SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997 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 small business issuer in its charter)
Oregon 93-1171049
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
121 SW Morrison Street
Suite 1000
Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (503) 227-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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-KSB or any
amendment to this Form 10-KSB. _____
State issuer's revenues for its most recent fiscal year: $13,958,282
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 March 20, 1998: $9,146,150
State the number of shares of Common Stock outstanding at March 20, 1998:
4,633,000
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-KSB into
Document which incorporated
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Proxy Statement for 1998 Annual Part III
Meeting of Shareholders
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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Item of Form 10-KSB Page
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PART I
Item 1 - Description of Business 1
Item 2 - Description of Property 13
Item 3 - Legal Proceedings 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 4(a) - Executive Officers of the Registrant 17
PART II
Item 5 - Market for Common Stock
and Related Stockholder Matters 19
Item 6 - Management's Discussion and Analysis
or Plan of Operation 19
Item 7 - Financial Statements 27
Item 8 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 27
PART III
Item 9 - Directors, Executive Officers and Control Persons;
Compliance with Section 16(a) of the Exchange Act 27
Item 10 - Executive Compensation 27
Item 11 - Security Ownership of Certain Beneficial
Owners and Management 28
Item 12 - Certain Relationships and Related Transactions 28
Item 13 - Exhibits and Reports on Form 8-K 28
SIGNATURES 32
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PART I
Item 1. Description of Business
Overview and Background
The Company is an owner, operator, and developer of private-pay assisted
living communities. Assisted living is part of a spectrum of long-term care
services that provide a combination of housing, personal services, and health
care designed to respond to elderly individuals who require assistance with
activities of daily living in a manner that promotes maximum independence. The
Company's founder, Walter C. Bowen, helped pioneer the development of assisted
living communities in the late 1980s, and the Company's senior management
collectively has more than 50 years of experience in the acquisition,
development, and management of assisted living communities.
At the end of 1998 the Company believes that it will be a leading provider
of assisted living services in the western United States. During 1997, the
Company doubled its number of assisted living communities and nearly doubled the
number of beds under ownership, operation, or management and expects those
numbers to double again in 1998. On December 31, 1997, the Company owned or
operated 901 beds in seven assisted living communities and also managed two more
communities with 162 additional beds, for total operations of 1,063 beds.
The Company believes that high-quality assisted living services can be more
efficiently and profitably provided in its prototypical communities than in
existing facilities that could be converted to use as an assisted living
community. Thus, in 1997 the Company continued upon an aggressive expansion
program begun in 1996 of acquiring sites in select markets in the western United
States and beginning the development and construction of new communities. During
1997, the Company also began making selective acquisitions of existing
communities that complement the Company's planned development of prototypical
communities. In 1997, the Company opened three internally developed communities,
began managing an additional community, and acquired a fifth community - adding
a total of 491 additional beds to the Company's operations. During the first
quarter of 1998 the Company opened four internally developed prototypical
communities comprising 512 additional beds, entered into a long-term lease for
another 60-bed community, and completed construction of an additional three
internally developed prototypical communities comprising an additional 371 beds.
Counting the later communities, as of March 30, 1998, the Company had a total of
2,006 beds within its operations. Furthermore, at that time the Company had
entered into agreements to acquire at least three additional communities
comprising a total of 183 beds and had five new communities under construction
comprising 526 beds. If each of these communities is acquired or completed, the
Company will then operate approximately 2,700 beds. Additionally, the Company
has sixteen sites in various stages of development.
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Assisted Living
The assisted living industry has evolved over the past 15 years in response
to pressure from the public to contain spiraling medical and other health care
related costs, and the choice 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, which skilled care
typically also costs much more than that provided at an assisted living
community. 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. 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. For instance, 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 bed-ridden and can often provide various degrees of
self-care. Assisted living seeks to encourage residents to live as independently
as possible, emphasizing quality care while treating residents with dignity and
respect.
Business Strategy
The principal elements of the Company's business strategy are described
below.
Personalized Quality Care. The Company's primary focus is on providing high
quality personalized care for each resident. The Company seeks to provide a wide
range of high-quality services and care tailored to the needs of its residents
in an attractive, home-like environment. The Company has established quality
assurance programs to insure that high-quality services are being provided to
every resident in its communities. These programs include periodic surveys of
the residents, their families, and community staff and the formation at each
community of a resident council, consisting of residents and their families, to
assist in evaluating the services provided to residents. The Company provides a
toll-free number that families of residents can use to make recommendations or
register complaints and frequently includes comment cards with resident
billings. The Company also attempts to achieve high-quality care through the
establishment of operational standards and performance goals. These standards
and goals apply to each of the Company's communities and relate to such matters
as health services, food service, housekeeping, maintenance, and administration.
Special Needs. A significant component of the Company's business is
providing services and activities required by residents afflicted with
Alzheimer's disease and other age-related dementias. Each of the Company's
larger assisted living communities is expected to have a special "Kingswood"
unit located in a separate wing or area of the community that will have its own
dining facilities, resident lounge areas, and specially-trained staff. The
physical separation of the special needs unit from the rest of the community
enables special needs residents to receive
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the unique care they require with a minimum of disruption to other residents.
The Company has also developed a stand-alone special needs assisted living
community it calls "Regent Court" that is designed to serve solely residents
with special needs.
Multiple Levels of Care. By providing graduated levels of care to residents
based on individual need, the Company permits its residents to "age in place"
and retains residents who might otherwise move to other facilities, which
assists the Company in maintaining its occupancy levels at its larger
communities. The Company believes that this high level of personalized quality
care also creates satisfied residents who, along with their families, are key
sources of referrals for the Company.
High Quality and Private Payor Focus. The Company seeks private pay
residents to the greatest extent possible. Private pay residents occupied
approximately 96 percent of the Company's units during 1997. The Company
believes that caring for private pay residents is more profitable because the
Company is able to charge market rates for its extensive, high-quality services
without regard to government-imposed cost containment pressures. The Company had
revenue per occupied unit in 1997 of $33,988 whereas the industry average, as
compiled for the American Seniors Housing Association, was $23,738 per occupied
unit for the same period. The Company will continue to focus its development
efforts primarily in larger, more affluent communities with median incomes
sufficient to support the Company's full service approach to assisted living.
Professional Management. The Company has developed and uses quality
assurance programs and operating standards to maintain quality and control
costs. This approach is coupled with a decentralized management structure under
which local managers and care coordinators responsively address residents'
individual needs. The relatively larger size of the Company's communities also
permits the Company to recruit and retain more highly paid, experienced managers
and professional staff.
Education and Training. The Company believes that education, training, and
development enhance the effectiveness of its employees which in turn generates
enhanced employee and resident satisfaction and decreases employee and resident
turnover. Managers, on-site marketing directors, and other administrative
personnel receive periodic training both at the community and at the Company's
corporate office. The Company, through ongoing in-service training, maintains a
highly trained staff that is responsive to the changing needs of the Company's
residents.
Marketing. The Company's marketing strategy focuses on enhancing the
reputation of the Company's communities and creating awareness of the Company
and its services among potential referral sources. The Company also markets its
services through doctors and other professionals by direct mail and other
methods. The Company's experience is that satisfied residents, resident
families, and professional health care providers are the most important sources
of referrals for the Company. In addition, the Company emphasizes community
outreach through such programs as adult day care and respite care. These
programs permit individuals to use the Company's services
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on a temporary basis, which provides the Company with an additional source of
revenue and increases awareness of the Company's communities among potential
full-time residents.
Rapid Growth and Development. The Company intends to increase the number of
communities it operates primarily through the development of new communities
based upon the Company's three prototypes. See "Principal Product Lines." The
Company will also undertake acquisitions when it locates suitable properties,
however the Company believes that because there are few acceptable stand-alone
assisted living communities such acquisitions will continue to be limited.
Nonetheless, the Company may pursue opportunistic acquisitions of congregate
care or other facilities that are suitable for conversion to its operating
model. The Company may also in the future acquire or enter businesses ancillary
to the operation of assisted living communities, such as a retail pharmacy or
rehabilitation therapy business.
Principal Services
Services provided to residents of the Company's communities are designed to
respond to their individual needs; promote independence, dignity and choice; and
improve their quality of life. Services are available 24 hours a day to meet
both anticipated and unanticipated needs. General services in the Company's
communities 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 special needs
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.
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The following table summarizes the services associated with each level of
care provided by the Company:
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Graduated Levels of Care
Assisted Living
Level One o Minimal assistance with ADLs and IADLs
o Services include
- Meals
- Housekeeping and laundry
- Personal care
- Scheduled transportation
Level Two o All Level One services plus moderate assistance with
ADLs and IADLs
- Direct hands-on assistance as needed for
- Medical treatments (e.g., injections)
- Dressing
- Other daily activities
Level Three o All Level Two services plus routine hands-on assistance
with ADLs and IADLs
o Personal care services include
- Incontinence care
- Bathing and dressing
- Mobility and/or ambulation assistance
o Close supervision as required for residents with special
behavioral conditions
Special Needs (Alzheimer's Disease and Age-Related Dementias)
Level One o Required assisted living services
o Direct hands-on assistance, behavioral intervention and
redirection as needed
Level Two o All Special Needs Level One services, plus routine
hands-on assistance with ADLs and personal care, including
- Incontinence care
- Bathing and dressing
- Mobility and/or ambulation assistance
o Increased frequency of certain services and increased
supervision
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The Company estimates that, of the current residents in its communities,
38.8 percent require assisted living level one care, 23.1 percent require
assisted living level two care, 12.4 percent require assisted living level three
care, 16.8 percent require special needs level one care and 7.1 percent require
special needs level two care. Additionally, 1.8 percent of the Company's
residents do not require assistance with activities of daily living and are
therefore excluded from the above care level percentages. The Company charges a
variety of rates depending upon the
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level of care required and whether the resident chooses to live alone or in a
companion suite. The single occupancy rates range from $1,700 to $2,700 per
month for assisted living level one care, $1,850 to $3,140 per month for
assisted living level two care, and $2,000 to $3,580 per month for assisted
living level three care. Special needs care ranges from $2,695 (double
occupancy) to $4,520 (single occupancy) per month for special needs level one
care, and $2,995 (double occupancy) to $4,840 per month (single occupancy) for
special needs level two care. The Company leases units to residents on a
month-to-month basis. Residents are also required to pay the Company a nominal,
nonrefundable administrative fee prior to admission.
Principal Product Lines
The Company currently provides its services in stand-alone assisted living
communities. The existing communities offer many 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 dementias ("special needs"). This community concept is generally
identified by the Company as a "Regent" community and is the genesis of the
Company's prototypical community, three of which opened in 1997 and ten of which
will open in 1998. The Company has recently developed alternative sizes for its
Regent community to adapt its prototypical plan, based upon operational
efficiencies and resident living and service considerations, to differing market
demands. The Company has also developed a new type of community, called "Regent
Court," at which it provides services solely to residents with special needs.
(i) Regent
The "Regent" is the Company's primary stand-alone assisted living
community prototype. This prototype design has been developed and refined
through the Company's experience as an operator of its existing assisted
living communities, which also contain a significant portion of the
important attributes of the Regent prototype. Use of this prototype will
continue to allow the Company to control development costs and maintain
efficiency in development and operations.
The prototypical Regent community is a stand-alone assisted living
community containing from 90 to 135 assisted living beds, with between 10
and 20 percent of the total generally comprising the special needs unit. A
"stand-alone" assisted living community is a facility devoted entirely to
assisted living, as distinct from other facilities 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. The buildings
generally range in size from 60,000 to 86,000 square feet and are generally
built on parcels ranging in size from 3 to 6 acres. The buildings are two
or three stories, depending upon site restrictions, and of wood frame
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
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approximately 755 square feet in size. In some locations the Company is
developing 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.
In addition to the larger prototype, the Company has developed a
smaller version for markets in which there currently is less demand for
assisted living services. The smaller "Regent" community will be
approximately 40,000 to 55,000 square feet and be comprised of between 60
and 90 beds, generally with at least 24 beds comprising the special needs
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 Regent's interior layout 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
community is expected to contain a special needs unit called "Kingswood"
that is designed to house and address the needs of residents afflicted with
Alzheimer's disease and other age-related dementias. The special needs
units are located in a separate wing or area of the community and have
their own dining facilities, resident lounge areas, and specially trained
staff. The physical separation of the special needs unit from the rest of
the community enables special needs residents to receive the unique care
they require with a minimum of disruption to other residents.
(ii) Regent Court
The "Regent Court" is a specially designed facility solely for
residents afflicted with Alzheimer's disease or other age-related
dementias. 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 special needs unit of the
Regent community, these communities will be much smaller than the Regent,
typically 21,000 to 25,000 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 and
both the overall layout and that of each neighborhood are designed to
promote the efficient delivery of services. Generally, two neighborhoods
will be reserved for those residents with a high level of function and two
for those with low levels of functioning. The community is designed in this
manner with the primary goal of providing high-quality care to special
needs residents who require unique care while providing for maximum
efficiencies of operation. Because the residents generally are easily
agitated and confused, organizing care within separate neighborhoods
permits the
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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 special 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 will be secured with fences to provide maximum
independence to the residents while also insuring their safety. Some Regent
Courts will also feature covered walkways to permit residents opportunities
for exercise on inclimate days.
Development of Additional Communities
The Company plans to continue its rate of rapid growth primarily through
construction of new Regent and Regent Court prototype communities in selected
markets in the western United States. From January 1, 1997, through December 31,
1998, the Company plans to have developed, constructed, and opened thirteen
large Regent communities and one Regent Court community. Also during 1998, the
Company plans to enter into long-term leases for an additional three communities
in desired, but generally less populated markets to complement the two
additional communities acquired during 1997 and the first quarter of 1998. Upon
completion of these transactions, the Company will have a total of approximately
2,600 beds under operation by December 31, 1998. Furthermore, the Company plans
to complete construction on a minimum of six large Regent communities, three
mid-size Regent communities, and five Regent Courts in 1999, adding
approximately 1250 additional beds to Regent's operations during 1999.
