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, 1998 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. [X]
State issuer's revenues for its most recent fiscal year: $30,419,195
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 26, 1999: $6,681,825
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
- -------- ------------------
Proxy Statement for 1999 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 12
Item 3 - Legal Proceedings 15
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 4(a) - Executive Officers of the Registrant 16
PART II
Item 5 - Market for Common Stock
and Related Stockholder Matters 18
Item 6 - Management's Discussion and Analysis
or Plan of Operation 18
Item 7 - Financial Statements 26
Item 8 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
Item 9 - Directors, Executive Officers and Control Persons;
Compliance with Section 16(a) of the Exchange Act 26
Item 10 - Executive Compensation 27
Item 11 - Security Ownership of Certain Beneficial
Owners and Management 27
Item 12 - Certain Relationships and Related Transactions 27
Item 13 - Exhibits and Reports on Form 8-K 27
SIGNATURES 31
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PART I
Item 1. Description of Business
Overview and Background
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The Company is an owner, operator, and developer of private-pay assisted
living communities including stand-alone Alzheimer's care communities. Assisted
living is part of a spectrum of long-term care services that provide a
combination of housing, personal services, and health care designed to respond
to elderly individuals who require assistance with activities of daily living in
a manner that promotes maximum independence. The Company's 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.
The Company continues to enhance its position as a leading provider of
assisted living services in the western United States. During 1998, the Company
increased its number of assisted living communities from 9 to 25, or 178
percent, and the number of beds owned, leased, or managed increased by 160
percent from 1,063 to 2,762. During 1998, the Company completed the sale of $9.0
million in Convertible Subordinated Notes and closed approximately $100.0
million in project-based financings. The Company also increased its revenues to
$30.4 million from $14.0 million in 1997.
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 1996 the Company began an aggressive expansion program of
acquiring sites in select markets in the western United States and beginning the
development and construction of new communities. This program resulted in
dramatic increases in both the number of communities and beds under operation in
both 1997 and 1998. Furthermore, during that time period the Company continued
making selective acquisitions of existing communities that complement the
Company's planned development of prototypical communities. In 1998, the Company
opened eleven internally developed communities, began managing an additional
community, and acquired four communities - adding a total of 1,699 additional
beds to the Company's operations.
As of March 29, 1999, the Company operated a total of 2,810 beds.
Furthermore, at that time an additional four communities were under construction
which include 353 beds. When these communities are completed, the Company will
then operate 3,163 beds. Additionally, the Company has seventeen sites in
various stages of development.
Assisted Living
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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 because of the opportunity assisted living provides to allow
senior citizens to "age in place" in a residential environment. Assisted living
offers a combination of housing and personalized health and support services for
senior citizens who cannot live completely independently but who do not require
the 24-hour medical care provided by a skilled nursing facility. Skilled care
typically also costs much more than that provided at an assisted living
community.
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Generally, assisted living residents require higher levels of care than
residents in congregate care but lower levels of care than patients in skilled
nursing facilities. In addition to housing and meals (the services commonly
provided in a congregate care facility), assisted living communities provide a
range of personal care and support services designed to meet the individual
needs of residents, including instrumental activities of daily living ("IADLs")
such as laundry and transportation services. Additionally, assisted living
residents often require assistance with activities of daily living ("ADLs") such
as bathing, dressing, incontinence care, and taking medications but generally
are not 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
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The principal elements of the Company's business strategy are described
below.
Personalized Quality Care. The Company's primary focus is to provide high-
quality personalized care for each resident. The Company seeks to provide a wide
range of high-quality services and care tailored to the needs of its residents
in an attractive, home-like environment. The Company has established quality
assurance programs to ensure that high-quality services are being provided to
every resident in its communities. These programs include periodic surveys of
the residents, their families, and community staff and the formation at each
community of a resident council, consisting of residents and their families, to
assist in evaluating the services provided to residents. The Company provides a
toll-free number that families of residents can use to make recommendations or
register complaints and frequently includes comment cards with resident
billings. The Company also attempts to achieve high-quality care through the
establishment of operational standards and performance goals. These standards
and goals apply to each of the Company's communities and relate to such matters
as health services, food service, housekeeping, maintenance, and administration.
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 dementia. Each of the Company's
internally developed assisted living communities is designed with a special
"Kingswood" unit located in a separate wing or area of the community that 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 the unique care they
require with a minimum of disruption to other residents. The Company has also
developed and operates its "Regent Court" stand-alone Alzheimer's care
communities that are specially designed to serve residents with 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 95 percent of the Company's units at the end of 1998. The Company
believes that caring for private pay residents
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is more profitable because the Company is able to charge market rates for its
extensive, high-quality services without regard to government-imposed cost
containment pressures. In 1998 the Company generated $27,762 of revenue per
occupied bed. The Company will continue to focus its development efforts in
communities with median incomes sufficient to support the Company's full service
approach to assisted living.
Professional Management. The Company has developed and uses quality
assurance programs and operating standards to maintain quality and control
costs. This approach is coupled with a decentralized management structure under
which local managers and care coordinators responsively address residents'
individual needs. The relatively larger size of the Company's communities also
permits the Company to recruit and retain more highly paid, experienced managers
and professional staff.
Education and Training. The Company believes that education, training, and
development increase the effectiveness of its employees which in turn generates
enhanced employee and resident satisfaction and decreases employee and resident
turnover. Managers, on-site marketing directors, and other administrative
personnel receive periodic training both at the community and at the Company's
corporate office. The Company, through ongoing in-service training, maintains a
highly trained staff that is responsive to the changing needs of the Company's
residents.
Marketing. The Company's marketing strategy focuses on enhancing the
reputation of the Company's communities and creating awareness of the Company
and its services among potential referral sources. The Company also markets its
services through doctors and other professionals by direct mail and other
methods. The Company's experience is that satisfied residents, resident
families, and professional health care providers are the most important sources
of referrals for the Company. In addition, the Company emphasizes community
outreach through such programs as adult day care and respite care. These
programs permit individuals to use the Company's services on a temporary basis,
which provides the Company with an additional source of revenue and increases
awareness of the Company's communities among potential full-time residents.
Growth and Development. 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
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Services provided to residents of the Company's communities are designed to
respond to their individual needs; promote independence, dignity and choice; and
improve their quality of life. Services are available 24 hours a day to meet
both anticipated and unanticipated needs. General services include the provision
of three meals per day, laundry, housekeeping, transportation, activities, and
medication maintenance. Available support services include personal care and
routine nursing care, social and recreational services, transportation, and
other special services needed by the resident. Personal care includes services
such as bathing, dressing
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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 Dementia)
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
- --------------------------------------------------------------------------------
The Company estimates that, of the current residents in its communities,
40.8 percent require assisted living level one care, 23.3 percent require
assisted living level two care, 12.2 percent require assisted living level three
care, 10.8 percent require special needs level one care and 6.6 percent require
special needs level two care. Additionally, 6.3 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. Geographic location, local wages and operating costs also
affect the Company's rates. As of December 31, 1998, the following range of
rates were charged by the Companies communities:
Low High
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Assisted Living
Level One $1,595 $3,195
Level Two $1,795 $3,585
Level Three $1,995 $4,095
Special Needs
Level One $2,895 $4,875
Level Two $3,195 $5,175
Residents are also required to pay the Company a nonrefundable community fee
prior to admission and, in some locations, refundable security deposits.
Principal Product Lines
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The Company currently provides its services in assisted living communities
including stand-alone Alzheimer's care communities. The existing communities
offer numerous services and activities designed to meet the varying needs of the
residents, including the unique services required by residents afflicted with
Alzheimer's disease or other age-related dementia ("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 opened in 1998. The Company recently developed a
"Regent House" model, a smaller community than the "Regent" and variable in size
to meet differing market demands. The Regent House maintains the operational
efficiencies and resident and service focus of the Regent model. The Company has
also developed its "Regent Court" community at which it provides services solely
to residents with special needs. The first Regent Court opened in 1998.
(i) Regent
The "Regent" is the Company's primary stand-alone assisted living
community model. This prototype design has been developed and refined
through the Company's experience as an operator of its early assisted
living communities, which also contain a significant portion of the
important attributes of the Regent prototype. Use of this prototype
will continue to allow the Company to control development costs and
maintain efficiency in development and operations.
The prototypical Regent community is a stand-alone assisted
living community containing from 90 to 135 assisted living beds, with
between 10 and 20 percent of the total generally comprising the
Kingswood Alzheimer's unit. A "stand-alone" assisted living community
is a community devoted entirely to assisted living, as distinct from
other models that may offer assisted living units in a separate wing
or floor as well as other forms of long-term care such as congregate
care or skilled nursing.
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Regent communities generally range in size from 60,000 to 86,000
square feet and are generally built on parcels ranging in size from
three to six acres. The buildings are two or three stories, depending
upon site restrictions, and of wood frame, fire-rated construction.
The exterior features are designed to be compatible with the
predominant architectural designs of the area and with an emphasis on
a residential versus institutional appearance. Individual units range
in size from 320 square feet for a studio to 450 square feet for a
one-bedroom apartment. Two-bedroom units are approximately 755 square
feet in size. In some locations the Company 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.
