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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-20765
SUNRISE ASSISTED LIVING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 54-1746596
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7902 Westpark Drive
McLean, VA 22102
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(703) 273-7500
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
5 1/2% Convertible Subordinated Notes due 2002
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the registrant's common
stock as of March 13, 2001 was $256,887,620. */
The number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share.
Outstanding at March 13, 2001: 21,612,707 shares.
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*/ Solely for the purposes of this calculation, all directors and executive
officers of the registrant and all stockholders beneficially owning more than
5% of the registrant's common stock are considered to be affiliates.
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TABLE OF CONTENTS
Page(s)
PART I Item 1. Business........................................................ 3
Item 2. Properties...................................................... 35
Item 3. Legal Proceedings............................................... 36
Item 4. Submission of Matters to a Vote of Security Holders............. 36
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters.................................... 36
Item 6. Selected Financial Data......................................... 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 38
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk.............................................. 54
Item 8. Financial Statements and Supplementary Data..................... 54
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 54
PART III Item 10. Directors and Executive Officers of the Registrant.............. 54
Item 11. Executive Compensation.......................................... 54
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 54
Item 13. Certain Relationships and Related Transactions.................. 55
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K..................................................... 55
SIGNATURES............................................................................... 57
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This Form 10-K contains certain forward-looking statements that
involve risks and uncertainties. Sunrise's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including development and construction risks,
acquisition risks, licensing risks, business conditions, competition,
Sunrise's ability to operate the Karrington properties profitably, the
Company's ability to execute on its sale/manage back program, market factors
that could affect the value of the Company's properties, changes in interest
rates, risks of downturns in economic conditions generally, satisfaction of
closing conditions and availability of financing for development and
acquisitions. Some of these factors are discussed elsewhere in this Form 10-K.
Unless the context suggests otherwise, references in this Form 10-K to
"Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and
predecessor entities.
PART I
ITEM 1. BUSINESS
GENERAL
Sunrise Assisted Living, Inc. is a provider of assisted living
services to the elderly. Sunrise was incorporated in Delaware on December 14,
1994 to combine various activities relating to the development, ownership and
operation of the Sunrise assisted living facilities held by predecessor
entities. Sunrise currently operates 170 facilities in 25 states and one in
the United Kingdom, with a resident capacity of more than 13,300 residents,
including 151 facilities owned by Sunrise or in which it has ownership
interests and 19 facilities managed for third parties. Sunrise had revenues of
$344.8 million and net income of $24.3 million in 2000. Approximately 99% of
Sunrise's revenues were derived from private pay sources.
Sunrise's growth objectives include developing new Sunrise model
assisted living facilities. Since its initial public offering in June 1996,
Sunrise has completed development of 89 such facilities with a resident
capacity of approximately 7,700 and has 24 facilities currently under
construction with a resident capacity of approximately 2,100. Sunrise also has
entered into contracts to purchase 40 additional sites, 21 of which are zoned,
and to lease one additional site. Sunrise is pursuing additional development
opportunities and also plans to acquire additional facilities as market
conditions warrant. See "--Facility Development" and "--Facility
Acquisitions."
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A subsidiary of Sunrise has obtained a syndicated revolving credit
facility for $400.0 million to be used for general corporate purposes,
including the continued construction and development of assisted living
facilities. Sunrise guarantees the repayment of all amounts outstanding under
this credit facility. The credit facility is secured by cross-collateralized
first mortgages on the real property and improvements and first liens on all
assets of the subsidiary, consisting of 30 properties. Advances under the
facility bear interest at LIBOR plus 1.75% (8.31% at December 31, 2000). The
credit facility expires in July 2002. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
On June 6, 1997, Sunrise issued and sold $150.0 million aggregate
principal amount of 5 1/2% convertible subordinated notes due 2002. These
notes bear interest at 5 1/2% per annum payable semiannually on June 15 and
December 15 of each year, and are convertible, at the option of the holder,
into shares of Sunrise common stock at a conversion rate of $37.1875 per
share, or 26.89 shares per $1,000 principal amount of the notes. The
conversion rate is subject to customary anti-dilution adjustments. The notes
rank junior in payment to substantially all indebtedness of Sunrise existing
at the time of the issuance of the notes and subsequently incurred by it. The
notes are redeemable at the option of Sunrise commencing June 15, 2000, at
specified premiums. The holders of the notes may require Sunrise to repurchase
the notes upon a change of control of Sunrise, as defined in the notes.
On June 5, 1996, Sunrise completed its initial public offering. On
October 31, 1996 Sunrise completed a follow-on public offering. Net proceeds
to Sunrise from these two offerings totaled approximately $196.1 million.
THE ASSISTED LIVING INDUSTRY
Sunrise believes that the assisted living industry has emerged as a
preferred alternative to meet the growing demand for a cost-effective setting
in which to care for the elderly who do not require the more intensive medical
attention provided by a skilled nursing facility but cannot live independently
due to physical or cognitive frailties. In general, assisted living represents
a combination of housing and 24-hour a day personal support services designed
to aid elderly residents with activities of daily living, such as bathing,
eating, personal hygiene, grooming and dressing. Some assisted living
facilities may also provide assistance to residents with low acuity medical
needs, or may offer higher levels of personal assistance for incontinent
residents or residents with Alzheimer's disease or other forms of dementia.
Unlike assisted living facilities, skilled nursing facilities provide 24-hour
skilled nursing care, supervised by a registered nurse. Sunrise believes that
consumer preference and demographic trends should allow assisted living to
remain one of the fastest growing segments of elder care.
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The assisted living industry is highly fragmented and characterized by
numerous small operators. The scope of assisted living services varies
substantially from one operator to another. Many smaller assisted living
providers do not operate in purpose-built facilities, do not have
professionally trained staff, and may provide only limited assistance with
low-level care activities. Sunrise believes that few assisted living operators
provide a comprehensive range of assisted living services, such as Alzheimer's
care and other services designed to permit residents to "age in place" within
the facility as they develop further physical or cognitive frailties.
THE SUNRISE OPERATING PHILOSOPHY
The Sunrise approach to assisted living is a unique combination of
operating philosophy and a signature facility design. Since the first Sunrise
facility opened in 1981, Sunrise's operating philosophy has been to provide
care and services to its residents in a residential environment in a manner
that: "nurtures the spirit, protects privacy, fosters individuality,
personalizes services, enables freedom of choice, encourages independence,
preserves dignity and involves family and friends." Sunrise believes that its
operating philosophy is one of its strengths. Furthermore, in implementing its
philosophy, Sunrise continuously seeks to refine and improve the care and
services it offers. The elements of the operating philosophy focus on:
- - the involvement of the resident and the resident's family in important
care giving decisions;
- - Sunrise's proprietary training programs for its management, executive
directors and care managers;
- - Sunrise's quality assurance programs;
- - the full range of assisted living services offered by Sunrise; and
- - the architecture and purpose-built design of Sunrise's "Victorian"
model facilities.
SERVICES
Sunrise offers a full range of assisted living services based upon
individual resident needs. Upon move-in, Sunrise assesses the resident
generally with the resident's family and physician to determine the level of
care required and develops an individualized service plan. This individual
service plan includes selection of resident accommodations and determination
of the appropriate level of care. The plan is periodically reviewed and
updated by Sunrise, and communicated to the resident and/or the resident's
family. The range of services offered by
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Sunrise includes: Basic Care, consisting of assistance with activities of
daily living and other personalized support services; Plus Care, consisting of
more frequent and intensive assistance or increased care; and Reminiscence
Care, consisting of care programs and services to help cognitively impaired
residents, including residents with Alzheimer's disease. By offering a full
range of services, Sunrise can accommodate residents with a broad range of
service needs and enable residents to remain at Sunrise as their needs change.
Daily net resident fees are generally revised annually whereas fees for
additional care are revised when a change in care needs arises.
The average daily resident fee, consisting of net resident fees plus
additional care fees combined, for owned facilities opened or operated by
Sunrise for at least 12 months, or that have achieved occupancy percentages of
95% or above, was approximately $106 for 2000, $97 for 1999, and $86 for 1998.
BASIC CARE
Sunrise's basic care program provided to all residents includes:
- assistance with activities of daily living, such as eating, bathing,
dressing, personal hygiene, and grooming;
- three meals per day served in a common dining room, including two
seating times per meal;
- coordination of special diets;
- 24-hour security; emergency call systems in each unit;
- transportation to stores and community services;
- assistance with coordination of physician care, physical therapy and
other medical services;
- health promotion and related programs;
- housekeeping services; and
- social and recreational activities.
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ASSISTED LIVING PLUS CARE
Through Sunrise's plus care program, residents who require more
frequent or intensive assistance or increased care or supervision are provided
extra care and supervision. Sunrise charges an additional daily fee based on
additional staff hours of care and services provided. The plus care program
allows Sunrise, through consultation with the resident, the resident's family
and the resident's personal physician, to create an individualized care and
supervision program for residents who might otherwise have to move to a more
medically intensive facility. At December 31, 2000, approximately 32% of
Sunrise's assisted living residents participated in the plus care program.
MEDICATION MANAGEMENT
Many of Sunrise's residents also require assistance with medications.
To the extent permitted by state law, the medication management program
includes the storage of medications, the distribution of medications as
directed by the resident's physician and compliance monitoring. Sunrise
charges an additional fixed daily fee for this service. At December 31, 2000,
approximately 43% of Sunrise's assisted living residents participated in the
medication management program.
REMINISCENCE CARE
Sunrise believes its reminiscence care program distinguishes it from
many other assisted living providers who do not provide such specialized care.
Sunrise's reminiscence program provides the attention, care programs and
services needed to help cognitively impaired residents, including residents
with Alzheimer's disease, maintain a higher quality of life. Specially trained
staff provide basic care and other specifically designed care and services to
cognitively impaired residents, in separate areas of facilities. Sunrise
charges each cognitively impaired resident a daily fee that includes
additional staff time per resident per day. Cognitively impaired residents who
require additional care and services pay a higher daily rate based on
additional staff hours of care and services provided. At December 31, 2000,
approximately 25% of Sunrise's assisted living residents participated in the
reminiscence program.
THE SUNRISE "VICTORIAN" MODEL FACILITY
Sunrise's signature Victorian model facility, first designed in 1985,
is a freestanding, residential-style facility generally with a capacity of 65
to 110 residents. The building ranges in size from approximately 37,000 to
65,000 square feet and is built generally on sites ranging from two to five
acres. Approximately 40% of the building is devoted to common areas and
amenities, including a reading room, activity room, family or living room and
other areas, such as dining room and bistro, designed to promote interaction
among residents. Sunrise has several
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basic building plan designs, which provide it with flexibility in adapting the
model to a particular site. The building is usually two or three stories and
of steel frame construction built to institutional health care standards but
strongly residential in appearance. The interior layout is designed to promote
a home-like environment, efficient delivery of resident care and resident
independence.
Resident units are functionally arranged to provide a
"community-within-a-community" atmosphere. The model facility may be
configured with as many as eight different types of resident units, including
double occupancy units, single units and two- and three-room suites. Sitting
areas on each floor serve as either family or living rooms. The ground level
typically contains a kitchen and common dining area, administrative offices, a
laundry room, a private dining room, library, living room, and bistro.
Typically, one floor or one or two wings of a facility contain resident units
and common areas, including separate dining facilities, specifically designed
to serve residents with Alzheimer's disease or other special needs.
The architectural and interior design concepts incorporate the Sunrise
operating philosophy of protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a homelike
setting. Sunrise believes its model facility meets the desire of many
individuals to move to a residence at least as comfortable as their former
home. Sunrise believes that its residential environments also accomplish
several other objectives, including: (1) lessening the trauma of change for
elderly residents and their families; (2) achieving operational efficiencies
through proven designs; (3) facilitating resident mobility and ease of access
by care givers; and (4) differentiating Sunrise from other assisted living and
long-term care operators.
OWNED FACILITIES
The table below sets forth certain information regarding owned
facilities or facilities in which Sunrise has an ownership interest that are
currently operating as well as those under construction or are subject to
purchase contracts and zoned:
DEVELOPED, SUNRISE
YEAR ---------- -------
OPENED ACQUIRED OR MODEL RESIDENT OWNERSHIP
BY ----------- ----- -------- ---------
FACILITY LOCATION SUNRISE CONSTR. STATUS FACILITY CAPACITY PERCENTAGE
-------- -------- ------- -------------- -------- -------- ----------
Sunrise of Oakton Oakton, VA 1981 Acquired(2) 51 100.0%(1)
Sunrise of Leesburg Leesburg, VA 1984 Acquired(2) 35 100.0(1)
Sunrise of Warrenton Warrenton, VA 1986 Acquired(2) 37 100.0(1)
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Sunrise of Arlington Arlington, VA 1988 Developed X 58 100.0(1)
Sunrise at Bluemont Arlington, VA 1990 100.0(1)
Park
Potomac Developed X 59
Shenandoah Developed X 77
James Developed X 59
Sunrise of Mercer Seattle, WA 1990 Developed X 59 100.0(1)
Island
Sunrise of Fairfax Fairfax, VA 1990 Developed X 52 100.0(1)(3)
Sunrise of Frederick Frederick, MD 1992 Developed X 78 100.0(1)
Sunrise at Sterling, VA 1992 100.0(1)
Countryside
East Building Developed(4) X 66
West Building Developed(4) X 64
Sunrise of Gunston Lorton, VA 1992 Developed(4) X 67 100.0(1)
Sunrise Atrium of Boca Raton, FL 1992 Acquired 196 100.0(1)
Boca Raton
Sunrise of Falls Falls Church, VA 1993 Developed X 66 100.0(1)
Church
Sunrise at Gaithersburg, MD 1993 Acquired 155(5) 100.0(1)
Montgomery Village
Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(1)
Sunrise at Gardner
Park Peabody, MA 1994 Developed X 59 50.0(1)(6)
Sunrise of Santa Rosa Santa Rosa, CA 1996 Acquired 120 100.0(1)
Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 100.0(7)
Huntcliff Summit Atlanta, GA 1996 Acquired 251 100.0(1)(8)
Sunrise at Northshore St. Petersburg,FL 1996 Acquired 162 100.0(1)(9)
Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0
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Sunrise at Columbus, GA 1996 Acquired 26 100.0
Brookside Glen
Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0
Sunrise of Blue Bell Philadelphia, PA 1996 Developed X 97 100.0(7)
Sunrise at Hunter Oakton, VA 1997 Developed X 90 25.0(13)
Mill
Sunrise at Sterling Valencia, CA 1997 Acquired 130 100.0(1)
Canyon
Sunrise of Napa Napa Valley, CA 1997 Acquired 65 100.0(1)
Sunrise of Petaluma Petaluma, CA 1997 Developed 84 100.0(10)
Sunrise of Springfield, VA 1997 Developed X 95 25.0(1)(16)
Springfield
Sunrise of Severna Severna Park, MD 1997 Developed X 93 50.0(3)(10)
Park Building I
Sunrise of Severna Severna Park, MD 1997 Developed X 66 50.0(3)(10)
Park Building II
Sunrise of Morris Morris Plains, NJ 1997 Developed X 92 25.0(1)(16)
Plains
Sunrise of Old Tappan Old Tappan, NJ 1997 Developed X 92 25.0(1)(16)
Sunrise at Granite Granite Run, PA 1997 Developed X 104 25.0(1)(16)
Run
Sunrise of Abington Abington, PA 1997 Developed X 95 25.0(1)(16)
Building I
Sunrise of Abington Abington, PA 1997 Developed X 66 25.0(1)(16)
Building II
Sunrise of Alexandria Alexandria, VA 1997 Developed X 91 100.0(1)(3)
Sunrise of Wayne Wayne, NJ 1997 Developed X 90 25.0(1)(16)
Sunrise of Wayland Wayland, MA 1997 Developed X 71 25.0(13)
Sunrise of Westfield Westfield, NJ 1997 Developed X 92 25.0(1)(16)
Sunrise at East Cobb East Cobb, GA 1997 Developed X 94 100.0(1)
Sunrise of Dunwoody Dunwoody, GA 1997 Acquired 30 100.0
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Sunrise of Weston Weston, MA 1997 Acquired 31 100.0(1)
Sunrise of Fresno Fresno, CA 1998 Developed 84 100.0(10)
Sunrise of Haverford Haverford, PA 1998 Developed X 72 25.0(1)(16)
Sunrise of Decatur Decatur, GA 1998 Developed X 92 25.0(1)(14)
Sunrise of Walnut Walnut Creek, CA 1998 Developed X 85 25.0(1)(14)
Creek
Sunrise of Glen Cove Glen Cove, NY 1998 Developed X 91 25.0(1)(14)
Sunrise at Ivey Ridge Ivey Ridge, GA 1998 Developed X 102 100.0(1)
Sunrise of Cohasset Cohasset, MA 1998 Developed X 74 25.0(1)(14)
Sunrise at Orchard Denver, CO 1998 Developed X 94 100.0(1)
Sunrise of Pinehurst Denver, CO 1998 Developed X 102 100.0(1)
Sunrise at Huntcliff Atlanta, GA 1998 Developed X 91 100.0(1)
Summit
Sunrise of Danville Danville, CA 1998 Developed X 86 100.0(10)
Sunrise of Lafayette Lafayette Hill, PA 1998 Developed X 84 25.0(1)(14)
Hill
Sunrise of Bellevue Bellevue, WA 1998 Developed X 84 25.0(1)(14)
Sunrise of Paramus Paramus, NJ 1998 Developed X 76 25.0(1)(14)
Sunrise at West Essex Fairfield, NJ 1998 Developed X 94 25.0(13)
Sunrise of Paoli Malvern, PA 1998 Developed X 98 25.0(1)(14)
Sunrise of Mission Mission Viejo, CA 1998 Developed X 103 100.0(1)
Viejo
Sunrise at Oakland Oakland, CA 1998 Developed X 91 100.0(1)
Hills
Sunrise of Rochester Detroit, MI 1999 Developed X 101 9.0(1)
Sunrise of East East Brunswick, NJ 1999 Developed X 94 9.0(1)
Brunswick
Sunrise on Providence Charlotte, NC 1999 Developed X 91 9.0(1)
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Sunrise of Smithtown Long Island, NY 1999 Developed X 90 100.0(1)
Sunrise of Buffalo Buffalo Grove, IL 1999 Developed X 94 100.0(1)
Grove
Sunrise at La Costa Carlsbad, CA 1999 Developed X 103 9.0(1)
Sunrise of Naperville Naperville, IL 1999 Developed X 91 9.0(1)
Sunrise of Richmond Richmond, VA 1999 Developed X 84 9.0(1)
Sunrise at Canyon Riverside, CA 1999 Developed X 77 100.0(1)
Crest
Sunrise at Fleetwood Mt. Vernon, NY 1999 Developed X 96 100.0(1)
Sunrise of Flossmoor Flossmoor, IL 1999 Developed X 74 100.0(1)
Sunrise of Bloomingdale, IL 1999 Developed X 91 100.0(1)
Bloomingdale
Sunrise of Wilton Wilton, CT 1999 Developed X 74 100.0(1)
Sunrise of Stamford Stamford, CT 1999 Developed X 76 9.0(1)
Sunrise at North North Lynbrook, NY 1999 Developed X 98 9.0(1)
Lynbrook
Sunrise at Frognal Sidcup, London 1999 Developed X 139 20.1(1)
House
Sunrise of New City New City, NY 1999 Developed X 91 9.0(1)
Karrington of Detroit, MI 1999 Acquired 80 100.0(1)
Farmington Hills
Karrington of Edina Minneapolis, MN 1999 Acquired 110 100.0(1)
Karrington of Bexley Columbus, OH 1999 Acquired 61 100.0(10)
Karrington at the Columbus, OH 1999 Acquired 61 100.0(10)
Scioto
Karrington at Tucker Columbus, OH 1999 Acquired 62 100.0(10)
Creek
Karrington Place for Columbus, OH 1999 Acquired 30 100.0(10)
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the Memory Impaired
Sunrise of Carmel Indianapolis, IN 1999 Acquired 66 100.0(10)
Sunrise of Bath Akron, OH 1999 Acquired 77 100.0(10)
Karrington of Gahanna Columbus, OH 1999 Acquired 54 100.0(10)
Sunrise of Rocky Cleveland, OH 1999 Acquired 74 100.0(10)
River
Sunrise at Presque Erie, PA 1999 Acquired 79 100.0(10)
Isle Bay
Sunrise of Eastover Charlotte, NC 1999 Acquired 52 100.0
Sunrise of Poland Youngstown, OH 1999 Acquired 75 100.0
Sunrise of Ann Arbor Ann Arbor, MI 1999 Acquired 77 100.0(10)
Sunrise of Shaker Cleveland, OH 1999 Acquired 68 100.0
Heights
Sunrise at South Pittsburgh, PA 1999 Acquired 77 100.0(1)
Hills
Sunrise at Fall Indianapolis, IN 1999 Acquired 71 100.0
Creek
Sunrise of Willow Indianapolis, IN 1999 Acquired 71 100.0
Lake
Sunrise of Fort Fort Wayne, IN 1999 Acquired 71 100.0
Wayne
Karrington of Wooster Wooster, OH 1999 Acquired 98(11) 100.0(3)
Sunrise of South
Charlotte Charlotte, NC 1999 Acquired 47 100.0(1)
Sunrise of
Monroeville Pittsburgh, PA 1999 Acquired 72 100.0(1)
Karrington at St. Albuquerque, NM 1999 Acquired 32 19.9(1)
Francis Place for
the Memory Impaired
Sunrise at Oakwood Dayton, OH 1999 Acquired 61 50.0
Sunrise of Colorado Colorado Springs, CO 1999 Acquired 74 19.9(1)
Springs
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Sunrise at of Kenwood Cincinnati, OH 1999 Acquired 77 35.0(1)
Sunrise of Englewood Dayton, OH 1999 Acquired 58 19.9(1)
Karrington of Albuquerque, NM 1999 Acquired 69 19.9(1)
Albuquerque
Sunrise of Findlay Findlay, OH 1999 Acquired 55 50.0(1)
Karrington Cottages Bismarck, ND 1999 Acquired 20 100.0(1)
of Bismark
Karrington Cottages Waterloo, IA 1999 Acquired 20 100.0(1)
of Waterloo
Karrington of Bismark Bismarck, ND 1999 Acquired 76 100.0(1)
Karrington Cottages Buffalo, MN 1999 Acquired 21 100.0(1)
of Buffalo 1
Karrington Cottages Buffalo, MN 1999 Acquired 20 100.0(1)
of Buffalo 2
Karrington of Buffalo Buffalo, MN 1999 Acquired 78 100.0(1)
Karrington Cottages Rochester, MN 1999 Acquired 19 100.0(1)
of Rochester 1
Karrington Cottages Rochester, MN 1999 Acquired 19 100.0(1)
of Rochester 2
Karrington Cottages Rochester, MN 1999 Acquired 27 100.0(1)
of Rochester 3
Karrington Cottages Rochester, MN 1999 Acquired 27 100.0(1)
of Rochester 4
Karrington Cottages Rochester, MN 1999 Acquired 30 100.0(1)
of Rochester 5
Karrington Cottages Mankato, MN 1999 Acquired 21 100.0(1)
of Mankato
Sunrise of Park Ridge Chicago, IL 1999 Acquired 128 100.0(1)(12)
Sunrise at Northville Northville, MI 2000 Developed X 84 100.0(1)
Sunrise of Hermosa Hermosa Beach, CA 2000 Developed X 96 100.0(1)(3)
Beach
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Sunrise of Exton Exton, PA 2000 Developed X 76 9.0(1)
Sunrise of Westtown Westtown, PA 2000 Developed X 95 9.0(1)
Karrington of Hamilton, OH 2000 Developed 58 100.0(1)
Hamilton
Karrington Cottages Rochester, MN 2000 Acquired 27 100.0(1)
of Rochester 7
Karrington at Cincinnati, OH 2000 Developed 82 35.0(1)
Finneytown
Sunrise of Glen Ellyn Glen Ellyn, IL 2000 Developed X 102 9.0(1)
Sunrise at Brooklyn, NY 2000 Developed 125 70.0(1)
Sheepshead Bay
Sunrise of Willowbrook, IL 2000 Developed X 98 100.0(1)
Willowbrook
Sunrise at Ann Ann Arbor, MI 2000 Developed X 86 9.0(1)
Arbor North
Sunrise of Cuyahoga Akron, OH 2000 Developed X 59 9.0(1)
Falls
Sunrise of Sunnyvale Sunnyvale, CA 2000 Developed X 96 9.0(1)
Sunrise at Denver, CO 2000 Developed X 104 9.0(1)
CherryCreek
Sunrise at Parma Parma, OH 2000 Developed X 61 100.0(1)
Sunrise of Baton Baton Rouge, LA 2000 Developed X 70 100.0(1)
Rouge
Sunrise of West West Bloomfield, 2000 Developed X 62 9.0(1)
Bloomfield MI
Sunrise of Woodcliff Woodcliff Lake, 2000 Developed X 102 9.0(1)
Lake NJ
Sunrise of Westminister, CO 2000 Developed X 94 100.0(1)
Westminister
Sunrise at Bayou - New Orleans, LA 2000 Developed X 91 100.0(1)(3)
St. Johns
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Sunrise of Tustin Tustin, CA 2000 Developed X 58 9.0(1)
Sunrise of St . Louis, MO 2000 Developed X 91 100.0(1)
Chesterfield
Sunrise of Edgewater, NJ 2000 Developed X 84 9.0(1)
Edgewater-Phase I
Sunrise of Wall Wall Township, NJ 2000 Developed X 70 100.0(1)
Sunrise of Claremont Claremont, CA 2000 Developed X 65 100.0(1)
Rancho
Sunrise of Alta Loma Cucamonga, CA 2001 Developed X 73 100.0(1)
Sunrise at Colorado 2001 Developed X 65 9.0(1)
University Park Springs, CO
Sunrise of Crystal Crystal Lake, IL 2001 Developed X 71 9.0(1)
Lake
Sunrise of West West Hartford, 2001 Developed X 91 100.0(1)
Hartford CT
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11,673
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Sunrise of Troy Troy, MI 1st half Construction X 70 100.0(1)
2001
Sunrise of Palos Park Palos Park, IL 1st half Construction X 102 100.0(1)
2001
Sunrise of Pacific Pacific Palisades, 1st half Construction X 47 100.0(1)
Palisades CA 2001
Sunrise of Holbrook Holbrook, NY 1st half Construction X 95 9.0(1)
2001
Sunrise of Unionville Markham, ON 1st half Construction X 98 20.1
2001
Sunrise of Schaumburg Schaumburg, IL 2nd half Construction X 94 9.0
2001
Sunrise of Victoria Victoria, BC 2nd half Construction X 110 20.1(1)
2001
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Sunrise at Mill Basin Brooklyn, NY 2nd half Construction X 118 70.0(1)
2001
Sunrise of Mississauga Mississaugua, 2nd half Construction X 101 20.1
ON 2001
Sunrise at Windsor Windsor, ON 2nd half Construction X 101 20.1
2001
Sunrise of Dix Hills Dix Hills, NY 1st half Construction X 91 100.0
2002
Sunrise of Arlington Arlington, MA 2nd half Construction X 102 100.0(1)(3)
2001
Sunrise of Gurnee Gurnee, IL 1st half Construction X 71 9.0
2002
Sunrise of Roseville Roseville, MN 2nd half Construction X 92 9.0
2001
Sunrise of Plainview Plainview, NY 2nd half Construction X 61 9.0
2001
Sunrise of Lincroft Lincroft, NJ 2nd half Construction X 72 9.0
2001
Sunrise of Oakville Oakville, ON 1st half Construction X 104 20.1
2002
Sunrise of Lynn Valley North Vancouver, 1st half Construction X 108 20.1
B.C. 2002
Sunrise of Marlboro Marlboro, NJ 1st half Construction X 77 100.0(1)
2002
Sunrise of East East Meadow, NY 1st half Construction X 98 100.0(3)
Meadow 2002
Sunrise of Richmond Richmond Hill, 1st half Construction X 84 20.1
Hill ON 2002
Sunrise of White Oak Silver Spring, 1st half Construction 78 100.0
MD 2002
Sunrise at Virginia Surrey, UK 1st half Construction X 60 20.1
Water 2002
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Sunrise of Bernards Basking Ridge, Zoned X 94 100.0
Township NJ
Sunrise of Aurora Aurora, CO Zoned X 65 100.0
Sunrise of Burlington Burlington, ON Zoned X 77 20.1
Sunrise of Edgewater Edgewater, NJ Zoned X 84 100.0
II
Sunrise of Farmington Zoned X 91 100.0
Farmington Hills Hills, MI
Karrington Cottages Rochester, MN Zoned 30 100.0
of Rochester 6
Karrington Cottages Rochester, MN Zoned 30 100.0
of Rochester 8
Karrington Cottages Rochester, MN Zoned 22 100.0
of Rochester 9
Karrington of Dallas Dallas, TX Zoned 82 100.0
Karrington of Jackson, MS Zoned 82 100.0
Northpointe
Sunrise at Canoga Canoga Park, CA Zoned X 78 100.0
Park
Sunrise at East East Setauket, Zoned X 98 100.0
Setauket NY
Sunrise of Washington, D.C. Zoned X 116 100.0
Washington, D.C.
