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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1996
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.)
9401 Lee Highway, Suite 300
Fairfax, VA 22031
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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)
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
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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 17, 1997 is $145,444,050. */
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 17, 1997: 18,641,518 shares.
Documents Incorporated by Reference:
Part II: Portions of the Annual Report to Stockholders for the year ended
December 31, 1996.
Part III: Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on April 28, 1997.
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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.................................................................... 19
Item 3. Legal Proceedings............................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........................... 19
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters.................................................. 19
Item 6. Selected Financial Data....................................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 20
Item 8. Financial Statements and Supplementary Data................................... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................................... 20
PART III Item 10. Directors and Executive Officers.............................................. 20
Item 11. Executive Compensation........................................................ 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................ 20
Item 13. Certain Relationships and Related Transactions................................ 20
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................................... 21
SIGNATURES ........................................................................................... 22
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This Form 10-K contains certain forward-looking statements relating to the
Company's development and acquisition program over the next three years that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the captions "Item
1. Business -- Facility Development," "--Facility Acquisitions" and "--Need
For Additional Financing." Unless the context suggests otherwise, references in
this Form 10-K to the "Company" or "Sunrise" mean Sunrise Assisted Living,
Inc. and its subsidiaries and predecessor entities.
PART I
ITEM 1. BUSINESS.
GENERAL
Sunrise Assisted Living, Inc. (the "Company" or "Sunrise") is a
leading provider of assisted living services to the elderly. The Company
currently operates 37 facilities in 11 states with a capacity of approximately
3,428 residents, including 32 facilities owned by the Company or in which it has
ownership interests and five facilities managed for third parties. The Company
had revenues of $47.3 million, and incurred a net loss of $4.8 million, in
1996. Approximately 99% of the Company's 1996 revenues were derived from
private pay sources.
The Company's three-year growth objective is to develop at least 52 new
Sunrise model assisted living facilities with a capacity of approximately 4,680
residents. As of March 17, 1997, the Company has obtained zoning approval for
28 new facilities with a resident capacity of 2,463, including 22 facilities
currently under construction. The Company has also entered into contracts to
purchase 21 additional sites and to lease two additional sites, and is
negotiating purchase terms for the remaining sites. During 1996, the Company
completed development of four of its model facilities ( Raleigh, N.C.,
Pikesville, MD, Blue Bell, PA, and Columbia, MD). In addition to its
construction and development plans, the Company plans to acquire up to 10
additional facilities over the next three years, including one facility located
in Valencia, California (the "California Property") that was acquired in
February 1997 for $13.75 million in cash. In October 1996, the Company completed
its acquisition of five facilities located in the southeast United States (the
"Southeast Properties") for an aggregate purchase price of $34.0 million in
cash. See "--Facility Development" and "--Facility Acquisitions."
On June 5, 1996, the Company completed its initial public offering and
on October 31, 1996 the Company completed a follow-on public offering. Net
proceeds to the Company from these two offerings totaled approximately $196.1
million. The net proceeds have been used as follows: $16.6 million in partial
payment of the Company's long-term debt; $10.2 million to redeem previously
outstanding shares of redeemable preferred stock; $47.8 million to acquire the
Southeast Properties and the California Property; and the balance to fund
continued development of new Sunrise model facilities, as well as for working
capital and general corporate purposes. To achieve its growth objectives, the
Company 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."
The Company was incorporated in Delaware on December 14, 1994 in order
to combine various activities relating to the development, ownership and
operation of the Sunrise assisted living facilities held by predecessor
entities. The predecessor entities consisted of a management company, a
development company, and various entities that held 100% ownership interests in
15 facilities, 50% ownership interests in five facilities and minority
ownership interests in two facilities.
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THE ASSISTED LIVING INDUSTRY
The Company believes that the assisted living industry is emerging 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 ("ADLs"), such as
bathing, eating, personal hygiene, grooming and dressing. Certain 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. Annual expenditures in the assisted living industry have been
estimated to be approximately $12 billion, including facilities ranging from
"board and care" to full-service assisted living facilities such as those
operated by the Company. The Company believes that consumer preference and
demographic trends will allow assisted living to remain one of the fastest
growing segments of elder care.
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. The Company 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, the Company'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." The Company believes that
its operating philosophy is one of its strengths. Furthermore, in implementing
its philosophy, the Company 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; the Company's proprietary training programs for its management,
Administrators and Care Managers; the Company's quality assurance programs; the
full range of assisted living services offered by the Company; and the
architecture and purpose-built design of Sunrise's "Victorian" model
facilities.
SERVICES
The Company offers a full range of assisted living services based upon
individual resident needs. Upon admission, the Company, the resident and the
resident's family assess the level of care required and jointly develop a
specific care plan. This care plan includes selection of resident
accommodations and determination of the appropriate level of care. The care
plan is periodically reviewed and updated by the Company, the resident and the
resident's family. By offering a full range of services, including Basic Care,
Assisted Living Plus Care ("Plus Care"), Medication Management and Alzheimer's
Care, the Company can accommodate residents with a broad range of service needs
and enable residents to age in place. In addition, upon admission the Company
generally charges each new resident a one-time community fee typically equal to
two months of daily resident fees, which is refundable on a prorated basis if
the resident leaves the facility during the first 90 days. Daily resident fees
are periodically revised based on increased care or modifications to a
resident's care plan.
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The average daily resident fee for owned facilities operated by the
Company for at least 12 months, excluding facilities with temporary vacancies
due to renovations ("Same Facilities") was approximately $83 for 1996, $80 for
1995 and $75 for 1994.
BASIC CARE
The Company's Basic Care program is provided to all residents and
includes: assistance with ADLs, 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 physician
offices, stores and community services; assistance with coordination of
physician care, physical therapy and other medical services; health promotion
and related programs; personal laundry services; housekeeping services; and
social and recreational activities.
ASSISTED LIVING PLUS CARE
Through the Company's Plus Care program, residents who require more
frequent or intensive assistance or increased care or supervision are provided
extra care and supervision. The Company charges an additional daily fee based
on additional staff hours of care and services provided. The Plus Care program
allows the Company, 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, 1996, approximately 49% of
the Company's assisted living residents participated in the Plus Care program.