If the Company fulfills its current plan to have opened thirteen internally
developed Regent communities and one internally developed Regent Court community
by December 31, 1998, it will have surpassed the Company's initial development
goal, expressed at the time of its initial public offering, to develop twelve
Regent communities in that time. In 1997 the Company increased its development
goal. However, during the fourth quarter of 1997 the Company redesigned its
Regent Court prototype to reflect and take advantage of several recent
developments in Alzheimer's care programs. The redesign resulted in the delayed
start of four Regent Courts to the second quarter of 1998 and thus the Company
will not complete five Regent Court communities by the end of 1998. Furthermore,
the Company experienced unforeseen delays by governmental agencies in issuing
building permits that resulted in the significant delay of the beginning of
construction of at least three Regent communities during 1997. The Company will
therefore not meet its increased goal of opening fifteen new Regent communities
by the end of 1998 and will instead open 13. Nonetheless, the Company will have
more than offset any gross bed loss in its increased goal due to the five
acquisitions the Company will have completed by year-end.
The Company is currently under construction on three large Regent
communities (368 beds) that will open by the end of the third quarter of 1998
and one Regent Court (48 beds) that will open during the fourth quarter of 1998.
Additionally, the Company has commenced construction of a large Regent community
that will open during the first quarter of 1999. The
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Company has either purchased or obtained the right to purchase real property on
which it could, assuming all necessary governmental approvals are obtained,
construct an additional sixteen communities and the Company is engaged in at
least preliminary development activities on each of these sites.
The Company is actively engaged in discussions regarding the acquisition of
additional sites for development of the Company's prototype communities. The
Company is targeting areas in eleven western states with favorable demographics
in which to accomplish its growth plan. The Company believes that each site
acquired or under consideration would accommodate one of the Company's prototype
assisted living communities and fit well with the Company's growth strategy.
The Company expects that the development time for a prototype community
will range from approximately six months to one year and may be longer in some
cases. The Company expects that the average construction time will be
approximately eleven to thirteen months for a Regent community and seven to nine
months for a Regent Court community. Furthermore, the Company estimates that
each of the Company's new communities will be approximately 25 percent
pre-leased and that it will take approximately 15 months from occupancy for each
Regent community to achieve an occupancy level of 95 percent or higher, at which
point, in the Company's experience, occupancy remains relatively stable. The
Company expects that it will take approximately five to six months for a Regent
Court community to achieve an occupancy level of 93 percent or higher. The cost
to construct a Regent community varies from site to site and is expected to
average approximately $75,000 per residential unit. The estimated cost to
construct a Regent Court is approximately $80,000 per bed, but this amount will
also vary from site to site.
The Company's ability to achieve its development plans will depend upon a
variety of factors, many of which are beyond the Company's control. Furthermore,
there is also no assurance that the Company will elect to acquire any of the
sites it has under option or that the Company will be able to develop
successfully any of the sites its has acquired or will in the future acquire.
See "Forward Looking Statements."
The Company's Markets. In evaluating a prospective development project, the
Company will consider primarily the size of the population, income and age
demographics, strength of the market demand, and the ability to maximize the
efficiency of its management resources in a specific market or "cluster." The
Company intends to locate its Regent communities in metropolitan areas of 50,000
or more people with a high percentage of affluent elderly persons and to select
sites so that it can strategically place multiple communities within a several
hundred mile radius, creating a cluster of communities. With the development of
the smaller Regent community, the Company can locate a larger number of
communities within a region and thereby obtain greater operating efficiencies.
Furthermore, due to the smaller size of the Company's Regent Court, they are
capable of being developed in markets of different sizes depending upon the
demand for Alzheimer's care. Other factors that will be considered in the site
selection process include the level of competition, the local labor market, the
state and local tax structure,
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and the state and local legislative and regulatory environment.
Competition
Providers of assisted living housing and services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the communities, services offered, family and physician
preferences, and location. The Company's current and potential competitors
include national, regional, and local operators of long-term care residences,
rehabilitation hospitals, extended care centers and skilled nursing facilities,
assisted and independent living centers, retirement communities, home health
agencies and similar institutions. The Company believes that assisted living is
a distinct and rapidly growing segment within the long-term care industry and
that it is distinguishable from other long-term care alternatives on the basis
of price, physical appearance, and range of services offered. Moreover, the
Company believes its communities are distinguishable from assisted living
facilities that do not cater primarily to private pay residents. Therefore,
although some of the Company's competitors have significantly greater resources
than those of the Company, the Company believes that it competes favorably in
all of the markets in which it operates due to the quality of its care and
services, operating systems, community designs, and community locations in the
market.
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. Licenses have been obtained for the Company's current
communities in California, Idaho, New Mexico, Oregon and Texas, and the Company
expects that it will be able to obtain licenses in other states as required. One
of the Company's communities, Sunshine Villa, is subject to restrictions that
require the Company to make 15 percent of the units at the community available
to low income residents.
Assisted living facilities are subject to less regulation than other
licensed health care providers, but more regulation than standard congregate
care or independent living facilities. However, the Company anticipates that
states and the federal government will likely impose additional regulations and
licensing requirements. Currently, certain states require licenses to provide
the assisted living services offered by the Company. Certain states also require
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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 enactments 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. To the Company's knowledge, no
material regulatory actions are currently pending or have been threatened with
respect to any of its current communities.
Although only a small portion of the Company's revenues are derived from
the Medicaid program, the Company is subject to Medicaid fraud and abuse laws
which prohibit any bribe, kickback, rebate or remuneration of any kind in return
for the referral of Medicaid patients, or to induce the purchasing, leasing,
ordering, or arranging of any goods or services to be paid for by Medicaid.
Violations of these laws may result in civil and criminal penalties and
exclusions from participation in the Medicaid program. The Company believes it
is in substantial compliance with all applicable Medicaid laws.
Employees
As of December 31, 1997, the Company employed approximately 389 full-time
and 153 part-time employees, and the corporate offices employed 37 individuals
full-time. None of these employees is represented by any labor union. Management
believes that its employee relations are good.
Trademarks
The Company has obtained trademark protection of its "Regent," "Regent
Court," and "Kingswood" tradenames.
Forward Looking Statements
The information set forth in this report regarding the Company's
acquisition of sites for development, the Company's development, construction
and opening of new assisted living communities, the operation and performance of
the Company's new assisted living communities, the Company's plans to develop,
construct and operate new Regent Court communities, and the ability of the
Company's newly developed communities to compete for residents constitute
"forwardlooking 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 its
employees, may contain other forward-looking statements. The following important
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 of this report. The Company undertakes no obligation
to release publicly the results of
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any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report.
There is no assurance that the Company will be able to achieve its plan to
develop, construct, and open the stated number of Regent and Regent Court
communities by the end of any specified period, or that any newly opened
community will be profitable. The Company's development, construction and
opening of new assisted living communities are subject to the risk that the
Company will be unable to obtain, or will experience delays in obtaining,
necessary zoning, land use, building, occupancy and other required governmental
permits and authorizations. The Company's opening of new assisted living
communities on schedule is also subject to the risk that the Company or its
contractor will experience delays in the construction of one or more
communities.
The achievement by the Company of its planned growth is subject to a number
of financing risks. The Company expects to incur significant debt and lease
obligations in connection with financing its growth plan. The Company currently
does not have commitments for all of the financing necessary to finance its
growth plan. If the Company were unable to obtain additional required financing,
or if such financing were not available on acceptable terms, the Company
believes that its plan to open the stated number of Regent and Regent Court
communities by the end of 1999 would likely be delayed or curtailed.
Furthermore, if the Company is unable to generate sufficient cash flow from
operations to satisfy required debt and lease payments, the Company will be
required to obtain additional financing to satisfy those obligations.
The Company's growth strategy is subject to the risk that lease-up and
occupancy rates at newly-developed communities may not be achieved or sustained
at expected levels. This could result at a particular community for a number of
reasons, including competition from other nearby providers of long-term senior
care, the failure of management to assess accurately the demand for long-term
care in a particular market, and the failure of the Company's prototypical
communities to be accepted in a particular market. If expected occupancy levels
are not achieved within the expected time frame, the Company may not be able to
repay or refinance a short-term construction loan obtained to construct the
relevant community. If occupancy rates at newly-developed communities are not
achieved and sustained at expected levels, the Company will experience greater
than anticipated operating losses in connection with the opening of new
communities and the Company's need for additional financing to meet its growth
plans will increase.
The Company's growth strategy is also subject to the risk that construction
costs for new communities may exceed original estimates. The Company's
agreements with its contractors generally provide for the contractor to
construct a community on a cost-plus basis. In addition, the Company's
sale/leaseback financing arrangements with REITs generally provide for the
Company to develop and construct the new community for a fixed amount.
Accordingly, the risk of construction cost over-runs on its new communities is
generally borne by the Company. Moreover, construction cost over-runs would
increase the Company's capital requirements and
12
<PAGE>
compel the Company to raise additional financing, beyond what is currently
anticipated, in order to achieve its growth plans.
The Company's planned growth will place increasing pressure on the
Company's management controls and require the Company to locate, train,
assimilate, and retain additional community managers and support staff. There is
no assurance that the Company will be able to manage this growth successfully.
The failure of the Company to manage its planned growth successfully could have
a material adverse effect on the financial performance of the Company and
increase the Company's need for additional financing.
Item 2. Description of Property
Current Communities. The table below sets forth certain information
regarding the Company's Communities as at December 31, 1997.
<TABLE>
<CAPTION>
Regent
Operations
Community Location Commenced Units(1) Beds(2) Interest
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oregon
Regency Park Portland 1987 122 142 Lease
Park Place Portland 1986 112 112 Manage
Washington
Sterling Park Redmond 1990 162 192 Lease
California
Sunshine Villa Santa Cruz 1990 106 126 Lease
Sun Oak Citrus Heights 1997 40 50 Manage
Willow Creek Folsom 1997 104 119 Own
Idaho
Willow Park Boise 1997 117 134 Lease
West Wind Boise 1997 48 52 Lease
Texas
Hamilton House San Antonio 1997 116 136 Lease
--- -----
Totals: 927 1,061
=== =====
</TABLE>
13
<PAGE>
Communities completed during the first quarter of 1998:
<TABLE>
<CAPTION>
Community Location Units(1) Beds(2) Interest
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oregon
Sheldon Park Eugene 108 124 Lease
California
Laurel Springs Bakersfield 113 130 Own
Summerfield House Vacaville 109 126 Own
Orchard Park Clovis 112 128 Lease
The Palms Roseville 93 108 Lease
Sunnyside Court Fremont 40 60 Lease(3)
Arizona
Canyon Crest Tucson 117 137 Lease
New Mexico
Sandia Springs Rio Rancho 109 130 Lease
--- ---
Totals: 801 943
=== ===
</TABLE>
Anticipated 1998 openings:
<TABLE>
<CAPTION>
Scheduled
Community Location Opening Units(1) Beds(2) Interest
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wyoming
Aspen Wind Cheyenne 2nd Quarter 77 77 Lease(4)
Meadow Wind Casper 2nd Quarter 53 53 Lease(4)
Spring Wind Laramie 2nd Quarter 53 53 Lease(4)
Washington
Northshore House Kenmore 2nd Quarter 85 98 Joint Venture(5)
Nevada
Mira Loma Henderson 2nd Quarter 115 133 Own
Texas
Parmer Woods Austin 3rd Quarter 117 137 Own
Arizona
Regent Court Scottsdale 4th Quarter 48 48 Lease
--- ---
Totals: 548 599
=== ===
</TABLE>
14
<PAGE>
Construction commenced for 1999 opening:
<TABLE>
<CAPTION>
Scheduled
Community Location Opening Units(1) Beds(2) Interest
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona
Desert Flower Scottsdale 1st Quarter 102 112 Own
(1) A "unit" is a single- or double-occupancy studio or one or two bedroom
apartment.
(2) "Beds" reflects the actual number of beds used by the Company for census
purposes, which in no event is a number greater than the maximum number of
licensed beds permitted under the community's license.
(3) Acquired through a lease financing effective March 18, 1998.
(4) The Company has entered into a Purchase Agreement to acquire this community
upon completion of construction. The Company anticipates assigning its
interest in the Agreement to a real estate investment trust ("REIT") and
leasing the completed community from the REIT.
(5) The Company owns a 50 percent interest in a joint venture with an
independent third party and will manage the community for the joint
venture.
</TABLE>
Each community for which the Company's interest is noted as "leased,"
except for Regency Park and Sterling Park, is leased from a real estate
investment trust (a "REIT") pursuant to a long term lease providing for an
initial term of approximately 14 to 15 years from the inception date. Each lease
provides for extensions that may permit the lease to continue for a total period
of between 25 and 35 years from the inception date.
The Company leases Regency Park and Sterling Park from entities controlled
by Mr. Bowen. Each lease expires in 2005, has annual base rent payments in
addition to percentage rent payments equal to ten percent of the Company's
annual gross revenues from operations in excess of the gross revenues for each
property in calendar year 1995, and contains three 10-year renewal options and a
right of first refusal if the lessor proposes to sell the property. Under the
leases, the Company is responsible for, among other costs, maintenance, property
taxes, capital expenditures and direct operating costs related to the
communities. The base yearly lease payments are $1,271,000 and $1,486,250 for
Regency Park and Sterling Park, respectively. The payment terms of the Leases
were based on the fair market values of the underlying properties, as determined
by independent appraisals, upon the inception of the leases. The aggregate
annual base rent payments under each Lease, when expressed as a percentage of
the appraised value of that property, reflects a lease rate of approximately
10.25 percent, which the Company believes was typical for leases in the health
care industry upon the inception of each lease. In obtaining the consent of the
Regency Park ownership entity's lender to the Company's lease on that community,
the Company agreed that not less than 25 percent of its outstanding stock will
be owned by Mr. Bowen and that Mr. Bowen will continue to control the management
of the Company.
15
<PAGE>
The Company manages Park Place, a community owned by a limited partnership
in which Mr. Bowen is a general partner and beneficially owns a 1.85 percent
interest. The Company receives a management fee equal to five percent of the
gross revenues of Park Place. In 1997, the fee paid to the Company for managing
Park Place was $151,793.
