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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-20765
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)
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
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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 15, 1999 was $600,755,652. */
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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 15, 1999: 19,510,726 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.................................................................... 30
Item 3. Legal Proceedings............................................................. 31
Item 4. Submission of Matters to a Vote of Security Holders........................... 31
PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters........ 32
Item 6. Selected Financial Data....................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 34
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................... 54
Item 8. Financial Statements and Supplementary Data................................... 55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 55
PART III Item 10. Directors and Executive Officers of the Registrant............................ 55
Item 11. Executive Compensation........................................................ 59
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 63
Item 13. Certain Relationships and Related Transactions................................ 66
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 68
SIGNATURES.................................................................................................. 70
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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, 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 79 facilities in 14 states with a capacity of over 6,800
residents, including 68 facilities owned by Sunrise or in which it has ownership
interests and 11 facilities managed for third parties. Sunrise had revenues of
$170.7 million and net income of $22.3 million in 1998. Approximately 99% of
Sunrise's revenues were derived from private pay sources.
Sunrise's previously announced three-year growth objectives include
developing at least 55 new Sunrise model assisted living facilities with an
additional resident capacity of more than 4,500 by the end of 1999. To date,
Sunrise has completed development of 40 such facilities with a resident capacity
of over 3,500 and has 24 facilities currently under construction with a resident
capacity of approximately 2,200. Sunrise also has entered into contracts to
purchase 46 additional sites and to lease two additional sites. Sunrise is
pursuing additional development opportunities and also plans to acquire
additional facilities as market conditions warrant. See "--Facility Development"
and "--Facility Acquisitions."
On October 18, 1998, Sunrise entered into a merger agreement to acquire
Karrington Health, Inc., a Columbus-based assisted living provider. The merger
agreement was amended on March 4, 1999. Sunrise plans to purchase Karrington
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in a tax-free, stock-for-stock transaction valued at approximately $94.9
million. The transaction will be accounted for using the purchase method of
accounting.
Under the merger agreement, Karrington would become a wholly owned
subsidiary of Sunrise, and each issued and outstanding Karrington common shares,
other than shares for which dissenters' rights are exercised, would be
automatically converted into the right to receive 0.3333 of a share of Sunrise
common stock. Subject to satisfaction of the conditions set forth in the merger
agreement, including approval of the merger agreement by Karrington
shareholders, Sunrise expects to consummate its acquisition of Karrington during
the second quarter of 1999.
Karrington owns or has ownership interests in 42 facilities, has an
additional eight facilities under construction and has an additional eight
development sites owned or under contract. Sunrise intends to sell 17 Karrington
facilities within 12 months following the merger. Most of these facilities are
Karrington Cottage prototype models, which consist of 20 units or less.
A subsidiary of Sunrise has obtained a syndicated revolving credit
facility for $250.0 million to be used for general corporate purposes, including
the continued construction and development of assisted living facilities. The
credit facility expires in December 2000 and includes two twelve month extension
options subject to the lender's approval. 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. Advances under the facility bear
interest at rates from LIBOR plus 1.00% to LIBOR plus 1.50%. 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.
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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 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, 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. 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 Sunrise. Sunrise believes that consumer
preference and demographic trends should 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. 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.
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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:
o the involvement of the resident and the resident's family in
important care giving decisions;
o Sunrise's proprietary training programs for its management,
executive directors and care managers;
o Sunrise's quality assurance programs;
o the full range of assisted living services offered by Sunrise; and
o 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 admission, Sunrise, 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 Sunrise, the resident and the resident's
family. The range of services offered by 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 age in place. In addition, upon admission Sunrise generally charges each new
resident a one-time community fee typically equal to two months of daily
resident
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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.
The average daily resident fee for owned facilities opened or operated
by Sunrise for at least 12 months, or that have achieved occupancy percentages
of 95% or above excluding temporary vacancies and resident relocations generally
of between three to six months due to renovations, was approximately $86 for
1998, $78 for 1997 and $80 for 1996.
BASIC CARE
Sunrise's basic care program provided to all residents includes:
o assistance with activities of daily living, such as eating, bathing,
dressing, personal hygiene, and grooming;
o three meals per day served in a common dining room, including two
seating times per meal;
o coordination of special diets;
o 24-hour security; emergency call systems in each unit;
o transportation to stores and community services;
o assistance with coordination of physician care, physical therapy and
other medical services;
o health promotion and related programs;
o personal laundry services;
o housekeeping services; and
o 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, 1998, approximately 26% 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, 1998, approximately 41% 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 one hour of
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, 1998, approximately
23% of Sunrise's assisted living residents participated in the reminiscence
program.
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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 reading rooms, family or living rooms and other areas, such as bistros
and ice cream parlors, designed to promote interaction among residents. Sunrise
has five 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 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.
Sunrise believes its model facility meets the desire of many individuals to move
to a new 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.
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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:
YEAR DEVELOPED,
OPENED ACQUIRED SUNRISE
BY OR CONSTR. MODEL RESIDENT OWNERSHIP
FACILITY LOCATION SUNRISE STATUS 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 Frederick Frederick, MD 1992 Developed X 86 100.0
Sunrise of Countryside Sterling, VA 1992 100.0
East Building Developed(4) X 66
West Building Developed(4) X 64
Sunrise of Gunston Lorton, VA 1992 Developed(4) 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(5) 100.0
Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(6)
Sunrise of Gardner Park Peabody, MA 1994 Developed X 59 50.0(6)(7)
Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0
Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 100.0
Huntcliff Summitt Atlanta, GA 1996 Acquired 248 100.0(8)
Sunrise of Northshore St. Petersburg, FL 1996 Acquired 157 100.0(9)
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Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0
Sunrise of Columbus Columbus, GA 1996 Acquired 26 100.0
Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0
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 90 100.0
Sunrise of Sterling Canyon Valencia, CA 1997 Acquired 130 100.0
Sunrise of Napa Napa Valley, CA 1997 Acquired 83 100.0
Sunrise of Petaluma Petaluma, CA 1997 Developed 84 100.0(10)
Sunrise of Springfield Springfield, VA 1997 Developed X 95 100.0
Sunrise of Severna Park Severna Park, MD 1997 Developed X 93 50.0(3)(6)
Building I
Sunrise of Severna Park Severna Park, MD 1997 Developed X 66 50.0(3)(6)
Building II
Sunrise of Morris Plains Morris Plains, NJ 1997 Developed X 92 100.0
Sunrise of Old Tappan Old Tappan, NJ 1997 Developed X 92 100.0
Sunrise of Granite Run Granite Run, PA 1997 Developed X 104 100.0
Sunrise of Abington Abington, PA 1997 Developed X 95 100.0
Building I
Sunrise of Abington Abington, PA 1997 Developed X 66 100.0
Building II
Sunrise of Rockville Rockville, MD 1997 Developed X 84 100.0
Sunrise of Alexandria Alexandria, VA 1997 Developed X 91 100.0(3)
Sunrise of Wayne Wayne, NJ 1997 Developed X 92 100.0
Sunrise of Norwood Norwood, MA 1997 Developed X 86 100.0
Sunrise of Wayland Wayland, MA 1997 Developed X 71 100.0
Sunrise of Westfield Westfield, NJ 1997 Developed X 92 100.0
Sunrise of East Cobb East Cobb, GA 1997 Developed X 94 100.0
Sunrise of Dunwoody Dunwoody, GA 1997 Acquired 30 100.0
Sunrise of Weston Weston, MA 1997 Acquired 31 100.0
Sunrise of Fresno Fresno, CA 1998 Developed 84 100.0(10)
Sunrise of Haverford Haverford, PA 1998 Developed X 72 100.0
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Sunrise of Decatur Decatur, GA 1998 Developed X 92 100.0
Sunrise of Walnut Creek Walnut Creek, CA 1998 Developed X 85 100.0
Sunrise of Glen Cove Glen Cove, NY 1998 Developed X 83 100.0
Sunrise of Ivey Ridge Ivey Ridge, GA 1998 Developed X 102 100.0
Sunrise of Cohasset Cohasset, MA 1998 Developed X 74 100.0
Sunrise of Holly Orchard Denver, CO 1998 Developed X 94 100.0
Sunrise of Pinehurst Denver, CO 1998 Developed X 102 100.0
Sunrise of Huntcliff II Atlanta, GA 1998 Developed X 91 100.0
(Assisted Living Expansion)
Sunrise of Danville Danville, CA 1998 Developed X 86 100.0
Sunrise of Lafayette Hill Lafayette Hill, PA 1998 Developed X 84 100.0
Sunrise of Bellvue Bellvue, WA 1998 Developed X 84 100.0
Sunrise of Paramus Paramus, NJ 1998 Developed X 76 100.0
Sunrise of West Essex Fairfield, NJ 1998 Developed X 94 100.0
Sunrise of Paoli Malvern, PA 1998 Developed X 98 100.0
Sunrise of Mission Viejo Mission Viejo, CA 1998 Developed X 102 9.0
Sunrise of Oakland Hills Oakland, CA 1998 Developed X 102 100.0
Sunrise of Rochester Detroit, MI 1999 Developed X 101 9.0
Sunrise of East Brunswick East Brunswick, NJ 1999 Developed X 94 9.0
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5,812
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Sunrise of Smithtown Long Island, NY 1st half Construction X 91 100.0
1999
Sunrise of Buffalo Grove Buffalo Grove, IL 1st half Construction X 94 100.0
1999
Sunrise at La Costa Carlsbad, CA 1st half Construction X 102 9.0
1999
Sunrise of Naperville Naperville, IL 1st half Construction X 91 9.0
1999
Sunrise of Richmond Richmond, VA 1st half Construction X 84 9.0
1999
Sunrise of Northville Northville, MI 2nd half Construction X 84 100.0
1999
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Sunrise at Canyon Crest Riverside, CA 2nd half Construction X 77 100.0
1999
Sunrise of San Mateo San Mateo, CA 2nd half Construction X 76 100.0
1999
Sunrise of Mt. Vernon Mt. Vernon, NY 2nd half Construction X 102 100.0
1999
Sunrise of Flossmoor Flossmoor, IL 2nd half Construction X 74 100.0
1999
Sunrise of Bloomingdale Bloomingdale, IL 2nd half Construction X 98 100.0
1999
Sunrise of Willowbrook Willowbrook, IL 2nd half Construction X 91 100.0
1999
Sunrise of Wilton Wilton, CT 2nd half Construction X 78 100.0
1999
Sunrise of Stamford Stamford, CT 2nd half Construction X 98 9.0
1999
Sunrise of Lynbrook North Lynbrook, NY 2nd half Construction X 98 9.0
1999
Sunrise of Frognal House Sidcup, London 2nd half Construction X 140 14.5
1999
Sunrise of New City New City, NY 2nd half Construction X 91 100.0
1999
Sunrise of Wall Wall Township, NJ 1st half Construction X 74 100.0
2000
Sunrise of Exton Exton, PA 1st half Construction X 76 100.0
2000
Sunrise of Westtown Westtown, PA 1st half Construction X 94 100.0
2000
Sunrise of Glen Ellyn Glen Ellyn, IL 1st half Construction X 102 100.0
2000
Sunrise of Sheepshead Bay Sheepshead Bay, NY 1st half Construction X 125 70.0
2000
Sunrise of Hermosa Beach Hermosa Beach, CA 1st half Construction X 96 100.0
2000
Sunrise of Ann Arbor Ann Arbor, MI 1st half Construction X 84 9.0
2000
Sunrise of Farmington Hills Farmington Hills, Zoned X 91 100.0
MI
Sunrise of Woodcliff Lake Woodcliff Lake, NJ Zoned X 102 100.0
Sunrise of Pittsburgh Pittsburgh, PA Zoned X 91 100.0
Sunrise of Randolph Randolph, NJ Zoned X 88 100.0
Sunrise of West Bloomfield West Bloomfield, Zoned X 60 100.0
MI
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Sunrise of Sunnyvale Sunnyvale, CA Zoned X 102 100.0
Sunrise of Cherry Creek Denver, CO Zoned X 95 100.0
Sunrise of Colorado Springs Colorado Springs, Zoned X 60 100.0
CO
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2,909(11)
Total 8,721
============
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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 $86.2 million mortgage loan. Nineteen other
wholly owned facilities (Springfield, Morris Plains, Old Tappan, Granite
Run, Abington (two facilities), Wayne, Westfield, Decatur, Walnut Creek,
Haverford, Huntcliff Summit (assisted living expansion), Lafayette Hill,
Oakland Hills, Paramus, Paoli, Fairfield, Smithtown, and Bellevue) serve
as collateral for a $250.0 million syndicated revolving credit facility.