MEDICATION MANAGEMENT
Many of the Company'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. The Company
charges an additional fixed daily fee for this service. At December 31, 1996,
approximately 57% of the Company's assisted living residents participated in
the Medication Management program.
ALZHEIMER'S CARE
The Company believes its Alzheimer's Care called the Sunrise
Reminiscence Program distinguishes it from many other assisted living providers
who do not provide such specialized care. The Sunrise Reminiscence Program
provides the attention, care programs and services needed to help cognitively
impaired residents 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. The Company
charges each cognitively impaired resident a daily fee that includes one hour
of additional staff time 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, 1996, approximately 25% of
the Company's assisted living residents participated in the Sunrise
Reminiscence Program.
THE SUNRISE "VICTORIAN" MODEL FACILITY
The Company's signature Victorian model facility, first designed in
1985, is a freestanding, residential-style facility with a capacity of 70 to
110 residents. The building ranges in size from approximately 40,000 to 60,000
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 reading rooms, family or living rooms and other areas (such as
bistros and ice cream parlors) designed to promote interaction among residents.
The Company has four basic building plan designs, which
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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 a family or living room. The ground level typically
contains a kitchen and common dining area, administrative offices, a laundry
room, a private dining room, library or living room, and bistro or ice cream
parlor. 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. The Company believes its model facility meets the desire of many
individuals to move to a new residence at least as comfortable as their former
home. The Company believes that its residential environments also accomplish
several other objectives, including: (i) lessening the trauma of change for
elderly residents and their families; (ii) achieving operational efficiencies
through proven designs; (iii) facilitating resident mobility and ease of access
by care givers; and (iv) differentiating the Company 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:
YEAR DEVELOPED SUNRISE
OPENED BY OR MODEL RESIDENT OWNERSHIP
FACILITY LOCATION SUNRISE ACQUIRED FACILITY CAPACITY PERCENTAGE(1)
-------- -------- --------- ---------- -------- --------- --------------
Sunrise of Oakton Oakton, VA 1981 Acquired(2) 51 100.0%
Sunrise of Leesburg Leesburg, VA 1984 Acquired(2) 35 100.0
Sunrise of Warrenton Warrenton, VA 1986 Acquired(2) 37 100.0
Sunrise of Arlington Arlington, VA 1988 Developed X 58 100.0
Sunrise of Bluemont Park Arlington, VA 1990 100.0
Potomac Developed X 59
Shenandoah Developed X 77
James Developed X 59
Sunrise of Mercer Island Seattle, WA 1990 Developed X 59 100.0
Sunrise of Fairfax Fairfax, VA 1990 Developed X 59 100.0(3)
Sunrise of Queen Anne Seattle, WA 1991 Acquired 136 33.3(4)
Sunrise of Frederick Frederick, MD 1992 Developed X 86 100.0
Sunrise of Countryside Sterling, VA 1992 100.0
East Building Developed(5) X 66
West Building Developed(5) X 64
Sunrise of Gunston Lorton, VA 1992 Developed(5) X 67 100.0
Sunrise of Atrium Boca Raton, FL 1992 Acquired 210 100.0
Sunrise of Falls Church Falls Church, VA 1993 Developed X 66 100.0
Sunrise of Village House Gaithersburg, MD 1993 Acquired 155(6) 80.0
Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(7)
Sunrise of Gardner Park Peabody, MA 1994 Developed X 59 50.0(7)(8)
Sunrise of Annapolis Annapolis, MD 1995 Developed X 88 51.0(8)(9)
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Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0
Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 50.0(8)(10)
Sunrise of Pikesville Pikesville, MD 1996 Developed X 103 51.0(8)(9)
Huntcliff Summitt Atlanta, GA 1996 Acquired 254 100.0(11)(12)
Sunrise of Northshore St. Petersburg, FL 1996 Acquired 157 100.0(11)(13)
Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0(11)
Sunrise of Columbus Columbus, GA 1996 Acquired 26 100.0(11)
Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0(11)
Sunrise of Blue Bell Philadelphia, PA 1996 Developed X 97 100.0
Sunrise of Columbia Columbia, MD 1996 Developed X 96 100.0
Sunrise of Hunter Mill Oakton, VA 1997 Developed X 96 100.0
Sunrise of Sterling Canyon Valencia, CA 1997 Acquired 130 100.0
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Total 2,810
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(1) Fifteen of the wholly owned facilities (Oakton, Leesburg, Warrenton,
Arlington, Bluemont Park (three facilities), Mercer Island, Fairfax,
Frederick, Countryside (two facilities), Gunston, Atrium and Falls Church)
serve as collateral for a $87.0 million mortgage loan. Ten other owned
facilities are subject to one or more mortgages or deeds of trust that
mature between 1998 and 2033 and bear interest at rates ranging from
6.875% to 9.125% annually as of December 31, 1996. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" and Note 6 of Notes to
Consolidated and Combined Financial Statements. All facilities that are
wholly owned by the Company are consolidated in the Consolidated and
Combined Financial Statements. The Village House, Gardner Park and Raleigh
facilities are held by limited liability companies or limited partnerships
in which the Company holds the ownership interests indicated in the table.
The Company is the general partner or managing member of such entities and
through the partnership or operating agreements and the management
agreements for the facilities the Company controls their ordinary course
business operations. Therefore, the Village House, Gardner Park and
Raleigh facilities are also consolidated in the Consolidated and Combined
Financial Statements. The ordinary course business operations of the Queen
Anne, Towson, Annapolis and Pikesville facilities are not currently
controlled by the Company and, therefore, are accounted for under the
equity method of accounting.
(2) Each of these facilities has been redeveloped in a manner consistent with
the Sunrise model.
(3) Subject to long-term ground lease.
(4) This property is held as a tenancy-in-common. The remaining ownership
interests are owned by unaffiliated third parties. The Company manages
this facility pursuant to a management contract that is subject to annual
renewal at the option of the owners.
(5) These facilities were initially developed by the Company for third parties
and were subsequently acquired by the Company in 1992.
(6) This facility is licensed for 40 assisted living residents. The remainder
of the resident capacity is for independent living residents.
(7) The remaining ownership interests are owned by third parties. Sunrise
manages each of these facilities.
