender as additional collateral with respect to a real estate loan. The Company reimbursed the majority shareholder approximately $17,700 for the carrying cost of the above mentioned deposit in 2001. The lender released this additional collateral requirement on July 2, 2001. LEASE ARRANGEMENTS Through October 31, 2001, the Company leased two assisted living communities from entities controlled by the majority shareholder. Effective November 1, 2001, the leases were terminated by the lessors due to non-payment of the September and October 2001 lease payments. These leases were cross-defaulted. The Company is attempting to negotiate a settlement with the lessors. The Company recorded a loss of $1.5 million as a result of the cancellation of the leases and write-off of leasehold improvements. The Company has recorded the past due rent obligations in the amount of $473,108 as notes payable, accruing interest at 8%, of which $167,108 would be subordinated to dividend payments due the Company's preferred shareholder. Interest expense of $10,266 was accrued on these notes during 2001. The Company continues to manage the communities on behalf of the lessors and recorded management fees totaling $77,296 in 2001 from these two communities. Lease payments totaled $1,224,000, $2,323,524 and $2,806,784 in 2001, 2000 and 1999, respectively. F-23 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. RELATED-PARTY TRANSACTIONS (CONTINUED) LEASE ARRANGEMENTS (CONTINUED) Lease payments deferred in 2001 and 2000 were $668,432 and $490,524, respectively. Total lease payments deferred at December 31, 2001 were $1,158,956. Total interest expense of $113,543 was accrued on these lease deferrals during 2001 and $19,700 was accrued during 2000. Total deferred interest payable on these deferred lease payments was $133,243 at December 31, 2001. The deferred lease and interest payments are subordinate to dividend payments due to the Company's preferred shareholder. MANAGEMENT FEES In 2001, the Company recorded $51,701 as management fee income and $68,977 as a decrease in deposits under sales contract in connection with a sale manageback arrangement related to a community owned by its majority shareholder. SHORT-TERM BORROWINGS In March 2001, the Company's Board of Directors approved the conversion of $750,000 of accrued dividends due to the preferred shareholder and $507,877 of deferred lease payments due to the majority shareholder into 857,143 and 580,431 shares of common stock, respectively. Such amounts were classified as noncurrent liabilities at December 31, 2000. In connection with this transaction, the preferred shareholder agreed to waive its dividend for a period of two years and the majority shareholder agreed to provide $1,000,000 in bridge financing (the Bridge Loan). The Company and the preferred shareholder did not complete the conversion into common stock and did not negotiate the final terms and conditions for the dividend waiver. The Company's Articles of Incorporation and state law prohibit the current payment of the preferred dividend since in the judgment of the Company's Board of Directors, the payment of the preferred dividend would jeopardize the ongoing viability of the Company and potentially result in its insolvency. Accordingly, the preferred dividends are classified as long-term liabilities at December 31, 2001. The deferred lease payments are subordinate to the preferred dividends and, accordingly, they are classified as noncurrent liabilities at December 31, 2001. Through June 30, 2001, the majority shareholder provided cash advances totaling $750,000 under the Bridge Loan. The majority shareholder earned a $15,000 fee as a result of providing this financing. At June 30, 2001, such advances were combined with additional outstanding amounts due to the majority shareholder and an affiliated company, along with accrued interest, into a demand note in the amount of $1,259,133. At December 31, 2001, the note plus accrued interest totaled $1,368,716. The note was due on June 30, 2002 and is past due. As of November 7, 2002 this note remains unpaid and the Company is attempting to negotiate extensions on these payment obligations. On July 3, 2001, the Company's Board of Directors approved a $1,000,000 operating line of credit provided by the majority shareholder. The Company drew $1,000,000 under the line in 2001. The line of credit bears interest at 18%. The majority shareholder earned a $50,000 fee as a result of providing this financing. At December 31, 2001, the note payable plus F-24 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. RELATED-PARTY TRANSACTIONS (CONTINUED) SHORT-TERM BORROWINGS (CONTINUED) accrued interest totaled $1,076,981. The line was due June 30, 2002 and is past due. As of November 7, 2002 this note remains unpaid and the Company is attempting to negotiate extensions on these payment obligations. INTEREST PAID TO RELATED-PARTY Interest paid to a construction company owned by the majority shareholder was $18,900 and $49,000 in 2000 and 1999, respectively. OTHER During December 2000, the Company formed a joint venture with the majority shareholder for the purpose of acquiring four communities for $33.9 million. The four communities, including one formerly accounted for as a capitalized lease, were previously leased from two separate real estate investment trusts. The Company contributed $0.6 million along with its rights to purchase the four communities for a 75% interest in the joint venture. The majority shareholder contributed $1.2 million for a 25% interest. In addition, the venture obtained $32.2 million in bank financing and $0.5 million of seller provided financing in order to complete the four acquisitions. On December 26, 2001, the Company and the majority shareholder agreed to a specified distribution of the assets of the joint venture upon its dissolution. Accordingly, the venture was dissolved and 100% of the venture's interest in the Santa Cruz and Clovis, California communities was distributed to the Company and 100% of the venture's interest in the Eugene, Oregon community was distributed to the majority shareholder. The remaining community located in Boise, Idaho and other venture assets were distributed 75% to the Company and 25% to the majority shareholder. As a result of the dissolution, the Company distributed cash of $165,091 and recorded a $31,783 payable to the majority shareholder. This amount is included in current liabilities at December 31, 2001. On December 27, 2001, the Company sold to its majority shareholder its Santa Cruz, California community for a net sales price of $11.7 million. The Company received $5.0 million in cash proceeds, of which $2.9 million was retained by the Company, and $2.1 million was used to pay down debt after which $6.7 million of debt was assumed by the majority shareholder. The Company recorded a gain of $2.5 million on the transaction, which has been deferred at December 31, 2001, in accordance with SFAS No. 66, Accounting for Sales of Real Estate, which requires that no profit shall be recognized until it is realized from transactions with outside parties. F-25 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. RETIREMENT PLAN Employees of the Company participate in a salary deferral plan under the provisions of Section 401(k) of the Internal Revenue Code whereby they may defer a portion of their gross wages. The employer may make additional contributions to the Retirement Plan. Employer contributions made by the Company totaled approximately $277,153, $154,166 and $137,100 in 2001, 2000 and 1999, respectively. 12. CONTINGENCIES The Company has been burdened by the bankruptcy of its former professional liability claims insurer, Reliance Insurance Company (Reliance). Reliance provided professional liability claims insurance for the Company from March 1, 1998 to March 1, 2001. With Reliance now in liquidation and no longer able to pay any losses or claims expenses, the Company must now defend itself from all claims in which it previously would have been protected through its insurance program. As of November 7, 2002, there are several such claims that have been filed against the Company. In addition, the Company is involved in various other lawsuits and claims, including various employment matters arising in the normal course of business. The Company believes that the claims are without merit and is vigorously working to settle the matters. However unfavorable outcomes of these claims may have a material adverse effect on the Company's financial condition, results of operations, cash flow and liquidity. There is no assurance that the Company will be able to settle these claims at a reasonable cost or at all. Even if the Company is successful in defending itself, the attorney fees associated with a defense could jeopardize the ability of the Company to provide a defense. If a judgment is rendered against the Company, the Company may be forced to pursue a court-supervised reorganization. At December 31, 2001, the Company has accrued $1.2 million, which represents amounts paid in 2002 or agreed to be paid for settled claims and an estimate for claims still pending. The California Department of Social Services filed an accusation against the Company on December 15, 2000 seeking to revoke licenses for eight of the Company's assisted living communities in the state of California. On June 28, 2001, the parties reached a final settlement on the matter. As part of the settlement, the Company agreed to subject three communities to certain conditions of probation, including the maintenance of high quality of care and training standards that exceed regulatory requirements. The Company voluntarily put into place many of these standards prior to the settlement. At November 7, 2002, the Company no longer operates the three communities referred to above. The majority shareholder has a claim against the Company for additional salary for 2001 of $226,000 plus a bonus of 25%. The Board of Directors has not agreed that these amounts are payable and, accordingly, these amounts have not been accrued at December 31, 2001. F-26 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. OTHER INCOME, NET In 2001, the Company recorded losses of $0.5 million as a result of settlement agreements with the owners of nine of its properties for lease cancellations and exchanged its Bakersfield and Vacaville, California communities for cancellation of convertible notes, recognizing a $12.0 million gain. The Company recorded a $1.5 million loss from the cancellation of leases with entities owned by the majority shareholder. The Company also assigned its leasehold interest in its three Wyoming communities for a $0.1 million gain. In 1999, the Company sold a 45 percent co-tenancy interest in its Modesto, California community. The Company recognized a $0.5 million gain as a result of the sale. 14. FINANCIAL RESULTS AND LIQUIDITY From 1995 to 2000, the Company's revenues increased from $12.6 million to $64.9 million. However, in connection with the opening and lease up of its newly developed communities, the Company incurred substantial operating losses. Although initial operating losses were anticipated, the Company did not foresee the extent of such losses. The Company attributes these losses to the extended time required to fill its communities and the difficulty in maintaining occupancy, which is primarily the result of competitive factors. In 2001, as a result of continuing operating losses and difficulties in obtaining operating licenses for certain of its new buildings, the Company was unable to meet certain of its lease obligations, discontinued all development and construction activities, reduced the number of communities it operates, downsized its workforce and entered into an agreement whereby the Company subcontracted a substantial portion of the management duties for its communities to another unrelated assisted living company. As of December 31, 2001, the Company had reduced its operations to 20 communities with a resident capacity of 2,067 beds. As of December 31, 2001, the Company's working capital decreased to a deficit of $5.9 million and its accumulated deficit increased to $35.0 million. Included in current liabilities are payables to the Company's majority shareholder of $2.6 million. Also included in current liabilities, is $8.9 million in debt related to the Company's South Ogden, Utah community, which was opened in January 2001. The Company had been declared in default under terms of the loan agreement and, accordingly, the amount due has been included in current portion of long-term debt at December 31, 2001. In May 2002, the Company transferred the South Ogden, Utah community to the bank in full satisfaction of the related debt. Accordingly, the Company has classified the related South Ogden, Utah property of $8.3 million in current assets as assets held for sale at December 31, 2001. Commencing January 1, 2002, the Company subcontracted with an unrelated assisted living company to provide operations management, consulting and accounting services to its assisted living communities. Accordingly, the Company implemented a corporate restructuring plan and laid-off a significant portion of its corporate workforce at December 31, 2001 and in the first quarter of 2002. The Company continues to provide an oversight management role, partnership administration and asset management services, including continued responsibility for placement of insurance and debt financing arrangements. F-28 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. FINANCIAL RESULTS AND LIQUIDITY (CONTINUED) The Company anticipates that its cash requirements during 2002 will exceed the cash provided by operations. The Company is exposed to significant liability losses that are uninsured as a result of the bankruptcy of its former professional liability claims insurer that provided professional liability claims insurance for the Company from March 1, 1998 to March 1, 2001. With the insurance company now in liquidation and no longer able to pay any losses or claims expenses, the Company must defend itself from all claims in which it previously would have been protected through its insurance program. Given Regent's current liquidity situation, the Company is considering various alternatives that may include the disposition of selected assets and/or the merger or sale of the remaining assets of the business. There can be no assurance the Company will be successful in these pursuits. The matters discussed above raise substantial doubt regarding the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern. 15. SUBSEQUENT EVENTS In February 2002, the Company entered into a lease termination agreement with the REIT owner of its Scottsdale, Arizona Alzheimer community and its assisted living community located in Folsom, California. The Company's leases for these two communities were canceled and the Company was released from all liability thereunder, including any past due obligations to pay rent under the leases and any real estate taxes in excess of $25,000. In 2002, the Company realized a reduction in current liabilities that were recorded at December 31, 2001, of approximately $217,200 as a result of this transaction. In May 2002, the Company sold its West Wind community located in Boise, Idaho to a third-party. The Company received $2.8 million in sales proceeds and paid down $2.4 million in debt, recognizing a gain of $272,000 on the transaction. The Company abandoned its wholly-owned subsidiary's Elk Grove, California construction project in December 2001 as a result of a declaration of default on the loan agreement by the construction lender. The Company wrote-off $3.8 million in related construction costs and $155,000 in restricted cash deposits, was released from $3.0 million of construction debt and recorded a loss for this project of $0.9 million at December 31, 2001. In May 2002, the Company entered into a settlement agreement with the lender and effective June 3, 2002 transferred its ownership interest in the construction project to a third-party purchaser F-28 REGENT ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 15. SUBSEQUENT EVENTS (CONTINUED) identified by the lender. No cash proceeds were generated for the Company as a result of this transaction. The Company and the majority shareholder had provided guarantees of the construction loan and were relieved of these guarantees upon closing of the transaction. In addition, the settlement agreement provided for the transfer of the Company's South Ogden, Utah community to the lender in lieu of foreclosure. The transfer of the South Ogden, Utah community closed May 31, 2002. The Company recorded a gain in 2002 totaling $1.1 million as a result of this transaction. The lender had declared the Company in default on the $8.9 million loan for the South Ogden, Utah facility in 2001 and, accordingly, this debt was classified as current at December 31, 2001. Accordingly, the related South Ogden, Utah property of $8.3 million was classified as current at December 31, 2001. On September 3, 2002, the Company sold its 55% co-tenancy interest in its Modesto community to an unrelated third party for a net sales price of $2.8 million. The Company received $1.0 million in cash proceeds, $0.1 million in notes receivable and satisfied $1.7 million of co-tenancy debt, which was assumed by the buyer. The Company, it's majority shareholder and the unrelated 45% co-tenant continue to guarantee the full $3.0 million in debt assumed by the buyer. The Company recorded a gain in 2002 totaling $1.0 million as a result of this transaction. On September 18, 2002, the Company assigned its lease of its San Antonio community to an unrelated assisted living company for $408,000. The Company recorded a gain in 2002 of approximately $327,000 as a result of this transaction. In connection with the assignment, the lessor released to the Company the cash deposit held under a letter of credit arrangement in the amount of $741,752, which amount is included in restricted cash at December 31, 2001. F-29 EX-23 2 exhibit23.txt CONSENTS OF EXPERTS AND COUNSEL Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 No. 333-5769 and Form S-8 (Nos. 333-61239, 333-12159 and 333-12157) of Regent Assisted Living, Inc. of our report dated May 10, 2002, except for Note 5 as to which the date is October 1, 2002; Notes 7, 10 and 12 as to which the date is November 7, 2002; Note 8 as to which the date is September 10, 2002; and Note 15, as to which the date is September 18, 2002, relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Portland, Oregon November 7, 2002 EX-10.36 4 exhibit36.txt EXECUTIVE SEVERANCE AGREEMENT Exhibit 10.36 EXECUTIVE SEVERANCE AGREEMENT James W. Ekberg Executive 6345 S.W. Dolph Drive Portland, Oregon 97219 Regent Assisted Living, Inc. Company An Oregon corporation 121 S.W. Morrison St., Suite 1000 Portland, Oregon 97204 Date: September 19, 2001. The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of Company and its stakeholders. In this connection, Company recognizes that, as is the case with many publicly held corporations, the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of Company and its shareholders. In order to induce Executive to remain employed by Company in the face of uncertainties about the long-term strategies of Company and a possible change of control of Company and their potential impact on Executive's position with Company, this Executive Severance Agreement ("Agreement"), which has been approved by the Board of Directors of Company, sets forth the severance benefits that Company will provide to Executive in the event Executive's employment by Company is terminated under the circumstances described in this Agreement. 1. Employment Relationship. Executive is currently employed by Company as Senior Vice President of Finance and Development. Executive and Company acknowledge that either party may terminate this employment relationship at any time and for any or no reason, subject to the obligation of Company to provide the severance benefits specified in this Agreement in accordance with the terms hereof. 2. Release of Claims. In consideration for and as a condition precedent to receiving the severance benefits outlined in this Agreement, Executive agrees to execute a Release of Claims in the appropriate form attached as Exhibit A ("Release of Claims"). Executive promises to execute and deliver the Release of Claims to Company within the later of (a) 45 days from the date Executive receives the Release of Claims or (b) the last day of Executive's active employment. 1 3. Compensation Upon Termination. In the event of a Termination of Executive's Employment (as defined in Section 6.1) at any time other than for Cause (as defined in Section 6.2 of this Agreement), death or Disability (as defined in Section 6.4 of this Agreement), or within 12 months following a Change of Control or prior to a Change of Control at the direction of a person who has entered into an agreement with Company, the consummation of which will constitute a Change of Control, and contingent upon Executive's execution of the Release of Claims and compliance with Section 9, Executive shall be entitled to the following benefits: 3.1 Base Amount. As severance pay and in lieu of any other compensation for periods subsequent to the date of termination, Company shall pay Executive, in a single payment after employment has terminated and eight days have passed following execution of the Release of Claims without revocation, an amount in cash equal to one year of Executive's annual base pay at the rate in effect immediately prior to the date of termination. 3.2 Health Insurance. Executive is entitled to extend coverage under any group health plan in which Executive and Executive's dependents are enrolled at the time of termination of employment for an 18-month period. Company will pay Executive a lump sum payment in an amount equivalent to the cost to extend such coverage for a period of 18 months, based on the then current rates for COBRA employee only group health and dental coverage under the Company's group health plan in effect at the time of termination. Executive may use this payment, as well as any payment made under Section 3.1, for such continuation coverage or for any other purpose. 3.3 Stock Options and Stock Awards. All outstanding stock options, restricted stock, stock bonuses or other stock awards shall be governed by the terms of the applicable agreement or plan. 4. Tax Withholding; Subsequent Employment. 4.1 All payments provided for in this Agreement are subject to applicable tax withholding obligations imposed by federal, state and local laws and regulations. 4.2 The amount of any payment provided for in this Agreement shall not be reduced, offset or subject to recovery by Company by reason of any compensation earned by Executive as the result of employment by another employer after termination. 2 5. Other Agreements. In the event that severance benefits are payable to Executive under any other agreement with Company in effect at the time of termination (including but not limited to any employment agreement, but excluding for this purpose any stock option agreement or stock bonus agreement that may provide for accelerated vesting or related benefits upon the occurrence of a change in control), the benefits provided in this Agreement shall not be payable to Executive. Executive may, however, elect to receive all of the benefits provided for in this Agreement in lieu of all of the benefits provided in all such other agreements. Any such election shall be made with respect to the agreements as a whole, and Executive cannot select some benefits from one agreement and other benefits from this Agreement. 6. Definitions. 6.1 Termination of Executive's Employment. Termination of Executive's Employment means that Company has terminated Executive's employment with Company (including any subsidiary of Company). For purposes of Section 3, if Executive is assigned additional or different titles, tasks or responsibilities from those currently held or assigned, consistent with Executive's areas of professional expertise and with no decrease in annual base compensation, whether at Company or any subsidiary of Company, such circumstances shall not constitute a Termination of Executive's Employment. For purposes of Section 3, Termination of Executive's Employment shall include termination by Executive, within 12 months of a Change of Control, by written notice to Company referring to the applicable paragraph of Section 6.1, for "Good Reason" based on: (A) the assignment to Executive of a different title, job or responsibilities that results in a decrease in the level of responsibility of Executive with respect to the surviving company after the Change of Control when compared to Executive's level of responsibility for Company' operations prior to the Change of Control; provided that Good Reason shall not exist if Executive continues to have the same or a greater general level of responsibility for the former Company operations after the Change of Control as Executive had prior to the Change of Control even if the former Company operations are a subsidiary or division of the surviving company; (B) a reduction by Company or the surviving company in Executive's base pay as in effect immediately prior to the Change of Control; 3 (C) a significant reduction by Company or the surviving company in total benefits available to Executive under cash incentive, stock incentive and other employee benefit plans after the Change of Control compared to the total package of such benefits as in effect prior to the Change of Control; (D) Company or the surviving company requires Executive to be based more than 20 miles from where Executive's office is located immediately prior to the Change of Control except for required travel on company business to an extent substantially consistent with the business travel obligations which Executive undertook on behalf of Company prior to the Change of Control; or (E) the failure by Company to obtain from any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Company ("Successor") the assent to this Agreement contemplated by Section 7 hereof. 6.2 Cause. Termination of Executive's Employment for "Cause" shall mean termination upon (a) the willful and continued failure by Executive to perform substantially Executive's reasonably assigned duties with Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness) after a demand for substantial performance is delivered to Executive by the Board, the Chief Executive Officer or the President of Company which specifically identifies the manner in which the Board or Company believes that Executive has not substantially performed Executive's duties, (b) any misappropriation of funds or property of the Company by Executive, (c) the conviction of or plea of guilty or nolo contendere by Executive of a felony or of any crime involving moral turpitude, (d) Executive's engagement in illegal or immoral conduct tending to place Executive or the Company, by association with Executive, in disrepute, (e) indulgence in alcohol or drugs to an extent that renders Executive generally unable or unfit to perform his duties hereunder, (f) Executive's gross dereliction of duty, or (g) any act or omission that constitutes a material breach by Executive of his obligations under this Agreement. No act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive without reasonable belief that Executive's action or omission was in, or not opposed to, the best interests of Company. Any act, or failure to act, based upon authority given pursuant to a 4 resolution duly adopted by the Board or based upon the advice of counsel for Company shall be conclusively presumed to be done, or omitted to be done, by Executive in the best interests of Company. 6.3 Change of Control. A Change of Control shall mean that one of the following events has taken place: (A) The shareholders of Company approve one of the following ("Approved Transactions"): (i) Any merger or statutory plan of exchange involving Company ("Merger") in which Company is not the continuing or surviving corporation or pursuant to which Common Stock would be converted into cash, securities or other property, other than a Merger involving Company in which the holders of Common Stock immediately prior to the Merger have the same proportionate ownership of Common Stock of the surviving corporation after the Merger; or (ii) Any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company or the adoption of any plan or proposal for the liquidation or dissolution; (B) A tender or exchange offer, other than one made by Company, is made for Common Stock (or securities convertible into Common Stock) and such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities representing at least 20 percent of the voting power of outstanding securities of Company; (C) Company receives a report on Schedule 13D of the Exchange Act reporting the beneficial ownership by any person (other than Walter C. Bowen or any of his affiliates) of securities representing 20 percent or more of the voting power of outstanding securities of Company, except that if such receipt shall occur during a tender offer or exchange offer described in 5 (B) above, a Change of Control shall not take place until the conclusion of such offer; (D) During any period of 6 months or less, any transaction or series of transactions that results in the holders of a majority of the outstanding securities of the Company prior to such transaction or transactions holding less than a majority of the outstanding securities of the Company after such transaction or transactions; (E) During any period of 12 months or less, individuals who at the beginning of such period constituted a majority of the Board of Directors cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; (F) The entry of an order for relief under Title 11 of the United States Code as to the Company or the determination of the Company as insolvent or bankrupt pursuant to the provisions of any state insolvency or bankruptcy laws; the commencement by the Company of any case, proceeding or other action seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution or similar relief for itself under any present or future statute, law or regulation relating to bankruptcy, insolvency, reorganization or other relief for debtors; the Company's consent to, acquiescence in or attempt to secure the appointment of any receiver of all or any part of its properties and such receivership or trusteeship shall continue undischarged for a period of sixty (60) days or more; the Company shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts or shall make a general assignment for the benefit of creditors; or the Company (including the shareholders of the Company) shall take any action to authorize any of the acts set forth above in this paragraph; or (G) Any case, proceeding or other action against the Company shall be commenced seeking to have an order for relief entered against it as a debtor or seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation relating to bankruptcy, insolvency, reorganization or other relief for debtors, or seeking appointment of any receiver for the Company or for all or any substantial part of its property, and such case, proceeding or other action is not dismissed or stayed within sixty (60) days after it is filed. 