(ii) Regent House
In addition to the larger Regent prototype, the Company has
developed a smaller version for markets in which there currently is
less demand for assisted living services. The smaller "Regent House"
community will be approximately 40,000 to 55,000 square feet and be
comprised of between 72 and 90 beds, generally with at least 24 beds
comprising the Kingswood Alzheimer's unit. The community is designed
with the same operational efficiencies and resident living and service
considerations as the larger model, including similar sized living
units, but with generally smaller lounge, dining, and recreation areas
to reflect the lower resident population.
The interior layout of each Regent House is designed to promote
efficient delivery of services and resident independence. Circulation
is organized around a core area on the ground level which contains the
kitchen and common dining area, administrative offices, a commercial
laundry, a private dining room, lounge, day room and public restrooms.
Elevators are conveniently located for easy access to all common areas
and resident units. Each Regent House community is expected to contain
a Kingswood Alzheimer's unit which is designed to house, and address
the needs of, residents afflicted with Alzheimer's disease and other
age-related dementia. The special needs units are located in a
separate wing or area of the community and have their own dining
communities, resident lounge areas, and specially trained staff. The
physical separation of the Kingswood unit from the rest of the
community enables special needs residents to receive the unique care
they require with a minimum of disruption to other residents.
(iii) Regent Court
The "Regent Court" is a specially designed community solely for
residents afflicted with Alzheimer's disease or other age-related
dementia. The typical Regent Court resident will have cognitive
difficulties, impaired motor functions, may be wander prone, and may
have incontinence. Accordingly, as with the Kingswood unit of the
Regent community, these communities will be much smaller than the
Regent or Regent House, typically 22,000 to 26,000 square feet in a
one-story configuration, and typically will service up to 48 residents
within its 24 units.
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The Regent Court's 24 units are divided into four "neighborhoods"
of equal size. Both the overall layout and that of each neighborhood
are designed to provide an ideal therapeutic living environment and
promote the efficient delivery of services. Generally, two
neighborhoods will be reserved for those residents with a high level
of function and two for those with lower levels of function. The
community is designed in this manner with the primary goal of
providing high-quality care to special needs residents who require
personalized care while providing for maximum efficiencies of
operation. Because the residents generally are easily agitated and
confused, organizing care within separate neighborhoods permits the
Company to assign staff to a specific neighborhood in caregiver
clusters. This permits the Company to minimize each resident's
exposure to multiple persons and allows staff to more thoroughly learn
about and provide for a resident's 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 inclement days.
Development of Additional Communities
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The Company plans to continue its growth primarily through construction of
new Regent, Regent House, and Regent Court prototype communities in selected
markets in the western United States. In February 1999, the Company began
operating its second Regent Court community. During the remainder of 1999, the
Company plans to complete construction of and begin operating one Regent and two
additional Regent Court communities. Upon completion of these transactions, the
Company will have a total of approximately 3,000 beds under operation by
December 31, 1999. An unrelated third party has commenced construction of a
142-bed Regent community the Company expects to begin operating under a
long-term lease in 2000. Furthermore, during 1999, the Company plans to commence
construction on up to ten additional communities comprising approximately 1,000
beds.
The Company surpassed its initial development goal, expressed at the time
of its initial public offering, to develop twelve Regent communities by December
31, 1998. However, for several reasons, the Company will not realize its
subsequent goal of opening an additional 1,250 beds during 1999, and instead
expects to achieve that goal by the end of the second quarter of 2000. The
primary reasons for this delay are the overall tightening in the credit and
equity markets and additional delays by governmental agencies in issuing
necessary site approvals and building permits.
The Company owns eight parcels of undeveloped real property, has obtained
the right to purchase six additional parcels, and is working with third party
developers on additional sites. Assuming all necessary governmental approvals
are obtained, the Company could construct an additional seventeen communities on
these sites. The Company has completed various degrees of development activities
on each of these sites. Third parties are completing development work for the
Company on four additional 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 twelve western states with favorable demographics
in which to accomplish its growth plan.
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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's experience is that the development time for a prototype
community ranges from approximately six months to one year, although it can take
longer in some cases. The Company's average construction time for Regent
communities is between eleven and thirteen months and between eight and ten
months for Regent Court communities. The Company expects the average
construction time for Regent House communities to ten to twelve months. The
Company obtains pre-opening deposits on approximately 25 percent of its units.
Further, the Company estimates that it will take approximately fifteen to
eighteen months from commencement of operations 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 twelve to fifteen months to achieve an occupancy
level of 95 percent or higher at its Regent House communities. The Company
expects that it will take approximately nine to twelve months for a Regent Court
community to achieve an occupancy level of 93 percent or higher.
The cost to construct all prototypical communities varies from site to
site. The Company's average cost per residential unit for Regent communities
developed since 1997 is approximately $75,000 per residential unit and the
Company expects this cost to increase to approximately $80-85,000 for future
construction. The Company's average cost per residential bed is $85,000 for its
Regent Court communities. The Company expects that the average construction cost
per residential unit in its Regent House communities will be approximately
$90,000.
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 communities in metropolitan areas of 50,000 or
more people with a high percentage of affluent elderly persons and to select
sites so that it can strategically place multiple communities within a several
hundred mile radius, creating a cluster of communities. With the development of
the Regent House community, the Company can locate a larger number of
communities within a region and thereby obtain greater operating efficiencies.
Furthermore, due to the smaller size of the Company's Regent Court, 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, and the state and local legislative and
regulatory environment.
Competition
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Providers of assisted living housing and services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the communities, services offered, family and physician
preferences, and location. The Company's current and potential
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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
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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 Arizona, California, Idaho, Nevada, New Mexico, Oregon, Texas,
Washington and Wyoming 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 communities are subject to less regulation than other
licensed health care providers, but more regulation than congregate care or
independent living retirement residences. However, the Company anticipates that
states and the federal government will likely impose additional regulations and
licensing requirements. Currently, certain states require licensees to provide
the assisted living services offered by the Company. Certain states also require
Certificates of Need for assisted living facilities, but this is not a
requirement in states where the Company currently conducts business. There can
be no assurance that administrative or judicial interpretation of existing laws
or regulations or enactment of new laws or regulations will not have a material
adverse effect on the Company's results of operations or financial condition.
The Company believes that its current communities are in substantial compliance
with all applicable regulatory requirements. 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.
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Employees
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As of December 31, 1998, the Company employed approximately 950 full-time
and 450 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
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The Company has federally registered its "Regent," "Regent Court," and
"Kingswood" trade names. An application has been filed with the federal patent
and trademark office regarding the Company's logo and "Regent House" trade name.
Forward Looking Statements and Risks Affecting the Company
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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
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and are subject to the safe harbor created by that section. From
time to time, information provided by the Company, or statements made by the
Company's management, may contain other forward-looking statements. The
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 they are made. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report.
There is no assurance that the Company will be able to achieve its plan to
develop, construct, and open the stated number of 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 communities by the end of
2000 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.
11
<PAGE>
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 development
and construction costs for new communities may exceed original estimates. The
Company's agreements with its contractors generally provide for the contractor
to construct a community for a fixed price, although anticipated development
costs and approved construction change orders may increase the overall cost of
any community. These additional costs are generally borne by the Company and
would accordingly increase the Company's capital requirements and compel the
Company to raise additional financing, 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 of December 31, 1998.
<TABLE>
<CAPTION>
Regent
Operations
Community Location Commenced Units(1) Beds(2) Interest
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oregon
Park Place Portland 1986 112 112 Lease
Regency Park Portland 1987 122 142 Lease
Sheldon Park Eugene 1998 108 124 Lease
Washington
Northshore House Kenmore 1998 85 98 Manage
Sterling Park Redmond 1990 162 192 Lease
California
Laurel Springs Bakersfield 1998 113 127 Own
Orchard Park Clovis 1998 112 128 Lease
12
<PAGE>
Regent
Operations
Community Location Commenced Units(1) Beds(2) Interest
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summerfield House Vacaville 1998 109 126 Own
Sun Oak Citrus Heights 1997 40 50 Manage
Sunnyside Court Fremont 1998 40 78 Lease
Sunshine Villa Santa Cruz 1990 106 126 Lease
The Palms Roseville 1998 93 108 Lease
Villa Serra Salinas 1998 150 150 Manage
Willow Creek Folsom 1997 104 119 Lease
Idaho
Willow Park Boise 1997 117 130 Lease
West Wind Boise 1997 48 52 Lease
Nevada
Mira Loma Henderson 1998 115 133 Lease
New Mexico
Sandia Springs Rio Rancho 1998 109 126 Lease
Texas
Parmer Woods Austin 1998 117 137 Own*
Hamilton House San Antonio 1997 116 136 Lease
Arizona
Canyon Crest Tucson 1998 117 137 Lease
Regent Court Scottsdale 1998 24 48 Lease
Wyoming
Aspen Wind Cheyenne 1998 77 77 Lease
Meadow Wind Casper 1998 53 53 Lease
Spring Wind Laramie 1998 53 53 Lease
----- -----
Totals: 2,402 2,762
===== =====
* See Subsequent Event disclosure in Item 6. Management's Discussion and
Analysis.
</TABLE>
During the first quarter of 1999 the Company opened a 24-unit, 48-bed Regent
Court community in Modesto, California.
13
<PAGE>
Construction commenced:
<TABLE>
<CAPTION>
Scheduled
Community Location Opening Units(1) Beds(2) Interest
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona
Desert Flower Scottsdale 2nd quarter 1999 102 115 Own
Oregon
Regent Court Clackamas 2nd quarter 1999 24 48 Lease
Washington
Regent Court Kent 2nd quarter 1999 24 48 Manage
California
Villa de Palma West Covina 2nd quarter 2000 130 142 Lease
----- ------
Totals: 280 353
===== ======
(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.