Development Sites. The Company is actively engaged in discussions to
acquire additional sites in several western states. In considering a prospective
site for development of a Regent community, the Company generally seeks a 3 to 6
acre parcel of undeveloped land located within a metropolitan area of 50,000
persons or more. A site of 1.5 to 3 acres is generally acquired for a Regent
Court community. The Company generally also seeks relatively flat parcels of
land zoned for multi-family residences with reasonable access to utilities and
streets. In the course of its evaluation, the Company generally will conduct a
geotechnical study of a site to determine if the soils have proper compaction
for the Company's development. The Company conducts "level one" environmental
assessments of each new property prior to acquisition.
In addition to the land for each of the communities under construction, as
of March 30, 1998, the Company had acquired two additional sites for the
development of Regent communities in San Clemente, California and Summerlin,
Nevada and four sties for the development of Regent Court communities in
Modesto, California; Corvallis and Portland, Oregon; and Kent, Washington. In
addition, as of March 30, 1998, the Company had entered into a joint venture to
develop and operate an assisted living community in Rancho Mirage, California
and had obtained options to acquire an additional ten sites for the development
of Regent communities. The Company has completed significant development
activity on the acquired sites and has commenced preliminary development
activities on each of the sites under option. Preliminary development activities
include due diligence activities (including the evaluation of environmental and
geotechnical matters), the preparation of architectural and engineering plans,
and the negotiation of definitive arrangements regarding the acquisition of the
site and the financing of the development.
The Company is actively engaged in discussions regarding the acquisition of
sites for additional development. The Company is targeting areas in twelve
western states with favorable demographics and regulatory structures that it
believes will allow it to enhance its growth. The Company believes that each
site acquired or under consideration would accommodate one of the Company's
prototype assisted living communities and fit well with the Company's growth
strategy. There is no assurance that the Company will elect to acquire any of
the sites it has under option or that the Company will be able to develop
successfully any of the sites its has acquired or will in the future acquire.
Office Facilities. The Company currently leases approximately 10,500 square
feet of office space in one location in Portland, Oregon.
16
<PAGE>
Item 3. Legal Proceedings
As of March 30, 1997, there were no material pending legal actions to which
the Company is a party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
As of March 30, 1998, the executive officers of the Company were as set
forth below.
Name Age Position
---- --- --------
Walter C. Bowen 55 Chairman of the Board, Chief Executive
Officer, and President
James W. Ekberg 45 Executive Vice President of Acquisitions
and Development
Eric W. Jacobsen 37 Chief Operating Officer
Steven L. Gish 39 Chief Financial Officer, Treasurer,
and Director
David R. Gibson 36 Vice President for Corporate Affairs,
General Counsel, and Secretary
Walter C. Bowen. Mr. Bowen is the founder of the Company and became the
Chief Executive Officer, President and a director of the Company upon its
formation. Mr. Bowen has been involved in the development, ownership, and
management of assisted living facilities since 1986, and has devoted a majority
of his time to the ownership and operation of those facilities over the past
five years. Mr. Bowen has also been the Chief Executive Officer of several
related companies including Bowen Property Management Company, Bowen Financial
Services Corp., a company formed to obtain financing for real estate development
projects, and Bowen Development Company, a real estate construction company
(collectively, the "Bowen Companies"), since their formation. Mr. Bowen attended
the University of Oregon and is a graduate of Portland State University. Mr.
Bowen serves on the Board of Directors of the Assisted Living Facilities
Association of America and on the advisory board for the National Investment
Conference for the Senior Living and Long Term Care Industries.
Eric W. Jacobsen. Mr. Jacobsen became Chief Operating Officer of the
Company in August 1995 and has served as the chief operating officer of the
assisted living business of the
17
<PAGE>
Bowen Companies since September 1994. Mr. Jacobsen joined the Bowen Companies in
February 1994 as Vice President of Development and Acquisitions. In his current
capacity Mr. Jacobsen oversees the management of the Company's communities and
is responsible for strategic planning for new communities. From July 1988 to
February 1994, Mr. Jacobsen served as Director of Development and Acquisitions
of Holiday Retirement Corp., the largest owner and operator of senior living
facilities in the United States. Mr. Jacobsen holds a degree in business
administration from the University of Oregon.
James W. Ekberg. Mr. Ekberg became Executive Vice President of Acquisitions
and Development of the Company in August 1995 and is responsible for the
development and construction of new facilities and for strategic acquisitions.
Mr. Ekberg joined the Bowen Companies in 1985 as Controller and has served as
Executive Vice President since 1991, in which capacity he was responsible for
the development of numerous projects for the Bowen Real Estate Group and oversaw
the operations of Bowen Development Company. Mr. Ekberg holds a bachelor's
degree in accounting from the Honors College of Michigan State University.
Steven L. Gish. Mr. Gish became Chief Financial Officer and Treasurer 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.
David R. Gibson. Mr. Gibson became Vice President for Corporate Affairs,
General Counsel, and Assistant Secretary of the Company in March 1996 and became
Secretary in May 1997. Mr. Gibson's primary responsibility with the Company is
to oversee its legal affairs. Prior to joining the Company, Mr. Gibson practiced
law for over eight years, the last seven with the law firm of Bogle & Gates
where he was a Senior Attorney in the firm's business department, assisting
clients in real estate, commercial finance, and business transactions. Mr.
Gibson received his law degree, cum laude, from Northwestern School of Law of
Lewis and Clark College in 1987 and his Bachelor of Science degree in accounting
from the University of Oregon in 1984.
18
<PAGE>
PART II
Item 5. Market for Common Stock and Related Stockholder Matters
The Company's Common Stock is quoted on the Nasdaq National Market System
under the symbol "RGNT." The following table sets forth the high and low closing
sale prices as reported on the Nasdaq National Market System for the periods
indicated.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- -----
<S> <C> <C>
March 31, 1996 8 4 3/4
June 30, 1996 8 1/4 5 3/8
September 30, 1996 7 1/2 4 1/2
December 31, 1996 6 1/2 3 1/8
March 31, 1997 5 3/4 3 5/8
June 30, 1997 5 3/4 4
September 30, 1997 7 4 7/8
December 31, 1997 7 1/2 4 7/8
</TABLE>
According to the Company's Transfer Agent, the Company had 29 holders of
record of the Common Stock as of March 20, 1998.
Since its initial public offering in December 1995, the Company has not
paid cash dividends on its Common Stock and presently intends to continue this
policy in order to retain its earnings for the development of the Company's
business. The Company's ability to pay dividends may 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.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company is an owner, operator and developer of private-pay assisted
living communities. Assisted living is part of a spectrum of long-term care
services that provide a combination of housing, personal services, and health
care designed to respond to elderly individuals who require assistance with
activities of daily living in a manner that promotes maximum independence. The
Company's revenues are derived primarily from resident fees for basic housing,
personalized health care services, and other support services.
Since its initial public offering on December 26, 1995, at which the
Company raised approximately $12.2 million, the Company has embarked upon a
strategy of aggressive growth primarily through internal development of
prototypical assisted living communities. This report covers the second full
year of the Company's operations following its initial public offering and
19
<PAGE>
describes in detail the Company's rapid growth which began in 1997 and which is
expected to continue through 1998 and beyond.
The Company raised an additional $10 million through the sale of preferred
stock in December 1996 and announced on March 26, 1998, that it had agreed to
the principal business terms of a private placement of $10.5 million of
convertible subordinated debentures. The proceeds of these two transactions
have, and will continue to, permit the Company to grow rapidly. From January 1,
1997, through March 30, 1998, the Company completed ten new prototypical
communities comprising 1,272 beds, acquired through long-term leases two
additional communities comprising 112 beds, added a management contract for a
50-bed community, commenced construction on an additional five prototypical
communities comprising 528 beds, and entered into contracts to acquire three
additional communities comprising 183 beds. Upon the completion of each of these
transactions the Company will have approximately 2,700 beds under operation,
compared to the 570 beds the Company operated at the time of its initial public
offering and 1,063 beds as of December 31, 1997. Additionally, the Company is
engaged in development activities related to sixteen additional Regent
communities and five Regent Court communities.
Recognizing the importance of internal controls, systems and procedures,
during 1997 the Company increased and refined its human resources functions,
employee training, marketing efforts, strategic planning, financial reporting,
and information systems. The Company's efforts in this regard will be of great
benefit as the Company continues to add a significant number of beds to its
operations in 1998 and beyond. Another essential element to such growth will be
the continued development of the Company's relationships with its commercial
banking and real estate investment trust financing partners. The Company
recently announced a commitment by LTC Properties, Inc. to provide approximately
$54.6 million of sale/leaseback financing to be used to refinance communities
completed during 1998 and for the acquisition of three additional communities.
Development and Acquisition of Additional Communities
The Company's current growth plan anticipates completion of an additional
three new Regent communities, one new Regent Court community, and the
acquisition of three other communities by December 31, 1998. An additional
sixteen Regent communities and five Regent Court communities are currently under
development. As the Company continues to conduct its preliminary development
activities on these sites it will determine whether to proceed with construction
of a new community. Currently, most of these projects are scheduled for
completion during 1999. The future profitability of the Company is largely
dependent upon the continued expansion of its operations. During this expansion
period, the expenses associated with development, construction, and leasing of
these communities are expected to be significant.
The Company expects that its typical 110-unit newly developed Regent
community will generate losses during the pre-opening period, during which the
Company hires senior community management and conducts extensive marketing
actives, and during the first eight to
20
<PAGE>
ten months of operations, at which time management expects that such communities
will, on average, have achieved approximately 65-70 percent occupancy and have
reached break-even cash flow. Stabilized occupancy of 95 percent or higher is
expected by the fifteenth month of operation, on average. Management expects
occupancies will remain fairly stable after 95 percent occupancy is achieved.
Similarly, newly developed Regent Court communities are expected to
generate losses during the pre-opening period and during the first four to five
months of operations. Management anticipates that newly developed Regent Court
communities will achieve break-even cash flow within five to six months after
commencing operations, at which time the communities are expected to have
achieved approximately 60-70 percent occupancy. Stabilized occupancy of 93
percent or higher is expected by the ninth month of operation. Based upon its
experience operating the Kingswood units at its existing communities, management
expects occupancies will remain fairly stable in its Regent Court communities
after 93 percent occupancy is achieved.
Although the Company expects that it will be able to increase income from
its communities as a result of management's continuing efforts to maximize
occupancy, align resident rates with services provided and control expenses, the
pre-opening and initial operating expenses associated with the large number of
communities the Company expects to open in 1998 will result in a net operating
loss for the year. Furthermore, if the Company expands its growth plan through
the development of additional new communities or if a significant number of
newly developed communities fail to reach break-even cash flow within the
expected time period, the Company may continue to incur operating losses beyond
1998.
Results of Operations
The following discussion and analysis should be read in conjunction with
the Financial Statements under Item 7. 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,
accounting, and other administrative expenses; lease expense; and depreciation
and amortization expense.
21
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Revenues:
Rental and service 98.5% 98.7%
Management fee 1.5 1.3
------ ------
Total revenues 100.0 100.0
------ ------
Operating expenses:
Residence operating expenses 76.6 61.1
General and administrative expenses 25.6 13.8
Lease expense 24.9 20.8
Depreciation and amortization 2.5 1.9
------ ------
Total operating expenses 129.6 97.6
------ ------
Operating income (loss) (29.6) 2.4
Interest income 2.7 2.7
Interest expense (1.0) (4.2)
Other income, net 0.2 0.1
------ ------
Income (loss) before income taxes
and extra-ordinary loss (27.7) 1.0
Provision for income taxes (0.1) (0.4)
------ ------
Income (loss) before extra-
ordinary loss (27.8) 0.6
Extraordinary loss, net of income tax
benefit -- (0.4)
------ ------
Net income (loss) (27.8)% 0.2%
------ ------
</TABLE>
Comparison of Years Ended December 31, 1997 and 1996
Revenues. Revenues for 1997 totaled $13,958,282 compared to $13,260,249 in
1996. The Company operated three communities and managed a fourth community in
1996, whereas in 1997 the Company added its fourth stabilized community through
an acquisition in July, began operating three newly developed communities, one
each in May, October and November, and began managing a new community in May.
The increase in revenue of $698,033, or 5.3 percent,
22
<PAGE>
includes $457,193 from newly opened communities and a decrease in revenue of
$232,882 at the three communities that the Company operated throughout 1996 and
1997. Revenue from operation of the stabilized community acquired in July was
$438,585 for the six months ended December 31, 1997. Overall average occupancy
at the Company's stabilized communities declined to 92.4% for the year ended
December 31, 1997, from 95.4% for the same period in 1996. The decline in
stabilized revenues from, and occupancy rate at, the Company's stabilized
communities relates primarily to the continued under-budget performance at
Sterling Park, the Company's largest community, which is due in large part to
continuing market pressures.
Residence Operating Expenses. Residence operating expenses were $10,689,905
for 1997, and $8,108,045 for 1996, an increase of $2,581,860 or 31.8 percent.
The current year includes $2,276,381 of start-up and pre-opening costs related
to eleven of the Company's newly developed communities. Residence operating
expenses, excluding the effect of the newly developed communities, totaled 63.3
percent and 61.9 percent of rental and service revenues for 1997 and 1996,
respectively.
General and Administrative Expenses. General and administrative expenses
were $3,568,382 for 1997, compared to $1,834,960 for 1996. The increase of
$1,733,422 is due primarily to increased payroll and ancillary costs resulting
from staffing increases related to the implementation of the Company's plan for
growth.
Lease Expense. Lease expense for the Company's leased communities totaled
$3,479,176 for 1997 compared to $2,757,250 for 1996. The increase of $721,926
includes $595,415 related to two newly developed communities and $128,711
related to the community acquired in July.
Depreciation and Amortization. Depreciation and amortization expense was
$356,852 for 1997, compared to $245,656 for 1996. The increase of $111,196
relates primarily to the purchase of resident vans for the Company's newly
developed communities and the purchase of furniture and equipment for the
Company's headquarters in connection with implementation of the Company's growth
plan.
Interest Income. Interest income increased in 1997 to $381,326 from
$361,565 for 1996. 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 decreased for the year ended December
31, 1997, to $136,636, from $561,466 for 1996. The Company capitalized
$1,789,548 of interest charges incurred during 1997, compared to $13,054 in
1996. The capitalized interest offsets substantially higher interest costs
incurred by the Company in the current fiscal year arising from increased
borrowing for construction purposes.