6 Notwithstanding anything in the foregoing to the contrary, no Change of Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in Executive, or a group of persons which includes Executive, acquiring, directly or indirectly, securities representing 20 percent or more of the voting power of outstanding securities of Company. 6.4 Disability. Termination of Executive's Employment based on "Disability" shall mean termination without further compensation under this Agreement, due to Executive's absence from Executive's full-time duties with Company for 180 consecutive days as a result of Executive's incapacity due to physical or mental illness, unless within 30 days after notice of termination by Company following such absence Executive shall have returned to the full-time performance of Executive's duties. 7. Successors; Binding Agreement. 7.1 This Agreement shall be binding on and inure to the benefit of Company and its Successors and assigns. Upon Executive's written request, Company will seek to have any Successor by agreement, assent to the fulfillment by Company of its obligations under this Agreement. If such a request is made, failure of Company to obtain such assent prior to or at the time a company becomes a Successor shall constitute Good Reason for termination by Executive of his or her employment and, if a Change of Control of the Company has occurred, shall entitle Executive to the benefits pursuant to Section 3. 7.2 This Agreement shall inure to the benefit of and be enforceable by Executive and Executive's legal representatives, executors, administrators and heirs. 8. Resignation of Corporate Offices. Executive will resign Executive's office, if any, as a director, officer or trustee of Company, its subsidiaries or affiliates and of any other corporation or trust of which Executive serves as such at the request of Company, effective as of the date of termination of employment. Executive agrees to provide Company such written resignation(s) upon request and that no severance will be paid until after such resignation(s) are provided. 9. Governing Law, Arbitration. This Agreement shall be construed in accordance with and governed by the laws of the State of Oregon. Executive and Company agree that should the issue arise of whether either party to this Agreement has failed to satisfy or has breached the terms of this Agreement, any dispute regarding the issue, shall be, upon the demand of Employee or the Company, conclusively arbitrated in Portland, Oregon, pursuant to the rules of the Arbitration Service of Portland, Inc. In the event that any arbitration or action is filed in relation to this Agreement, the unsuccessful party shall pay to the successful party, in addition to all sums that either party may be called upon to pay, a reasonable sum for the successful party's reasonable attorney fees and costs. 7 10. Amendment. No provision of this Agreement may be modified unless such modification is agreed to in a writing signed by Executive and Company. 11. Severability. If any of the provisions or terms of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other terms of this Agreement, and this Agreement shall be construed as if such unenforceable term had never been contained in this Agreement. [SIGNATURE PAGE FOLLOWS] 8 IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date first above written. Regent Assisted Living, Inc. By: /s/ Walter C. Bowen /s/ James W. Ekberg -------------------------------- -------------------------------------- Walter C. Bowen Executive Chief Executive Officer 9 EXHIBIT A RELEASE OF CLAIMS 1. PARTIES. ------- The parties to Release of Claims (hereinafter "Release") are __________ _______ and Regent Assisted Living, Inc., an Oregon corporation, as hereinafter defined. 1.1 EXECUTIVE. ---------- For the purposes of this Release, "Executive" means _________ ____________, and his or her attorneys, heirs, executors, administrators, assigns, and spouse. 1.2 THE COMPANY. ----------- For purposes of this Release the "Company" means Regent Assisted Living, Inc., an Oregon corporation, its predecessors and successors, corporate affiliates, and all of each corporation's officers, directors, employees, insurers, agents, or assigns, in their individual and representative capacities. 2. BACKGROUND AND PURPOSE. ---------------------- Executive was employed by Company. Executive's employment is ending effective __________ pursuant to Section 3 of the Executive Severance Agreement dated ________ between Executive and the Company ("Agreement"). The purpose of this Release is to settle, and the parties hereby settle, fully and finally, any and all claims Executive may have against Company, whether asserted or not, known or unknown, including, but not limited to, claims arising out of or related to Executive's employment, any claim for reemployment, or any other claims whether asserted or not, known or unknown, past or future, that relate to Executive's employment, reemployment, or application for reemployment. 3. RELEASE. ------- Except as reserved in paragraphs 3 or 3.1, Executive waives, acquits and forever discharges Company from any obligations Company has and all claims Executive may have including but not limited to obligations and/or claims arising from the Agreement or any other document or oral agreement relating to employment compensation, benefits severance or post-employment issues. Except as reserved in Paragraph 3.1, Executive hereby releases Company from any and all claims, demands, actions, or causes of action, whether known or unknown, arising from or related in any way to any employment of or past or future failure or refusal to employ Executive by Company, or any other past or future claim (except as reserved by this Release or where expressly prohibited by law) that relates in any way to Executive's employment, compensation, benefits, reemployment, or application for employment, with the exception of any claim Executive may have against Company for enforcement of this Release. This release includes any and all claims, direct or indirect, which might otherwise be made under any applicable local, state or federal authority, including but not limited to any claim arising under the Oregon statutes dealing with employment, discrimination in employment, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans With Disabilities Act, the Family and Medical Leave Act of 1993, the Equal Pay Act of 1963, Executive Order 11246, the Rehabilitation Act of 1973, the Uniformed Services Employment and Reemployment Rights Act of 1994, the Age Discrimination in Employment Act, the Fair Labor Standards Act, Oregon wage and hour statutes, all as amended, any regulations under such authorities, and any applicable contract, tort, or common law theories. 3.1 Reservations of Rights. ---------------------- This Release shall not affect any rights which Executive may have under any medical insurance, disability plan, workers' compensation, unemployment compensation, applicable company stock incentive plan(s), indemnifications, or the 401(k) plan maintained by the Company. 3.2 No Admission of Liability. ------------------------- It is understood and agreed that the acts done and evidenced hereby and the release granted hereunder is not an admission of liability on the part of Executive or Company, by whom liability has been and is expressly denied. 4. CONSIDERATION TO EXECUTIVE. -------------------------- After receipt of this Release fully endorsed by Executive, and the expiration of the seven- (7) day revocation period provided by the Older Workers Benefit Protection Act without Executive's revocation, Company shall pay the lump sum of ___________ DOLLARS ($__________ ) to Executive (less proper withholding) for severance and the reasonable estimate of COBRA continuation coverage as provided in Section[s] 3.1 and 3.2 of the Agreement. 5. NO DISPARAGEMENT. ---------------- Executive agrees that henceforth Executive will not disparage or make false or adverse statements about Company. The Company should report to Executive any actions or statements that are attributed to Executive that the Company believes are disparaging. The Company may take actions consistent with breach of this Release should it determine that Executive has disparaged or made false or adverse statements about Company. The Company agrees to follow the applicable policy(ies) regarding release of employment reference information. 6. CONFIDENTIALITY, PROPRIETARY, TRADE SECRET AND RELATED INFORMATION. ------------------------------------------------------------------- Executive acknowledges the duty and agrees not to make unauthorized use or disclosure of any confidential, proprietary or trade secret information learned as an employee about Company, its products, customers and suppliers, and covenants not to breach that duty. Moreover, Executive acknowledges that, subject to the enforcement limitations of applicable law, the Company reserves the right to enforce the terms of Executive's Employment Agreement with Company and any paragraph(s) therein. Should Executive, Executive's attorney or agents be requested in any judicial, administrative, or other proceeding to disclose confidential, proprietary or trade secret information Executive learned as an employee of Company, Executive shall promptly notify the Company of such request by the most expeditious means in order to enable the Company to take any reasonable and appropriate action to limit such disclosure. 7. ARBITRATION OF CERTAIN DISPUTES. ------------------------------- Executive and Company agree that should the issue arise of whether either party to this Agreement has failed to satisfy or has breached the terms of this Agreement, any dispute regarding the issue, shall be, upon the demand of Employee or the Company, conclusively arbitrated in Portland, Oregon, pursuant to the rules of the Arbitration Service of Portland, Inc. In the event that any arbitration or action is filed in relation to this Agreement, the unsuccessful party shall pay to the successful party, in addition to all sums that either party may be called upon to pay, a reasonable sum for the successful party's reasonable attorney fees and costs. 8. SCOPE OF RELEASE. ---------------- The provisions of this Release shall be deemed to obligate, extend to, and inure to the benefit of the parties; Company's parents, subsidiaries, affiliates, successors, predecessors, assigns, directors, officers, and employees; and each parties insurers, transferees, grantees, legatees, agents and heirs, including those who may assume any and all of the above-described capacities subsequent to the execution and effective date of this Release. 9. OPPORTUNITY FOR ADVICE OF COUNSEL. --------------------------------- Executive acknowledges that Executive has been encouraged to seek advice of counsel with respect to this Release and has had the opportunity to do so. 10. ENTIRE RELEASE. -------------- This Release and the Agreement signed by Executive contain the entire agreement and understanding between the parties and, except as reserved in paragraph 3 and 3.1, supersede and replace all prior agreements written or oral including but not limited to the Agreement, prior negotiations and proposed agreements, written or oral. Executive and Company acknowledge that no other party, nor agent nor attorney of any other party, has made any promise, representation, or warranty, express or implied, not contained in this Release concerning the subject matter of this Release to induce this Release, and Executive and Company acknowledge that they have not executed this Release in reliance upon any such promise, representation, or warranty not contained in this Release. 11. SEVERABILITY. ------------ Every provision of this Release is intended to be severable. In the event any term or provision of this Release is declared to be illegal or invalid for any reason whatsoever by a court of competent jurisdiction or by final and unappealed order of an administrative agency of competent jurisdiction, such illegality or invalidity should not affect the balance of the terms and provisions of this Release, which terms and provisions shall remain binding and enforceable. 12. PARTIES MAY ENFORCE RELEASE. --------------------------- Nothing in this Release shall operate to release or discharge any parties to this Release or their successors, assigns, legatees, heirs, or personal representatives from any rights, claims, or causes of action arising out of, relating to, or connected with a breach of any obligation of any party contained in this Release. 13. COSTS AND ATTORNEY'S FEES. ------------------------- The parties each agree to bear their own costs and attorneys' fees which have been or may be incurred in connection with any matters released herein or in connection with the negotiation and consummation of this Release. In the event of any administrative or civil action to enforce the provisions of this Release, the prevailing party shall be entitled to attorney fees and costs through trial and/or on appeal. 14. ACKNOWLEDGMENTS. ---------------- Executive acknowledges that the Release provides severance pay and benefits which the Company would otherwise have no obligation to provide. Executive acknowledges that Company has provided the following information: (a) the class or group of employees offered the opportunity to obtain severance benefits similar to those in the Release, (b) the eligibility factors required to obtain severance benefits similar to those in the Release, (c) the time limits required to obtain severance benefits similar to those in the Release, (d) the job titles and ages of employees eligible or selected for severance benefits similar to those in the Release, and (e) the ages of employees in the same classification either not eligible or not selected. 15. REVOCATION. ---------- As provided by the Older Workers Benefit Protection Act, Executive's is entitled to have forty-five (45) days to consider this Release. For a period of seven (7) days from execution of this Release, Executive may revoke this Release. Upon receipt of Executive's signed Release and the end of the revocation period, payment by Company as described in paragraph 4 above will be forwarded by mail in a timely manner as provided herein. Dated: __________ __, 2001 - -------------------------------------------------- [Name of Executive] STATE OF ________ ) ) ss. County of _________ ) Personally appeared the above named _________________________and acknowledged the foregoing instrument to be his or her voluntary act and deed. Before me: ------------------------------------------ Notary Public for ------------------------ My commission expires: ------------ Regent Assisted Living, Inc. By: Dated: -------------------------------------------------- ------------------ Its: ------------------------------------------------- EX-10.37 5 exhibit37.txt EXECUTIVE SEVERANCE AGREEMENT Exhibit 10.37 EXECUTIVE SEVERANCE AGREEMENT Steven L. Gish Executive 12707 S.W. 59th Circle Portland, Oregon 97219 Regent Assisted Living, Inc. Company An Oregon corporation 121 S.W. Morrison St., Suite 1000 Portland, Oregon 97204 Date: September 19, 2001. The Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of Company and its stakeholders. In this connection, Company recognizes that, as is the case with many publicly held corporations, the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of Company and its shareholders. In order to induce Executive to remain employed by Company in the face of uncertainties about the long-term strategies of Company and a possible change of control of Company and their potential impact on Executive's position with Company, this Executive Severance Agreement ("Agreement"), which has been approved by the Board of Directors of Company, sets forth the severance benefits that Company will provide to Executive in the event Executive's employment by Company is terminated under the circumstances described in this Agreement. 1. Employment Relationship. Executive is currently employed by Company as Chief Financial Officer and Treasurer. Executive and Company acknowledge that either party may terminate this employment relationship at any time and for any or no reason, subject to the obligation of Company to provide the severance benefits specified in this Agreement in accordance with the terms hereof. 2. Release of Claims. In consideration for and as a condition precedent to receiving the severance benefits outlined in this Agreement, Executive agrees to execute a Release of Claims in the appropriate form attached as Exhibit A ("Release of Claims"). Executive promises to execute and deliver the Release of Claims to Company within the later of (a) 45 days from the date Executive receives the Release of Claims or (b) the last day of Executive's active employment. 1 3. Compensation Upon Termination. In the event of a Termination of Executive's Employment (as defined in Section 6.1) at any time other than for Cause (as defined in Section 6.2 of this Agreement), death or Disability (as defined in Section 6.4 of this Agreement), or within 12 months following a Change of Control or prior to a Change of Control at the direction of a person who has entered into an agreement with Company, the consummation of which will constitute a Change of Control, and contingent upon Executive's execution of the Release of Claims and compliance with Section 9, Executive shall be entitled to the following benefits: 3.1 Base Amount. As severance pay and in lieu of any other compensation for periods subsequent to the date of termination, Company shall pay Executive, in a single payment after employment has terminated and eight days have passed following execution of the Release of Claims without revocation, an amount in cash equal to one year of Executive's annual base pay at the rate in effect immediately prior to the date of termination. 3.2 Health Insurance. Executive is entitled to extend coverage under any group health plan in which Executive and Executive's dependents are enrolled at the time of termination of employment for an 18-month period. Company will pay Executive a lump sum payment in an amount equivalent to the cost to extend such coverage for a period of 18 months, based on the then current rates for COBRA employee only group health and dental coverage under the Company's group health plan in effect at the time of termination. Executive may use this payment, as well as any payment made under Section 3.1, for such continuation coverage or for any other purpose. 3.3 Stock Options and Stock Awards. All outstanding stock options, restricted stock, stock bonuses or other stock awards shall be governed by the terms of the applicable agreement or plan. 4. Tax Withholding; Subsequent Employment. 4.1 All payments provided for in this Agreement are subject to applicable tax withholding obligations imposed by federal, state and local laws and regulations. 4.2 The amount of any payment provided for in this Agreement shall not be reduced, offset or subject to recovery by Company by reason of any compensation earned by Executive as the result of employment by another employer after termination. 2 5. Other Agreements. In the event that severance benefits are payable to Executive under any other agreement with Company in effect at the time of termination (including but not limited to any employment agreement, but excluding for this purpose any stock option agreement or stock bonus agreement that may provide for accelerated vesting or related benefits upon the occurrence of a change in control), the benefits provided in this Agreement shall not be payable to Executive. Executive may, however, elect to receive all of the benefits provided for in this Agreement in lieu of all of the benefits provided in all such other agreements. Any such election shall be made with respect to the agreements as a whole, and Executive cannot select some benefits from one agreement and other benefits from this Agreement. 6. Definitions. 6.1 Termination of Executive's Employment. Termination of Executive's Employment means that Company has terminated Executive's employment with Company (including any subsidiary of Company). For purposes of Section 3, if Executive is assigned additional or different titles, tasks or responsibilities from those currently held or assigned, consistent with Executive's areas of professional expertise and with no decrease in annual base compensation, whether at Company or any subsidiary of Company, such circumstances shall not constitute a Termination of Executive's Employment. For purposes of Section 3, Termination of Executive's Employment shall include termination by Executive, within 12 months of a Change of Control, by written notice to Company referring to the applicable paragraph of Section 6.1, for "Good Reason" based on: (A) the assignment to Executive of a different title, job or responsibilities that results in a decrease in the level of responsibility of Executive with respect to the surviving company after the Change of Control when compared to Executive's level of responsibility for Company' operations prior to the Change of Control; provided that Good Reason shall not exist if Executive continues to have the same or a greater general level of responsibility for the former Company operations after the Change of Control as Executive had prior to the Change of Control even if the former Company operations are a subsidiary or division of the surviving company; (B) a reduction by Company or the surviving company in Executive's base pay as in effect immediately prior to the Change of Control; 3 (C) a significant reduction by Company or the surviving company in total benefits available to Executive under cash incentive, stock incentive and other employee benefit plans after the Change of Control compared to the total package of such benefits as in effect prior to the Change of Control; (D) Company or the surviving company requires Executive to be based more than 20 miles from where Executive's office is located immediately prior to the Change of Control except for required travel on company business to an extent substantially consistent with the business travel obligations which Executive undertook on behalf of Company prior to the Change of Control; or (E) the failure by Company to obtain from any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Company ("Successor") the assent to this Agreement contemplated by Section 7 hereof. 6.2 Cause. Termination of Executive's Employment for "Cause" shall mean termination upon (a) the willful and continued failure by Executive to perform substantially Executive's reasonably assigned duties with Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness) after a demand for substantial performance is delivered to Executive by the Board, the Chief Executive Officer or the President of Company which specifically identifies the manner in which the Board or Company believes that Executive has not substantially performed Executive's duties, (b) any misappropriation of funds or property of the Company by Executive, (c) the conviction of or plea of guilty or nolo contendere by Executive of a felony or of any crime involving moral turpitude, (d) Executive's engagement in illegal or immoral conduct tending to place Executive or the Company, by association with Executive, in disrepute, (e) indulgence in alcohol or drugs to an extent that renders Executive generally unable or unfit to perform his duties hereunder, (f) Executive's gross dereliction of duty, or (g) any act or omission that constitutes a material breach by Executive of his obligations under this Agreement. No act, or failure to act, on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive without reasonable belief that Executive's action or omission was in, or not opposed to, the best interests of Company. Any act, or failure to act, based upon authority given pursuant to a 4 resolution duly adopted by the Board or based upon the advice of counsel for Company shall be conclusively presumed to be done, or omitted to be done, by Executive in the best interests of Company. 6.3 Change of Control. A Change of Control shall mean that one of the following events has taken place: (A) The shareholders of Company approve one of the following ("Approved Transactions"): (i) Any merger or statutory plan of exchange involving Company ("Merger") in which Company is not the continuing or surviving corporation or pursuant to which Common Stock would be converted into cash, securities or other property, other than a Merger involving Company in which the holders of Common Stock immediately prior to the Merger have the same proportionate ownership of Common Stock of the surviving corporation after the Merger; or (ii) Any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company or the adoption of any plan or proposal for the liquidation or dissolution; (B) A tender or exchange offer, other than one made by Company, is made for Common Stock (or securities convertible into Common Stock) and such offer results in a portion of those securities being purchased and the offeror after the consummation of the offer is the beneficial owner (as determined pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities representing at least 20 percent of the voting power of outstanding securities of Company; (C) Company receives a report on Schedule 13D of the Exchange Act reporting the beneficial ownership by any person (other than Walter C. Bowen or any of his affiliates) of securities representing 20 percent or more of the voting power of outstanding securities of Company, except that if such receipt shall occur during a tender offer or exchange offer described in 5 (B) above, a Change of Control shall not take place until the conclusion of such offer; (D) During any period of 6 months or less, any transaction or series of transactions that results in the holders of a majority of the outstanding securities of the Company prior to such transaction or transactions holding less than a majority of the outstanding securities of the Company after such transaction or transactions; (E) During any period of 12 months or less, individuals who at the beginning of such period constituted a majority of the Board of Directors cease for any reason to constitute a majority thereof unless the nomination or election of such new directors was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; (F) The entry of an order for relief under Title 11 of the United States Code as to the Company or the determination of the Company as insolvent or bankrupt pursuant to the provisions of any state insolvency or bankruptcy laws; the commencement by the Company of any case, proceeding or other action seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution or similar relief for itself under any present or future statute, law or regulation relating to bankruptcy, insolvency, reorganization or other relief for debtors; the Company's consent to, acquiescence in or attempt to secure the appointment of any receiver of all or any part of its properties and such receivership or trusteeship shall continue undischarged for a period of sixty (60) days or more; the Company shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts or shall make a general assignment for the benefit of creditors; or the Company (including the shareholders of the Company) shall take any action to authorize any of the acts set forth above in this paragraph; or (G) Any case, proceeding or other action against the Company shall be commenced seeking to have an order for relief entered against it as a debtor or seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation relating to bankruptcy, insolvency, reorganization or other relief for debtors, or seeking appointment of any receiver for the Company or for all or any substantial part of its property, and such case, proceeding or other action is not dismissed or stayed within sixty (60) days after it is filed. 6 Notwithstanding anything in the foregoing to the contrary, no Change of Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in Executive, or a group of persons which includes Executive, acquiring, directly or indirectly, securities representing 20 percent or more of the voting power of outstanding securities of Company. 6.4 Disability. Termination of Executive's Employment based on "Disability" shall mean termination without further compensation under this Agreement, due to Executive's absence from Executive's full-time duties with Company for 180 consecutive days as a result of Executive's incapacity due to physical or mental illness, unless within 30 days after notice of termination by Company following such absence Executive shall have returned to the full-time performance of Executive's duties. 7. Successors; Binding Agreement. 7.1 This Agreement shall be binding on and inure to the benefit of Company and its Successors and assigns. Upon Executive's written request, Company will seek to have any Successor by agreement, assent to the fulfillment by Company of its obligations under this Agreement. If such a request is made, failure of Company to obtain such assent prior to or at the time a company becomes a Successor shall constitute Good Reason for termination by Executive of his or her employment and, if a Change of Control of the Company has occurred, shall entitle Executive to the benefits pursuant to Section 3. 7.2 This Agreement shall inure to the benefit of and be enforceable by Executive and Executive's legal representatives, executors, administrators and heirs. 8. Resignation of Corporate Offices. Executive will resign Executive's office, if any, as a director, officer or trustee of Company, its subsidiaries or affiliates and of any other corporation or trust of which Executive serves as such at the request of Company, effective as of the date of termination of employment. Executive agrees to provide Company such written resignation(s) upon request and that no severance will be paid until after such resignation(s) are provided. 9. Governing Law, Arbitration. This Agreement shall be construed in accordance with and governed by the laws of the State of Oregon. Executive and Company agree that should the issue arise of whether either party to this Agreement has failed to satisfy or has breached the terms of this Agreement, any dispute regarding the issue, shall be, upon the demand of Employee or the Company, conclusively arbitrated in Portland, Oregon, pursuant to the rules of the Arbitration Service of Portland, Inc. In the event that any arbitration or action is filed in relation to this Agreement, the unsuccessful party shall pay to the successful party, in addition to all sums that either party may be called upon to pay, a reasonable sum for the successful party's reasonable attorney fees and costs. 7 10. Amendment. No provision of this Agreement may be modified unless such modification is agreed to in writing signed by Executive and Company. 11. Severability. If any of the provisions or terms of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other terms of this Agreement, and this Agreement shall be construed as if such unenforceable term had never been contained in this Agreement. [SIGNATURE PAGE FOLLOWS] 8 IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date first above written. Regent Assisted Living, Inc. By: /s/ Walter C. Bowen /s/ Steven L. Gish --------------------------------- ---------------------------------------- Walter C. Bowen Executive Chief Executive Officer 9 EXHIBIT A RELEASE OF CLAIMS 1. PARTIES. ------- The parties to Release of Claims (hereinafter "Release") are _________ _________________________ and Regent Assisted Living, Inc., an Oregon corporation, as hereinafter defined. 