</TABLE>
Each community for which the Company's interest is noted as "leased,"
except for Regency Park and Sterling Park, is leased from a third party pursuant
to a long-term lease providing for an initial term of 10 to 15 years from the
inception date. Each lease provides for extensions that may permit the lease to
continue for a total period of between 25 and 35 years from the inception date.
The Company leases Regency Park and Sterling Park from entities controlled
by Mr. Bowen. Each lease expires in 2005, has annual base rent payments in
addition to percentage rent payments equal to 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.
Through April 30, 1998, the Company managed Park Place, a community then
owned by a limited partnership in which Mr. Bowen was a general partner and
beneficially owned a 1.85
14
<PAGE>
percent interest. During the four months the Company managed this community it
received a management fee of five percent of the gross revenues or $53,255.
During 1998 the partnership sold the community to an unrelated real estate
investment trust. The Company now operates the community pursuant to a long-term
lease arrangement with the real estate investment trust.
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 or Regent House 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 3.0 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 29, 1999, the Company had entered into an agreement to lease a Regent
community being developed by a third party and had acquired eight additional
sites for the development of the following communities in the following
locations: Regent communities in Mesa, Arizona; San Clemente, California; Las
Vegas, Nevada; and Ogden, Utah; Regent House communities in Elk Grove, Merced
and Visalia, California; and a Regent Court community in Corvallis, Oregon. In
addition, as of March 29, 1999, the Company agreed in principle to terms to
develop and operate an assisted living community in Sonoma County, California
and had obtained options to acquire an additional six sites for the development
of Regent and Regent House 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. The Company has
tentatively agreed to sell its San Clemente site to a third party and thus will
not likely operate that community. 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 within 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.
Item 3. Legal Proceedings
As of March 29, 1999, the only material pending legal action to which the
Company is a party or to which any of its property is subject involves claims
made by one of the Company's architectural firms. The architects have purported
to terminate their contracts with the Company based upon an allegation that the
Company is not current in its payments. As a result, the
15
<PAGE>
architects claim the Company does not have the right to use plans to construct
the Corvallis, Mesa, Las Vegas, and San Clemente communities or to complete the
Clackamas, Kent, or Scottsdale communities. The Company has filed responsive
breach of contract and other claims against the architects, including claims for
offsetting damages for the architects' negligent performance of services, and is
aggressively defending the architects' claims. On March 26, 1999, the architects
amended their pleading to also claim unspecified damages for copyright
infringement on certain of Regent's communities. The Company has obtained a
preliminary injunction that orders the architects to make certain of their files
on these projects available to the Company and prevents the architects from
interfering with the Company's contractual relationships associated with these
projects.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
As of March 29, 1999, the executive officers of the Company were as set
forth below.
Name Age Position
---- --- --------
Walter C. Bowen 56 Chairman of the Board, Chief Executive
Officer, and President
James W. Ekberg 46 Executive Vice President
Eric W. Jacobsen 38 Chief Operating Officer
Steven L. Gish 40 Chief Financial Officer, Treasurer,
and Director
David R. Gibson 37 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 communities since 1986, and has devoted a majority
of his time to the ownership and operation of those communities over the past
five years. Mr. Bowen has also been the Chief Executive Officer of several
related companies including Bowen Property Management Company, Bowen Financial
Services Corp., a company formed to obtain financing for real estate development
projects, and Bowen Development Company, a real estate construction company
(collectively, the "Bowen Companies"), since their formation. Mr. Bowen attended
the University of Oregon and is a graduate of Portland State University. Mr.
Bowen serves on the Board of Directors of the Assisted Living Communities
Association of America and on the advisory board for the National Investment
Conference for the Senior Living and Long Term Care Industries.
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 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.
16
<PAGE>
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 communities in
the United States. Mr. Jacobsen holds a degree in business administration from
the University of Oregon.
James W. Ekberg. Mr. Ekberg joined Regent in 1995 and is the Executive Vice
President. Mr. Ekberg is responsible for the development and construction of new
communities and for strategic acquisitions. Mr. Ekberg joined the Bowen
Companies in 1985 as Controller and has served as 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 and
General Counsel of the Company in 1996 and also serves as Corporate Secretary.
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.
17
<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.
Quarter Ended High Low
------------- ---- ---
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
March 31, 1998 8 1/8 4 1/4
June 30, 1998 8 1/2 6
September 30, 1998 6 1/4 4 1/8
December 31, 1998 6 1/2 3 3/4
According to the Company's transfer agent, the Company has approximately 33
holders of record as of March 29, 1999.
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, the Company has
embarked upon a strategy of aggressive growth primarily through internal
development of prototypical assisted living communities. This report covers the
third full year of the Company's operations following its initial public
offering and describes in detail the Company's rapid growth that began in 1997
and continued through 1998. To fund the Company's continued growth, in addition
to gross proceeds of $12.2 million for the initial public offering, the Company
also raised $10 million in 1996 through the issuance of preferred stock and the
Company raised $9 million through a private placement of convertible
subordinated notes in 1998.
From January 1, 1998, through March 29, 1999, the Company completed ten new
prototypical Regent communities comprising 1,244 beds, two Regent Court
stand-alone
18
<PAGE>
Alzheimer's care communities comprising 96 beds, acquired through long-term
leases four additional communities comprising 261 beds, added a management
contract for a 150-bed community, and commenced construction on an additional
four prototypical communities comprising 353 beds. Upon the completion of these
four communities, the Company will have 3,163 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. The Company is engaged in development
activities related to seventeen additional communities.
Recognizing the importance of internal controls, systems and procedures,
during 1998, 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 1999 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.
Development and Acquisition of Additional Communities
- -----------------------------------------------------
The Company's current growth plan anticipates completion of one Regent
community and two additional Regent Court communities by December 31, 1999.
Another Regent community is currently under construction and is expected to be
complete in early 2000. An additional seventeen 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, the Company believes each of these communities
could be completed during 2000 provided the Company obtains the necessary
governmental approvals and financing. As the Company continues to expand its
operations the expenses associated with development, construction, and operation
of these communities are expected to be significant.
The Company's experience is that its typical Regent communities generate
losses during the pre-opening period and during the initial eight to ten months
of operations, on average, at which time such communities, on average, have
achieved approximately 65-75 percent occupancy and have reached break-even cash
flow. Stabilized occupancy of 95 percent or higher is expected between the
fifteenth and eighteenth months of operation, on average. The Company's
experience is that occupancies remain fairly stable after 95 percent occupancy
is achieved.
The Company expects that its typical Regent House communities will generate
losses during the pre-opening period and during the initial seven to nine 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
between the twelfth and fifteenth months 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 initial five to six
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 to twelfth month of operation. Based
19
<PAGE>
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 fifteen
communities the Company opened in 1998 and the four communities the Company
expects to open in 1999 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 1999.
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 and
other administrative expenses; lease expense; and depreciation and amortization
expense.
20
<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>
1998 1997
------ ------
<S> <C> <C>
Revenues:
Rental and service 99.3% 98.5%
Management fees .7 1.5
------ ------
Total revenues 100.0 100.0
------ ------
Operating expenses:
Residence operating expenses 84.2 76.6
General and administrative expenses 13.7 25.6
Lease expense 29.6 24.9
Depreciation and amortization 3.5 2.5
------ ------
Total operating expenses 131.0 129.6
------ ------
Operating loss (31.0) (29.6)
Interest income 1.1 2.7
Interest expense (5.3) (1.0)
Equity in losses of joint venture (1.2) -
Other income, net - 0.2
------ ------
Loss before income taxes (36.4) (27.7)
Provision for income taxes - (0.1)
------ ------
Net loss (36.4) (27.8)
Preferred stock dividends (2.0) (4.3)
------ ------
Net loss available to common shareholders (38.4)% (32.1)%
====== ======
</TABLE>
21
<PAGE>
Comparison of Years Ended December 31, 1998 and 1997
- ----------------------------------------------------
Revenues. Revenues for 1998 totaled $30.4 million compared to $14.0 million
in 1997, an increase of $16.4 million or 117.9 percent. The Company operated
twenty-three communities and managed two communities in 1998. The Company
operated seven communities and managed two communities in 1997. From 1997 to
1998, revenues from "Same Residences", the three stabilized communities that the
Company operated at the beginning of both periods, increased by $0.4 million.
Revenue increased by $2.7 million from 1997 to 1998 as a result of the
acquisition of one stabilized community in each of July 1997 and May 1998. The
Company began operating three newly developed communities in 1997, whereas in
1998 the Company added eleven newly developed communities, acquired four
non-stabilized communities and added a management contract, which in the
aggregate account for a $13.3 million increase in revenues. Overall average
occupancy at the Company's stabilized Same Residences increased to 93.9 percent
for the year ended December 31, 1998, from 92.4 percent for the same period in
1997. A community is considered "stabilized" for reporting purposes after it
first attains occupancy of 95.0 percent.
Residence Operating Expenses. Residence operating expenses were $25.6
million for 1998, and $10.7 million for 1997, an increase of $14.9 million or
139.5 percent. The current year includes $15.2 million of start-up operating
expenses and pre-opening costs related to eighteen of the Company's newly
developed or acquired communities. Residence operating expenses, excluding the
effect of the newly developed communities, totaled 63.7 percent and 63.3 percent
of rental and service revenues for 1998 and 1997, respectively.