23
<PAGE>
Extraordinary Loss. The extraordinary loss in 1996 of $53,097, net of an
income tax benefit of $33,900, resulted from the write-off of previously
capitalized loan fees. The write-off occurred in connection with the
sale/leaseback of Sunshine Villa, which has been accounted for as a financing
transaction.
Net Income (Loss). Net operating results decreased to a loss of $3,877,654
during the year ended December 31, 1997, from net income of $23,598 for the same
period in 1996. The decrease in net results is primarily due to an increase in
general and administrative expenses (as discussed above), an increase in lease
expense (as discussed above), a decrease in residence operating profit (rental
and service revenue less residence operating expenses) of $1,918,964, offset by
a decrease in interest expense of $424,830.
Liquidity and Capital Resources
At December 31, 1997, the Company had a working capital deficit of
$4,303,527 compared to approximately $10,326,089 of working capital at December
31, 1996, a decrease of $14,628,616. The decrease in working capital is due
primarily to implementation of the Company's growth plan.
Net cash used in operating activities totaled approximately $2,637,000 for
1997, which resulted primarily from a net loss of approximately $3,878,000, net
of $694,000 related to depreciation and a non-cash compensation change, and less
the net positive change in other operating assets and liabilities of $547,000.
Net cash used in investing activities totaled approximately $50,189,000 for
1997, consists of approximately $53,100,000 for land acquisition, development
and construction costs, net of approximately $2,900,000 related to the maturity
of investments. The land acquisition, development, and construction costs are
related to the development of assisted living communities. At December 31, 1997,
the aggregate purchase price for six parcels of land for which the Company had
purchase options was approximately $4,413,000. The Company has paid initial
deposits relating to these sites and has also completed the demographic analysis
and other preliminary due diligence for purposes of developing assisted living
communities at these sites.
Net cash provided by financing activities totaled approximately $46,040,000
during 1997, consisting primarily of net proceeds from issuances of long-term
debt and short term borrowing for construction activities.
On December 16, 1996, the Company completed the sale of $10 million of its
Preferred Stock to Prudential Private Equity Investors III, L.P. ("PPEI"). The
Preferred Stock is convertible into 1,818,181 shares of Common Stock. In
connection with the sale of the Preferred Stock, the Company issued to PPEI a
Stock Purchase Warrant to purchase 200,000 shares of the Company's Common Stock
at $5.50 per share. The Company is required to pay a quarterly cumulative
dividend on the Preferred Stock at the rate of six percent per annum.
24
<PAGE>
As of December 31, 1997, the Company had completed the following
construction loans:
<TABLE>
<CAPTION>
Amount Community Lender
- ----------- ----------------------- --------------------------
<S> <C> <C>
$ 6,850,000 Folsom, California US National Bank of Oregon
$ 6,480,000 Kenmore, Washington US National Bank of Oregon
$ 7,600,000 Vacaville, California US National Bank of Oregon
$ 7,200,000 Bakersfield, California Guaranty Federal Bank, FSB
$ 7,700,000 Austin, Texas Guaranty Federal Bank, FSB
$ 7,375,500 Rio Rancho, New Mexico Guaranty Federal Bank, FSB
$ 6,255,000 Eugene, Oregon Wells Fargo
$ 6,450,000 Roseville, California Key Bank
$ 7,115,000 Tucson, Arizona Bank United of Texas, FSB
$ 7,000,000 Henderson, Nevada Bank United of Texas, FSB
</TABLE>
In addition to the foregoing loans, the Company has also obtained a commitment
from a bank to provide up to $15,000,000 of financing with which to develop up
to five Regent Court communities.
The Company's current growth plan anticipates the development,
construction, and opening of ten new Regent communities and one new Regent Court
community by the end of 1998, the acquisition of three additional communities by
the end of 1998, and an additional nine Regent and five Regent Court communities
by the end of 1999. The Company has obtained all financing necessary to complete
its development plan for 1998 and has obtained a $12.8 million commitment from a
real estate investment trust to provide all financing necessary to acquire the
three identified communities during 1998. The total cost to develop and
construct the fourteen communities planned for 1999, including the estimated
initial operating deficits, will likely be between $80-90 million. A substantial
portion of these costs will be incurred during 1998. The Company anticipates
that it will be able to obtain the financing, upon acceptable terms, necessary
to complete the thirteen communities planned for 1999 although it has not
obtained any commitments in that regard at this time. Provided that the Company
can obtain financing upon acceptable terms, the Company estimates that it has
the necessary equity capital to complete construction and to fund the initial
operating deficits of the thirteen communities planned for 1999.
The Company may enter into additional arrangements with one or more
unrelated parties regarding the joint development and ownership of one or more
of the Company's communities currently under construction or development in
order to further leverage the Company's growth. Furthermore, the Company may
utilize various forms of financing that would permit a community to be sold to
or initially developed by a third party who would incur the initial operating
deficits and permit the Company to manage the community for a customary fee. The
Company, under such financing methods, would likely have the option to either
purchase the community or enter into a long-term lease at such time as the
Company deems appropriate. The Company has not obtained any commitments for this
form of financing.
25
<PAGE>
If the Company were unable to obtain additional required financing, or if
such financing is not available on acceptable terms, the Company expects that
its plan to develop an additional nine Regent communities and five Regent Court
communities by the end of 1999 would likely be delayed or curtailed.
Furthermore, if the Company expands its growth plan, development activities do
not result in the construction of a community on the site, the Company
experiences a decline in the operations of its current communities or the
Company does not achieve and sustain anticipated occupancy levels at its new
communities, then the Company may require additional financing to complete its
growth plan.
The Company does not presently intend to pay dividends to holders of its
Common Stock and intends to retain future earnings to finance the development of
assisted living communities and expand its business.
Subsequent Events
During the first quarter of 1998 the Company refinanced two assisted living
communities through sale/leaseback transactions with two REITs for an aggregate
sales price of $18.1 million, repaying approximately $11.7 million of its
mortgage indebtedness, recognizing approximately $2.6 million in deferred gain,
and generating approximately $5.8 million of net proceeds.
On March 30, 1998, the Company completed a private placement pursuant to
which parties agreed to purchase up to $10.5 million of convertible subordinated
debentures due 2008. The debentures bear interest at 7.5 percent per annum and
are convertible into the Company's Common Stock at an effective price of $7.50
per share. The Company intends to utilize the proceeds to finance the Company's
continued rapid expansion of internally developed communities, to repay
short-term borrowings, and for general working capital purposes.
Inflation
Management believes that the Company's operations have not been materially
adversely affected by inflation. The Company expects salary and wage increases
for its skilled staff will continue to be higher than average salary and wage
increases, as is common in the health care industry. To date, the Company has
been able to offset the effects of inflation on salaries and other operating
expenses by increases in rental and service rates. The Company expects to be
able to continue to do so in the future, subject to applicable statutory,
regulatory, and zoning restrictions.
Recent Accounting Pronouncements
New accounting pronouncements are discussed in Note 1 of the Notes to
Consolidated Financial Statements.
26
<PAGE>
Item 7. Financial Statements
The financial statements required by this item are included on pages F-1 to
F-23 of this Report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 29, 1997, the Company dismissed its previous certifying
accountant, Coopers & Lybrand L.L.P., and retained its new certifying
accountant, KPMG Peat Marwick LLP. The decision to change accountants was
approved by the Audit Committee of the Company's Board of Directors. The reports
of Coopers & Lybrand L.L.P. on the Company's financial statements for 1995 and
1996, being the two fiscal years preceding the year addressed in this report,
contain no adverse opinion or disclaimer of opinion and were not modified as to
uncertainty, audit scope, or accounting principles. Furthermore, during fiscal
years 1995 and 1996, and during the subsequent interim periods to December 29,
1997, there were no disagreements with Coopers & Lybrand L.L.P. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Coopers & Lybrand L.L.P. would have caused it to make reference thereto in
connection with its report on the financial statements for such years.
PART III
Item 9. Directors, Executive Officers, and Control Persons; Compliance with
Section 16(a) of the Exchange Act
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1998
annual meeting of shareholders to be filed not later than 120 days after the end
of the fiscal year covered by this report and is incorporated herein by
reference. Information with respect to executive officers of the Company is
included under Item 4(a) of Part I of this report. Information required by Item
405 of Regulation S-B is included under "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Company's definitive proxy statement for
its 1998 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this report and is incorporated
herein by reference.
Item 10. Executive Compensation
Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's definitive proxy statement for its
1998 annual meeting of shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this report and is incorporated herein by
reference.
27
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners
and management will be included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for its 1998
annual meeting of shareholders to be filed not later than 120 days after the end
of the fiscal year covered by this report and is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in the Company's
definitive proxy statement for its 1998 annual meeting of shareholders to be
filed not later than 120 days after the end of the fiscal year covered by this
report and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements are listed in the Index to Financial Statements on
page F1 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.
(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)10.3 Employment Agreement between the Company and Walter C. Bowen.
(1)10.4 Employment Agreement between the Company and James W. Ekberg.
(1)10.5 Employment Agreement between the Company and Eric W. Jacobsen.
(1)10.6 Employment Agreement between the Company and Steven L. Gish.
28
<PAGE>
(1)10.7 Employment Agreement between the Company and Gregory Roderick.
(1)10.8 Restrictive Covenant Agreement between the Company and
Walter C. Bowen.
(1)10.9 Restrictive Covenant Agreement between the Company and
James W. Ekberg.
(1)10.10 Restrictive Covenant Agreement between the Company and
Eric W. Jacobsen.
(1)10.11 Restrictive Covenant Agreement between the Company and
Steven L. Gish.
(1)10.12 Restrictive Covenant Agreement between the Company and
Gregory Roderick.
(5)10.13 1995 Stock Incentive Plan, as amended effective December 4,
1997.
(1)10.14 Form of Incentive Stock Option Agreement.
(1)10.15 Form of Nonqualified Stock Option Agreement.
(1)10.16 Administrative Services Agreement among the Company and
certain of the Bowen companies.
(1)10.17 Indemnity Agreement between the Company and Walter C. Bowen.
(1)10.18 Indemnity Agreement between the Company and James W. Ekberg.
(1)10.19 Indemnity Agreement between the Company and Eric W. Jacobsen.
(1)10.20 Indemnity Agreement between the Company and Steven L. Gish.
(1)10.21 Regulatory Agreement by and between the Company (as assignee)
and the Oregon Housing and Community Services Department
("OHCS").
(1)10.22 Form of First Amendment to Regulatory Agreement between the
Company and OHCS.
(1)10.23 Management Agreement regarding Park Place.
(1)10.24 Subordination and Attornment Agreement with The Canada Life
Assurance Company regarding Regency Park.
(1)10.25 Promissory Note from the Company to Sunshine Villa, Inc.
(1)10.26 Note from the Company to United States National Bank of
Oregon.
29
<PAGE>
(1)10.27 Line of Credit Instrument between the Company and United
States National Bank of Oregon.
(2)10.28 Letter of Understanding, effective as of March 8, 1996,
between the Company, Dr. Marvin S. Hausman, and Northwest
Medical Research Partners.
(2)10.29 Employment Agreement, effective as of March 20, 1996, between
David R. Gibson and the Company
(2)10.30 Restrictive Covenant Agreement, effective as of March 20,
1996, between David R. Gibson and the Company
(3)10.32 Preferred Stock and Warrant Agreement between Prudential
Private Equity Investors III, L.P. ("PPEI") and the Company
dated as of December 16, 1996.
(3)10.33 Stockholders Agreement among the Company, PPEI, and Walter C.
Bowen dated as of December 16, 1996.
(3)10.34 Registration Agreement between the Company and PPEI dated as
of December 16, 1996.
(3)10.35 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of
Common Stock.
(3)10.36 First Amendment to Lease between the Company and Regency Park
Apartments Limited Partnership dated December 16, 1996.
(3)10.37 Second Amendment to Lease between the Company and Sterling
Park, L.L.C. dated December 16, 1996.
(3)10.38 Form of Indemnity Agreement between the Company and directors.
(4)16 Letter from Coopers & Lybrand L.L.P.
(5)21 List of Subsidiaries.
(5)23.1 Consent of Coopers & Lybrand L.L.P.
(5)23.2 Consent of KPMG Peat Marwick LLP.
(5)27.1 Financial Data Schedule
(5)27.2 Restated Financial Data Schedule
- --------------
30
<PAGE>
(1) Incorporated by reference to 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 Exhibit to the Company's Form 8-K dated
December 29, 1997.
(5) 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
The Company filed a Form 8-K, dated December 29, 1997, with respect to a
change in its accountants as described therein.
31
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Index
Page(s)
Independent Auditors' Report - KPMG Peat Marwick LLP F - 1
Report of Independent Accountants of Coopers & Lybrand L.L.P. F - 2
Financial Statements:
Consolidated Balance Sheets F - 3
Consolidated Statements of Operations F - 4
Consolidated Statements of Changes in Shareholders' Equity F - 5
Consolidated Statements of Cash Flows F - 6
Notes to Consolidated Financial Statements F - 7
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Regent Assisted Living, Inc.:
We have audited the accompanying consolidated balance sheet of Regent Assisted
Living, Inc. and subsidiaries (the Company) as of December 31, 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Regent
Assisted Living, Inc. and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 13, 1998, except as to
note 11 which is as of March 27, 1998
F - 1
<PAGE>
Report of Independent Accountants
The Board of Directors and Shareholders
Regent Assisted Living, Inc.:
We have audited the accompanying consolidated balance sheet of Regent Assisted
Living, Inc. and subsidiary (the Company) as of December 31, 1996 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Regent
Assisted Living, Inc. and subsidiary as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
March 21, 1997
F - 2
<PAGE>
<TABLE>
<CAPTION>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
--------------------------------
Assets 1997 1996
------ ------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,865,576 $ 8,650,817
Investments - 2,939,448
Accounts receivable 128,110 148,976
Prepaid expenses 249,708 126,148
Construction advances receivable 123,670 1,125,315
------------- --------------
Total current assets 2,367,064 12,990,704
Restricted cash 2,361,993 1,646,485
Property and equipment, net 69,820,324 17,383,668
Investment in joint venture 401,460 263,579
Deferred income tax asset - 304,300
Other assets 752,932 588,948
------------- --------------
Total assets $ 75,703,773 $ 33,177,684
============= ==============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 218,881 $ 150,950
Short-term borrowings 4,500,000 -
Construction accounts payable 583,043 667,312
Accounts payable and other accrued expenses 685,136 1,453,668
Accrued payroll 502,568 335,155
Accrued interest 179,963 57,530
------------- --------------
Total current liabilities 6,669,591 2,664,615
Long-term debt 51,450,545 9,981,235
Deferred development fees, net 898,802 -
Other liabilities 517,578 474,423
------------- --------------
Total liabilities 59,536,516 13,120,273
------------- --------------
Minority interest 250,000 -
------------- --------------
Commitments
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized;
1,666,667 shares issued and outstanding in 1997 and 1996 9,349,841 9,349,841
Common stock, no par value, 25,000,000 shares authorized;
4,633,000 shares issued and outstanding in 1997 and 1996 10,808,703 10,808,703
Accumulated deficit (4,241,287) (101,133)
------------- --------------
Total shareholders' equity 15,917,257 20,057,411
------------- --------------
Total liabilities and shareholders' equity $ 75,703,773 $ 33,177,684
============= ==============
See accompanying notes to consolidated financial statements.