Ten other owned facilities are subject to one or more mortgages or deeds
of trust that mature between 2001 and 2033 and bear interest at rates
ranging from 6.87% to 7.90% annually as of December 31, 1998. 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 and Sheepshead Bay 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 such 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 and Sheepshead Bay facilities
are also consolidated in the consolidated financial statements. The
ordinary course business operations of the Towson, Mission Viejo,
Rochester and East Brunswick facilities are not currently controlled by
Sunrise 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.
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(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.
(6) The remaining ownership interests are owned by third parties. Sunrise
manages each of these facilities.
(7) 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.
(8) Excludes 11 units owned by the occupants of the units. The occupants can
require Sunrise to repurchase the units for their original purchase
prices, aggregating approximately $1.6 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 has entered into operating leases with a third-party
owner/developer who completed the facilities under a design reviewed and
approved by Sunrise. These facilities are operated under 15-year operating
leases, with two 10-year extension options.
(11) 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:
o population;
o income and age demographics;
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o target site visibility;
o probability of obtaining zoning approvals;
o estimated level of market demand; and
o 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 previously announced three-year growth objectives include
developing at least 55 new Sunrise model assisted living facilities with an
additional resident capacity of more than 4,500 by the end of 1999. To date,
Sunrise has completed development of 40 such new model facilities with a
resident capacity of more than 3,500 and has 24 facilities under construction
with resident capacity of more than 2,200. Sunrise has also entered into
contracts to purchase 46 additional sites and to lease two additional sites.
These sites are located in Pennsylvania, Massachusetts, New Jersey, Connecticut,
New York, Illinois, California, Missouri, Michigan and Virginia. Sunrise is
pursuing additional development opportunities as market conditions warrant.
Sunrise 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 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:
o site selection and contract signing;
o feasibility;
o zoning, site plan approval and building permits; and
o 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 10 to 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
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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, 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 $13.0 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
32-person 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:
o obtaining zoning, land use, building, occupancy, licensing and other
required governmental permits for the construction of new facilities
without experiencing significant delays;
o completing construction of new facilities on budget and on schedule;
o the ability to work with third-party contractors and subcontractors
who construct the facilities;
o shortages of labor or materials that could delay projects or make
them more expensive;
o adverse weather conditions that could delay projects;
o finding suitable sites for future development activities at
acceptable prices; and
o addressing changes in laws and regulations or how existing laws and
regulations are applied.
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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.
FACILITY ACQUISITIONS
Sunrise's previously announced growth plan included the acquisition of
up to 15 facilities by the end of 1999, of which nine have been acquired
excluding the announced proposed 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:
o location, construction quality, condition and design of the
facility;
o current and projected facility cash flow;
o the ability to increase revenue, occupancy and cash flow by
providing a full range of assisted living services;
o costs of facility repositioning, including any renovations; and
o the extent to which the acquisition will complement Sunrise's
development plans.
There can be no assurance that Sunrise's acquisition of Karrington or
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. Any failure to do so could have a material adverse effect
on Sunrise's business, financial condition, revenues and earnings.
NEED FOR ADDITIONAL FINANCING AND MANAGEMENT OF GROWTH
To achieve its growth objectives, 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 substantially as it pursues its
development and acquisition
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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
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 11 operating facilities and
two facilities under construction with total resident capacity of 1,208,
including four in Massachusetts, two in New Jersey, one in Pennsylvania, two in
Maryland, one in North Carolina, one in Georgia and two in Virginia. The
facilities in New Jersey, Maryland and North Carolina are Sunrise model
facilities. The management contract expiration dates range from April 1999 to
November 2008. Sunrise owns $5.9 million carrying value of tax exempt mortgage
bonds on the Pennsylvania facility. One of the Massachusetts facilities is
licensed for 139 continuing care retirement community residents. 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.
Sunrise also manages two skilled nursing facilities, Pembrook and
Prospect Park, located in West Chester and Prospect Park, Pennsylvania,
respectively. 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. Sunrise received
management fee revenues of approximately $0.4 million in 1998 for these two
facilities. Sunrise is entitled to receive a deferred management fee of
approximately $0.9 million as of December 31, 1998, upon expiration of the
management agreement or if the owners terminate the management agreement or sell
the properties. Sunrise does not provide financial or accounting services for
these facilities.
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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. Headquarters staff members in Fairfax, Virginia
are responsible for: the establishment of Company-wide policies and procedures
relating to resident care, facility design and facility operations; billing and
collection; accounts payable; finance and accounting; management of Sunrise's
development and acquisition activities; development of employee training
materials and programs; 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 eight regions. Each of the regions
is headed by a vice president of operations with extensive experience in the
senior housing, health care and assisted living industries. The regional staff
typically consists of a marketing specialist, a resident care specialist, a
human resources specialist and a dining services specialist. Sunrise expects
that all regions will create similar staff positions as the number of facilities
in those regions increases.
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, social
services 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 oversees the care managers and is directly
responsible for day-to-day care of the residents and (c) the director of
community relations, who oversees marketing and outreach programs. Other key
positions include the dining services coordinator, the program coordinator and,
in some homes, the director of Alzheimer's care.
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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.
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 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 one-week of intensive on-the-job
training using a detailed checklist which outlines every aspect of the position.
Thereafter, the mentor maintains regular contact with the new manager to provide
on-going support and guidance. Region-based classroom training also is provided
monthly for department managers in specialized areas, including Sunrise's
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"reminiscence program," the social and volunteer programs, human resources,
staffing and scheduling and medication management.
Sunrise also has developed the "executive director development program,"
which offers a structured curriculum for internal department managers who have
been selected based on their potential to become executive directors. Sunrise
also has created the "executive director in training program" to increase the
number of Sunrise-trained professionals who will be available to manage acquired
and newly developed communities. This program recruits successful, strong
leaders from outside Sunrise and provides them with an accelerated training
curriculum to prepare them to be Sunrise leaders.
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. 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
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.
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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 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
Sunrise's marketing strategy is intended to create awareness of 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. A central marketing staff develops overall strategies for promoting
Sunrise throughout its markets and monitors the success of Sunrise'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, Sunrise 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.
THIRD-PARTY RESIDENT 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.
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In mid-1997, Sunrise again began seeking to capitalize on its brand
awareness by accepting third-party management and development contracts. Sunrise
has renewed efforts to seek additional third-party management and development
opportunities after a two year period during which Sunrise focused on building
its infrastructure. In September 1998, Sunrise 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.
COMPETITION
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. Although
some competitors are significantly larger, there are no one or more dominant
companies in the assisted living segment. In a recent industry report, it is
estimated that there are approximately 770,000 total assisted living beds
currently available, and that the 25 largest owners of assisted living
properties, which includes Sunrise, has 180,446 or only 23% of those currently
available. The largest individual owner has only 3% of the total assisted living
beds currently available. 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 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 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.
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OVERBUILDING IN THE ASSISTED LIVING INDUSTRY
Sunrise believes that many 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. In
addition, because the segment of the population that can afford to pay Sunrise's
daily resident fee is finite, the development of new assisted living facilities
could outpace demand. Overbuilding in the assisted living industry, or in
particular 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.
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 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:
o personnel education, training, and records;
o facility services, including:
-- administration of medication,
-- assistance with self-administration of medication and
-- limited nursing services;
o monitoring of resident wellness;
o physical plant specifications;
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o furnishing of resident units;
o food and housekeeping services;
o emergency evacuation plans; and
o 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 several of the states
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 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 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 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 Medicare 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.
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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 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 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
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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 our 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
---------------- --------------- -----------------------------
o General liability o $1,000,000 per occurrence/ o premises claims by third parties,
per facility, with additional not including residents
specific limitations for
particular categories of o personal injury and advertising
claims that fall under the injury
general liability category
o independent contractors
o fire damage to other rented
locations
o Medical professional o $1,000,000 per occurrence/ o negligence claims by residents
liability $3,000,000 total for all
claims per policy year;
coverage limits do not
overlap with general
liability coverage
o Umbrella excess liability o $25,000,000 per policy year; o same as under general liability
coverage is in excess of the and medical liability professional
general liability and medical liability coverages
liability limits
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o Non-medical professional o $5,000,000 per wrongful act/ o claims against Sunrise's development
liability $7,000,000 total; coverage or management company subsidiaries
limits do not overlap with by third parties for whom Sunrise
general liability, medical develops or manages properties
liability or umbrella excess
liability limits
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, 1998, Sunrise had 5,190 employees, including 2,948
full-time employees, of which 178 were employed at Sunrise's headquarters.
Sunrise believes employee relations are good.
ITEM 2. PROPERTIES.
Sunrise leases its corporate office, regional operations and
development offices, and warehouse space under various leases. The leases have
terms of five to seven years. The corporate lease has an option to terminate
after twelve months from the most recent expansion commencement. The initial
annual lease payments of the corporate leases amount to $311,000, 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 amounts to $148,000, subject to annual
increases of 3%. Various other leases expire during 1999 and 2003.
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During 1998, Sunrise entered into an agreement to lease new office
space for its corporate headquarters. The lease has a term of twelve years
beginning when the building is completed. 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.
Sunrise has also entered into operating leases for six facilities and
three long-term ground leases related to other facilities. The operating lease
terms vary from 15 years, with two ten-year extension options, to 50 years and
ground leases have terms of 75 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 exceed the obligation under the lease, Sunrise is
entitled to the to 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 are
currently subleased to Karrington under operating leases which expire in May
2010.
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.
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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
15, 1999, there were 174 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, 1997 $ 30.00 $ 25.75
June 30, 1997 35.63 24.00
September 30, 1997 39.50 30.00
December 31, 1997 43.25 34.75
Quarter Ended High Low
- -----------------------------------------------------------------
March 31, 1998 $ 45.13 $ 38.50
June 30, 1998 46.50 27.75
September 30, 1998 35.75 22.50
December 31, 1998 53.13 29.00
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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,
--------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Operating revenue $170,712 $89,884 $47,345 $37,258 $33,969
Facility operating expenses 88,834 53,286 28,274 20,882 17,983
Facility development and pre-rental expenses 5,197 5,586 2,420 1,172 263
General and administrative expenses 12,726 10,454 10,042 6,875 4,183
Depreciation and amortization expenses 21,650 10,592 4,048 3,009 3,160
Interest expense, net 15,430 4,613 6,425 15,327 8,023
Income (loss) before extraordinary item 22,312 4,001 (4,760) (10,137) 562
Extraordinary item - - - - 850
Net income (loss) 22,312 4,001 (4,760) (10,137) 1,412
Net income (loss) per common share:
Basic 1.16 0.21 (0.52)
Diluted 1.11 0.20 (0.52)
BALANCE SHEET DATA (at end of period):
Cash and cash equivalents $54,197 $82,643 $101,811 $6,253 $8,089
Working capital (deficit) 69,573 70,340 102,822 2,051 (7,305)
Total assets 683,411 556,260 342,839 123,321 109,003
Total debt 428,326 340,987 145,511 122,289 110,029
Series A convertible preferred stock - - - 23,964 -
Common stockholders' equity (deficit) 227,655 195,340 185,824 (31,774) (16,391)
OPERATING AND OTHER DATA:
Earnings before interest, taxes, depreciation
and amortization (1) $59,392 $19,206 $5,713 $8,199 $11,745
Net cash provided by operating activities 19,224 8,264 758 944 2,736
Net cash used in investing activities (138,557) (221,846) (112,495) (17,907) (17,037)
Net cash provided by financing activities 90,887 194,414 207,295 15,127 19,122
Facilities (at end of period):
Owned 66 54 30 20 19
Managed 11 7 5 8 9
--------------------------------------------------------------------------------------------------------------------------------
Total 77 61 35 28 28
--------------------------------------------------------------------------------------------------------------------------------
Resident capacity (at end of period):
Owned 5,617 4,632 2,584 1,557 1,473
Managed 1,010 683 528 712 772
--------------------------------------------------------------------------------------------------------------------------------
Total 6,627 5,315 3,112 2,269 2,245
--------------------------------------------------------------------------------------------------------------------------------
Occupancy rate (2) 94% 94% 94% 92% 95%
--------------------------------------------------------------------------------------------------------------------------------
(1) 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 prescribed 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.