Sunrise of Pacific San Diego, CA Zoned X 60 100.0
Beach
Sunrise of Fair Oaks Sacramento, CA Zoned X 71 100.0
Sunrise at Richmond St. Louis, MO Zoned X 78 100.0
Heights
Sunrise of Naperville Naperville, IL Zoned X 95 100.0
Sunrise at Elstree Elstree, UK Zoned X 71 20.1
Manor
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Sunrise of San San Gabriel, CA Zoned X 71 100.0
Gabriel
Sunrise of Lincoln Lincoln Park, IL Zoned X 72 100.0
Park
Sunrise of Boulder Boulder, CO Zoned X 101 100.0
------------
3,602 (16)
------------
Total 15,275
============
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(1) Serves as collateral for outstanding debt on facilities in which Sunrise
has an ownership percentage. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and note 8 of notes to consolidated financial
statements. All facilities that are wholly owned by Sunrise are
consolidated in the consolidated financial statements. The Gardner Park,
Severna Park, Sheepshead Bay, and Mill Basin facilities are held by
limited liability companies or limited partnerships in which Sunrise holds
the ownership interests indicated in the table. Sunrise is the general
partner or managing member of these entities and through the partnership
or operating agreements and the management agreements for the facilities
Sunrise controls their ordinary course business operations. Therefore, the
Gardner Park, Severna Park, Sheepshead Bay, and Mill Basin facilities are
also consolidated in Sunrise's consolidated financial statements. The
ordinary course business operations of the Towson, Rochester, East
Brunswick, Providence, La Costa, Naperville, Richmond, Stamford, North
Lynbrook, Frognal House, New City, Exton, Westtown, Finneytown, St.
Francis Place, Oakwood, Colorado Springs, Kenwood, Englewood, Albuquerque,
Findlay, Glen Ellyn, Ann Arbor, Akron, Sunnyvale, Cherry Creek, West
Bloomfield, Woodcliff Lake, Tustin, Edgewater I, Huntermill, Wayland, West
Essex, Decatur, Walnut Creek, Glen Cove, Cohasset, Lafayette Hills,
Paramaus, Paoli, Bellevue, Abington, Granite Run, Haverford, Morris
Plains, Old Tappan, Wayne, Westfield and Springfield facilities are not
currently controlled by Sunrise and, therefore, are accounted for under
the equity method of accounting. The remaining ownership interests in
these facilities are owned by third parties. Sunrise manages each of these
facilities.
(2) Each of these facilities has been redeveloped in a manner consistent with
the Sunrise model.
(3) Subject to long-term ground lease.
(4) These facilities were initially developed by Sunrise for third parties and
were subsequently acquired by Sunrise in 1992.
(5) This facility is licensed for 40 assisted living residents. The remainder
of the resident capacity is for independent living residents.
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(6) A current officer and a former employee of Sunrise each have a 25%
ownership interest in this facility. Sunrise has the right to acquire
these minority ownership interests for fair market value, as determined by
an appraiser mutually agreeable to the parties.
(7) Serves as collateral for one of Sunrise's operating leases. See note 15
of notes to consolidated financial statements.
(8) Excludes 10 units owned by the occupants of the units. The occupants can
require Sunrise to repurchase the units for their original purchase
prices, aggregating approximately $1.3 million, under specified
circumstances. Sunrise has a right to purchase the units at fair market
value upon the occurrence of specified events and has a right of first
refusal on sales of the units.
(9) This facility is licensed for 26 skilled nursing residents. The
remainder of the resident capacity is for assisted living residents.
(10) Sunrise leases these facilities under operating leases, which range from
3 to 20 years. See note 15 of notes to consolidated financial
statements.
(11) Includes 43 rental apartment units for which no independent or assisted
living services are offered.
(12) In February 2000, Sunrise acquired the remaining 30% minority interest
of this facility.
(13) On June 29, 2000, three facilities were sold to a real estate venture
company in which Sunrise owns a 25% interest.
(14) On September 30, 2000, eight facilities were sold to a real estate
venture company in which Sunrise owns a 25% interest.
(15) On December 28, 2000, two facilities were sold to a privately held real
estate company. Sunrise will continue to provide day-to-day management
of the communities of the communities under long-term operating
agreements.
(16) On February 23, 2001, nine facilities were sold to a real estate venture
company in which Sunrise owns a 25% interest.
(17) There can be no assurance that construction delays will not be
experienced.
FACILITY DEVELOPMENT
Sunrise targets sites for development located in major metropolitan
areas and their surrounding suburban communities. In evaluating a prospective
market, Sunrise considers a number of factors, including:
- population;
- income and age demographics;
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- target site visibility;
- probability of obtaining zoning approvals;
- estimated level of market demand; and
- the ability to maximize management resources in a specific market
by clustering its development and operating activities.
Sunrise continues to develop its Victorian model facilities in major
metropolitan markets.
Sunrise's growth objectives include developing new Sunrise model
assisted living facilities. Since its initial public offering in June 1996,
Sunrise has completed development of 89 such new model facilities with a
resident capacity of approximately 7,700 and has 24 facilities under
construction with resident capacity of approximately 2,100. Sunrise has also
entered into contracts to purchase 40 additional sites and to lease one
additional site. These sites are located in District of Columbia, Colorado,
Louisiana, New Jersey, Connecticut, New York, Illinois, California, Missouri,
Michigan, Pennsylvania, Washington, Texas, Mississippi, Virginia, Ontario,
Vancouver and United Kingdom. Sunrise is pursuing additional development
opportunities as market conditions warrant. Sunrise bases its development
primarily upon its "Victorian" model facility that it has developed and
refined since the first model facility was designed in 1985. Use of a standard
model allows Sunrise to control development costs, maintain facility
consistency and improve operational efficiency. Use of the Sunrise model also
creates "brand" awareness in Sunrise's markets.
The primary milestones in the development process are:
- site selection and contract signing;
- feasibility;
- zoning, site plan approval and building permits; and
- completion of construction.
Once a market has been identified, site selection and contract
signing typically take approximately three to nine months. Zoning and site
plan approval generally take 12 months and are typically the most difficult
steps in the development process due to Sunrise's selection of sites in mature
communities which usually require site rezoning. Facility construction
normally takes 10 to 12 months. Sunrise believes its extensive development
experience gives it an advantage relative to certain of its competitors in
obtaining necessary governmental approvals and completing construction in a
timely manner. After a facility receives a certificate of occupancy,
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residents usually begin to move in within one month. Since 1993, the total
capitalized cost to develop, construct and open a Sunrise model facility,
including land acquisition and construction costs, has ranged from
approximately $8.5 million to $20.0 million. The cost of any particular
facility may vary considerably based on a variety of site-specific factors.
Sunrise's development activities are coordinated by its experienced
development staff, which has extensive real estate acquisition, engineering,
general construction and project management experience. Architectural design
and hands-on construction functions are contracted to experienced outside
architects and contractors.
The ability of Sunrise to achieve its development plans will depend
upon a variety of factors, many of which will be outside the control of
Sunrise. These factors include:
- obtaining zoning, land use, building, occupancy, licensing and
other required governmental permits for the construction of new
facilities without experiencing significant delays;
- completing construction of new facilities on budget and on
schedule;
- the ability to work with third-party contractors and subcontractors
who construct the facilities;
- shortages of labor or materials that could delay projects or make
them more expensive;
- adverse weather conditions that could delay projects;
- finding suitable sites for future development activities at
acceptable prices; and
- addressing changes in laws and regulations or how existing laws and
regulations are applied.
Sunrise cannot assure that it will not experience delays in completing
facilities under construction or in development or that it will be able to
identify suitable sites at acceptable prices for future development
activities. If it fails to achieve its development plans, its growth could
slow, which would adversely impact its revenues and results of operations.
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FACILITY ACQUISITIONS
Since its 1996 initial public offering, Sunrise has acquired nine
existing independent living and assisted living facilities and has completed
its acquisition of Karrington. See "Item 7. Management Discussion and Analysis
of Financial Condition and Results of Operation."
In evaluating possible acquisitions, Sunrise considers various
factors, including:
- location, construction quality, condition and design of the
facility;
- current and projected facility cash flow;
- the ability to increase revenue, occupancy and cash flow by
providing a full range of assisted living services;
- costs of facility repositioning, including any renovations; and
- the extent to which the acquisition will complement Sunrise's
development plans.
There can be no assurance that any acquisitions of additional assisted
living facilities will be completed. The success of Sunrise's acquisitions
will be determined by numerous factors, including Sunrise's ability to
identify suitable acquisition candidates, competition for such acquisitions,
the purchase price, the financial performance of the facilities after
acquisition and the ability of Sunrise to integrate or operate acquired
facilities.
NEED FOR ADDITIONAL FINANCING AND MANAGEMENT OF GROWTH
Sunrise will need to obtain substantial additional resources to fund
its development, construction and acquisition activities. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation." Sunrise expects that the number of owned and operated facilities
will increase as it pursues its development and acquisition programs for new
assisted living facilities. This growth will place significant demands on
Sunrise's management resources. Sunrise's ability to manage its growth
effectively will require it to continue to expand its operational, financial
and management information systems and to continue to attract, train,
motivate, manage and retain key employees. If Sunrise is unable to manage its
growth effectively, its business, revenues, expenses and operating results
could be adversely affected.
MANAGED FACILITIES
Sunrise also manages for third-party owners 19 operating facilities
and two facilities under development with total resident capacity of over
1,800, including one in Georgia, four in Maryland, four in Massachusetts, one
in Nebraska, two in New Jersey, one in Pennsylvania, four
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in Virginia and two in California. The facilities in Georgia, Maryland, and
New Jersey and one facility in Massachusetts and California are Sunrise model
facilities. The management contract expiration dates range from June 2001 to
September 2013. Sunrise owns $5.8 million carrying value of tax exempt
mortgage bonds on the Pennsylvania facility. Under the management agreement
for one of the New Jersey facilities, Sunrise has a right of first refusal to
purchase the facility if the owner receives a bona fide offer to purchase the
facility during the term of the management agreement. Sunrise does not provide
financial or accounting services to one of the Virginia facilities.
COMPANY OPERATIONS
OPERATING STRUCTURE
Sunrise has centralized accounting, finance and other operational
functions at the corporate headquarters and regional office levels in order to
allow facility-based personnel to focus on resident care, consistent with
Sunrise's operating philosophy. Sunrise maintains its corporate headquarters
office in McLean, Virginia and a business office in Fairfax, Virginia. The
business office comprises mainly accounting and information technology staff,
and the new Sunrise "At-Home" business is headquartered in the Fairfax office.
Corporate staff members are responsible for: the establishment of Company-wide
policies and procedures relating to resident care, employee hiring, training
on retention, facility design and development, and facility operations; and
accounting and finance functions including billing and collection, accounts
payable, general finance and accounting, and tax planning and compliance; and
providing overall strategic direction to Sunrise. Regional staff are
responsible for: overseeing all aspects of facility-based operations,
including marketing and sales activities; resident care; the hiring of
facility executives, care managers and other facility-based personnel;
compliance with applicable local and state regulatory requirements; and
implementation of Sunrise's development and acquisition plans within a given
geographic region.
Sunrise is currently organized into four large geographic regions:
Northeast, Mid-Atlantic and Southeast, Midwest and West, with multiple cluster
regions under each. Sunrise has regional offices in Boston, MA, Long Island,
NY, Paramus, NJ, Villanova, PA, Atlanta, GA, Chicago, IL, Columbus, OH,
Claremont, CA, and Concord, CA that support the currently opened and/or to be
opened properties in these markets. Sunrise also has regional offices in
London, England and Toronto, Canada supporting the Sunrise homes open or under
construction in those locations. Each of the regions is headed by either a
vice president or director of operations with extensive experience in the
senior housing, health care and assisted living industries. Each regional
cluster is supported typically by a sales/marketing specialist, a resident
care specialist, a human resources specialist and a dining services
specialist. Sunrise expects that all regional clusters will create similar
staff positions as the number of facilities in those regions increases.
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FACILITY STAFFING
Each of Sunrise's facilities has an executive director responsible for
the day-to-day operations of the facility, including: quality of care;
resident services; sales and marketing; and financial performance. Each
executive director receives specialized training from Sunrise. Sunrise
believes that the quality and size of its facilities, coupled with its
competitive compensation philosophy, have enabled it to attract high-quality,
professional executive directors. The executive director is supported by (a)
the department heads, who oversee the care and service of the facility's
assisted living neighborhood and Alzheimer neighborhood, (b) a nurse, who
serves as a case manager responsible for coordinating the services necessary
to meet the health care needs of our residents and (c) the director of
community relations, who is responsible for selling Sunrise services. Other
key positions include the dining services coordinator, the program coordinator
and, the maintenance coordinator
Care managers, who work on full-time, part-time and flex-time schedules,
provide most of the hands-on resident care, such as bathing, dressing and
other personalized care services, including housekeeping, meal service and
resident activities. As permitted by state law, nurses or care managers who
complete a special training program supervise the storage and distribution of
medications. The use of care managers to provide substantially all services to
residents has the benefits of consistency and continuity in resident care. In
most cases, the same care manager assists the resident in dressing, dining and
coordinating daily activities. The number of care managers working in a
facility varies according to the level of care required by the residents of
the facility and the numbers of residents receiving Alzheimer's care and plus
care services. The number of care managers ranges from three (Leesburg
facility) to 20 (Atrium facility) on the day shifts and from two care managers
(Leesburg) to seven care managers (Atrium) on the night shift.
Sunrise believes that its facilities can be most efficiently managed
by maximizing direct resident and staff contact. Employees involved in
resident care, including the administrative staff, are trained in the care
manager duties and participate in supporting the care needs of the residents.
Accounting functions are centralized so that administrative staff may devote
substantially all of their time to care giving.
STAFF EDUCATION AND TRAINING
Sunrise has attracted, and continues to seek, highly dedicated,
experienced personnel. Sunrise has developed a formal training program, the
"five star training program," which focuses on providing every employee with
the appropriate skills that are required to ensure the highest quality of
resident care. All managers and direct care staff must complete a
comprehensive orientation and the core curriculum, which consists of basic
resident care procedures, Alzheimer's care, communication systems, and
activities and dining programming. For the
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supervisors of direct care staff, additional program levels provide education
in medical awareness and management skills.
For department managers, Sunrise has developed the "mentor program,"
which partners each new manager with an experienced, successful manager. Under
this program, new managers typically receive several weeks of training
including classroom, on the job and corporate orientation. Thereafter, the
mentor maintains regular contact with the new manager to provide ongoing
support and guidance. Region-based classroom training also is provided monthly
for department managers in specialized areas, including Sunrise's
"reminiscence program," the social and volunteer programs, human resources,
staffing and scheduling and medication management.
Sunrise also has developed the "executive director in training program,"
which offers a structured curriculum to train individuals to become executive
directors at Sunrise. This program recruits successful, strong leaders from
both Sunrise department head ranks as well as professionals from outside
Sunrise and provides them with an accelerated training curriculum to prepare
them to be Sunrise executive directors.
QUALITY IMPROVEMENT PROCESSES
Sunrise coordinates quality assurance programs at each of its
facilities through its corporate headquarters staff and through its regional
offices. Sunrise's commitment to quality assurance is designed to achieve a
high degree of resident and family member satisfaction with the care and
services provided by Sunrise. In addition to ongoing training and performance
reviews of care managers and other employees, Sunrise's quality control
measures include:
Family and Resident Feedback. Sunrise surveys residents and family
members on a regular basis to monitor the quality of services provided to
residents. Semi-annual and annual written surveys are used to appraise and
monitor the level of satisfaction of residents and their families. A toll-free
telephone line also is maintained which may be used at any time by a
resident's family members to convey comments.
Regular Facility Inspections. Facility inspections are conducted by
regional operations staff on a regular basis. These inspections cover: the
appearance of the exterior and grounds; the appearance and cleanliness of the
interior; the professionalism and friendliness of staff; resident care plans;
the quality of activities and the dining program; observance of residents in
their daily living activities; and compliance with government regulations.
Third-Party Reviews. To further evaluate customer service, Sunrise
engages an independent service evaluation company to "mystery shop" Sunrise's
facilities. These professionals assess Sunrise's performance from the
perspective of a customer, without the
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inherent biases of a company employee. Each facility is "shopped" at least
three times per year in person, as well as one or more times per month by
telephone. To evaluate medication management, third-party pharmacists conduct
periodic reviews of on-site handling and storage of medications,
record-keeping and coordination of medications.