</TABLE>
F - 3
<PAGE>
<TABLE>
<CAPTION>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended
December 31
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Rental and service $ 13,751,027 $ 13,088,131
Management fees 207,255 172,118
------------- -------------
Total revenues 13,958,282 13,260,249
------------- -------------
Operating expenses:
Residence operating expenses 10,689,905 8,108,045
General and administrative 3,568,382 1,834,960
Lease expense 3,479,176 2,757,250
Depreciation and amortization 356,852 245,656
------------- -------------
Total operating expenses 18,094,315 12,945,911
------------- -------------
Operating income (loss) (4,136,033) 314,338
Interest income 381,326 361,565
Interest expense (136,636) (561,466)
Other income, net 26,566 20,658
------------- -------------
Income (loss) before income
taxes and extraordinary loss (3,864,777) 135,095
Provision for income taxes 12,877 58,400
------------- -------------
Income (loss) before extraordinary loss (3,877,654) 76,695
Extraordinary loss, net of income tax benefit - 53,097
------------- -------------
Net income (loss) $ (3,877,654) $ 23,598
============= =============
Diluted earnings (loss) per common share:
Before extraordinary loss (0.97) $ 0.01
Extraordinary loss - (0.01)
------------- -------------
Net income (loss) $ (0.97) $ -
============= =============
Weighted average common shares outstanding - basic 4,633,000 4,633,000
============= =============
Weighted average common shares outstanding - diluted 4,633,000 4,666,800
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
F - 4
<PAGE>
<TABLE>
<CAPTION>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Preferred stock
---------------------------------------------
Series A Series B Common stock Total
------------------- ------------------ ------------------- Accumulated shareholders'
Shares Amount Shares Amount Shares Amount deficit equity
------ ------ ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995 - $ - - $ - 4,633,000 $10,758,703 $ (98,501) $10,660,202
Issuance of preferred
stock, net of
issuance costs of
$600,159 1,283,785 7,201,910 382,882 2,147,931 - - - 9,349,841
Proceeds from issuance
of common stock
warrant - - - - - 50,000 - 50,000
Preferred stock
dividends - - - - - - (26,230) (26,230)
Net income - - - - - - 23,598 23,598
--------- ---------- --------- --------- --------- ---------- ---------- ----------
Balance, December 31,
1996 1,283,785 7,201,910 382,882 2,147,931 4,633,000 10,808,703 (101,133) 20,057,411
Preferred stock
dividends - - - - - - (600,000) (600,000)
Non-cash compensation
charge - - - - - - 337,500 337,500
Net loss - - - - - - (3,877,654) 3,877,654)
--------- ---------- -------- --------- --------- ---------- ---------- ----------
Balance, December 31,
1997 1,283,785 $7,201,910 382,882 $2,147,931 4,633,000 $10,808,703 $(4,241,287) $15,917,257
========= ========= ======== ========= ========= ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F - 5
<PAGE>
<TABLE>
<CAPTION>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended
December 31
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,877,654) $ 23,598
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 356,852 245,656
Non-cash compensation charge 337,500 -
Amortization of deferred development fees (21,198) -
Extraordinary loss - 86,997
Deferred income taxes 304,300 (304,300)
Changes in other assets and liabilities:
Accounts receivable 20,866 (33,240)
Prepaid expenses (61,560) (48,220)
Restricted cash - 76,364
Other assets (67,141) (149,187)
Accounts payable and other accrued epenses 38,418 529,890
Accrued payroll 167,413 252,290
Accrued interest 122,433 23,591
Other liabilities 43,155 57,418
------------- ------------
Net cash provided by (used in) operating activities (2,636,616) 760,857
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (52,898,548) (9,685,259)
Increase (decrease) in construction accounts payable (84,269) 885,486
Maturity (purchase) of investments, net 2,939,448 (986,906)
Investment in joint venture (137,881) (263,579)
Deposits to replacement reserve account, net (7,909) (43,200)
------------- ------------
Net cash used in investing activities (50,189,159) (10,093,458)
------------- ------------
Cash flows from financing activities:
Short-term borrowings 4,500,000 -
Proceeds from issuance of long-term debt 41,700,424 9,487,752
Payments on long-term debt (163,183) (5,682,956)
Construction advances 1,001,645 (1,125,315)
Payments and deposits for financing arrangements, net (234,364) (92,735)
Restricted cash for financing arrangements, net (707,599) (1,603,285)
Deferred development fee from financing arrangements 920,000 -
Contributions by minority partner 250,000 -
Proceeds from issuance of preferred stock - 9,349,841
Proceeds from issuance of common stock warrant - 50,000
Preferred stock issuance costs (600,159) 14,164
Preferred stock dividends (626,230) -
------------- ------------
Net cash provided by financing activities 46,040,534 10,397,466
------------- ------------
Net increase (decrease) in cash and cash equivalents (6,785,241) 1,064,865
Cash and cash equivalents, beginning of period 8,650,817 7,585,952
------------- ------------
Cash and cash equivalents, end of period $ 1,865,576 $ 8,650,817
============= ============
See accompanying notes to consolidated financial statements.
</TABLE>
F - 6
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Operations and Summary of Significant Accounting Policies
Regent Assisted Living, Inc. (the Company) is an owner, operator and
developer of private-pay assisted living communities. 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.
(a) The Company
The results of operations for the year ended December 31, 1996 reflect
the operations of three assisted living communities (458 beds) and
property management services provided to one community (112 beds). The
results of operations for the year ended December 31, 1997, additionally
reflect the start-up operations of three new internally developed
assisted living communities (389 beds), one acquired community (48 beds)
and one additional management account (48 beds).
As of December 31, 1997, an additional 11 assisted living communities
(1,299 beds) are under construction. Also, the Company has acquired five
sites and has purchase options to acquire six additional parcels, all for
future development.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company maintains its cash in bank deposit accounts which, 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.
(Continued)
F - 7
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) Investments
The Company classifies its investments as available-for-sale securities.
Realized gains and losses on sales of securities are reflected in
operations; unrealized gains and losses are reflected in the statement of
changes in shareholders' equity. The Company had no unrealized gains or
losses on its investments as of December 31, 1997 and 1996.
(e) 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 10 years
Furniture and equipment 5 - 7 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.
The Company has adopted Statement of Financial Accounting Standards No
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This Statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of this Statement did not affect the Company's results of
operations.
(f) 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 $2,310,884 and $1,603,285 as of December 31,
1997 and 1996, respectively. Restricted cash also includes a replacement
reserve required to be maintained for one of the communities.
(Continued)
F - 8
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(g) Investment in Joint Venture
The Company has a 50% investment in Regent Northshore House, L.L.C., a
joint venture organized to develop an assisted living community in
Kenmore, Washington. As of December 31, 1997, the community was under
construction and has not commenced operations. The Company accounts for
its investment under the equity method.
(h) Pre-opening Costs
The Company expenses pre-opening and start-up costs as incurred.
(i) Development Fees
The Company defers development fees and amortizes them over the term of
the related lease.
(j) 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 other support services. Management fees
related to property management services for other assisted living
communities, substantially all of which are owned by affiliated entities,
are recorded when the services are rendered.
(k) 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.
(Continued)
F - 9
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) Computation of Per Share Amounts
Beginning December 31, 1997, basic earnings per share (EPS) and diluted
EPS are computed using the methods prescribed by Statement of Financial
Accounting Standard No. 128, Earnings Per share (SFAS 128). Basic EPS is
calculated using income (loss) attributable to common shares (after
deducting preferred dividends) divided by the weighted average number of
common shares outstanding for the period. Diluted EPS is calculated using
income (loss) attributable to common shares (after deducting preferred
dividends and considering the effects of dilutive common equivalent
shares) divided by the weighted average number of common shares and
dilutive common shares outstanding for the period. Prior period amounts
have been restated to conform with the presentation requirements of SFAS
128.
The difference between the weighted average common shares outstanding for
basic and diluted earnings per share in 1996 relates to stock options.
(m) 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 Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123
requires that companies which 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 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 123.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(o) 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.
(Continued)
F - 10
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(p) New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). This statement
establishes standards for reporting and displaying comprehensive income
and its components in a full set of general purpose financial statements.
The objective of SFAS 130 is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events
of the period other than transactions with owners. The Company expects to
adopt SFAS 130 in the first quarter of 1998 and does not expect
comprehensive income (loss) to be materially different from currently
reported net loss.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). This statement establishes standards for the way
that public business enterprises report information about operating
segments interim and annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The Company expects to adopt SFAS 131 for its
fiscal year beginning January 1, 1998 and does not expect the adoption of
SFAS 131 to have a significant impact on their financial statements.
(q) Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1996 to conform to the 1997 presentation.
(2) Property and Equipment
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Land $ 1,730,810 $ 1,100,000
Buildings and improvements 12,713,346 6,520,556
Furniture and equipment 1,512,868 530,540
Construction in progress 54,429,419 9,456,006
------------ -----------
70,386,443 17,607,102
Less accumulated depreciation and amortization 566,119 223,434
----------- -----------
Property and equipment, net $69,820,324 $17,383,668
=========== ===========
</TABLE>
(Continued)
F - 11
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 a capital
lease in the amount of $7,724,177 at December 31, 1997 and 1996.
Accumulated amortization related to this lease was $390,700 and $200,403 at
December 31, 1997 and 1996, respectively.
(3) Other Assets
Other assets consist of the following:
1997 1996
---- ----
Resident security and trust deposits $ 517,578 $ 473,437
Deferred financing costs, net 195,381 89,961
Other 39,973 25,550
-------- --------
Total other assets $ 752,932 $ 588,948
======== ========
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.
(Continued)
F - 12
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Long-Term Debt
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Capital lease obligation, due in monthly
installments of $69,100, including interest at
8.40%, due in November 2012 (see note 7) $ 8,072,754 $ 8,217,044
Notes payable to a bank, due in monthly installments
of $6,056, including interest at various rates
between 8.75% and 8.88%, all maturing at
various dates in 2002 279,774 -
Note payable to a corporation, quarterly payments
of interest only at 9.00%, due in December 2000 500,000 500,000
Construction loans, totaling $63,545,500, for
communities under construction, interest varies
between 8.38% and 9.50%, maturities vary from
August 1999 through September 2003 42,250,452 1,362,721
Other 566,446 52,420
------------ -------------
51,669,426 10,132,185
Less amounts due within one year 218,881 150,950
------------ -------------
Amounts due after one year $ 51,450,545 $ 9,981,235
============ =============
</TABLE>
Principal payments on long-term debt for the years ending December 31 are
as follows:
1998 $ 218,881
1999 4,967,038
2000 14,955,143
2001 4,548,534
2002 6,370,391
Thereafter 20,609,439
-----------
$ 51,669,426
===========
The Company incurred total interest costs of approximately $1,926,200 and
$574,500 in 1997 and 1996, respectively, of which approximately $1,789,500
and $13,100 has been capitalized as part of construction in progress.
Interest costs paid by the Company in 1997 and 1996 totaled approximately
$1,803,800 and $550,900, respectively.
The Company, along with its joint venture partner, has guaranteed a
construction loan in the amount of $6.5 million.
(Continued)
F - 13
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Shareholders' Equity
The Company is authorized to issue 5,000,000 shares of preferred stock.
The Board of Directors has the authority to issue preferred stock in one
or more series and to fix the number of shares constituting any such
series, and the preferences, limitations and relative rights, including
the dividend rights, dividend rate, voting rights, terms of redemption,
redemption price or prices, conversion rights and liquidation preferences
of the shares constituting any series, without any further vote or action
by the shareholders of the Company.
On December 16, 1996, the Company issued 1,283,785 shares of Series A
preferred stock and 382,882 shares of Series B preferred stock
(collectively, the "Preferred Stock") for a total of $9,950,000. In
connection with this transaction, a warrant was issued to the holders of
the preferred stock for $50,000, allowing the warrant holder to purchase
200,000 shares of common stock at an exercise price of $5.50 per share.
The preferred stock is convertible into 1.091 shares of common stock. The
Series A preferred shares are convertible at any time at the option of
the holder. The Series B preferred shares are convertible upon the
occurrence of certain "Conversion Events" as defined in the Company's
amended articles of incorporation.
Dividends on the preferred stock accrue at an annual rate of 6% of the
liquidation value of $5.50 per share.
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.
(6) Stock Options
(a) 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 600,000 shares of common stock
may be issued under the 1995 Stock Incentive Plan. As of December 31,
1997 options to purchase 393,000 shares had been granted pursuant to the
Plan.
(Continued)
F - 14
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The 1995 Stock Incentive Plan is administered by the Board of Directors,
which has the authority, subject to the terms of the 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 of option agreements entered into at the time of grant. Generally,
options expire 10 years from date of grant and are expected to become
exercisable over a five-year period. Options granted under the 1995 Stock
Incentive Plan are generally nontransferable by the optionee and, unless
otherwise determined by the Board of Directors, must be exercised by the
optionee during the period of the optionee's employment or service with
the Company or within a specified period following termination of
employment or service.