1.1 EXECUTIVE. --------- For the purposes of this Release, "Executive" means __________ _________________ , and his or her attorneys, heirs, executors, administrators, assigns, and spouse. 1.2 THE COMPANY. ----------- For purposes of this Release the "Company" means Regent Assisted Living, Inc., an Oregon corporation, its predecessors and successors, corporate affiliates, and all of each corporation's officers, directors, employees, insurers, agents, or assigns, in their individual and representative capacities. 2. BACKGROUND AND PURPOSE. ---------------------- Executive was employed by Company. Executive's employment is ending effective __________ pursuant to Section 3 of the Executive Severance Agreement dated ________ between Executive and the Company ("Agreement"). The purpose of this Release is to settle, and the parties hereby settle, fully and finally, any and all claims Executive may have against Company, whether asserted or not, known or unknown, including, but not limited to, claims arising out of or related to Executive's employment, any claim for reemployment, or any other claims whether asserted or not, known or unknown, past or future, that relate to Executive's employment, reemployment, or application for reemployment. 3. RELEASE. ------- Except as reserved in paragraphs 3 or 3.1, Executive waives, acquits and forever discharges Company from any obligations Company has and all claims Executive may have including but not limited to obligations and/or claims arising from the Agreement or any other document or oral agreement relating to employment compensation, benefits severance or post-employment issues. Except as reserved in Paragraph 3.1, Executive hereby releases Company from any and all claims, demands, actions, or causes of action, whether known or unknown, arising from or related in any way to any employment of or past or future failure or refusal to employ Executive by Company, or any other past or future claim (except as reserved by this Release or where expressly prohibited by law) that relates in any way to Executive's employment, compensation, benefits, reemployment, or application for employment, with the exception of any claim Executive may have against Company for enforcement of this Release. This release includes any and all claims, direct or indirect, which might otherwise be made under any applicable local, state or federal authority, including but not limited to any claim arising under the Oregon statutes dealing with employment, discrimination in employment, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans With Disabilities Act, the Family and Medical Leave Act of 1993, the Equal Pay Act of 1963, Executive Order 11246, the Rehabilitation Act of 1973, the Uniformed Services Employment and Reemployment Rights Act of 1994, the Age Discrimination in Employment Act, the Fair Labor Standards Act, Oregon wage and hour statutes, all as amended, any regulations under such authorities, and any applicable contract, tort, or common law theories. 3.1 Reservations of Rights. ---------------------- This Release shall not affect any rights which Executive may have under any medical insurance, disability plan, workers' compensation, unemployment compensation, applicable company stock incentive plan(s), indemnifications, or the 401(k) plan maintained by the Company. 3.2 No Admission of Liability. ------------------------- It is understood and agreed that the acts done and evidenced hereby and the release granted hereunder is not an admission of liability on the part of Executive or Company, by whom liability has been and is expressly denied. 4. CONSIDERATION TO EXECUTIVE. -------------------------- After receipt of this Release fully endorsed by Executive, and the expiration of the seven- (7) day revocation period provided by the Older Workers Benefit Protection Act without Executive's revocation, Company shall pay the lump sum of ___________ DOLLARS ($__________ ) to Executive (less proper withholding) for severance and the reasonable estimate of COBRA continuation coverage as provided in Section[s] 3.1 and 3.2 of the Agreement. 5. NO DISPARAGEMENT. ---------------- Executive agrees that henceforth Executive will not disparage or make false or adverse statements about Company. The Company should report to Executive any actions or statements that are attributed to Executive that the Company believes are disparaging. The Company may take actions consistent with breach of this Release should it determine that Executive has disparaged or made false or adverse statements about Company. The Company agrees to follow the applicable policy(ies) regarding release of employment reference information. 6. CONFIDENTIALITY, PROPRIETARY, TRADE SECRET AND RELATED INFORMATION. ------------ Executive acknowledges the duty and agrees not to make unauthorized use or disclosure of any confidential, proprietary or trade secret information learned as an employee about Company, its products, customers and suppliers, and covenants not to breach that duty. Moreover, Executive acknowledges that, subject to the enforcement limitations of applicable law, the Company reserves the right to enforce the terms of Executive's Employment Agreement with Company and any paragraph(s) therein. Should Executive, Executive's attorney or agents be requested in any judicial, administrative, or other proceeding to disclose confidential, proprietary or trade secret information Executive learned as an employee of Company, Executive shall promptly notify the Company of such request by the most expeditious means in order to enable the Company to take any reasonable and appropriate action to limit such disclosure. 7. ARBITRATION OF CERTAIN DISPUTES. ------------------------------- Executive and Company agree that should the issue arise of whether either party to this Agreement has failed to satisfy or has breached the terms of this Agreement, any dispute regarding the issue, shall be, upon the demand of Employee or the Company, conclusively arbitrated in Portland, Oregon, pursuant to the rules of the Arbitration Service of Portland, Inc. In the event that any arbitration or action is filed in relation to this Agreement, the unsuccessful party shall pay to the successful party, in addition to all sums that either party may be called upon to pay, a reasonable sum for the successful party's reasonable attorney fees and costs. 8. SCOPE OF RELEASE. ---------------- The provisions of this Release shall be deemed to obligate, extend to, and inure to the benefit of the parties; Company's parents, subsidiaries, affiliates, successors, predecessors, assigns, directors, officers, and employees; and each parties insurers, transferees, grantees, legatees, agents and heirs, including those who may assume any and all of the above-described capacities subsequent to the execution and effective date of this Release. 9. OPPORTUNITY FOR ADVICE OF COUNSEL. --------------------------------- Executive acknowledges that Executive has been encouraged to seek advice of counsel with respect to this Release and has had the opportunity to do so. 10. ENTIRE RELEASE. -------------- This Release and the Agreement signed by Executive contain the entire agreement and understanding between the parties and, except as reserved in paragraph 3 and 3.1, supersede and replace all prior agreements written or oral including but not limited to the Agreement, prior negotiations and proposed agreements, written or oral. Executive and Company acknowledge that no other party, nor agent nor attorney of any other party, has made any promise, representation, or warranty, express or implied, not contained in this Release concerning the subject matter of this Release to induce this Release, and Executive and Company acknowledge that they have not executed this Release in reliance upon any such promise, representation, or warranty not contained in this Release. 11. SEVERABILITY. ------------ Every provision of this Release is intended to be severable. In the event any term or provision of this Release is declared to be illegal or invalid for any reason whatsoever by a court of competent jurisdiction or by final and unappealed order of an administrative agency of competent jurisdiction, such illegality or invalidity should not affect the balance of the terms and provisions of this Release, which terms and provisions shall remain binding and enforceable. 12. PARTIES MAY ENFORCE RELEASE. --------------------------- Nothing in this Release shall operate to release or discharge any parties to this Release or their successors, assigns, legatees, heirs, or personal representatives from any rights, claims, or causes of action arising out of, relating to, or connected with a breach of any obligation of any party contained in this Release. 13. COSTS AND ATTORNEY'S FEES. ------------------------- The parties each agree to bear their own costs and attorneys' fees which have been or may be incurred in connection with any matters released herein or in connection with the negotiation and consummation of this Release. In the event of any administrative or civil action to enforce the provisions of this Release, the prevailing party shall be entitled to attorney fees and costs through trial and/or on appeal. 14. ACKNOWLEDGMENTS. ---------------- Executive acknowledges that the Release provides severance pay and benefits which the Company would otherwise have no obligation to provide. Executive acknowledges that Company has provided the following information: (a) the class or group of employees offered the opportunity to obtain severance benefits similar to those in the Release, (b) the eligibility factors required to obtain severance benefits similar to those in the Release, (c) the time limits required to obtain severance benefits similar to those in the Release, (d) the job titles and ages of employees eligible or selected for severance benefits similar to those in the Release, and (e) the ages of employees in the same classification either not eligible or not selected. 15. REVOCATION. ---------- As provided by the Older Workers Benefit Protection Act, Executive's is entitled to have forty-five (45) days to consider this Release. For a period of seven (7) days from execution of this Release, Executive may revoke this Release. Upon receipt of Executive's signed Release and the end of the revocation period, payment by Company as described in paragraph 4 above will be forwarded by mail in a timely manner as provided herein. Dated: __________ __, 2001 - --------------------------------------------- [Name of Executive] STATE OF ________ ) ) ss. County of _________ ) Personally appeared the above named __________________________and acknowledged the foregoing instrument to be his or her voluntary act and deed. Before me: -------------------------------------------- Notary Public for -------------------------- My commission expires: ------------ Regent Assisted Living, Inc. By: Dated: -------------------------------------------------- ------------------ Its: ------------------------------------------------- EX-10.38 6 exhibit38.txt AMENDED AND RESTATED AGREEMENT Exhibit 10.38 AMENDED AND RESTATED AGREEMENT TO PROVIDE ACCOUNTING AND CONSULTING SERVICES TO CALIFORNIA ASSISTED LIVING FACILITIES This Agreement made as of the 31st day of December, 2001, by and between Regent Assisted Living, Inc., an Oregon corporation (hereinafter referred to as "Owner") and Emeritus Corporation, a Washington corporation (hereinafter referred to as "Emeritus"). WHEREAS, as set forth more fully in Exhibit A, Owner either owns, leases or manages under contract or in its capacity as the managing member of the owner or lessee of, the assisted living facilities described in Exhibit A (the "Facilities" and, where the context requires, individually, a "Facility") and is, in each instance, authorized to engage a Emeritus or submanager in connection with its operation of the Facilities; WHEREAS, Owner wants someone to manage the Facilities on its behalf; WHEREAS, Emeritus is experienced and qualified in the field of assisted living facility management and has agreed to manage the Facilities on behalf of Owner, pursuant to the terms and conditions set forth herein; WHEREAS, Emeritus is required as a matter of law to be licensed to operate the Facilities; WHEREAS, pending issuance of a license to Emeritus to operate the Facilities, Owner is interested in engaging Emeritus to provide certain accounting, reporting and consulting services to Owner with respect to the Facilities; and WHEREAS, Owner and Emeritus are interested in documenting the terms and conditions under which such services will be provided. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, IT IS AGREED AS FOLLOWS: I. Accounting Services: ------------------- (i) Emeritus shall, at its expense, provide accounting support to the Facilities. Owner acknowledges and agrees that such accounting support shall not include the preparation of Owner's corporate financial statements or securities filings, but only the individual financial statements for the Facilities, in each case meeting the requirements of Section II. Emeritus shall not be required to reflect in the financial statements for the Facilities any corporate accounting adjustments provided to Emeritus by Owner until such time as Emeritus fully understands the rationale for such adjustment. 1 (ii) All accounting procedures and systems utilized in providing said support shall be in accordance with the operating capital and cash programs developed by Emeritus, which programs shall conform to generally accepted accounting principles ("GAAP") and shall not materially distort income or loss; provided, however, Emeritus shall have no liability for errors in the financial statements prepared during the term of this Agreement which arise from errors in starting accounting balances provided by Owner to Emeritus pursuant to Section I(v). (iii) In addition, as a cost of operating the Facilities, Emeritus shall prepare or cause to be prepared all payroll tax returns, sales and use tax returns, real and personal property tax returns, informational tax returns, Forms 5500 and local or state gross receipts and/or business and occupation tax returns and Emeritus shall cause to be paid all of the taxes reflected on such returns as being due, which taxes shall be paid from the cash receipts of the Facilities or the working capital provided by Owner under the terms of this Agreement. All other tax returns, including Owner's local, state or federal income tax returns and state corporate franchise tax returns and third party payor cost reports, shall be prepared by Owner or its designee and the taxes and other payments due thereunder shall be the sole responsibility of Owner. (iv) Nothing herein shall preclude Emeritus from delegating to a third party a portion of the accounting duties provided for in this section; provided, that such delegation shall not relieve Emeritus from ultimate liability for the timely and complete performance of the obligations provided for herein or for the expense thereof, to the extent such expense is to be borne hereunder by Emeritus. Owner acknowledges and agrees that in the event Emeritus retains one or more third parties to review the real and/or personal property tax returns or utility bills of the Facilities or other third party charges in an effort to effect cost savings for the Facilities, the fees and expenses of such third parties shall be paid from the cash receipts of the Facilities or the working capital provided by Owner under the terms of this Agreement. (v) In order to enable Emeritus to provide the accounting support services described in this Section, prior to the Commencement Date, Owner shall provide to Emeritus the information and shall take the transition actions described in Exhibit B hereto (the "Accounting Transition Services"), it being understood and agreed that Emeritus will not be able to fully perform its obligations under this Section I unless and until Owner has fully complied with its obligations with respect to the Accounting Transition Services. II. Reports: Emeritus shall prepare and provide to Owner any reasonable operational information with respect to the Facility which may from time to time be specifically requested by Owner, including any information needed to assist Owner in completing the tax returns for which it is responsible under Section I , in complying with any reporting obligations imposed on Owner or Owner's parent under its leases and loan agreements or as a publicly traded company, in refinancing any of the debt secured by the Facilities and in complying with the reporting obligations described in Exhibit C. In addition, by no later than thirty (30) days after the end of each calendar month, Emeritus shall provide Owner with an unaudited balance sheet of the Facilities, dated the last day 2 of such month, and an unaudited statement of income and expenses for such month and for the fiscal year to date relating to the operation of the Facilities showing the variance between the actual and budgeted operating results of the Facilities for said month and in the form attached hereto as Exhibit D and with a census report for the month indicating the number of units occupied and the number of units vacant. Upon request Emeritus shall cooperate with Owner or Owner's certified public accountant in the event Owner elects, or is required, to have audited annual financial statements prepared. The financial statements prepared by Emeritus shall be prepared in accordance with (i) GAAP, consistently applied, (ii) this Agreement, and (iii) the procedures and practices provided for in this Agreement. III. Bank Accounts: ------------- (i) With respect to each of the Facilities, Emeritus shall establish and maintain a checking account for each of the Facilities in the name set forth opposite the name of each of the Facilities in Exhibit E (each of which accounts shall hereinafter be referred to as the "Depository Account") and shall deposit therein all money received during the term of this Agreement in the course of the operation of the applicable Facility including any money received upon the collection of accounts receivable which are outstanding as of the Commencement Date for goods sold or services rendered at the Facilities prior to the Commencement Date and shall pay therefrom the expenses incurred in the operation of the applicable Facility during the Term of, and in accordance with the terms of, this Agreement. (ii) During the Term hereof, withdrawals and payments from the Depository Account for each Facility shall be made only on checks signed by a person or persons designated by Emeritus but Emeritus shall have no ownership interest in or other rights to the Depository Account other than the right to make withdrawals therefrom and to make deposits thereto; and provided, further that Owner shall be given notice as to the identity of said authorized signatories. (iii) Withdrawals from the Depository Account for each Facility shall be made first to pay to Owner the fee due with respect to such Facility as set forth in Exhibit F (the "Regent Fees"), which Regent Fees shall be deposited in an account established by Owner in Seattle, Washington (the "Regent Account") and thereafter to pay the expenses of operating such Facility, including payroll and related state and federal payroll tax obligations (the "Daily Operating Expenses") and rent and debt service payments to the lenders and landlords set forth in Exhibit G and in the amounts set forth in Exhibit G as the same may be amended from time to time to reflect changes in such rent and debt service payments or in the amounts otherwise specified by Owner to Emeritus in writing from time to time (the "Property Expenses"). Exhibit G shall also reflect when the rent or debt service payment is due under the terms of the applicable lease or loan documents and any available grace period. The Daily Operating Expenses and the Property Expenses shall be paid by Emeritus in such order of priority as Emeritus deems appropriate from time to time to the operation of such Facility, provided however, Daily Operating Expenses and the Property Expenses shall be paid by no later than their due date or, if applicable, before the expiration of any applicable grace period in which payment may be 3 made prior to the occurrence of a default under the terms of the applicable lease, loan agreement, contract, agreement or purchasing arrangement, unless resulting from the failure of Owner to provide the Working Capital Funds (as defined in Section II(v) below) or Service Fee Funds (as defined in Section II(v) below) as and when due in accordance with Section II(v) below. Emeritus shall make any rent and debt service payments which are made by it by wire transfer in accordance with wiring instructions provided by Owner to Emeritus. (iv) Any excess funds in the Depository Account for a Facility, after establishing the working capital reserves required by Section II(vii), shall be distributed by Emeritus to Owner. (v) In the event (A) at any time Emeritus determines in the exercise of its reasonable judgment that there are insufficient funds in the Depository Account or in the Other Authorized Accounts (as hereinafter defined), in the case of a Designated Facility (as hereinafter defined), to maintain the minimum bank balance required by Section II(vii) and pay all Daily Operating Expenses and Property Expenses due and payable in the following thirty (30) day period (the "Working Capital Funds") or (B) in the event there are at any time insufficient funds available in the Regent Account to pay Emeritus's Service Fee (as defined below) (the "Service Fee Funds"), no less than three (3) days prior to the date on which Emeritus determines that Working Capital Funds or Service Fee Funds, as applicable, are required, Emeritus shall provide Owner with a verbal demand therefor followed by a written confirmation of such demand, which written confirmation shall specify in reasonable detail the amount needed and the reason therefor and, Owner shall, within five (5) business days of its receipt of such written demand by Emeritus, deposit in the applicable Depository Account or the Regent Account, as applicable, the amount so demanded by Emeritus. For purposes hereof, the Other Authorized Accounts shall be defined as those accounts designated in writing by Owner to Emeritus from which Emeritus is authorized to draw funds in order to meet the working capital needs of certain other Facilities designated in writing by Owner to Emeritus (the "Designated Facilities" or individually a "Designated Facility"), provided the designation shall not be effective unless the same is accompanied by either (i) an opinion of Owner's outside legal counsel confirming that it has reviewed all necessary legal documents and determined that Owner is authorized to lend money from the Other Authorized Accounts for the benefit of the Designated Facilities or (ii) a certificate, in form and substance reasonably acceptable to Emeritus signed by Owner's Representative to the effect that Owner is authorized to lend money from the Other Authorized Accounts for the benefit of the Designated Facilities, along with appropriate supporting documentation with respect to the statements contained in such certificate, which documentation shall be in form and substance acceptable to Emeritus in the exercise of its reasonable discretion. Owner acknowledges and agrees that in no event will Emeritus have any obligation to pay any Daily Operating Expenses or the Regent Fee other than from funds available in the applicable Depository Account, including funds deposited therein by Emeritus after withdrawing funds from the Other Authorized Accounts, if applicable, or to provide its own funds to satisfy or support in any manner the working capital needs of the Facilities or to pay its own Service Fee and that (i) such working capital is to be provided solely from the cash receipt of the Facilities, if applicable, 4 withdrawals from the Other Authorized Accounts and the working capital provided by Owner pursuant to this Section I(h) and (ii) such service fees are to be paid from the funds deposited by Emeritus in payment of the Regent Fees and by Owner pursuant to this Section II(v), if applicable, in the Regent Account. (vi) Owner acknowledges and agrees that in the course of providing the consulting services described in this Agreement Emeritus may incur common expenses benefiting all of the facilities owned and/or operated by Emeritus, including the Facilities (the "Common Expenses"). Such Common Expenses shall be included in the Daily Operating Expenses of the Facilities and may be paid from the cash in the applicable Depository Account(s) if (i) the same relate to the direct cost of corporate, regional or divisional meetings or training sessions held by Emeritus and in which the administrative personnel of the Facilities have participated ("Meeting and Training Common Expenses"), (ii) the same are included within the approved annual capital or operating budgets ("Budgeted Common Expenses") or (iii) the same are not Meeting and Training Common Expenses or Budgeted Common Expenses (the "Other Common Expenses") but are approved by Owner, which approval shall not be unreasonably withheld, after Emeritus has provided Owner with a specification setting forth in reasonable detail the nature of such Other Common Expenses. (vii) During the Term hereof, Owner and Emeritus shall attempt to agree on the necessary minimum cash balance to be maintained in the Depository Account for each Facility but if they are unable to so agree such minimum cash balance shall upon demand of Emeritus be required to be equal to the amount reflected in Exhibit H opposite the name of such Facility and Owner shall upon demand in accordance with Section II(v) provide Emeritus with any working capital which may be needed to enable Emeritus to maintain such minimum cash balances. In addition, during the Term hereof, Owner shall at all times maintain a minimum balance in the Regent Account of $80,000. IV. Consulting Services. During the term of this Agreement, Emeritus shall supervise the day to day operation and management of the Facility. In furtherance of the foregoing, utilizing the resources provided or made available by Owner in accordance with the terms of this Agreement, Emeritus shall be responsible for the supervision and management of the operation of the Facilities, in accordance with applicable laws and regulations, including the supervision of employees, hiring and discharge of employees in consultation with Owner, billings and collection, and regulatory compliance, including compliance with the State Agreements (as hereinafter defined). Emeritus shall have no authority to commit the expenditure of the Facilities' funds or the funds of Owner during the terms of this Agreement unless it has secured the prior written consent of Owner's Representative and Owner's Representative shall have no obligation to approve any non-routine expenditures of the Facilities' funds or Owner's funds during the term of this Agreement. For purposes hereof, the State Agreement shall be defined as that Stipulation, Waiver and Order dated May 25, 2000 entered in Case No. 7099344003-C (the "2000 Order"), a true and correct copy of which is attached hereto as Exhibit I, and that Stipulation and Waiver; Decision and Order dated June 28, 2001 entered in Case Nos, 7400271001D, 7400271001E, 7400271001F, 7400271001G, 7400271001H, 7400271001K, 7400271001L and 7400271001M (the "2001 Order"), a true and correct 5 copy of which is attached hereto as Exhibit J. In furtherance and not in limitation of the foregoing, Emeritus shall designate an individual currently in its employ who, subject to Owner's review and approval, which will not be unreasonably withheld, shall be hired/engaged by Owner, to act as the training officer required by the terms of Paragraph 6(O) of the 2001 Order (the "Training Officer"). V. Emeritus' and Owner's Representative: Emeritus hereby appoints Frank Ruffo (the "Emeritus' Representative") as the person employed by Emeritus with whom Owner shall interact and upon whose decisions Owner shall be authorized to rely, and Owner hereby appoints Walt Bowen (the "Owner's Representative") as the person employed by Owner with whom Emeritus shall interact and upon whose decisions Emeritus shall be authorized to rely, with respect to the performance by Emeritus of its duties hereunder. Emeritus shall have the right from time to time during the term of this Agreement to replace the Emeritus' Representative upon written notice to Owner designating the replacement Emeritus' Representative and Owner shall have the right from time to time during the term of this Agreement to replace the Owner's Representative upon written notice to Emeritus designating the replacement Owner's Representative. Nothing herein shall be construed as imposing any personal liability on the Emeritus' Representative or Owner's Representative with respect to the acts or omissions of Emeritus or Owner, respectively, under this Agreement. VI. Term of Agreement and Termination Payments: ------------------------------------------ (i) The Term of this Agreement shall commence on January 1, 2002 (the "Commencement Date"). (ii) The Term of this Agreement shall terminate upon the first to occur of the following: (A) the occurrence of an Event of Default hereunder and the exercise by Emeritus or Owner, as applicable, of its right to terminate this Agreement as a result thereof; or (B) on written notice from Owner to Emeritus delivered within the last ninety days of the third year of the term of this Agreement (the "Termination Period") terminating this Agreement as of the end of the third (3rd) year of the term of this Agreement (the "Termination Notice"); provided, however, if the Termination Notice is not delivered by Owner within the Termination Period, then this Agreement shall automatically renew for successive one year terms, subject to Owner's right to terminate the same on no less than ninety (90) days written notice to Emeritus; or (C) on no less than ninety (90) days written notice from either Owner or Emeritus as to all, but not less than all, of the Facilities; or (D) with respect to one or more Facilities, by Owner or Emeritus on no less than ninety (90) days prior written notice in the event that at any time 6 during the term of this Agreement Owner will no longer own or control such Facilities whether resulting from a sale or other reasons, whether voluntary or involuntary; or (E) with respect to one of more of the Facilities, by Owner in the event it is unable on or before February 28, 2002 to secure any consents of its lenders, landlords or joint venture partners which may be required for it to enter into this Agreement with Emeritus (the "Third Party Consents"); provided, however, that Owner shall be solely responsible for any and all costs of securing such Third Party Consents, including any consent fees or other consideration required by such landlords, lenders or joint venture partners as a condition to granting their consent; or (F) on receipt by Emeritus of licensure approval from the State of California, in which case Emeritus shall commence management of the Facilities in accordance with the terms of the Agreement to Provide Management Services between Owner and Emeritus of even date herewith; or (G) if at the end of any year, the actual "Net Operating Income/Loss Before Property" less "Property Insurance" and "Liability Insurance" for any Facility as reflected on the financial statements of the Facilities is more than ten percent (10%) less than the amount for "Net Operating Income/Loss Before Property" less "Property Insurance" and "Liability Insurance" as reflected in the annual approved operating budget for such Facility but such termination right shall only apply with respect to the affected Facility. For the purposes of Sections VI, VII and VIII of this Agreement, any termination due to an Owner Event of Default or a Emeritus Event of Default or by Owner pursuant to Section VII shall be a partial termination as if there were a separate Agreement for each Facility if the Event of Default or failure to secure the necessary Third Party Consent relates to less than all of the Facilities. In such event, Owner's or Emeritus' required termination payments shall only be with respect to the Facilities covered by the partial termination. (iii) In the event of the termination of this Agreement prior to the end of the third year of this Agreement, the following payments shall be due and owing from Emeritus or Owner, as applicable: (A) In the event of the termination of this Agreement by Owner as a result of the occurrence of a Emeritus Event of Default, Emeritus shall pay to Owner an amount equal to one month's Service Fee concurrently with the termination of this Agreement. (B) In the event of the termination of this Agreement during the first year either by Emeritus as a result of the occurrence of an Owner Event of Default of the Term or by Owner pursuant to Section VI(ii)(C) other than 7 with respect to the Bowen Facility (as hereinafter defined), Owner shall pay to Emeritus an amount equal to the difference between the aggregate Service Fee due during the first year of the Term and the Service Fee actually paid to Emeritus to the date of such termination. For purposes hereof, the Bowen Facility shall mean the Facility located in Santa Cruz, California. (C) In the event of the termination of this Agreement at any time after the first year of the Term either by Emeritus as a result of the occurrence of an Owner Event of Default or by Owner pursuant to Section VI(ii)(C) Owner shall pay to Emeritus an amount equal to the then applicable Service Fee multiplied by three. (D) In the event of the termination of this Agreement by Emeritus pursuant to SectionVI(ii)(C) no payment shall be due from Emeritus to Owner upon termination and in the event of the termination of this Agreement by Owner pursuant to Section VI(ii)(E) or (F) no payment shall be due from Owner to Emeritus upon termination. (iv) Examples of the calculation of the termination fees due pursuant to this Section VI are set forth in Exhibit K. (v) In the event of the termination of this Agreement by Owner or Emeritus in accordance with the terms hereof, (A) no such termination shall be effective until all amounts due and owing from one party to the other in accordance with the terms of this Agreement, including the monetary damages specifically provided for in Sections VI(a) and (b), but specifically excluding any other damages alleged to have been suffered by a party as a result of the termination of this Agreement after the occurrence of an Event of Default, have been paid in full and (B) Emeritus shall cooperate with Owner or its designee, at no cost to Emeritus and without the assumption of any further liability by Emeritus other than the liability imposed on Emeritus under this Agreement, in an orderly transition of accounting responsibility for the affected Facility or Facilities to Owner or its designee. VII. Default: Either party may terminate this Agreement, as specified in this Section V, in the event of a default ("Event of Default") by the other party. (a) With respect to Emeritus, it shall be an "Event of Default" hereunder: (i) If Emeritus shall fail to keep, observe or perform any material agreement, term or provision of this Agreement, and such default shall continue for a period of forty five (45) days (subject to the force majeure provisions below) after notice thereof shall have been given to Emeritus by Owner, which notice shall specify in detail the event or events constituting the default; or 8 (ii) If Emeritus shall (A) apply for or consent to the appointment of a receiver, trustee or liquidator of Emeritus of all or a substantial part of its assets, (B) file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, (C) make a general assignment for the benefit of creditors, or (D) file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law, or if an order judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Emeritus, a bankrupt or insolvent or approving a petition seeking reorganization of Emeritus, or appointing a receiver, trustee or liquidator of Emeritus, of all or a substantial part of its assets. (b) With respect to Owner, it shall be an Event of Default hereunder: (i) If Owner shall fail to make or cause to be made any payment to Emeritus required to be made hereunder (other than its working capital obligation which is addressed in clause (iii)) and such failure shall continue for a period of thirty (30) days after notice, which notice shall specify the payment or payments which Owner has failed to make; (ii) If Owner shall fail to keep, observe or perform any material agreement, term or provision of this Agreement and such default shall continue for a period of forty five (45) days after notice (subject to the force majeure provisions below), which notice shall specify in detail the event or events constituting the default thereof by Emeritus to Owner; (iii) If Owner shall fail to provide necessary working capital upon demand by Emeritus with respect to the payment of the Daily Operating Expenses or the Service Fee due to Emeritus within the time provided in Section I(h), and such failure continues uncured for five (5) business days after Emeritus gives Owner notice of such failure; (iv) If Owner shall fail to make payments, or keep any covenants, owing to any third party which are beyond the control of Emeritus to make or keep (which for purposes hereof shall include any covenants by which Owner may be bound as of the Commencement Date (the "Pre-Existing Covenants") or to which Owner may agree to be bound after the Commencement Date without the prior approval of Emeritus (the "Unapproved Covenants")), and which would cause Owner to lose possession of the Facilities or any personal property required to operate the Facilities in the normal course; provided that Emeritus shall give Owner prompt notice of any such payment and failure to pay of which Emeritus has knowledge; (v) If Owner shall be dissolved or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Owner or of all or a substantial part of its assets, file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, make a general assignment for the benefit of creditors, file a petition or an answer seeking reorganization of arrangement with creditors or taking advantage of any insolvency law, or if an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Owner 9 a bankrupt or insolvent or approving a petition seeking reorganization of Owner or appointing a receiver, trustee or liquidator of Owner of all or a substantial part of its assets; or (vi) If Owner or any of its principal officers is convicted or a crime that materially affects the operation or regulation of the Facilities. VIII. Remedies and Obligations Upon Default: ------------------------------------- (i) If any Event of Default by Owner shall occur, Emeritus may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement, and neither party shall have any further obligations whatsoever under this Agreement except for Emeritus's right to receive damages from Owner in the amount specified in Section IV and except any settlement and payment obligations and other obligations that by their nature survive termination of this Agreement. (ii) If any Event of Default by Emeritus shall occur, Owner may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement and the exclusive right to possession of the Facilities granted to Emeritus hereunder, and neither party shall have any further obligation whatsoever under this Agreement; except for Owner's right to receive payment of liquidated damages from Emeritus in an amount specified in Section IV. IX. Accounting and Consulting Fee: ----------------------------- (i) In consideration for the provision of the services contemplated in this Agreement and the provision of the Training Officer, Emeritus shall receive a fee of $8,000 per month for each of the Facilities other than the West Covina and Merced Facilities as to which the fee shall be $2,000 per month per Facility until Owner is licensed to operate the West Covina Facility, which is currently anticipated to be on or about March 1, 2002, at which time the fee shall be increased to $8,000 per month for the West Covina Facility and until Owner is licensed to operate the Merced Facility, which is currently anticipated to be on or about March 1, 2002, at which time the fee shall be increased to $8,000 per month for the Merced Facility (the "Services Fee"). The Services Fee shall be increased by 5% on the second anniversary of the Commencement Date. (ii) If the services of Emeritus commence or terminate (for any reason, including those set forth in Paragraph V) other than on the first day of the month, the revenues upon which the fee is calculated shall be prorated in proportion to the number of days for which services are actually rendered. (iii) The Services Fee provided for herein shall be disbursed by Emeritus to itself out of the Depository Account in accordance with the provisions of Section III. (iv) Any amounts due from Owner to Emeritus or Emeritus to Owner pursuant to this Section IX which are not paid when due shall bear interest at the annual rate equal to the Prime Rate as set forth in the Money Rates Section of The Wall Street Journal (as 10 the same may change from time to time) plus 5% from the date due to the date paid in full. X. Assignment: This Agreement shall not be assigned by either party without the prior written consent of the other party; provided, however, Emeritus shall have the right to assign this Agreement to an entity which is owned or controlled by Emeritus or its principal shareholder, Daniel R. Baty, without the prior written consent of Owner. XI. Notices: All notices required or permitted hereunder shall be given in writing by hand delivery, by registered or certified mail, postage prepaid, by overnight delivery or by facsimile transmission (with receipt confirmed with the recipient). Notice shall be delivered or mailed to the parties at the following addresses or at such other places as either party shall designate in writing. All notices shall be deemed duly given when delivery is received or refused by a party if delivered by hand, three (3) business days after being deposited in the mails if sent by registered or certified mail, on the next business day if sent by overnight delivery and on confirmed receipt, if sent by facsimile transmission. To Emeritus: Emeritus Corporation 3131 Elliott Avenue Suite 500 Seattle, WA 98121 Facsimile: 206-301-4500 Attn: Raymond R. Brandstrom, Vice President -Finance To Owner: Regent Assisted Living, Inc. Bank of America Building 121 SW Morrison Suite 100 Portland, OR 97201 Facsimile: 503-274-4685 Attn: Walt Bowen, President XII. Relationship of the Parties: The relationship of the parties shall be that of principal and independent contractor and all acts performed by Emeritus during the term hereof as Emeritus of the Facility shall be deemed to be performed in its capacity as an independent contractor. Nothing contained in this Agreement is intended to or shall be construed to give rise to or create a partnership or joint venture or lease between Owner, its successors and assigns on the one hand, and Emeritus, its successors and assigns on the other hand. Notwithstanding the foregoing, Emeritus shall be authorized to execute certain documents in the course of the day to day operation of the Facility as the agent of Owner, such as credit applications for supplies, banking resolutions for the Depository Account, utility deposit forms, etc. 11 XIII. Indemnification: Emeritus shall indemnify, defend and hold harmless Owner from any loss incurred by or damage to Owner where such loss or damage results from the negligence or willful misconduct of Emeritus in performing its obligations under this Agreement or from a breach of this Agreement by Emeritus; provided, however, Owner specifically acknowledges and agrees that nothing in this Section XIII shall be construed as imposing any liability on Emeritus for any insurance deductibles for which Owner shall be solely responsible. Owner shall indemnify, defend and hold Emeritus harmless from any loss incurred by or damage to Emeritus where such loss or damage results from the negligence or willful misconduct of Owner in performing its obligations under the Agreement or from a breach of this Agreement by Owner. XIV. Entire Agreement: This Agreement contains the entire agreement between the parties relating to the operation of the Facility and shall be binding upon and inure to the benefit of their successors and assigns. This Agreement may not be modified or amended except by written instrument signed by both of the parties hereto. XV Captions: The captions used herein are for convenience of reference only and shall not be construed in any manner to limit or modify any of the terms hereof. XVI. Arbitration: In the event of any dispute among the parties regarding the Facilities or this Agreement, the parties agree to submit the same to resolution before an arbitrator, in the case of disputes alleged to involve less than $250,000, and before a panel of three arbitrators, in the case of disputes alleged to involve $250,000 or more, selected by mutual agreement of the parties or, if the parties are unable to agree on an arbitrator or panel of arbitrators within a period of twenty (20) days, selected by a court of competent jurisdiction. Such arbitration shall be held in accordance with the rules of the American Arbitration Association and the decision of the arbitrator shall be final and binding on the parties and may be enforced by a court of competent jurisdiction.. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in reasonable detail in said notice the nature of the dispute; provided, however, in the event that notwithstanding the terms hereof, a party commences legal proceedings, rather than arbitration proceedings, before a court of competent jurisdiction, the other party shall be deemed to have forfeited its right to have such dispute determined by binding arbitration in accordance with this Section XVI unless within thirty (30) days after being served with the first pleading in such legal proceedings, it files a motion to dismiss such legal proceedings and serves on the other party notice of its intent to submit such dispute to arbitration. Any party who fails to submit to binding arbitration following a lawful demand by the other party shall bear all costs and expenses, including reasonable attorneys fees (including those incurred in any trial, bankruptcy proceeding, appeal or review) incurred by the other party in obtaining a stay of any pending judicial proceeding concerning a dispute which by the terms of this Agreement has been properly submitted to mandatory arbitration and/or in compelling arbitration of any dispute. All disputes under this Section XVI shall be determined in the City of Portland, Oregon, if the arbitration is initiated by Owner and in the City of Seattle, Washington, if the arbitration is initiated by Emeritus, by a single arbitrator. All arbitrators shall be a licensed attorneys having at least ten (10) years experience, with at least five (5) years experience with assisted living facility sale, lease or management transactions. 12 The award in such arbitration may be enforced on the application of either party by the order of judgment of a court of competent jurisdiction. The prevailing party shall be entitled to recover the reasonable fees and expenses of its attorneys and experts. The arbitrator(s) shall resolve all disputes in accordance with the substantive law of the state of Oregon. The arbitrator(s) shall have no authority or jurisdiction to award any damages or any other remedies beyond those which could have been awarded in a court of law if the parties had litigated the claims instead of arbitrating them. The parties shall not assert any claim for punitive damages . The Federal Arbitration Act, Title 9 of the United States Code, is applicable to this transaction and shall be controlling in any judicial proceedings and in the arbitration itself as to issues of arbitrability and procedure. Nothing herein shall preclude a party from curing either their own or the other party's alleged default which is, or could be, the subject of an arbitration proceeding under this Section XVI or from seeking equitable relief which the arbitrator or panel of arbitrators is not empowered to award, such as an injunction, receivership, attachment or garnishment. XVII. Severability: In the event one or more of the provisions contained in this Agreement is deemed to be invalid, illegal or unenforceable in any respect under applicable law, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be impaired thereby. XVIII. Cumulative; No Waiver: No right or remedy herein conferred upon or reserved to either of the parties hereto is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of an Event of Default hereunder. The failure of either party hereto to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as provided in this Agreement shall not impair any such right or remedy or be construed as a waiver or relinquishment thereof with respect to subsequent defaults. Every right and remedy given by this Agreement to the parties hereof may be exercised from time to time and as often as may be deemed expedient by the parties thereto, as the case may be. XIX. Authorization for Agreement: The execution and performance of this Agreement by Owner and Emeritus have been duly authorized by all necessary laws, resolutions or corporate action, and this Agreement constitutes the valid and enforceable obligations of Owner and Emeritus in accordance with its terms. XX. Counterparts: This Agreement may be executed in any number of counterparts, each of which shall be an original, and each such counterpart shall together constitute but one and the same Agreement. XXI. Confidentiality: Throughout the Term of this Agreement and for a period of one (1) year after the expiration or earlier termination of this Agreement, each of Emeritus and Owner agrees to maintain the confidentiality of any proprietary information concerning the other or the Facility to which they may gain access during the term of this Agreement and shall only disclose the same with the consent of the other party or as required by an order of a court of competent jurisdiction. 13 XXII. Construction: Each of the parties acknowledges and agrees that it has participated in the drafting and negotiation of this Agreement. Accordingly, in the event of a dispute with respect to the interpretation or enforcement of the terms hereof, no provision shall be construed so as to favor or disfavor either party hereto. 14 IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed, as of the day and year first above written. REGENT ASSISTED LIVING, INC. By: /s/ Walter C. Bowan -------------------------------- Its: CEO -------------------------------- EMERITUS CORPORATION By: /s/ Raymond R. Brandstrom -------------------------------- Its: Vice President of Finance --------------------------------- 15 EXHIBIT A DESCRIPTION OF THE FACILITY 16 EXHIBIT B ACCOUNTING TRANSITION SERVICES 17 EXHIBIT C ADDITIONAL FACILITY SPECIFIC REPORTING OBLIGATIONS 18 EXHIBIT D FORM OF FINANCIAL STATEMENTS 19 EXHIBIT E FACILITY BANK ACCOUNT INFORMATION 20 EXHIBIT F REGENT FEES BY FACILITY 21 EXHIBIT G RENT AND DEBT SERVICE PAYMENTS BY FACILITY 22 EXHIBIT H MINIMUM BANK BALANCES 23 EXHIBIT I 2000 ORDER 24 EXHIBIT J 2001 ORDER 25 EXHIBIT K CALCULATION OF TERMINATION FEES 26 EX-10.39 7 exhibit39.txt AGREEMENT TO PROVIDE MANAGEMENT SERVICES Exhibit 10.39 AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO WASHINGTON ASSISTED LIVING FACILITIES This Agreement made as of the 31st day of December, 2001, by and between Regent Assisted Living, Inc., an Oregon corporation (hereinafter referred to as "Licensee") and Emeritus Corporation, a Washington corporation (hereinafter referred to as "Manager"). WHEREAS, as set forth more fully in Exhibit A, Licensee either owns, leases or manages under contract or in its capacity as the managing member of the Licensee or lessee of, the assisted living facilities which are licensed under Washington law as boarding homes and which are described in Exhibit A (the "Facilities" and, where the context requires, individually, a "Facility") and is, in each instance, authorized to engage a manager or submanager in connection with its operation of the Facilities; WHEREAS, Licensee wants someone to manage the Facilities on its behalf; WHEREAS, Manager is experienced and qualified in the field of assisted living facilities management and has agreed to manage the Facilities on behalf of Licensee, pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, IT IS AGREED AS FOLLOWS: I. Responsibilities of Manager: Licensee hereby engages Manager and Manager hereby accepts such engagement and agrees to provide management, consulting and advisory services to Licensee in connection with the operation of the Facilities, upon the terms and conditions set forth in this Agreement; provided, however, Licensee has and retains under this Agreement the ultimate responsibility for the operational decisions of the Facility. By entering into this Agreement, Licensee does not delegate to Manager any powers, duties or responsibilities which it is prohibited by law from delegating. Licensee also retains such other authority as shall not have been expressly delegated to Manager pursuant to this Agreement. Subject to the foregoing, Manager shall provide the following services: (a) Operational Policies and Forms: Manager shall develop and implement such operational policies and procedures as may be necessary to ensure the ongoing licensure of the Facilities and the establishment and maintenance of operational standards appropriate for the nature of the Facilities. Licensee shall have the right to recommend changes to such policies and procedures in the event, in its capacity as the licensed operator of the Facilities, it believes 1 that such changes are needed to ensure the compliance of the Facilities with applicable licensure laws. (b) Charges: Manager shall establish the schedules of recommended charges, including any and all special charges for services rendered to the residents at the Facilities. Manager shall have the right to review the fee schedules as the same may change from time to time. Residents of the Facilities shall be provided with notice of any changes in the schedules of charges in accordance with RCW Chapter 70.120, the Long Term Care Residents Rights Act, and, if applicable, the terms of their admission agreement and the policies and procedures of the Facilities. (c) Information: Manager shall develop any informational material, mass media releases, and other related publicity materials, which are necessary or appropriate for the operation of the Facilities. If and to the extent any such materials developed by Manager contain Manager's name or logo, the same shall clearly reflect that Manager is the manager and shall not, directly or indirectly, give the appearance that Manager is the licensee of the Facility. Further, when Manager takes any action on behalf of Licensee, any communication or correspondence must clearly indicate that it is acting as the agent of Licensee. (d) Regulatory Compliance: Subject to the force majeure and notice and cure right contained in the Agreement below, Manager shall assist Licensee in maintaining all licenses, permits, qualifications and approvals from any applicable governmental or regulatory authority for the operation of the Facilities, it being understood and agreed that under Washington law, Licensee is responsible for ensuring that all such licenses are obtained and maintained and that the Facilities are operated in compliance with all applicable laws and regulations, including, but not limited to, the laws and regulations governing the licensure of boarding homes and local, state and federal employment rules and regulations. Manager shall manage the operation of the Facilities in a manner which is intended to ensure their full compliance with all applicable laws and regulations; provided, however, Manager shall not be deemed to be in default of its obligations under this Section I(d) in the event (i) of a violation of any applicable law or regulation which occurs during the first thirty (30) days after the Commencement Date (the "Protected Period"), (ii) of the citation of any deficiency or deficiencies which do not result in the threatened revocation of the licensure or Medicaid certification of, or the imposition of a ban on admissions at, the affected Facility or Facilities and which deficiency or deficiencies are timely corrected in accordance with a plan of correction approved by the applicable regulatory authority, (iii) Manager is duly contesting the application of any law to the operation of a Facility or Facilities and compliance therewith is stayed during the period that such contest is pending or (iv) compliance with law requires the expenditure of funds which require the approval of Licensee and for which Licensee refuses or fails to provide such approval. In order to ensure Manager's compliance with its obligations under this Section I(d) Licensee shall provide 2 Manager prior to the Commencement Date with a copy of any agreements or orders to which Licensee may be a party in connection with the operation of the Facilities. Within 48 hours of receipt, Manager shall provide Licensee with copies by fax, overnight mail, email or other comparable means of expedited transmission of any written notices of non-compliance which it receives from any governmental authority having jurisdiction over the Facilities in which such authorities threaten a loss or licensure or Medicaid certification of, or the imposition of a ban on admissions at or the imposition of civil or criminal penalties against, a Facility or Licensee. In addition, Licensee shall have the right to approve, which approval shall not be unreasonably withheld, any plan of correction developed by Manager with respect to any survey or other governmental action which threatens revocation of the licensure or Medicaid certification of, or a ban on admissions at or the imposition of civil or criminal penalties against, a Facility or Licensee and to approve the election by Manager to contest the application of any law to the operation of a Facility or Facilities. (e) Capital Repairs, Replacements and Improvements: Recognizing the Licensee is ultimately responsible for compliance with and meeting all applicable state boarding home licensing requirements, Manager shall make all capital repairs, replacements and improvements which are necessary for the efficient and effective operation of the Facilities and their compliance with law unless doing so involves an expenditure requiring Licensee's approval in accordance with the terms of this Agreement and Licensee fails to provide such approval. The cost of such capital repairs, replacements and improvements shall be within the budgetary limits set forth in the annual capital budgets prepared by Manager pursuant to Paragraph I(L); provided, however, Manager shall not be deemed to be in default of its obligations under this Section I(e) in the event the cost of such repairs, replacements and/or improvements exceeds the applicable budgetary limits provided such repairs, replacements and/or improvements are (a) of such an emergency nature that Licensee's prior notice and approval is not feasible in order to adequately protect the Facilities and the health and safety of the occupants or (b) the cost of such repairs, replacements and/or improvements are within 10% of the budgetary limits set forth in the annual approved capital budget then in effect for the affected Facility or Facilities prepared by Manager pursuant to Paragraph I(L). Any other capital expenditures for repairs, replacements or improvements that exceed such budgetary limits shall be subject to the prior approval of the Licensee, which approval shall not be unreasonably withheld; provided, however, Licensee shall not be deemed to have unreasonably withheld its approval if (i) Licensee lacks the financial resources to cover the cost of such capital repair, replacement or improvement or (ii) the cost of such capital repair, replacement or improvement will exceed $25,000 individually or in the aggregate with other unbudgeted capital repairs, replacements or improvements undertaken by Manager in the same fiscal year. In performing the foregoing repairs, replacements and improvements Manager shall use the Facilities' on site maintenance personnel as and where possible and shall otherwise contract with qualified third parties to 3 provide the necessary services and shall undertake the same or cause the same to be undertaken in a workman like and lien free manner. (f) Accounting: ---------- (i) Manager shall, at its expense, provide accounting support to the Facilities. Licensee acknowledges and agrees that such accounting support shall not include the preparation of Licensee's corporate financial statements or securities filings, but only the individual financial statements for the Facilities, in each case meeting the requirements of Section 1(G). Manager shall not be required to reflect in the financial statements for the Facilities any corporate accounting adjustments provided to Manager by Licensee until such time as Manager fully understands the rationale for such adjustment. (ii) All accounting procedures and systems utilized in providing said support shall be in accordance with the operating capital and cash programs developed by Manager, which programs shall conform to generally accepted accounting principles ("GAAP") and shall not materially distort income or loss; provided, however, Manager shall have no liability for errors in the financial statements prepared during the term of this Agreement which arise from errors in starting accounting balances provided by Licensee to Manager pursuant to Section I(f)(v). (iii) In addition, as a cost of operating the Facilities, Manager shall prepare or cause to be prepared all payroll tax returns, sales and use tax returns, real and personal property tax returns, informational tax returns, Forms 5500 and local or state gross receipts and/or business and occupation tax returns and Manager shall cause to be paid all of the taxes reflected on such returns as being due, which taxes shall be paid from the cash receipts of the Facilities or the working capital provided by Licensee under the terms of this Agreement. All other tax returns, including Licensee's local, state or federal income tax returns and state corporate franchise tax returns and third party payor cost reports, shall be prepared by Licensee or its designee and the taxes and other payments due thereunder shall be the sole responsibility of Licensee. (iv) Nothing herein shall preclude Manager from delegating to a third party a portion of the accounting duties provided for in this section; provided, that such delegation shall not relieve Manager from ultimate liability for the timely and complete performance of the obligations provided for herein or for the expense thereof, to the extent such expense is to be borne hereunder by Manager. Licensee acknowledges and agrees that in the event Manager retains one or more third parties to review the real and/or personal property tax returns or utility bills of the Facilities or other third party charges in an effort to effect cost savings for the 4 Facilities, the fees and expenses of such third parties shall be paid from the cash receipts of the Facilities or the working capital provided by Licensee under the terms of this Agreement. (v) In order to enable Manager to provide the accounting support services described in this Section, prior to the Commencement Date, Licensee shall provide to Manager the information and shall take the transition actions described in Exhibit B hereto (the "Accounting Transition Services"), it being understood and agreed that Manager will not be able to fully perform its obligations under this Section I(f) unless and until Licensee has fully complied with its obligations with respect to the Accounting Transition Services. (g) Reports: Manager shall prepare and provide to Licensee any reasonable financial and operational information with respect to the Facilities which may from time to time be specifically requested by Licensee, including any information needed to assist Licensee in completing the tax returns for which it is responsible under Section I(f),in complying with any reporting obligations imposed on Licensee or Licensee's parent under its leases and loan agreements or as a publicly traded company, in refinancing any of the debt secured by the Facilities and in complying with the reporting obligations described in Exhibit C. In addition, by no later than thirty (30) days after the end of each calendar month, Manager shall provide Licensee with an unaudited balance sheet of the Facilities, dated the last day of such month, and an unaudited statement of income and expenses for such month and for the fiscal year to date relating to the operation of the Facilities showing the variance between the actual and budgeted operating results of the Facilities for said month and in the form attached hereto as Exhibit D and with a census report for the month indicating the number of units occupied and the number of units vacant. Upon request Manager shall cooperate with Licensee or Licensee's certified public accountant in the event Licensee elects, or is required, to have audited annual financial statements prepared. The financial statements prepared by Manager shall be prepared in accordance with (i) GAAP, consistently applied, (ii) this Agreement, and (iii) the procedures and practices provided for in this Agreement. (h) Bank Accounts: ------------- (i) With respect to each of the Facilities, Manager shall establish and maintain a checking account for each of the Facilities in the name set forth opposite the name of each of the Facilities in Exhibit E (each of which accounts shall hereinafter be referred to as the "Depository Account") and shall deposit therein all money received during the term of this Agreement in the course of the operation of the applicable Facility including any money received upon the collection of accounts receivable which are outstanding as of the Commencement Date for goods sold or services rendered at the Facilities prior to the Commencement Date and shall pay therefrom the expenses incurred in the operation of the applicable Facility during the Term of, and in accordance with the terms of, this Agreement. 