SALES AND MARKETING
Sunrise's sales and marketing strategy is intended to create awareness
which reflect in visits to Sunrise and its services among potential residents
and their family members and referral sources, such as hospital discharge
planners, physicians, clergy, area agencies for the elderly, skilled nursing
facilities, home health agencies and social workers resulting in personal
visits to the property. A central marketing staff develops overall strategies
for systems and programs promoting Sunrise throughout its markets and monitors
the success of Sunrise's marketing efforts. Each regional cluster generally
has at least one sales and marketing specialist and each property has at least
one sales and marketing director of community relations who is responsible for
implementing sales and marketing programs. In addition to direct contacts with
prospective referral sources, Sunrise also relies on print and yellow page
advertising, direct mail, signage, the internet, and open houses and special
events, such as grand openings for new facilities, health fairs and various
community receptions.
THIRD-PARTY RESIDENT, MANAGEMENT AND DEVELOPMENT SERVICES
While Sunrise serves the vast majority of a resident's needs with its
own staff, some services, such as physician care, infusion therapy, physical
and speech therapy and other home health care services, may be provided to
residents at Sunrise facilities by third parties. Company staff assist
residents in locating qualified providers for such health care services. In
October 1996, Sunrise entered into an affiliation agreement with Jefferson
Health System, an integrated health care system located in Philadelphia,
Pennsylvania. Under this agreement, Jefferson Health System provides residents
of Sunrise facilities located in the Philadelphia metropolitan region, on a
preferred but non-exclusive basis, with access to various health care services
offered by Jefferson Health System. These health care services may include
hospital services, physician services, rehabilitation services, home health
services and products and mental health services.
Sunrise continues to capitalize on its brand awareness by accepting
third-party management and development contracts. Sunrise previously entered
into an agreement with Inova Health System Services, Inc., the largest
not-for-profit integrated health care system in the Washington, D.C.
metropolitan area, to manage Inova's two assisted living communities and
provide development and management services for an additional four to eight
assisted living communities with a total resident capacity of up to 800.
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Sunrise has also entered into unconsolidated joint venture arrangements
with third parties to develop up to 37 projects in the United States, United
Kingdom and Canada. The joint ventures have completed 13 assisted living
facilities, 12 in the United States and one in the United Kingdom and are
currently developing 13 assisted living facilities, three in the United
States, two in the United Kingdom and eight in Canada. Sunrise is providing
management and development services to the joint ventures on a contract-fee
basis with rights to acquire the assets in the future. Sunrise has ownership
interests in these joint ventures ranging from 9% to 20.1%.
Sunrise is continuing its previously-announced plan of selling selected
real estate assets, subject to market conditions, as a normal part of its
operations while retaining long-term management through operating agreements,
to include the potential sale of approximately 15 - 20 properties each year.
This strategy of selling selected real estate assets as a normal part of
operations should enable Sunrise to reduce debt, redeploy its capital into new
development projects and realize gains on appreciated real estate. As of March
1, 2001, Sunrise has completed the sale of 26 facilities. Sunrise continues to
operate the facilities under long-term operating agreements.
COMPETITION
The long-term care industry is competitive. Sunrise competes with
numerous other companies that provide similar long-term care alternatives,
such as home health care agencies, facility-based service programs, retirement
communities, convalescent centers and other assisted living providers.
Although some competitors are significantly larger, Sunrise believes there are
no one or more dominant companies in the assisted living segment. In general,
regulatory and other barriers to competitive entry in the assisted living
industry are not substantial. Although new construction of assisted living
facilities have declined significantly, Sunrise has experienced and expects to
continue to experience competition in their efforts to develop and acquire
assisted living facilities. Some of the present and potential competitors of
Sunrise are significantly larger and have, or may obtain, greater financial
resources than Sunrise. Consequently, Sunrise cannot assure that it will not
encounter competition that could limit its ability to attract residents or
expand its business, which could have a material adverse effect on its
revenues and earnings.
OVERBUILDING IN THE ASSISTED LIVING INDUSTRY
Sunrise believes that some assisted living markets have become or are
on the verge of becoming overbuilt. As described above, regulation and other
barriers to entry into the assisted living industry are not substantial.
Although the construction of assisted living facilities has declined
significantly, the development of new assisted living facilities could outpace
demand. Overbuilding in Sunrise market areas could, therefore, cause Sunrise
to experience decreased occupancy, depressed margins or lower operating
results.
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STAFFING AND LABOR COSTS
Sunrise competes with various health care services providers,
including other elderly care providers, in attracting and retaining qualified
and skilled personnel. A shortage of nurses or other trained personnel or
general inflationary pressures may require that Sunrise enhance its pay and
benefits package to compete effectively for such personnel. If there is an
increase in these costs or if Sunrise fails to attract and retain qualified
and skilled personnel, the business and financial results of Sunrise could be
adversely affected.
GOVERNMENT REGULATION
Assisted living facilities and services are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities. Although requirements vary from state to state, in
general, these requirements address:
- personnel education, training, and records;
- facility services, including:
-- administration of medication,
-- assistance with self-administration of medication and
-- limited nursing services;
- monitoring of resident wellness;
- physical plant specifications;
- furnishing of resident units;
- food and housekeeping services;
- emergency evacuation plans; and
- resident rights and responsibilities, including in some states the
right to receive health care services from providers of a
resident's choice.
Some facilities are also licensed to provide independent living
services, which generally involve lower levels of resident assistance. In some
states, assisted living services are provided to residents through licensed
home-healthcare agencies which are subject to additional regulations. Sunrise
operates several licensed home-healthcare agencies. In several of the states
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in which Sunrise operates or intends to operate, assisted living facilities
also require a certificate of need before the facility can be opened. In most
states, assisted living facilities and services also are subject to state or
local building code, fire code and food service licensing or certification
requirements. Like other health care facilities, assisted living facilities
and services are subject to periodic survey or inspection by governmental
authorities.
From time to time in the ordinary course of business, Sunrise receives
deficiency reports, which it reviews to take appropriate corrective action.
Although most inspection deficiencies are resolved through a plan of
correction, the reviewing agency typically is authorized to take action
against a licensed facility or home healthcare agency where deficiencies are
noted in the inspection process. This action may include imposition of fines,
imposition of a provisional or conditional license or suspension or revocation
of a license or other sanctions. If Sunrise fails to comply with applicable
requirements, its business and revenues could be materially and adversely
affected. To date, none of the deficiency reports received by Sunrise has
resulted in a suspension, fine or other disposition that has had a material
adverse effect on its revenues.
Regulation of the assisted living industry is evolving. Sunrise's
operations could suffer if future regulatory developments, such as mandatory
increases in scope and quality of care given to residents, are enacted and
licensing and certification standards are revised. For example, if more states
seek and obtain Medicaid waivers to authorize reimbursement for assisted
living, the prospect of some federal regulation may become more likely. If the
regulatory requirements increase, the costs of complying with those
requirements could increase as well.
Sunrise also is subject to federal and state anti-remuneration laws,
such as the federal health care program anti-kickback law which governs
various types of financial arrangements among health care providers and others
who may be in a position to refer or recommend patients to these providers.
This law prohibits direct and indirect payments that are intended to induce
the referral of patients to, the arranging of services by, or the recommending
of, a particular provider of health care items or services. The federal health
care program anti-kickback law has been interpreted to apply to some
contractual relationships between health care providers and sources of patient
referral. Similar state laws vary from state to state, are sometimes vague and
have rarely been interpreted by courts or regulatory agencies. Violation of
these laws can result in loss of licensure, civil or criminal penalties and
exclusion of health care providers or suppliers from furnishing covered items
or services to beneficiaries of the federal health care program. Sunrise
cannot be sure that these laws will be interpreted consistently with its
practices.
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may
be held liable for the costs of removal or remediation of hazardous or toxic
substances, including asbestos-containing materials, that
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could be located on, in or under a property. These laws and regulations often
impose liability without regard to whether or not the owner or operator knew
of, or was responsible for, the presence or release of the hazardous or toxic
substances. The costs of any required remediation or removal of these
substances could be substantial. In addition, the liability of an owner or
operator is generally not limited and could exceed the property's value and
the aggregate assets of the owner or operator. An owner or operator or an
entity that arranges for the disposal of hazardous or toxic substances at a
disposal site also may be liable for the costs of any required remediation or
removal of hazardous or toxic substances.
Sunrise engages consultants to conduct Phase I environmental studies
of development sites that are placed under contract. If the Phase I study
indicates the existence of hazardous or toxic substances on the property, a
Phase II study is requested and performed. The Phase I and Phase II reports,
as applicable, may not reveal all environmental liabilities. There could be,
therefore, material environmental liabilities of which Sunrise is unaware. In
connection with the ownership or operation of its properties, Sunrise could be
liable for the costs of remediation or removal of hazardous or toxic
substances. Sunrise also could be liable for other costs, including
governmental fines and damages for injuries to persons or properties. As a
result, the presence, with or without Sunrise's knowledge, of hazardous or
toxic substances at any property owned or operated by it, or acquired or
operated by it in the future, could have an adverse effect on Sunrise's
financial condition or earnings.
MEDICAL WASTE
Some of Sunrise's facilities generate infectious waste due to the
illness or physical condition of the residents, including, for example, blood
soaked bandages, swabs and other medical waste products and incontinence
products of those residents diagnosed with an infectious disease. The
management of infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation under various
laws, including federal and state liability laws. These environmental laws set
forth the management requirements, as well as permit, record keeping, notice
and reporting obligations. Each of Sunrise's facilities has an agreement with
a waste management company for the proper disposal of all infectious medical
waste. Any finding that Sunrise is not in compliance with these environmental
laws could adversely affect its business operations and financial condition.
Because these environmental laws are amended from time to time, Sunrise cannot
predict when and to what extent liability may arise. In addition, because
these environmental laws vary from state to state, expansion of Sunrise's
operations to states where Sunrise does not currently operate may subject
Sunrise to additional restrictions on the manner in which it operates its
facilities.
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LIABILITY AND INSURANCE
The assisted living business entails an inherent risk of
liability. In recent years, Sunrise, as well as other participants in the
assisted living industry, have become subject to an increasing number of
lawsuits alleging negligence or related legal theories, many of which involve
large claims and significant legal costs. Sunrise maintains insurance policies
in amounts and with the coverage and deductibles it believes are adequate,
based on the nature and risks of our business, historical experience and
industry standards. The insurance currently maintained by Sunrise has the
following coverage limits:
Type of Coverage Coverage Limits Examples of Incidents Covered
---------------- --------------- -----------------------------
- General liability - $1,000,000 per - premises claims by
occurrence/per facility, third parties, not
with additional specific including residents
limitations for particular
categories of claims that - personal injury and
fall under the general advertising injury
liability category
- independent contractors
- fire damage to other
rented locations
- Health care - $1,000,000 per - negligence claims by
professional occurrence/$3,000,000 total residents
liability for all claims per policy
year; coverage limits do
not overlap with general
liability coverage
- Umbrella excess - $50,000,000 per policy - same as under general
liability year; coverage is in excess liability and medical
of the general liability liability professional
and medical liability limits liability coverages
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- Non-medical - $5,000,000 per wrongful - claims against
professional act/$7,000,000 total; Sunrise's development
liability coverage limits do not or management company
overlap with general subsidiaries by third
liability, medical parties for whom
liability or umbrella Sunrise develops or
excess liability limits manages properties
- Property - $958,528,539 Blanket Real - "All Risk" of physical
& Personal Property; loss or damage to
$226,849,283 Blanket Sunrise property for
Business Interruption; all perils unless
$10,000,000 Flood & otherwise excluded
Earthquake; $1,000,000
California Earthquake
- Boiler & - $20,000,000 Equipment - Physical damage &
Machinery Breakdown financial damage
stemming from an
accident to covered
equipment
- Builder's Risk - $13,000,000 Hard Costs; - Physical loss or
$2,000,000 Soft Costs damage to building or
other related property
while under the course
of construction.
- Business Auto - $1,000,000 combined - Loss for Physical
single limit; $1,000,000 damage by or to
Hired/Non-Owned Liability; Sunrise's fleet.
$1,000,000 Injuries to other
Uninsured/underinsured persons & legal
Motorists; $5,000 Medical liability imposed on
Payments Sunrise for damage others.
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- Workers - Statutory Limits; - Protects employees
Compensation $1,000,000 Employers' against injury or
Liability contracted disease
arising out of and in
the course of
employment.
- Comprehensive - $5,000,000 Employee - Dishonest acts
Crime Dishonesty; $500,000 committed by an
Depositors Forgery or employee including
Alteration; $500,000 Monies theft of monies &
& Securities securities,
embezzlement & other
forms of employee
dishonesty. Has
limited coverage for
theft of resident's
property.
- Fiduciary - $1,000,000 Annual - Claims arising out of
Aggregate the handling of
employee pension,
benefit & health &
welfare plans.
- California - $4,000,000 excess of - Physical loss or
Earthquake property limits; damage to Sunrise
$10,000,000 excess of property due to earth
underlying $5,000,000 movement or earthquakes
- Flood - $500,000 building; - Physical loss or
$500,000 contents; Property damage to Sunrise's
sites in excess of this property in a flood
policy in a flood zone A
zone A
- Underground - $1,000,000 Annual - Third party bodily
Storage Tank Aggregate injury & property
damage that results
from a confirmed
release from a storage
tank system.
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Sunrise cannot be sure that claims will not arise that are in excess
of its coverage or not covered by its policies. If a successful claim against
Sunrise is made and it is not covered by insurance or exceeds the policy
limits, Sunrise's financial condition and results of operations could be
materially and adversely affected. Claims against Sunrise, regardless of their
merit or eventual outcome, could also have a material adverse effect on its
ability to attract residents or expand its business and could require
Sunrise's management to devote time to matters unrelated to the operation of
its business. Sunrise also has to renew its policies every year and it cannot
be sure that it will be able to continue to obtain liability insurance
coverage on acceptable terms.
EMPLOYEES
At December 31, 2000, Sunrise had 9,947 employees, including 5,946
full-time employees, of which 240 were employed at Sunrise's headquarters and
business office. Sunrise believes employee relations are good.
ITEM 2. PROPERTIES
Sunrise leases its corporate and business offices, regional operations
and development offices, and warehouse space under various leases. The leases
have terms of five to twelve years. The corporate headquarters lease commenced
upon completion of the building in July 1999 and expires in July 2011. The
lease has an initial annual base rent of $1.2 million. The base rent escalates
approximately 2.5% per year in accordance with a base rent schedule. In
September 1999, Sunrise amended another corporate lease to increase the amount
of leased premises and extend the maturity date to October 2004. The initial
annual lease payments of the business office leases amount to $462,000, and
the base rent is subject to annual increases based on the consumer price index
from a minimum of 2% to a maximum cap of 3% per year. The initial annual base
rent payments under the warehouse lease amount to $148,000, subject to annual
increases of 3%. Also required are an amortization rent of $88,000 and a
portion of operating expenses. Various other leases expire during 2001 and
2003.
Sunrise has also entered into operating leases for eleven facilities
and five long-term ground leases related to other facilities. The operating
lease terms vary from 15 years, with two ten-year extension options, to 20
years and ground leases have terms of 30 to 99 years. For information
regarding facilities owned by Sunrise or in which it holds interests, see "
Item 1. Business - Owned Facilities" and "Facility Development."
In December 1998, a subsidiary of Sunrise entered into a three year
operating lease for six assisted living facilities. Sunrise has guaranteed the
payment of all obligations of its subsidiary under the lease. There are no
extension options. However, Sunrise has the option, 120 days prior to the
expiration date of the lease, of either purchasing or selling all the leased
properties. If Sunrise exercises its option to sell the properties and the
proceeds from the sale
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exceed the obligation under the lease, Sunrise is entitled to the excess.
However, if the proceeds from the sale are less than the obligation under the
lease, Sunrise is obligated to fund the difference. Sunrise is responsible for
the payment of real estate taxes, insurance and other operating expenses. The
lease requires Sunrise to maintain specified coverage ratios, liquidity and
net worth. These six leased properties were sublet to Karrington until the
acquisition of Karrington in May 1999. During 2000, Sunrise purchased two of
the properties for $17.7 million.
ITEM 3. LEGAL PROCEEDINGS
Sunrise is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of management of Sunrise, although
the outcomes of these suits and claims are uncertain, in the aggregate they
should not have a material adverse effect on Sunrise's business, financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sunrise's common stock is traded on the Nasdaq National Market under the
symbol "SNRZ." Trading of the common stock commenced May 31, 1996. As of March
13, 2001, there were 261 stockholders of record. No cash dividends have been
paid in the past, and none are expected to be paid in the foreseeable future.
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
Quarter Ended High Low
- --------------------------------------------------------
March 31, 1999 $ 52.50 $ 30.50
June 30, 1999 45.00 29.88
September 30, 1999 35.50 24.00
December 31, 1999 26.63 9.25
Quarter Ended High Low
- --------------------------------------------------------
March 31, 2000 $ 15.75 $12.00
June 30, 2000 20.00 12.38
September 30, 2000 24.13 15.00
December 31, 2000 31.00 18.69
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with Sunrise's Consolidated Financial Statements and notes
thereto included elsewhere herein.
December 31,
- ----------------------------------------------------------------------------------------------------------------
2000 1999 (1) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Operating revenue $ 344,786 $ 255,219 $ 170,712 $ 89,884 $ 47,345
Facility operating expenses 169,966 131,055 88,834 53,286 28,274
Facility development and pre-rental expenses 6,226 7,184 5,197 5,586 2,420
General and administrative expenses 27,418 20,715 12,726 10,454 10,042
Depreciation and amortization expenses 33,902 25,448 21,650 10,592 4,048
Interest expense, net 37,566 21,750 15,430 4,613 6,425
Net income (loss) (2) 24,278 20,213 22,312 4,001 (4,760)
Net income (loss) per common share:
Basic 1.12 0.96 1.16 0.21 (0.52)
Diluted 1.10 0.94 1.11 0.20 (0.52)
BALANCE SHEET DATA (at end of period):
Cash and cash equivalents $ 42,874 $ 53,540 $ 54,197 $ 82,643 $ 101,811
Working capital (34,063) 95,480 69,573 70,340 102,822
Total assets 1,132,346 1,101,413 683,411 556,260 342,839
Total debt 674,703 700,943 428,326 340,987 145,511
Stockholders' equity 354,045 335,124 227,655 195,340 185,824
OPERATING AND OTHER DATA:
Earnings before interest, taxes,
depreciation and amortization (3) $ 111,268 $ 75,239 $ 59,392 $ 19,206 $ 5,713
Net cash provided by operating activities 51,632 42,787 27,138 12,183 871
Net cash used in investing activities (23,413) (235,065) (146,471) (225,765) (112,608)
Net cash (used in) provided by financing actives (38,885) 191,621 90,887 194,414 207,295
Facilities (at end of period):
Owned 147 126 66 54 30
Managed 17 14 11 7 5
- ----------------------------------------------------------------------------------------------------------------
Total 164 140 77 61 35
================================================================================================================
Resident capacity (at end of period):
Owned 11,380 9,756 5,617 4,632 2,584
Managed 1,503 1,289 1,010 683 528
- ----------------------------------------------------------------------------------------------------------------
Total 12,883 11,045 6,627 5,315 3,112
================================================================================================================
Occupancy rate (4) 94% 96% 94% 94% 94%
- ----------------------------------------------------------------------------------------------------------------
(1) On May 14, 1999, Sunrise completed its acquisition of Karrington Health,
Inc. through a tax-free, stock-for-stock transaction in which it issued
2.3 million common shares in exchange for all outstanding shares of
Karrington and Karrington became a wholly owned subsidiary of Sunrise.
The total transaction was valued at $85.1 milion and was accounted for
using the purchase method of accounting and, accordingly, the results of
operations of Karrington since the acquisition are included in Sunrise's
financial information for 1999. See Note 13 of Notes to Consolidated
Financial Statements.
(2) Net income for 1999 includes non-recurring charges of $5.1 million ($4.0
million after tax).
(3) Earnings before interest, taxes, depreciation and amortization is
presented because Sunrise believes this data is used by some investors to
evaluate Sunrise's ability to meet debt service requirements. Sunrise
considers earnings before interest, taxes, depreciation and amortization
to be an indicative measure of its operating performance due to the
significance of Sunrise's long-lived assets and because this data can be
used to measure Sunrise's ability to service debt, fund capital
expenditures and expand its business. However, this data should not be
considered as an alternative to net income, operating profit, cash flows
from operations or any other operating or liquidity performance measure
proscribed by generally accepted accounting principles. In addition,
earnings before interest, taxes, depreciation and amortization as
calculated by Sunrise may not be comparable to similarly titled measures
reported by other companies. Interest expense, taxes, depreciation and
amortization, which are not reflected in the presentation of earnings
before interest, taxes, depreciation and amortization, have been, and
will be incurred by Sunrise. Investors are cautioned that these excluded
items are significant components in understanding and assessing Sunrise's
financial performance.
(4) Based on monthly occupancy for owned facilities, opened or operated for
at least 12 months, or that have achieved occupancy percentages of 95% or
above at the beginning of the year. The occupancy rate excludes
facilities with temporary vacancies and resident relocations generally of
between three to six months due to renovations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
information contained in the consolidated financial statements, including the
related notes, and other financial information appearing elsewhere herein.
This management's discussion and analysis contains certain forward-looking
statements that involve risks and uncertainties. Sunrise's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including development and
construction risks, acquisition risks, licensing risks, business conditions,
competition, Sunrise's ability to operate Karrington properties profitably,
the Company's ability to execute on its sale/manage back program, market
factors that could affect the value of the Company's properties, changes in
interest rates, risks of downturns in economic conditions generally,
satisfaction of closing conditions and availability of financing for
development and acquisitions. Some of these factors are discussed elsewhere
herein. Unless the context suggests otherwise, references herein to "Sunrise"
mean Sunrise Assisted Living, Inc. and its subsidiaries.
OVERVIEW
Sunrise is a provider of assisted living services for seniors. Sunrise
currently operates 170 facilities in 25 states and in the United Kingdom, with
a resident capacity of more than 13,300 residents, including 151 facilities
owned by Sunrise or in which it has ownership interests and 19 facilities
managed for third parties. Sunrise provides assistance with the activities of
daily living and other personalized support services in a residential setting
for elderly residents who cannot live independently but who do not need the
level of medical care provided in a skilled nursing facility. Sunrise also
provides additional specialized care and services to residents with certain
low acuity medical needs and residents with Alzheimer's disease or other forms
of dementia. By offering this full range of services, Sunrise is able to
accommodate the changing needs of residents as they age and develop further
physical or cognitive frailties.
Sunrise has continued to experience growth in operations during the
year ended December 31, 2000 and continued to capitalize on its brand
awareness by accepting third-party management and development contracts.
During this period, Sunrise began operating 25 additional facilities in which
it has an ownership interest and managing two additional facilities for
independent third parties. Sunrise also entered into several third-party
management and development contracts during 2000. As a result, total operating
revenue increased substantially to $344.8 million for 2000 from $255.2 million
for 1999, and correspondingly, earnings before interest, taxes, depreciation
and amortization ("EBITDA") increased to $111.3 million for 2000 from $75.2
million for 1999. Average resident occupancy for stabilized facilities
decreased to 94.2% for 2000 from 95.6% for 1999, and the average daily
resident fee for these stabilized facilities increased to $106 for 2000 from
$97 for 1999. Net income, however, increased to $24.2 million for 2000, or
$1.10 per share (diluted), from $20.2 million for 1999, or $0.94 per share
(diluted). The increase in net income between 2000 and 1999 was due in part to
additional facilities operated in 2000 and an increase in property sales,
offset, in part, by increases in
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interest expense. In prior years, recognizing tax benefits of certain net
operating loss carryforwards offset income tax expense.