General and Administrative Expenses. General and administrative expenses
were $4.2 million for 1998, compared to $3.6 million for 1997. The increase of
$0.6 million or 16.6 percent is due primarily to an increase in development
activities and operations related to the implementation of the Company's plan
for growth.
Lease Expense. Lease expense for the Company's leased communities totaled
$9.0 million for 1998 compared to $3.5 million for 1997. The increase of $5.5
million relates primarily to the opening and sale-leaseback of newly developed
communities and the lease-acquisition of several additional communities.
Depreciation and Amortization. Depreciation and amortization expense was
$1.1 million for 1998, compared to $0.4 million for 1997. The increase of $0.7
million relates primarily to the Company's newly developed communities.
Interest Income. Interest income is earned from the Company's investment of
cash and cash equivalents in high-quality, short-term securities placed with
institutions with high credit ratings.
Interest Expense. Interest expense increased for the year ended December
31, 1998, to $1.6 million, from $0.1 million for 1997. In 1998, the Company
incurred $1.5 million in interest expense related to the operation of nine newly
developed communities, whereas only a nominal interest charge was incurred in
1997 related to the operation of one newly developed community. The Company
incurred $0.4 million of interest in 1998 related to the convertible
subordinated notes that were issued during 1998. The Company capitalized $2.7
million of interest charges incurred during 1998, compared to $1.8 million in
1997 due to increased borrowing for construction purposes.
22
<PAGE>
Equity in Losses of Joint Venture. Losses of joint venture resulted from
the initial operations of the Company's 50 percent owned Kenmore, Washington
community.
Net Loss. Net operating results decreased to a loss of $11.1 million during
the year ended December 31, 1998, from a net loss of $3.9 million for the same
period in 1997. The $7.2 million decrease in net operating results is primarily
due to an increase in residence operating profit (rental and service revenue
less residence operating expenses) of $1.6 million, offset by increases in
general and administrative expenses, lease expense, depreciation, interest
expense and equity in losses of joint venture, all as discussed above.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Company had $1.6 million of working capital,
compared to a working capital deficit of $4.3 million at December 31, 1997. The
increase of $5.9 million resulted from the repayment of $4.5 million in
short-term borrowings from the initial proceeds of the issuance by the Company
of convertible subordinated notes, a $2.7 million increase in cash (as described
below), and a $0.7 million working capital escrow established in connection with
a lease financing arrangement, offset by a $2.0 million increase in net current
liabilities directly attributable to the Company's growth in operating capacity.
Net cash used in operating activities totaled $7.6 million for 1998,
resulting primarily from a net loss of $11.1 million adjusted for depreciation,
amortization and non-cash charges of $1.2 million, and an increase of $2.3
million in accounts payable and other accrued expenses and accrued payroll. The
increase in current liabilities is attributable to the increase in the number of
communities under operation.
Net cash used in investing activities totaled $35.7 million for 1998,
consisting primarily of land acquisition, development, and construction costs.
At December 31, 1998, the aggregate purchase price for six parcels of land for
which the Company had purchase options was approximately $5.1 million. 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 $46.0 million during
1998, consisting of property and equipment financing proceeds totaling $27.5
million, net proceeds from lease-financing arrangements totaling $53.0 million
and proceeds from the issuance of convertible subordinated notes of $9.0
million, offset by repayment of short-term borrowing of $4.5 million, repayment
of long-term debt of $38.4 million, and payment of preferred stock dividends of
$0.6 million.
On March 30, 1998, the Company completed a private placement pursuant to
which parties purchased an aggregate of $4.5 million of convertible subordinated
notes from the Company and agreed to purchase up to an additional aggregate
amount of $6 million of convertible subordinated notes. As of December 31, 1998,
a total of $9.0 million of convertible subordinated notes have been issued under
this facility. The Company and the purchasers have agreed that no additional
notes will be issued. The notes bear interest at 7.5 percent per annum and are
convertible into the Company's common stock at an effective price of $7.50 per
share. Interest on the notes is payable quarterly and all principal and unpaid
interest on the notes is due March 31, 2008. The notes may be converted at the
option of the holder at any time prior to the maturity date of the notes. The
Company also has the right to force a conversion of the notes if
23
<PAGE>
the average trading price of the common stock equals or exceeds $12 per share
over thirty consecutive days.
The Company has an aggregate of $14.6 million in loans from which to
complete construction of its Scottsdale and Modesto communities and the Kent
community of which the Company is co-owner. As of December 31, 1998,
approximately $5.9 million remained to be drawn on these loans to fund
construction activities and debt service reserves. The Company has entered into
a lease financing arrangement with a REIT pursuant to which the Company is
constructing its Clackamas, Oregon community.
In addition to one Regent Court community that began operation in February
1999, the Company anticipates completing construction on one Regent community
and two Regent Court communities in 1999. The Company has entered into a
long-term lease for a fourth assisted living community being constructed by an
unrelated third party and expects to commence operation of this community during
the second quarter of 2000. In 1998, the Company announced that it intended to
complete construction on nine new Regent communities and five new Regent Court
communities in 1999. The Company has revised its plan due to delays experienced
with obtaining building permits and other governmental approvals for some of its
sites, a pending dispute with one of the Company's architects on four projects,
and delays in obtaining necessary financing. The total cost to develop and
construct the three communities planned for 1999, including the estimated
initial operating deficits, will be approximately $20 million. The Company has
obtained financing necessary to complete these communities.
The Company anticipates capital expenditures for 1999 will include
additional land acquisition costs, architectural fees, and other development
costs related to at least seventeen assisted living communities and construction
costs related to at least three new assisted living communities. During 1999,
the Company anticipates commencing construction on as many as ten additional
communities and has obtained a commitment from a REIT to provide up to $14.1
million in lease financing for the construction of two of these communities. The
total cost to develop and construct the ten communities, including the estimated
initial operating deficits, will likely be between $85 million to $95 million. A
substantial portion of these costs may be incurred during 1999.
The Company is currently discussing with commercial banks and REITs the
terms of potential financing with which the Company will construct new
communities currently under development. Each of the pending financing
transactions is subject to a number of conditions, including the negotiation and
execution of definitive documents and the satisfactory completion of due
diligence on the related properties, and there is no assurance that any of these
financing transactions will be completed on the terms proposed, or at all.
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 seven of these ten
communities and may require additional equity capital to complete the final
three communities.
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
24
<PAGE>
community or enter into a long-term lease at such time as the Company deems
appropriate. The Company has not obtained any commitments for this form of
financing.
If the Company was unable to obtain additional required financing, or if
such financing is not available on acceptable terms, the Company expects that
its plan to commence construction of up to ten additional 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 a 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.
Year 2000 Disclosure
- --------------------
"Year 2000 issues" relate to the result of computer programs having been
written using two digits rather than four to define the applicable year.
Computer programs and electronic devices that utilize date sensitive software or
information may recognize a date using the "00" as the year 1900 rather than the
year 2000. This recognition could result in a system failure or miscalculations
causing disruptions of operations or the inability of suppliers of material
services and products to continue supporting the Company's operations.
The Company has assessed its readiness in regard to Year 2000 issues. The
Company believes that all material hardware and software utilized in its
operations and, specifically, in its accounting systems, is Year 2000 compliant
or that Year 2000 compliant versions are available to the Company for
installation during the normal course of replacing or updating such systems
prior to November 30, 1999. The financial impact of any change is not
anticipated to be material to the financial position or results of the Company's
operations.
The Company believes it has adequate alternatives to counteract potential
Year 2000 issues that may arise with its internally utilized software and
hardware if the assurances of relevant vendors are incorrect. The Company
believes the primary risks from Year 2000 issues to its operations and prospects
are the potential inability of the Company's commercial banks to permit access
to the Company's accounts and of utility companies to continue supplying
utilities to the Company's communities. The Company does not have a contingency
plan in effect at this time to guard against such events.
The Company is in the process of obtaining Year 2000 compliance letters and
reports from suppliers of material services and products. To date, no such
supplier has indicated an inability to continue supplying material products and
services to the Company after January 1, 2000, although most are in the process
of evaluating and updating their internal systems and cannot yet assure the
Company that their systems are Year 2000 compliant. Nonetheless, the Company
does not expect that Year 2000 issues will have a material adverse effect upon
the Company's operations or prospects. However, there can be no assurances that
the systems of other companies on which the Company's operations or systems rely
will be timely remediated or that a failure by another company to remediate its
systems in a timely manner would not have a material adverse effect on the
Company.
25
<PAGE>
Subsequent Events
- -----------------
During the first quarter of 1999, the Company completed with a REIT a $10.4
million sale/leaseback transaction involving its Austin community. In addition
to generating approximately $3.0 million in net proceeds, the Company repaid
approximately $7.2 million of its mortgage indebtedness and recognized
approximately $1.0 million in deferred gain.
Recent Accounting Pronouncements
- --------------------------------
New accounting pronouncements are discussed in Note 1 of the Notes to
Consolidated Financial Statements.
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 15, 1998, the Company dismissed its previous certifying
accountant, KPMG Peat Marwick LLP, and retained its new certifying accountant,
PricewaterhouseCoopers LLP. The decision to change accountants was approved by
the Audit Committee of the Company's Board of Directors. The report of KPMG Peat
Marwick LLP on the Company's financial statements for 1997, being the fiscal
year preceding the year addressed in this report, contains no adverse opinion or
disclaimer of opinion and was not modified as to uncertainty, audit scope, or
accounting principles. Furthermore, during fiscal year 1997, and during the
subsequent interim periods to December 15, 1998, there were no disagreements
with KPMG Peat Marwick LLP 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 KPMG Peat Marwick LLP would
have caused it to make reference thereto in connection with its report on the
financial statements for such year.