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(8) A current officer and a former employee of the Company 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.
(9) Commencing on June 1, 1998, the third-party owner of the remaining
interests in the limited partnership that owns this facility ("the
Partnership") has the right to require the Company to buy the facility
from the Partnership for 112 1/2% of its "appraised fair market value" as
mutually agreed upon by the parties or, if they cannot agree, as
determined by an appraiser mutually selected by the parties. Commencing
three years after the date that the certificate of occupancy is received
for the facility (November 1998 for Annapolis and April 1999 for
Pikesville) and continuing for two years thereafter, the Company has the
right to give written notice to such third-party owner that it desires to
buy the facility from the Partnership for 112 1/2% of its appraised fair
market value. If the Company has not given such notice during such
two-year period, then the Company will be deemed to have given such
notice. Such third-party owner will then give notice either that it
consents to such a sale of the facility or that it does not consent. If
the third-party does not consent to such sale, the management agreement
for the facility with the Company would be extended for an additional
seven-year period. After the expiration of such seven-year period, the
third-party would have the right to require the Company to purchase, and
the Company would have the right to purchase, the facility from the
Partnership at 115% of appraised fair market value. If any person or
entity acquires ownership of more than 50% of the outstanding voting stock
of the Company (other than the Company, any subsidiary of the Company,
Paul or Teresa Klaassen, the Company's co-founders, or any affiliate,
associate or the estate of either founder), then the put rights held by
the third party owner become immediately exercisable.
(10) On March 17, 1997, the Company provided notice of its exercise of its
option to purchase all of the third-party interests in the limited
liability company that owns this facility. Under the terms of the
purchase option, the purchase will be completed on or before May 1, 1997,
the price will be the greater of (i) $0.8 million, or (ii) the third
party's 50% interest multiplied by the net value of the limited liability
company's business as determined by applying a 12.5% capitalization rate
to the net operating income of the limited liability company, and
subtracting limited liability company liabilities.
(11) The Company intends to use these facilities as collateral for financing.
(12) This facility is licensed for 24 assisted living residents. The remainder
of the resident capacity is for independent living residents. Excludes 12
units owned by the occupants thereof. The occupants can require the
Company to repurchase the units for their original purchase prices
(aggregating approximately $1.9 million) under certain circumstances. The
Company has a right to purchase the units at fair market value upon the
happening of certain events and has a right of first refusal on sales of
the units.
(13) This facility is licensed for 26 skilled nursing residents. The remainder
of the resident capacity is for assisted living residents.
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MANAGED FACILITIES
The Company also manages facilities for third-party owners. The
following table sets forth certain information regarding facilities currently
being managed by the Company or for which the Company has entered into
development contracts which provide that the Company will manage the facility
following completion of construction:
SUNRISE CONTRACT
MODEL RESIDENT INITIAL EXPIRATION
FACILITY LOCATION FACILITY CAPACITY CONTRACT DATE DATE
-------- -------- -------- -------- ------------- ----
Woodbury Lake Deptford, NJ X 87 March 1993 June 2001(1)
Mill Run(2) Bristol, PA 186 April 1992 April 1997
Lincolnian(3) Fairfax, VA 84 June 1989 June 1997
John Bertram House Salem, MA 32 June 1994 Oct. 1998
Mount Laurel Mount Laurel, NJ X 90 May 1994(4) July 2021
Boston(5) Boston, MA 139 July 1995 Jan. 2002
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Total 618
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(1) This contract is subject to two five-year renewals. Pursuant to the
management agreement, the Company has a right of first refusal to purchase
this facility if the owner receives a bona fide offer to purchase the
facility during the term of the management agreement.
(2) The Company owns $5.4 million carrying value of tax exempt mortgage bonds
on this facility. See Note 4 of Notes to Consolidated and Combined
Financial Statements.
(3) The Company does not provide financial or accounting services for this
facility.
(4) This facility is currently under construction. The Company has entered into
a development contract for this facility which provides that the Company
will begin managing Mt. Laurel for a 25-year period following completion of
construction.
(5) This facility opened on November 12, 1996 and is licensed for 139
continuing care retirement community residents.
The Company also manages two skilled nursing facilities, Pembrook and
Prospect Park, located in West Chester and Prospect Park, Pennsylvania. The
Pembrook facility has 240 beds and the Prospect Park facility has 180 beds.
Both of these facilities are owned by a single unaffiliated nonprofit
corporation. The management contracts for these facilities were initially
entered into in May 1994 and expire in April 1999. The owner of these
facilities has the option to terminate the management agreements in May 1997.
The Company does not provide financial or accounting services for these
facilities.
FACILITY DEVELOPMENT
The Company targets sites for development located in major
metropolitan areas and their surrounding suburban communities. In evaluating a
prospective market, the Company considers a number of factors, including
population, income and age demographics, 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.
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The Company continues to develop its Victorian model facilities in
major metropolitan markets. During the next three years, the Company plans to
develop at least 52 additional new Victorian model facilities with an aggregate
capacity of approximately 4,680 residents. To date, the Company has obtained
zoning approval for 28 new facilities with a resident capacity of approximately
2,463 residents, including 22 facilities currently under construction, and has
contracts to purchase 21 additional sites and to lease two additional sites,
and is currently negotiating purchase terms for the remaining sites.
Historically, the Company has completed all but one of the facilities for which
it has obtained zoning approval. The Company bases its development 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 the Company
to control development costs, maintain facility consistency and improve
operational efficiency. Use of the Sunrise model also creates "brand" awareness
in the Company's markets.
The primary milestones in the development process are (i) site
selection and contract signing, (ii) zoning and site plan approval and (iii)
completion of construction. Once a market has been identified, site selection
and contract signing typically take approximately one to three months. Zoning
and site plan approval generally take 10 to 12 months and are typically the
most difficult steps in the development process due to the Company's selection
of sites in established communities which usually require site rezoning.
Facility construction normally takes 10 to 12 months. The Company 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, 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 $5.5 million to $10.0 million. The cost of any particular
facility may vary considerably based on a variety of site-specific factors.
The Company's development activities are coordinated by its
experienced 18-person development staff, which has extensive real estate
acquisition, engineering, general construction and project management
experience. Architectural design and hands-on construction functions are
usually contracted to experienced outside architects and contractors.