Sunrise's growth objectives include developing new Sunrise model
assisted living facilities and selectively acquiring existing facilities.
Sunrise currently has 24 facilities under construction with a resident
capacity of approximately 2,100. Sunrise has also entered into contracts to
purchase 40 additional development sites, 21 of which are zoned, and to lease
one additional site. Sunrise is pursuing additional development opportunities
and also plans to acquire additional facilities as market conditions warrant.
In connection with the implementation of its growth plans, in prior
years Sunrise made significant investments in its infrastructure through the
addition of information technology, as well as additions to headquarters and
regional staff. During 2000, Sunrise continued to invest in these areas to
support both the growth of Sunrise and to provide expansion and enhancement to
some of its existing computer and communication systems.
Sunrise continues to execute its previously announced plan of selling
selected real estate properties, subject to market conditions, as a normal
part of its operations while retaining long-term management contracts. This
strategy of selling selected real estate properties as a normal part of
operations has and is expected to continue to enable Sunrise to reduce debt,
re-deploy its capital into new development projects and realize gains on
appreciated real estate. During 2000, Sunrise entered into definitive
agreements for the sale of 22 properties (13 of which closed) for
approximately $314.1 million. In February 2001, Sunrise closed the sale of the
remaining nine properties.
Sunrise has concluded its efforts to sell former Karrington operating
properties held for sale. In September 2000, the Company sold two former
Karrington operating properties for their book value of approximately $7.0
million. Sunrise terminated discussions to sell the remaining 14 operating
properties held for sale because market conditions for selling such properties
in secondary markets are depressed and the Company believes that it can obtain
better prices in the future. Accordingly, these properties have been
reclassified from assets held for sale to operating properties and the
operations of these properties have been included in Sunrise's consolidated
results beginning in the third quarter of 2000.
Sunrise continues its efforts to explore international development and
acquisition possibilities. To date, Sunrise has entered into a joint venture
arrangement with a third party that is providing up to $55.3 million of the
equity capital to develop up to 22 projects in the United Kingdom and Canada.
Currently, the joint venture has one property operating in the United Kingdom,
eight properties under development in Canada and two properties under
development in the United Kingdom. Sunrise provides management and contract
services to the joint venture on a contract-fee basis with rights to acquire
the assets in the future. As of December 31, 2000, the third party has
provided approximately $26.5 million and Sunrise has provided $2.4 million of
equity capital to the joint venture.
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During the third quarter of 2000, Sunrise entered into an agreement
with Schroder Ventures Life Sciences ("SVLS") to form a new business that will
provide private pay assisted living services to frail seniors in their own
homes. SVLS will initially hold a majority interest in the new business,
Sunrise At-Home Senior Living, Inc. Under the venture agreements, Sunrise has
the ability to acquire a 75% interest in Sunrise At-Home under certain
conditions and has an option to purchase the SVLS ownership interest.
Sunrise's Board of Directors has authorized the Company to repurchase
its outstanding common stock and/or its outstanding 5 1/2% convertible
subordinated notes up to an aggregate purchase price of $50.0 million over a
period of 12 months. Sunrise expects to fund the repurchases from available
funds and the continued execution of its property sale/manage back program.
Sunrise has repurchased 585,000 shares of common stock at an average price of
$16.66 per share through open-market purchases during the period from March
30, 2000 to December 31, 2000.
RESULTS OF OPERATIONS
Sunrise derives its revenues from three primary sources: (1) resident
fees for the delivery of assisted living services, (2) management services
income for management and contract services of facilities owned by third
parties and (3) income from property sales. Historically, most of Sunrise's
operating revenue has come from resident fees, which in 2000, 1999 and 1998
comprised 79.5%, 85.2% and 89.0% of total operating revenues, respectively.
Residents, their families or other responsible parties typically pay resident
fees monthly. In 2000, 1999 and 1998 approximately 99% of Sunrise's revenue
was derived from private pay sources. Resident fees include revenue derived
from basic care, community fees, plus care, Reminiscence(TM) and other
resident related services. Plus care and Reminiscence(TM) fees are paid by
residents who require personal care in excess of services provided under the
basic care program.
Management and contract services income represents fees from long-term
contracts for facilities owned by unconsolidated joint ventures and other
third party owners. Management services income includes management fees, which
are generally in the range of 5% to 8% of a managed facility's total operating
revenue for homes in operation, and consulting service fees for site
acquisition, development services, facility design and construction management
services. Management services income accounted for 11.2%, 12.1% and 9.8% of
operating revenue in 2000, 1999 and 1998, respectively.
Income from property sales represents the gain recognized from the
sale of assisted living properties. Generally, upon sale of a property,
Sunrise will enter into a long-term management agreement with the facility.
Income from property sales accounted for 9.3%, 2.8% and 1.2% of operating
revenues in 2000, 1999 and 1998, respectively.
Sunrise classifies its operating expenses into the following
categories: (1) facility operating, which include labor, food, marketing and
other direct facility expenses; (2) management and contract services, which
include operating expenses reimbursable to Sunrise;
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(3) facility development and pre-rental, which include non-capitalized
development expenses and pre-rental labor and marketing expenses; (4) general
and administrative, which primarily include headquarters and regional staff
expenses and other overhead costs; (5) depreciation and amortization; and (6)
facility lease, which represent rental expenses for facilities and property
not owned by Sunrise.
SUNRISE MANAGEMENT SERVICES
Sunrise Management Services provides full-service assisted living
management services, in the U.S. and internationally, for all communities
owned or managed by Sunrise. In addition, the Sunrise Management Services
division provides management and consulting services to third parties on
market and site selection, pre-opening sales and marketing, start-up training,
and management services for properties under development and construction.
The following table sets forth the components of Sunrise Management
Services net income (in thousands):
Year Ended December 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Operating revenue:
Management and contract services $227,278 $170,892 $107,137
Operating expenses:
Management and contract services 186,095 137,494 89,929
General and administrative 18,470 13,216 7,751
Depreciation and amortization 1,495 947 479
- ---------------------------------------------------------------------------------------------
Total operating expenses 206,060 151,657 98,159
- ---------------------------------------------------------------------------------------------
Operating income 21,218 19,235 8,978
Provision for income taxes (8,275) (5,551)
- ---------------------------------------------------------------------------------------------
Sunrise Management Services net income $12,943 $13,684 $ 8,978
- ---------------------------------------------------------------------------------------------
Note: Management and contract services revenues include revenue from Sunrise
Properties in the amounts of $195,302, $150,293 and $96,722 for the year ended
December 31, 2000, 1999 and 1998, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999
Operating Revenue. The Management Services division revenues include
management and contract services revenues from third-party owners and internal
management services revenues for services provided to the Sunrise Properties
division. Internal fees reflect market-based fees for the management services.
Total revenues for Sunrise Management Services increased 33% to $227.3 million
for the year ended December 31, 2000 from $170.9 million for the year ended
December 31, 1999. This increase was primarily due to the growth in the number
of communities operated by the Management Services division. The total number
of communities operated increased 17% to 164 for 2000, up from 140 communities
in 1999. This growth resulted from the completion and opening of 25 additional
facilities and the addition of two managed facilities, net of the sale of two
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former Karrington facilities that Sunrise will not continue to manage and the
termination of one management contract with a third-party owner.
Operating Expenses. The Management Services division operating
expenses include all operating expenses of facilities managed for third-party
owners and the Sunrise Properties division. Total operating expenses for the
year ended December 31, 2000 increased 36% to $206.1 million from $151.7
million for the year ended December 31, 1999. Management and contract services
expenses for the year ended December 31, 2000 increased $48.6 million, or 35%,
to $186.1 million from $137.5 million for the year ended December 31, 1999.
This increase was directly related to the increase in the number of
communities operated by Management Services. General and administrative
expenses increased $5.3 million to $18.5 million for the year ended December
31, 2000 from $13.2 million for the year ended December 31, 1999. The general
and administrative expenses for the Management Services division have
increased due to the substantial growth in the number of facilities operated
during the last twelve months.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31,
1998
Operating Revenue. Total revenues for Sunrise Management Services
increased 60% to $170.9 million for the year ended December 31, 1999 from
$107.1 million for the year ended December 31, 1998. This increase was
primarily due to the growth in the number of communities operated by the
Management Services division. The total number of communities operated
increased 82% to 140 for 1999, up from 77 communities in 1998. This growth
resulted from the completion and opening of 20 additional facilities, the
acquisition of 42 facilities and the addition of 1 managed facility.
Operating Expenses. Total operating expenses for the year ended
December 31, 1999 increased 54% to $151.7 million from $98.2 million for the
year ended December 31, 1998. Management and contract services expenses for
the year ended December 31, 1999 increased $47.6 million, or 53%, to $137.5
million from $89.9 million for the year ended December 31, 1998. This increase
was directly related to the increase in the number of communities operated by
Management Services. General and administrative expenses increased $5.4
million to $13.2 million for the year ended December 31, 1999 from $7.8
million for the year ended December 31, 1998. The general and administrative
expenses for the Management Services division increased due to the substantial
growth in the number of facilities operated during 1999 as compared to 1998.
SUNRISE PROPERTIES
Sunrise Properties is responsible for all Sunrise real estate
operations, including development, construction, project and permanent
financing and property sales. As of December 31, 2000, the Sunrise Properties
division wholly owned 102 communities, a 2% decrease over the 104 communities
wholly owned as of December 31, 1999. In addition, Sunrise Properties has
majority ownership interests in 4 communities and minority ownership interests
in another 41 communities.
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The following table sets forth the components of Sunrise Properties
net income (in thousands):
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Operating revenue:
Resident fees $274,236 $217,397 $151,878
Management and contract services 6,453 10,206 6,383
Income from property sales 32,121 7,017 2,036
- ---------------------------------------------------------------------------------------------
Total operating revenue 312,810 234,620 160,297
Operating expenses:
Facility operating 169,966 131,055 88,834
Management and contract services 25,138 19,238 7,888
Facility development and pre-rental 6,226 7,184 5,196
General and administrative 2,772 3,922 1,857
Depreciation and amortization 30,102 24,368 20,983
Facility lease 10,833 7,903 3,014
Non-recurring charge 5,069
- ---------------------------------------------------------------------------------------------
Total operating expenses 245,037 198,739 127,772
- ---------------------------------------------------------------------------------------------
Operating income 67,773 35,881 32,525
Interest expense, net (37,566) (21,750) (15,430)
Equity in losses of unconsolidated
assisted living facilities (2,941) (1,239) 54
Minority interest (203) (376) (508)
Provision for income taxes (10,555) (3,370)
- ---------------------------------------------------------------------------------------------
Sunrise Properties net income $16,508 $9,146 $16,641
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Note: Operating expenses include costs with Sunrise Management Services in the
amounts of $195,302, $150,293 and $96,722 for the year ended December 31,
2000, 1999 and 1998, respectively.
On June 29, 2000, Sunrise entered into a definitive agreement for the
sale of 11 assisted living communities to a real estate venture company
("venture company") in which Sunrise owns a 25 percent interest. Also, on June
29, 2000, the venture company closed on three of the 11 properties, located in
Wayland, Massachusetts, West Essex, New Jersey and Oakton, Virginia, for an
aggregate sales price of $44 million. The transaction will result in up to
$13.3 million in gain over the four quarters following the sale, subject to
certain contingencies being met, of which $11.1 million was recognized during
2000. On September 29, 2000, the venture company closed on the remaining eight
properties for an aggregate sales price of $111 million. The eight properties
are located in seven states. The venture company assumed approximately $75
million of debt secured by the eight properties. The transaction will result
in up to $26.0 million in gain over the four quarters following the sale,
subject to certain contingencies being met, of which $13.1 million was
recognized during 2000. The Sunrise Management Services division will continue
to provide day-to-day management of the communities under long-term operating
agreements.
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On December 28, 2000, Sunrise completed the sale of two properties for
an aggregate sales price of $28.1 million. Following the sale, the Sunrise
Management Services division will continue to operate the communities under a
long-term operating agreement. The transaction will result in up to $7.8
million in gain over the four quarters following the sale, subject to certain
contingencies being met, of which $1.8 million was recognized during 2000.
In June 1999, Sunrise completed the sale of two assisted living
facilities located in Columbia, Maryland and Norwood, Massachusetts for an
aggregate sales price of $27.9 million in cash. The transaction resulted in
the realization of $11.2 million in gain over the three quarters following the
sale, of which the final $6.1 million was recognized during 2000. Previously,
in September 1998, Sunrise completed the sale of two assisted living
facilities located in Maryland for an aggregate sales price of $29.3 million
in cash that will result in the realization of up to a $6.4 million gain. As
of December 31, 2000, Sunrise has recognized $3.4 million of the gain. The
remaining gain is deferred, the recognition of which is contingent upon future
events. For tax purposes, the transactions are tax-free exchanges. Sunrise
continues to operate the facilities under long-term operating agreements.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999
Operating Revenue. Sunrise Properties revenues include resident fees
from Sunrise owned properties, management service revenues from consulting and
pre-opening services contracts with third parties, and income from the sales
of owned communities. Sunrise Properties revenues increased 33% to $312.8
million for the year ended December 31, 2000 from $234.6 million for the year
ended December 31, 1999. Resident fees, including community fees, for the year
ended December 31, 2000 increased $56.8 million, or 26%, to $274.2 million
from $217.4 million for the year ended December 31, 1999. This increase was
due primarily to the inclusion for the year ended December 31, 2000 of
approximately $11.8 million of resident fees generated from the operations of
the 12 consolidated assisted living facilities open during the year ended
December 31, 2000 that were not open during the year ended December 31, 1999.
In addition, resident fees of $6.9 million were included in the year ended
December 31, 2000 from properties previously held for sale. The remaining
increase in resident fees was due primarily to a full year of operations for
the Karrington facilities acquired in May 1999 and an increase in the average
daily resident rate for facilities that were owned and operated by Sunrise
during both periods.
Average resident occupancy for Sunrise's 68 stabilized communities
during 2000 was 94.2% compared to 95.6% for the 49 Sunrise communities
stabilized during 1999. Comparing the 47 same-store properties for 2000 and
1999 (which excludes the Karrington facilities that are now stabilized) would
have resulted in occupancy of 95.7% for both years. Sunrise defines stabilized
communities as those it has owned and operated for at least 12 months or those
that have achieved occupancy percentages of 95% or above at the beginning of
the measurement period.
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Average daily rate for stabilized facilities during 2000 was $106
compared to $97 during 1999. For the 47 facilities currently owned which were
stabilized in both 2000 and 1999, average daily rate increased from $97 to
$102. The increase is due to the inclusion of additional prototype facilities
that have higher basic care rates and a general increase in the basic care
rate.
Management and contract services revenue decreased $3.7 million to
$6.5 million for the year ended December 31, 2000 from $10.2 million for the
year ended December 31, 1999. This decrease is due to a reduction in the
number of third-party pre-opening services contracts in place during each of
the respective periods, and the stage of completion on each contract. There
were 25 pre-opening services contracts in place during 2000 compared to 28
contracts for 1999.
Operating Expenses. Sunrise Properties operating expenses for the year
ended December 31, 2000 increased 23% to $245.0 million from $198.7 million
for the year ended December 31, 1999. Facility operating expenses for the year
ended December 31, 2000 increased 30% to $170.0 million from $131.1 million
for the year ended December 31, 1999. Of the $38.9 million increase,
approximately $7.9 million was attributable to expenses from operations of the
12 consolidated additional assisted living facilities open during 2000 that
were not open during 1999. In addition, facility-operating expenses of $4.8
million were included in 2000 from properties previously held for sale. The
remaining balance of the increase was primarily due to a full year of
operations for the Karrington facilities acquired in May 1999 and an increase
in labor and other expenses at facilities that were operational for a full
year in both periods.
Management and contract services expense represents amounts Sunrise
Properties pays to Sunrise Management Services for management of its wholly
owned and majority owned facilities. Management and contract services expense
for the year ended December 31, 2000 increased $5.9 million to $25.1 million
from $19.2 million for the year ended December 31, 1999. This increase is
primarily attributable to the growth in the number of properties managed
during 2000 compared to 1999.
Depreciation and amortization for the year ended December 31, 2000
increased $5.7 million, or 23%, to $30.1 million from $24.4 million for the
year ended December 31, 1999. This increase is primarily due to the increase
in the number of facilities open during 2000 that were not open during 1999.
Net Interest Expense. Net interest expense increased for the year
ended December 31, 2000 to $37.6 million from $21.8 million for the year ended
December 31, 1999. Of this $15.8 million increase, $5.3 million was due to
additional borrowings and an increase in the variable interest rate under
Sunrise's $400.0 million credit facility. The remaining increase is due to an
overall increase in average borrowings during 2000 compared to 1999 and an
increase to 7.61% in the weighted-average interest rate on Sunrise's variable
rate debt for 2000 compared to 7.17% for 1999.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31,
1998
Operating Revenue. Sunrise Properties revenues increased 46% to $234.6
million for the year ended December 31, 1999 from $160.3 million for the year
ended December 31, 1998. Resident fees, including community fees, for the year
ended December 31, 1999 increased $65.5 million, or 43%, to $217.4 million
from $151.9 million for the year ended December 31, 1998. This increase was
due primarily to the inclusion for the year ended December 31, 1999 of
approximately $5.0 million of resident fees generated from the operations of
the 10 consolidated assisted living facilities open during 1999 that were not
open during 1998. In addition, approximately $26.2 million of resident fees
were generated by the Karrington consolidated facilities from the date of
acquisition through the end of 1999. The remaining increase in resident fees
was due primarily to an increase in the average daily resident rate for
facilities that were owned and operated by Sunrise during both periods.
Average resident occupancy for Sunrise's 49 stabilized communities
during 1999 was 95.6% compared to 94.3% for the 32 Sunrise communities
stabilized during 1998. For the 29 stabilized facilities owned and operated in
both 1999 and 1998, average resident occupancy increased from 94.2% to 95.4%.
Sunrise defines stabilized communities as those it has owned and operated for
at least 12 months or those that have achieved occupancy percentages of 95% or
above at the beginning of the measurement period.
Average daily rate for stabilized facilities during 1999 was $97
compared to $86 during 1998. For the 29 stabilized facilities owned and
operated in both 1999 and 1998, average daily rate increased from $84 to $88.
The increase is due to the inclusion of additional prototype facilities that
have higher basic care rates and a general increase in the basic care rate.
Management and contract services revenue increased $3.8 million to
$10.2 million for the year ended December 31, 1999 from $6.4 million for the
year ended December 31, 1998. This increase is due to an increase in the
number of third-party pre-opening services contracts in place during each of
the respective periods, and the stage of completion on each contract. There
were 28 pre-opening services contracts in place during the year ended December
31, 1999 compared to 17 contracts for the year ended December 31, 1998.
Operating Expenses. Sunrise Properties operating expenses for the year
ended December 31, 1999 increased 55% to $198.7 million from $127.8 million
for the year ended December 31, 1998. Facility operating expenses for the year
ended December 31, 1999 increased 48% to $131.1 million from $88.8 million for
the year ended December 31, 1998. Of the $42.3 million increase, approximately
$3.0 million was attributable to expenses from operations of the 10
consolidated additional assisted living facilities open during the year ended
December 31, 1999 that were not open during the same period in 1998. In
addition, approximately $21.7 million of operating expenses were generated by
the Karrington consolidated facilities from the date of acquisition through
the end of 1999. The remaining
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balance of the increase was primarily due to an increase in labor and other
expenses at facilities that were operational for a full year in both periods.
Management and contract services expense for the year ended December
31, 1999 increased $11.3 million to $19.2 million from $7.9 million for the
year ended December 31, 1998. This increase is primarily attributable to the
growth in the number of properties managed during the year ended December 31,
1999 compared to the year ended December 31, 1998.
Depreciation and amortization for the year ended December 31, 1999
increased $3.4 million, or 16%, to $24.4 million from $21.0 million for the
year ended December 31, 1998. This increase is primarily due to the increase
in the number of facilities open during the year ended December 31, 1999 that
were not open during the same period in 1998.
Net Interest Expense. Net interest expense increased for the year
ended December 31, 1999 to $21.8 million from $15.4 million for the year ended
December 31, 1998. Of this $6.4 million increase, $5.3 million was due to
additional borrowings and an increase in the variable interest rate under
Sunrise's $400.0 million credit facility. The remaining increase is due to an
overall increase in total debt as of December 31, 1999 compared to December
31, 1998 and an increase to 7.45% in the weighted-average interest rate on
Sunrise's variable rate debt for 1999 compared to 7.17% for 1998.
CORPORATE EXPENSES
Operating Expenses. Parent company operating expenses were $8.5
million, $3.7 million and $3.3 million for the years ended December 31, 2000,
1999 and 1998, respectively. The increase was primarily due to the addition of
personnel and other infrastructure in anticipation of the continuing growth of
the company.
Provision for Income Taxes. The provision for income taxes for Sunrise
was $15.5 million, $7.8 million and $0.0 million for the years ended December
31, 2000, 1999 and 1998, respectively. The increase is due to an increase in
pre-tax income and an increase in the effective tax rate to 39% for 2000
compared to 28% for 1999 and 0% for 1998. Utilization of operations-related
deferred tax benefits reduced Sunrise's federal and state income tax rates in
both 1999 and 1998.
Realization of the deferred tax asset of $19.4 million at December 31,
2000 is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforwards. Sunrise expects to fully utilize the
loss carryforwards prior to expiration.
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LIQUIDITY AND CAPITAL RESOURCES
To date, Sunrise has financed its operations from long-term
borrowings, equity offerings and cash generated from operations. At December
31, 2000, Sunrise had $674.7 million of outstanding debt at a weighted average
interest rate of 7.61%. Of the amount of outstanding debt, Sunrise had $352.8
million of fixed-rate debt, excluding a $0.2 million loan discount, at a
weighted average interest rate of 6.91%, and $322.1 million of variable rate
debt at a weighted average interest rate of 8.37%. Increases in prevailing
interest rates could increase Sunrise's interest payment obligations relating
to variable-rate debt. See Note 8 to Sunrise's consolidated financial
statements for a detail of Sunrise's outstanding debt at December 31, 2000.
Sunrise has entered into a swap transaction whereby, effective during
the period June 18, 1998 through June 18, 2001, outstanding advances of up to
$19.0 million LIBOR floating rate debt bear interest at a fixed rate based on
a fixed LIBOR base rate of 7.30%. Sunrise recorded net interest expense in
2000, 1999 and 1998 in the amounts of $174,000, $511,000 and $227,000,
respectively, for swap transactions.