Non-employee members of the Board of Directors of the Company are
automatically granted an option to purchase 2,000 shares of common stock
when they become a director. Each non-employee director is automatically
granted an option to purchase 2,000 additional shares of common stock in
each subsequent calendar year that the director continues to serve in
that capacity. The exercise price for these options will generally be the
fair market value of the common stock at the date of grant.
During the year ended December 31, 1997, the Company recognized
compensation expense in the amount of $337,500 for options granted below
fair value on the grant date.
(b) 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. These options vest and become
immediately exercisable, and are subject to the terms of option
agreements which contain terms similar to those governing the options
granted under the 1995 Stock Incentive Plan.
(Continued)
F - 15
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Weighted-
Number average
of exercise
shares price
------ -----
<S> <C> <C>
Balance, December 31, 1995 354,000 $ 6.83
Options granted 184,500 4.85
-------
Balance, December 31, 1996 538,500 6.15
Options granted 239,500 3.55
Options canceled (215,000) 6.97
-------
Balance, December 31, 1997 563,000 4.73
=======
</TABLE>
The following table summarizes information about stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options exercisable
Weighted- ------------------------
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
price outstanding life price exercisable price
----- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$6.00 - $8.00 170,000 7.7 years $ 6.12 170,000 $ 6.12
$3.00 - $7.50 393,000 8.4 years 4.13 112,100 5.22
-------- --------
563,000 282,100
======== ========
</TABLE>
The total value of options granted during 1997 and 1996 was computed as
approximately $1,250,000 and $916,000, respectively, which would be
amortized on a pro forma basis over the vesting period of the options. The
weighted average fair market value of the option grants during 1997 and
1996 was $5.22 and $4.96, respectively.
(Continued)
F - 16
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has adopted the disclosure-only provisions of SFAS No. 123.
The following table presents the Company's net income (loss) and earnings
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.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income (loss) before
extraordinary loss As Reported $ (3,877,654) $ 76,695
Pro Forma (4,235,654) (104,041)
Net income (loss) As Reported (3,877,654) 23,598
Pro Forma (4,235,654) (157,138)
Diluted earnings (loss)
per common share
before extraordinary
loss As Reported (0.97) 0.01
Pro Forma (1.04) (0.03)
Diluted earnings (loss)
per common share As Reported (0.97) -
Pro Forma (1.04) (0.03)
</TABLE>
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.
1997 1996
---- ----
Risk-free interest rate 6.25% 6.75%
Expected life 6.5 years 9.1 years
Expected volatility 43.1% 36.6%
Expected dividend yield 0% 0%
(Continued)
F - 17
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Commitments
(a) Operating Leases
The Company leases seven communities under non-cancelable lease
agreements expiring in the years 2005 through 2012. The leases are
subject to additional rent payments based on a percentage of the increase
in annual revenue of the respective facility. The Company is responsible
for all costs including repairs, property taxes and other direct
operating costs.
The Company leases its corporate offices under a noncancelable operating
lease expiring February 2003. The corporate offices were shared with
certain other related entities in 1997, and a portion of the total lease
expense was paid by those entities (see note 9(a)).
Future minimum lease payments required under these leases for the years
ending December 31 are as follows:
1998 $ 5,405,000
1999 5,475,000
2000 5,469,000
2001 5,470,000
2002 5,456,000
Thereafter 30,415,000
-------------
$ 57,690,000
=============
Lease and rent expense for the Company totaled approximately $3,648,700
and $2,845,300 in 1997 and 1996, respectively.
(b) Capital Lease
During 1996, the Company entered into a sale leaseback transaction
accounting for this transaction as a financing. The total consideration
for the sale was $8,300,000, which was recorded as a capital lease
obligation by the Company (see note 4). As a result of the transaction,
the Company realized net cash proceeds of approximately $2,660,000 (after
related costs of approximately $99,000) and retired long-term debt
totaling $5,541,000. In connection with the retirement of the existing
debt, the Company wrote off the unamortized balance of the loan costs
related to that debt resulting in an extraordinary charge of $86,997,
before income tax benefit of $33,900. The Company recognized a gain on
this transaction of approximately $733,000 for income tax purposes.
(Continued)
F - 18
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company will continue to operate this community pursuant to a lease
agreement that expires in 2012. This lease is subject to additional rent
payments based on a percentage of the increase in annual revenue of the
community. The Company is also responsible for all costs including
property taxes, maintenance and other direct operating costs.
(c) Other Lease Financing
The Company entered into arrangements pursuant to which a real estate
investment trust (REIT) specializing in health care properties agreed to
provide lease financing for the development of three of the Company's
communities. Two of the communities commenced operations in 1997 and one
community was under construction at December 31, 1997. The Company
advanced approximately $124,000 and $1,125,000 of reimburseable
construction costs at December 31, 1997 and 1996, respectively. These
leases are included in note 7(a). Upon commencement of operations at the
communities, lease payments begin and are accounted for as operating
leases.
(d) Construction Financing
The Company has entered into construction loans in the aggregate of $63.5
million for the construction of nine of its communities. The Company has
also obtained from a bank a commitment to provide up to $15 million to
finance five stand-alone Alzheimers' projects. The Company, along with
its joint venture partner, has guaranteed a construction loan of $6.5
million. All of these loans are generally for a term of 3 years, are
collateralized by the related property, and are guaranteed by a
shareholder.
(Continued)
F - 19
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Income Taxes
The components of the provision for income taxes before extraordinary loss
for the year ended December 31, 1997 and 1996 are as follows:
1997 1996
----------- -----------
Current:
Federal $ (271,194) $ 300,774
State (20,229) 61,926
----------- -----------
(291,423) 362,700
Deferred:
Federal 257,370 (256,200)
State 46,930 (48,100)
----------- -----------
304,300 (304,300)
----------- -----------
$ 12,877 $ 58,400
=========== ===========
Income tax expense for the year ended December 31, 1997 and 1996 differs
from the amounts computed by applying the U.S. Federal income tax rate of
34% to pretax income before extraordinary loss as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (1,314,024) $ 45,932
Increase (decrease) in income taxes resulting from:
State taxes, net of federal benefit (151,973) 9,125
Increase in valuation allowance 1,513,097 -
Other, net (34,223) 3,343
------------ ----------
Actual income tax expense $ 12,877 $ 58,400
============ ==========
</TABLE>
(Continued)
F - 20
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to the deferred tax
assets at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Sale leaseback transaction (note 2) $ 311,785 $ 285,800
Accrued expenses 77,900 -
Federal and state operating loss carryforwards 644,945 -
Deferred development fees 341,185 -
Other 137,282 18,500
------------- ------------
Total gross deferred tax assets 1,513,097 304,300
Less valuation allowance (1,513,097) -
------------- ------------
Net deferred tax assets $ - $ 304,300
============= ============
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards for
<PAGE>
Federal and state income tax purposes of approximately $1,573,000 and
$2,371,000, respectively, which are available to offset future Federal and
state taxable income, if any, through 2012.
The net change in the total valuation allowance for the years ended
December 31, 1997 and 1996 was an increase of $1,513,097 and $-0-,
respectively.
(9) Related Party Transactions
Certain executive officers of the Company fulfill similar executive
functions for other companies, which are owned or controlled by the
majority shareholder, and spend significant amounts of time on the business
of such companies.
(a) 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 $408,000 in 1997 and $398,000 in 1996.
(Continued)
F - 21
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Construction Contracts
Throughout 1997 and 1996, construction of the Company's new communities
has been performed pursuant to construction contracts with a company
owned by the majority shareholder. The terms of these contracts provide
for, among other things, contractor's profit and overhead of up to 5% of
the construction costs. Such fees totaled approximately $1,058,000 in
1997 and $181,000 in 1996.
(c) Lease Arrangements
The Company leases two assisted living communities from entities
controlled by the majority shareholder. The leases, expiring in 2005, are
for 10 year terms at annual base rentals of $2,757,250 and are subject to
additional rent payments based on a percentage of the increase in annual
revenue of the respective community. Lease payments totaled $2,776,248
and $2,757,250 in 1997 and 1996, respectively. The Company is responsible
for all costs including repairs to the facilities, property taxes and
other direct operating costs of the communities. The underlying mortgage
lender for one of the leased communities requires that not less than 25
percent of the outstanding stock of the Company be owned by the current
majority shareholder and that the current majority shareholder continue
to control the management of the Company.
(d) Management Fees
The Company manages one assisted living community from an entity
controlled by the majority shareholder. The Company receives a management
fee equal to 5 percent of the gross revenues of the community which
amounted to approximately $151,800 and $147,800 in 1997 and 1996,
respectively.
(10) Retirement Plan
Employees of the Company participate in a salary deferral plan under the
provisions of Section 401(k) of the Internal Revenue Code whereby they may
defer a portion of their gross wages. The employer may make additional
contributions to the Plan. Employer contributions made by the Company
totaled approximately $92,300 and $53,000 in 1997 and 1996, respectively.
(Continued)
F - 22
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Subsequent Events
During the first quarter of 1998, the Company entered into sale leaseback
agreements with real estate investment trusts (REITs) related to two
assisted living communities. These communities were sold for an aggregate
of $18.1 million, resulting in a net gain approximating $2.6 million, which
was deferred and will be amortized over the respective lease term.
The Company will continue to operate these communities pursuant to lease
agreements, expiring at various dates from 2011 to 2013. The terms of these
agreements provide for annual base rental payments of $1,615,370. These
leases are subject to typical rent escalations. The Company is responsible
for all costs including property taxes, maintenance and other direct
operating costs.
On March 27, 1998, the Board of Directors approved a private placement of
$10.5 million of the Company's convertible subordinated debentures due
2008. The debentures will bear interest at 7.5 percent per annum and are
convertible into the Company's common stock at a price of $7.50 per share.
The closing of this transaction is subject to the satisfaction of customary
conditions.
Upon closing of the private placement of the Company's convertible
subordinated debentures, the Company will have secured a commitment to
receive approximately $54.6 million of sale leaseback financing.
F - 23
<PAGE>
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 30th day of March, 1998.
REGENT ASSISTED LIVING, INC.
By: 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 30th day of March, 1998.
Signature Title
--------- -----
WALTER C. BOWEN President, Chief Executive Officer,
- ---------------------------------- Chairman of the Board and Director
Walter C. Bowen (Principal Executive Officer)
STEVEN L. GISH Chief Financial Officer, Treasurer,
- ---------------------------------- Assistant Secretary and Director
Steven L. Gish (Principal Financial and Accounting
Officer)
PETER J. BRIX Director
- ----------------------------------
Peter J. Brix
STEPHEN A. GREGG Director
- ----------------------------------
Stephen A. Gregg
DANA J. O'BRIEN Director
- ----------------------------------
Dana J. O'Brien
MARVIN S. HAUSMAN, M.D. Director
- ----------------------------------
Marvin S. Hausman, M.D.
GARY R. MAFFEI Director
- ----------------------------------
Gary R. Maffei
MARTHA L. ROBINSON
- ---------------------------------- Director
Martha L. Robinson
<PAGE>
EXHIBIT INDEX
Exhibit Description
Number Page 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.
(1)4.1 See Article II of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2.
(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)10.3 Employment Agreement between the Company and Walter C. Bowen.
(1)10.4 Employment Agreement between the Company and James W. Ekberg.
(1)10.5 Employment Agreement between the Company and Eric W. Jacobsen.
(1)10.6 Employment Agreement between the Company and Steven L. Gish.
(1)10.7 Employment Agreement between the Company and Gregory Roderick.
(1)10.8 Restrictive Covenant Agreement between the Company and
Walter C. Bowen.
(1)10.9 Restrictive Covenant Agreement between the Company and
James W. Ekberg.
(1)10.10 Restrictive Covenant Agreement between the Company and
Eric W. Jacobsen.
(1)10.11 Restrictive Covenant Agreement between the Company and
Steven L. Gish.
(1)10.12 Restrictive Covenant Agreement between the Company and
Gregory Roderick.
(5)10.13 1995 Stock Incentive Plan, as amended effective December 4,
1997.
(1)10.14 Form of Incentive Stock Option Agreement.
(1)10.15 Form of Nonqualified Stock Option Agreement.
(1)10.16 Administrative Services Agreement among the Company and
certain of the Bowen companies.
(1)10.17 Indemnity Agreement between the Company and Walter C. Bowen.
(1)10.18 Indemnity Agreement between the Company and James W. Ekberg.
(1)10.19 Indemnity Agreement between the Company and Eric W. Jacobsen.
(1)10.20 Indemnity Agreement between the Company and Steven L. Gish.
(1)10.21 Regulatory Agreement by and between the Company (as assignee)
and the Oregon Housing and Community Services Department
("OHCS").
(1)10.22 Form of First Amendment to Regulatory Agreement between the
Company and OHCS.
(1)10.23 Management Agreement regarding Park Place.
(1)10.24 Subordination and Attornment Agreement with The Canada Life
Assurance Company regarding Regency Park.
(1)10.25 Promissory Note from the Company to Sunshine Villa, Inc.
(1)10.26 Note from the Company to United States National Bank of
Oregon.
(1)10.27 Line of Credit Instrument between the Company and United
States National Bank of Oregon.
(2)10.28 Letter of Understanding, effective as of March 8, 1996,
between the Company, Dr. Marvin S. Hausman, and Northwest
Medical Research Partners.
(2)10.29 Employment Agreement, effective as of March 20, 1996, between
David R. Gibson and the Company
(2)10.30 Restrictive Covenant Agreement, effective as of March 20,
1996, between David R. Gibson and the Company
(3)10.32 Preferred Stock and Warrant Agreement between Prudential
Private Equity Investors III, L.P. ("PPEI") and the Company
dated as of December 16, 1996.
(3)10.33 Stockholders Agreement among the Company, PPEI, and Walter C.
Bowen dated as of December 16, 1996.
(3)10.34 Registration Agreement between the Company and PPEI dated as
of December 16, 1996.
(3)10.35 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of
Common Stock.
(3)10.36 First Amendment to Lease between the Company and Regency Park
Apartments Limited Partnership dated December 16, 1996.
(3)10.37 Second Amendment to Lease between the Company and Sterling
Park, L.L.C. dated December 16, 1996.
(3)10.38 Form of Indemnity Agreement between the Company and directors.
(4)16 Letter from Coopers & Lybrand L.L.P.