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The following table sets forth certain information regarding Sunrise
model facilities that either are owned and under construction or are subject to
purchase contracts and zoned:
ESTIMATED
DEVELOPMENT COMPLETION RESIDENT OWNERSHIP
FACILITY LOCATION PHASE(1) DATE(2) CAPACITY PERCENTAGE
-------- -------- -------- ------- -------- ----------
Sunrise of Petaluma Petaluma, CA Construction 1st Q 1997 84 100.0%(3)(5)
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 97 100.0
Building I metro region
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 71 100.0
Building II metro region
Sunrise of Granite Run Philadelphia, PA Construction 2nd Q 1997 95 100.0
metro region
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 99 50.0(4)(5)
Building I
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 74 50.0(4)(5)
Building II
Sunrise of Springfield Springfield Construction 2nd Q 1997 98 100.0
Sunrise of Old Tappan Old Tappan, NJ Construction 2nd Q 1997 95 100.0
Sunrise of Morris Plains Morris Plains, NJ Construction 2nd Q 1997 95 100.0
Sunrise of Rockville Rockville, MD Construction 3rd Q 1997 86 100.0
Sunrise of Alexandria Alexandria, VA Construction 3rd Q 1997 92 100.0(6)
Sunrise of Wayne Wayne, NJ Construction 3rd Q 1997 90 100.0
Sunrise of Westfield Westfield, NJ Construction 3rd Q 1997 95 100.0
Sunrise of Norwood Boston, MA Construction 3rd Q 1997 90 100.0
metro region
Sunrise of Wayland Boston, MA Construction 3rd Q 1997 68 100.0
metro region
Sunrise of Fresno Fresno, CA Construction 4th Q 1997 84 100.0(3)(5)
Sunrise of East Cobb Atlanta, GA Construction 4th Q 1997 96 100.0
metro region
Sunrise of Decatur Decatur, GA Construction 4th Q 1997 96 100.0
Sunrise of Haverford Haverford, PA Construction 1st Q 1998 73 100.0
Sunrise of Glen Cove Glen Cove, NY Construction 1st Q 1998 80 100.0
Sunrise at Ivey Ridge Atlanta, GA Construction 1st Q 1998 97 100.0
metro region
Sunrise of Walnut Creek Walnut Creek, CA Construction 1st Q 1998 85 100.0
Sunrise of Cohasset Cohasset, MA Zoned 1st half 1998 71 100.0
Sunrise of Pinehurst Denver, CO Zoned 1st half 1998 100 100.0
Sunrise of Holly Denver, CO Zoned 1st half 1998 97 100.0
metro region
Sunrise of Danville Danville, CA Zoned 2nd half 1998 84 100.0
Sunrise of Huntcliff Atlanta, GA Zoned 2nd half 1998 96 100.0
Summit (Assisted Living
Expansion)
Sunrise of Paramus Paramus, NJ Zoned 2nd half 1998 75 100.0
--------
Total 2,463
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(1) The Alexandria and Rockville facilities under construction are subject to
one or more mortgages or deeds of trust that mature between April 2001 and
April 2003 and bear interest at rates currently
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averaging approximately 8.4%. The Abington, Granite Run, Franconia, Old
Tappan, Morris Plains, and Wayne and Norwood facilities are financed under
one of the Company's credit facilities and are subject to one or more
mortgages or deeds of trust that mature June 2001 and currently bear
interest at a rate of approximately 8.4%. Norwood and Wayland facilities
are financed under another one of the Company's credit facilities and are
subject to one or more mortgages or deeds of trust that mature April 2002
and currently bear interest at a rate of approximately 8.1%.
(2) There can be no assurance that construction delays will not be experienced.
(3) Not a Sunrise model facility. Sunrise has entered into an operating lease
with a third-party owner/developer who will complete the facility under a
design reviewed and approved by Sunrise.
(4) The remaining ownership interests are owned by unaffiliated third parties.
Sunrise is the general partner or managing member of the limited
partnership or limited liability company, respectively, that will lease the
facility.
(5) Will be operated under a 15-year operating lease, with two 10-year
extension options.
(6) Subject to a long-term ground lease.
The Company has entered into purchase contracts for 21 additional
sites and leases for two additional sites in North Carolina, Pennsylvania,
Massachusetts, New Jersey, Connecticut, New York, Georgia, Illinois, Colorado,
California and Washington. The Company has completed preliminary feasibility
studies and submitted rezoning requests on five of such sites and is conducting
preliminary feasibility studies on the remaining sites. The Company's
development team is negotiating purchase terms on 18 additional sites
identified for development.
The Company's ability to achieve its development plans will depend
upon a variety of factors, many of which are beyond the Company's control.
There can be no assurance that the Company will not suffer delays in its
development program, which could slow the Company's growth. The successful
development of additional assisted living facilities will involve a number of
risks, including the possibility that the Company may be unable to locate
suitable sites at acceptable prices or may be unable to obtain, or may
experience delays in obtaining, necessary zoning, land use, building,
occupancy, licensing and other required governmental permits and
authorizations. The Company may also incur construction costs that exceed
original estimates, may not complete construction projects on schedule and may
experience competition in the search for suitable development sites. The
Company relies on third-party general contractors to construct its new assisted
living facilities. There can be no assurance that the Company will not
experience difficulties in working with general contractors and subcontractors,
which could result in increased construction costs and delays. Further,
facility development is subject to a number of contingencies over which the
Company will have little control and that may adversely affect project cost and
completion time, including shortages of, or the inability to obtain, labor or
materials, the inability of the general contractor or subcontractors to perform
under their contracts, strikes, adverse weather conditions and changes in
applicable laws or regulations or in the method of applying such laws and
regulations. Accordingly, if the Company is unable to achieve its development
plans, its business, financial condition and results of operations could be
adversely affected.