There are various financial covenants and other restrictions in
Sunrise's debt instruments, including provisions which:
- require it to meet specified financial tests. For example,
Sunrise's $85.1 million multi-property mortgage, which is secured
by 15 of its facilities, requires that these facilities maintain a
cash flow to interest expense coverage ratio of at least 1.25 to
1. Sunrise's $400.0 million credit facility requires Sunrise to
have a consolidated tangible net worth of at least $255.0 million,
to maintain a consolidated minimum cash liquidity balance of at
least $25.0 million and to meet other financial ratios. These
tests are administered on a monthly or quarterly basis, depending
on the covenant;
- require consent for changes in management or control of Sunrise.
For example, Sunrise's $400.0 million revolving credit facility
requires the lender's consent for any merger where Paul Klaassen
or Teresa Klaassen does not remain chairman of the board and chief
executive officer of Sunrise;
- restrict the ability of Sunrise subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business
combinations without lender consent; and
- require that Sunrise maintain minimum occupancy levels at its
facilities to maintain designated levels of borrowings. For
example, Sunrise's $400.0 million credit facility requires that
85% occupancy be achieved after 12 months for a newly opened
facility and, following this 12-month period, be maintained at or
above that level.
At December 31, 2000, Sunrise had approximately $42.9 million in
unrestricted cash and cash equivalents, including $4.3 million in high quality
short-term investments (A1/P1 rated) and currently has $237.8 million of
unused lines of credit.
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Working capital at December 31, 2000 was $51.0 million, excluding the
$85.1 million multi-property mortgage due on May 31, 2001. Management
anticipates extending the multi-property mortgage with the original lender
prior to maturity. Excluding this multi-property mortgage, working capital
decreased $44.5 million from $95.5 million at December 31, 1999 primarily due
to a reclassification of assets held for sale to property and equipment, a
decrease in prepaid and other current assets, and an increase in deferred
revenue from property sales.
Net cash provided by operating activities for 2000 and 1999 was
approximately $51.6 million and $42.8 million, respectively. Net cash provided
by operating activities for 2000 reflects the corresponding increase in the
number of facilities operated by Sunrise at December 31, 2000 versus December
31, 1999.
During 2000 and 1999, Sunrise used $23.4 million and $235.1 million,
respectively, for investing activities. Investing activities included
investment in property and equipment in the amounts of $46.3 million and
$178.4 million, respectively, related to the construction of assisted living
facilities, net of sales of facilities. In 2000, Sunrise also invested $152.8
million to facilitate the development of assisted living facilities with third
parties, compared to $75.3 million in 1999. These investing activities were
offset by proceeds from the sale of 15 assisted living facilities in 2000
amounting to $45.7 million plus $142.4 million of proceeds from investments
and notes receivable.
Net cash (used in)/provided by financing activities was ($38.9)
million and $191.6 million for 2000 and 1999, respectively. Financing
activities in 2000 and 1999 included additional borrowings of $187.3 million
and $313.5 million, respectively, offset by debt repayments of $215.6 million
and $122.1 million, respectively. The reduced level of borrowings and
increased level of repayments are partially a result of Sunrise's strategy to
sell certain assisted living facilities. The additional borrowings under
Sunrise's credit facility during 2000 and 1999 were used to fund Sunrise's
continued development of assisted living facilities.
Sunrise currently estimates that the existing credit facilities,
together with existing working capital, proceeds from sales of selected real
estate assets as a normal part of its operations, financing commitments and
financing expected to be available, will be sufficient to fund facilities
currently under construction. Additional financing will, however, be required
to complete additional development and to refinance existing indebtedness.
Sunrise estimates that it will cost between $85 million and $200 million to
complete the facilities Sunrise currently has under construction. Sunrise has
entered into contracts to purchase and lease additional sites. The total
contracted purchase price of these sites is $65.0 million. Sunrise estimates
that it will cost between $349 million and $820 million to develop these
properties. Sunrise expects that the cash flow from operations, together with
borrowings under existing credit facilities, will be sufficient to fund the
development sites for these additional properties for at least the next twelve
months. Sunrise expects from time to time to seek additional funding through
public or private financing sources, including equity or debt financing. There
can be no assurance that such financing and refinancing will be available on
acceptable terms.
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The ability of Sunrise to achieve its development plans will depend
upon a variety of factors, many of which will be outside the control of
Sunrise. These factors include:
- obtaining zoning, land use, building, occupancy, licensing and other
required governmental permits for the construction of new facilities
without experiencing significant delays;
- completing construction of new facilities on budget and on schedule;
- the ability to work with third-party contractors and subcontractors
who construct the facilities;
- shortages of labor or materials that could delay projects or make them
more expensive;
- adverse weather conditions that could delay projects;
- finding suitable sites for future development activities at acceptable
prices; and
- addressing changes in laws and regulations or how existing laws and
regulations are applied.
Sunrise cannot assure that it will not experience delays in completing
facilities under construction or in development or that it will be able to
identify suitable sites at acceptable prices for future development
activities. If it fails to achieve its development plans, its growth could
slow, which would adversely impact its revenues and results of operations.
Sunrise's growth plan includes the acquisition of assisted living
facilities or companies operating assisted living facilities. The success of
Sunrise's acquisitions will be determined by numerous factors, including the
Sunrise's ability to identify suitable acquisition candidates, competition for
such acquisitions, the purchase price, the financial performance of the
facilities after acquisition and the ability of Sunrise to integrate or
operate acquired facilities effectively. Any failure to do so may have a
material adverse effect on Sunrise's business, financial condition and results
of operations.
The long-term care industry is highly competitive and the assisted
living segment is becoming increasingly competitive. Sunrise competes with
numerous other companies that provide similar long-term care alternatives,
such as home health care agencies, facility-based service programs, retirement
communities, convalescent centers and other assisted living providers. In
general, regulatory and other barriers to competitive entry in the assisted
living industry are not substantial. In pursuing its growth strategies,
Sunrise has experienced and expects to continue to experience increased
competition in its efforts to develop and acquire assisted living facilities.
Some of the present and potential competitors of Sunrise are significantly
larger and have, or may obtain, greater financial resources than Sunrise.
Consequently, Sunrise cannot assure that it will not encounter increased
competition that could limit its ability to attract residents or expand its
business, which could have a material adverse effect on its revenues and
earnings.
Sunrise expects that the number of owned and operated facilities will
continue to increase substantially as it pursues its development and
acquisition programs for new assisted living facilities. This rapid growth
will place significant demands on Sunrise's management resources. Sunrise's
ability to manage its growth effectively will require it to continue to expand
its
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operational, financial and management information systems and to continue to
attract, train, motivate, manage and retain key employees. If Sunrise is
unable to manage its growth effectively, its business, financial condition and
results of operations could be adversely affected.
Sunrise believes that some assisted living markets have become or are on
the verge of becoming overbuilt. As described above, regulation and other
barriers to entry into the assisted living industry are not substantial.
Consequently, the development of new assisted living facilities could outpace
demand. Overbuilding in Sunrise market areas could, therefore, cause Sunrise
to experience decreased occupancy, depressed margins or lower operating
results. Sunrise believes that each local market is different and Sunrise is
and will continue to react in a variety of ways, including selective price
discounting, to the specific competitive environment that exists in each
market.
MARKET RISK
Sunrise is exposed to market risks related to fluctuations in interest
rates on its notes receivable, investments and debt. The purpose of the
following analyses is to provide a framework to understand the Company's
sensitivity to hypothetical changes in interest rates as of December 31, 2000.
Sunrise has investments in notes receivable and bonds. Investments in
notes receivable are primarily with joint venture arrangements in which
Sunrise has equity ownership percentages ranging from 9% to 20%. Investments
in bonds are secured by the operating properties subject to the debt and are
with properties that are managed by Sunrise. The majority of the investments
have fixed rates. One of the notes has an adjustable rate. Sunrise utilizes a
combination of debt and equity financing to fund its development, construction
and acquisition activities. Sunrise seeks the financing at the most favorable
terms available at the time. When seeking debt financing, Sunrise uses a
combination of variable and fixed rate debt, whichever is more favorable in
management's judgment at the time of financing.
Sunrise has used interest rate swaps to manage the interest rates on
some of its long-term borrowings. As of December 31, 2000, Sunrise had one
interest rate swap agreement that effectively establishes fixed rates of 7.3%
on up to $19.0 million of long-term debt until June 2001. Sunrise does not
utilize forward or option contracts on foreign currencies or commodities, or
other types of derivative financial instruments.
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt, but not earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact fair
market value of the debt, but do affect the future earnings and cash flows.
Sunrise generally cannot prepay fixed rate debt prior to maturity without
penalty. Therefore, interest rate risk and changes in fair market value should
not have a significant impact on the fixed rate debt until Sunrise would be
required to refinance such debt. Holding the variable rate debt balance of
$322.1 million at December 31, 2000 constant, each one-percentage point
increase in interest rates would result in an increase in interest expense for
the coming year of approximately $3.2 million.
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The table below details by category the principal amount, the average
interest rates and the estimated fair market value. Some of the mortgage loans
receivable and some items in the various categories of debt, excluding the
convertible debentures, require periodic principal payments prior to the final
maturity date. The fair value estimates for the mortgage loans receivable are
based on the estimates of management and on rates currently prevailing for
comparable loans. The fair market value estimates for debt securities are
based on discounting future cash flows utilizing current rates offered to
Sunrise for debt of the same type and remaining maturity. The fair market
value estimate of the convertible notes is based on the market value at
December 31, 2000.
Estimated
Fair
Maturity Date Market
(dollars in thousands) 2001 2002 2003 2004 2005 Thereafter Value
---- ---- ---- ---- ---- ---------- -----
ASSETS
Notes receivable
Fixed rate $9,127 $18,242 -- -- -- $36,152 $63,521
Average interest rate 10.5% 10.0% -- -- -- 11.3% --
Variable rate -- $998 -- $22,599 -- -- $23,597
Average interest rate -- 11.5% -- 11.6% -- -- --
Investments
Bonds -- -- -- -- -- $5,750 $5,750
Average interest rate -- -- -- -- -- 11.0% --
LIABILITIES
Debt
Fixed rate $67,238 $10,573 $2,444 $2,639 $2,741 $117,155 $198,530
Average interest rate 8.5% 7.1% 7.7% 7.7% 7.6% 7.7% --
Variable rate $49,991 $194,173 $55,188 $10,943 $7,393 $4,400 $322,088
Average interest rate 8.5% 8.4% 8.6% 8.3% 8.3% 4.7% --
Convertible notes -- $150,000 -- -- -- -- $137,629
Average interest rate -- 5.5% -- -- -- -- --
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No 137 and 138, which is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Statement No.
133 standardizes the accounting for derivative instruments. Sunrise
participates in interest rate swap transactions, which would be considered
derivatives under Statement No. 133. Sunrise has not entered into any other
derivative transactions. Because of Sunrise's minimal use of derivatives,
Statement No. 133 is not anticipated to materially affect results of
operations or the financial position of Sunrise.
IMPACT OF INFLATION
Resident fees from owned assisted living facilities and management
services income from facilities operated by Sunrise for third parties are the
primary sources of revenue. These revenues are affected by daily resident fee
rates and facility occupancy rates. The rates charged for the
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delivery of assisted living services are highly dependent upon local market
conditions and the competitive environment in which the facilities operate. In
addition, employee compensation expense is the principal cost element of
property operations. Employee compensation, including salary increases and the
hiring of additional staff to support Sunrise's growth initiatives, have
previously had a negative impact on operating margins and may again do so in
the foreseeable future.
Substantially all of Sunrise's resident agreements are for terms of
one year, but are terminable by the resident at any time upon 30 days' notice,
and allow, at the time of renewal, for adjustments in the daily fees payable,
and thus may enable Sunrise to seek increases in daily fees due to inflation
or other factors. Any increase would be subject to market and competitive
conditions and could result in a decrease in occupancy of Sunrise's
facilities. Sunrise believes, however, that the short-term nature of its
resident agreements generally serves to reduce the risk to Sunrise of the
adverse effect of inflation. There can be no assurance that resident fees will
increase or that costs will not increase due to inflation or other causes.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk appears in the
liquidity and capital resources, market risk section of item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements appear on pages F-1 through F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the sections "Election of Directors -
Information as to Nominees and Other Directors," "--Other Executive Officers,"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in Sunrise's 2001
Annual Meeting Proxy Statement, which Sunrise intends to file within 120 days
after its fiscal year-end, is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the sections "Compensation of Directors" and
"Executive Compensation and Other Information" in Sunrise's 2001 Annual Meeting
Proxy Statement, which Sunrise intends to file within 120 days after its fiscal
year-end, is incorporated by reference herein.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the sections "Stock Owned by Management" and
"Principal Holders of Voting Securities" in Sunrise's 2001 Annual Meeting Proxy
Statement, which Sunrise intends to file within 120 days after its fiscal
year-end, is incorporated by reference herein.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the sections "Certain Transactions" in
Sunrise's 2001 Annual Meeting Proxy Statement, which Sunrise intends to file
within 120 days after its fiscal year-end, is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of Form 10-K.
Page
----
(1) Financial Statements:
Report of Independent Auditors. F-1
Consolidated Balance Sheets -- December 31, 2000 and 1999. F-2
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998. F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998. F-5
Notes to Consolidated Financial Statements. F-6
(2) Financial Statements Schedules:
All schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the
related instructions or are inapplicable or are included in the
consolidated financial statements.
(3) Exhibits:
Sunrise files as part of this Annual Report on Form 10-K the
Exhibits listed in the Index to Exhibits.
(b) Reports on Form 8-K.
On March 9, 2000, Sunrise filed a Form 8-K with the Securities and
Exchange Commission announcing the date of its 2000 annual meeting
of stockholders.
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On October 13, 2000, Sunrise filed a Form 8-K with the Securities
and Exchange Commission announcing it had completed the sale of
eight properties.
(c) Exhibits.
Sunrise hereby files as part of this Annual Report on Form 10-K the
Exhibits listed in the Index to Exhibits.
(d) Financial Statement Schedules.
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUNRISE ASSISTED LIVING, INC.
------------------------------------
Registrant
By: /s/ Paul J. Klaassen
--------------------------------
Paul J. Klaassen
Chairman of the Board and
Chief Executive Officer
3/30/01
--------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Paul J. Klaassen 3/30/01
------------------------- -----------------------------
Paul J. Klaassen Date
Chairman of the Board, and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Larry E. Hulse 3/30/01
-------------------------- -----------------------------
Larry E. Hulse Date
Chief Financial Officer
(Principal Financial Officer)
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By: /s/ Carl G. Adams 3/30/01
-------------------------- -----------------------------
Carl G. Adams Date
Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ David W. Faeder 3/30/01
---------------------------- -----------------------------
David W. Faeder Date
Vice Chairman of the Board
Director
By:
-------------------------- -----------------------------
Ronald V. Aprahamian Date
Director
By:
-------------------------- -----------------------------
Craig R. Callen Date
Director
By:
---------------------- -----------------------------
David G. Bradley Date
Director
By: /s/ Thomas J. Donohue 3/30/01
----------------------- -----------------------------
Thomas J. Donohue Date
Director
By: /s/ Teresa M. Klaassen 3/30/01
------------------------ -----------------------------
Teresa M. Klaassen Date
Executive Vice President,
Secretary and Director
By: /s/ Pete A. Klisares 3/30/01
----------------------------- -----------------------------
Pete A. Klisares Date
Director
By: /s/ J. Douglas Holladay 3/30/01
-------------------------------- -----------------------------
J. Douglas Holladay Date
Director
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59
INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- ----------
3.1 Restated Certificate of Incorporation of Sunrise
(Exhibit 3.1 to Sunrise's Form S-1 Registration
Statement No. 333- 13731).
3.2 Amended and Restated Bylaws of Sunrise, as
amended (Exhibit 3 to Sunrise's Form 10-Q for the
quarter ended September 30, 1997).
4.1 Form of common stock certificate (Exhibit 4.1 to
Sunrise's Form S-1 Registration Statement No.
333-13731).
4.2 Stockholder Rights Agreement (Exhibit 4.2 to
Sunrise's Form S-1 Registration Statement No.
333-13731).
4.3 Amendment No. 1 to Rights Agreement, dated as of
December 17, 1998, between Sunrise and First Union
National Bank of North Carolina (Exhibit 99(a) to
Sunrise's Form 8-K dated December 18, 1998).
10.1 Assignment and Contribution Agreement, effective
as of January 4, 1995, by and between Paul and
Teresa Klaassen and Sunrise (Exhibit 10.1.1 to
Sunrise's Form S-1 Registration Statement No.
333-2582).
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10.2 Assignment and Contribution Agreement, dated as
of January 4, 1995, by and between Paul J.
Klaassen and Teresa M. Klaassen, Sunrise
Partners, L.P. and Sunrise Assisted Living
Investments, Inc. (Exhibit 10.1.2 to Sunrise's
Form S-1 Registration Statement No. 333-2582).
10.3 Letter Agreement, dated January 4, 1995, from
Paul J. Klaassen and Teresa M. Klaassen to the
Series A Preferred Stockholders regarding cash
distributions from Sunrise Retirement
Investments, Inc., Sunrise Terrace of Gunston,
Inc., Sunrise Terrace of Countryside, Inc. and
Sunrise Atrium, Inc. (Exhibit 10.19 to Sunrise's
Form S-1 Registration Statement No. 33-2852).
10.4 Registration Agreement, dated January 4, 1995, by and
among Sunrise, the Investors (as defined therein) and Paul
and Teresa Klaassen (Exhibit 10.3 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.5 Promissory Note, dated June 8, 1994, executed by
Sunrise Assisted Living Limited Partnership in
favor of General Electric Capital Corporation
(Exhibit 10.4 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.6 Indemnity Agreement dated as of June 8, 1994 by
Paul J. Klaassen and Teresa M. Klaassen to and
for the benefit of General Electric Capital
Corporation (Exhibit 10.4.1 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.7 First Loan Modification Agreement dated as of
February 15, 1996 by and between General Electric
Capital Corporation and Sunrise Assisted Living
Limited Partnership (Exhibit 10.4.2 to Sunrise's
Form S-1 Registration Statement No. 333-2582).
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10.8 Second Loan Modification Agreement dated as of May 1, 1996
by and between General Electric Capital Corporation and
Sunrise Assisted Living Limited Partnership (Exhibit
10.4.3 to Sunrise's Form S-1 Registration Statement No.
333-2582).
10.9 Letter Agreement dated as of May 1, 1996 by and
between General Electric Capital Corporation and
Sunrise Assisted Living Limited Partnership
(Exhibit 10.4.4 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.10 Letter agreement dated as of December 30, 1996 by and
between General Electric Capital Corporation and Sunrise
Assisted Living Partnership (Exhibit 10.11 to Sunrise's
1996 Form 10-K).
10.11 Third Loan Modification Agreement dated as of March 4,
1997 by and between General Electric Capital Corporation
and Sunrise Assisted Living Limited Partnership (Exhibit
10.11 to Sunrise's 1997 Form 10-K).
10.12 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement, dated as of June 8, 1994 (Arlington,
Bluemont Park and Falls Church) (Exhibit 10.5 to Sunrise's
Form S-1 Registration Statement No. 333-2582).
10.13 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement, dated as of June 8, 1994 (Gunston and
Oakton) (Exhibit 10.6 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.14 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
financing Statement, dated as of June 8, 1994 (Fairfax
Leasehold) (Exhibit 10.7 to Sunrise's Form S-1
Registration Statement No. 333-2582).
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10.15 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing
and Financing Statement, dated as of June 8, 1994
(Warrenton) (Exhibit 10.8 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.16 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing
and Financing Statement, dated as of June 8, 1994
(Countryside and Leesburg) (Exhibit 10.9 to
Sunrise's Form S-1 Registration Statement No.
333-2582).
10.17 First Mortgage and Security Agreement, Assignment
of Leases and Rents, Fixture Filing and Financing
Statement, dated as of June 8, 1994 (Boca Raton)
(Exhibit 10.10 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.18 First Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing
and Financing Statement, dated as of June 8, 1994
(Frederick) (Exhibit 10.11 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.19 First Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing
and Financing Statement, Dated as of June 8, 1994
(Mercer Island) (Exhibit 10.12 to Sunrise's Form
S-1 Registration Statement No. 333-2582).
10.20 Amended and Restated Lease Agreement and
Assignment of Leasehold Right, dated June 6,
1994, by and among Barbara M. Volentine and
Teresa M. Klaassen, the Executor of the Estate of
Eldon J. Merritt, Sunrise Assisted Living Limited
Partnership Assisted Living Group -- Fairfax
Associates, and Sunrise Foundation, Inc. (Exhibit
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10.15 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.21 Ground Lease, dated June 7, 1994, by and between
Sunrise Assisted Living Limited Partnership and
Paul J. Klaassen and Teresa M. Klaassen (Exhibit
10.16 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.22 Amended and Restated Agreement of Sublease,
Indemnification and Easements dated February 5, 1995 by
and between Assisted Living Group -- Fairfax Associates
and Sunrise Foundation, as amended (Exhibit 10.17 to
Sunrise's Form S-1 Registration Statement No. 333-2582).
10.23 Indenture, dated as of June 5, 1997, between Sunrise and
First Union National Bank of Virginia, as trustee (Exhibit
4.1 to Sunrise's Form 10-Q for the quarter ended June 30,
1997).
10.24 Amended, Restated, Consolidated and Increased Master
Promissory Note dated as of December 23, 1997 by and
between NationsBank, N. A. as agent and for certain
additional lenders and Sunrise East Assisted Living
Limited Partnership (Exhibit 10.31.1 to Sunrise's 1997
Form 10-K).
10.25 Amended and Restated Financing and Security Agreement
dated as of December 23, 1997 by and between
NationsBank, N.A. as agent and for certain additional
lenders and Sunrise East Assisted Living Limited
Partnership (Exhibit 10.31.2 to Sunrise's 1997 Form
10-K).
10.26 Amended and Restated Master Construction Loan Agreement
dated as of December 23, 1997 by and between
NationsBank, N. A. as agent and for certain additional
lenders and Sunrise East Assisted Living Limited
Partnership (Exhibit 10.31.3 to Sunrise's 1997 Form
10-K).
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10.27 Management Fee Subordination Agreement dated as of
December 23, 1997 by and between NationsBank, N. A. as
agent and for certain additional lenders and Sunrise
East Assisted Living Limited Partnership (Exhibit
10.31.4 to Sunrise's 1997 Form 10-K).
10.28 Amended and Restated Pledge, Assignment and Security
Agreement dated as of December 23, 1997 by and between
NationsBank, N. A. as agent and for certain additional
lenders and Sunrise East Assisted Living Limited
Partnership (Exhibit 10.31.5 to Sunrise's 1997 Form
10-K).