5 (ii) During the Term hereof, withdrawals and payments from the Depository Account for each Facility shall be made only on checks signed by a person or persons designated by Manager but Manager shall have no ownership interest in or other rights to the Depository Account other than the right to make withdrawals therefrom and to make deposits thereto; and provided, further that Licensee shall be given notice as to the identity of said authorized signatories. (iii) Withdrawals from the Depository Account for each Facility shall be made first to pay to Licensee the management fee due with respect to such Facility as set forth in Exhibit F (the "Regent Management Fees"), which Regent Management Fees shall be deposited in an account established by Licensee in Seattle, Washington (the "Regent Account") and thereafter to pay the expenses of operating such Facility, including payroll and related state and federal payroll tax obligations (the "Daily Operating Expenses") and rent and debt service payments to the lenders and landlords set forth in Exhibit G and in the amounts set forth in Exhibit G as the same may be amended from time to time to reflect changes in such rent and debt service payments or in the amounts otherwise specified by Licensee to Manager in writing from time to time (the "Property Expenses"); provided, however, that regardless of the priority of payments set forth in this Section I(h)(iii), Licensee shall be required to ensure that all expenses related to the care of the residents of the Facilities are paid, it being understood and agreed that any limitation on resources or insufficiency of funds of the Licensee or the Facilities shall not excuse Licensee, as the licensed operator of the Facility, from fulfilling its obligation to ensure that the Facilities meet all applicable state licensing requirements. Exhibit G shall also reflect when the rent or debt service payment is due under the terms of the applicable lease or loan documents and any available grace period. The Daily Operating Expenses and the Property Expenses shall be paid by Manager in such order of priority as Manager deems appropriate from time to time to the operation of such Facility, provided however, Daily Operating Expenses and the Property Expenses shall be paid by no later than their due date or, if applicable, before the expiration of any applicable grace period in which payment may be made prior to the occurrence of a default under the terms of the applicable lease, loan agreement, contract, agreement or purchasing arrangement, unless resulting from the failure of Licensee to provide the Working Capital Funds (as defined in Section I(h)(v) below) or Management Fee Funds (as defined in Section I(h)(v) below) as and when due in accordance with Section I(h)(v) below. Manager shall make any rent and debt service payments which are made by it by wire transfer in accordance with wiring instructions provided by Licensee to Manager. (iv) Any excess funds in the Depository Account for a Facility, after establishing the working capital reserves required by Section VIII(c), shall be distributed by Manager to Licensee. 6 (v) In the event (A) at any time Manager determines in the exercise of its reasonable judgment that there are insufficient funds in the Depository Account or in the Other Authorized Accounts (as hereinafter defined), in the case of a Designated Facility (as hereinafter defined), to maintain the minimum bank balance required by Section VIII(c) and pay all Daily Operating Expenses and Property Expenses due and payable in the following thirty (30) day period (the "Working Capital Funds") or (B) in the event there are at any time insufficient funds available in the Regent Account to pay Manager's Base Management Fee (as defined below) (the "Management Fee Funds"), no less than three (3) days prior to the date on which Manager determines that Working Capital Funds or Management Fee Funds, as applicable, are required, Manager shall provide Licensee with a verbal demand therefor followed by a written confirmation of such demand, which written confirmation shall specify in reasonable detail the amount needed and the reason therefor and, Licensee shall, within five (5) business days of its receipt of such written demand by Manager, deposit in the applicable Depository Account or the Regent Account, as applicable, the amount so demanded by Manager. For purposes hereof, the Other Authorized Accounts shall be defined as those accounts designated in writing by Licensee to Manager from which Manager is authorized to draw funds in order to meet the working capital needs of certain other Facilities designated in writing by Licensee to Manager (the "Designated Facilities" or individually a "Designated Facility"), provided the designation shall not be effective unless the same is accompanied by either (i) an opinion of Licensee's outside legal counsel confirming that it has reviewed all necessary legal documents and determined that Licensee is authorized to lend money from the Other Authorized Accounts for the benefit of the Designated Facilities or (ii) a certificate, in form and substance reasonably acceptable to Manager signed by Licensee's Representative to the effect that Licensee is authorized to lend money from the Other Authorized Accounts for the benefit of the Designated Facilities, along with appropriate supporting documentation with respect to the statements contained in such certificate, which documentation shall be in form and substance acceptable to Manager in the exercise of its reasonable discretion. Licensee acknowledges and agrees that in no event will Manager have any obligation to pay any Daily Operating Expenses or the Regent Management Fee other than from funds available in the applicable Depository Account, including funds deposited therein by Manager after withdrawing funds from the Other Authorized Accounts, if applicable, or to provide its own funds to satisfy or support in any manner the working capital needs of the Facilities or to pay its own Base Management Fee, and that (i) such working capital is to be provided solely from the cash receipt of the Facilities, if applicable, withdrawals from the Other Authorized Accounts and the working capital provided by Licensee pursuant to this Section I(h) and (ii) such management fees are to be paid from the funds deposited by Manager in payment of the Regent Management Fees and by Licensee pursuant to this Section I(h)(v), if applicable, in the Regent Account. (vi) Licensee acknowledges and agrees that in the course of its operation of the Facilities Manager may incur common expenses benefiting all of the facilities owned and/or 7 operated by Manager, including the Facilities (the "Common Expenses"). Such Common Expenses shall be included in the Daily Operating Expenses of the Facilities and may be paid from the cash in the applicable Depository Account(s) if (i) the same relate to the direct cost of corporate, regional or divisional meetings or training sessions held by Manager and in which the administrative personnel of the Facilities have participated ("Meeting and Training Common Expenses"), (ii) the same are included within the approved annual capital or operating budgets ("Budgeted Common Expenses") or (iii) the same are not Meeting and Training Common Expenses or Budgeted Common Expenses (the "Other Common Expenses") but are approved by Licensee, which approval shall not be unreasonably withheld, after Manager has provided Licensee with a specification setting forth in reasonable detail the nature of such Other Common Expenses. (i) Personnel: All of the personnel of the Facilities, including the community directors, business managers and the Wellness Directors, if applicable, shall be the employees of Licensee and the salaries, bonuses, commissions, state and federal payroll and social security tax obligations and benefits paid to or on behalf of such employees shall be deemed to be included in the Daily Operating Expenses of the Facilities and thus shall be paid from the Facilities Depository Account, subject to the limitation set forth in Section II with respect to the payment of Insurance Costs (as defined in Section II). Notwithstanding the foregoing, Manager shall recruit, employ, train, promote, direct, discipline, suspend and discharge the personnel of the Facilities; establish salary levels, personnel policies and employee benefits; and establish employee performance standards, all as needed during the term of this Agreement to ensure the efficient operation of all departments within and services offered by the Facilities; provided, however, that ultimate control over the community directors, including their appointment, and over personnel matters relating to the operation of the Facilities and the care provided to the residents of the Facilities and responsibility for the staffing levels, and training of the personnel at, the Facilities shall remain with Licensee. (j) Supplies and Equipment: Manager shall purchase supplies and non-capital equipment needed to operate the Facilities. In purchasing said supplies and equipment, if possible without Manager incurring personal liability for the cost of such supplies and equipment, Manager shall take advantage of any national or group purchasing agreements to which Manager may be a party. (k) Legal Proceedings: Manager shall, with the assistance and at the direction of Licensee and its legal counsel, take any and all appropriate steps to protect and/or assist in litigating to a final decision in an appropriate court or forum any such third party claim of violation, order, rule or regulation affecting the Facilities and its operation or any claim, loss, violation or cause of action relating to the Facilities, it being understood and agreed that under Washington law any administrative appeals of licensing or contract action/enforcement imposed 8 by the Washington Department of Social and Health Services ("DSHS") may only be filed by Licensee or by Manager if it is expressly authorized to do so by Licensee. All of the costs incurred in any litigation of third party claims respecting the Facilities, including the reasonable legal fees and expenses of legal counsel retained to defend Licensee and/or Licensee and Manager jointly and/or any landlord or lender, shall be included in the Daily Operating Expenses and shall be reimbursed from the funds in the Depository Account of the applicable Facility established pursuant to Section 1(h) if previously paid by Licensee or shall be paid from the funds in the Depository Account of the applicable Facility if not previously paid by Licensee. Nothing herein shall be construed as precluding Licensee from seeking to recover from Manager the fees and expenses described in this Section I(k) to the extent Manager is otherwise liable therefore under the default or indemnification provisions of this Agreement. (l) Budgets: ------- (i) The Facilities shall be operated on a fiscal year of January 1 through December 31. (ii) Licensee and Manager shall agree prior to the Commencement Date (as hereinafter defined) on an initial operating budget and capital budget for the period from the Commencement Date through December 31, 2002. (iii) Prior to the start of each subsequent fiscal year, Manager shall prepare and submit to Licensee for its review and approval, which approval shall not be unreasonably withheld, an annual operating budget, an annual capital expenditure budget, an annual operating plan, an annual marketing plan and an annual cash flow projection for each of the Facilities. The annual operating budget and capital expenditure budget shall be prepared using the format set forth in Exhibit H. In the event a budget for a Facility has not been agreed upon by the beginning of the fiscal year for any reason whatsoever including Licensee's or Manager's unreasonable refusal to approve the same, Manager sole remedy shall be that the operating results of the prior fiscal year for such Facility plus 5% shall serve as the budget for the following fiscal year for such Facility unless and until the new budget is agreed upon, it being understood and agreed that the refusal by Licensee or Manager to approve a budget shall not be deemed to be an Event of Default hereunder. (m) Collection of Accounts: Manager shall issue bills for goods and services furnished by the Facilities during the term of this Agreement and shall attempt to collect the balances reflected on such bills, including, but not limited to, enforcing the rights of Licensee and the Facilities as creditor under any contract or in connection with the rendering of any services; provided, however, that any expenses incurred by Manager in so doing with respect to any Facility shall be included in the Daily Operating Expenses of such Facility and shall be 9 payable out of funds deposited in the Depository Account of such Facility described in Section I(h). In addition, upon request by Licensee, Manager shall issue bills and collect accounts and monies owed for goods and services furnished by the Facilities prior to the Commencement Date. Regardless of any standard of performance set forth in this Agreement, Licensee acknowledges and agrees that there can be no assurances that Manager will be able to collect any or all of the Facilities' accounts receivable. (n) Contracts. Manager shall negotiate and enter into any and all contracts necessary from time to time in connection with the day to day operation of the Facilities including, but not limited to, contracts for water, electricity, natural gas, telephone, sewer, cleaning, trash removal, pest control and extermination, cable, elevator and boiler maintenance, pharmacy services, therapy services and other appropriate ancillary services and contracts for the provision of various services which are designed to identify potential cost savings to the Facilities, such as utility and tax bill review services; provided that such contracts can be terminated on no more than 90 days notice. Any contract which cannot be terminated on no more than 90 days notice shall require the approval of Licensee before the same may be executed by Manager, which approval shall not be unreasonably withheld. Manager shall have the right to contract with entities which are owned by or under common ownership with Manager provided the terms of any such contracts are no less favorable than the terms then offered by unrelated third parties for the same or similar goods or services. All contracts shall be entered into in the name of Licensee or the Facilities. All resident leases or admission agreements entered into by Manager in connection with the operation of the Facilities shall comply with the Long Term Care Residents Act, RCW Chapter 70.129. (o) Manager's and Licensee's Representative: Manager hereby appoints Frank Ruffo (the "Manager's Representative") as the person employed by Manager with whom Licensee shall interact and upon whose decisions Licensee shall be authorized to rely, and Licensee hereby appoints Walt Bowen (the "Licensee's Representative") as the person employed by Licensee with whom Manager shall interact and upon whose decisions Manager shall be authorized to rely, with respect to the performance by Manager of its duties hereunder. Manager shall have the right from time to time during the term of this Agreement to replace the Manager's Representative upon written notice to Licensee designating the replacement Manager's Representative and Licensee shall have the right from time to time during the term of this Agreement to replace the Licensee's Representative upon written notice to Manager designating the replacement Licensee's Representative. Nothing herein shall be construed as imposing any personal liability on the Manager's Representative or Licensee's Representative with respect to the acts or omissions of Manager or Licensee, respectively, under this Agreement. Owner and Licensee shall use good faith efforts to notify DSHS in the event of any changes in the Manager's Representative or the Licensee's Representative but neither shall be in default of its obligations hereunder should it fail to do so. Any such notice to DSHS shall be sent to the 10 following address (the "DSHS Address"): Residential Care Services (Attn: Deb Burman, PO Box 45600, Olympia, WA 98504-5600). II. Insurance: Licensee shall, at its sole cost and expense, arrange for and maintain all necessary and proper property insurance covering the Facilities, the furniture, fixtures, and equipment situated thereon, and all necessary and proper professional and commercial general liability insurance for Licensee's and Manager's protection. Manager shall, at its sole cost and expense, maintain commercial general liability insurance for its operations. All such liability insurance policies shall include coverage for liability to each party's respective employees involved in the operation of the Facilities and arising from any improper employment practices (except in the case of Manager where Licensee acknowledges no such coverage shall be provided by Manager) and employee crime and theft coverage. All such policies of liability insurance shall name the other party as, as well as any landlord or lender identified by Licensee to Manager in writing as additional insureds thereunder (except in the case of Manager's directors and officers insurance and employee crime insurance as to which Licensee acknowledges Manager has advised it no such additional insureds shall be named). In addition, each party shall provide all employee health and worker's compensation insurance required for their respective employees. Each party shall be responsible for all deductibles due with respect to any insurance maintained by it and for any uninsured losses of any nature whether arising from an failure by the party to maintain insurance or from the loss not being covered under the terms of any policy of insurance maintained by the party. All premiums, claims and deductibles related to the Licensee's insurance covered by this Section II (the "Insurance Costs") shall, at Licensee's request, be paid by Manager from the applicable Facility's Depository Account provided (i) Licensee has provided Manager in writing with reasonable details concerning the amount to be paid and the purpose of such payment, (ii) there are sufficient funds, whether in the form of cash receipts of the Facilities or working capital funds deposited by Licensee, in the Depository Account to enable Manager to pay the same from the Depository Account, (iii) all other Daily Operating Expenses and the Regent Management Fee which are then due and payable have been paid from the Depository Account as of the time when Licensee requests payment of the premiums, deductibles and/or claims from the Depository Account, (iv) Manager's Base Management Fee which is then due and payable have been paid from the Regent Account as of the time when Licensee requests payment of the premiums, deductibles and/or claims from the Depository Account and (v) Licensee in not otherwise in default of its obligations under this Agreement. III. Proprietary Interest and Noncompetition: --------------------------------------- (a) The systems, methods, procedures and controls employed by Manager and Licensee and any written materials, computer software or policies developed by Manager and Licensee to document the same are to remain the property of Manager and Licensee, 11 respectively, and are not, at any time during or after the term of this Agreement, to be utilized, distributed, copied or otherwise employed or acquired, except as authorized by the respective Licensee thereof, provided, however, that upon request of Licensee, Manager shall negotiate in good faith the terms and conditions upon which Licensee may be permitted by Manager to use such systems, methods, procedures, controls, materials, software or brochures containing Manager's name or logo for a limited transitional period following the termination of this Agreement, which terms and conditions shall be satisfactory to both Manager and Licensee in their respective discretion. Any written materials developed or used by Manager in connection with the operation of the Facilities shall meet the requirements of Section I(c) of this Agreement, if applicable. (b) With respect to each of the Facilities, from the Commencement Date until the earlier to occur of (i) the termination of this Agreement by Manager as a result of the occurrence of an Licensee Event of Default or (ii) the date on which Licensee, voluntarily or involuntarily, losses possession of such Facility or (iii) three years after the expiration of the term of this Agreement as to such Facility for any reason whatsoever other than the reasons set forth in clause (ii), Manager shall not solicit, discuss, negotiate or enter into any agreement or arrangement by which the Manager would obtain any substantial control of the ownership or management of such Facility from any third party having an interest in such Facility superior to the Licensee's. The restrictions in the preceding sentence shall be applicable, without limitation, to any purchase, lease, license, franchise, partnership, joint venture or other means, direct or indirect by which Manager or any entity or person controlling, controlled by or under common control with Manager obtains substantial ownership or control of one or more of the Facilities; provided, however, nothing herein shall be construed to prohibit the acquisition by an entity under common control with Manager of the Facility in Folsom, California and of one of the Facilities in Scottsdale, Arizona. IV. Term of Agreement and Termination Payments: ------------------------------------------ (a) The Term of this Agreement shall commence on January 1, 2002 (the "Commencement Date. (b) The Term of this Agreement shall terminate upon the first to occur of the following: (i) the occurrence of an Event of Default hereunder and the exercise by Manager or Licensee, as applicable, of its right to terminate this Agreement as a result thereof; or (ii) on written notice from Licensee to Manager delivered within the last ninety days of the third year of the term of this Agreement (the "Termination Period") 12 terminating this Agreement as of the end of the third (3rd) year of the term of this Agreement (the "Termination Notice"); provided, however, if the Termination Notice is not delivered by Licensee within the Termination Period, then this Agreement shall automatically renew for successive one year terms, subject to Licensee's right to terminate the same on no less than ninety (90) days written notice to Manager; or (iii) on no less than ninety (90) days written notice from either Licensee or Manager as to all, but not less than all, of the Facilities; or (iv) with respect to one or more Facilities, by Licensee or Manager on no less than ninety (90) days prior written notice in the event that at any time during the term of this Agreement Licensee will no longer own or control such Facilities whether resulting from a sale or other reasons, whether voluntary or involuntary; or (v) with respect to one of more of the Facilities, by Licensee in the event it is unable on or before February 28, 2002 to secure any consents of its lenders, landlords or joint venture partners which may be required for it to enter into this Agreement with Manager (the "Third Party Consents"); provided, however, in the event of the termination of this Agreement by Licensee pursuant to this Section IV(b)(v), effective with the termination of this Agreement as to the affected Facility, Licensee and Manager shall enter into an Accounting Services Agreement with respect to such Facility unless prohibited by such lender, landlord or joint venture partner; and provided, further, that Licensee shall be solely responsible for any and all costs of securing such Third Party Consents, including any consent fees or other consideration required by such landlords, lenders or joint venture partners as a condition to granting their consent; or (vi) by either Licensee or Manager on thirty (30) days notice to the other in the event that on or before February 28, 2002 they have not secured formal approval of this Management Agreement from DSHS (the "State Approval"), it being understood and agreed that this Agreement has been drafted in a manner intended to address the concerns identified by DSHS in a letter dated December 10, 2001 from Deb Burman to Chris Radzom and that the parties have agreed to negotiate in good faith the terms of any reasonable amendments or modifications hereto which may be required to secure the State Approval; or (vii) by Licensee effective as of a date specified by DSHS if DSHS is able to demonstrate to the satisfaction of Licensee and Manger that DSHS has the authority to lawfully require Licensee to terminate this Management Agreement as to any or all of the Facilities as a result of violations of law occurring at any or all of the Facilities. 