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 1999
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 1999 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.
26
<PAGE>
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
1999 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 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 1999
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 1999 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 F-1 of this Report.
(a)(2) Exhibits
Exhibit
Number
-------
(1)3.1 Restated Articles of Incorporation, as amended effective December
13, 1996
(2)3.2 Restated Bylaws, as amended effective December 12, 1996
4.1 See Article II of Exhibit 3.1 and Articles I and VI of Exhibit
3.2
(4)4.2 Letter of Commitment, dated March 30, 1998, by and among LTC
Properties, Inc., LTC West, Inc. and the Registrant relating to
the agreement to purchase and lease assisted living residences
(4)4.3 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and LTC Equity
Holding Company, Inc.
(4)4.4 Note No. 1998-1 issued to LTC Equity Holding Company, Inc. in the
principal amount of $4,000,000, due March 31, 2008
27
<PAGE>
(4)4.5 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and Andre C.
Dimitriadis
(4)4.6 Note No. 1998-2 issued to Andre C. Dimitriadis in the principal
amount of $160,000, due March 31, 2008
(4)4.7 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and James J.
Pieczynski
(4)4.8 Note No. 1998-3 issued to James J. Pieczynski in the principal
amount of $160,000, due March 31, 2008
(4)4.9 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and Christopher T.
Ishikawa
(4)4.10 Note No. 1998-4 issued to Christopher T. Ishikawa in the
principal amount of $90,000, due March 31, 2008
(4)4.11 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and Pamela J.
Privett
(4)4.12 Note No. 1998-5 issued to Pamela J. Privett in the principal
amount of $90,000, due March 31, 2008
(4)4.13 Registration Rights Agreement, dated as of March 30, 1998, by and
between LTC Equity Holding Company, Inc. and the Registrant
(4)4.14 Registration Rights Agreement, dated as of March 30, 1998, by and
between Andre C. Dimitriadis and the Registrant
(4)4.15 Registration Rights Agreement, dated as of March 30, 1998, by and
between James J. Pieczynski and the Registrant
(4)4.16 Registration Rights Agreement, dated as of March 30, 1998, by and
between Christopher T. Ishikawa and the Registrant
(4)4.17 Registration Rights Agreement, dated as of March 30, 1998, by and
between Pamela J. Privett and the Registrant
(1)10.1 Lease Agreement between the Company and Regency Park Apartments
Limited Partnership
(1)10.2 Lease Agreement between the Company and the Bowen-Gionet Joint
Venture
(1)10.4 Employment Agreement between the Company and James W. Ekberg
(1)10.5 Employment Agreement between the Company and Eric W. Jacobsen
(1)10.6 Employment Agreement between the Company and Steven L. Gish
(1)10.8 Restrictive Covenant Agreement between the Company and Walter C.
Bowen
28
<PAGE>
(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
(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
(2)10.21 Employment Agreement, effective as of March 20, 1996, between
David R. Gibson and the Company
(2)10.22 Restrictive Covenant Agreement, effective as of March 20, 1996,
between David R. Gibson and the Company
(3)10.23 Preferred Stock and Warrant Agreement between Prudential Private
Equity Investors III, L.P. ("PPEI") and the Company dated as of
December 16, 1996
(3)10.24 Stockholders Agreement among the Company, PPEI, and Walter C.
Bowen dated as of December 16, 1996
(3)10.25 Registration Agreement between the Company and PPEI dated as of
December 16, 1996
(3)10.26 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of
Common Stock
(3)10.27 First Amendment to Lease between the Company and Regency Park
Apartments Limited Partnership dated December 16, 1996
(3)10.28 Second Amendment to Lease between the Company and Sterling Park,
L.L.C. dated December 16, 1996
(3)10.29 Form of Indemnity Agreement between the Company and directors
29
<PAGE>
(5)16 Letter from KPMG Peat Marwick LLP
(6)21 List of Subsidiaries
(6)23.1 Consent of PricewaterhouseCoopers LLP
(6)23.2 Consent of KPMG Peat Marwick LLP
(6)27.1 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 Exhibits to the Company's Form 10-QSB
dated May 14, 1998.
(5) Incorporated by reference to the Exhibit to the Company's Form 8-K dated
December 22, 1998.
(6) 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 22, 1998, with respect to a
change in its accountants as described therein.
30
<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 29th day of March, 1999.
REGENT ASSISTED LIVING, INC.
By: /s/ WALTER C. BOWEN
-------------------------------------
Walter C. Bowen
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the following persons in the capacities indicated have signed this
report below on the 30th day of March, 1999.
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)
WAYNE C. REMBOLD MARVIN S. HAUMSNA, M.D.
- ---------------------------------- ----------------------------------
Wayne C. Rembold, Director Marvin S. Hausman, M.D., Director
STEPHEN A. GREGG GARY R. MAFFEI
- ---------------------------------- ----------------------------------
Stephen A. Gregg, Director Gary R. Maffei, Director
DANA J. O'BRIEN MARTHA L. ROBINSON
- ---------------------------------- ----------------------------------
Dana J. O'Brien, Director Martha L. Robinson, Director
31
<PAGE>
EXHIBIT INDEX
Exhibit
Number
-------
(1)3.1 Restated Articles of Incorporation, as amended effective December
13, 1996
(2)3.2 Restated Bylaws, as amended effective December 12, 1996
4.1 See Article II of Exhibit 3.1 and Articles I and VI of Exhibit
3.2
(4)4.2 Letter of Commitment, dated March 30, 1998, by and among LTC
Properties, Inc., LTC West, Inc. and the Registrant relating to
the agreement to purchase and lease assisted living residences
(4)4.3 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and LTC Equity
Holding Company, Inc.
(4)4.4 Note No. 1998-1 issued to LTC Equity Holding Company, Inc. in the
principal amount of $4,000,000, due March 31, 2008
(4)4.5 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and Andre C.
Dimitriadis
(4)4.6 Note No. 1998-2 issued to Andre C. Dimitriadis in the principal
amount of $160,000, due March 31, 2008
(4)4.7 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and James J.
Pieczynski
(4)4.8 Note No. 1998-3 issued to James J. Pieczynski in the principal
amount of $160,000, due March 31, 2008
(4)4.9 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and Christopher T.
Ishikawa
(4)4.10 Note No. 1998-4 issued to Christopher T. Ishikawa in the
principal amount of $90,000, due March 31, 2008
(4)4.11 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between the Registrant and Pamela J.
Privett
(4)4.12 Note No. 1998-5 issued to Pamela J. Privett in the principal
amount of $90,000, due March 31, 2008
(4)4.13 Registration Rights Agreement, dated as of March 30, 1998, by and
between LTC Equity Holding Company, Inc. and the Registrant
<PAGE>
Exhibit
Number
-------
(4)4.14 Registration Rights Agreement, dated as of March 30, 1998, by and
between Andre C. Dimitriadis and the Registrant
(4)4.15 Registration Rights Agreement, dated as of March 30, 1998, by and
between James J. Pieczynski and the Registrant
(4)4.16 Registration Rights Agreement, dated as of March 30, 1998, by and
between Christopher T. Ishikawa and the Registrant
(4)4.17 Registration Rights Agreement, dated as of March 30, 1998, by and
between Pamela J. Privett and the Registrant
(1)10.1 Lease Agreement between the Company and Regency Park Apartments
Limited Partnership
(1)10.2 Lease Agreement between the Company and the Bowen-Gionet Joint
Venture
(1)10.4 Employment Agreement between the Company and James W. Ekberg
(1)10.5 Employment Agreement between the Company and Eric W. Jacobsen
(1)10.6 Employment Agreement between the Company and Steven L. Gish
(1)10.8 Restrictive Covenant Agreement between the Company and Walter C.
Bowen
(1)10.9 Restrictive Covenant Agreement between the Company and James W.
Ekberg
(1)10.10 Restrictive Covenant Agreement between the Company and Eric W.
Jacobsen
(1)10.11 Restrictive Covenant Agreement between the Company and Steven L.
Gish
(5)10.13 1995 Stock Incentive Plan, as amended effective December 4, 1997
(1)10.14 Form of Incentive Stock Option Agreement
(1)10.15 Form of Nonqualified Stock Option Agreement
(1)10.16 Administrative Services Agreement among the Company and certain
of the Bowen companies
(1)10.17 Indemnity Agreement between the Company and Walter C. Bowen
(1)10.18 Indemnity Agreement between the Company and James W. Ekberg
<PAGE>
Exhibit
Number
-------
(1)10.19 Indemnity Agreement between the Company and Eric W. Jacobsen
(1)10.20 Indemnity Agreement between the Company and Steven L. Gish
(2)10.21 Employment Agreement, effective as of March 20, 1996, between
David R. Gibson and the Company
(2)10.22 Restrictive Covenant Agreement, effective as of March 20, 1996,
between David R. Gibson and the Company
(3)10.23 Preferred Stock and Warrant Agreement between Prudential Private
Equity Investors III, L.P. ("PPEI") and the Company dated as of
December 16, 1996
(3)10.24 Stockholders Agreement among the Company, PPEI, and Walter C.