10.29 Master Guaranty of Performance dated as of December 23,
1997 by and between NationsBank, N. A. as agent and for
certain additional lenders and Sunrise East Assisted
Living Limited Partnership (Exhibit 10.31.6 to Sunrise's
1997 Form 10-K)
10.30 Amended and Restated Collateral Assignment of Operating
Agreements and Management Contracts dated as of December
23, 1997 by and between NationsBank, N. A. as agent and
for certain additional lenders and Sunrise East Assisted
Living Limited Partnership (Exhibit 10.31.7 to Sunrise's
1997 Form 10-K).
10.31 Amended and Restated Collateral Assignment of Licenses,
Participation Agreements and Resident Agreements dated as
of December 23, 1997 by and between NationsBank, N. A. as
agent and for certain additional lenders and Sunrise East
Assisted Living Limited Partnership (Exhibit 10.31.8 to
Sunrise's 1997 Form 10-K).
10.32 Amended and Restated Master Guarantee of Payment Agreement
dated as of December 23, 1997 by and between
NationsBank, N. A. as agent and for certain additional
lenders and Sunrise East
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Assisted Living Limited Partnership (Exhibit 10.31.9 to
Sunrise's 1997 Form 10-K).
10.33 +Form of Indemnification Agreement (Exhibit 10.24 to
Sunrise's Form S-1 Registration Statement No. 333-2582).
10.34 + 1995 Stock Option Plan, as amended Exhibit 10.20
to Sunrise's 1997 Form 10-K).
10.35 + 1996 Directors' Stock Option Plan, as amended.
10.36 + Stock Option Agreement, entered into, effective
as of January 4, 1995, by and between Sunrise and
David W. Faeder (Exhibit 10.14 to Sunrise's Form
S-1 Registration Statement No. 333-2582).
10.37 + 1996 Non-Incentive Stock Option Plan, as amended
(Exhibit 10.24 to Sunrise's 1997 Form 10-K).
10.38 + 1997 Stock Option Plan, as amended (Exhibit 10.25
to Sunrise's 1997 Form 10-K).
10.39 + 1998 Stock Option Plan, as amended. (Exhibit 10.41 to
Sunrise's 1998 Form 10-K)
10.40 + 1999 Stock Option Plan (Exhibit 10.1 to Sunrise's
Form 10-Q for the quarter ended March 31, 1999).
10.41 Trust Agreement, dated as of December 2, 1998, between the
several holders from time to time parties thereto, as the
holders, and First Security Bank, National Association, as
the Owner Trustee (Sunrise Trust 1998-1) (Exhibit 2.2 to
Sunrise's Form 8-K dated December 17, 1998).
10.42 Credit Agreement, dated as of December 2, 1998, among
First Security Bank, National Association, not
individually, except as expressly stated therein, but
solely as the Owner Trustee under the Sunrise Trust
1998-1, as the Borrower, the several lenders from time
to time parties thereto, and NationsBank,
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N.A., as the Agent (Exhibit 2.3 to Sunrise's Form 8-K
dated December 17, 1998).
10.43 Participation Agreement, dated as of December 2, 1998,
among Sunrise Midwest Leasing, L.L.C., as the
Construction Agent and as the Lessee, Sunrise, as the
Guarantor, First Security Bank, National Association,
not individually, except as expressly stated therein,
but solely as the Owner Trustee under the Sunrise Trust
1998-1, the various banks and other lending institutions
which are parties thereto from time to time, as the
holders, the various banks and other lending
institutions which are parties thereto from time to
time, as the lenders, and NationsBank, N.A., as the
Agent for the Lenders and respecting the Security
Documents, as the Agent for the Lenders and the Holders,
to the extent of their interests (Exhibit 2.4 to
Sunrise's Form 8-K dated December 17, 1998).
10.44 Security Agreement, dated as of December 2, 1998,
between First Security Bank, National Association, not
individually, but solely as the owner trustee under the
Sunrise Trust 1998-1 and NationsBank, N.A., as the agent
for the lenders and the holders and accepted and agreed
to by Sunrise Midwest Leasing, L.L.C. (Exhibit 2.5 to
Sunrise's Form 8-K dated December 17, 1998).
10.45 Lease Agreement, dated as of December 2, 1998, between
First Security Bank, National Association, not
individually, but solely as the Owner Trustee under the
Sunrise Trust 1998-1, as Lessor and Sunrise Midwest
Leasing, L.L.C., as Lessee (Exhibit 2.6 to Sunrise's Form
8-K dated December 17, 1998).
10.46 Cross-Collateralization, Cross-Default, and Mortgage
Modification Agreement, dated as of May 20, 1999, by and
among Sunrise Borrowers (as defined in the agreement) and
GMAC Commercial
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Mortgage Corporation (Exhibit 10.1 to Sunrise's Form
10-Q for the quarter ended June 30, 1999).
10.47 Form of Exceptions to Non-Recourse Guaranty (Multistate),
dated as of May 20, 1999, between Sunrise Borrower (as
defined in the guaranty) and GMAC Commercial Mortgage
Corporation (Exhibit 10.2 to Sunrise's Form 10-Q for the
quarter ended June 30, 1999).
10.48 Second Amended and Restated Financial and Security Agreement
dated as of July 29, 1999 by and between Bank of
America, N.A. (formerly NationsBank, N.A.) as agent for
certain additional lenders and Sunrise East Assisted
Living Limited Partnership and other subsidiaries of
Sunrise (Exhibit 10.48 to Sunrise's 1999 Form 10-K)
10.49 Second Amended, Restated and Increased Master Promissory
Note dated as of July 29, 1999 by and between Bank of
America, N.A., (formerly NationsBank, N.A.) as agent for
certain additional lenders and Sunrise East Assisted
Living Limited Partnership and other subsidiaries of
Sunrise (as amended) (Exhibit 10.49 to Sunrise's 1999
Form 10-K)
10.50 Second Amended and Restated Master Guaranty of Payment
Agreement dated as of July 29, 1999 by and between Bank
of America, N.A., (formerly NationsBank, N.A.) as agent
for certain additional lenders and Sunrise (Exhibit
10.50 to Sunrise's 1999 Form 10-K)
10.51 Confirmation of and Amendment to Master Guaranty of
Performance dated as of July 29, 1999 by and between
Bank of America, N.A., (formerly NationsBank, N.A.) as
agent for certain additional lenders and Sunrise
(Exhibit 10.51 to Sunrise's 1999 Form 10-K)
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10.52 Omnibus Confirmation of and Amendment to Security
Documents dated July 29, 1999 by Sunrise and certain
subsidiaries, as Assignors, in favor of Bank of America,
N.A., (formerly NationsBank, N.A.) as agent for certain
additional lenders (Exhibit 10.52 to Sunrise's 1999 Form
10-K)
10.53 Third Amended and Restated Financial and Security
Agreement dated as of March 14, 2000 by and between Bank
of America, N.A. (formerly NationsBank, N.A.) as agent
for certain additional lenders and Sunrise East Assisted
Living Limited Partnership and other subsidiaries of
Sunrise (Exhibit 10.53 to Sunrise's 1999 Form 10-K)
10.54 Third Amended and Restated Master Guaranty of Payment
Agreement dated as of March 14, 2000 by and between Bank
of America, N.A., (formerly NationsBank, N.A.) as agent
for certain additional lenders and Sunrise East Assisted
Living Limited Partnership and other subsidiaries of
Sunrise (Exhibit 10.54 to Sunrise's 1999 Form 10-K)
10.55 Amendment No. 1 to Certain Operative Agreements, dated as
of March 14, 2000, among Sunrise Midwest Leasing,
L.L.C., as the Construction Agent and Lessee, Sunrise as
the Guarantor, First Security Bank, National
Association, not individually but solely as the Owner
Trustee under the Sunrise Trust 1998-1, the various
banks and other lending institutions which are parties
thereto, as Lenders, and Bank of America, N.A., as the
Agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and Holders, to
the extent of their interests (Exhibit 10.55 to
Sunrise's 1999 Form 10-K)
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10.56 Form of Multifamily Note (Multistate), dated as of May 20,
1999, between Sunrise Borrower (as defined in the note)
and GMAC Commercial Mortgage Corporation (Exhibit 10.3 to
Sunrise's Form 10-Q for the quarter ended June 30, 1999).
10.57 Form of Multifamily Mortgage, Assignment of Rents and
Security Agreement, dated as of May 20, 1999, between
Sunrise Borrower (as defined in the mortgage) and GMAC
Commercial Mortgage (Exhibit 10.4 to Sunrise's Form 10-Q
for the quarter ended June 30, 1999).
10.58 Amendment No. 1 to Stock Option Agreement by and between
Sunrise and David W. Faeder (Exhibit 10.14.1 to
Sunrise's Form S-1 Registration Statement No.
333-13731).
10.59 Cross-Collateralization Agreement, dated as of March 22,
2000 by and among GMAC Commercial Mortgage Corporation and
Sunrise Borrowers (as defined in the agreement) (Exhibit
10.1 to Sunrise's Form 10-Q for the quarter ended
March 31, 2000)
10.60 Form of Multifamily Note (Multistate), dated as of March
22, 2000, by and among GMAC Commercial Mortgage
Corporation and Sunrise Borrowers (as defined in the note)
(Exhibit 10.2 to Sunrise's Form 10-Q for the quarter ended
March 31, 2000)
10.61 Form of Multifamily Mortgage, Assignment of Rents and
Security Agreement, dated as of March 22, 2000 by and
among GMAC Commercial Mortgage Corporation and Sunrise
Borrowers (as defined in the mortgage) (Exhibit 10.3 to
Sunrise's Form 10-Q for the quarter ended March 31,
2000)
10.62 Form of Limited Guaranty, dated as of March 22, 2000, by
and among GMAC Commercial Mortgage Corporation and Sunrise
Borrowers (as defined in
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the guaranty) (Exhibit 10.4 to Sunrise's Form 10-Q for
the quarter ended March 31, 2000)
10.63 + Chief Executive Officer Severance Plan (Exhibit
10.5 to Sunrise's Form 10-Q for the quarter ended
March 31, 2000)
10.64 + Senior Executive Officer Severance Plan (Exhibit
10.6 to Sunrise's Form 10-Q for the quarter ended
March 31, 2000)
10.65 + Consulting Agreement dated as of April 1, 2000 by
and between Sunrise and David W. Faeder (Exhibit
10.7 to Sunrise's Form 10-Q for the quarter ended
March 31, 2000)
10.66 + 1996 Non-Incentive Stock Option Plan, as amended
(Exhibit 10.8 to Sunrise's Form 10-Q for the
quarter ended March 31, 2000)
10.67 Limited Liability Company Agreement of Metropolitan Senior
Housing, LLC, a Delaware Limited Liability Company, dated
as of June 29, 2000 (Exhibit 10.1 to Sunrise's Form 10-Q
for the quarter ended June 30, 2000)
10.68 Purchase and Sale Agreement dated as of June 29, 2000, by
and between certain Sunrise affiliates and Metropolitan
Senior Housing, LLC for the sale of three (3) properties
(Exhibit 10.2 to Sunrise's Form 10-Q for the quarter ended
June 30, 2000)
10.69 Purchase and Sale Agreement dated as of June 29, 2000, by
and between certain Sunrise affiliates and Metropolitan
Senior Housing, LLC for the sale of eight (8) properties
(Exhibit 10.3 to Sunrise's Form 10-Q for the quarter ended
June 30, 2000)
10.70 + Employment Agreement, dated as of September 12,
2000, by and between Sunrise Assisted Living,
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Inc. and Paul J. Klaassen (Exhibit 10.1 to
Sunrise's Form 10-Q for the quarter ended
September 30, 2000)
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
- ----------------
+ Represents management contract or compensatory plan or arrangement.
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REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Sunrise Assisted Living, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise
Assisted Living, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sunrise Assisted
Living, Inc. as of December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
McLean, Virginia
March 7, 2001 /s/ Ernst & Young LLP
F-1
73
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
---------------------------
2000 1999
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 42,874 $ 53,540
Accounts receivable, net 25,467 15,441
Notes receivable 9,127 1,051
Deferred income taxes, net 19,448 8,221
Assets held for sale - 33,724
Prepaid expenses and other current assets 35,874 52,530
------------ -------------
Total current assets 132,790 164,507
Property and equipment, net 812,937 763,306
Notes receivable 77,991 59,654
Management contracts and leaseholds, net 24,142 33,994
Costs in excess of assets acquired, net 33,709 35,412
Investments in unconsolidated assisted living facilities 27,773 20,435
Investments 5,750 5,750
Other assets 17,254 18,355
------------ -------------
Total assets $ 1,132,346 $ 1,101,413
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,932 $ 4,114
Accrued expenses and other current liabilities 22,890 21,335
Deferred revenue 21,977 7,475
Current maturities of long-term debt 117,054 36,103
------------ -------------
Total current liabilities 166,853 69,027
Long-term debt, less current maturities 557,649 664,840
Investments in unconsolidated assisted living facilities 3,353 2,561
Deferred income taxes, net 44,247 22,128
Other long-term liabilities 3,407 3,985
------------ -------------
Total liabilities 775,509 762,541
Minority interests 2,792 3,748
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $0.01 par value, 60,000,000 shares authorized,
21,595,569 and 21,938,742 shares issued and outstanding
in 2000 and 1999 216 219
Additional paid-in capital 298,660 304,014
Retained earnings 55,169 30,891
------------ -------------
Total stockholders' equity 354,045 335,124
------------ -------------
Total liabilities and stockholders' equity $ 1,132,346 $ 1,101,413
============ =============
See accompanying notes.
F-2
74
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------
2000 1999 1998
----------- ------------ ------------
Operating revenue:
Resident fees $ 274,236 $ 217,397 $ 151,878
Management and contract services 38,429 30,805 16,798
Income from property sales 32,121 7,017 2,036
----------- ------------ ------------
Total operating revenue 344,786 255,219 170,712
----------- ------------ ------------
Operating expenses:
Facility operating 169,966 131,055 88,834
Facility contract services 15,931 6,439 1,095
Facility development and pre-rental 6,226 7,184 5,197
General and administrative 27,418 20,715 12,726
Depreciation and amortization 33,902 25,448 21,650
Facility lease 10,833 7,903 3,014
Non-recurring charges - 5,069 -
----------- ------------ ------------
Total operating expenses 264,276 203,813 132,516
----------- ------------ ------------
Income from operations 80,510 51,406 38,196
Other income (expense):
Interest income 12,412 10,849 6,695
Interest expense (49,978) (32,599) (22,125)
----------- ------------ ------------
Total other expense (37,566) (21,750) (15,430)
Equity in (losses) earnings of unconsolidated
assisted living facilities (2,941) (1,239) 54
Minority interests (203) (376) (508)
----------- ------------ ------------
Income before income taxes 39,800 28,041 22,312
Provision for income taxes (15,522) (7,828) -
----------- ------------ ------------
Net income $ 24,278 $ 20,213 $ 22,312
=========== ============ ============
Net income per common share:
Basic $ 1.12 $ 0.96 $ 1.16
=========== ============ ============
Diluted $ 1.10 $ 0.94 $ 1.11
=========== ============ ============
See accompanying notes.
F-3
75
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Shares of Common Retained
Common Stock Additional Earnings
Stock Amount Paid-in Capital (Deficit) Total
-------- --------- --------------- --------- ----------
Balance at December 31, 1997 19,028 $ 190 $ 206,784 $ (11,634) $195,340
Exercise of employee options and
warrants for common stock 418 4 6,352 6,356
Tax effect from the exercise of non-
qualified stock options 3,647 3,647
Net income 22,312 22,312
-------- --------- --------------- --------- ----------
Balance at December 31, 1998 19,446 194 216,783 10,678 227,655
Exercise of employee options
for common stock 214 2 3,666 3,668
Issuance of common stock to
acquire Karrington 2,279 23 75,663 75,686
Tax effect from the exercise of non-
qualified stock options 7,902 7,902
Net income 20,213 20,213
-------- --------- --------------- --------- ----------
Balance at December 31, 1999 21,939 219 304,014 30,891 335,124
Exercise of employee options
for common stock 242 3 3,233 3,236
Repurchase of common stock (585) (6) (9,641) (9,647)
Tax effect from the exercise of non-
qualified stock options 1,054 1,054
Net income 24,278 24,278
-------- --------- --------------- --------- ----------
Balance at December 31, 2000 21,596 $ 216 $ 298,660 $ 55,169 $354,045
======== ========= =============== ========= ==========
See accompanying notes.
F-4
76
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------------
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 24,278 $ 20,213 $ 22,312
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from property sales (16,900) (70) (551)
Equity in losses (earnings) of unconsolidated
assisted living facilities 2,941 1,239 (54)
Minority interests 203 376 508
Provision for bad debts 1,250 1,380 521
Provision for deferred income taxes 15,522 1,930 -
Depreciation and amortization 33,902 25,448 21,650
Amortization of financing costs and discount on
long-term debt 3,754 2,676 2,084
Amortization of discount on investments - (566) (175)
Non-recurring charges - 3,786 -
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable (11,895) 2,793 (12,490)
Assets held for sale - (1,054) -
Prepaid expenses and other current assets 1,008 (71) (1,555)
Other assets 218 2,623 (5,778)
Increase (decrease):
Accounts payable and accrued expenses (3,448) (13,243) (49)
Deferred revenue (929) 94 (1,105)
Other liabilities 1,728 (4,767) 1,820
----------- ----------- -----------
Net cash provided by operating activities 51,632 42,787 27,138
----------- ----------- -----------
INVESTING ACTIVITIES
Investment in property and equipment (46,268) (178,443) (126,167)
Proceeds from sales of assets 45,704 26,923 28,552
Increase in investments and notes receivable (152,809) (75,259) (45,315)
Proceeds from investments and notes receivable 142,422 7,574 -
Increase in restricted cash and cash equivalents (830) (727) (1,459)
Contributions to investments in unconsolidated
assisted living facilities (10,534) (1,519) (742)
Acquisition of interests in facilities (1,098) (13,614) (1,340)
----------- ----------- -----------
Net cash used in investing activities (23,413) (235,065) (146,471)
----------- ----------- -----------
FINANCING ACTIVITIES
Additional borrowings under long-term debt 187,302 313,529 108,000
Repayment of long-term debt (215,569) (122,079) (23,369)
Net proceeds from exercised options 3,235 3,668 6,356
Net investment of minority interests (1,088) 1,000 -
Financing costs paid (3,118) (4,497) (100)
Repurchase of stock (9,647) - -
----------- ----------- -----------
Net cash (used in) provided by financing activities (38,885) 191,621 90,887
----------- ----------- -----------
Net decrease in cash and cash equivalents (10,666) (657) (28,446)
Cash and cash equivalents at beginning of year 53,540 54,197 82,643
----------- ----------- -----------
Cash and cash equivalents at end of year $ 42,874 $ 53,540 $ 54,197
=========== =========== ===========
See accompanying notes.
F-5
77
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRESENTATION
Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") is a provider of
assisted living services for seniors. Assisted living services provide a
residence, meals and non-medical assistance to elderly residents for a monthly
fee. Sunrise's services are generally not covered by health insurance and
therefore monthly fees are generally payable by the residents, their family,
or another responsible party.
Sunrise was incorporated in Delaware on December 14, 1994. The consolidated
financial statements include Sunrise's wholly owned subsidiaries that manage,
own and develop assisted living facilities. The consolidated financial
statements also include one limited partnership which owns a facility (Sunrise
of Gardner Park) in which Sunrise owns a 50% partnership interest and controls
the limited partnership through its status as the manager of the facility and
as the sole general partner with the unilateral ability under the partnership
agreement to conduct the ordinary course of business of the partnership. In
addition, the consolidated financial statements include three limited
liability companies. One of the limited liability companies owns two
facilities (Sunrise of Severna Park) in which Sunrise owns a 50% membership
interest. The other two limited liability companies own one facility each
(Sunrise of Sheepshead Bay and Sunrise of Mill Basin) in which Sunrise owns a
70% membership interest. Sunrise controls the three limited liability
companies through its status as the manager of the facilities and as sole
managing member of the limited liability companies with unilateral ability
under the operating agreements to conduct the ordinary course of business of
the companies. It is Sunrise's policy to consolidate non-wholly owned
interests when, through its managing partnership or operating agreements,
status as manager of the facility and sole general partner or managing member,
Sunrise holds the unilateral ability to conduct the ordinary course of
business of the facility. In February 2000, Sunrise acquired the remaining 30%
minority interest in Sunrise of Park Ridge, in which Sunrise previously had a
70% membership interest.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Sunrise considers cash and cash equivalents to include currency on hand,
demand deposits, and all highly liquid investments with a maturity of three
months or less at the date of purchase.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Details of the allowance for doubtful accounts receivable are as follows
(in thousands):
DECEMBER 31,
--------------------------------
2000 1999 1998
--------------------------------
Beginning balance $3,716 $2,080 $1,798
Acquired allowance - 786 --
Provision for bad
debts 1,250 1,380 521
Accounts written off (1,311) (530) (239)
--------------------------------
Ending balance $3,655 $3,716 $2,080
================================
F-6
78
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and include interest and
property taxes capitalized on long-term construction projects during the
construction period, as well as other costs directly related to the
development and construction of facilities. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are
not sufficient to recover its carrying amount. Sunrise measures an impairment
loss by comparing the fair value of the asset to its carrying amount. Fair
value of an asset is calculated as the present value of expected future cash
flows.
Construction in progress includes pre-acquisition costs and other direct
costs related to acquisition, development and construction of facilities
including certain direct and indirect costs of Sunrise's development
subsidiary. If a project is abandoned, any costs previously capitalized are
expensed.
INTANGIBLE ASSETS
Intangible assets relate primarily to the acquisition of Karrington Health,
Inc. and are comprised of management contracts, leaseholds and costs in excess
of assets acquired. Costs in excess of assets acquired represent costs of
business acquisitions in excess of the fair value of identifiable net assets
acquired. Such costs are being amortized over 38 years using the straight-line
method. Management contracts and leaseholds are also amortized using the
straight-line method over periods ranging from 11 to 40 years.
The carrying amounts of all intangible assets are reviewed for impairment
when indicators of impairment are identified. If the review indicates that the
intangible assets are not expected to be recoverable based on the undiscounted
cash flows of the acquired assets over the remaining amortization periods, the
carrying value of the intangible assets will be adjusted.
PRE-RENTAL COSTS
Costs incurred to initially rent facilities are capitalized and amortized
over 12 months. All other pre-rental costs are expensed as incurred.
DEFERRED FINANCING COSTS
Costs incurred in connection with obtaining permanent financing for
Company-owned facilities have been deferred and are amortized over the term of
the financing.
INVESTMENTS IN UNCONSOLIDATED ASSISTED LIVING FACILITIES
Sunrise owns non-controlling interests in 60 assisted living facilities,
some of which are currently under development. Sunrise's interests, through
limited liability companies and partnerships, range from nine to 50 percent.
Sunrise does not control these entities as major business decisions require
approval by the other partners or members. Accordingly, these investments are
accounted for under the equity method, where the investments are recorded at
cost and subsequently are adjusted for equity in net income (losses) and cash
contributions and distributions. Sunrise eliminates intercompany profits on
sales of services that are capitalized by the ventures. Differences between
the carrying value of investments and the underlying equity in net assets of
the investee are amortized on a straight line basis over the estimated useful
life of the investments. Sunrise's interests in accumulated losses of
unconsolidated assisted living facilities are recorded below Sunrise's cost
basis, which reflects Sunrise's obligations as the general partner or managing
member. Sunrise has no liability for any other material commitments or
contingencies of partnerships or limited liability companies in which it is a
general partner or managing member.