13 For the purposes of Sections IV, V, and VI of this Agreement, any termination due to an Licensee Event of Default or a Manager Event of Default or by Licensee pursuant to Section IV(b)(v) shall be a partial termination as if there were a separate Agreement for each Facility if the Event of Default or failure to secure the necessary Third Party Consent relates to less than all of the Facilities. In such event, Licensee's or Manager's required termination payments shall only be with respect to the Facilities covered by the partial termination. Each of Licensee and Owner agrees to use good faith efforts to give notice of the termination of this Agreement to DSHS at the DSHS Address prior to the effective date thereof but neither shall be in default of its obligations hereunder should it fail to do so. (c) In the event of the termination of this Agreement prior to the end of the third year of this Agreement, the following payments shall be due and owing from Manager or Licensee, as applicable: (i) In the event of the termination of this Agreement by Licensee as a result of the occurrence of a Manager Event of Default, Manager shall pay to Licensee an amount equal to one month's base management fee concurrently with the termination of this Agreement. (ii) In the event of the termination of this Agreement during the first year either by Manager as a result of the occurrence of an Licensee Event of Default of the Term or by Licensee pursuant to Section IV(b)(iii) other than with respect to the Bowen Facility (as hereinafter defined), Licensee shall pay to Manager an amount equal to the difference between the aggregate Base Management Fee due during the first year of the Term and the Base Management Fee actually paid to Manager to the date of such termination. For purposes hereof, the Bowen Facility shall mean the Facility located in Redmond, Washington. (iii) In the event of the termination of this Agreement at any time after the first year of the Term either by Manager as a result of the occurrence of an Licensee Event of Default or by Licensee pursuant to Section IV(b)(iii), Licensee shall pay to Manager an amount equal to the then applicable Base Management Fee multiplied by three. (iv) In the event of the termination of this Agreement by Manager pursuant to Section IV(b)(iii) no payment shall be due from Manager to Licensee upon termination and in the event of the termination of this Agreement by Licensee pursuant to Sections IV(b)(v), (vi) or (vii) no payment shall be due from Licensee to Manager upon termination. (v) Examples of the calculation of the termination fees due pursuant to this Section IV(c) are set forth in Exhibit I. 14 (d) In the event of the termination of this Agreement by Licensee or Manager in accordance with the terms hereof, (A) no such termination shall be effective until all amounts due and owing from one party to the other in accordance with the terms of this Agreement, including the monetary damages specifically provided for in Sections VI(a) and (b), but specifically excluding any other damages alleged to have been suffered by a party as a result of the termination of this Agreement after the occurrence of an Event of Default, have been paid in full and (B) Manager shall cooperate with Licensee or its designee, at no cost to Manager and without the assumption of any further liability by Manager other than the liability imposed on Manager under this Agreement, in an orderly transition of operational responsibility for the affected Facility or Facilities to Licensee or its designee (who the parties acknowledge and agree may only assume operational responsibility in accordance with the requirements of Washington law) subject to the limitation set forth in this Section IV with respect to Licensee's obligation to remove Manager from any affected Facility's license before such termination and transfer are effective. (e) In the event of the termination of this Agreement for any reason, Licensee shall continue to be responsible for the care of the residents of the Facilities until the earlier to occur of (i) the transfer of the affected Facility or Facilities to a new licensee or (ii) the transfer of the residents another facility or facilities licensed under applicable state law or (iii) management responsibility for the affected Facility or Facilities is assumed by a manager operating under a management agreement which has been approved by DSHS. V. Default: Either party may terminate this Agreement, as specified in this Section V, in the event of a default ("Event of Default") by the other party. (a) With respect to Manager, it shall be an "Event of Default" hereunder: (i) If Manager shall fail to keep, observe or perform any material agreement, term or provision of this Agreement, and such default shall continue for a period of forty five (45) days (subject to the force majeure provisions below) after notice thereof shall have been given to Manager by Licensee, which notice shall specify in detail the event or events constituting the default; (ii) If Manager shall (A) apply for or consent to the appointment of a receiver, trustee or liquidator of Manager of all or a substantial part of its assets, (B) file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, (C) make a general assignment for the benefit of creditors, or (D) file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law, or if an order judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Manager, a bankrupt or insolvent or approving a petition 15 seeking reorganization of Manager, or appointing a receiver, trustee or liquidator of Manager, of all or a substantial part of its assets; (iii) If, at anytime after the Protected Period, (A) proceedings are commenced which threaten to revoke, rescind, terminate or not renew the licensure or certification of the Facilities and Manager is unable to develop a plan of correction with respect thereto which is acceptable to the applicable state or federal authorities within the applicable cure period provided by such authorities or (B) a ban on admissions lasting more than ninety (90) days is imposed against the Facilities; or (iv) If at the end of any year, the actual "Net Operating Income/Loss Before Property" less "Property Insurance" and "Liability Insurance" for any Facility as reflected on the financial statements of the Facilities prepared by Manager is more than ten percent (10%) less than the amount for "Net Operating Income/Loss Before Property" less "Property Insurance" and "Liability Insurance" as reflected in the annual approved operating budget for such Facility the same shall be an Event of Default but only with respect to the affected Facility . (b) With respect to Licensee, it shall be an Event of Default hereunder: (i) If Licensee shall fail to make or cause to be made any payment to Manager required to be made hereunder (other than its working capital obligation which is addressed in clause (iii)) and such failure shall continue for a period of thirty (30) days after notice, which notice shall specify the payment or payments which Licensee has failed to make; (ii) If Licensee shall fail to keep, observe or perform any material agreement, term or provision of this Agreement and such default shall continue for a period of forty five (45) days after notice (subject to the force majeure provisions below), which notice shall specify in detail the event or events constituting the default thereof by Manager to Licensee; (iii) If Licensee shall fail to provide necessary working capital upon demand by Manager with respect to the payment of the Daily Operating Expenses or the Base Management Fee due to Manager within the time provided in Section I(h), and such failure continues uncured for five (5) business days after Manager gives Licensee notice of such failure; (iv) If Licensee shall fail to make payments, or keep any covenants, owing to any third party which are beyond the control of Manager to make or keep (which for purposes hereof shall include any covenants by which Licensee may be bound as of the Commencement Date (the "Pre-Existing Covenants") or to which Licensee may agree to be bound after the Commencement Date without the prior approval of Manager (the "Unapproved 16 Covenants")), and which would cause Licensee to lose possession of the Facilities or any personal property required to operate the Facilities in the normal course; provided that Manager shall give Licensee prompt notice of any such payment and failure to pay of which Manager has knowledge; (v) If Licensee shall be dissolved or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Licensee or of all or a substantial part of its assets, file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, make a general assignment for the benefit of creditors, file a petition or an answer seeking reorganization of arrangement with creditors or taking advantage of any insolvency law, or if an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Licensee a bankrupt or insolvent or approving a petition seeking reorganization of Licensee or appointing a receiver, trustee or liquidator of Licensee of all or a substantial part of its assets; or (vi) If Licensee or any of its principal officers is convicted or a crime that materially affects the operation or regulation of the Facilities. (c) Licensee and Manager shall use good faith efforts to provide DSHS at the DSHS Address with copies of any written notices of default issued under the terms of this Section V but neither Licensee nor Manager shall be in default of its obligations hereunder should it fail to do so. VI. Remedies and Obligations Upon Default: ------------------------------------- (a) If any Event of Default by Licensee shall occur, Manager may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement, and neither party shall have any further obligations whatsoever under this Agreement except for Manager's right to receive damages from Licensee in the amount specified in Section IV and except any settlement and payment obligations and other obligations that by their nature survive termination of this Agreement. (b) If any Event of Default by Manager shall occur, Licensee may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement and the exclusive right to possession of the Facilities granted to Manager hereunder, and neither party shall have any further obligation whatsoever under this Agreement; except for Licensee's right to receive payment of liquidated damages from Manager in an amount specified in Section IV. 17 VII. Licensee's Inspection: Manager acknowledges and agrees that during the term of this Agreement, Licensee is ultimately responsible for the care provided to the residents of the Facilities and for the compliance of the Facilities with applicable law. Accordingly, during the term hereof, Licensee may enter and inspect the Facilities at any time provided Licensee coordinates such inspections with the on site administrative personnel at the Facilities in order to minimize any disruption of Manager's day to day operations of the Facilities and to ensure that such inspections do not violate resident rights to privacy under state or federal resident rights laws. During such inspections, Licensee may inspect and/or audit all books and records pertaining to the operation of the Facilities. In addition, Licensee shall have the right to conduct telephonic or personal interviews with the Community Directors and/or with any of Manager's regional personnel involved in the operation of the Facilities with respect to any matters related to the operation thereof subject to the same duty to minimize the disruption to Manager's operations resulting from such interviews. In no event will Licensee have the right as part of such inspections or otherwise to provide directions to the employees of the Facilities, it being understood and agreed that all such directions shall come from Manager for so long as this Agreement is in effect and in the event of any disputes between Licensee and Manager with respect to the management of the Facilities the same shall be resolved directly between Licensee and Manager. Nothing in this Section or elsewhere in this Agreement shall be construed as limiting in any manner Manager's or Licensee's obligation to retain, disclose or produce appropriate documentation and records to any governmental agency having authority over the Facilities pursuant to applicable laws and regulations or as limiting the rights of the residents of the Facilities to address to Licensee any concerns, questions or complaints which they may have with respect to the operation of the facilities. VIII. Operations of the Facilities: ---------------------------- (a) Standard of Performance: In performing its obligations under this Agreement, Manager shall manage the Facilities as assisted living facilities licensed under Washington law as boarding homes in accordance with the terms of this Agreement, including, but not limited to, the limitations set forth herein on operating and capital expenditures, and the policies adopted by, and resources available to, the Facilities; provided, however, that regardless of the standard of performance imposed by this Section VIII(a), Manager shall have no liability in the event the operation of the Facilities fail to comply with the Pre-Existing Covenants or the Unapproved Covenants; and provided, further, that nothing in this Agreement shall relieve Licensee as the licensed operator of the Facilities from its ultimate responsibility under State law for the care provided at the Facilities. (b) Force Majeure: Neither party will be deemed to be in violation of this Management Agreement if it is prevented from performing any of its obligations hereunder for any reason beyond its control, including, without limitation, strikes, shortages, acts of terrorism, 18 war, acts of God, (but excluding lack of the party's own financial resources), or any statute, regulation or rule of federal, state or local government or agency thereof or, in the case of Manager, unreasonable interference by Licensee with Manager's performance of its duties hereunder or in the case of Licensee, unreasonable interference by Manager with Licensee's performance of its duties hereunder. (c) Minimum Bank Balances: During the Term hereof, Licensee and Manager shall attempt to agree on the necessary minimum cash balance to be maintained in the Depository Account for each Facility but if they are unable to so agree such minimum cash balance shall upon demand of Manager be required to be equal to 50% of the Daily Operating Expenses of such Facility during the prior month and Licensee shall upon demand in accordance with Section I(h) provide Manager with any working capital which may be needed to enable Manager to maintain such minimum cash balances. In addition, during the Term hereof, Licensee shall at all times maintain a minimum balance in the Regent Account of $80,000. (d) Facility Records. All of the records of the Facilities shall be and remain the property of Licensee and Manager shall at all times maintain the confidentiality of all resident records, including, without limitation, all medical records and shall only disclose the same as required by law and/or as authorized by the resident to whom such record relates; provided, however, that Manager's failure to maintain the confidentiality of resident records in accordance with the requirements of this Section VIII(d) shall not relieve Licensee of liability should any such resident records be improperly disclosed in whole or in part. (e) Notice to Residents. Within a reasonable period of time after the Commencement Date, Manager shall provide written notice to all of the residents of the Facilities that it has assumed management responsibility for the Facilities and confirming the address at which they can reach Licensee should they elect to do so for any reason. IX. Management Fee: -------------- (a) In consideration for the provision of the services contemplated in this Agreement, Manager shall receive a management fee of $8,000 per month (the "Base Management Fee") payable in advance on the first day of each month during the term of this Agreement except for the month of January 2002, one third of which shall be paid on the earlier to occur of the first day of February, March and April of 2002 or the date of the termination of this Agreement. The Base Management Fee payable with respect to all of the Facilities shall be increased by 5% on the second anniversary of the Commencement Date. (b) If the services of Manager commence or terminate (for any reason, including those set forth in Paragraph V) other than on the first day of the month, the revenues upon which 19 the fee is calculated shall be prorated in proportion to the number of days for which services are actually rendered. (c) The Base Management Fee provided for herein shall be disbursed by Manager to itself out of the Regent Account in accordance with the provisions of I(H). (d) Any amounts due from Licensee to Manager or Manager to Licensee pursuant to this Section IX which are not paid when due shall bear interest at the annual rate equal to the Prime Rate as set forth in the Money Rates Section of The Wall Street Journal (as the same may change from time to time) plus 5% from the date due to the date paid in full. X. Assignment: Except as otherwise provided in Section I(f), this Agreement shall not be assigned by either party without the prior written consent of the other party; provided, however, Manager shall have the right to assign this Agreement to an entity which is owned or controlled by Manager or its principal shareholder, Daniel R. Baty, without the prior written consent of Licensee; provided, however, no assignment of this Agreement shall be effective unless the assignee, in the case of an assignment by Licensee, has first been duly licensed by DSHS, or unless the Management Agreement between Licensee and the assignee, in the case of an assignment by Manager, has been approved by DSHS. XI. Notices: All notices required or permitted hereunder shall be given in writing by hand delivery, by registered or certified mail, postage prepaid, by overnight delivery or by facsimile transmission (with receipt confirmed with the recipient). Notice shall be delivered or mailed to the parties at the following addresses or at such other places as either party shall designate in writing. The parties agree to use their good faith efforts to give notice of any change of address to DSHS at the DSHS Address but neither shall be in default of its obligations hereunder should it fail to do so. All notices shall be deemed duly given when delivery is received or refused by a party if delivered by hand, three (3) business days after being deposited in the mails if sent by registered or certified mail, on the next business day if sent by overnight delivery and on confirmed receipt, if sent by facsimile transmission. To Manager: Emeritus Corporation 3131 Elliott Avenue Suite 500 Seattle, WA 98121 Facsimile: 206-301-4500 Attn: Raymond R. Brandstrom, Vice President -Finance To Licensee: Regent Assisted Living, Inc. Bank of America Building 20 121 SW Morrison Suite 100 Portland, OR 97201 Facsimile: 503-274-4685 Attn: Walt Bowen, President XII. Relationship of the Parties: The relationship of the parties shall be that of principal and independent contractor and all acts performed by Manager during the term hereof as Manager of the Facilities shall be deemed to be performed in its capacity as an independent contractor. Nothing contained in this Agreement is intended to or shall be construed to give rise to or create a partnership or joint venture or lease between Licensee, its successors and assigns on the one hand, and Manager, its successors and assigns on the other hand. Notwithstanding the foregoing, Manager shall be authorized to execute certain documents in the course of the day to day operation of the Facilities as the agent of Licensee, such as credit applications for supplies, banking resolutions for the Depository Account, utility deposit forms, etc. XIII. Indemnification: Manager shall indemnify, defend and hold harmless Licensee from any loss incurred by or damage to Licensee where such loss or damage results from the negligence or willful misconduct of Manager in performing its obligations under this Agreement or from a breach of this Agreement by Manager; provided, however, Licensee specifically acknowledges and agrees that nothing in this Section XIII shall be construed as imposing any liability on Manager for any insurance deductibles for which Licensee shall be solely responsible under Section II hereof. Licensee shall indemnify, defend and hold Manager harmless from any loss incurred by or damage to Manager where such loss or damage results from the negligence or willful misconduct of Licensee in performing its obligations under the Agreement, from a breach of this Agreement by Licensee, from Licensee's lack of authority to enter into this Agreement or in the event any lease, loan, limited liability company operating agreement or other document or instrument to which Licensee (or, in the case of third party management agreements, Licensee's principal) may be a party prohibits Manager from fulfilling any of the obligations imposed on Manager or from exercising any of the rights granted to Manager hereunder. XIV. Entire Agreement: This Agreement contains the entire agreement between the parties relating to the operation of the Facilities and shall be binding upon and inure to the benefit of their successors and assigns. This Agreement may not be modified or amended except by written instrument signed by both of the parties hereto. Licensee and Manager agree to use their good faith efforts to give DSHS at the DSHS Address copies of any amendments to this Agreement but neither shall be in default of its obligations hereunder should it fail to do so. XV. Captions: The captions used herein are for convenience of reference only and shall not be construed in any manner to limit or modify any of the terms hereof. 21 XVI. Arbitration: In the event of any dispute among the parties regarding the Facilities or this Agreement, the parties agree to submit the same to resolution before an arbitrator, in the case of disputes alleged to involve less than $250,000, and before a panel of three arbitrators, in the case of disputes alleged to involve $250,000 or more, selected by mutual agreement of the parties or, if the parties are unable to agree on an arbitrator or panel of arbitrators within a period of twenty (20) days, selected by a court of competent jurisdiction. Such arbitration shall be held in accordance with the rules of the American Arbitration Association and the decision of the arbitrator shall be final and binding on the parties and may be enforced by a court of competent jurisdiction.. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in reasonable detail in said notice the nature of the dispute; provided, however, in the event that notwithstanding the terms hereof, a party commences legal proceedings, rather than arbitration proceedings, before a court of competent jurisdiction, the other party shall be deemed to have forfeited its right to have such dispute determined by binding arbitration in accordance with this Section XVI unless within thirty (30) days after being served with the first pleading in such legal proceedings, it files a motion to dismiss such legal proceedings and serves on the other party notice of its intent to submit such dispute to arbitration. Any party who fails to submit to binding arbitration following a lawful demand by the other party shall bear all costs and expenses, including reasonable attorneys fees (including those incurred in any trial, bankruptcy proceeding, appeal or review) incurred by the other party in obtaining a stay of any pending judicial proceeding concerning a dispute which by the terms of this Agreement has been properly submitted to mandatory arbitration and/or in compelling arbitration of any dispute. All disputes under this Section XVI shall be determined in the City of Portland, Oregon, if the arbitration is initiated by Licensee and in the City of Seattle, Washington, if the arbitration is initiated by Manager, by a single arbitrator. All arbitrators shall be a licensed attorneys having at least ten (10) years experience, with at least five (5) years experience with assisted living facility sale, lease or management transactions. The award in such arbitration may be enforced on the application of either party by the order of judgment of a court of competent jurisdiction. The prevailing party shall be entitled to recover the reasonable fees and expenses of its attorneys and experts. The arbitrator(s) shall resolve all disputes in accordance with the substantive law of the state of Oregon. The arbitrator(s) shall have no authority or jurisdiction to award any damages or any other remedies beyond those which could have been awarded in a court of law if the parties had litigated the claims instead of arbitrating them. The parties shall not assert any claim for punitive damages . The Federal Arbitration Act, Title 9 of the United States Code, is applicable to this transaction and shall be controlling in any judicial proceedings and in the arbitration itself as to issues of arbitrability and procedure. Nothing herein shall preclude a party from curing either their own or the other party's alleged default which is, or could be, the subject of an arbitration proceeding under this Section XVI or from seeking equitable relief which the arbitrator or panel of arbitrators is not empowered to award, such as an injunction, receivership, attachment or garnishment. 22 XVII. Severability: In the event one or more of the provisions contained in this Agreement is deemed to be invalid, illegal or unenforceable in any respect under applicable law, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be impaired thereby. XVIII. Cumulative; No Waiver: No right or remedy herein conferred upon or reserved to either of the parties hereto is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of an Event of Default hereunder. The failure of either party hereto to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as provided in this Agreement shall not impair any such right or remedy or be construed as a waiver or relinquishment thereof with respect to subsequent defaults. Every right and remedy given by this Agreement to the parties hereof may be exercised from time to time and as often as may be deemed expedient by the parties thereto, as the case may be. XIX. Authorization for Agreement: The execution and performance of this Agreement by Licensee and Manager have been duly authorized by all necessary laws, resolutions or corporate action, and this Agreement constitutes the valid and enforceable obligations of Licensee and Manager in accordance with its terms. XX. Counterparts: This Agreement may be executed in any number of counterparts, each of which shall be an original, and each such counterpart shall together constitute but one and the same Agreement. XXI. Confidentiality: Throughout the Term of this Agreement and for a period of one (1) year after the expiration or earlier termination of this Agreement, each of Manager and Licensee agrees to maintain the confidentiality of any proprietary information concerning the other or the Facilities to which they may gain access during the term of this Agreement and shall only disclose the same with the consent of the other party or as required by an order of a court of competent jurisdiction. XXII. Construction: Each of the parties acknowledges and agrees that it has participated in the drafting and negotiation of this Agreement. Accordingly, in the event of a dispute with respect to the interpretation or enforcement of the terms hereof, no provision shall be construed so as to favor or disfavor either party hereto. 23 IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed, as of the day and year first above written. REGENT ASSISTED LIVING, INC. By: /s/ Walter C. Bowen ------------------- Its: CEO & Chairman -------------------- EMERITUS CORPORATION By: /s/ Martin D. Roffe -------------------- Its: Vice President of Financial Planning ------------------------------------- 24 EXHIBIT A DESCRIPTION OF THE FACILITIES, INCLUDING WHETHER OWNED, LEASED OR MANAGED BY REGENT 25 EXHIBIT B ACCOUNTING TRANSITION SERVICES 26 EXHIBIT C ADDITIONAL SPECIFIC REPORTING OBLIGATIONS BY FACILITY 27 EXHIBIT D FORM OF FINANCIAL STATEMENTS 28 EXHIBIT E FACILITY BANK ACCOUNT INFORMATION 29 EXHIBIT F REGENT MANAGEMENT FEES BY FACILITY 30 EXHIBIT G RENT AND DEBT SERVICE PAYMENTS BY FACILITY 31 EXHIBIT H FORM OF BUDGET 32 EXHIBIT I TERMINATION FEE CALCULATION EXAMPLES 33 EX-10.40 8 exhibit40.txt AMENDED AND RESTATED AGREEMENT Exhibit 10.40 AMENDED AND RESTATED AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO ASSISTED LIVING FACILITIES This Agreement made as of the 31st day of December, 2001, by and between Regent Assisted Living, Inc., an Oregon corporation (hereinafter referred to as "Owner") and Emeritus Corporation, a Washington corporation (hereinafter referred to as "Manager"). WHEREAS, as set forth more fully in Exhibit A, Owner either owns, leases or manages under contract or in its capacity as the managing member of the owner or lessee of, the assisted living facilities described in Exhibit A (the "Facilities" and, where the context requires, individually, a "Facility") and is, in each instance, authorized to engage a manager or submanager in connection with its operation of the Facilities; WHEREAS, Owner wants someone to manage the Facilities on its behalf; WHEREAS, Manager is experienced and qualified in the field of assisted living facilities management and has agreed to manage the Facilities on behalf of Owner, pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, IT IS AGREED AS FOLLOWS: I. Responsibilities of Manager: Owner hereby engages Manager and Manager hereby accepts such engagement and agrees to provide management, consulting and advisory services to Owner in connection with the operation of the Facilities, upon the terms and conditions set forth in this Agreement. By entering into this Agreement, Owner does not delegate to Manager any powers, duties or responsibilities which it is prohibited by law from delegating. Owner also retains such other authority as shall not have been expressly delegated to Manager pursuant to this Agreement. Subject to the foregoing, Manager shall provide the following services: (a) Operational Policies and Forms: Manager shall develop and implement such operational policies and procedures as may be necessary to ensure the ongoing licensure of the Facilities and the establishment and maintenance of operational standards appropriate for the nature of the Facilities. (b) Charges: Manager shall establish the schedules of recommended charges, including any and all special charges for services rendered to the residents at the Facilities. 