Bowen dated as of December 16, 1996
(3)10.25 Registration Agreement between the Company and PPEI dated as of
December 16, 1996
(3)10.26 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of
Common Stock
(3)10.27 First Amendment to Lease between the Company and Regency Park
Apartments Limited Partnership dated December 16, 1996
(3)10.28 Second Amendment to Lease between the Company and Sterling Park,
L.L.C. dated December 16, 1996
(3)10.29 Form of Indemnity Agreement between the Company and directors
(5)16 Letter from KPMG Peat Marwick LLP
(6)21 List of Subsidiaries
(6)23.1 Consent of PricewaterhouseCoopers LLP
(6)23.2 Consent of KPMG Peat Marwick LLP
(6)27.1 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 Exhibits to the Company's Form 10-QSB
dated May 14, 1998.
(5) Incorporated by reference to the Exhibit to the Company's Form 8-K dated
December 22, 1998.
(6) Filed herewith.
<PAGE>
REGENT ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED Financial Statements
for the years ended December 31, 1998 and 1997
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Table of Contents
Page
Report of Independent Accountants - PricewaterhouseCoopers LLP F-1
Independent Auditors' Report - KPMG Peat Marwick LLP 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>
Report of Independent Accountants
---------------------------------
March 10, 1999
To the Board of Directors and Shareholders
Regent Assisted Living, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Regent
Assisted Living, Inc. and Subsidiaries (the Company) as of December 31, 1998,
and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
F-1
<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
F-2
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,483,048 $ 1,805,096
Cash held in working capital escrow 734,408 60,480
Accounts receivable, net 287,483 128,110
Prepaid expenses 280,324 249,708
Construction advances receivable 481,819 123,670
------------- -------------
Total current assets 6,267,082 2,367,064
Restricted cash 2,757,981 2,361,993
Property and equipment, net 54,191,324 69,820,324
Investment in and advances to joint venture 261,995 401,460
Other assets 2,795,374 752,932
------------- -------------
Total assets $ 66,273,756 $ 75,703,773
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 284,481 $ 218,881
Short-term borrowings 4,500,000
Construction accounts payable 608,585 583,043
Accounts payable and other accrued expenses 2,280,230 685,136
Accrued payroll 1,213,630 502,568
Accrued interest 318,201 179,963
------------- -------------
Total current liabilities 4,705,127 6,669,591
Long-term debt 40,704,567 51,450,545
Convertible subordinated notes 9,000,000
Deferred gains and development fees, net 6,022,773 898,802
Other liabilities 1,586,164 517,578
------------- -------------
Total liabilities 62,018,631 59,536,516
------------- -------------
Minority interest in consolidated subsidiary - 250,000
------------- -------------
Commitments
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized;
1,666,667 shares issued and outstanding in 1998 and 1997 9,349,841 9,349,841
Common stock, no par value, 25,000,000 shares authorized;
4,633,000 shares issued and outstanding in 1998 and 1997 10,808,703 10,808,703
Accumulated deficit (15,903,419) (4,241,287)
------------- -------------
Total shareholders' equity 4,255,125 15,917,257
------------- -------------
Total liabilities and shareholders' equity $ 66,273,756 $ 75,703,773
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1998 and 1997
1998 1997
<S> <C> <C>
Revenues:
Rental and service $ 30,217,379 $ 13,751,027
Management fees 201,816 207,255
------------- -------------
Total revenues 30,419,195 13,958,282
------------- -------------
Operating expenses:
Residence operating expenses 25,602,709 10,689,905
General and administrative 4,161,981 3,568,382
Lease expense 9,014,483 3,479,176
Depreciation and amortization 1,080,050 356,852
------------- -------------
Total operating expenses 39,859,223 18,094,315
------------- -------------
Operating loss (9,440,028) (4,136,033)
Interest income 336,168 381,326
Interest expense (1,594,777) (136,636)
Equity in losses of joint venture (360,028) -
Other income (loss), net (3,467) 26,566
------------- -------------
Loss before income taxes (11,062,132) (3,864,777)
Provision for income taxes - 12,877
------------- -------------
Net loss (11,062,132) (3,877,654)
Preferred stock dividends (600,000) (600,000)
------------- -------------
Net loss available to common shareholders $ (11,662,132) $ (4,477,654)
============= =============
Basic loss per common share $ (2.52) $ (.97)
============= =============
Diluted loss per common share $ (2.52) $ (.97)
============= =============
Weighted average common shares outstanding - basic 4,633,000 4,633,000
============= =============
Weighted average common shares outstanding - diluted 4,633,000 4,633,000
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997
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, 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
Preferred stock dividends (600,000) (600,000)
Net loss (11,062,132) (11,062,132)
---------- ------------ -------- ----------- --------- ------------ ------------ -------------
Balance, December 31, 1998 1,283,785 $ 7,201,910 382,882 $ 2,147,931 4,633,000 $ 10,808,703 $(15,903,419 $ 4,255,125
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1998 and 1997
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (11,062,132) $ (3,877,654)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,080,050 356,852
Non-cash compensation charge - 337,500
Amortization of deferred gains and development fees (350,564) (21,198)
Equity interest in joint venture 360,028 -
Non-cash operating expense 128,957 -
Increase in allowance for doubtful accounts 10,000 -
Deferred income taxes - 304,300
Changes in other assets and liabilities:
Cash held in working capital escrow (10,925) (7,054)
Accounts receivable (169,373) 20,866
Prepaid expenses (145,523) (61,560)
Other assets (990,086) (67,141)
Accounts payable and other accrued expenses 1,595,094 38,418
Accrued payroll 711,062 167,413
Accrued interest 138,238 122,433
Other liabilities 1,068,586 43,155
------------- -------------
Net cash used in operating activities (7,636,588) (2,643,670)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (36,267,398) (52,898,548)
Increase (decrease) in construction accounts payable 25,542 (84,269)
Maturity (purchase) of investments, net - 2,939,448
Investment in and advances to joint venture (158,563) (137,881)
Proceeds from sale of property and equipment 829,408 -
Deposits to replacement reserve account, net (80,186) (7,909)
------------- -------------
Net cash used in investing activities (35,651,197) (50,189,159)
------------- -------------
Cash flows from financing activities:
Short-term borrowings (4,500,000) 4,500,000
Proceeds from issuance of long-term debt 27,490,812 41,700,424
Payments on long-term debt (38,421,190) (163,183)
Construction (advances) payments (110,625) 1,001,645
Payments and deposits for lease financing arrangements, net (897,484) (234,364)
Restricted cash for lease financing arrangements, net (315,802) (707,599)
Deferred development fees from lease financing arrangements 497,218 920,000
Proceeds from lease financing arrangements 53,822,808 -
Proceeds from issuance of convertible subordinated notes 9,000,000 -
Contributions by minority partner - 250,000
Preferred stock issuance costs - (600,159)
Preferred stock dividends (600,000) (626,230)
------------- -------------
Net cash provided by financing activities 45,965,737 46,040,534
------------- -------------
Net increase (decrease) in cash and cash equivalents 2,677,952 (6,792,295)
Cash and cash equivalents, beginning of period 1,805,096 8,597,391
------------- -------------
Cash and cash equivalents, end of period $ 4,483,048 $ 1,805,096
============= =============
Supplemental disclosure of non-cash investing and financing activities:
Long-term debt incurred to acquire minority interest in
consolidated subsidiary $ 250,000
============
Contribution of property and equipment in exchange for investment
in and advances to joint venture $ 138,000
============
The accompanying notes are an integral part of the 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 including stand-alone
Alzheimer's communities. Assisted living is part of a spectrum of long-term
care services that provide a combination of housing, personal services and
health care designed to respond to elderly individuals who require
assistance with activities of daily living in a manner that promotes
maximum independence.
The Company
As of December 31, 1998, the Company operated twenty-five assisted living
communities in nine western states. In addition, the Company had four
communities under construction and seventeen under development. During
1998, the Company opened eleven new internally developed communities
(including one owned in a joint venture), completed the lease-acquisition
of five communities (including one that was previously managed), and
entered into one additional management contract.
As of December 31, 1997, the Company operated nine assisted living
communities in five states, including two under management contracts.
During 1997, the Company opened three new internally developed communities,
completed the lease-acquisition of one community, and entered into one
management contract.
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. As of
December 31, 1998, the Company has one active subsidiary, RAL, Inc.
Cash and Cash Equivalents
The Company maintains its cash in bank deposit accounts that, at times, may
exceed federally insured limits. Cash equivalents consist of highly liquid
debt instruments purchased with an original maturity of three months or
less. The Company's cash equivalents are in high quality securities placed
with institutions with high credit ratings. This investment policy limits
the Company's exposure to concentrations of credit risk, and the Company
has not experienced any credit related losses.
F-7
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies, Continued:
Cash Held in Working Capital Escrow
Cash is held in the Company's name in bank accounts in the custody of
financial institutions. Under an agreement with a lessor, the majority of
this cash is available for release in accordance with a predetermined
monthly draw schedule and upon a community's initial achievement of a 1.25
to 1.00 coverage ratio, which is expected in 1999.
Property and Equipment
Property and equipment are stated at cost with depreciation being provided
over the assets' estimated useful lives using straight-line and accelerated
methods as follows:
Buildings 40 years
Land improvements 15 years
Furniture and equipment 5 - 10 years
Interest incurred during construction periods is capitalized as part of the
building costs. Maintenance and repairs are expensed as incurred; renewals
and improvements are capitalized. Upon disposal of property and equipment
subject to depreciation, the related costs and accumulated depreciation are
removed and resulting gains and losses are reflected in operations.