(5)21 List of Subsidiaries.
(5)23.1 Consent of Coopers & Lybrand L.L.P.
(5)23.2 Consent of KPMG Peat Marwick LLP.
(5)27.1 Financial Data Schedule
(5)27.2 Restated Financial Data Schedule
- -----------
(1) Incorporated by reference to 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 Exhibit to the Company's Form 8-K dated
December 29, 1997.
(5) Filed herewith.
REGENT ASSISTED LIVING, INC.
1995 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to
enable Regent Assisted Living, Inc. (the "Company") to attract and retain the
services of (1) selected employees, officers and directors of the Company and
(2) selected nonemployee agents, consultants, advisors and independent
contractors of the Company.
2. Shares Subject to the Plan. Subject to adjustment as provided below and
in Section 13, the shares to be offered under the Plan shall consist of Common
Stock of the Company, and the total number of shares of Common Stock that may be
issued under the Plan shall not exceed 600,000 shares (after giving effect to a
3,000 for 1 stock split). The shares issued under the Plan may be authorized and
unissued shares or reacquired shares. If an option, stock appreciation right or
performance unit granted under the Plan expires, terminates or is cancelled, the
unissued shares subject to such option, stock appreciation right or performance
unit shall again be available under the Plan. If shares sold or awarded as a
bonus under the Plan are forfeited to or repurchased by the Company, the number
of shares forfeited or repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective as of August 28,
1995. No option, stock appreciation right or performance unit granted under the
Plan to an officer (an "Officer") who is subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or a director,
and no incentive stock option, shall become exercisable, however, until the Plan
is approved by the affirmative vote of the holders of a majority of the shares
of Common Stock represented at a shareholders meeting at which a quorum is
present, and any such awards under the Plan before such approval shall be
conditioned on and subject to such approval. Subject to this limitation,
options, stock appreciation rights and performance units may be granted and
shares may be awarded as bonuses or sold under the Plan at any time after the
effective date and before termination of the Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.
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4. Administration.
(a) Board of Directors. The Plan shall be administered by the Board of
Directors of the Company, which shall determine and designate from time to time
the individuals to whom awards shall be made, the amount of the awards and the
other terms and conditions of the awards. Subject to the provisions of the Plan,
the Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Board of Directors necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the Board
of Directors shall be final and conclusive. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect, and it shall be the sole and final judge of such
expediency.
(b) Committee. The Board of Directors may delegate to the Compensation
Committee of the Board of Directors or specified officers of the Company, or
both (the "Committee") any or all authority for administration of the Plan. If
authority is delegated to the Committee, all references to the Board of
Directors in the Plan shall mean and relate to the Committee, except (i) as
otherwise provided by the Board of Directors, (ii) that only the Board of
Directors may amend or terminate the Plan as provided in Sections 3 and 13 and
(iii) that if the Committee includes officers of the Company, the Committee
shall not be permitted to grant options to persons who are officers of the
Company. If awards are to be made under the Plan to Officers or directors (in
addition to the option grants to be awards made to non-employee directors
pursuant to Section 17 hereof), authority for selection of Officers and
directors for participation and decisions concerning the timing, pricing and
amount of a grant or award, if not determined under a formula meeting the
requirements of Rule 16b3 under the Exchange Act, shall be delegated to another
committee consisting of two or more disinterested directors.
5. Types of Awards; Eligibility. The Board of Directors may, from time to
time, take the following action, separately or in combination, under the Plan:
(i) grant Incentive Stock Options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), as provided in Sections 6(a) and
6(b); (ii) grant options other than Incentive Stock Options ("NonStatutory Stock
Options") as provided in Sections 6(a) and 6(c); (iii) award stock bonuses as
provided in Section 7; (iv) sell shares subject to restrictions as provided in
Section 8; (v) grant stock appreciation rights as provided in Section 9; (vi)
grant cash bonus rights as provided in Section 10; and (vii) grant performance
units as provided in Section 11. Any such awards may be made to employees,
including employees who are officers or directors, and to other individuals
described in Section 1 who the Board of Directors believes have made or will
make an important contribution to the Company; provided, however, that only
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employees of the Company shall be eligible to receive Incentive Stock Options
under the Plan. The Board of Directors shall select the individuals to whom
awards shall be made and shall specify the action taken with respect to each
individual to whom an award is made. At the discretion of the Board of
Directors, an individual may be given an election to surrender an award in
exchange for the grant of a new award. No employee may be granted options or
stock appreciation rights under the Plan for more than an aggregate of 100,000
shares of Common Stock in connection with the hiring of the employee or 50,000
shares of Common Stock in any calendar year otherwise.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Board of Directors may grant options
under the Plan. With respect to each option grant, the Board of Directors
shall determine the number of shares subject to the option, the option
price, the period of the option, the time or times at which the option may
be exercised and whether the option is an Incentive Stock Option or a
NonStatutory Stock Option. At the time of the grant of an option or at any
time thereafter, the Board of Directors may provide that an optionee who
exercised an option with Common Stock of the Company shall automatically
receive a new option to purchase additional shares equal to the number of
shares surrendered and may specify the terms and conditions of such new
options.
(ii) Exercise of Options. Except as provided in Section 6(a)(iv)
or as determined by the Board of Directors, no option granted under the
Plan may be exercised unless at the time of such exercise the optionee is
employed by or in the service of the Company and shall have been so
employed or provided such service continuously since the date the option
was granted. Absence on leave or on account of illness or disability under
rules established by the Board of Directors shall not, however, be deemed
an interruption of employment or service for this purpose. Unless otherwise
determined by the Board of Directors, vesting of options shall not continue
during an absence on leave (including an extended illness) or on account of
disability. Except as provided in Sections 6(a)(iv) and 12, options granted
under the Plan may be exercised from time to time over the period stated in
each option in such amounts and at such times as shall be prescribed by the
Board of Directors, provided that options shall not be exercised for
fractional shares. Unless otherwise determined by the Board of Directors,
if an optionee does not exercise an option in any one year with respect to
the full number of shares to which the optionee is entitled in that year,
the optionee's rights shall be cumulative and the optionee may purchase
those shares in any subsequent year during the term of the option. Unless
otherwise determined by the Board of Directors, if an Officer exercises an
option
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within six months of the grant of the option, the shares acquired upon
exercise of the option may not be sold until six months after the date of
grant of the option.
(iii) Nontransferability. Each Incentive Stock Option and, unless
otherwise determined by the Board of Directors with respect to an option
granted to a person who is neither an Officer nor a director of the
Company, each other option granted under the Plan by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution
of the state or country of the optionee's domicile at the time of death.
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the Board
of Directors, in the event an optionee's employment or service with
the Company terminates for any reason other than because of physical
disability or death as provided in Sections 6(a)(iv)(B) and (C), his
or her option may be exercised at any time before the expiration date
of the option or the expiration of 30 days after the date of
termination, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Board of Directors, in the event an
optionee's employment or service with the Company terminates because
of total disability, his or her option may be exercised at any time
before the expiration date of the option or the expiration of 12
months after the date of termination, whichever is the shorter period,
but only if and to the extent the optionee was entitled to exercise
the option at the date of termination. The term "total disability"
means a medically determinable mental or physical impairment that is
expected to result in death or has lasted or is expected to last for a
continuous period of 12 months or more and that causes the optionee to
be unable, in the opinion of the Company and two independent
physicians, to perform his or her duties as an employee, director,
officer or consultant of the Company and to be engaged in any
substantial gainful activity. Total disability shall be deemed to have
occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the
Company.
(C) Termination Because of Death. Unless otherwise
determined by the Board of Directors, in the event of an optionee's
death while employed by or providing service to the Company, his or
her option may be exercised at any time before the expiration date of
the option or the expiration of 12 months after the date of death,
whichever is
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the shorter period, but only if and to the extent the optionee was
entitled to exercise the option at the date of death and only by the
person or persons to whom the optionee's rights under the option shall
pass by the optionee's will or by the laws of descent and distribution
of the state or country of domicile at the time of death.
(D) Amendment of Exercise Period Applicable to Termination.
The Board of Directors, at the time of grant or, with respect to an
option that is not an Incentive Stock Option, at any time thereafter,
may extend the 30-day and 12-month exercise periods any length of time
not longer than the original expiration date of the option, and may
increase the portion of an option that is exercisable, subject to such
terms and conditions as the Board of Directors may determine.
(E) Failure to Exercise Option. To the extent that the
option of any deceased optionee or any optionee whose employment or
service terminates is not exercised within the applicable period, all
further rights to purchase shares pursuant to the option shall cease
and terminate.
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(v) Purchase of Shares. Unless the Board of Directors determines
otherwise, shares may be acquired pursuant to an option granted under the
Plan only upon the Company's receipt of written notice from the optionee of
the optionee's intention to exercise, specifying the number of shares as to
which the optionee desires to exercise the option and the date on which the
optionee desires to complete the transaction, and if required in order to
comply with the Securities Act of 1933, as amended, containing a
representation that it is the optionee's present intention to acquire the
shares for investment and not with a view to distribution. Unless the Board
of Directors determines otherwise, on or before the date specified for
completion of the purchase of shares pursuant to an option, the optionee
must have paid the Company the full purchase price of those shares in cash
(including, with the consent of the Board of Directors, cash that may be
the proceeds of a loan from the Company (provided that, with respect to an
Incentive Stock Option, such loan is approved at the time of option grant))
or, with the consent of the Board of Directors, in whole or in part, in
Common Stock of the Company valued at fair market value, restricted stock,
performance units or other contingent awards denominated in either stock or
cash, promissory notes and other forms of consideration. The fair market
value of Common Stock provided in payment of the purchase price shall be
the closing price of the Common Stock as reported in The Wall Street
Journal on the last trading day before the date the option is exercised, or
such other reported value of the Common Stock as shall be specified by the
Board of Directors. No shares shall be issued until full payment for the
shares has been made. With the consent of the Board of Directors (which, in
the case of an Incentive Stock Option, shall be given only at the time of
grant), an optionee may request the Company to apply automatically the
shares to be received upon the exercise of a portion of a stock option
(even though stock certificates have not yet been issued) to satisfy the
purchase price for additional portions of the option. Each optionee who has
exercised an option shall, immediately upon notification of the amount due,
if any, pay to the Company in cash amounts necessary to satisfy any
applicable federal, state and local tax withholding requirements. If
additional withholding is or becomes required beyond any amount deposited
before delivery of the certificates, the optionee shall pay such amount to
the Company on demand. If the optionee fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the
Company to the optionee, including salary, subject to applicable law. With
the consent of the Board of Directors an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold from the
shares to be issued upon exercise that number of shares that would satisfy
the withholding amount due or by delivering to the Company Common Stock to
satisfy the withholding amount. Upon the exercise of an option, the number
of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued upon exercise of the option.
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(b) Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value,
on the date of grant, of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by that employee during
any calendar year under the Plan and under all incentive stock option plans
(within the meaning of Section 422 of the Code) of the Company exceeds
$100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company only if the option price is at least 110
percent of the fair market value, as described in Section 6(b)(iv), of the
Common Stock subject to the option on the date it is granted and the option
by its terms is not exercisable after the expiration of five years from the
date it is granted.
(iii) Duration of Options. Subject to Sections 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Board of Directors, except that no
Incentive Stock Option shall be exercisable after the expiration of 10
years from the date it is granted.
(iv) Option Price. The option price per share shall be determined
by the Board of Directors at the time of grant. Except as provided in
Section 6(b)(ii), the option price shall not be less than 100 percent of
the fair market value of the Common Stock covered by the Incentive Stock
Option at the date the option is granted. The fair market value shall be
deemed to be the closing price of the Common Stock as reported in The Wall
Street Journal on the day before the date the option is granted, or, if
there has been no sale on that date, on the last preceding date on which a
sale occurred, or such other value of the Common Stock as shall be
specified by the Board of Directors.
(v) Limitation on Time of Grant. No Incentive Stock Option shall
be granted on or after the 10th anniversary of the effective date of the
Plan.
(vi) Conversion of Incentive Stock Options. The Board of
Directors may at any time, without the optionee's consent, convert an
Incentive Stock Option to a NonStatutory Stock Option.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following terms and conditions, in addition to those set forth in
Section 6(a) above:
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(i) Option Price. The option price for NonStatutory Stock Options
shall be determined by the Board of Directors at the time of grant and may
be any amount determined by the Board of Directors.
(ii) Duration of Options. Non-Statutory Stock Options granted
under the Plan shall continue in effect for the period fixed by the Board
of Directors.
7. Stock Bonuses. The Board of Directors may award shares under the Plan as
stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. If shares are subject to forfeiture, all
dividends or other distributions paid by the Company with respect to the shares
shall be retained by the Company until the shares are no longer subject to
forfeiture, at which time all accumulated amounts shall be paid to the
recipient. The Board of Directors may require the recipient to sign an agreement
as a condition of the award, but may not require the recipient to pay any
monetary consideration other than amounts necessary to satisfy tax withholding
requirements. The agreement may contain any terms, conditions, restrictions,
representations and warranties required by the Board of Directors. The
certificates representing the shares awarded shall bear any legends required by
the Board of Directors. Unless otherwise determined by the Board of Directors,
shares awarded as a stock bonus to an Officer may not be sold until six months
after the date of the award. The Company may require any recipient of a stock
bonus to pay to the Company in cash upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements. If the
recipient fails to pay the amount demanded, the Company may withhold that amount
from other amounts payable by the Company to the recipient, including salary,
subject to applicable law. With the consent of the Board of Directors, a
recipient may deliver Common Stock to the Company to satisfy this withholding
obligation. Upon the issuance of a stock bonus, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued.