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FACILITY ACQUISITIONS
The Company and its predecessors have completed 13 acquisitions,
including the five Southeast Properties, the California Property, five
acquisitions of long-term care facilities which have been repositioned to
provide Sunrise assisted living services and two acquisitions of Sunrise model
facilities initially developed for third parties. During the next three years,
the Company plans to acquire up to 9 additional assisted living facilities or
other properties that can be repositioned as Sunrise assisted living
facilities. On January 10, 1997 the Company entered into three
purchase-and-sale agreements, giving the Company the right to purchase three
properties in Northern California for $17.6 million. The properties include a
74-unit assisted living community in the Napa Valley; a 73-unit assisted living
property in Walnut Creek that is currently under construction (acquired by the
Company on February 24, 1997); and a 3.5 acre site in Oakland Hills on which
the Company plans to build a 75- to 80- unit assisted living facility. Because
the purchase-and-sale agreements are subject to, among other things, the
satisfactory completion by the Company of a financial, accounting, regulatory
and property due diligence review, there is no assurance that the acquisition
of the remaining two properties will be consummated. In evaluating possible
acquisitions, the Company considers, among other factors, (i) location,
construction quality, condition and design of the facility, (ii) current and
projected facility cash flow, (iii) the ability to increase revenue, occupancy
and cash flow by providing a full range of assisted living services, (iv) costs
of facility repositioning (including renovations, if any) and (v) the extent to
which the acquisition will complement the Company's development plans.
There can be no assurance that the Company's acquisition of assisted
living facilities will be completed at the rate currently expected, if at all.
The success of the Company's acquisitions will be determined by numerous
factors, including the Company'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
the Company to integrate effectively the operations of acquired facilities. Any
failure by the Company to integrate or operate acquired facilities effectively
may have a material adverse effect on the Company's business, financial
condition and results of operations.
NEED FOR ADDITIONAL FINANCING
To achieve its growth objectives, the Company 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." The Company expects that the
number of owned and operated facilities will increase substantially as it
pursues its development and acquisition programs for new assisted living
facilities. This rapid growth will place significant demands on the Company's
management resources. The Company'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 the Company is unable to manage its growth
effectively, its business, financial condition and results of operations could
be adversely affected.
COMPANY OPERATIONS
OPERATING STRUCTURE
The Company 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 the
Company's operating philosophy. Headquarters staff members in Fairfax, Virginia
are responsible for: the establishment of Company-wide policies and procedures
relating to, among other things, resident care, facility design and facility
operations; billing and collection; accounts payable; finance and accounting;
management of the Company's development and
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acquisition activities; development of employee training materials and
programs; and providing overall strategic direction to the Company. Regional
staff are responsible for: overseeing all aspects of facility-based operations,
including marketing activities; resident care; the hiring of Administrators,
Care Managers and other facility-based personnel; compliance with applicable
local and state regulatory requirements; and implementation of the Company's
development and acquisition plans within a given geographic region.
The Company is currently organized into several regions. Each of the
regions is headed by a Regional Senior Vice President with extensive experience
in the long-term care and assisted living industries. The regional staff
typically consists of a Marketing Specialist, a Resident Care Specialist and a
Human Resources Specialist. The Company's largest region (the Mid-Atlantic)
also has separate Marketing Specialists for existing facilities and those in
development, an Activities Specialist, a Regulatory Specialist, a Dietary
Specialist and a Maintenance Specialist. The Company expects that all regions
will create similar staff positions as the number of facilities in those
regions increases.
FACILITY STAFFING
Each of the Company's facilities has an Administrator responsible for
the day-to-day operations of the facility, including quality of care, social
services and financial performance. Each Administrator receives specialized
training from the Company. The Company believes that the quality and size of
its facilities, coupled with its competitive compensation philosophy, have
enabled it to attract high-quality, professional Administrators. The
Administrator is supported by the Director of Resident Care, a nurse who
oversees the Care Managers and is directly responsible for day-to-day care of
the residents, and by the Director of Community Relations, who oversees
marketing and outreach programs. Other key positions include the Director of
Dining Services, the Activities Director, and in certain homes, the Director of
Alzheimer's Care.
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). To the extent 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.
The Company 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
The Company has attracted, and continues to seek, highly dedicated,
experienced personnel. The Company has adopted formal training procedures and
review and evaluation procedures to help ensure quality care for its residents.
The Company believes that education, training and development enhance the
effectiveness of its employees. All employees are required to complete the
Company's training program, which centers around its proprietary "Five-Star
Educational Program." This program includes a core curriculum consisting of
care basics, Alzheimer's care, resident care
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procedures and communication skills. For Care Managers who desire to advance
into facility management, the Five-Star Education Program provides additional
training in medical awareness and management skills. There are also leadership
certifications in areas such as community relations, facility management,
recruiting, staffing, human resources and regulations. Sunrise also has
developed an "Administrator-in-Training ("AIT") Program" that places an
Administrator trainee in an existing facility to learn the position based on
hands-on experience and direct supervision from a current Administrator. The
AIT Program is intended to ensure that enough Sunrise-trained professionals
will be available to manage acquired and newly developed facilities.
QUALITY ASSURANCE
The Company coordinates quality assurance programs at each of its
facilities through its corporate headquarters staff and through its regional
offices. The Company'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 the Company. In addition to ongoing training and
performance reviews of Care Managers and other employees, the Company's quality
control measures include:
Family and Resident Feedback. The Company surveys residents and family
members on a regular basis to monitor the quality of services provided to
residents. Approximately 30 days after moving into a facility, a resident or
family member is surveyed by a Sunrise representative to inquire about their
initial level of satisfaction. Thereafter, 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 vice presidents and other regional staff on at least a monthly 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, the Company
engages an independent service evaluation company to "mystery shop" the
Company's facilities. These professionals assess the Company's performance from
the perspective of a customer, without the 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.
MARKETING AND SALES
The Company's marketing strategy is intended to create awareness of
the Company 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. A central marketing staff develops overall strategies for
promoting the Company throughout its markets and monitors the success of the
Company's marketing efforts. Each regional office generally has at least one
Marketing Specialist and each facility typically has a Director of Community
Relations who oversees marketing and outreach programs. In addition to direct
contacts with prospective referral sources, the Company also relies on print
advertising, yellow pages advertising, direct mail, signage and special events,
such as grand openings for new facilities, health fairs and community
receptions.
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THIRD-PARTY RESIDENT SERVICES
While the Company serves the vast majority of a resident's needs with
its own staff, certain 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.