Management reviews all long-lived assets and certain identifiable
intangibles to be held and used by the Company for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
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 $2,315,733 and $2,310,884 as of December 31,
1998 and 1997, respectively. Restricted cash also includes a replacement
reserve required to be maintained for one of the communities.
F-8
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies, Continued:
Investment in Joint Ventures
The Company has a 50% investment in a joint venture organized to develop an
assisted living community in Kenmore, Washington. This community commenced
operations on August 25, 1998. The Company accounts for its investment
under the equity method and reported a loss of $360,028 for the year ended
December 31, 1998.
The Company has a 10% investment in a joint venture organized to develop an
Alzheimer's community in Kent, Washington. As of December 31, 1998, this
community was under construction and had not commenced operations. Because
the Company controls the operations of the joint venture, its investment is
accounted for under the equity method.
Pre-Opening Costs
The Company expenses pre-opening and start-up costs as incurred.
Deferred Gains and Development Fees
Gains realized on the sale and leaseback of the Company's assisted living
communities are deferred and credited to income as rent adjustments over
the related lease terms. The Company also defers development fees and
amortizes them over the term of the related lease.
Revenue Recognition
Revenue from owned or leased assisted living communities is recorded when
services are rendered and consist of resident fees for basic housing,
personalized health care and management fees from other assisted living
communities.
Income Taxes
Under the asset and liability method, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of changes in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
F-9
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies, Continued:
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 Standards (SFAS) No. 128, Earnings Per Share. 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 No. 128.
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 SFAS No. 123, Accounting for Stock-Based Compensation. SFAS
No. 123 requires that companies that do not choose to account for
stock-based compensation as prescribed by this statement shall disclose the
pro forma effect on earnings per share as if SFAS No. 123 had been adopted.
Additionally, certain other disclosures are required with respect to stock
compensation and the assumptions used to determine the pro forma effects of
SFAS No. 123.
Use of Estimates
The preparation of financial statements in conformity with 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.
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.
F-10
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
1. Operations and Summary of Significant Accounting Policies, Continued:
New Accounting Pronouncements
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities
(SOP 98-5). This statement requires that the costs of start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after
December 15, 1998. Consistent with its past accounting practices, the
Company expenses all start-up costs and thus the adoption of this statement
will have no impact on the Company's reported results.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities and is effective for all quarters of fiscal years beginning
after June 15, 1999. The adoption of this statement will have no impact on
the Company's reported results.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1997 to conform to the 1998 presentation.
2. Property and Equipment:
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 3,057,756 $ 1,730,810
Buildings and improvements 29,747,219 12,713,346
Furniture and equipment 3,452,579 1,512,868
Construction in progress 19,375,174 54,429,419
-------------- --------------
55,632,728 70,386,443
Less accumulated depreciation and amortization 1,441,404 566,119
-------------- --------------
Property and equipment, net $ 54,191,324 $ 69,820,324
============== ==============
</TABLE>
F-11
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
2. Property and Equipment, Continued:
Land, buildings and certain furniture and equipment serve as collateral for
long-term debt. Construction in progress includes land, development and
building costs incurred in connection with the construction of the
Company's new communities and the cost of land held for development.
Property and equipment includes the asset value attributable to a capital
lease in the amount of $7,724,177 at December 31, 1998 and 1997.
Accumulated amortization related to this lease was $581,000 and $390,700 at
December 31, 1998 and 1997, respectively.
3. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Resident security and trust deposits $ 1,586,164 $ 517,578
Deferred financing costs, net 899,629 195,381
Other 309,581 39,973
----------- -----------
Total other assets $ 2,795,374 $ 752,932
----------- -----------
</TABLE>
Pursuant to rental agreements, residents are required to provide security
deposits, and in certain cases, the last month's rent. A liability for
these deposits is recorded in other liabilities in the consolidated
financial statements.
Deferred financing costs are amortized over the original term of the
related financing agreement.
F-12
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
4. Long-Term Debt and Convertible Subordinated Notes:
<TABLE>
<CAPTION>
Long-term debt consists of:
1998 1997
<S> <C> <C>
Capital lease obligation, due in monthly installments of
$69,100, including interest at 8.4%, due in November
2012 (Note 7) $ 7,915,863 $ 8,072,754
Notes payable to a bank, due in monthly installments of
$11,167, including interest at various rates between 8.75%
and 8.88%, all maturing at various dates in 2002 and 2003 451,477 279,774
Note payable to a corporation, quarterly payments of interest
only at 9%, due in December 2000 500,000 500,000
Construction loans, totaling $36,705,000, interest varies between
7.88% and 11.75%, maturities vary from February 2000
through September 2004 30,668,688 42,250,452
Note payable to construction company owned by the majority
shareholder, quarterly payments of interest only at 10%,
due in November 2000 (Note 9) 1,000,000 -
Other 453,020 566,446
------------ ------------
40,989,048 51,669,426
Less amounts due within one year 284,481 218,881
------------ ------------
$ 40,704,567 $ 51,450,545
============ ============
</TABLE>
Principal payments on long-term debt for the years ending December 31 are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 284,481
2000 9,222,125
2001 9,078,543
2002 595,550
2003 12,180,324
Thereafter 9,628,025
------------
$ 40,989,048
============
</TABLE>
The Company incurred total interest costs of approximately $4,246,600 and
$1,926,200 in 1998 and 1997, respectively, of which approximately
$2,651,800 and $1,789,500 has been capitalized as part of construction in
progress. Interest costs paid by the Company in 1998 and 1997 totaled
approximately $4,108,400 and $1,803,800, respectively.
F-13
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
4. Long-Term Debt and Convertible Subordinated Notes, Continued:
The Company, along with its joint venture partners, has guaranteed
construction loans totaling approximately $9.9 million.
On March 30, 1998, the Company completed a private placement pursuant to
which parties purchased an aggregate of $4.5 million of convertible
subordinated notes of the Company and agreed to purchase up to an
additional aggregate amount of $6 million of convertible subordinated
notes. As of December 31, 1998, a total of $9 million of convertible notes
were issued under this facility. The Company and the purchasers have agreed
that no additional notes will be issued. The notes bear interest at 7.5%
per annum and are convertible into 1,200,000 shares of common stock at an
exercise price of $7.50 per share. Interest on the notes is payable
quarterly and all principal and unpaid interest on the notes is due March
31, 2008. The notes may be converted at the option of the holder at any
time prior to the maturity date of the notes. The Company also has the
right to force a conversion of the notes if the average trading price of
the common stock equals or exceeds $12 per share over thirty consecutive
trading days.
5. Shareholders' Equity:
The Company is authorized to issue 5,000,000 shares of preferred stock. The
Board of Directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series,
and the preferences, limitations and relative rights, including the
dividend rights, dividend rate, voting rights, terms of redemption,
redemption price or prices, conversion rights and liquidation preferences
of the shares constituting any series, without any further vote or action
by the shareholders of the Company.
On December 16, 1996, the Company issued 1,283,785 shares of Series A
preferred stock and 382,882 shares of Series B preferred stock
(collectively, the Preferred Stock) for a total of $9,950,000. In
connection with this transaction, a warrant was issued to the holders of
the preferred stock for $50,000, allowing the warrant holder to purchase
200,000 shares of common stock at an exercise price of $5.50 per share.
Each share of preferred stock is convertible into 1,091 shares of common
stock. The Series A preferred shares are convertible at any time at the
option of the holder. The Series B preferred shares are convertible upon
the occurrence of certain "Conversion Events" as defined in the Company's
amended articles of incorporation.
Dividends on the preferred stock accrue and are paid at an annual rate of
6% of the liquidation value of $5.50 per common equivalent share.
F-14
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
5. Shareholders' Equity, Continued:
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:
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, 1998,
options to purchase 434,000 shares had been granted and are outstanding
pursuant to the Stock Incentive Plan.
The 1995 Stock Incentive Plan is administered by the Board of Directors,
which has the authority, subject to the terms of the Stock Incentive Plan,
to determine the persons to whom options or rights may be granted, the
exercise price and number of shares subject to each option or right, the
character of grant, the time or times at which all or a portion of each
option or right may be exercised and certain other provisions of each
option or right.
Options are exercisable over a period of time in accordance with the terms
or option agreements entered into at the time of grant. Generally, options
expire 10 years from date of grant and are expected to become exercisable
over a five-year period. Options granted under the 1995 Stock Incentive
Plan are generally nontransferable by the optionee and, unless otherwise
determined by the Board of Directors, must be exercised by the optionee
during the period of the optionee's employment or service with the Company
or within a specified period following termination of employment or
service.
Non-employee members of the Board of Directors of the Company are
automatically granted an option to purchase 2,000 shares of common stock
when they become a director. Each non-employee director is automatically
granted an option to purchase 2,000 additional shares of common stock in
each subsequent calendar year that the director continues to serve in that
capacity. The exercise price for these options will generally be the fair
market value of the common stock at the date of grant.
During the year ended December 31, 1997, the Company recognized
compensation expense in the amount of $337,500 for employee options granted
below fair value on the grant date.