1 (c) Information: Manager shall develop any informational material, mass media releases, and other related publicity materials, which are necessary or appropriate for the operation of the Facilities. (d) Regulatory Compliance: Subject to the force majeure and notice and cure right contained in the Agreement below, Manager shall maintain all licenses, permits, qualifications and approvals from any applicable governmental or regulatory authority for the operation of the Facilities and shall manage the operation of the Facilities in full compliance with all applicable laws and regulations; provided, however, Manager shall not be deemed to be in default of its obligations under this Section I(d) in the event (i) of a violation of any applicable law or regulation which occurs during the first thirty (30) days after the Commencement Date (the "Protected Period"), (ii) of the citation of any deficiency or deficiencies which do not result in the threatened revocation of the licensure or Medicaid certification of, or the imposition of a ban on admissions at, the affected Facility or Facilities and which deficiency or deficiencies are timely corrected in accordance with a plan of correction approved by the applicable regulatory authority, (iii) Manager is duly contesting the application of any law to the operation of a Facility or Facilities and compliance therewith is stayed during the period that such contest is pending or (iv) compliance with law requires the expenditure of funds which require the approval of Owner and for which Owner refuses or fails to provide such approval. In order to ensure Manager's compliance with its obligations under this Section I(d) Owner shall provide Manager prior to the Commencement Date with a copy of any agreements or orders to which Owner may be a party in connection with the operation of the Facilities. Within 48 hours of receipt, Manager shall provide Owner with copies by fax, overnight mail, email or other comparable means of expedited transmission of any written notices of non-compliance which it receives from any governmental authority having jurisdiction over the Facilities in which such authorities threaten a loss or licensure or Medicaid certification of, or the imposition of a ban on admissions at or the imposition of civil or criminal penalties against, a Facility or Owner. In addition, Owner shall have the right to approve, which approval shall not be unreasonably withheld, any plan of correction developed by Manager with respect to any survey or other governmental action which threatens revocation of the licensure or Medicaid certification of, or a ban on admissions at or the imposition of civil or criminal penalties against, a Facility or Owner and to approve the election by Manager to contest the application of any law to the operation of a Facility or Facilities. (e) Capital Repairs, Replacements and Improvements: Manager shall make all capital repairs, replacements and improvements necessary for the efficient and effective operation of the Facilities and their compliance with law unless doing so involves an expenditure requiring Owner's approval in accordance with the terms of this Agreement and Owner fails to provide such approval. The cost of such capital repairs, replacements and improvements shall be within the budgetary limits set forth in the annual capital budgets prepared by Manager 2 pursuant to Paragraph I(L); provided, however, Manager shall not be deemed to be in default of its obligations under this Section I(e) in the event the cost of such repairs, replacements and/or improvements exceeds the applicable budgetary limits provided such repairs, replacements and/or improvements are (a) of such an emergency nature that Owner's prior notice and approval is not feasible in order to adequately protect the Facilities and the health and safety of the occupants or (b) the cost of such repairs, replacements and/or improvements are within 10% of the budgetary limits set forth in the annual approved capital budget then in effect for the affected Facility or Facilities prepared by Manager pursuant to Paragraph I(L). Any other capital expenditures for repairs, replacements or improvements that exceed such budgetary limits shall be subject to the prior approval of the Owner, which approval shall not be unreasonably withheld; provided, however, Owner shall not be deemed to have unreasonably withheld its approval if (i) Owner lacks the financial resources to cover the cost of such capital repair, replacement or improvement or (ii) the cost of such capital repair, replacement or improvement will exceed $25,000 individually or in the aggregate with other unbudgeted capital repairs, replacements or improvements undertaken by Manager in the same fiscal year. In performing the foregoing repairs, replacements and improvements Manager shall use the Facilities' on site maintenance personnel as and where possible and shall otherwise contract with qualified third parties to provide the necessary services and shall undertake the same or cause the same to be undertaken in a workman like and lien free manner. (f) Accounting: ---------- (i) Manager shall, at its expense, provide accounting support to the Facilities. Owner acknowledges and agrees that such accounting support shall not include the preparation of Owner's corporate financial statements or securities filings, but only the individual financial statements for the Facilities, in each case meeting the requirements of Section 1(G). Manager shall not be required to reflect in the financial statements for the Facilities any corporate accounting adjustments provided to Manager by Owner until such time as Manager fully understands the rationale for such adjustment. (ii) All accounting procedures and systems utilized in providing said support shall be in accordance with the operating capital and cash programs developed by Manager, which programs shall conform to generally accepted accounting principles ("GAAP") and shall not materially distort income or loss; provided, however, Manager shall have no liability for errors in the financial statements prepared during the term of this Agreement which arise from errors in starting accounting balances provided by Owner to Manager pursuant to Section I(f)(v). (iii) In addition, as a cost of operating the Facilities, Manager shall prepare or cause to be prepared all payroll tax returns, sales and use tax returns, real and personal property tax returns, informational tax returns, Forms 5500 and local or state gross receipts and/or 3 business and occupation tax returns and Manager shall cause to be paid all of the taxes reflected on such returns as being due, which taxes shall be paid from the cash receipts of the Facilities or the working capital provided by Owner under the terms of this Agreement. All other tax returns, including Owner's local, state or federal income tax returns and state corporate franchise tax returns and third party payor cost reports, shall be prepared by Owner or its designee and the taxes and other payments due thereunder shall be the sole responsibility of Owner. (iv) Nothing herein shall preclude Manager from delegating to a third party a portion of the accounting duties provided for in this section; provided, that such delegation shall not relieve Manager from ultimate liability for the timely and complete performance of the obligations provided for herein or for the expense thereof, to the extent such expense is to be borne hereunder by Manager. Owner acknowledges and agrees that in the event Manager retains one or more third parties to review the real and/or personal property tax returns or utility bills of the Facilities or other third party charges in an effort to effect cost savings for the Facilities, the fees and expenses of such third parties shall be paid from the cash receipts of the Facilities or the working capital provided by Owner under the terms of this Agreement. (v) In order to enable Manager to provide the accounting support services described in this Section, prior to the Commencement Date, Owner shall provide to Manager the information and shall take the transition actions described in Exhibit B hereto (the "Accounting Transition Services"), it being understood and agreed that Manager will not be able to fully perform its obligations under this Section I(f) unless and until Owner has fully complied with its obligations with respect to the Accounting Transition Services. (g) Reports: Manager shall prepare and provide to Owner any reasonable operational information with respect to the Facilities which may from time to time be specifically requested by Owner, including any information needed to assist Owner in completing the tax returns for which it is responsible under Section I(f),in complying with any reporting obligations imposed on Owner or Owner's parent under its leases and loan agreements or as a publicly traded company, in refinancing any of the debt secured by the Facilities and in complying with the reporting obligations described in Exhibit C. In addition, by no later than thirty (30) days after the end of each calendar month, Manager shall provide Owner with an unaudited balance sheet of the Facilities, dated the last day of such month, and an unaudited statement of income and expenses for such month and for the fiscal year to date relating to the operation of the Facilities showing the variance between the actual and budgeted operating results of the Facilities for said month and in the form attached hereto as Exhibit D and with a census report for the month indicating the number of units occupied and the number of units vacant. Upon request Manager shall cooperate with Owner or Owner's certified public accountant in the event Owner elects, or is required, to have audited annual financial statements prepared. The financial statements 4 prepared by Manager shall be prepared in accordance with (i) GAAP, consistently applied, (ii) this Agreement, and (iii) the procedures and practices provided for in this Agreement. (h) Bank Accounts: ------------- (i) With respect to each of the Facilities, Manager shall establish and maintain a checking account for each of the Facilities in the name set forth opposite the name of each of the Facilities in Exhibit E (each of which accounts shall hereinafter be referred to as the "Depository Account") and shall deposit therein all money received during the term of this Agreement in the course of the operation of the applicable Facility including any money received upon the collection of accounts receivable which are outstanding as of the Commencement Date for goods sold or services rendered at the Facilities prior to the Commencement Date and shall pay therefrom the expenses incurred in the operation of the applicable Facility during the Term of, and in accordance with the terms of, this Agreement. (ii) During the Term hereof, withdrawals and payments from the Depository Account for each Facility shall be made only on checks signed by a person or persons designated by Manager but Manager shall have no ownership interest in or other rights to the Depository Account other than the right to make withdrawals therefrom and to make deposits thereto; and provided, further that Owner shall be given notice as to the identity of said authorized signatories. (iii) Withdrawals from the Depository Account for each Facility shall be made first to pay to Owner the management fee due with respect to such Facility as set forth in Exhibit F (the "Regent Management Fees"), which Regent Management Fees shall be deposited in an account established by Owner in Seattle, Washington (the "Regent Account") and thereafter to pay the expenses of operating such Facility, including payroll and related state and federal payroll tax obligations (the "Daily Operating Expenses") and rent and debt service payments to the lenders and landlords set forth in Exhibit G and in the amounts set forth in Exhibit G as the same may be amended from time to time to reflect changes in such rent and debt service payments or in the amounts otherwise specified by Owner to Manager in writing from time to time (the "Property Expenses"). Exhibit G shall also reflect when the rent or debt service payment is due under the terms of the applicable lease or loan documents and any available grace period. The Daily Operating Expenses and the Property Expenses shall be paid by Manager in such order of priority as Manager deems appropriate from time to time to the operation of such Facility, provided however, Daily Operating Expenses and the Property Expenses shall be paid by no later than their due date or, if applicable, before the expiration of any applicable grace period in which payment may be made prior to the occurrence of a default under the terms of the applicable lease, loan agreement, contract, agreement or purchasing arrangement, unless resulting from the failure of Owner to provide the Working Capital Funds (as defined in Section 5 I(h)(v) below) or Management Fee Funds (as defined in Section I(h)(v) below) as and when due in accordance with Section I(h)(v) below. Manager shall make any rent and debt service payments which are made by it by wire transfer in accordance with wiring instructions provided by Owner to Manager. (iv) Any excess funds in the Depository Account for a Facility, after establishing the working capital reserves required by Section VIII(c), shall be distributed by Manager to Owner. (v) In the event (A) at any time Manager determines in the exercise of its reasonable judgment that there are insufficient funds in the Depository Account or in the Other Authorized Accounts (as hereinafter defined), in the case of a Designated Facility (as hereinafter defined), to maintain the minimum bank balance required by Section VIII(c) and pay all Daily Operating Expenses and Property Expenses due and payable in the following thirty (30) day period (the "Working Capital Funds") or (B) in the event there are at any time insufficient funds available in the Regent Account to pay Manager's Base Management Fee (as defined below) and, if applicable, Incentive Management Fee (as defined below) (the "Management Fee Funds"), no less than three (3) days prior to the date on which Manager determines that Working Capital Funds or Management Fee Funds, as applicable, are required, Manager shall provide Owner with a verbal demand therefor followed by a written confirmation of such demand, which written confirmation shall specify in reasonable detail the amount needed and the reason therefor and, Owner shall, within five (5) business days of its receipt of such written demand by Manager, deposit in the applicable Depository Account or the Regent Account, as applicable, the amount so demanded by Manager. For purposes hereof, the Other Authorized Accounts shall be defined as those accounts designated in writing by Owner to Manager from which Manager is authorized to draw funds in order to meet the working capital needs of certain other Facilities designated in writing by Owner to Manager (the "Designated Facilities" or individually a "Designated Facility"), provided the designation shall not be effective unless the same is accompanied by either (i) an opinion of Owner's outside legal counsel confirming that it has reviewed all necessary legal documents and determined that Owner is authorized to lend money from the Other Authorized Accounts for the benefit of the Designated Facilities or (ii) a certificate, in form and substance reasonably acceptable to Manager signed by Owner's Representative to the effect that Owner is authorized to lend money from the Other Authorized Accounts for the benefit of the Designated Facilities, along with appropriate supporting documentation with respect to the statements contained in such certificate, which documentation shall be in form and substance acceptable to Manager in the exercise of its reasonable discretion. Owner acknowledges and agrees that in no event will Manager have any obligation to pay any Daily Operating Expenses or the Regent Management Fee other than from funds available in the applicable Depository Account, including funds deposited therein by Manager after withdrawing funds from the Other Authorized Accounts, if applicable, or to provide its own funds to satisfy or support in any manner the working capital needs of the Facilities or to pay its own Base 6 Management Fee or, if applicable, Incentive Management Fee, and that (i) such working capital is to be provided solely from the cash receipt of the Facilities, if applicable, withdrawals from the Other Authorized Accounts and the working capital provided by Owner pursuant to this Section I(h) and (ii) such management fees are to be paid from the funds deposited by Manager in payment of the Regent Management Fees and by Owner pursuant to this Section I(h)(v), if applicable, in the Regent Account. (vi) Owner acknowledges and agrees that in the course of its operation of the Facilities Manager may incur common expenses benefiting all of the facilities owned and/or operated by Manager, including the Facilities (the "Common Expenses"). Such Common Expenses shall be included in the Daily Operating Expenses of the Facilities and may be paid from the cash in the applicable Depository Account(s) if (i) the same relate to the direct cost of corporate, regional or divisional meetings or training sessions held by Manager and in which the administrative personnel of the Facilities have participated ("Meeting and Training Common Expenses"), (ii) the same are included within the approved annual capital or operating budgets ("Budgeted Common Expenses") or (iii) the same are not Meeting and Training Common Expenses or Budgeted Common Expenses (the "Other Common Expenses") but are approved by Owner, which approval shall not be unreasonably withheld, after Manager has provided Owner with a specification setting forth in reasonable detail the nature of such Other Common Expenses. (i) Personnel: All of the personnel of the Facilities, including the community directors, business managers and the Wellness Directors, if applicable, shall be the employees of Owner and the salaries, bonuses, commissions, state and federal payroll and social security tax obligations and benefits paid to or on behalf of such employees shall be deemed to be included in the Daily Operating Expenses of the Facilities and thus shall be paid from the Facilities Depository Account, subject to the limitation set forth in Section II with respect to the payment of Insurance Costs (as defined in Section II). Notwithstanding the foregoing, Manager shall recruit, employ, train, promote, direct, discipline, suspend and discharge the personnel of the Facilities; establish salary levels, personnel policies and employee benefits; and establish employee performance standards, all as needed during the term of this Agreement to ensure the efficient operation of all departments within and services offered by the Facilities. (j) Supplies and Equipment: Manager shall purchase supplies and non-capital equipment needed to operate the Facilities. In purchasing said supplies and equipment, if possible without Manager incurring personal liability for the cost of such supplies and equipment, Manager shall take advantage of any national or group purchasing agreements to which Manager may be a party. 7 (k) Legal Proceedings: Manager shall, with the assistance and at the direction of Owner and its legal counsel, take any and all appropriate steps to protect and/or assist in litigating to a final decision in an appropriate court or forum any such third party claim of violation, order, rule or regulation affecting the Facilities and its operation or any claim, loss, violation or cause of action relating to the Facilities. All of the costs incurred in any litigation of third party claims respecting the Facilities, including the reasonable legal fees and expenses of legal counsel retained to defend Owner and/or Owner and Manager jointly and/or any landlord or lender, shall be included in the Daily Operating Expenses and shall be reimbursed from the funds in the Depository Account of the applicable Facility established pursuant to Section 1(h) if previously paid by Owner or shall be paid from the funds in the Depository Account of the applicable Facility if not previously paid by Owner. Nothing herein shall be construed as precluding Owner from seeking to recover from Manager the fees and expenses described in this Section I(k) to the extent Manager is otherwise liable therefore under the default or indemnification provisions of this Agreement. (l) Budgets: ------- (i) The Facilities shall be operated on a fiscal year of January 1 through December 31, other than the Villa Serra facility which shall be operated on a fiscal year of July 1 through June 30 (ii) Owner and Manager shall agree prior to the Commencement Date (as hereinafter defined) on an initial operating budget and capital budget for the period from the Commencement Date through December 31, 2002. (iii) Prior to the start of each subsequent fiscal year, Manager shall prepare and submit to Owner for its review and approval, which approval shall not be unreasonably withheld, an annual operating budget, an annual capital expenditure budget, an annual operating plan, an annual marketing plan and an annual cash flow projection for each of the Facilities. The annual operating budget and capital expenditure budget shall be prepared using the format set forth in Exhibit H. In the event a budget for a Facility has not been agreed upon by the beginning of the fiscal year for any reason whatsoever including Owner's or Manager's unreasonable refusal to approve the same, Manager sole remedy shall be that the operating results of the prior fiscal year for such Facility plus 5% shall serve as the budget for the following fiscal year for such Facility unless and until the new budget is agreed upon, it being understood and agreed that the refusal by Owner or Manager to approve a budget shall not be deemed to be an Event of Default hereunder. (m) Collection of Accounts: Manager shall issue bills for goods and services furnished by the Facilities during the term of this Agreement and shall attempt to collect the balances reflected on such bills, including, but not limited to, enforcing the rights of Owner and 8 the Facilities as creditor under any contract or in connection with the rendering of any services; provided, however, that any expenses incurred by Manager in so doing with respect to any Facility shall be included in the Daily Operating Expenses of such Facility and shall be payable out of funds deposited in the Depository Account of such Facility described in Section I(h). In addition, upon request by Owner, Manager shall issue bills and collect accounts and monies owed for goods and services furnished by the Facilities prior to the Commencement Date. Regardless of any standard of performance set forth in this Agreement, Owner acknowledges and agrees that there can be no assurances that Manager will be able to collect any or all of the Facilities' accounts receivable. (n) Contracts. Manager shall negotiate and enter into any and all contracts necessary from time to time in connection with the day to day operation of the Facilities including, but not limited to, contracts for water, electricity, natural gas, telephone, sewer, cleaning, trash removal, pest control and extermination, cable, elevator and boiler maintenance, pharmacy services, therapy services and other appropriate ancillary services and contracts for the provision of various services which are designed to identify potential cost savings to the Facilities, such as utility and tax bill review services; provided that such contracts can be terminated on no more than 90 days notice. Any contract which cannot be terminated on no more than 90 days notice shall require the approval of Owner before the same may be executed by Manager, which approval shall not be unreasonably withheld. Manager shall have the right to contract with entities which are owned by or under common ownership with Manager provided the terms of any such contracts are no less favorable than the terms then offered by unrelated third parties for the same or similar goods or services. All contracts shall be entered into in the name of Owner or the Facilities. (o) Manager's and Owner's Representative: Manager hereby appoints Frank Ruffo (the "Manager's Representative") as the person employed by Manager with whom Owner shall interact and upon whose decisions Owner shall be authorized to rely, and Owner hereby appoints Walt Bowen (the "Owner's Representative") as the person employed by Owner with whom Manager shall interact and upon whose decisions Manager shall be authorized to rely, with respect to the performance by Manager of its duties hereunder. Manager shall have the right from time to time during the term of this Agreement to replace the Manager's Representative upon written notice to Owner designating the replacement Manager's Representative and Owner shall have the right from time to time during the term of this Agreement to replace the Owner's Representative upon written notice to Manager designating the replacement Owner's Representative. Nothing herein shall be construed as imposing any personal liability on the Manager's Representative or Owner's Representative with respect to the acts or omissions of Manager or Owner, respectively, under this Agreement. 9 II. Insurance: Owner shall, at its sole cost and expense, arrange for and maintain all necessary and proper property insurance covering the Facilities, the furniture, fixtures, and equipment situated thereon, and all necessary and proper professional and commercial general liability insurance for Owner's and Manager's protection. Manager shall, at its sole cost and expense, maintain commercial general liability insurance for its operations. All such liability insurance policies shall include coverage for liability to each party's respective employees involved in the operation of the Facilities and arising from any improper employment practices (except in the case of Manager where Owner acknowledges no such coverage shall be provided by Manager) and employee crime and theft coverage. All such policies of liability insurance shall name the other party as, as well as any landlord or lender identified by Owner to Manager in writing as additional insureds thereunder (except in the case of Manager's directors and officers insurance and employee crime insurance as to which Owner acknowledges Manager has advised it no such additional insureds shall be named). In addition, each party shall provide all employee health and worker's compensation insurance required for their respective employees. Each party shall be responsible for all deductibles due with respect to any insurance maintained by it and for any uninsured losses of any nature whether arising from an failure by the party to maintain insurance or from the loss not being covered under the terms of any policy of insurance maintained by the party. All premiums, claims and deductibles related to the Owner's insurance covered by this Section II (the "Insurance Costs") shall, at Owner's request, be paid by Manager from the applicable Facility's Depository Account provided (i) Owner has provided Manager in writing with reasonable details concerning the amount to be paid and the purpose of such payment, (ii) there are sufficient funds, whether in the form of cash receipts of the Facilities or working capital funds deposited by Owner, in the Depository Account to enable Manager to pay the same from the Depository Account, (iii) all other Daily Operating Expenses and the Regent Management Fee which are then due and payable have been paid from the Depository Account as of the time when Owner requests payment of the premiums, deductibles and/or claims from the Depository Account, (iv) Manager's Base Management Fee and, if applicable, Incentive Management Fee which are then due and payable have been paid from the Regent Account as of the time when Owner requests payment of the premiums, deductibles and/or claims from the Depository Account and (v) Owner in not otherwise in default of its obligations under this Agreement. III. Proprietary Interest and Noncompetition: --------------------------------------- a. The systems, methods, procedures and controls employed by Manager and Owner and any written materials, computer software or policies developed by Manager and Owner to document the same are to remain the property of Manager and Owner respectively and are not, at any time during or after the term of this Agreement, to be utilized, distributed, copied or otherwise employed or acquired, except as authorized by the respective owner thereof, provided, however, that upon request of Owner, Manager shall negotiate in good faith the terms and 10 conditions upon which Owner may be permitted by Manager to use such systems, methods, procedures, controls, materials, software or brochures containing Manager's name or logo for a limited transitional period following the termination of this Agreement, which terms and conditions shall be satisfactory to both Manager and Owner in their respective discretion. b. With respect to each of the Facilities, from the Commencement Date until the earlier to occur of (i) the termination of this Agreement by Manager as a result of the occurrence of an Owner Event of Default or (ii) the date on which Owner, voluntarily or involuntarily, losses possession of such Facility or (iii) three years after the expiration of the term of this Agreement as to such Facility for any reason whatsoever other than the reasons set forth in clause (ii), Manager shall not solicit, discuss, negotiate or enter into any agreement or arrangement by which the Manager would obtain any substantial control of the ownership or management of such Facility from any third party having an interest in such Facility superior to the Owner's. The restrictions in the preceding sentence shall be applicable, without limitation, to any purchase, lease, license, franchise, partnership, joint venture or other means, direct or indirect by which Manager or any entity or person controlling, controlled by or under common control with Manager obtains substantial ownership or control of one or more of the Facilities; provided, however, nothing herein shall be construed to prohibit the acquisition by an entity under common control with Manager of the Facility in Folsom, California and of one of the Facilities in Scottsdale, Arizona. IV. Term of Agreement and Termination Payments: ------------------------------------------ (a) The Term of this Agreement shall commence on January 1, 2002 (the "Commencement Date") provided as of that date, in the case of the Facilities located in California, Manager has been added to the license to operate the Facilities (the "Licensure Condition"). In the event the Licensure Condition has not been satisfied as of the Commencement Date as to any or all of the Facilities located in California, then as to the Facilities with respect to which the Licensure Condition has not been satisfied, Manager and Owner shall enter into an Accounting Services and Consulting Agreement in the form approved by Manager and Owner and Manager shall provide the services reflected therein until the Licensure Condition is satisfied as to such Facilities; provided, however, if, as to any or all of the California Facilities, the Licensure Condition has not been satisfied by June 30, 2002, then this Agreement shall be null and void and of no further force and effect with respect to any of the California Facilities for which the Licensure Condition has not been satisfied and neither Owner nor Manager shall have any further rights hereunder with respect to such California Facilities but such termination shall not affect Owner's rights or Manager's obligations under the Accounting Services and Consulting Agreement executed with respect to such California Facilities on the Commencement Date. 11 (b) The Term of this Agreement shall terminate upon the first to occur of the following: (i) the occurrence of an Event of Default hereunder and the exercise by Manager or Owner, as applicable, of its right to terminate this Agreement as a result thereof; or (ii) on written notice from Owner to Manager delivered within the last ninety days of the third year of the term of this Agreement (the "Termination Period") terminating this Agreement as of the end of the third (3rd) year of the term of this Agreement (the "Termination Notice"); provided, however, if the Termination Notice is not delivered by Owner within the Termination Period, then this Agreement shall automatically renew for successive one year terms, subject to Owner's right to terminate the same on no less than ninety (90) days written notice to Manager; or (iii) on no less than ninety (90) days written notice from either Owner or Manager as to all, but not less than all, of the Facilities; or (iv) with respect to one or more Facilities, by Owner or Manager on no less than ninety (90) days prior written notice in the event that at any time during the term of this Agreement Owner will no longer own or control such Facilities whether resulting from a sale or other reasons, whether voluntary or involuntary; or (v) with respect to one of more of the Facilities, by Owner in the event it is unable on or before February 28, 2002 to secure any consents of its lenders, landlords or joint venture partners which may be required for it to enter into this Agreement with Manager (the "Third Party Consents"); provided, however, in the event of the termination of this Agreement by Owner pursuant to this Section IV(b)(v), effective with the termination of this Agreement as to the affected Facility, Owner and Manager shall enter into an Accounting Services Agreement with respect to such Facility unless prohibited by such lender, landlord or joint venture partner; and provided, further, that Owner shall be solely responsible for any and all costs of securing such Third Party Consents, including any consent fees or other consideration required by such landlords, lenders or joint venture partners as a condition to granting their consent. For the purposes of Sections IV, V, and VI of this Agreement, any termination due to an Owner Event of Default or a Manager Event of Default or by Owner pursuant to Section IV(b)(v) shall be a partial termination as if there were a separate Agreement for each Facility if the Event of Default or failure to secure the necessary Third Party Consent relates to less than all of the Facilities. In such event, Owner's or Manager's required termination payments shall only be with respect to the Facilities covered by the partial termination. 