As of December 31, 2000, the carrying value of investments in the net
assets of unconsolidated assisted living facilities exceeded the underlying
equity in net assets of the investees by $3.8 million.
F-7
79
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTEREST RATE SWAPS
Interest rate swap transactions are designated with certain outstanding
debt instruments. Amounts received or paid on the interest rate swaps are
recorded on an accrual basis as an adjustment to the related interest expense
of the outstanding debt. The fair value of and changes in fair value as a
result of changes in market interest rates for the interest rate swap
agreements are not reflected in the financial statements. Gains and losses on
terminations of interest rate swap agreements are deferred as an adjustment to
the carrying amount of the outstanding debt and amortized into interest
expense over the remaining term of the original contract life of the
terminated swap agreement. In the event of early extinguishment of a
designated debt obligation, any realized or unrealized gain or loss from the
swap would be recognized in income coincident with the extinguishment gain or
loss. There were no gains or losses on terminations of interest swap
agreements recognized by Sunrise for the periods presented.
REVENUE RECOGNITION
Operating revenue consists of resident fee revenue, including resident
community fees, management services revenue, facility contract services
revenue and realized gain upon sale of assisted living facilities. Resident
fee revenue is recognized when services are rendered. Agreements with
residents are for a term of one year and are cancelable by residents with
thirty days notice. Management and contract services revenue is comprised of
revenue from management contracts, development contracts and facility
contracts. Revenue from management contracts is recognized in the month in
which it is earned in accordance with the terms of the management contract.
Revenue from development contracts is recognized over the term of the
respective development contracts using the percentage-of-completion method.
Revenue from facility contract services is comprised of fees plus reimbursable
expenses of facilities operated with Sunrise's employees under long-term
operating agreements. Income from property sales is recognized upon
consummation of the sale of properties unless a portion of the sale is
contingent upon future events or performance. Deferred gains are then
recognized upon performance or resolution of the contingency.
INCOME TAXES
Sunrise accounts for income taxes under the asset and liability approach
which requires recognition of deferred tax assets and liabilities for the
differences between the financial reporting and tax bases of assets and
liabilities. A valuation allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not
be realized.
STOCK-BASED COMPENSATION
Sunrise grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
Sunrise accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and accordingly recognizes no
compensation expense for the stock option grants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 137 and 138, which is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Statement No. 133 standardizes the
accounting for derivative instruments. Sunrise participates in interest rate
swap transactions, which would be considered derivatives under Statement No.
133. Sunrise has not entered into any other derivative transactions. Because
of Sunrise's minimal use of derivatives, Statement No. 133 is not anticipated
to materially affect results of operations or the financial position of
Sunrise.
F-8
80
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain 1999 and 1998 balances have been reclassified to conform with the
2000 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
----------------------
ASSET LIVES 2000 1999
----------------------
Land and land improvements 10-15 yrs. $122,794 $115,516
Building and building
Improvements 40 yrs. 576,820 520,502
Furniture and equipment 3-10 yrs. 82,982 76,072
----------------------
782,596 712,090
Less accumulated
depreciation
And amortization (72,335) (55,983)
----------------------
710,261 656,107
Construction in progress 102,676 107,199
----------------------
$812,937 $763,306
======================
Depreciation expense was $25.2 million, $18.6 million and $13.7 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
F-9
81
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES RECEIVABLE
Notes receivable plus accrued interest consist of the following (in
thousands):
DECEMBER 31,
-------------------
2000 1999
-------------------
LLC Note I, interest accrues at LIBOR plus
5.0% (11.6% at December 31, 2000) $22,599 $24,799
LLC Note II, interest accrues at 10.0% 8,534 7,797
LLC Note III, interest accrues at 10.0% 18,242 16,632
LLC Note IV, interest accrues at 10.0% 17,685 6,054
LLC Note V, interest accrues at 15.0% 9,388 -
Note I with United Kingdom joint venture,
variable interest 5,125 3,829
Note II with United Kingdom joint venture,
interest accrues at 15.0% 696 -
ADG Note, interest accrues at 10.0% 544 543
Promissory Note, interest accrued at 8.0% - 562
Property Note, interest accrues at 7.75% 3,016 -
Promissory Note, interest accrues at 11.5%
through March 2001 and 13.5% thereafter 999 -
Other notes receivable 290 489
-------------------
87,118 60,705
Current maturities (9,127) (1,051)
-------------------
$77,991 $59,654
===================
In October 1997, a wholly owned subsidiary of Sunrise jointly formed a
limited liability company ("LLC I") with an unrelated third party in which
Sunrise's subsidiary owns a 9% minority interest. The purpose of LLC I is to
develop, construct and own assisted living facilities. Sunrise loaned LLC I
$15.0 million (the "LLC Note I") to partially finance the initial development
and construction of six properties. The LLC Note I to Sunrise's subsidiary is
subordinated to other lenders of LLC I. In September 1998, Sunrise and LLC I
amended the LLC Note I to increase the loan by $6.0 million to a total of
$21.0 million in order to partially finance the initial development and
construction of two additional properties. Principal and interest are due
October 2003.
In January 1999, a wholly owned subsidiary of Sunrise jointly formed a
limited liability company ("LLC II") in which Sunrise's subsidiary owns a 9%
minority interest. The purpose of LLC II is to develop, construct and own
assisted living facilities. Sunrise loaned LLC II $7.3 million (the "LLC Note
II") to partially finance the initial development and construction of four
properties. The LLC Note II to Sunrise's subsidiary is subordinated to other
lenders of LLC II. The principal amount of the loan and accrued interest are
due on the earlier of March 30, 2006 or termination of the management
agreement between the parties. See Note 17 Related-Party Transactions, Joint
Ventures.
In March 1999, a wholly owned subsidiary of Sunrise jointly formed a
limited liability company ("LLC III") in which Sunrise's subsidiary owns a 9%
minority interest. The purpose of LLC III is to develop, construct and own
assisted living facilities. Sunrise loaned LLC III $15.8 million (the "LLC
Note III") to partially finance the initial development and construction of
five properties. The LLC Note III to Sunrise's subsidiary is subordinated to
other lenders of LLC III. The principal amount of the loan and accrued
interest are due on July 1, 2002. See Note 17 Related-Party Transactions,
Joint Ventures.
In March 1999, a wholly owned subsidiary of Sunrise jointly formed a
limited liability company ("LLC IV") in which Sunrise's subsidiary owns a 9%
minority interest. The purpose of LLC IV is to develop, construct, and own
assisted living facilities. Sunrise loaned LLC IV $6.0 million (the "LLC Note
IV") to
F-10
82
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
partially finance the initial development and construction of six properties.
In December 1999, Sunrise and LLC IV amended the LLC Note IV to increase the
loan by $10.0 million. The LLC Note IV to Sunrise's subsidiary is subordinated
to other lenders of LLC IV. The principal amount of the loan and accrued
interest are due on the earlier of December 31, 2006 or termination of the
management agreement between the parties. See Note 17 Related-Party
Transactions, Joint Ventures.
In December 2000, a wholly owned subsidiary of Sunrise jointly formed a
limited liability company ("LLC V") with an unrelated third party in which
Sunrise's subsidiary owns a 9% minority interest. The purpose of LLC V is to
develop, construct and own assisted living facilities. Sunrise has committed
to loan LLC V $17.4 million (the "LLC Note V") to partially finance the
initial development and construction of five properties. The LLC Note V to
Sunrise's subsidiary is subordinated to other lenders of LLC V. The principal
amount of the loan and accrued interest are due on December 16, 2007.
In November 1998, Sunrise agreed to make available up to approximately $3.4
million ("Note I") to a subsidiary of a joint venture of Sunrise in the United
Kingdom under a revolving credit arrangement. During 2000, Sunrise advanced an
additional $1.4 million to the joint venture. Interest on the first $3.4
million of advances made under Note I accrues at 12.0%. Interest on the
additional $1.4 million of advances accrues at a variable rate based on LIBOR
plus 2.0% (8.56% at December 31, 2000). The outstanding principal and unpaid
accrued interest are due November 2001. See Note 17 Related-Party
Transactions, Joint Ventures.
In 2000, Sunrise agreed to make available up to approximately $1.4 million
("Note II") to a subsidiary of a joint venture of Sunrise in the United
Kingdom under a promissory note. Interest on amounts outstanding under Note II
accrues at 15.0%. A portion of the outstanding principal and unpaid accrued
interest was converted to an investment in the joint venture and the remainder
was repaid in full in January 2001. See Note 17 Related-Party Transactions,
Joint Ventures.
In January 1999, a facility, in which Sunrise has a controlling interest,
accepted a $0.5 million promissory note ("ADG Note") from its minority owner.
The ADG Note accrues interest at 10% per annum and is due annually beginning
February 22, 2000. The principal balance plus accrued and unpaid interest are
due on February 22, 2009.
In connection with the sale of Sunrise's minority interest in a
tenancy-in-common that owned one facility, a wholly owned subsidiary of
Sunrise accepted a promissory note in the amount of $850,000 in March 1998.
The promissory note accrued interest at 8.0% per annum and was due in
September 1998. In October 1998, the promissory note was amended to extend the
maturity date to August 1, 1999 and modify the payment terms to include a
payment due in October 1998, which has been received, followed by quarterly
payments of principal and interest. Under the terms of the amended promissory
note, the promissory note was in default as of August 1, 1999. The promissory
note was paid in full in February 2000.
In June 1999, a wholly owned subsidiary of Sunrise loaned $200,000
("Property Note") to owners of certain property on which Sunrise plans to
develop an assisted living community. Immediately following issuance of the
Property Note, the wholly owned subsidiary of Sunrise entered into a purchase
agreement with the owners to acquire this property. In January 2000, an
additional $2.6 million was advanced to the owners of the property for a total
of $2.8 million. The principal and unpaid accrued interest are due in 2001.
In September 2000, a wholly owned subsidiary of Sunrise agreed to make
available up to $1.25 million ("Promissory Note") to the purchaser of two
former Karrington operating properties located in Ohio. The Promissory Note is
secured by a second mortgage and is subordinated to the purchaser's first
mortgage. The Promissory Note accrues interest at 11.5% through March 2001 and
13.5% thereafter. The outstanding principal and unpaid accrued interest are
due September 2002. The note was repaid in January 2001.
F-11
83
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management believes the net carrying cost of the notes receivable
approximates market value at December 31, 2000 and 1999.
5. INVESTMENTS
The balances outstanding are as follows (in thousands):
FACE AMOUNT
DECEMBER 31,
-----------------
DESCRIPTION 2000 1999 INTEREST RATE MATURITY DATE
----------------------------------------------------------------------------
Bonds:
Series A $5,000 $5,000 11% July 1, 2025
Series B 750 750 11% July 1, 2015
-----------------
$5,750 $5,750
=================
On March 1, 1995, Sunrise purchased all of the outstanding mortgage revenue
bonds used to finance a facility managed by Sunrise. The 10% Bucks County
Industrial Development Authority, First Mortgage Revenue Bonds, July 1, 2019,
having a face value of $12.5 million, were purchased for $5.0 million. The
bonds were in financial default when purchased.
On June 30, 1995, the bonds were restructured, at no gain or loss to
Sunrise, to reduce their face amount to $5.8 million (Series A and C) and
provide the facility managed by Sunrise additional funding up to $750,000 for
renovations (Series B). Interest only is payable until maturity. In March
1999, the Series C bonds were paid in full.
Subsequent to June 30, 1995, all interest payments on these bonds are
current. Sunrise recognized $632,000, $721,000 and $957,000 in interest income
during 2000, 1999 and 1998, respectively, on this investment. The bond
discount for the Series C bonds was being recognized as interest income over
the life of the loan commencing in 1998. Sunrise amortized $575,000 and
$175,000 of the bond discount in 1999 and 1998, respectively.
Management believes the net carrying cost of the investments approximates
market value at December 31, 2000 and 1999.
6. INTANGIBLES AND OTHER ASSETS
Intangible assets consist of the following (dollars in thousands):
DECEMBER 31,
------------------
2000 1999 ESTIMATED
USEFUL LIFE
--------------------------------
Management contracts, less accumulated
amortization of $709 and $250 $ 6,679 $ 7,138 11-20 years
Leaseholds, less accumulated amortization of
$1,118 and $584 17,463 26,856 18-40 years
------------------
$ 24,142 $ 33,994
==================
Costs in excess of assets acquired, less
accumulated amortization of $1,244 and $474 $ 33,709 $ 35,412 38 years
===================
F-12
84
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other assets consist of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------------------
Restricted cash $5,211 $4,380
Deferred financing costs less amortization of
$8,876 and $6,045 7,539 8,705
Pre-rental costs less amortization of $16,437
and $15,896 3,783 4,707
Other 721 563
------------------
$17,254 $18,355
==================
Restricted cash consists of real estate tax escrows, operating reserves and
capital reserves related to Sunrise's debt agreements and resident deposits.
7. TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
Included in prepaid expenses and other current assets are net receivables
from unconsolidated partnerships or limited liability companies of $21.2
million and $38.6 million as of December 31, 2000 and 1999, respectively.
Included in other current liabilities are net payables to unconsolidated
partnerships or limited liability companies of $3.0 million and $1.6 million
in 2000 and 1999, respectively. Net receivables from unconsolidated
partnerships or limited liability companies relate primarily to development
activities.
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
---------------------
2000 1999
---------------------
5 1/2% Convertible Subordinated Notes due 2002 $150,000 $150,000
Syndicated revolving credit facility 177,456 209,972
Multi-property/participating blanket first
mortgage 85,109 85,602
Multi-property first mortgage 85,868 87,242
Other mortgages and notes payable 176,445 168,720
Discount on the multi-property mortgage less
amortization of $3,025 and $2,607 (175) (593)
---------------------
674,703 700,943
Current maturities (117,054) (36,103)
---------------------
$557,649 $664,840
=====================
On June 6, 1997, Sunrise issued and sold $150.0 million aggregate
principal amount of 5 1/2% convertible subordinated notes due 2002. The
convertible notes bear interest at 5 1/2% per annum payable semiannually on
June 15 and December 15 of each year, beginning on December 15, 1997. The
conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares
per $1,000 principal amount of the convertible notes). The convertible notes
are redeemable at the option of Sunrise commencing June 15, 2000, at specified
premiums. The holders of the convertible notes may require Sunrise to
repurchase the convertible notes upon a change of control of Sunrise as
defined in the convertible notes.
F-13
85
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A subsidiary of Sunrise has obtained a syndicated revolving credit facility
for $400.0 million to be used for general corporate purposes, including the
continued construction and development of assisted living facilities. Sunrise
guarantees the repayment of all amounts outstanding under this credit
facility. The credit facility is secured by cross-collateralized first
mortgages on the real property and improvements and first liens on all assets
of the subsidiary, consisting of 30 properties. Advances under the facility
bear interest at LIBOR plus 1.75% (8.31% at December 31, 2000). The credit
facility expires in July 2002. There were $177.5 million of advances
outstanding under this credit facility as of December 31, 2000.
The multi-property mortgage is collateralized by a blanket first mortgage
on all assets of a subsidiary of Sunrise, consisting of 15 facilities. The
multi-property mortgage consists of two separate debt classes. Class A in the
amount of $65.0 million bears a fixed interest rate of 8.56% and is interest
only until the maturity date of May 31, 2001. Class B in the amount of $20.1
million bears a variable interest rate. Class B was interest only until July
1, 1997 at which time principal and interest payments were due using a 20-year
amortization schedule. The interest rate applicable to the floating rate debt
is LIBOR plus 1.75% (8.31% at December 31, 2000).
A participation interest of $3.2 million payable in connection with the
multi-property mortgage was recorded at the loan date. A corresponding amount
recorded as a loan discount is being amortized over the life of the loan.
Amortization of the discount of $418,000 has been included as interest expense
in 2000, 1999 and 1998.
In May 1999, Sunrise entered into a multi-property first mortgage for $88.0
million secured by eight properties. The loan accrues interest at 7.14% and
matures on June 1, 2009. The proceeds were used to reduce the balance of one
of Sunrise's credit facilities and, as a result, convert a portion of
Sunrise's variable rate debt into debt with a fixed rate. At December 31,
2000, $85.9 million was outstanding.
In March 2000, Sunrise entered into a multi-property first mortgage for
$75.0 million secured by eight properties. The loan accrues interest at 8.66%
and matures in April 2007. The proceeds of the loan were used to repay $59.0
million of floating rate construction debt and to help fund Sunrise's
development and stock repurchase programs. The eight properties securing the
debt were sold on September 29, 2000 to a joint venture in which Sunrise has a
25% interest. The joint venture assumed the debt with an outstanding balance
of $74.6 million as of September 30, 2000.
In 1999, included in long-term debt is a note due to an employee and an
entity related to that employee. Interest accrued at 18% annually and
principal was due June 8, 1999. In October 1999, the principal balance plus
accrued and unpaid interest under the promissory note was paid in full.
The other mortgages and notes payable relate primarily to 29 facilities
whereby outstanding balances are collateralized by the total assets of the
respective facility. Payments of principal and interest are made monthly.
Interest rates range from 4.7% to 10.0% with remaining maturities ranging from
less than one to 33 years. These other mortgages and notes payable have total
borrowings of $176.4 million as of December 31, 2000, which include $55.2
million of debt assumed through the acquisition of Karrington.
Sunrise has entered into a swap transaction whereby, effective during the
period June 18, 1998 through June 18, 2001, outstanding advances of up to
$19.0 million under LIBOR floating rate debt bear interest at a fixed rate
based on a fixed LIBOR base rate of 7.30%. Sunrise entered into another swap
transaction whereby, effective during the period August 20, 1997 through April
1, 2003, outstanding advances of up to $7.0 million under LIBOR floating rate
debt bear interest at a fixed LIBOR base rate of 7.14%. In November 1999,
Sunrise settled the $7.0 million swap transaction. There was no gain or loss
on the settlement.
There are various financial covenants and other restrictions in Sunrise's
debt instruments, including provisions which: (1) require it to meet certain
financial tests. For example, Sunrise's $85.1 million multi-property mortgage,
which is secured by 15 of its facilities, requires that these facilities
maintain a cash flow to interest expense coverage ratio of at least 1.25 to 1.
Sunrise's $400.0 million credit facility
F-14
86
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
requires Sunrise to have a consolidated tangible net worth of at least $255.0
million and to maintain a consolidated minimum cash liquidity balance of at
least $25.0 million. These tests are administered on a monthly or quarterly
basis, depending on the covenant; (2) require consent for changes in
management or control of Sunrise. For example, Sunrise's $400.0 million
revolving credit facility requires the lender's consent for any merger where
Paul Klaassen or Teresa Klaassen does not remain chairman of the board and
chief executive officer of Sunrise; (3) restrict the ability of Sunrise's
subsidiaries to borrow additional funds, dispose of assets or engage in
mergers or other business combinations without lender consent; and (4) require
that Sunrise maintain minimum occupancy levels at its facilities. For example,
Sunrise's $400.0 million credit facility requires that 85% occupancy be
achieved after 12 months for newly opened facilities and, following this
12-month period, be maintained at or above that level.
Principal maturities of long-term debt as of December 31, 2000 are as follows
(in thousands):
2001 $117,054
2002 354,746
2003 57,632
2004 13,582
2005 10,134
Thereafter 121,555
-----------
$674,703
===========
Interest paid totaled $52.2 million, $35.7 million and $23.8 million in
2000, 1999 and 1998, respectively. Interest capitalized was $6.1 million, $6.3
million and $4.2 million in 2000, 1999 and 1998, respectively.
As of December 31, 2000, Sunrise has $11.3 million in unused letters of
credit that have been pledged for the benefit of certain lending institutions
and municipalities. The letters of credit expire within two years.
9. STOCKHOLDERS' EQUITY
On May 14, 1999, Sunrise completed its acquisition of Karrington Health,
Inc. through a tax-free, stock-for-stock transaction in which it issued 2.3
million common shares in exchange for all the outstanding shares of Karrington
and Karrington became a wholly owned subsidiary of Sunrise. The total
transaction was valued at $85.1 million, including merger and stock issuance
costs of $8.4 million and the fair value of assumed employee stock options of
$1.5 million.
Sunrise's Board of Directors has authorized Sunrise to repurchase its
outstanding common stock and/or its outstanding 5 1/2% convertible
subordinated notes up to an aggregate purchase price of $50.0 million over a
period of 12 months. Under the stock repurchase program, Sunrise is authorized
to repurchase Company common stock in the open market or in privately
negotiated transactions, subject to market conditions, applicable legal
requirements and other factors. The stock repurchase program does not obligate
Sunrise to repurchase any specific number of shares, and repurchases pursuant
to the program may be suspended or resumed at any time or from time to time
without further notice or announcement. Sunrise repurchased 585,000 shares of
common stock at an average price of $16.66 per share through open-market
purchases during 2000.
F-15
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SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS
Sunrise has stock option plans providing for the grant of incentive and
nonqualified stock options to employees, directors, consultants and advisors.
At December 31, 2000, these plans provided for the grant of options to
purchase up to 7,323,910 shares of common stock. The option exercise price and
vesting provisions of the options are fixed when the option is granted. The
options expire ten years from the date of grant and generally vest over a
four-year period. The option exercise price is not less than the fair market
value of a share of common stock on the date the option is granted.
In September 1998, Sunrise canceled 1.6 million options granted to
employees at exercise prices greater than $29.00 and granted an equal number
of options with an exercise price of $25.00. In connection with the new grants
certain vesting periods of the executive officers were extended.
On April 25, 1996, the Board of Directors adopted the 1996 Directors' Stock
Option Plan (the "Directors' Plan"). Any director who was a member of the
Board of Directors but not an officer or employee of Sunrise or any of its
subsidiaries (other than the persons elected as director representatives of
the holders of Series A Preferred Stock) was eligible to receive options under
the Directors' Plan. In March 2000, the Directors' Plan was terminated. An
aggregate of 75,000 shares of common stock is reserved for issuance under
existing option agreements. The option exercise price is not less than the
fair market value of a share of common stock on the date the option was
granted. The period for exercising an option begins six months after the
option was granted and generally ends ten years from the date the option was
granted. Options granted under the Directors' Plan vested immediately. All
options granted under the Directors' Plan are non-incentive stock options. As
of December 31, 2000, 75,000 options remained outstanding under the plan.