F-15
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
6. Stock Options, Continued:
Options Granted by Shareholder
In August 1995, the Company's founding shareholder granted options to
purchase an aggregate of 170,000 shares of common stock, of which 165,000
were to certain officers of the Company. These options vest and become
immediately exercisable, and are subject to the terms of option agreements
that contain terms similar to those governing the options granted under the
1995 Stock Incentive Plan.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
------------ ------------
<S> <C> <C>
Balance, December 31, 1996 538,500 $ 6.15
Options granted 239,500 3.55
Options cancelled (215,000) 6.97
------------
Balance, December 31, 1997 563,000 4.73
Options granted 43,500 5.35
Options cancelled (2,500) 6.59
------------
Balance, December 31, 1998 604,000 4.77
============
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<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 6.7 years $ 6.12 170,000 $ 6.12
$3.00 - $7.50 434,000 7.3 years 4.24 234,400 4.30
------------- -------------
604,000 404,400
============= =============
</TABLE>
F-16
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
6. Stock Options, Continued:
The total value of options granted during 1998 and 1997 was computed as
approximately $140,417 and $1,250,000, 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 1998 and
1997 was $3.23 and $5.22 per share, respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123. The
following table presents the Company's net loss and loss per share,
assuming compensation cost had been determined based on the fair value at
the date of grant, and recognized as expense on a straight-line basis over
the vesting period of the options, consistent with the provisions of SFAS
No. 123.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss:
As reported $(11,062,132) $(3,877,654)
Pro forma (11,333,132) (4,235,654)
Diluted loss per common share:
As reported (2.52) (0.97)
Pro forma (2.58) (1.04)
</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.
1998 1997
Risk-free interest rate 6.0% 6.25%
Expected life 7.1 years 6.5 years
Expected volatility 50% 43.1%
Expected dividend yield 0% 0%
7. Commitments:
Operating Leases
The Company leases eighteen communities under noncancelable lease
agreements expiring in the years 2005 through 2014. 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.
F-17
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
7. Commitments, Continued:
Operating Leases, Continued
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 1998, and a portion of the total lease
expense was paid by those entities (see Note 9).
Future minimum lease payments required under these leases for the years
ending December 31 are as follows:
1999 $ 13,035,000
2000 13,031,000
2001 13,030,000
2002 12,829,000
2003 12,769,000
Thereafter 96,326,000
------------
$161,020,000
------------
Lease and rent expense for the Company totaled $9,679,100 and $3,648,700 in
1998 and 1997, respectively.
Certain of the Company's operating lease agreements contain restrictive
covenants. As of December 31, 1998, the Company was in compliance with the
covenants for all lease agreements, except for a covenant related to the
Company's $2.7 million lease of its West Wind community in Boise, Idaho.
The Company is currently in negotiation with the lessor to remedy the
noncompliance. The Company believes the ultimate resolution of this matter
will not have a material adverse impact on the Company's financial
position, results of operations or cash flows.
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). The Company has continued 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.
F-18
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
7. Commitments, Continued:
Other Lease Financing
The Company entered into arrangements pursuant to which real estate
investment trusts (REITs) specializing in health care properties agreed to
provide lease financing for the development of five of the Company's
communities. Two of the communities commenced operations in 1997 and two
commenced operations in 1998. One community was under construction at
December 31, 1998. The Company advanced approximately $482,000 and $124,000
of reimbursable construction costs at December 31, 1998 and 1997,
respectively (see Note 7). Upon commencement of operations at the
communities, payments begin under the leases, which are accounted for as
operating leases.
Construction Financing
The Company has entered into construction loans in the aggregate of $36.7
million for the construction of six of its communities. The Company, along
with its joint venture partners, has guaranteed construction loans of $9.9
million. All of these loans are generally for a term of 3 years, are
collateralized by the related party, and are guaranteed by a shareholder.
8. Income Taxes:
The components of the provision for income taxes for the year ended
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $ - $ (271,194)
State - (20,229)
------------- -------------
- (291,423)
------------- -------------
Deferred:
Federal - 257,370
State - 46,930
------------- -------------
- 304,300
------------- -------------
$ - $ 12,877
============= =============
</TABLE>
F-19
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
8. Income Taxes, Continued:
Income tax expense for the year ended December 31, 1998 and 1997 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>
1998 1997
<S> <C> <C>
Computed expected tax expense (benefit) $(3,758,507) $(1,314,024)
Increase (decrease) in income taxes resulting from:
State taxes, net of federal benefit (467,000) (151,973)
Increase in valuation allowance 4,226,514 1,513,097
Other, net (1,007) (34,223)
----------- -----------
Actual income tax expense $ - $ 12,877
=========== ===========
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Capital lease obligation (Note 4) $ 3,026,804 $ 3,404,637
Accrued expenses 193,331 77,900
Federal and state operating loss carryforwards 2,940,648 644,945
Deferred gains and development fees 2,241,321 341,185
Depreciation and amortization (2,939,661) (3,110,795)
Other 277,168 155,225
----------- -----------
5,739,611 1,513,097
Less valuation allowance (5,739,611) (1,513,097)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards for
Federal and state income tax purposes of approximately $7,692,000 and
$7,682,000, respectively, which are available to offset future Federal and
state taxable income, if any, through the years 2012 and 2013.
F-20
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
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.
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
$145,000 and $408,000 in 1998 and 1997, respectively.
Construction Contracts
Throughout 1998 and 1997, construction of thirteen 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 3% to
5% of the construction costs. Such fees totaled approximately $1,430,000
and $1,058,000 in 1998 and 1997, respectively.
Guaranty Fees
In 1998, the Company paid fees totaling $75,000 to its majority shareholder
for guaranteeing two of the Company's construction loans.
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 $2,798,650 and $2,776,250
in 1998 and 1997, respectively. The Company is responsible for all costs
including repairs to the facilities, property taxes and other direct
operating costs of the communities. The underlying mortgage lender for one
of the leased communities requires that not less than 25% of the
outstanding stock of the Company be owned by the current majority
shareholder and that the current majority shareholder continue to control
the management of the Company.
F-21
<PAGE>
Regent Assisted Living, Inc. and Subsidiaries
Notes to Financial Statements, Continued
9. Related Party Transactions, Continued:
Management Fees
For a portion of 1998 and for all of 1997, the Company managed one assisted
living community from an entity controlled by the majority shareholder. The
Company received a management fee equal to 5% of the gross revenues of the
community which amounted to approximately $53,300 and $151,800 in 1998 and
1997, respectively. In 1998, the community was sold to a REIT and the
Company entered into a lease agreement with the REIT and will continue to
operate the community.
10. Retirement Plan:
Employees of the Company participate in a salary deferral plan under the
provisions of Section 401(k) of the Internal Revenue Code whereby they may
defer a portion of their gross wages. The employer may make additional
contributions to the Retirement Plan. Employer contributions made by the
Company totaled approximately $85,900 and $66,500 in 1998 and 1997,
respectively.
11. Contingencies:
The Company is involved in certain litigation relating to claims arising
out of its operations in the normal course of business. Management believes
that it is not presently a party to any litigation, the outcome of which
would have a material adverse effect on the Company's business, financial
condition, results of operations or cash flows.
12. Subsequent Events:
During the first quarter of 1999, the Company entered into a sale leaseback
agreement with a REIT related to one assisted living community. This
community was sold for an aggregate of $10.4 million, resulting in a net
gain of approximately $1.0 million, which will be deferred and amortized
over the respective lease term.
The Company will continue to operate this community pursuant to a lease
agreement, expiring in the year 2014. The terms of this agreement provide
for annual base rental payments of $1,054,600, subject to annual rent
escalations not to exceed 2% per year. The Company is responsible for all
costs including property taxes, maintenance and other direct operating
costs.
F-22
Exhibit 21
Subsidiaries of Regent Assisted Living, Inc.
The Company has one subsidiary. The Company owns 100 percent of the issued and
outstanding common stock of RAL, Inc., an Oregon corporation.
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. 333-61239, 333-12159 and
333-12157) and Form S-3 (File No. 333-55769) of our report dated March 10, 1999,
on our audit of the consolidated financial statements of Regent Assisted Living,
Inc. as of December 31, 1998 and for the year then ended, which report is
included in this Annual Report on Form 10-KSB.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March 29, 1999
Independent Accountants' Consent
The Board of Directors
Regent Assisted Living, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 333-61239, 333-12159, and 333-12157) and Form S-3 (No. 333-55769) of
Regent Assisted Living, Inc. of our report dated February 13, 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,
stockholders' equity, and cash flows for the year then ended, which report
appears in the December 31, 1998, annual report on Form 10-KSB of Regent
Assisted Living, Inc.
KPMG PEAT MARWICK LLP
Portland, Oregon
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,483,048
<SECURITIES> 0
<RECEIVABLES> 806,302
<ALLOWANCES> 37,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,267,082
<PP&E> 55,632,728
<DEPRECIATION> 1,441,404
<TOTAL-ASSETS> 66,273,756
<CURRENT-LIABILITIES> 4,705,127
<BONDS> 49,704,567
10,808,703
0
<COMMON> 9,349,841
<OTHER-SE> (15,903,419)
<TOTAL-LIABILITY-AND-EQUITY> 66,273,756
<SALES> 30,217,379
<TOTAL-REVENUES> 30,419,195
<CGS> 25,602,709
<TOTAL-COSTS> 39,859,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,594,777
<INCOME-PRETAX> (11,062,132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,062,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,062,132)
<EPS-PRIMARY> (2.52)
<EPS-DILUTED> (2.52)
</TABLE>