(2) 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. 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 the other financial information appearing elsewhere in this
Form 10-K. 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,
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 to "Sunrise" mean Sunrise Assisted Living, Inc.
and its subsidiaries.
OVERVIEW
Sunrise is a provider of assisted living services for seniors. Sunrise
currently operates 79 facilities in 14 states with a capacity of approximately
6,800 residents, including 68 facilities owned by Sunrise or in which it has
ownership interests and 11 facilities managed for third parties. Sunrise also
operates two skilled nursing facilities owned by a third party. 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 over the 12
months ended December 31, 1998. During this period, Sunrise began operating an
additional 18 facilities owned by it or in which it has an ownership interest
and managing an additional four facilities for independent third parties.
Sunrise also entered into several new development contracts during 1998. As a
result, operating revenue increased substantially to $170.7 million for 1998
from $89.9 million for 1997. Net income increased by $18.3 million to $22.3
million for 1998, or $1.11 per share (diluted), from $4.0 million for 1997, or
$0.20 per share (diluted). The increase in net income between 1998 and 1997 was
attributable to the additional facilities operated in 1998, increases in
development contracts with independent
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third parties and Sunrise's ability to control operating expenses during the
expansion of operations. Operating expenses decreased as a percentage of
operating revenue by 13.0% between the years ended December 31, 1998 and 1997.
See "Results of Operations" for further discussion.
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 2,200. Sunrise also has entered into contracts to purchase 46
additional development sites, eight of which are zoned, and to lease two
additional sites. Sunrise is pursuing additional development opportunities and
also plans to acquire additional facilities as market conditions warrant.
On October 18, 1998, Sunrise entered into a merger agreement to acquire
Karrington Health, Inc., a Columbus-based assisted living provider, as amended
on March 4, 1999. Sunrise plans to purchase Karrington in a tax-free,
stock-for-stock transaction valued at approximately $94.9 million. The
transaction will be accounted for using the purchase method of accounting.
Karrington owns or has ownership interests in 42 facilities, has an additional
eight facilities under construction and has an additional eight development
sites under contract. Sunrise intends to sell 17 Karrington facilities within
12 months following the merger. Most of these facilities are Karrington Cottage
prototype models, which consist of 20 units or less.
Under the amended merger agreement, Karrington would become a wholly
owned subsidiary of Sunrise and each issued and outstanding Karrington common
share, other than shares for which dissenters' rights are exercised, would be
automatically converted into the right to receive 0.3333 of a share of Sunrise
common stock. Subject to satisfaction of the conditions set forth in the amended
merger agreement, including approval of the amended merger agreement by
Karrington shareholders, Sunrise expects to consummate its acquisition of
Karrington during the second quarter of 1999.
Sunrise previously agreed to make available to Karrington a fully
secured line of credit in the principal amount of up to $10.0 million. Sunrise
advanced $5.4 million to Karrington under this line of credit as of December 31,
1998. Interest accrues at 10.0%. The note was amended in March 1999 to provide
up to $6.5 million of additional advances and to extend the maturity from
November 1999 to January 2000.
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In December 1998, Sunrise acquired four separate first trust mortgages
secured by Karrington properties for $22.4 million. In December 1998, Sunrise
also assigned its right to purchase six properties owned by Meditrust
Corporation and leased by Karrington to a trust owned and funded by financial
institutions. The trust purchased the six properties from Meditrust Corporation
for approximately $42.2 million. Simultaneously, Sunrise entered into a leasing
arrangement with the trust to lease the six properties.
Also in December 1998, Sunrise entered into development agreements with
Karrington. Under the agreements, Sunrise will provide development and
construction services relating to three facilities until each facility receives
a certificate of occupancy.
In January 1999, Sunrise and Karrington entered into a management
consulting agreement and a management services agreement. Under the consulting
agreement, Sunrise agreed to assist Karrington in the management of its assisted
living facilities pending completion of the merger. Under the management
services agreement, Sunrise will receive a management fee of 7% of the revenues
from the facilities to manage five of Karrington's facilities pending completion
of the merger. Both agreements are for a term of one year.
Sunrise initiated a 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. 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 recognize gains on appreciated real estate.
In September 1998, Sunrise completed the sale of two assisted living
facilities located in Annapolis and Pikesville, Maryland 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
$1.5 million on the sale in 1998. For tax purposes, the transaction is treated
as a tax-free exchange. Sunrise will continue operating the facilities under
long-term operating agreements.
In mid-1997, Sunrise again began seeking to capitalize on its brand
awareness by accepting third-party management and development contracts. Sunrise
has renewed efforts to seek additional third-party management and development
opportunities after a two year period during which Sunrise focused on building
its infrastructure. In September 1998, Sunrise entered into an agreement
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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.
Sunrise has continued its efforts to explore international development
and acquisition possibilities in the United Kingdom and Canada and 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. A director of
Sunrise is a general partner in the third party that is providing the equity
capital. Currently, the joint venture has one property under development in the
United Kingdom and purchase commitments for two properties in Canada. Sunrise
provides management and development services to the joint venture on a
contract-fee basis with rights to acquire the assets in the future and has
agreed to invest up to $2.8 million of equity capital in the joint venture. As
of December 31, 1998, the third party has provided approximately $5.1 million
and Sunrise has provided $0.4 million of equity capital to the joint venture.
Sunrise has also committed to providing a revolving credit arrangement
of up to approximately $3.4 million to a subsidiary of the joint venture.
Interest on the outstanding principal amount accrues at 12.0%. The arrangement
expires on November 4, 2001. As of December 31, 1998, Sunrise has advanced
approximately $3.4 million under this revolving credit arrangement.
In connection with the implementation of its growth plans, Sunrise made
significant investments in its infrastructure through the addition of
information technology in 1998 and 1997, as well as additions to headquarters
and regional staff. During 1999, Sunrise expects to continue to invest in these
areas to support both the growth of Sunrise and to provide enhancement to some
of its existing computer systems to make them year 2000 compliant. See "Year
2000 Issues" for further discussion.
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RESULTS OF OPERATIONS
The following table sets forth operating data expressed as a percentage
of operating revenue:
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
Operating revenue 100.0% 100.0% 100.0%
Operating expenses:
Facility operating 52.0 59.3 59.7
Facility contract services 0.6 -- --
Facility development
and pre-rental 3.0 6.2 5.1
General and administrative 7.5 11.6 21.2
Depreciation and amortization 12.7 11.8 8.6
Facility lease 1.8 1.7 0.3
--------------------------------------------------------------------------------
Total operating expenses 77.6 90.6 94.9
--------------------------------------------------------------------------------
Income from operations 22.4 9.4 5.1
Other income (expense):
Interest income 3.9 7.6 7.0
Interest expense (13.0) (12.8) (20.6)
Equity in earnings of unconsolidated
assisted living facilities -- 0.1 --
Minority interests (0.3) 0.2 0.5
Unusual charge -- -- (2.1)
--------------------------------------------------------------------------------
Net income (loss) 13.0% 4.5% (10.1)%
================================================================================
Sunrise derives its revenues from two primary sources:
- - resident fees for the delivery of assisted living services; and
- - management services income for management and development of facilities owned
by third parties.
Historically, most of Sunrise's operating revenue has come from resident fees,
which in 1998, 1997 and 1996 comprised 89.0%, 95.3% and 93.3% of total operating
revenues, respectively. Resident fees typically are paid monthly by residents,
their families or other responsible parties. In 1998, 1997 and 1996
approximately 99% of Sunrise's revenue was derived from private pay sources.
Resident fees include revenue derived from: (a) basic care, consisting of
assistance with activities of daily living and other personalized support
services, (b) plus care, consisting of more frequent and intensive assistance or
increased care, (c) reminiscence care, consisting of care programs and services
to help cognitively impaired residents, including residents with Alzheimer's
disease, and (d) community fees. Community fees are one-time fees generally
equal to 60 times the daily resident fee payable by a resident upon
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admission. Plus care and reminiscence care fees are paid by residents who
require personal care in excess of services provided under the basic care
program.
Management services income represents fees from long-term contracts for
facilities owned by unconsolidated joint ventures and other third party owners
and includes management fees, which are generally in the range of 5% to 7% of a
managed facility's total operating revenue, for homes in operation and
development fees for site acquisition, development services, facility design and
construction management services. Management services income accounted for 9.1%,
4.7% and 6.7% of operating revenue in 1998, 1997 and 1996, respectively.
Sunrise classifies its operating expenses into the following
categories:
o facility operating, which include labor, food, marketing and other
direct facility expenses;
o facility contract services, which include operating expenses
reimbursable to Sunrise under operating agreements;
o facility development and pre-rental, which include non-capitalized
development expenses and pre-rental labor and marketing expenses;
o general and administrative, which primarily include headquarters and
regional staff expenses and other overhead costs;
o depreciation and amortization; and
o facility lease, which represent rental expenses for facilities not
owned by Sunrise.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Operating Revenue. Operating revenue for 1998 increased 89.9% to $170.7
million from $89.9 million for 1997 due primarily to the growth in resident
fees. Resident fees, including community fees, for 1998 increased $66.2 million,
or 77.3%, to $151.9 million from $85.6 million for 1997. This increase was due
primarily to the inclusion for the year ended December 31, 1998 of approximately
$23.7 million of resident fees generated from the operations of additional
facilities opened in 1998 and a $35.6 million increase in resident fees from
facilities operated for a full year in 1998 that were initially opened in 1997.
The remaining increase in resident fees
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was primarily due to an increase in the average daily resident fee, excluding
community fees, for owned facilities operated by Sunrise for at least twelve
months.
Average resident occupancy for owned facilities, opened or operated for
at least 12 months, or that have achieved occupancy percentages of 95% or above,
remained unchanged at 94% for both 1998 and 1997. The occupancy rate excludes
facilities with temporary vacancies and resident relocations generally of
between three to six months due to renovations. The average daily resident fee,
excluding community fees, for these stabilized facilities increased to $86 for
1998 from $78 for 1997. The increase is due to the inclusion of additional
stabilized prototype facilities which have higher basic care rates, a general
increase in the basic care rate at other facilities, and an increase in the
number of residents receiving plus care and reminiscence care services. Average
resident occupancy for owned facilities in initial resident lease-up increased
to 70% for 1998 from 62% for 1997. The average daily resident fee, excluding
community fees for these facilities increased to $107 for 1998 from $94 for
1997.
Management services income for 1998 increased to $15.6 million from
$4.2 million for 1997. The increase resulted primarily from a $11.2 million
increase in development and management fees to $15.2 million for 1998 from $4.0
million for 1997 relating to the development and management of facilities for
unconsolidated joint ventures and third party owners. This increase is primarily
due to the increase in the number of development and management contracts
entered into from the fourth quarter of 1997 through 1998. Sunrise had 24
development and management contracts as of December 31, 1998 and 18 development
and management contracts as of December 31, 1997.
In 1998, Sunrise recognized a gain of $1.5 million on the sale of two
assisted living communities and a $0.5 million gain on the sale of its minority
interest in a tenancy-in-common that owned one facility.
Operating Expenses. Operating expenses for 1998 increased by 62.7% to
$132.5 million from $81.5 million for 1997. The increase in operating expenses
was attributable to increases in all of the following areas: facility operating,
facility contract services, general and administrative, depreciation and
amortization and facility lease expenses.