On October 8, 1996, the Company entered into an affiliation agreement with
Jefferson Health System ("JHS"), an integrated health care system located in
Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide
residents of Sunrise facilities located in the Philadelphia metropolitan
region, on a preferred (but non-exclusive) basis, with access to certain health
care services offered by JHS. Such health care services may include hospital
services, physician services, rehabilitation services, home health services and
products and mental health services.
COMPETITION
The long-term care industry is highly competitive and the Company
believes that the assisted living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health
care agencies, facility-based service programs, retirement communities and
convalescent centers. In general, regulatory and other barriers to competitive
entry in the assisted living industry are not substantial. In pursuing its
growth strategy, the Company expects to face competition in its efforts to
develop and acquire assisted living facilities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its business and that could
have a material adverse effect on its business, financial condition and results
of operations. Moreover, if the development of new assisted living facilities
outpaces demand for those facilities in certain markets, such markets may
become saturated. Such an oversupply of facilities could cause the Company to
experience decreased occupancy, depressed margins and lower operating results.
Providers of assisted living and related services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the facilities, services offered, family and physician
preferences and location. As assisted living receives increased attention, the
Company believes that competition will grow from new local and regional
companies that operate, manage and develop assisted living facilities within
the same geographic areas as the Company.
STAFFING AND LABOR COSTS
The Company competes with various health care services providers,
including other elderly care providers, in attracting and retaining qualified
or skilled personnel. A shortage of nurses or other trained personnel or
general inflationary pressures may require the Company to enhance its wage and
benefits package to compete effectively for personnel. In anticipation of the
Company's growth plans, the Company's general and administrative expenses
(which consist primarily of staffing and labor expenses, including hiring
additional staff and increasing the salary and benefits of existing staff) have
increased from 12.3% of operating revenue for 1994 to 18.5% of operating
revenue for 1995 and 21.2% of operating revenue for 1996. There can be no
assurance that the Company's labor costs will not continue to increase as a
percentage of operating revenue. Any significant failure by the Company to
attract and retain qualified employees, to control its labor costs or to match
increases in its labor expenses with corresponding increases in revenues could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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GOVERNMENT REGULATION
The Company's facilities 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, among other things: 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 certain health care services from providers of a resident's choice.
Certain of the Company's facilities are also licensed to provide independent
living services which generally involve lower levels of resident assistance. In
several states in which the Company 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 also are subject to state or
local building code, fire code and food service licensure or certification
requirements. Like other health care facilities, assisted living facilities are
subject to periodic survey or inspection by governmental authorities. From time
to time in the ordinary course of business, the Company receives deficiency
reports. The Company reviews such reports and seeks 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 where deficiencies are noted in the inspection
process. Such action may include imposition of fines, imposition of a
provisional or conditional license or suspension or revocation of a license or
other sanctions.
Any failure by the Company to comply with applicable requirements
could have a material and adverse effect on the Company's business, financial
condition and results of operations. Regulation of the assisted living industry
is evolving and the Company's operations could also be adversely affected by,
among other things, future regulatory developments such as mandatory increases
in scope and quality of care to be afforded residents and revisions to
licensing and certification standards. Increased regulatory requirements could
increase costs of compliance with such requirements.
Virginia state and local authorities initiated actions in 1995
alleging that the Company permitted non-ambulatory residents to reside at the
Company's Gunston and Countryside facilities in violation of state licensure
requirements and the state building code. The Company entered into consent
decrees, pursuant to which it agreed to permit only ambulatory residents to
reside at the facilities until the buildings had been upgraded to meet more
stringent fire code requirements for non-ambulatory residents. During 1995, the
Company made capital improvements to these two facilities at an aggregate cost
of approximately $1.1 million. The Company recently has received the issuance
of new licenses that would enable non-ambulatory residents to reside at these
facilities. The Countryside license is provisional requiring reinspection by
May 31, 1997.
The Company also is subject to Federal and state anti-remuneration
laws, such as the Medicare/ Medicaid anti-kickback law which govern certain
financial arrangements among health care providers and others who may be in a
position to refer or recommend patients to such providers. These laws prohibit,
among other things, certain direct and indirect payments that are intended to
induce the referral of patients to, the arranging for services by, or the
recommending of, a particular provider of health care items or services. The
Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to
certain contractual relationships between health care providers and sources of
patient referral. Similar state laws vary from state to state, are sometimes
vague and seldom have been interpreted by courts or regulatory agencies.
Violation of these laws can result in loss of licensure, civil and criminal
penalties, and exclusion of health care providers or suppliers from
participation in (i.e., furnishing covered items or services to beneficiaries
of) the Medicare and Medicaid programs. There can be no assurance that such
laws will be interpreted in a manner consistent with the practices of the
Company.
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Management is not aware of any non-compliance by the Company with
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.
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 cost of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. The costs
of any required remediation or removal of these substances could be substantial
and the liability of an owner or operator as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
an entity that arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. As a result, the presence, with or without the Company's knowledge,
of hazardous or toxic substances at any property held or operated by the
Company, or acquired or operated by the Company in the future, could have an
adverse effect on the Company's business, financial condition and results of
operations. Environmental audits performed on the Company's properties have not
revealed any significant environmental liability that management believes would
have a material adverse effect on the Company's business, financial condition
or results of operations. No assurance can be given that existing environmental
audits with respect to any of the Company's properties reveal all environmental
liabilities.
LIABILITY AND INSURANCE
The Company's business entails an inherent risk of liability. In
recent years, participants in the long-term care industry, including the
Company, 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. The Company is from time to time subject to such suits
as a result of the nature of its business. The Company currently maintains
insurance policies in amounts and with such coverage and deductibles as it
believes are adequate, based on the nature and risks of its business,
historical experience and industry standards. The Company also currently
maintains professional liability insurance and general liability insurance. The
Company's medical professional liability coverage is limited to $1,000,000 per
occurrence and $3,000,000 in the aggregate for all claims per annual policy
period. The non-medical professional liability insurance coverage is limited to
$5,000,000 per wrongful act and $7,000,000 in the aggregate. The general
liability insurance is limited to $1,000,000 per facility/per event, with
additional specific limitations of $100,000 per event (premises damage), $5,000
per event (medical expenses) and $1,000 per event (resident's property damage).