12 (c) In the event of the termination of this Agreement prior to the end of the third year of this Agreement, the following payments shall be due and owing from Manager or Owner, as applicable: (i) In the event of the termination of this Agreement by Owner as a result of the occurrence of a Manager Event of Default, Manager shall pay to Owner an amount equal to one month's base management fee concurrently with the termination of this Agreement. (ii) In the event of the termination of this Agreement during the first year either by Manager as a result of the occurrence of an Owner Event of Default of the Term or by Owner pursuant to Section IV(b)(iii) other than with respect to the Bowen Facilities (as hereinafter defined), Owner shall pay to Manager an amount equal to the sum of (A) the difference between the aggregate Base Management Fee due during the first year of the Term and the Base Management Fee actually paid to Manager to the date of such termination and (B) the difference between the Annualized Incentive Management Fee (as hereinafter defined) and the Incentive Management Fee actually paid to the date of termination. For purposes hereof, the Annualized Incentive Management Fee shall mean the Incentive Management Fee paid to the date of termination divided by the number of months for which the payment has been made and multiplied by twelve. For purposes hereof, the Bowen Facilities shall mean the Facilities located in Eugene, Oregon, Santa Cruz, California, Scottsdale, Arizona (Desert Flower), Portland, Oregon and Redmond, Washington. (iii) In the event of the termination of this Agreement at any time after the first year of the Term either by Manager as a result of the occurrence of an Owner Event of Default or by Owner pursuant to Section IV(b)(iii), Owner shall pay to Manager an amount equal to the sum of (A) then applicable Base Management Fee multiplied by three and (B) the Annualized Incentive Management Fee for the year in which the termination occurs, divided by twelve and multiplied by three. (iv) In the event of the termination of this Agreement by Manager pursuant to Section IV(b)(iii) no payment shall be due from Manager to Owner upon termination and in the event of the termination of this Agreement by Owner pursuant to Section IV(b)(v) no payment shall be due from Owner to Manager upon termination. (v) Examples of the calculation of the termination fees due pursuant to this Section IV(c) are set forth in Exhibit I. (d) In the event of the termination of this Agreement by Owner or Manager in accordance with the terms hereof, (A) no such termination shall be effective until all amounts due and owing from one party to the other in accordance with the terms of this Agreement, 13 including the monetary damages specifically provided for in Sections VI(a) and (b), but specifically excluding any other damages alleged to have been suffered by a party as a result of the termination of this Agreement after the occurrence of an Event of Default, have been paid in full and (B) Manager shall cooperate with Owner or its designee, at no cost to Manager and without the assumption of any further liability by Manager other than the liability imposed on Manager under this Agreement, in an orderly transition of operational responsibility for the affected Facility or Facilities to Owner or its designee subject to the limitation set forth in this Section IV with respect to Owner's obligation to remove Manager from any affected Facility's license before such termination and transfer are effective. (e) Notwithstanding the foregoing, in the event that Manager is named on the license to operate the affected Facility or Facilities at the time of the termination of this Agreement with respect thereto, then this Agreement shall remain in effect as to such Facility or Facilities until such time as Owner is able to provide Manager with evidence that Manager has been removed from the license(s). V. Default: Either party may terminate this Agreement, as specified in this Section V, in the event of a default ("Event of Default") by the other party. (a) With respect to Manager, it shall be an "Event of Default" hereunder: (i) If Manager shall fail to keep, observe or perform any material agreement, term or provision of this Agreement, and such default shall continue for a period of forty five (45) days (subject to the force majeure provisions below) after notice thereof shall have been given to Manager by Owner, which notice shall specify in detail the event or events constituting the default; (ii) If Manager shall (A) apply for or consent to the appointment of a receiver, trustee or liquidator of Manager of all or a substantial part of its assets, (B) file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, (C) make a general assignment for the benefit of creditors, or (D) file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law, or if an order judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Manager, a bankrupt or insolvent or approving a petition seeking reorganization of Manager, or appointing a receiver, trustee or liquidator of Manager, of all or a substantial part of its assets; (iii) If, at anytime after the Protected Period, (A) proceedings are commenced which threaten to revoke, rescind, terminate or not renew the licensure or certification of the Facilities and Manager is unable to develop a plan of correction with respect 14 thereto which is acceptable to the applicable state or federal authorities within the applicable cure period provided by such authorities or (B) a ban on admissions lasting more than ninety (90) days is imposed against the Facilities; or (iv) If at the end of any year, the actual "Net Operating Income/Loss Before Property" less "Property Insurance" and "Liability Insurance" for any Facility as reflected on the financial statements of the Facilities prepared by Manager is more than ten percent (10%) less than the amount for "Net Operating Income/Loss Before Property" less "Property Insurance" and "Liability Insurance" as reflected in the annual approved operating budget for such Facility the same shall be an Event of Default but only with respect to the affected Facility . (b) With respect to Owner, it shall be an Event of Default hereunder: (i) If Owner shall fail to make or cause to be made any payment to Manager required to be made hereunder (other than its working capital obligation which is addressed in clause (iii)) and such failure shall continue for a period of thirty (30) days after notice, which notice shall specify the payment or payments which Owner has failed to make; (ii) If Owner shall fail to keep, observe or perform any material agreement, term or provision of this Agreement and such default shall continue for a period of forty five (45) days after notice (subject to the force majeure provisions below), which notice shall specify in detail the event or events constituting the default thereof by Manager to Owner; (iii) If Owner shall fail to provide necessary working capital upon demand by Manager with respect to the payment of the Daily Operating Expenses or the Base Management Fee or, if applicable, Incentive Management Fee due to Manager within the time provided in Section I(h), and such failure continues uncured for five (5) business days after Manager gives Owner notice of such failure; (iv) If Owner shall fail to make payments, or keep any covenants, owing to any third party which are beyond the control of Manager to make or keep (which for purposes hereof shall include any covenants by which Owner may be bound as of the Commencement Date (the "Pre-Existing Covenants") or to which Owner may agree to be bound after the Commencement Date without the prior approval of Manager (the "Unapproved Covenants")), and which would cause Owner to lose possession of the Facilities or any personal property required to operate the Facilities in the normal course; provided that Manager shall give Owner prompt notice of any such payment and failure to pay of which Manager has knowledge; (v) If Owner shall be dissolved or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Owner or of all or a substantial part of its 15 assets, file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, make a general assignment for the benefit of creditors, file a petition or an answer seeking reorganization of arrangement with creditors or taking advantage of any insolvency law, or if an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Owner a bankrupt or insolvent or approving a petition seeking reorganization of Owner or appointing a receiver, trustee or liquidator of Owner of all or a substantial part of its assets; or (vi) If Owner or any of its principal officers is convicted or a crime that materially affects the operation or regulation of the Facilities. VI. Remedies and Obligations Upon Default: ------------------------------------- (a) If any Event of Default by Owner shall occur, Manager may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement, and neither party shall have any further obligations whatsoever under this Agreement except for Manager's right to receive damages from Owner in the amount specified in Section IV and except any settlement and payment obligations and other obligations that by their nature survive termination of this Agreement. (b) If any Event of Default by Manager shall occur, Owner may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement and the exclusive right to possession of the Facilities granted to Manager hereunder, and neither party shall have any further obligation whatsoever under this Agreement; except for Owner's right to receive payment of liquidated damages from Manager in an amount specified in Section IV. VII. Owner's Inspection: During the term hereof, Owner may enter and inspect the Facilities at any time provided Owner coordinates such inspections with the on site administrative personnel at the Facilities in order to minimize any disruption of Manager's day to day operations of the Facilities and to ensure that such inspections do not violate resident rights to privacy under state or federal resident rights laws. During such inspections, Owner may inspect and/or audit all books and records pertaining to the operation of the Facilities. In addition, Owner shall have the right to conduct telephonic or personal interviews with the Community Directors and/or with any of Manager's regional personnel involved in the operation of the Facilities with respect to any matters related to the operation thereof subject to the same duty to minimize the disruption to Manager's operations resulting from such interviews. In no event will Owner have the right as part of such inspections or otherwise to provide directions to the employees of the Facilities, it being understood and agreed that all such directions shall come from Manager for so long as this Agreement is in effect and in the event of any disputes between 16 Owner and Manager with respect to the management of the Facilities the same shall be resolved directly between Owner and Manager. VIII. Operations of the Facilities: ---------------------------- (a) Standard of Performance: In performing its obligations under this Agreement, Manager shall manage the Facilities as licensed assisted living facilities in accordance with the terms of this Agreement, including, but not limited to, the limitations set forth herein on operating and capital expenditures, and the policies adopted by, and resources available to, the Facilities; provided, however, that regardless of the standard of performance imposed by this Section VIII(a), Manager shall have no liability in the event the operation of the Facilities fail to comply with the Pre-Existing Covenants or the Unapproved Covenants. (b) Force Majeure: Neither party will be deemed to be in violation of this Management Agreement if it is prevented from performing any of its obligations hereunder for any reason beyond its control, including, without limitation, strikes, shortages, acts of terrorism, war, acts of God, (but excluding lack of the party's own financial resources), or any statute, regulation or rule of federal, state or local government or agency thereof or, in the case of Manager, unreasonable interference by Owner with Manager's performance of its duties hereunder or in the case of Owner, unreasonable interference by Manager with Owner's performance of its duties hereunder. (c) Minimum Bank Balances: During the Term hereof, Owner and Manager shall attempt to agree on the necessary minimum cash balance to be maintained in the Depository Account for each Facility but if they are unable to so agree such minimum cash balance shall upon demand of Manager be required to be equal to the amount reflected in Exhibit K opposite the name of such Facility and Owner shall upon demand in accordance with Section I(h) provide Manager with any working capital which may be needed to enable Manager to maintain such minimum cash balances. In addition, during the Term hereof, Owner shall at all times maintain a minimum balance in the Regent Account of $80,000. IX. Management Fee: -------------- (a) In consideration for the provision of the services contemplated in this Agreement, Manager shall receive a management fee of $8,000 per month per Facility for each of the Facilities other than the West Covina and Merced Facilities as to which the fee shall be $2,000 per month per Facility until Owner is licensed to operate the West Covina Facility, which is currently anticipated to be on or about March 1, 2002, at which time the fee 17 shall be increased to $8,000 per month for the West Covina Facility and until Owner is licensed to operate the Merced Facility, which is currently anticipated to be on or about March 1, 2002, at which time the fee shall be increased to $8,000 per month for the Merced Facility (the "Base Management Fee") payable in advance on the first day of each month during the term of this Agreement except for the month of January 2002, one third of which shall be paid on the earlier to occur of the first day of February, March and April of 2002 or the date of the termination of this Agreement. The Base Management Fee payable with respect to all of the Facilities shall be increased by 5% on the second anniversary of the Commencement Date. (b) In addition, to the Base Management Fee, with respect to certain of the Facilities identified in Section IX(c)(i) below (the "Incentive Fee Facilities") Manager shall be entitled to receive an additional fee (the "Incentive Management Fee) equal to the Applicable Percentage of the Excess Cash Flow of the Incentive Fee Facilities. The Incentive Management Fee shall be due and payable quarterly in arrears. (c) For purposes of calculating the Incentive Management Fee, the following definitions shall apply: (i) Applicable Percentage shall mean ten (10%) for the Eugene, OR, Santa Cruz, CA, Scottsdale, AZ, Portland, OR, Boise, ID (West Wind), Boise, ID (Willow Park), Modesto, CA, West Covina and Merced Facilities. Applicable Percentage shall mean two and one half (2.5%) percent for the Redmond, CA, San Antonio, TX and Clovis, CA Facilities. (ii) Applicable Period shall mean a three month period with the first Applicable Period being the three month period commencing on the Commencement Date and ending on the last day of the third month thereafter. (iii) Quarterly Cash Flow shall mean the Cash Flow of each of the Incentive Fee Facilities for the Applicable Period. (iii) Base Cash Flow shall mean the Cash Flow of each of the Incentive Fee Facilities during December, 2001 multiplied by three. (iv) Deficit Cash Flow shall mean the amount by which the Quarterly Cash Flow is less than the Base Cash Flow. (v) Deficit Payment shall mean an amount equal to the Deficit Cash Flow multiplied by the Applicable Percentage. (vi) Excess Cash Flow shall mean the amount by which the Quarterly Cash Flow exceeds the Base Cash Flow. 18 (vi) Cash Flow (A) prior to the Commencement Date shall mean the amount reflected on the Owner's financial statements under the caption "Net Income From Rental Operations" after adding back the amount reflected on the Owner's financial statements under the caption "Insurance" and any non-recurring one time charges and/or credits reflected in the Owner's December, 2001 financial statements and (B) after the Commencement Date shall mean the amount reflected on Manager's financial statements under the caption "Net Operating Income/Loss Before Property" after adding back the amount reflected on the Manager's financial statements under the captions "Property Insurance" and "Liability Insurance." (d) Within thirty (30) days after the end Applicable Period, Manager shall submit to Owner a calculation of the Incentive Management Fee due for the Applicable Period with respect to each of the Incentive Fee Facilities (the "Incentive Management Fee Calculation"). If the Incentive Management Fee Calculation shows with respect to any of the Incentive Fee Facilities that there was Excess Cash Flow during the Applicable Period, then the Incentive Management Fee due with respect to such Incentive Fee Facilities shall be paid by Manager to itself from the funds in the Regent Account or from the funds deposited therein by Owner pursuant to Section I(h) if the funds in the Regent Account are not sufficient to enable the Incentive Management Fee to be paid when due. If the Incentive Management Fee Calculation shows that there was not Excess Cash Flow during the Applicable Period with respect to any of the Incentive Fee Facilities, then no Incentive Management Fee shall be due and payable by Owner to Manager for Applicable Period with respect to such Incentive Fee Facilities. If the Incentive Management Fee Calculation shows Deficit Cash Flow during the Applicable Period with respect to any of the Incentive Fee Facilities, then a Deficit Payment shall be due from Manager to Owner with respect to the affected Incentive Fee Facility or Facilities but in no event shall the aggregate Deficit Payments from Manager to Owner with respect to any Incentive Fee Facility in any calendar year of the Term exceed the aggregate Incentive Management Fee payments paid to Manager during such year for such Incentive Fee Facility (e) If the services of Manager commence or terminate (for any reason, including those set forth in Paragraph V) other than on the first day of the month, the revenues upon which the fee is calculated shall be prorated in proportion to the number of days for which services are actually rendered. (f) The Base Management Fee and the Incentive Management Fee provided for herein shall be disbursed by Manager to itself out of the Regent Account in accordance with the provisions of I(H). (g) Any amounts due from Owner to Manager or Manager to Owner pursuant to this Section IX which are not paid when due shall bear interest at the annual rate equal to the Prime 19 Rate as set forth in the Money Rates Section of The Wall Street Journal (as the same may change from time to time) plus 5% from the date due to the date paid in full. (h) Examples of the calculation of the Incentive Management Fee due to Manager and Deficit Payments due from Manager are set forth in Exhibit J. X. Assignment: Except as otherwise provided in Section I(f), this Agreement shall not be assigned by either party without the prior written consent of the other party; provided, however, Manager shall have the right to assign this Agreement to an entity which is owned or controlled by Manager or its principal shareholder, Daniel R. Baty, without the prior written consent of Owner. XI. Notices: All notices required or permitted hereunder shall be given in writing by hand delivery, by registered or certified mail, postage prepaid, by overnight delivery or by facsimile transmission (with receipt confirmed with the recipient). Notice shall be delivered or mailed to the parties at the following addresses or at such other places as either party shall designate in writing. All notices shall be deemed duly given when delivery is received or refused by a party if delivered by hand, three (3) business days after being deposited in the mails if sent by registered or certified mail, on the next business day if sent by overnight delivery and on confirmed receipt, if sent by facsimile transmission. To Manager: Emeritus Corporation 3131 Elliott Avenue Suite 500 Seattle, WA 98121 Facsimile: 206-301-4500 Attn: Raymond R. Brandstrom, Vice President -Finance To Owner: Regent Assisted Living, Inc. Bank of America Building 121 SW Morrison Suite 100 Portland, OR 97201 Facsimile: 503-274-4685 Attn: Walt Bowen, President XII. Relationship of the Parties: The relationship of the parties shall be that of principal and independent contractor and all acts performed by Manager during the term hereof as Manager of the Facilities shall be deemed to be performed in its capacity as an independent contractor. Nothing contained in this Agreement is intended to or shall be construed to give rise 20 to or create a partnership or joint venture or lease between Owner, its successors and assigns on the one hand, and Manager, its successors and assigns on the other hand. Notwithstanding the foregoing, Manager shall be authorized to execute certain documents in the course of the day to day operation of the Facilities as the agent of Owner, such as credit applications for supplies, banking resolutions for the Depository Account, utility deposit forms, etc. XIII. Indemnification: Manager shall indemnify, defend and hold harmless Owner from any loss incurred by or damage to Owner where such loss or damage results from the negligence or willful misconduct of Manager in performing its obligations under this Agreement or from a breach of this Agreement by Manager; provided, however, Owner specifically acknowledges and agrees that nothing in this Section XIII shall be construed as imposing any liability on Manager for any insurance deductibles for which Owner shall be solely responsible under Section II hereof. Owner shall indemnify, defend and hold Manager harmless from any loss incurred by or damage to Manager where such loss or damage results from the negligence or willful misconduct of Owner in performing its obligations under the Agreement, from a breach of this Agreement by Owner, from Owner's lack of authority to enter into this Agreement or in the event any lease, loan, limited liability company operating agreement or other document or instrument to which Owner (or, in the case of third party management agreements, Owner's principal) may be a party prohibits Manager from fulfilling any of the obligations imposed on Manager or from exercising any of the rights granted to Manager hereunder. XIV. Entire Agreement: This Agreement contains the entire agreement between the parties relating to the operation of the Facilities and shall be binding upon and inure to the benefit of their successors and assigns. This Agreement may not be modified or amended except by written instrument signed by both of the parties hereto. XV. Captions: The captions used herein are for convenience of reference only and shall not be construed in any manner to limit or modify any of the terms hereof. XVI. Arbitration: In the event of any dispute among the parties regarding the Facilities or this Agreement, the parties agree to submit the same to resolution before an arbitrator, in the case of disputes alleged to involve less than $250,000, and before a panel of three arbitrators, in the case of disputes alleged to involve $250,000 or more, selected by mutual agreement of the parties or, if the parties are unable to agree on an arbitrator or panel of arbitrators within a period of twenty (20) days, selected by a court of competent jurisdiction. Such arbitration shall be held in accordance with the rules of the American Arbitration Association and the decision of the arbitrator shall be final and binding on the parties and may be enforced by a court of competent jurisdiction.. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in reasonable detail in said notice the nature of the dispute; provided, however, in the event that notwithstanding the terms hereof, a party commences legal 21 proceedings, rather than arbitration proceedings, before a court of competent jurisdiction, the other party shall be deemed to have forfeited its right to have such dispute determined by binding arbitration in accordance with this Section XVI unless within thirty (30) days after being served with the first pleading in such legal proceedings, it files a motion to dismiss such legal proceedings and serves on the other party notice of its intent to submit such dispute to arbitration. Any party who fails to submit to binding arbitration following a lawful demand by the other party shall bear all costs and expenses, including reasonable attorneys fees (including those incurred in any trial, bankruptcy proceeding, appeal or review) incurred by the other party in obtaining a stay of any pending judicial proceeding concerning a dispute which by the terms of this Agreement has been properly submitted to mandatory arbitration and/or in compelling arbitration of any dispute. All disputes under this Section XVI shall be determined in the City of Portland, Oregon, if the arbitration is initiated by Owner and in the City of Seattle, Washington, if the arbitration is initiated by Manager, by a single arbitrator. All arbitrators shall be a licensed attorneys having at least ten (10) years experience, with at least five (5) years experience with assisted living facility sale, lease or management transactions. The award in such arbitration may be enforced on the application of either party by the order of judgment of a court of competent jurisdiction. The prevailing party shall be entitled to recover the reasonable fees and expenses of its attorneys and experts. The arbitrator(s) shall resolve all disputes in accordance with the substantive law of the state of Oregon. The arbitrator(s) shall have no authority or jurisdiction to award any damages or any other remedies beyond those which could have been awarded in a court of law if the parties had litigated the claims instead of arbitrating them. The parties shall not assert any claim for punitive damages . The Federal Arbitration Act, Title 9 of the United States Code, is applicable to this transaction and shall be controlling in any judicial proceedings and in the arbitration itself as to issues of arbitrability and procedure. Nothing herein shall preclude a party from curing either their own or the other party's alleged default which is, or could be, the subject of an arbitration proceeding under this Section XVI or from seeking equitable relief which the arbitrator or panel of arbitrators is not empowered to award, such as an injunction, receivership, attachment or garnishment. XVII. Severability: In the event one or more of the provisions contained in this Agreement is deemed to be invalid, illegal or unenforceable in any respect under applicable law, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be impaired thereby. XVIII. Cumulative; No Waiver: No right or remedy herein conferred upon or reserved to either of the parties hereto is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of an Event of Default hereunder. The failure of either party hereto to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as 22 provided in this Agreement shall not impair any such right or remedy or be construed as a waiver or relinquishment thereof with respect to subsequent defaults. Every right and remedy given by this Agreement to the parties hereof may be exercised from time to time and as often as may be deemed expedient by the parties thereto, as the case may be. XIX. Authorization for Agreement: The execution and performance of this Agreement by Owner and Manager have been duly authorized by all necessary laws, resolutions or corporate action, and this Agreement constitutes the valid and enforceable obligations of Owner and Manager in accordance with its terms. XX. Counterparts: This Agreement may be executed in any number of counterparts, each of which shall be an original, and each such counterpart shall together constitute but one and the same Agreement. XXI. Confidentiality: Throughout the Term of this Agreement and for a period of one (1) year after the expiration or earlier termination of this Agreement, each of Manager and Owner agrees to maintain the confidentiality of any proprietary information concerning the other or the Facilities to which they may gain access during the term of this Agreement and shall only disclose the same with the consent of the other party or as required by an order of a court of competent jurisdiction. XXII. Construction: Each of the parties acknowledges and agrees that it has participated in the drafting and negotiation of this Agreement. Accordingly, in the event of a dispute with respect to the interpretation or enforcement of the terms hereof, no provision shall be construed so as to favor or disfavor either party hereto. 23 IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed, as of the day and year first above written. REGENT ASSISTED LIVING, INC. By: /s/ Walter C. Bowen -------------------------------- Its: Chairman & CEO -------------------------------- EMERITUS CORPORATION By: /s/ Raymond R. Brandstrom -------------------------------- Its: Vice President of Finance -------------------------------- 24 EXHIBIT A DESCRIPTION OF THE FACILITIES, INCLUDING WHETHER OWNED, LEASED OR MANAGED BY REGENT 25 EXHIBIT B ACCOUNTING TRANSITION SERVICES 26 EXHIBIT C ADDITIONAL SPECIFIC REPORTING OBLIGATIONS BY FACILITY 27 EXHIBIT D FORM OF FINANCIAL STATEMENTS 28 EXHIBIT E FACILITY BANK ACCOUNT INFORMATION 29 EXHIBIT F REGENT MANAGEMENT FEES BY FACILITY 30 EXHIBIT G RENT AND DEBT SERVICE PAYMENTS BY FACILITY 31 EXHIBIT H FORM OF BUDGET 32 EXHIBIT I TERMINATION FEE CALCULATION EXAMPLES 33 EXHIBIT J INCENTIVE MANAGEMENT FEE AND DEFICIT PAYMENT CALCULATION EXAMPLES 34 EXHIBIT K MINIMUM BANK BALANCES 35 EX-99.1 9 exhibit99_1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Walter C. Bowen hereby certify, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of Regent Assisted Living, Inc. ("Regent"), that, to my knowledge, the Annual Report of Regent on form 10-K for the period ended December 31, 2001, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of Regent. Date: November 7, 2002 By: /s/ WALTER C. BOWEN -------------------------- ------------------------- Walter C. Bowen President, Chief Executive Officer and Chairman of the Board and Director EX-21 10 exhibit21.txt LIST OF SUBSIDIARIES Exhibit 21 Subsidiaries of Regent Assisted Living, Inc. - -------------------------------------------- As of December 31, 2001, the Company has six subsidiaries. The subsidiaries and the Company's respective ownership percentages of the issued and outstanding common stock are as follows: Percentage Subsidiary Ownership ---------- ---------- RAL, Inc. 100 % RAL/Bakersfield, Inc. 100 % RAL/Vacaville, Inc. 100 % RAL/Elk Grove, Inc. 100 % RAL/Santa Cruz, Inc. 100 % RAL/Clovis, Inc. 100 % EX-99.2 11 exhibit99_2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven L. Gish hereby certify, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of Regent Assisted Living, Inc. ("Regent"), that, to my knowledge, the Annual Report of Regent on form 10-K for the period ended December 31, 2001, fully complies with the requirements of the Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of Regent. Date: November 7, 2002 By: /s/ STEVEN L. GISH -------------------------- ------------------------- Steven L. Gish Chief Financial Officer, Treasurer, Secretary and Director -----END PRIVACY-ENHANCED MESSAGE-----