Facility operating expense for 1998 increased 66.7% to $88.8 million
from $53.3 million for 1997. As a percentage of resident fees, facility
operating expense for 1998 decreased to 58.5% from 62.2% for 1997. Of the $35.5
million increase, $14.3 million was attributable to expenses from the operations
of additional
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assisted living facilities operated by Sunrise in 1998 as compared to 1997 and
$17.9 million was attributable to facilities operated for a full year in 1998
that were initially opened in 1997. The remaining balance of the increase was
primarily due to an increase in labor and general and administrative expense at
facilities that were operational for a full year in both periods.
General and administrative expense for 1998 increased 21.7% to $12.7
million from $10.5 million for 1997. As a percentage of operating revenue,
general and administrative expense for 1998 decreased to 7.5% from 11.6% for
1997, reflecting the higher operating revenue in the 1998 period. The $2.3
million increase in general and administrative expense for 1998 was primarily
related to labor costs, consisting of hiring and training additional staff at
the headquarters and regional offices.
Depreciation and amortization expense for 1998 compared to 1997
increased $11.1 million, or 104.4%, to $21.7 million from $10.6 million. Of the
increase, $6.4 million related to homes opened during 1998 and $4.7 million
related to homes operated for a full year in 1998 that were initially opened in
1997.
Facility lease expense increased $1.5 million primarily due to the
opening of two facilities developed and leased by Sunrise in 1998 and two
facilities operated for a full year in 1998 that were initially opened in 1997.
Other Income (Expense). Interest income decreased to $6.7 million for
1998 compared to $6.9 million for 1997. This decrease was primarily due to
decreased funds available for investment, offset, in part, by an increase in
interest income from notes receivable. See note 4 of notes to consolidated
financial statements. Interest expense increased for 1998 to $22.1 million from
$11.5 million for 1997. Of this increase, $3.6 million was due to a full year of
interest on Sunrise's $150.0 million aggregate principal amount of 5 1/2%
convertible subordinated notes due 2002 issued in June 1997 and $5.6 million was
due to interest on additional borrowings under one of Sunrise's credit
facilities. The remaining increase was primarily due to a decrease in
capitalized interest in 1998 versus 1997 due to a reduction in the average
balance of funded project costs.
Income Tax. Sunrise generated taxable income for the year ended
December 31, 1998 for the first time since its formation. Income tax expense for
the year was offset by a $9.8 million reduction in Sunrise's deferred tax asset
valuation allowance. The change in the valuation allowance reflects the
reduction of the combined net difference in net book and tax basis of property
and equipment, the expected tax benefit of various timing differences and the
anticipated utilization of
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net operating loss carryforwards. Of the remaining $8.6 million unrecognized
deferred tax assets, approximately $2.6 million relates to the remaining
difference between the net book and tax bases of property and equipment and
approximately $6.0 million relates to the tax benefit of nonqualified stock
options that have not been recognized for tax purposes. When the valuation
allowance related to the nonqualified stock options is released, the tax benefit
will be credited directly to equity. See note 15 of notes to consolidated
financial statements.
Realization of the tax benefits associated with the long-term deferred
tax assets is dependent upon Sunrise generating sufficient taxable income prior
to the expiration of the loss carryforward and reversals of the timing
differences. Based on this uncertainty, Sunrise is maintaining a valuation
allowance of $8.6 million on the deferred tax asset at December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Operating Revenue. Operating revenue for 1997 increased 89.8% to $89.9
million from $47.3 million for 1996 due primarily to the growth in resident
fees. Resident fees for 1997 increased 93.9% to $85.6 million from $44.2 million
for 1996. This increase was due primarily to the inclusion, in 1997, of
additional total revenue of $23.1 million generated from 19 Sunrise developed
facilities opened in late 1996 and throughout 1997, and $16.1 million generated
from the operations of nine acquired facilities. Other increases in revenue were
due primarily to increases in average resident occupancy and management services
income.
Average resident occupancy for owned facilities, opened or operated for
at least 12 months, or that have achieved occupancy percentages of 95% or above,
but excluding temporary vacancies and resident relocations generally of between
three to six months due to renovations, was 94% for both 1997 and 1996. The
average daily resident fee, excluding community fees, for these stabilized
facilities decreased to $78 for 1997 from $80 for 1996. Excluding acquired
facilities, the average daily resident fee, excluding community fees, was $84
for 1997 and 1996. Average resident occupancy for owned facilities in initial
resident lease-up remained unchanged at 62% for 1997 and 1996. The average daily
resident fee, excluding community fees for these facilities increased to $94 for
1997 from $83 for 1996.
Management services income for 1997 increased by $1.1 million, or
33.6%, to $4.2 million from $3.2 million for 1996 due to an increase in fees for
management and development services relating to the development of facilities
for unconsolidated joint ventures and third party owners.
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Operating Expenses. Operating expenses for 1997 increased 81.3% to
$81.5 million from $44.9 million for 1996. The increase in operating expenses in
1997 is attributable to increases in all of the following areas: facility
operating, facility development and pre-rental, depreciation and amortization
and facility lease expenses.
Facility operating expense for 1997 increased 88.5% to $53.3 million
from $28.3 million for 1996. As a percentage of operating revenue, facility
operating expense for 1997 decreased to 59.3% from 59.7% for 1996 as revenue
increased at a faster rate than facility operating expense. The $25.0 million
increase was primarily related to expenses from the operations of nine acquired
and 19 developed facilities during 1996 and 1997.
Facility development and pre-rental expense for 1997 increased by
130.8% to $5.6 million from $2.4 million for 1996. As a percentage of operating
revenue, facility development and pre-rental expense increased to 6.2% from
5.1%. This increase was due to a $1.0 million increase in non-capitalized labor
and related development costs, and a $2.2 million increase in start-up costs
relating to 20 new facilities opened during 1997.
General and administrative expense for 1997 increased 4.1% to $10.5
million from $10.0 million for 1996. As a percentage of operating revenue,
general and administrative expense decreased to 11.6% for 1997 from 21.2% for
1996. The $0.4 million increase was due to a $1.0 million increase in labor
costs, offset, in part, by a $0.6 million decrease attributable to various other
corporate and regional expenses. The provision for bad debts was $0.9 million
for 1997 and $0.7 million for 1996, respectively. Of the 1997 provision, $0.4
million related to certain subordinated management fees, $0.1 million related to
one-time consulting fees and the remainder related to resident services revenue.
Depreciation and amortization expense for 1997 increased 161.7% to
$10.6 million from $4.0 million for 1996 primarily due to the opening of 19
developed facilities and the acquisition of nine other facilities during 1996
and 1997.
Other Income (Expense). Interest income for 1997 increased 108.1% to
$6.9 million from $3.3 million for 1996. This increase was primarily due to the
investment of funds received from Sunrise's initial public offering and
follow-on offering completed during 1996, as well as net proceeds received from
the issuance and sale of $150.0 million aggregate principal amount of 5 1/2 %
convertible notes issued in June 1997. Interest expense for 1997 increased 18.0%
to $11.5 million from $9.7 million for 1996. This increase was due to $4.7
million of interest on the
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convertible notes and an increase of $1.6 million of interest for other
borrowings, net of interest reductions described below, offset, in part, by an
increase in capitalized interest of $4.5 million. Interest rate reductions
include the following:
o a lender agreeing, effective March 4, 1997, to reduce the interest
rate applicable to the $22.0 million outstanding portion of variable
rate indebtedness from LIBOR plus 3.75% to LIBOR plus 1.75%;
o Sunrise renegotiating interest rate reductions from LIBOR plus 2.75%
to corresponding U.S. Treasuries plus 1.00% on $15.7 million of
credit facilities;
o Sunrise renegotiating interest rate reductions from LIBOR plus 2.95%
to corresponding U.S. Treasuries plus 1.10% on a $7.4 million credit
facility; and
o Sunrise entering into a swap transaction, effective August 20, 1997,
whereby outstanding advances of up to $7.0 million under LIBOR
floating rate debt, bear interest at a fixed LIBOR base rate of
7.14%.
Unusual Charge. In order to avoid a possible change in Sunrise's
ability to continue to manage two facilities resulting from the reduction in
Paul Klaassen's or Teresa Klaassen's ownership interest in Sunrise following
completion of Sunrise's initial public offering in June 1996, Sunrise made a
$1.0 million cash payment to the third-party limited partner in these two
facilities in exchange for the transfer to Sunrise by the third party of
additional 1% partnership interests in each facility, with a total book value of
$18,700, and the elimination of any requirement for the Klaassens to maintain a
specified ownership interest in Sunrise. This was reflected as an unusual charge
during 1996.
Income Tax. As a result of tax losses incurred in prior periods,
Sunrise, at December 31, 1997, had net operating loss carryforwards for income
tax purposes of $23.6 million. In addition, as part of the formation of certain
Sunrise entities, the tax bases of the property and equipment of Sunrise
involved in the reorganization exceeds its respective book bases for financial
reporting. Under Statement of Financial Accounting Standards No. 109, Sunrise is
required to recognize the value of these tax loss carryforwards and differences
in book and tax bases in property and equipment if it is more likely than not
that they will be realized.
Realization of the net deferred tax asset of $18.3 million at December
31, 1997 is dependent on generating sufficient taxable income prior to the
expiration of
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the loss carryforwards. Based on historical net operating losses and no
assurance that Sunrise will generate any earnings or any specific level of
earnings in future years, Sunrise established a valuation allowance on the
deferred tax asset at December 31, 1997.
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, 1998,
Sunrise had $428.3 million of outstanding debt, excluding $40,000 notes payable
to an affiliate, at a weighted average interest rate of 6.8%. Of the amount of
outstanding debt, Sunrise had $260.3 million of fixed rate debt, excluding a
$1.0 million loan discount, at a weighted average interest rate of 6.5%, and
$169.0 million of variable rate debt at a weighted average interest rate of
7.2%. Sunrise is exposed to market risks related to fluctuations in interest
rates on its debt. Increases in prevailing interest rates could increase
Sunrise's interest payment obligations relating to variable rate debt. For
example, a one-eighth of one percent increase in interest rates would increase
annual interest expense by approximately $211,250.
At December 31, 1998, Sunrise had approximately $54.2 million in
unrestricted cash and cash equivalents, including $21.2 million in high quality
A1/P1 rated short-term investments and $175.0 million of unused lines of credit.
A subsidiary of Sunrise has a syndicated revolving credit facility for
$250.0 million. Sunrise guarantees the repayment of all amounts outstanding
under this credit facility. The credit facility expires in December 2000 and
includes two 12 month extension options, subject to the lender's approval.
The credit facility is secured by cross-collateralized first mortgages on the
real property and improvements and first liens on all other assets of the
subsidiary. Advances under the facility bear interest at LIBOR plus 1.00% to
LIBOR plus 1.50%. There were $137.0 million of advances outstanding under this
credit facility as of December 31, 1998.
Other subsidiaries have revolving credit facilities totaling $66.7
million. The repayments of the amounts outstanding under these credit facilities
are also guaranteed by Sunrise. The credit facilities are secured by real
property and first liens on other assets. Advances under these facilities bear
interest at rates ranging from LIBOR plus 1.25% to LIBOR plus 2.35% and totaled
$4.7 million as of December 31, 1998.
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. The conversion price is $37.1875, which is
equivalent to a
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conversion rate of 26.89 shares per $1,000 principal amount of the 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 notes upon a change of control of Sunrise, as defined
in the convertible notes.
Sunrise has an $86.2 million, excluding a $1.0 million discount,
multi-property mortgage, 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; and Class B in the amount of
$21.2 million bears a variable interest rate of LIBOR plus 1.75% and is payable
in installments through May 2001.
As of December 31, 1998, Sunrise had various other debt outstanding
totaling approximately $51.4 million with interest rates ranging from 6.9% to
8.5%.
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 has 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%. Sunrise recorded net
interest expense in 1998 and 1997 in the amounts of $227,000 and $17,000,
respectively, for swap transactions.
There are various financial covenants and other restrictions in
Sunrise's debt instruments, including provisions which:
o require it to meet specified financial tests. For example, Sunrise's
$86.2 million multi-property mortgage, which is secured by 15 of its
76 facilities, requires that these facilities maintain a cash flow
to interest expense coverage ratio of at least 1.25 to 1. Sunrise's
$250.0 million credit facility requires Sunrise to have a
consolidated tangible net worth of at least $178.3 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;
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o require consent for changes in management or control of Sunrise. For
example, Sunrise's $250.0 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;
o 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
o require that Sunrise maintain minimum occupancy levels at its
facilities. For example, Sunrise's $250.0 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.