8. Restricted Stock. The Board of Directors may issue shares under the Plan
for such consideration (including promissory notes and services) as determined
by the Board of Directors. Shares issued under the Plan shall be subject to the
terms, conditions and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability, repurchase by
the Company and forfeiture of the shares issued, together with such other
restrictions as may be determined by the Board of Directors. If shares are
subject to forfeiture or repurchase by the Company, all dividends or other
distributions paid by the Company with respect to the shares shall be retained
by the Company until the shares are no longer subject to forfeiture or
repurchase, at which time all accumulated amounts shall be paid to the
recipient. All Common Stock issued pursuant to this Section 8 shall be subject
to a purchase agreement, which shall be executed by the Company and the
prospective
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recipient of the shares before the delivery of certificates representing such
shares to the recipient. The purchase agreement may contain any terms,
conditions, restrictions, representations and warranties required by the Board
of Directors. The certificates representing the shares shall bear any legends
required by the Board of Directors. Unless otherwise determined by the Board of
Directors, shares issued under this Section 8 to an Officer may not be sold
until six months after the date the shares are issued. The Company may require
any purchaser of restricted stock to pay to the Company in cash upon demand
amounts necessary to satisfy any applicable federal, state or local tax
withholding requirements. If the purchaser fails to pay the amount demanded, the
Company may withhold that amount from other amounts payable by the Company to
the purchaser, including salary, subject to applicable law. With the consent of
the Board of Directors, a purchaser may deliver Common Stock to the Company to
satisfy this withholding obligation. Upon the issuance of restricted stock, the
number of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the Plan by
the Board of Directors, subject to such rules, terms and conditions as the Board
of Directors may determine.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal
in value to the excess of the fair market value on the date of exercise of
one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a stock appreciation right granted in
connection with an option, the excess of the fair market value of one share
of Common Stock of the Company over the option price per share under the
option to which the stock appreciation right relates), multiplied by the
number of shares covered by the stock appreciation right or the option, or
portion thereof, that is surrendered. No stock appreciation right shall be
exercisable at a time that the amount determined under this Section 9(b) is
negative. Payment by the Company upon exercise of a stock appreciation
right may be made in Common Stock valued at fair market value, in cash or
partly in Common Stock and partly in cash, all as determined by the Board
of Directors.
(ii) A stock appreciation right shall be exercisable only at the
time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, the following
rules shall apply: (1) the stock appreciation right shall be exercisable
only to the extent and on the same conditions that the related option may
be exercised; (2) the stock appreciation right shall be exercisable only
when the fair market value of the stock exceeds the option price of the
related option; (3) the stock appreciation right shall be for
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no more than 100 percent of the excess of the fair market value of the
stock at the time of exercise over the option price; (4) upon exercise of
the stock appreciation right, the option or portion thereof to which the
stock appreciation right relates terminates; and (5) upon exercise of the
option, the related stock appreciation right or portion thereof terminates.
Unless otherwise determined by the Board of Directors, no stock
appreciation right granted to an Officer or director may be exercised
during the first six months following the date it is granted.
(iii) The Board of Directors may withdraw any stock appreciation
right granted under the Plan at any time and may impose any conditions upon
the exercise of a stock appreciation right or adopt rules and regulations
from time to time affecting the rights of holders of stock appreciation
rights. Such rules and regulations may govern the right to exercise stock
appreciation rights granted before adoption or amendment of such rules and
regulations, as well as stock appreciation rights granted thereafter.
(iv) For purposes of this Section 9, the fair market value of the
Common Stock shall be determined as of the date the stock appreciation
right is exercised, under the methods set forth in Section 6(b)(iv).
(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to
the value of the fraction or, if the Board of Directors shall determine,
the number of shares may be rounded downward to the next whole share.
(vi) Each stock appreciation right granted in connection with an
Incentive Stock Option, and unless otherwise determined by the Board of
Directors with respect to a stock appreciation right granted to a person
who is neither an Officer nor a director of the Company, each other stock
appreciation right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution
of the state or country of the holder's domicile at the time of death, and
each stock appreciation right by its terms shall be exercisable during the
holder's lifetime only by the holder.
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(vii) Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in
cash amounts necessary to satisfy any applicable federal, state and local
tax withholding requirements. If the participant fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the participant, including salary, subject to applicable
law. With the consent of the Board of Directors, a participant may satisfy
this obligation, in whole or in part, by having the Company withhold from
any shares to be issued upon exercise that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the
Company to satisfy the withholding amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.
10. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
stock appreciation rights granted or previously granted, (iii) stock bonuses
awarded or previously awarded and (iv) shares sold or previously sold under the
Plan. Cash bonus rights will be subject to such rules, terms and conditions as
the Board of Directors may determine. Unless otherwise determined by the Board
of Directors with respect to a cash bonus right granted to a person who is
neither an Officer nor a director of the Company, each cash bonus right granted
under the Plan by its terms shall be nonassignable and nontransferable by the
holder, either voluntarily or by operation of law, except by will or by the laws
of descent and distribution of the state or country of the holder's domicile at
the time of death. The payment of a cash bonus shall not reduce the number of
shares of Common Stock reserved for issuance under the Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part if, in the sole discretion of the Board of Directors, the bonus right will
result in a tax deduction that the Company has sufficient taxable income to use.
If an optionee purchases shares upon exercise of an option and does not exercise
a related stock appreciation right, the amount of the bonus, if any, shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon exercise over the total option price for the shares
by the applicable bonus percentage. If the optionee exercises a related stock
appreciation right in connection with the termination of an option, the amount
of the bonus, if any, shall be determined by multiplying the total fair market
value of the
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shares and cash received pursuant to the exercise of the stock appreciation
right by the applicable bonus percentage. The bonus percentage applicable to a
bonus right, including a previously granted bonus right, may be changed from
time to time at the sole discretion of the Board of Directors but shall in no
event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Board of Directors.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to Section 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to Section 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount of any cash bonus to be awarded and timing of payment of a cash bonus
shall be determined by the Board of Directors.
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to this Section 10 the amount necessary to satisfy any applicable
federal, state and local withholding requirements.
11. Performance Units. The Board of Directors may grant performance units
consisting of monetary units which may be earned in whole or in part if the
Company achieves certain goals established by the Board of Directors over a
designated period of time, but not in any event more than 10 years. The goals
established by the Board of Directors may include earnings per share, return on
shareholders' equity, return on invested capital and such other goals as the
Board of Directors may establish. In the event that the minimum performance goal
established by the Board of Directors is not achieved at the conclusion of a
period, no payment shall be made to the participants. In the event the maximum
corporate goal is achieved, 100 percent of the monetary value of the performance
units shall be paid to or vested in the participants. Partial achievement of the
maximum goal may result in a payment or vesting corresponding to the degree of
achievement as determined by the Board of Directors. Payment of an award earned
may be in cash or in Common Stock or a combination of both, and may be made when
earned, or vested and deferred, as the Board of Directors determines. Deferred
awards shall earn interest on the terms and at a rate determined by the Board of
Directors. Unless otherwise determined by the Board of Directors with respect to
a performance unit granted to a person who is neither an Officer nor a director
of the Company, each performance unit granted under the Plan by its terms shall
be nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will
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or by the laws of descent and distribution of the state or country of the
holder's domicile at the time of death. Each participant who has been awarded a
performance unit shall, upon notification of the amount due, pay to the Company
in cash amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant, including salary, subject to applicable law. With the
consent of the Board of Directors a participant may satisfy this obligation, in
whole or in part, by having the Company withhold from any shares to be issued
that number of shares that would satisfy the withholding amount due or by
delivering Common Stock to the Company to satisfy the withholding amount. The
payment of a performance unit in cash shall not reduce the number of shares of
Common Stock reserved for issuance under the Plan. The number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued upon
payment of an award.
12. Changes in Capital Structure.
(a) Stock Splits; Stock Dividends. If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company by
reason of any stock split, combination of shares, dividend payable in shares,
recapitalization or reclassification, appropriate adjustment shall be made by
the Board of Directors in the number and kind of shares available for grants
under the Plan. In addition, the Board of Directors shall make appropriate
adjustment in the number and kind of shares as to which outstanding options, or
portions thereof then unexercised, shall be exercisable, so that the optionee's
proportionate interest before and after the occurrence of the event is
maintained. Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the issuance
of fractional shares, and any fractional shares resulting from any adjustment
may be disregarded or provided for in any manner determined by the Board of
Directors. Any such adjustments made by the Board of Directors shall be
conclusive.
(b) Mergers, Reorganizations, Etc. In the event of a merger,
consolidation, plan of exchange, acquisition of property or stock, separation,
reorganization or liquidation to which the Company is a party or a sale of all
or substantially all of the Company's assets (each, a "Transaction"), the Board
of Directors shall, in its sole discretion and to the extent possible under the
structure of the Transaction, select one of the following alternatives for
treating outstanding options under the Plan:
(i) Outstanding options shall remain in effect in accordance with
their terms.
(ii) Outstanding options shall be converted into options to
purchase stock in the corporation that is the surviving or acquiring
corporation in
<PAGE>
the Transaction. The amount, type of securities subject thereto and
exercise price of the converted options shall be determined by the Board of
Directors of the Company, taking into account the relative values of the
companies involved in the Transaction and the exchange rate, if any, used
in determining shares of the surviving corporation to be issued to holders
of shares of the Company. Unless otherwise determined by the Board of
Directors, the converted options shall be vested only to the extent that
the vesting requirements relating to options granted hereunder have been
satisfied.
(iii) The Board of Directors shall provide a 30-day period before
the consummation of the Transaction during which outstanding options may be
exercised to the extent then exercisable, and upon the expiration of that
30-day period, all unexercised options shall immediately terminate. The
Board of Directors may, in its sole discretion, accelerate the
exercisability of options so that they are exercisable in full during that
30-day period.
(c) Dissolution of the Company. In the event of the dissolution of the
Company, options shall be treated in accordance with Section 12(b)(iii).
(d) Rights Issued by Another Corporation. The Board of Directors may
also grant options, stock appreciation rights, performance units, stock bonuses
and cash bonuses and issue restricted stock under the Plan having terms,
conditions and provisions that vary from those specified in this Plan, provided
that any such awards are granted in substitution for, or in connection with the
assumption of, existing options, stock appreciation rights, stock bonuses, cash
bonuses, restricted stock and performance units granted, awarded or issued by
another corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a Transaction.
13. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in Sections 6(a)(iv), 9, 10 and 12, however, no
change in an award already granted shall be made without the written consent of
the holder of such award.
14. Approvals. The Company's obligations under the Plan are subject to the
approval of state and federal authorities or agencies with jurisdiction in the
matter. The Company will use its best efforts to take steps required by state or
federal law or applicable regulations, including rules and regulations of the
Securities and Exchange Commission and any stock exchange on which the Company's
shares may then be listed, in connection with the grants under the Plan. The
foregoing notwithstanding, the Company shall not be obligated to issue or
deliver Common Stock under the Plan if such issuance or delivery would violate
applicable state or federal securities laws.
15. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the
<PAGE>
employment of the Company or interfere in any way with the Company's right
to terminate such employee's employment at any time, for any reason, with or
without cause, or to decrease such employee's compensation or benefits, or (ii)
confer upon any person engaged by the Company any right to be retained or
employed by the Company or to the continuation, extension, renewal or
modification of any compensation, contract or arrangement with or by the
Company.
16. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for those shares. Except
as otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs before the date such
stock certificate is issued.
17. Option Grants to Non-Employee Directors.
(a) Initial Board Grants. Each person who is a Non-Employee Director
when the Plan is adopted or who becomes a Non-Employee Director thereafter shall
be automatically granted an option to purchase 2,000 shares of Common Stock on
the later of the date the Plan is approved by the shareholders of the Company or
when the person becomes a Non-Employee Director. A "Non-Employee Director" is a
director who is not an employee of the Company.
(b) Additional Grants. Each Non-Employee Director shall be
automatically granted an option to purchase additional shares of Common Stock in
each calendar year subsequent to the year in which the Non-Employee Director was
granted an option pursuant to Section 17(a), such option to be granted as of the
date of the Company's annual shareholders meeting held in such calendar year,
provided that the Non-Employee Director continues to serve in that capacity as
of that date. The number of shares subject to each additional grant shall be
[2,000] shares for each Non-Employee Director.
(c) Exercise Price. The exercise price of options for shares granted
pursuant to Section 17(a) as of the date the Plan is approved by the
shareholders of the Company shall be equal to the price per share to the public
in the Company's initial public offering, unless otherwise determined by the
Board. The exercise price of all other options granted pursuant to this Section
17 shall be equal to 100 percent of the fair market value of the Common Stock
determined pursuant to Section 6(b)(iv).
(d) Term of Option. The term of each option granted pursuant to this
Section 17 shall be [10] years from the date of grant.
(e) Exercisability. Until an option expires or is terminated, an
option granted under this Section 17 shall be immediately exercisable for the
full number of shares subject to the option.
<PAGE>
(f) Termination As a Director. If an optionee ceases to be a director
of the Company for any reason, including death, his or her option may be
exercised at any time before the expiration date of the option or the expiration
of 30 days (or 12 months in the event of death) after the last day the optionee
served as a director, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option as of the last day the
optionee served as a director.
(g) Nontransferability. Each option by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the optionee's domicile at the time of death, and each
option by its terms shall be exercisable during the optionee's lifetime only by
the optionee.
(h) Exercise of Options. Options may be exercised upon payment of cash
or shares of Common Stock of the Company in accordance with Section 6(a)(v).
Adopted: August 28, 1995
Amended: May 6, 1997
Amended: December 4, 1997
Exhibit 21
Subsidiaries of Regent Assisted Living, Inc.
Name of Subsidiary Percentage Owned State of Incorporation
RAL, Inc. 100% Oregon
Regent/Corvallis, LLC 50.1% Oregon
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Regent Assisted Living, Inc. on form S-8 (File Nos. 333-12157 and 333-12159) of
our report, dated March 21, 1997, on our audit of the consolidated financial
statements of Regent Assisted Living, Inc. and subsidiary as of December 31,
1996 and for the year then ended, which report is included in this Annual Report
on Form 10-KSB for the year ended December 31, 1997.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
March 30, 1998
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Regent Assisted Living, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-12157 and 333-12159) on Form S-8 of Regent Assisted Living, Inc. of our
report dated February 13, 1998, except as to note 11, which is as of March 27,
1998, relating to the consolidated balance sheet of Regent Assisted Living, Inc.
and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended, which report appears in the December 31, 1997, annual report on Form
10-KSB of Regent Assisted Living, Inc.
KPMG PEAT MARWICK LLP
Portland, Oregon
March 30, 1998
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET OF REGENT ASSISTED LIVING, INC., AS OF DECEMBER 31,
1997, AND THE RELATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS IN THE
PERIOD ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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