A summary of Sunrise's stock option activity, and related information for
the years ended December 31 are presented below:
2000 1999 1998
----------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000) PRICE (000) PRICE (000) PRICE
- ----------------------------------------------------------------------------------------------------------
Outstanding-beginning of year 5,250 $ 23.28 4,170 $ 24.93 3,156 $ 22.76
Granted 1,905 15.93 1,712 23.02 3,417 32.81
Exercised (242) 13.77 (213) 17.24 (384) 16.39
Canceled (954) 28.57 (419) 30.39 (2,019) 36.51
-------- -------- -------
Outstanding-end of year 5,959 5,250 23.28 4,170 24.93
======== ======== =======
Options exercisable at year-end 2,523 1,853 1,055
Weighted-average fair
value of options granted
during the year $11.78 $16.46 $16.80
F-16
88
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE
- --------------------------------------------------------------------------------------------
$ 3.00 - $ 8.00 85 4.7 $ 5.03 85 $ 5.03
8.01 - 20.00 2,505 8.8 14.52 530 15.69
20.01 - 25.63 2,456 6.6 24.96 1,606 25.01
25.64 - 44.56 913 8.3 31.78 302 34.87
------------ ------------
5,959 2,523
============ ============
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and has
been determined as if Sunrise had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 2000, 1999
and 1998: risk-free interest rate of 4.4% to 6.5%; dividend yield of 0%;
expected lives of 7 to 10 years; and volatility of 36.8% to 57.54%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Sunrise's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures below, the estimated fair value of
the options is amortized to expense over the options' vesting period.
Sunrise's pro forma information follows (in thousands, except per share
amounts):
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
---------- ---------- ---------
Net income:
As reported $24,278 $20,213 $22,312
Pro forma $7,686 $7,882 $13,368
Diluted net income per share:
As reported $1.10 $0.94 $1.11
Pro forma $0.35 $0.37 $0.67
11. STOCKHOLDER RIGHTS AGREEMENT
The Board of Directors adopted a Stockholders Rights Agreement ("Rights
Agreement") effective April 25, 1996, as amended. All shares of common stock
issued by Sunrise between the date of adoption of the Rights Agreement and the
Distribution Date (as defined below) have rights attached to them. The rights
expire ten years after adoption of the Rights Agreement. Each right, when
exercisable, entitles the holder to purchase one one-thousandth of a share of
Series C Junior Participating Preferred Stock at a price of $85.00 (the
"Purchase Price"). Until a right is exercised, the holder thereof will have no
rights as a stockholder of Sunrise.
The rights initially attach to the common stock. The rights will separate
from the common stock and a distribution of rights certificates will occur (a
"Distribution Date") upon the earlier to occur of (1) ten days following a
public announcement that a person or group (an "Acquiring Person") has
acquired, or obtained
F-17
89
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the right to acquire, beneficial ownership of 20% or more of the outstanding
shares of common stock (the "Stock Acquisition Date") or (2) ten business days
(or such later date as the Board of Directors may determine) following the
commencement of a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person of 20% or more of the
outstanding shares of common stock. However, neither Paul J. Klaassen nor
Teresa M. Klaassen (nor their affiliates, associates and estates), each of
whom, as of the date of adoption of the Rights Agreement, beneficially owned
in excess of 20% of the outstanding shares of common stock, will be deemed an
"Acquiring Person," unless they acquire an additional 2% of the common stock
which was outstanding at the time of completion of Sunrise's initial public
offering.
In general, if a person becomes the beneficial owner of 20% or more of the
then outstanding shares of common stock, each holder of a right may exercise
the right by purchasing common stock having a value equal to two times the
Purchase Price. If at any time following the Stock Acquisition Date (1)
Sunrise is acquired in a merger or other business combination transaction in
which it is not the surviving corporation (other than a merger which follows
an offer described in the preceding paragraph), or (2) 50% or more of
Sunrise's assets or earning power is sold or transferred, each holder of a
right shall have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the Purchase Price. The
Board of Directors of Sunrise generally may redeem the rights at a price of
$.005 per right at any time until ten days after an Acquiring Person has been
identified as such.
12. NET INCOME PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income per common share amounts presented in the accompanying consolidated
statements of operations (in thousands, expect per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------------------------------------
Numerator:
Net income $24,278 $20,213 $ 22,312
==========================================
Denominator:
Denominator for basic net income per
common share-weighted average shares 21,654 21,045 19,288
Effect of dilutive securities:
Employee stock options 366 544 744
------------------------------------------
Denominator for diluted net income
per common share-weighted average
shares plus assumed conversions 22,020 21,589 20,032
==========================================
Basic net income per common share $ 1.12 $ 0.96 $ 1.16
==========================================
Diluted net income per common share $ 1.10 $ 0.94 $ 1.11
==========================================
Certain shares issuable upon the exercise of stock options or convertible
notes have been excluded from the computation because the effect of their
inclusion would be anti-dilutive. Options are included under the treasury
stock method to the extent they are dilutive.
13. ACQUISITIONS AND DISPOSITIONS
In March 1998, Sunrise sold its minority interest in a tenancy-in-common
that owned one facility resulting in a $0.5 million realized gain.
F-18
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SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1998, Sunrise completed the sale of two facilities for an
aggregate sales price of $29.3 million in cash. Sunrise will realize up to a
$6.4 million gain from the transaction over a maximum of 15 quarters. Sunrise
recognized a gain of $1.9 million and $1.5 million on the sale in 1999 and
1998, respectively. The remaining gain was deferred, the recognition of which
is contingent upon future events. For tax purposes, the transaction is treated
as a tax-free exchange. Sunrise operates the two facilities under long-term
operating agreements.
In June 1999, Sunrise completed the sale of two facilities for an
aggregate sales price of $27.9 million in cash. Sunrise realized an $11.2
million gain from the transaction over three quarters. Sunrise recognized a
gain of $5.1 million on the sale in 1999 and $6.1 million in 2000. For tax
purposes, the transaction is treated as a tax-free exchange. Sunrise operates
the two facilities under long-term operating agreements.
On May 14, 1999, Sunrise completed its acquisition of Karrington Health,
Inc. through a tax-free, stock-for-stock transaction in which it issued 2.3
million common shares in exchange for all the outstanding shares of Karrington
and Karrington became a wholly owned subsidiary of Sunrise. The total
transaction was valued at $85.1 million, including merger and stock issuance
costs of $8.4 million and the fair value of assumed employee stock options of
$1.5 million. Karrington operates assisted living facilities providing
services to the elderly.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of Karrington for the period from
May 14, 1999 (excluding assets held for sale) are included in the accompanying
consolidated financial statements. The purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values.
The excess purchase price over the estimated fair value of the net assets
acquired was $35.1 million. Sunrise acquired cash of $2.4 million in the
Karrington acquisition, which is included in the statement of cash flows. The
remainder of the Karrington transaction was a non-cash transaction for the
statement of cash flows.
Sunrise recorded non-recurring charges of $5.1 million during 1999, of
which $4.4 million related to the consolidation and integration of the
acquired operations and development pipeline of Karrington and $0.7 million
related to the termination of a property acquisition agreement. Of the $5.1
million non-recurring charges, $3.8 million were non-cash transactions.
The following unaudited pro forma information presents the results of
operations of Sunrise for the year ended December 31, 1999, as if the
acquisition of Karrington had taken place as of January 1, 1999. This pro
forma information excludes the results of operations of the assets held for
sale. See Note 14 Assets Held For Sale. (in thousands, except per share
amounts)
1999
------------
Revenue $ 268,074
Net income 13,101
Basic earnings per share 0.60
Diluted earnings per share 0.58
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
On June 29, 2000, Sunrise entered into a definitive agreement for the
sale of 11 assisted living communities to a real estate venture company in
which Sunrise owns a 25 percent interest. Also, on June 29, 2000, the venture
company closed on three of the 11 properties, located in Wayland,
Massachusetts, West Essex, New Jersey and Oakton, Virginia, for an aggregate
sales price of $44 million. The transaction will result in up to $13.3 million
in gain over the four quarters following the sale, subject to certain
contingencies being met, of which $11.1 million was recognized in 2000. On
F-19
91
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 29, 2000, the venture company closed on the remaining eight
properties for an aggregate sales price of $111 million. The eight properties
are located in seven states. The venture company assumed approximately $75
million of debt secured by the eight properties. The transaction will result
in up to $26.0 million in gain over the four quarters following the sale,
subject to certain contingencies being met, of which $13.1 million was
recognized in 2000. Sunrise will continue to provide day-to-day management of
the communities under long-term operating agreements.
On December 28, 2000, Sunrise sold its entire interest in two assisted
living communities located in Rockville, Maryland, and San Mateo, California,
to a privately held real estate company for a purchase price of $28.1 million.
The transaction will result in up to $7.8 million in gain over the four
quarters following the sale, subject to certain contingencies being met, of
which $1.8 million was recognized during 2000. Sunrise will continue to
provide day-to-day management of the communities under long-term operating
agreements.
On December 28, 2000, Sunrise entered into a definitive agreement to
sell nine assisted living communities to a limited partnership for an
aggregate sales price of $131.0 million. Sunrise will continue to operate the
communities under long-term management agreements and Sunrise will retain a
25% ownership interest in the limited partnership. The nine communities are
located in three states. Sunrise closed on this sale on February 23, 2001.
14. ASSETS HELD FOR SALE
In connection with its acquisition of Karrington, Sunrise intended to sell
16 of Karrington's operating properties. Sunrise has concluded its efforts to
sell these former Karrington operating properties held for sale. In September
2000, the Company sold two former Karrington operating properties for their
book value of approximately $7.0 million. Sunrise terminated discussions to
sell the remaining 14 operating properties held for sale because market
conditions for selling these properties in secondary markets are depressed and
the Company believes that it can obtain better prices in the future.
Accordingly, these properties have been reclassified from assets held for sale
to operating properties and the operations of these properties have been
included in Sunrise's consolidated results beginning in the third quarter of
2000.
15. COMMITMENTS
Sunrise leases its corporate offices, regional offices, development
offices and warehouse space under various leases. During 1998, Sunrise entered
into an agreement to lease new office space for its corporate headquarters.
The lease commenced upon completion of the building in July 1999 and expires
in July 2011. The lease has an initial annual base rent of $1.2 million. The
base rent escalates approximately 2.5% per year in accordance with a base rent
schedule. In September 1999, Sunrise amended another corporate lease to
increase the amount of leased premises and extend the maturity date to October
2004. The initial annual lease payments amount to $462,000, and the base rent
is subject to annual increases based on the consumer price index from a
minimum of 2% to a maximum cap of 3% per year. The warehouse lease has a term
of seven years and expires in May 2004. The initial annual base rent payments
amount to $148,000, subject to annual increases of 3%. Also required are an
amortization rent of $88,000 and a portion of operating expenses. Various
other leases expire between 2001 and 2003.
Sunrise has also entered into operating leases for five facilities. Two
facilities commenced operations during 1997, two facilities commenced
operations in 1998, and the other facility commenced operations in 1999. In
May 1999 in connection with the acquisition of Karrington, Sunrise assumed six
operating leases for six assisted living properties and a ground lease. The
operating lease terms vary from 15-20 years, with two ten-year extension
options. Sunrise also has four other ground leases related to two facilities
in operation and two facilities under construction. Lease terms range from 30
to 99 years and are subject to annual increases based on the consumer price
index and/or stated increases in the lease.
In December 1998, a subsidiary of Sunrise entered into a three-year
operating lease for six assisted living facilities. Sunrise has guaranteed the
payment of all obligations of its subsidiary under the lease.
F-20
92
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There are no extension options, however Sunrise has the option, 120 days prior
to the expiration date of the lease, of either purchasing or selling all the
leased properties. If the company exercises its option to sell the properties
and the proceeds from the sale exceed the obligation under the lease, Sunrise
is entitled to the excess. However, if the proceeds from the sale are less
than the obligation under the lease, Sunrise is obligated to fund the
difference. Sunrise is responsible for the payment of real estate taxes,
insurance and other operating expenses. The lease requires Sunrise to maintain
certain coverage ratios, liquidity and net worth. These six leased properties
were sublet to Karrington until the acquisition of Karrington in May 1999.
During 2000, Sunrise purchased two of the properties for $17.7 million.
Future minimum lease payments under office, equipment, ground and other
operating leases as of December 31, 2000 are as follows (in thousands):
2001 $ 36,703
2002 11,013
2003 10,850
2004 10,618
2005 10,182
Thereafter 134,183
--------------
$213,549
==============
Sunrise has entered into contracts to purchase and lease additional sites.
Total contracted purchase price of these sites is $61.8 million. Sunrise is
pursing additional development opportunities and also plans to acquire
additional facilities as market conditions warrant.
16. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
The primary components of Sunrise's net deferred tax asset are as follows
(in thousands):
DECEMBER 31,
-------------------
2000 1999
-------------------
Deferred tax assets:
Operating loss
carryforward $ 11,632 $ 18,386
Accrued expenses 5,792 3,525
Other 2,024 2,001
-------------------
Total deferred tax assets 19,448 23,912
-------------------
Deferred tax liabilities:
Property and equipment (41,128) (37,177)
Other (3119) (642)
-------------------
Total deferred tax
liabilities (44,247) (37,819)
-------------------
Net deferred tax liability $(24,799) $(13,907)
===================
F-21
93
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On May 14, 1999, Sunrise completed its acquisition of Karrington Health,
Inc. through a tax-free, stock-for-stock transaction. The acquisition was
accounted for using the purchase method of accounting. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Accordingly, the book basis of a majority of the
property and equipment acquired from Karrington exceeds its respective tax
basis. A net deferred tax liability of approximately $35.5 million was
recorded at the time of purchase to account for the Karrington acquisition.
At December 31, 2000, Sunrise had federal net operating loss carryforwards
available to offset future taxable income of approximately $29.2 million,
which expire from 2010 through 2019. This amount includes approximately $11.9
million of net operating loss carryforwards acquired from Karrington, which
are subject to certain limitations on utilization. At December 31, 2000,
Sunrise had alternative minimum tax credits of approximately $0.7 million
available to offset future federal tax liabilities. These tax credits do not
expire. Various Sunrise entities have fully utilized their net operating loss
carryforwards for state tax purposes.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Sunrise expects to fully utilize the loss carryforward prior to expiration.
Significant components of the provision for income taxes are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
Current:
Federal $ 1,501 $ 4,738 $ 3,521
State 2,754 1,160 457
-----------------------------------------
Total current 4,255 5,898 3,978
Deferred:
Federal 11,235 4,507 3,891
State 32 (8) 1,897
Decrease in valuation allowance - (2,569) (9,766)
-----------------------------------------
Total deferred 11,267 1,930 (3,978)
-----------------------------------------
Total tax expense $ 15,522 $ 7,828 $ -
=========================================
In 2000, 1999 and 1998, Sunrise paid federal and state income taxes of $2.8
million, $1.8 million and $0.9 million, respectively. Current taxes payable
for 2000 and 1999 have been reduced by approximately $1.1 million and $7.9
million, respectively, reflecting the tax benefit to Sunrise of employee stock
options exercised during the year. The tax benefit has been recognized as an
increase to additional paid-in capital.
The differences between the tax provision calculated at the statutory
federal income tax rate and the actual tax provision recorded for each year
are as follows:
YEAR ENDED DECEMBER 31,
2000 1999 1998
------------------------------------
Statutory rate 35% 35% 35%
State taxes, net 7 7 6
Tax exempt interest (1) (3) (4)
Other (2) (2) 7
Valuation allowance - (9) (44)
------------------------------------
39% 28% 0%
====================================
F-22
94
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. RELATED-PARTY TRANSACTIONS
SUNRISE ASSISTED LIVING FOUNDATION
Paul and Teresa Klaassen, Sunrise's founders, operate two schools,
including day care centers, through a not-for-profit organization, Sunrise
Assisted Living Foundation, Inc. ("SALF"). SALF reimbursed Sunrise monthly for
use of office facilities and support services in the amounts of $84,000 in
2000, 1999 and 1998. Such amounts are included in operating revenue.
During 1999, a subsidiary of SALF provided certain health care services to
residents of Sunrise facilities located in Illinois. The SALF subsidiary
entered into various administrative, accounting and collection service
agreements with Sunrise affiliates. The service agreements allow for
reimbursement of costs of service plus a management fee. Sunrise recognized
management fees of $204,000 and $49,000 in 2000 and 1999, respectively. As of
December 31, 2000, Sunrise had a receivable of $0.4 million from SALF under
such service agreements.
GROUND LEASE
Sunrise has a 99 year ground lease with one of Sunrise's founders. The
ground lease expires in May 2085. The basic monthly rent is adjusted annually
based on the consumer price index. Rent expense under this lease was $262,000
for each of the years ended December 31, 2000, 1999 and 1998. Sunrise
subleases one-half of this ground lease to SALF. The sublease expires in May
2085 and requires payments equal to 50% of all payments made by Sunrise under
the ground lease. Sublease rental income was $131,000 for each of the years
ended December 31, 2000, 1999 and 1998. Lease expense is recorded net of the
sublease income.
JOINT VENTURES
Sunrise has entered into unconsolidated joint venture arrangements with a
third party that is providing up to $70.8 million of the equity capital to
develop up to 37 projects in the United States, United Kingdom and Canada. A
director of Sunrise is a managing director in the third party that is
providing the equity capital and a former director of Sunrise is a general
partner in the third party. The joint ventures have completed 13 assisted
living facilities, 12 in the United States and one in the United Kingdom and
are currently developing 13 assisted living facilities, three in the United
States, two in the United Kingdom and eight in Canada. Sunrise is providing
management and development services to the joint ventures on a contract-fee
basis with rights to acquire the assets in the future and has agreed to invest
up to $4.3 million of equity capital in the joint ventures. Sunrise recognized
development fees from these joint ventures of $7.4 million and $12.7 million,
respectively, in 2000 and 1999. As of December 31, 2000 and 1999, the third
party had provided approximately $42.0 million and $22.5 million,
respectively, and Sunrise has provided $4.4 million and $2.0 million,
respectively, of equity capital to the joint ventures.
18. PROFIT-SHARING PLAN
Sunrise has a profit-sharing plan (the "Plan") under Internal Revenue Code
Section 401(k). All employees of Sunrise are covered by the Plan and are
eligible to participate in the Plan after meeting certain eligibility
requirements. The Plan contains three elements -- employee salary
contributions, discretionary matching employer contributions and special
discretionary employer contributions. Deferred salary contributions are made
through pre-tax salary deferrals of between 1% and 16%. Matching contributions
made by Sunrise totaled $347,000, $278,000 and $177,000 during 2000, 1999 and
1998, respectively.
Sunrise has made amendments to the Plan that will be effective January 1,
2001. Employees will vest in their matching employer contributions 100% over
four years at 25% each year. When an employee reaches 5 years of service,
Sunrise will contribute $0.50 for every dollar the employee contributes up to
7%
F-23
95
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the employee's annual compensation. If the employee has less than 5 years
of service, the employer contribution will be $0.25 for every dollar the
employee contributes up to 7% of the employee's annual compensation. The Plan
has eliminated the discretionary matching contributions, all employees who
earn $85,000 or less annually are eligible to receive regular matching
contributions by Sunrise provided the employee meets certain eligibility
requirements.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts Sunrise could realize on disposition of
the financial instruments. The use of different market assumptions or
estimation methodologies may have an effect on the estimated fair value
amounts. The fair values of the notes receivable and investments are discussed
in Notes 4 and 5.
Cash equivalents, accounts receivable, accounts payable and accrued
expenses, marketable securities, investments and other current assets and
liabilities are carried at amounts which reasonably approximate their fair
values.
Fixed rate debt with an aggregate carrying value of $352.8 million,
excluding a $0.2 million loan discount, has an estimated aggregate fair value
of $336.2 million at December 31, 2000. Estimated fair value of fixed rate
debt is based on interest rates currently available to Sunrise for issuance of
debt with similar terms and remaining maturities. The estimated fair value of
Sunrise's variable rate debt is estimated to be approximately equal to its
carrying value of $322.1 million at December 31, 2000. The interest rate swap
related to floating rate debt (see Note 8) has an estimated fair value of $0.1
million at December 31, 2000.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 2000. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, these amounts have not been comprehensively
revalued for purposes of these financial statements since December 31, 2000
and current estimates of fair value may differ from the amounts presented
herein.
20. INFORMATION ABOUT SUNRISE'S SEGMENTS
In the first quarter of 2000, Sunrise reorganized and began reporting the
results of its two operating divisions - Sunrise Management Services and
Sunrise Properties . Sunrise Assisted Living, Inc. continues as the parent
company of each division and develops Sunrise's strategy and overall business
plan and coordinates the activities of all business divisions. The Sunrise
Management Services division provides full-service assisted living management
services, in the U.S. and internationally, for all homes owned by Sunrise or
managed by Sunrise for third-parties. The Sunrise Management Services division
also provides consulting services on market and site selection and pre-opening
sales and marketing. The Sunrise Properties division is responsible for all
Sunrise real estate operations, including development, construction, property
management, project and permanent financing, real estate and property sales.
Prior year segments have been restated to reflect current segments.
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96
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment information is as follows (in thousands):
YEAR ENDED DECEMBER 31,
2000 1999 1998
--------- ---------- ---------
Operating Revenue:
Sunrise Management Services $227,278 $170,892 $107,137
Sunrise Properties 312,810 234,620 160,297
Elimination of intersegment revenue (195,302) (150,293) (96,722)
---------- ---------- ---------
Total consolidated operating revenue 344,786 255,219 170,712
---------- ---------- ---------
Operating Expenses:
Sunrise Management Services 206,060 151,657 98,159
Sunrise Properties 245,037 198,739 127,772
Elimination of intersegment expenses (195,302) (150,293) (96,722)
---------- ---------- ---------
Total consolidated operating expenses 255,795 200,103 129,209
---------- ---------- ---------
Segment operating income 88,991 55,116 41,503
Reconciliation to net income:
Corporate operating expenses 8,481 3,710 3,307
---------- ---------- ---------
Income from operations 80,510 51,406 38,196
Interest expense, net (37,566) (21,750) (15,430)
Equity in losses of unconsolidated assisted living
facilities (2,941) (1,239) 54
Minority interests (203) (376) (508)
Provision for income taxes (15,522) (7,828) -
---------- ---------- ---------
Total consolidated net income $ 24,278 $ 20,213 $ 22,312
========== ========== =========
Management services revenue from operations in England were $0.7 million
and $0.8 million for 2000 and 1999, respectively. Management services revenue
from operations in Canada were $2.4 million and $1.2 million for 2000 and
1999, respectively. The remaining revenues and all long-lived assets are
domestic.
21. QUARTERLY RESULT OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the
fiscal quarters: (in thousands, except per share amounts):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- -------------- ------------ -----------
2000
- ----
Operating revenue $76,802 $82,329 $90,484 $95,171
Net income 4,094 4,901 6,486 8,797
Diluted net income per
Common share $ 0.19 $ 0.22 $ 0.30 $ 0.39
1999
- ----
Operating revenue 51,378 61,524 68,133 74,184
Net income 7,226 5,416 3,711 3,860
Diluted net income per
Common share $ 0.35 $ 0.25 $ 0.17 $ 0.18
The sum of diluted net income per common share for the four quarters in 2000
and 1999 may not equal diluted net income per common share for the year due to
the changes in the number of weighted average shares outstanding and
fluctuations in the market price of Sunrise's common stock during the year.
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