Working capital decreased to $69.6 million at December 31, 1998, from
$70.3 million at December 31, 1997, primarily due to Sunrise's continued
investment in the development and ownership of assisted living facilities. The
decrease was offset, in part, by a net increase in working capital resulting
from the sale of two facilities, net borrowings during the year ended December
31, 1998 and an increase in receivables related to management and development
contracts from unrelated and related parties. Receivables from related parties
are included in prepaid expenses and other current assets on the accompanying
balance sheets.
Net cash provided by operating activities for 1998 and 1997 was
approximately $19.2 million and $8.3 million, respectively, corresponding to the
increased number of facilities operated by Sunrise at December 31, 1998,
compared to December 31, 1997.
During 1998 and 1997, Sunrise used $138.6 million and $221.8 million,
respectively, for investing activities. Investing activities included investment
in property and equipment in the amounts of $126.2 million and $213.6 million,
respectively, related to the construction of assisted living facilities. In
1998, Sunrise also invested $15.1 million in notes to facilitate the development
of assisted living facilities with third parties and $22.4 million in first
trust mortgages, offset by $28.6 million of proceeds from the disposition of
facilities. See note 4 to consolidated financial statements. In 1997, Sunrise
invested $16.9 million in notes receivable.
Net cash provided by financing activities was $90.9 million and $194.4
million for 1998 and 1997, respectively. Financing activities in 1998 and 1997
included additional borrowings of $108.0 million and $255.6 million,
respectively,
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48
offset, in part, by debt repayments of $23.4 million and $59.4 million,
respectively. Additional borrowings during 1998 were from one of Sunrise's
credit facilities and 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, financing commitments and financing
expected to be available, will be sufficient to fund facilities currently under
development. Additional financing will be required to complete additional
development and to refinance existing indebtedness. If the acquisition of
Karrington is completed, Sunrise estimates that it will cost between $420.5
million and $637.0 million to complete the 54 facilities the two companies have
under development. Sunrise expects that the cash flow from the combined
companies operations, together with borrowings under existing credit facilities,
will be sufficient to fund the needs of the combined entity for at least six
months following the merger. There can be no assurance that required financing
and refinancing will be available on acceptable terms.
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:
o obtaining zoning, land use, building, occupancy, licensing and other
required governmental permits for the construction of new facilities
without experiencing significant delays;
o completing construction of new facilities on budget and on schedule;
o the ability to work with third-party contractors and subcontractors
who construct the facilities;
o shortages of labor or materials that could delay projects or make
them more expensive;
o adverse weather conditions that could delay projects;
o finding suitable sites for future development activities at
acceptable prices; and
o addressing changes in laws and regulations or how existing laws and
regulations are applied.
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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 the companies operating assisted living facilities, such as
Karrington. 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 effectively. Any failure to do so may
have a material adverse effect on Sunrise's business, financial condition,
revenues and earnings.
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. Although
some competitors are significantly larger, there are no one or more dominant
companies in the assisted living segment. In a recent industry report, it is
estimated that there are approximately 770,000 total assisted living beds
currently available, and that the 25 largest owners of assisted living
properties, which includes Sunrise, has 180,446 or only 23% of those currently
available. The largest individual owner has only 3% of the total assisted living
beds currently available. 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 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
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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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities, which
is effective for fiscal years beginning after December 15, 1998. SOP 98-5
provides guidance on the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. It is Sunrise's policy to capitalize certain costs
incurred to rent its facilities such as costs of model units, their furnishings
and "grand openings" in accordance with Statement of Financial Accounting
Standards No. 67, Accounting for Costs and Initial Rental Operation of Real
Estate Projects. Additionally, initial direct costs associated with originating
lease transactions are capitalized in accordance with Statement of Financial
Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases. Direct costs include employees' compensation and payroll-related fringe
benefits directly related to acquiring leases. All costs of Sunrise's
development and leasing activities which are not considered to be within the
scope of Statement 67 or Statement 91 are expensed as incurred. SOP 98-5 states
that the guidance provided by Statement 67 and Statement 91 is not affected by
the provisions of SOP 98-5. Therefore, the adoption of SOP 98-5 is not
anticipated to affect results of operations or the financial position of
Sunrise.
Effective December 31, 1998, Sunrise adopted the provisions of
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information. Statement 131 establishes standards
for the way that a public company reports information about operating segments
in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. See note 19 of notes to consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Statement 133 standardizes the accounting for derivative instruments. Sunrise
participates in interest rate swap transactions, which would be considered
derivatives under Statement 133. Sunrise has not entered into any other
derivative
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51
transactions. For the three year period ended December 31, 1998, the net effect
of the interest rate swaps to Sunrise's results of operations has not been
material. Therefore, Statement 133 is not anticipated to affect results of
operations or the financial position of Sunrise.
IMPACT OF INFLATION
Resident fees from Company-owned assisted living facilities and
management services income from facilities operated by Sunrise for third parties
are the primary sources of revenue for Sunrise. These revenues are affected by
daily resident fee rates and facility occupancy rates. The rates charged for the
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.
YEAR 2000 ISSUES
Impact of Year 2000. Some of the older computer programs utilized by
Sunrise were written using two digits rather than four to define the applicable
year. As a result, those computer programs have time-sensitive software that
recognize a date using "00" as the year 1900 rather than the year 2000. This
could cause a system failure or miscalculations causing disruptions of
operations, including a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
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State of Readiness. Sunrise started to formulate a plan to address the
year 2000 issue in late 1996. Sunrise has given its vice president of
information technology specific responsibility for managing its year 2000 plan.
This vice president leads a multi-disciplinary team to make Sunrise's mission
critical information technology systems and embedded systems year 2000 ready.
Sunrise's plan for mission critical information technology systems consists of
four phases:
o inventory - identifying all mission critical information technology
systems and risk rating each according to its potential business
impact;
o assessment - identifying mission critical information technology
systems that use date functions and assessing them for year 2000
functionality;
o remediation - reprogramming, or replacing where necessary,
inventoried items to ensure they are year 2000 ready; and
o testing - including date testing and performing quality assurance
testing to ensure successful operation in the post-1999 environment.
Sunrise completed the inventory and assessment phases for substantially
all of its mission critical information technology systems by year-end 1997.
Sunrise's mission critical information technology systems are currently in the
remediation and testing phases. Mission critical information technology systems
implemented or updated that are year 2000 compliant include:
o the accounting general ledger system;
o the resident billing system;
o the cash disbursement or accounts payable system;
o the development or project cost system;
o the fixed asset system;
o the employee stock option system;
o payroll and human resource system; and
o substantially all software residing on Sunrise's home office and
facility desk-top and lap-top computers.
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Sunrise plans to complete the remediation of substantially all of its mission
critical systems by mid-1999. Sunrise plans to complete the testing of all of
its mission critical information technology systems by September 1999.
Sunrise is approximately 75% complete in its assessment of embedded
systems and expects to complete its assessment in March 1999. Sunrise's
remaining steps will then include testing selected embedded systems and
remediating and testing systems that exhibit year 2000 issues. Sunrise intends
to focus its testing and remediation efforts on select embedded systems at
Sunrise's facilities, such as telephone, elevator, security, HVAC and similar
systems. Sunrise plans to complete the assessment, remediation and testing of
these systems by year-end 1999.
External Relationships. Sunrise also faces the risk that one or more of
its critical vendors will not be able to interact with Sunrise due to the third
party's inability to resolve its own year 2000 issues, including those
associated with its own external relationships. Sunrise has completed its
inventory of external relationships and is attempting to determine the overall
year 2000 readiness of its external relationships. In the case of mission
critical suppliers, such as banks, financial intermediaries, including stock
exchanges, telecommunications providers and other utilities, Sunrise is engaged
in discussions with the third parties and is attempting to obtain detailed
information as to those parties' year 2000 plans and state of readiness.
Sunrise, however, does not have sufficient information at the current time to
predict whether its external relationships with mission critical suppliers will
be year 2000 ready.
Year 2000 Costs. Sunrise estimates on a preliminary basis that the cost
of assessment, remediation, testing and certification of its internal systems
will range from approximately $500,000 to $1,500,000. The major components of
these costs are: consultants, new software and hardware, software upgrades and
travel expenses. Sunrise expects that these costs will be funded through
operating cash flows. This estimate is based on currently available information.
Sunrise's year 2000 costs may increase once it has determined the year 2000
readiness of its vendors, customers and other third parties. In addition, the
availability and cost of consultants and other personnel trained in this area
and any future acquisitions may materially affect the estimated costs.
No Assurance that Sunrise Can Fully Implement Its Year 2000 Plan.
Sunrise's year 2000 issue involves significant risks. There can be no assurance
that Sunrise will succeed in fully implementing its year 2000 plan. The
following describes Sunrise's most reasonably likely worst-case scenario, given
current
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uncertainties. If Sunrise's remediated internal mission critical information
technology systems fail upon testing, or any software application or embedded
microprocessors central to Sunrise's operations are overlooked in the assessment
or implementation phases, Sunrise may incur significant problems, including
delays in billing its residents. If Sunrise's vendors or suppliers fail to
provide its facilities with necessary power, telecommunications, transportation
and financial services, equipment and services, Sunrise will be unable to
provide services to its residents. If any of these uncertainties were to occur,
Sunrise's business, revenues and results of operations would be adversely
affected. Sunrise is unable at this time to assess the likelihood of these
events occurring or the extent of the effect on Sunrise.
Year 2000 Forward-Looking Statements. The foregoing year 2000 discussion
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements, including
anticipated costs and the dates by which Sunrise expects to complete actions,
are based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of resources, representations received from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause material differences include the ability to identify and
remediate all relevant mission critical information technology and non-mission
critical information technology systems, results of year 2000 testing, adequate
resolution of year 2000 issues by businesses and other third parties who are
service providers and suppliers of Sunrise, unanticipated system costs, the
adequacy of and ability to develop and implement contingency plans and similar
uncertainties. The "forward-looking statements" made in the previous year 2000
discussion speak only as of the date on which the statements are made. Sunrise
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Quantitative and qualitative disclosure about market risk appears in
the liquidity and capital resources section of item 7. managements discussion
and analysis of financial condition and results of operations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements appear on pages F-1 through F-25.
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.
Sunrise's certificate of incorporation provides for a minimum of two
directors and a maximum of 11 directors. The board of directors of Sunrise
currently consists of eight members. The directors are divided into three
classes, each consisting of approximately one-third of the total number of
directors. In general, the term of office of only one class expires in each year
and their successors are elected for terms of three years and until their
successors are elected and qualified. At the 1999 annual meeting, three
directors will be elected, each for a three-year term. As described below, the
board of directors' nominees are Ronald V. Aprahamian, David G. Bradley and
Teresa M. Klaassen.
INFORMATION AS TO NOMINEES AND OTHER DIRECTORS
The following table sets forth certain information regarding the board of
directors' three nominees for election as directors at the 1999 annual meeting
and those directors who will continue to serve as directors after the annual
meeting.
AGE AT
MARCH 15, DIRECTOR FOR TERM POSITION(S) HELD
1999 SINCE (1) TO EXPIRE WITH SUNRISE
-------- --------- --------- --------------
NOMINEES:
- ---------
Ronald V. Aprahamian..............................52.. 1995 2002 Director
David G. Bradley..................................46.. 1997 2002 Director
Teresa M. Klaassen (2)............................43.. 1981 2002 Executive Vice
President, Secretary
and Director
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TERM
CONTINUING DIRECTORS: EXPIRES
- --------------------- -------
Richard A. Doppelt.............................................43... 1995 2001 Director
Paul J. Klaassen (2)...........................................41... 1981 2001 Chairman of the Board
and Chief Executive
Officer
Thomas J. Donohue..............................................60... 1995 2000 Director
David W. Faeder................................................42... 1993 2000 President, Chief
financial Officer and
Director
Scott F. Meadow................................................45... 1996 2000 Director
- ----------------------
(1) The dates shown, except for Mr. Meadow, reflect the year in which these
persons were first elected as directors of Sunrise or its predecessors.