The Company also has an umbrella excess liability protection policy in the
total amount of $25,000,000. There can be no assurance that claims will not
arise which are in excess of the Company's insurance coverage or are not
covered by the Company's insurance coverage. A successful claim against the
Company not covered by, or in excess of, the Company's insurance could have a
material adverse effect on the Company's financial condition and results of
operations. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect on the Company's ability to
attract residents or expand its business and would require management to devote
time to matters unrelated to the operation of the Company's business. In
addition, the
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Company's insurance policies must be renewed annually and there can be no
assurance that the Company will be able to continue to obtain liability
insurance coverage in the future or, if available, that such coverage will be
available on acceptable terms.
EMPLOYEES
At December 31, 1996, the Company had 2,275 employees, including 1,385
full-time employees, of which 97 were employed at the Company's headquarters.
The Company believes employee relations are good.
ITEM 2. PROPERTIES.
The Company leases its corporate and regional office space under
various leases. The leases have terms of five years with an option to terminate
after twelve months from the most recent expansion commencement, or January 1,
1997. The initial annual lease payments amount to $258,000, 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. Various other leases expire on June 15,
1999 and September 30, 2001.
The Company also has entered into operating leases for four facilities
and long-term ground lease related to another facility, each of which are
currently under construction and are expected to commence operation in 1997.
The operating lease terms vary from fifteen years, with two ten-year extension
options to seventy-three years. The ground lease has a term of ninety-nine
years. For information regarding facilities owned by the Company or in which it
holds interests, see "Item 1. Business -- Owned Facilities" and "-- Facility
Development."
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of management of the Company,
although the outcomes of these suits and claims are uncertain, in the aggregate
they should not have a material adverse effect on the Company'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.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "SNRZ." Other information set forth under the caption
"Corporate Information" on page 37 of the Company's 1996 Annual Report to
Stockholders is incorporated by reference herein.
On January 19, 1996, the Company issued an aggregate of 1,000,000
shares of Series B Exchangeable Preferred Stock to three institutional
investors and certain affiliates thereof for $10,000,000. These securities were
issued without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption in Section 4(2) of the
Securities Act.
On March 19, 1996, the Company issued warrants covering 50,000 shares
of Common Stock to a lender. The warrants have a per share exercise price equal
to $17.00. These securities were issued
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without registration under the Securities Act, in reliance upon the exemption
in Section 4(2) of the Securities Act.
On May 28, 1996, the Company issued 52,500 shares of Common Stock to a
director of the Company in exchange for a 30% membership interest held by the
director in one of the Company's facilities. These securities were issued
without registration under the Securities Act, in reliance upon the exemption
in Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the caption "Selected Financial and
Operating Data" on page 18 of the Company's 1996 Annual Report to Stockholders
is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 19 to
23 of the Company's 1996 Annual Report to Stockholders is incorporated by
reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated and combined financial statements set forth on pages
24 to 34 of the Company's 1996 Annual Report to Stockholders are incorporated
by reference herein.
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 set forth under the captions "Election of Directors --
Information as to Nominees and Other Directors," "-- Other Executive Officers,"
and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 2 to 5
and 14 in the Company's 1997 Annual Meeting Proxy Statement is incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Compensation of
Directors" and "Executive Compensation and Other Information" on pages 7 and 8
to 11 in the Company's 1997 Annual Meeting Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Stock Owned by
Management" and "Principal Holders of Voting Securities" on pages 24 to 27 of
the Company's 1997 Annual Meeting Proxy Statement is incorporated by reference
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions" on
page 14 and 15 of the Company's 1997 Annual Meeting Proxy Statement is
incorporated by reference herein.
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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.
(1) Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 and Combined Statement of
Operations of Sunrise Entities for the year ended
December 31, 1994.
Consolidated Statements of Changes in Stockholders'
(Deficit) Equity and Combined Statement of Owners' Deficit of
Sunrise Entities.
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 and Combined Statement of
Cash Flows of Sunrise Entities for the year ended December
31, 1994.
Notes to Consolidated and Combined Financial Statements.
Report of Independent Auditors.
The remaining information appearing in the Company's 1996
Annual Report to Stockholders is not deemed to be filed as
part of this Report, except as expressly provided herein.
(2) Financial Statements Schedules:
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable or are included in the consolidated
financial statements.
(3) Exhibits:
The Exhibits filed as part of this Annual Report on Form 10-K
are listed on the Index to Exhibits on pages 25 to 30 and are
incorporated by reference herein.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The Company 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,
President and Chief Executive
Officer
3/26/97
-----------------------------
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 3/26/97
--------------------------------- -----------------------------
Paul J. Klaassen Date
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ DAVID W. FAEDER 3/31/97
--------------------------------- -----------------------------
David W. Faeder Date
Executive Vice President, Chief
Financial Officer and Director
(Principal Financial Officer)
By: /s/ LARRY E. HULSE 3/31/97
--------------------------------- -----------------------------
Larry E. Hulse Date
Controller
(Principal Accounting Officer)
By: /s/ RONALD V. APRAHAMIAN 3/26/97
--------------------------------- -----------------------------
Ronald V. Aprahamian Date
Director
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By:
--------------------------------- -----------------------------
Thomas J. Donohue Date
Director
By: /s/ RICHARD A. DOPPELT 3/26/97
--------------------------------- -----------------------------
Richard A. Doppelt Date
Director
By: /s/ TERESA M. KLAASSEN 3/31/97
--------------------------------- -----------------------------
Teresa M. Klaassen Date
Executive Vice President,
Secretary and Director
By: /s/ SCOTT F. MEADOW 3/27/97
--------------------------------- -----------------------------
Scott F. Meadow Date
Director
By: /s/ DARCY J. MOORE 3/26/97
--------------------------------- -----------------------------
Darcy J. Moore Date
Director
By: /s/ TIMOTHY S. SMICK 3/31/97
--------------------------------- -----------------------------
Timothy S. Smick Date
Executive Vice President,
Chief Operating Officer and Director
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INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
2.1 Purchase and Sale Agreement dated July 31, 1996
between the Company and Laing Properties &
Subsidiaries, Inc. (Exhibit 2.1 to the Company's Form
S-1 Registration No. 333-13731).