Mr. Meadow previously served as a director of Sunrise from January 1995
to August 1995, and most recently has been a director since February
1996.
(2) Paul J. Klaassen and Teresa M. Klaassen are related as husband and wife.
The principal occupations for the past five years of each of the three
nominees for director and the five directors whose terms of office will continue
after the 1999 annual meeting are set forth below.
RONALD V. APRAHAMIAN served as chairman of the board and chief executive
officer of The Compucare Company, a health care information technology company,
from 1988 until October 1996. From May 1997 to September 1998, he was a
consultant to Sunrise. Mr. Aprahamian also is a director of Metrocall, Inc., a
paging company.
DAVID G. BRADLEY is chairman and owner of the Advisory Board Company, a
750-person think tank and for-profit membership association in Washington, D.C.,
and owner of the National Journal, a Washington, D.C.-based public policy
magazine. He also serves on the boards of directors of Georgetown University, MD
Anderson Cancer Center, City of Hope National Medical Center and The Wolf Trap
Foundation. Mr. Bradley previously worked at the White House, the White House
Conference on Children and Youth and the Wall Street law firm of Cravath, Swaine
& Moore.
57
TERESA M. KLAASSEN, a co-founder of Sunrise, has served as executive vice
president and secretary of Sunrise and its predecessor entities since 1981. Ms.
Klaassen is a founding member of the Assisted Living Federation of America, the
largest assisted living trade association, and currently serves on the boards of
directors of several long-term care organizations.
RICHARD A. DOPPELT has been a member of the investment management firm of
Brownson, Rehmus & Foxworth, Inc. since January 1999. From August 1987 through
December 1998, he was a director with Allstate Private Equity, an investment
division of Allstate Insurance. Before joining Allstate, he practiced as a
corporate attorney with the law firm of Morrison & Foerster. Mr. Doppelt is a
director of several privately held companies.
PAUL J. KLAASSEN, a co-founder of Sunrise, has served as chairman of the
board and chief executive officer of Sunrise and its predecessor entities since
1981. He also served as president of Sunrise and its predecessor entities from
1981 through July 1997. Mr. Klaassen is the founding chairman of the Assisted
Living Federation of America. He is a director of: ACSYS, Inc., an accounting
and staffing firm; the Advisory Board Company; the U.S. Chamber of Commerce; and
The National Chamber Foundation, an independent, nonprofit, public policy
research organization affiliated with the U.S. Chamber of Commerce. He also is
on the Board of Trustees of Marymount University and The Hudson Institute, a
public policy think tank, and the Advisory Committee for the Department of
Health Care Policy at Harvard University Medical School. Mr. Klaassen also
serves on the editorial advisory boards of Contemporary Long Term Care,
Retirement Housing Report, Assisted Living Today and Assisted Living Briefing
magazines.
THOMAS J. DONOHUE is president and chief executive officer of the U.S.
Chamber of Commerce. From 1984 to September 1997 he was president and chief
executive officer of the American Trucking Association, the national trade
organization of the trucking industry. Mr. Donohue is a director of: Marymount
University; the National Football League Alumni Association; IPAC, an
international consulting firm; Newmyer Associates, a Washington, D.C. firm that
tracks and analyzes public policy; and The Hudson Institute. In addition, Mr.
Donohue served on the President's Commission on Intermodal Transportation.
DAVID W. FAEDER has served as executive vice president and chief
financial officer of Sunrise and its predecessor entities since 1993. He was
named president of Sunrise in July 1997. From 1991 to 1993, Mr. Faeder was a
vice president of CS First Boston Corporation, serving in both the investment
banking and fixed income departments. From 1984 to 1991, Mr. Faeder served as a
vice president of Morgan
58
Stanley, where he worked in the Real Estate Capital Markets Group. Mr. Faeder
is a director of IBS Interactive, Inc., a technology company.
SCOTT F. MEADOW has been a general partner of The Sprout Group, the
venture capital division of DLJ Capital Corporation, since February 1996. From
1992 to 1995, Mr. Meadow was a general partner of Frontenac Company, a venture
capital firm. From 1982 to 1992, he was a general partner of William Blair
Venture Partners, a venture capital firm. Mr. Meadow is a director of several
privately held companies.
OTHER EXECUTIVE OFFICERS
The principal occupation during the past five years of Sunrise's other
executive officers follows:
THOMAS B. NEWELL, 41, has served as general counsel of Sunrise and
president of Sunrise Development, Inc., Sunrise's development subsidiary, since
January 1996 and was named an executive vice president of Sunrise in May 1996.
From 1989 to January 1996, Mr. Newell was a partner with the law firm of Watt
Tieder & Hoffar, where his practice concentrated on all aspects of commercial
and real estate development transactions and where he represented Sunrise for
more than five years.
BRIAN C. SWINTON, 53, joined Sunrise as executive vice president, sales
and marketing, in May 1996. From January 1994 to April 1996, Mr. Swinton was a
senior vice president of Forum Group, Inc., a developer and operator of
retirement communities and assisted living facilities, where his
responsibilities included marketing, sales and product development. From 1986 to
1994, Mr. Swinton served as vice president, sales, marketing and product
development at Marriott International, where he was responsible for designing,
developing, marketing and the initial operations of the Brighton Gardens
assisted living concept.
TIFFANY TOMASSO, 36, was promoted to executive vice president --
operations of Sunrise, in March 1998. She joined Sunrise in 1993 as regional
vice president in charge of developing assisted living facilities in New Jersey,
Pennsylvania and Delaware, and was promoted in 1994 to senior vice president.
Before 1993, Ms. Tomasso was vice president of operations for assisted living
and healthcare at Presbytarian Homes of New Jersey. She previously served in a
variety of long-term care administrator positions in facilities owned by HBA
Management, Inc.
Executive officers are elected annually and serve at the discretion of
the board of directors.
59
Sunrise has entered into a merger agreement with Karrington Health, Inc.
Under the merger agreement, Karrington would become a wholly owned subsidiary of
Sunrise. As part of the merger agreement, Sunrise agreed, following the
acquisition, to appoint Richard R. Slager, Karrington's Chief Executive Officer,
to Sunrise's board of directors as the representative of JMAC, Inc.,
Karrington's largest stockholder. As long as JMAC, Inc. continues to
beneficially own at least 500,000 shares of Sunrise common stock, Sunrise also
has agreed to re-nominate Mr. Slager, or another nominee of JMAC, Inc.
reasonably acceptable to Sunrise's directors, and solicit proxies for his
reelection as a director of Sunrise. Mr. Slager also would become an executive
officer of Sunrise. Karrington's stockholders must approve the acquisition. If
approved by Karrington's stockholders, Sunrise expects that its acquisition of
Karrington will be completed in the second quarter of 1999, and that Mr. Slager
will be appointed a director and executive officer of Sunrise promptly
thereafter. Under Delaware law, the board of directors of Sunrise has the
authority to increase the size of the board of directors and fill the vacancy
resulting from an increase in the size of the board of directors for the
remaining term of the newly created directorship.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Sunrise's
directors, officers and beneficial owners of more than 10% of Sunrise's
outstanding equity securities to file with the SEC initial reports of ownership
of Sunrise's equity securities and to file subsequent reports when there are
changes in such ownership. Based on a review of reports submitted to Sunrise for
1998, Sunrise believes that all Section 16(a) filing requirements for that year
applicable to such persons were complied with on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, for the years ended December 31, 1998,
1997 and 1996, the cash compensation paid by Sunrise, as well as other
compensation paid or accrued during those years, to Sunrise's chief executive
officer and each of the other four most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 in 1998.
60
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION/
AWARDS
----------------
SHARES OF
ANNUAL COMPENSATION COMMON STOCK ALL OTHER
------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(S) YEAR SALARY ($) OPTIONS (#) ($)(1)
- ------------------------------ ---- ---------- ---------------- -----------
Paul J. Klaassen 1998 $200,000 N/A $ -0-
Chairman of the Board 1997 200,000 N/A 942
and Chief Executive Officer 1996 200,000 N/A 2,375
David W. Faeder 1998 175,000 400,000(2) -0-
President and 1997 175,000 100,000 838
Chief Financial Officer 1996 175,000 191,666 2,375
Thomas B. Newell(3)
Executive Vice President and
General Counsel of Sunrise 1998 175,000 400,000(2) -0-
and President of Sunrise 1997 175,000 100,000 -0-
Development, Inc. 1996 175,000 213,333 N/A
Brian C. Swinton(4) 1998 165,000 200,000(2) -0-
Executive Vice President, 1997 165,000 75,000 -0-
Sales and Marketing 1996 165,000 195,000 N/A
Tiffany Tomasso(5) 1998 165,000 430,000(2) -0-
Executive Vice President, 1997 -- -- --
Operations 1996 -- -- --
- ----------------------
(1) Represents matching contributions made by Sunrise under its 401(k) plan.
(2) Includes options repriced in 1998. See "Option Grants in Last Fiscal
Year" below.
(3) Mr. Newell joined Sunrise in January 1996.
(4) Mr. Swinton joined Sunrise in May 1996.
(5) Ms. Tomasso joined Sunrise in June 1993 and was promoted to executive
vice president, operations in March 1998.
OPTION GRANTS
The following table contains certain information with respect to stock
options granted in 1998 to each of the named executive officers of Sunrise,
including
61
repriced options. All options granted in 1998, other than repriced options, were
ten-year non-qualified options.
OPTION GRANTS IN LAST FISCAL YEAR
% OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
SHARES OF OPTIONS ANNUAL RATES OF
COMMON GRANTED STOCK PRICE
STOCK TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ------------
NAME GRANTED YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------- ---------- ------ ------------ ---------- -----------
Paul J. Klaassen -0- -0-% $-0- -0- $-0- $-0-
David W. Faeder 200,000(1) 6.0 43.50 3/3/08 5,512,106 13,930,403
200,000(2) 6.0 25.00 3/3/08 2,523,942 6,436,046
Thomas B. Newell 200,000(1) 6.0 43.50 3/3/08 5,512,106 13,930,403
200,000(2) 6.0 25.00 3/3/08 2,523,942 6,436,046
Brian C. Swinton 100,000(1) 3.0 43.50 3/3/08 2,756,053 6,965,201
100,000(2) 3.0 25.00 3/3/08 1,261,971 3,218,023
Tiffany Tomasso 100,000(1) 3.0 43.50 3/3/08 2,756,053 6,965,201
100,000(1) 3.0 44.00 1/19/08 2,767,136 7,012,467
100,000(2) 3.0 25.00 3/3/08 1,261,971 3,218,023
100,000(2) 3.0 25.00 1/19/08 1,261,971 3,218,023
30,000(2) 0.9 25.00 8/28/07 378,591 965,407
- ----------------------
(1) These options were canceled upon the regrant of a corresponding number of
options in September 1998, as indicated in the table. The original
vesting period of the options was four years. Vesting of options is
accelerated if the options are not assumed in connection with any
dissolution or liquidation of Sunrise, the sale of substantially all of
Sunrise's assets, a merger, reorganization or consolidation in which
Sunrise is not the surviving corporation or any other transaction
approved by the board of directors which results in any person or entity
owning 80% or more of the total combined voting power of all classes of
stock of Sunrise.
(2) Represents options regranted in September 1998. The regranted options
vest over a five-year period, as follows: 15%, 15%, 20%, 20%, and 30%.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to each of the
named executive officers of Sunrise concerning the exercise of stock options
during 1998, the number of securities underlying unexercised options at the 1998
year-end and the 1998 year-end value of all unexercised in-the-money options
held by such individuals.
62
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS($)(1)
SHARES ACQUIRED ON --------------------------- --------------------------
NAME EXERCISE (#) VALUE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ------------------ -------------------- ----------- ------------- ----------- -------------
Paul J. Klaassen -0- $-0- -0- -0- $-0- $-0-
David W. Faeder 68,082 2,384,441 159,418 354,167 4,633,056 8,914,597
Thomas B. Newell 20,000 470,000 120,000 370,002 3,501,559 9,782,899
Brian C. Swinton 20,000 470,000 86,250 223,750 2,294,531 5,755,469
Tiffany Tomasso 38,834 892,276 36,000 266,001 1,063,189 6,835,732
- ----------------------
(1) Market values of underlying securities at exercise or year-end minus the
exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed entirely of non-employee
directors. During 1998, Messrs. Aprahamian, Donohue and Meadow served on the
Compensation Committee.
Scott F. Meadow is a general partner of The Sprout Group, the venture
capital division of DLJ Capital Corporation. In 1998, Sunrise entered into a
joint venture with several affiliates of The Sprout Group and DLJ Capital
Corporation for the purpose of constructing, developing, marketing and operating
up to 22 assisted living facilities in the United Kingdom and Canada. Sunrise
has agreed to provide up to $2.8 million, and the other investors have agreed to
provide up to $55.3 million, of equity capital in the joint venture. In
connection with the establishment of the joint venture, Sunrise sold to the
joint venture its interest in an assisted living development site near London,
England. The purchase price was $4.6 million representing the amount paid by
Sunrise to purchase the property plus related organizational and development
costs. In addition to its equity capital investment, Sunrise will provide
management and development services to the joint venture on a contract-fee basis
with rights to acquire the assets in the future. As of December 31, 1998,
Sunrise has provided approximately $0.4 million, and the other investors have
provided approximately $5.1 million, of equity capital to the joint venture.
63
COMPENSATION OF DIRECTORS
Non-employee directors are reimbursed for expenses incurred in attending
meetings of the board of directors. No fees are paid for attendance at board or
committee meetings.
Non-employee directors of Sunrise are eligible to receive options under
Sunrise's 1996 directors' stock option plan, as amended. An aggregate of 75,000
shares of common stock are reserved for issuance under this plan. As of December
31, 1998, 35,000 shares remained available for grant. Under the plan, each
non-employee director whose commencement of service is after April 25, 1996, the
effective date of the plan, is entitled to receive (a) an initial non-qualifying
option, as of the date of the director's commencement of service, to purchase
10,000 shares of common stock and (b) an additional non-qualifying option to
purchase 5,000 shares of common stock as of each subsequent annual meeting of
Sunrise's stockholders if the director is then serving on the board. The option
exercise price may not be less than the fair market value of a share of common
stock on the date the option is granted. The period for exercising an option is
generally ten years from the date of grant.
In 1998, Messrs. Aprahamian, Bradley and Donohue each received grants of
ten-year non-qualified stock options for 5,000 shares of common stock at an
exercise price of $44.56 per share under Sunrise's 1996 directors' stock option
plan, as amended. Mr. Doppelt received an initial option grant in 1998 for
10,000 shares of common stock at an exercise price of $44.56. Messrs.
Aprahamian, Bradley, Donohue and Doppelt will each receive additional option
grants for 5,000 shares as of the date of the annual meeting. Directors also are
eligible to receive option grants under the 1998 stock option plan.
During the first nine months of 1998, Mr. Aprahamian was a consultant to
Sunrise for which he received $63,405.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
STOCK OWNED BY MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of March 15, 1999 by (a) each
director and nominee for director of Sunrise; (b) each named executive officer
of Sunrise; and (c) all executive officers and directors of Sunrise as a group.
64
NAME AND POSITION(S) AMOUNT AND NATURE OF PERCENT OF COMMON
WITH SUNRISE BENEFICIAL OWNERSHIP(1) STOCK OUTSTANDING
------------ ----------------------- -----------------
Paul J. Klaassen(2)
Chairman of the Board
and Chief Executive Officer 2,800,780 14.4%
Teresa M. Klaassen(2)
Executive Vice President and
Secretary 2,800,780 14.4
David W. Faeder(3)
President and
Chief Financial Officer 159,418 *
Thomas B. Newell(3)
Executive Vice President and
General Counsel of Sunrise
and President of Sunrise
Development, Inc. 120,000 *
Brian C. Swinton(3)
Executive Vice President, Sales
and Marketing 86,250 *
Tiffany Tomasso(3)
Executive Vice President, Operations 36,000 *
Ronald V. Aprahamian(4)
Director 95,000 *
David G. Bradley
Director 15,000 *
Thomas J. Donohue(5)
Director 85,800 *
Richard A. Doppelt
Director 10,000 *
Scott F. Meadow
Director 369 *
Executive officers and directors as a group (11 persons)(6) 3,408,617 17.0
- ----------------------
* Less than one percent.
(1) Under Rule 13d-3 under the Securities Exchange Act, a person has
beneficial ownership of any securities as to which such person, directly
or indirectly, through any contract, arrangement, undertaking,
relationship or otherwise has or shares voting power and/or
65
investment power and as to which such person has the right to acquire
such voting and/or investment power within 60 days. Percentage of
beneficial ownership as to any person as of a particular date is
calculated by dividing the number of shares beneficially owned by such
person by the sum of the number of shares outstanding as of such date and
the number of shares as to which such person has the right to acquire
voting and/or investment power within 60 days.
(2) Represents 2,800,780 shares held jointly by the Klaassens, as tenants by
the entireties. See "Principal Holders of Voting Securities."
(3) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of March 15, 1999.
(4) Represents 55,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days of March 15, 1999 and 40,000 shares of
common stock held directly.
(5) Represents 40,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days of March 15, 1999 and 45,800 shares of
common stock held directly.
(6) Includes 516,668 shares issuable upon the exercise of stock options that
are exercisable within 60 days of March 15, 1999, and the 2,800,780
shares beneficially owned jointly by Paul J. and Teresa M. Klaassen.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information as of March 15, 1999 with
respect to the ownership of shares of Sunrise common stock by each person
believed by management to be the beneficial owner of more than five percent of
Sunrise's outstanding common stock. The information is based on the most recent
Schedule 13D or 13G filed with the SEC on behalf of such persons or other
information made available to Sunrise. Except as otherwise indicated, the
reporting persons have stated that they possess sole voting and sole dispositive
power over the entire number of shares reported.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF COMMON
BENEFICIAL OWNER BENEFICIAL OWNERSHIP STOCK OUTSTANDING
---------------- -------------------- -----------------
Paul J. and Teresa M. Klaassen(1)
9401 Lee Highway, Suite 300
Fairfax, VA 22031 2,800,780 14.4%
Putnum Investments, Inc.(2)
One Post Office Square
Boston, MA 02109 1,389,179 7.1
American Express Company(3)
American Express Tower
200 Vesey Street
New York, NY 10285 1,243,200 6.4
66
- ----------------------
(1) See "Stock Owned by Management."
(2) The Schedule 13G dated January 26, 1999 of Putnam Investments, Inc., a
wholly-owned subsidiary of Marsh & McLennan Companies, Inc., states that
it wholly owns two registered investment advisers: Putnam Investment
Management, Inc. and The Putnam Advisory Company, Inc. The Schedule 13G
states that: (a) Putnam Investments has shared power to vote 183,900
shares and shared power to dispose of 1,389,179 shares; (b) Putnam
Investment Management has shared power to dispose of 1,135,479 shares;
and (c) Putnam Advisory Company has shared power to vote 183,900 shares
and shared power to dispose of 253,700 shares. Both Putnam Investments
and Marsh & McLennan declare in the Schedule 13G that the filing of the
Schedule 13G shall not be deemed an admission by either or both of them
that they are the beneficial owner of any securities covered by the
Schedule 13G, and that neither of them have any power to vote or dispose
of, or direct the voting or disposition of, any of the securities covered
by the Schedule 13G.
(3) The Schedule 13G dated December 31, 1998 of American Express Financial
Corporation states that American Express Financial, a registered
investment adviser, has shared power to vote 479,800 shares and shares
power to dispose of 1,243,200 shares. The Schedule 13G also states that
American Express Company, a parent holding company, has shared power to
vote 479,800 shares and shares power to dispose of 1,243,200 shares.
American Express Financial disclaims beneficial ownership of the
securities referred to in the Schedule 13G.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Sunrise leases the real property on which the Fairfax facility is located
from Teresa M. Klaassen and Paul J. Klaassen under a 99-year ground lease
entered into in June 1986. The ground lease provides for monthly rent of
$21,272, as adjusted annually based on the consumer price index. Annual rent
expense for 1998 was $262,000. Sunrise has subleased approximately 50% of the
property subject to the ground lease to Sunrise Assisted Living Foundation,
a not-for-profit organization operated by the Klaassens. Sunrise Foundation
operates a school and day care center on the property. The sublease terminates
upon expiration of the ground lease and provides for monthly rent equal to 50%
of all of the rent payable under the ground lease. Sunrise Foundation also
reimburses Sunrise for use of office facilities and support services.
Reimbursements for 1998 were $84,000. Sunrise believes that the terms of the
lease and sublease were no less favorable to Sunrise than those which it could
have obtained from an unaffiliated third party.
The Klaassens also lease real property located in Fairfax County,
Virginia from Sunrise for use as a residence under a 99-year ground lease
entered into in June 1994. The rent is $1.00 per month. This property is part of
a parcel, which includes Sunrise's Oakton facility, that was previously
transferred by the Klaassens to Sunrise in connection with a financing
transaction. Rather than attempting to
67
subdivide the parcel, which would have caused a significant delay in completing
the financing transaction, Sunrise agreed to lease back the residence to the
Klaassens as a condition to the transfer of the property.
For a description of certain other transactions involving Sunrise and its
directors, see the section entitled "Compensation Committee Interlocks and
Insider Participation" included as part of Item 11.
68
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, 1998 and 1997. F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996. F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996. 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.
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69
(b) Reports on Form 8-K.
On October 28, 1998, Sunrise filed a Form 8-K with the SEC which
announced the proposed acquisition of Karrington Health, Inc.
On December 17, 1998, Sunrise filed a Form 8-K with the SEC which
announced the closing of a transaction with Meditrust Corporation. That
transaction involved the acquisition of four first trust mortgages
secured by assisted living properties owned and operated by Karrington
and the assignment of Sunrise's right to purchase six assisted living
properties currently leased to Karrington to a third party.
On December 21, 1998, Sunrise filed a Form 8-K with the SEC which
announced Amendment No. 1 to the Rights Agreement with Sunrise's rights
agent, First Union National Bank of North Carolina, dated as of December
17, 1998.
(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
3/26/99
-------------------------
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 3/26/99
----------------------------- -------------------------
Paul J. Klaassen Date
Chairman of the Board, and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ David W. Faeder 3/26/99
----------------------------- -------------------------
David W. Faeder Date
President, Chief Financial
Officer and Director
(Principal Financial Officer)
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71
By: /s/ Larry E. Hulse 3/26/99
----------------------------- -------------------------
Larry E. Hulse Date
Controller
(Principal Accounting Officer)
By: /s/ Ronald V. Aprahamian 3/26/99
----------------------------- -------------------------
Ronald V. Aprahamian Date
Director
By: /s/ David G. Gradley 3/26/99
----------------------------- -------------------------
David G. Bradley Date
Director
By: /s/ Thomas J. Donohue 3/26/99
----------------------------- -------------------------
Thomas J. Donohue Date
Director
By: /s/ Richard A. Doppelt 3/26/99
----------------------------- -------------------------
Richard A. Doppelt Date
Director
By: /s/ Teresa M. Klaassen 3/26/99
----------------------------- -------------------------
Teresa M. Klaassen Date
Executive Vice President,
Secretary and Director
By:/s/ Scott F. Meadow 3/26/99
----------------------------- -------------------------
Scott F. Meadow Date
Director
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INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
2.1 Agreement of Merger, dated as of October 18, 1998, among Sunrise, Buckeye
Merger Corporation and Karrington (Exhibit 2.1 to Sunrise's Form 8-K
dated October 28, 1998).
2.2 Amendment No. 1 to Agreement of Merger, dated as of March 4, 1999, among
Sunrise, Buckeye Merger Corporation and Karrington (Exhibit 2.1 to
Sunrise's From 8-K dated March 5, 1999).
2.3 Letter dated October 16, 1998 from Sunrise to Meditrust Mortgage
Investments, Inc. setting forth terms and conditions under which Sunrise
would acquire certain properties subject to leases and certain mortgage
loans. (Exhibit 2.1 to Sunrise's Form 8-K dated December 17, 1998).