2.2 Purchase Agreement dated October 4, 1996 by and
between Sunrise Development, Inc., a wholly owned
subsidiary of the Company, and Birtcher Properties,
Ltd. (Exhibit 2.1 to the Company's Form 8-K dated
February 17, 1997).
2.3 Amendment to Purchase Agreement dated December 5, 1996
between Sunrise Development, Inc. and Birtcher
Properties, Ltd. (Exhibit 2.2 to the Company's Form
8-K dated February 17, 1997).
3.1 Restated Certificate of Incorporation of the Company
(Exhibit 3.1 to the Company's Form S-1 Registration
Statement No. 333- 13731).
3.2 Amended and Restated Bylaws of the Company (Exhibit
3.2 to the Company's Form S-1 Registration Statement
No. 333-13731).
4.1 Form of Common Stock certificate (Exhibit 4.1 to the
Company's Form S-1 Registration Statement No.
333-13731).
4.2 Stockholder Rights Agreement (Exhibit 4.2 to the
Company's Form S-1 Registration Statement No.
333-13731).
10.1 Assignment and Contribution Agreement, effective as of
January 4, 1995, by and between Paul and Teresa
Klaassen and the Company (Exhibit 10.1.1 to the
Company's Form S-1 Registration Statement No.
333-2582).
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
the Company's Form S-1 Registration Statement No.
333-2582).
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Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
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 the Company's Form S-1 Registration Statement
No. 33-2852).
10.4 Series A and Series B Preferred Stock Purchase
Agreement, dated as of December 19, 1994, by and
between the Company and the purchasers listed therein
(Exhibit 10.2 to the Company's Form S-1 Registration
No. 333-2582).
10.5 Registration Agreement, dated January 4, 1995, by
and among the Company, the Investors (as defined
therein) and Paul and Teresa Klaassen (Exhibit 10.3
to the Company's Form S-1 Registration Statement No.
333-2582).
10.6 Promissory Note, dated June 8, 1994, executed by
Sunrise Assisted Living Limited Partnership in favor
of General Electric Capital Corporation (Exhibit 10.4
to the Company's Form S-1 Registration Statement No.
333-2582).
10.7 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 the Company's Form S-1 Registration
Statement No. 333-2582).
10.8 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 the Company's Form S-1
Registration Statement No. 333-2582).
10.9 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 the Company's Form S-1
Registration Statement No. 333-2582).
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Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
10.10 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 the Company's Form S-1 Registration
Statement No. 333-2582).
10.11 Letter agreement dated as of December 30, 1996 by and
between General Electric Capital Corporation and
Sunrise Assisted Living Partnership.
10.12 Third Loan Modification Agreement dated as of March 4,
1997 by and between General Electric Capital
Corporation and Sunrise Assisted Living Limited
Partnership.
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
(Arlington, Bluemont Park and Falls Church) (Exhibit
10.5 to the Company'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 (Gunston
and Oakton) (Exhibit 10.6 to the Company's Form S-1
Registration Statement No. 333-2582).
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 (Fairfax
Leasehold) (Exhibit 10.7 to the Company'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
(Warrenton) (Exhibit 10.8 to the Company's Form S-1
Registration Statement No. 333-2582).
10.17 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 the
Company's Form S-1 Registration Statement No.
333-2582).
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Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
10.18 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 the Company'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 (Frederick)
(Exhibit 10.11 to the Company's Form S-1 Registration
Statement No. 333-2582).
10.20 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 the Company's Form S-1 Registration
Statement No. 333-2582).
10.21 1995 Stock Option Plan, as amended (Exhibit 10.13 to
the Company's Form S-1 Registration Statement No.
333-2582).
10.22 1996 Directors' Stock Option Plan (Exhibit 10.13.1 to
the Company's Form S-1 Registration Statement No.
333-2582).
10.23 Stock Option Agreement, entered into, effective as of
January 4, 1995, by and between the Company and David
W. Faeder (Exhibit 10.14 to the Company's Form S-1
Registration Statement No. 333-2582).
10.24 Amendment No. 1 to Stock Option Agreement by and
between the Company and David W. Faeder (Exhibit
10.14.1 to the Company's Form S-1 Registration
Statement No. 333-13731).
10.25 1996 Non-Incentive Stock Option Plan (Exhibit 4.5 to
the Company's Form S-8 Registration Statement No.
333-21817).
10.26 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 10.15 to the Company's Form S-1
Registration Statement No. 333-2582).
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Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
10.27 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
the Company's Form S-1 Registration Statement No.
333-2582).
10.28 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 the Company's Form S-1 Registration Statement
No. 333-2582).
10.29 Sunrise Village House LLC Operating Agreement, dated
as of April 15, 1993, by and between Paul J. Klaassen
and Teresa M. Klaassen and Thomas Donohue and
Elizabeth Donohue, as amended (Exhibit 10.18 to the
Company's Form S-1 Registration Statement No.
333-2582).
10.30 Membership Interest Purchase Agreement among the
Company and Thomas and Elizabeth Donohue (Exhibit
10.23 to the Company's Form S-1 Registration Statement
No. 333-13731).
10.31 Loan Agreement, dated as of March 19, 1996, between
the Company and Creditanstalt-Bankverein (Exhibit
10.20 to the Company's Form S-1 Registration Statement
No. 333-2582).
10.32 Warrant Agreement, dated as of March 19, 1996, between
the Company and Creditanstalt-Bankverein (Exhibit
10.21 to the Company's Form S-1 Registration Statement
No. 333-2582).
10.33 Commitment Letter for $80,000,000 syndicated line of
credit for Construction/Interim Loans from
NationsBank, N.A. to an entity to be formed by Sunrise
Assisted Living, Inc. (Exhibit 10.22 to the Company's
Form S-1 Registration Statement No. 333-2582).
10.34 Form of Indemnification Agreement (Exhibit 10.24 to
the Company's Form S-1 Registration Statement No.
333-2582).
13 1996 Annual Report to Stockholders (which is not
deemed to be "filed" except to the extent that
portions thereof are expressly incorporated by
reference in this Annual Report on Form 10-K).
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Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
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