2.4 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).
2.5 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
-1-
73
1998-1, as the Borrower, the several lenders from time to time parties
thereto, and Nationsbank, N.A., as the Agent (Exhibit 2.3 to Sunrise's
Form 8-K dated December 17, 1998).
2.6 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).
2.7 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).
2.8 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
-2-
74
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).
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).
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.
-3-
75
(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
-4-
76
Form S-1 Registration Statement No. 333-2582).
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
-5-
77
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).
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
-6-
78
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 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).
-7-
79
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 Registration Rights Agreement, dated as of June 6, 1997, among Sunrise,
Donaldson, Lufkin & Jenrette Securities Corporation and Alex. Brown &
Sons Incorporated (Exhibit 4.2 to Sunrise's Form 10-Q for the quarter
ended June 30, 1997).
10.25 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).
10.26 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).
10.27 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).
-8-
80
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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
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81
for certain additional lenders and Sunrise East Assisted Living
Limited Partnership (Exhibit 10.31.8 to Sunrise's 1997 Form 10-K).
10.33 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 Assisted Living Limited
Partnership (Exhibit 10.31.9 to Sunrise's 1997 Form 10-K).
10.34 + Form of Indemnification Agreement (Exhibit 10.24 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.35 + 1995 Stock Option Plan, as amended (Exhibit 10.20 to Sunrise's 1997
Form 10-K).
10.36 + 1996 Directors' Stock Option Plan, as amended.
10.37 + 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).
10.38 + 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).
10.39 + 1996 Non-Incentive Stock Option Plan, as amended (Exhibit 10.24 to
Sunrise's 1997 Form 10-K).
-10-
82
10.40 + 1997 Stock Option Plan, as amended (Exhibit 10.25 to Sunrise's 1997
Form 10-K).
10.41 + 1998 Stock Option Plan, as amended.
10.42 + Separation Agreement and General Release between Sunrise and Timothy S.
Smick dated March 6, 1998 (Exhibit 10.3 to Sunrise's Form 10-Q for the
quarter ended March 31, 1998).
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule as of and for the year ended December 31, 1998.
99.1 Option Agreement dated October 18, 1998 between Sunrise and Karrington
(Exhibit 99.1 to Sunrise's Form 8-K dated October 28, 1998).
99.2 Form of Shareholder Agreement with Karrington affiliates (Exhibit 99.2 to
Sunrise's Form 8-K dated October 28, 1998).
99.3 Form of amendment to Shareholder Agreement with Karrington affiliates.
99.4 Revolving Loan Agreement dated November 6, 1998 between Sunrise and
Karrington.
99.5 First Amendment to Revolving Loan Agreement dated February 26, 1999
between Sunrise and Karrington.
-11-
83
99.6 Letter dated March 23, 1999 from Sunrise to Karrington extending the
maturity date of the Karrington line of credit.
99.7 Management Services Agreement for Certain Karrington Homes, dated January
1, 1999, by and between Sunrise Assisted Living Management, Inc. and
Karrington
99.8 Management Consulting Agreement for Certain Karrington Homes, dated
January 1, 1999, by and between Sunrise Assisted Living Management, Inc.
and Karrington
99.9 Development Agreement (Edina, Minnesota), dated as of December 1, 1998,
by and between Sunrise Development, Inc. and Karrington
99.10 Development Agreement (Farmington Hills, Michigan), dated as of December
1, 1998, by and between Sunrise Development, Inc. and Karrington
99.11 Development Agreement (Hamilton, Ohio), dated as of December 1, 1998, by
and between Sunrise Development, Inc. and Karrington
-12-
- ----------------
+ Represents management contract or compensatory plan or arrangement.
84
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. (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/Ernst & Young LLP
Washington, D.C.
March 3, 1999
F-1
85
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
------------------------
1998 1997
------------ ----------
ASSETS
Current Assets:
Cash and cash equivalents $54,197 $82,643
Accounts receivable, net 17,818 5,849
Notes receivable 754 -
Deferred income taxes 3,978 -
Prepaid expenses and other current assets 15,921 6,081
-------- --------
Total current assets 92,668 94,573
Property and equipment, net 512,708 423,615
Notes receivable 34,919 17,248
Investments 28,329 5,750
Other assets 14,787 15,074
-------- --------
Total assets $683,411 $556,260
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $3,556 $8,303
Accrued expenses and other current liabilities 14,049 8,986
Deferred revenue 3,722 1,482
Current maturities of long-term debt 1,768 5,462
-------- --------
Total current liabilities 23,095 24,233
Long-term debt, less current maturities 426,558 335,525
Investments in unconsolidated assisted living facilities 1,003 445
Other long-term liabilities 3,194 319
-------- --------
Total liabilities 453,850 360,522
Minority interests 1,906 398
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,
19,446,427 and 19,028,040 shares issued and outstanding
in 1998 and 1997 194 190
Additional paid-in capital 216,783 206,784
Retained earnings (deficit) 10,678 (11,634)
-------- --------
Total stockholders' equity 227,655 195,340
-------- --------
Total liabilities and stockholders' equity $683,411 $556,260
======== ========
See accompanying notes.
F-2
86
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
------------------------------------------------
1998 1997 1996
---------- ---------- ---------
Operating revenue:
Resident fees $151,878 $85,644 $44,171
Management services income 15,596 4,240 3,174
Facility contract services 1,202 - -
Realized gain on assisted living facilities 2,036 - -
-------- ------- -------
Total operating revenue 170,712 89,884 47,345
-------- ------- -------
Operating expenses:
Facility operating 88,834 53,286 28,274
Facility contract services 1,095 - -
Facility development and pre-rental 5,197 5,586 2,420
General and administrative 12,726 10,454 10,042
Depreciation and amortization 21,650 10,592 4,048
Facility lease 3,014 1,532 130
-------- ------- -------
Total operating expenses 132,516 81,450 44,914
-------- ------- -------
Income from operations 38,196 8,434 2,431
Other income (expense):
Interest income 6,695 6,862 3,297
Interest expense (22,125) (11,475) (9,722)
-------- ------- -------
Total other expense (15,430) (4,613) (6,425)
Equity in earnings (losses) of unconsolidated
assisted living facilities 54 88 (12)
Minority interests (508) 92 227
Unusual charge - - (981)
-------- ------- -------
Net income (loss) $22,312 $4,001 ($4,760)
======== ======= =======
Net income (loss) per common share:
Basic $1.16 $0.21 ($0.52)
======== ======= =======
Diluted $1.11 $0.20 ($0.52)
======== ======= =======
See accompanying notes.
F-3
87
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Shares of Common Additional Retained
Common Stock Paid-in Capital Earnings
Stock Amount (Deficiency) (Deficit) Total
--------- ------- ---------------- --------- ----------
Balance at December 31, 1995 6,019 $60 ($19,733) ($12,101) ($31,774)
Issuance of common stock warrants 135 135
Preferred return on Series A
convertible preferred stock (858) (858)
Distributions to stockholders (390) (390)
Issuance of common stock -
initial public offering 5,700 57 104,237 104,294
Conversion of Series A convertible
preferred stock to common stock 2,444 24 24,798 24,822
Forfeiture of preferred return on
Series A convertible preferred stock (2,822) 2,822 -
Dividends paid on Series B
exchangeable preferred stock (348) (348)
Issuance of common stock to acquire
interest in facility 53 945 945
Exercise of employee options for
common stock 259 3 1,964 1,967
Issuance of common stock -
follow-on offering 4,055 41 91,750 91,791
Net loss (4,760) (4,760)
------ ---- -------- -------- --------
Balance at December 31, 1996 18,530 185 201,274 (15,635) 185,824
Exercise of employee options for
common stock 498 5 5,510 5,515
Net income 4,001 4,001
------ ---- -------- -------- --------
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
====== ==== ======== ======== ========
See accompanying notes.
F-4
88
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------ -----------
OPERATING ACTIVITIES
Net income (loss) $22,312 $4,001 ($4,760)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of interest (551) - -
Equity in (earnings) losses of unconsolidated
assisted living facilities (54) (88) 12
Minority interests 508 (92) (227)
Provision for bad debts 521 893 734
Depreciation and amortization 21,650 10,592 4,048
Amortization of financing costs and discount on long-term debt 2,084 1,268 714
Amortization of discount on marketable securities (175) - (215)
Changes in assets and liabilities:
(Increase) decrease:
Accounts receivable (12,490) (5,220) (1,250)
Prepaid expenses and other current assets (9,404) (3,687) 249
Other assets (5,778) (8,146) (1,420)
Increase (decrease):
Accounts payable and accrued expenses (49) 8,289 1,784
Deferred revenue (1,105) (539) 1,117
Other liabilities 1,755 993 (28)
--------- --------- ---------
Net cash provided by operating activities 19,224 8,264 758
--------- --------- ---------
INVESTING ACTIVITIES
Investment in property and equipment (126,167) (213,560) (103,667)
Proceeds from disposition of assisted living facilities 28,552 - -
Increase in investment and notes receivable (37,466) (16,856) (375)
(Increase) decrease in restricted cash and cash equivalents (1,459) 147 (459)
Contributions to investments in unconsolidated
assisted living facilities (742) - -
Distributions from investment in unconsolidated
assisted living facilities 65 101 113
Net purchases of marketable securities - - (8,107)
Proceeds from maturities of marketable securities - 8,322 -
Acquisition of interests in facilities (1,340) - -
--------- --------- ---------
Net cash used in investing activities (138,557) (221,846) (112,495)
--------- --------- ---------
FINANCING ACTIVITIES
Additional borrowings under long-term debt 108,000 255,643 28,870
Repayment of long-term debt (23,369) (59,403) (17,165)
Net proceeds from exercised options 6,356 5,515 1,967
Net proceeds from initial public offering of common stock - - 104,294
Net proceeds from follow-on offering of common stock - - 91,791
Net proceeds from sale of Series B exchangeable preferred stock - - 10,000
Redemption of Series B exchangeable preferred stock - - (10,000)
Dividends paid on Series B exchangeable preferred stock - - (348)
Net investment of minority interests - 525 (41)
Repayment of notes payable to affiliated partnerships - (1,381) (314)
Distributions to stockholders/partners - - (390)
Financing costs paid (100) (6,485) (1,369)
--------- --------- ---------
Net cash provided by financing activities 90,887 194,414 207,295
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (28,446) (19,168) 95,558
Cash and cash equivalents at beginning of year 82,643 101,811 6,253
--------- --------- ---------
Cash and cash equivalents at end of year $54,197 $82,643 $101,811
========= ========= =========
See accompanying notes.
F-5
89
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND PRESENTATION
Sunrise Assisted Living, Inc. (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. The
Company'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.
The Company was incorporated in Delaware on December 14, 1994. The
consolidated financial statements include the Company'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 the Company 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 two limited liability companies. One of the limited liability companies
owns two facilities (Sunrise of Severna Park) in which the Company owns a
50% membership interest. The other limited liability company owns one facility
(Sunrise of Sheepshead Bay) in which the Company owns a 70% membership interest.
The Company controls the two 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 the Company'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, the Company holds unilateral ability to
conduct the ordinary course of business of the facility.
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
The Company 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,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
Beginning balance $1,798 $ 927 $ 235
Provision for bad debts 521 893 734
Accounts written off (239) (22) (42)
----------- ---------- ----------
Ending balance $2,080 $1,798 $ 927
=========== ========== ==========
F-6
90
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at the lower of cost or fair value 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 of the Company 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. The Company 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 the Company's development
subsidiary. If a project is abandoned, any costs previously capitalized are
expensed.
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
The Company owns non-controlling interests in certain assisted living
facilities, most of which are currently under development. These investments
include one facility in which the Company has a 13.9% general and limited
partnership ownership interest, one facility in which the Company has a 33%
tenancy-in-common ownership interest (interest sold in March 1998), one facility
in which the Company has a 14.5% interest in a United Kingdom limited company
and eight facilities in which the Company has a 9% member interest in a limited
liability company. The Company does not control these entities as major business
decisions require approval by the other partners or members. Accordingly, the
investments are accounted for under the equity method, where the investments are
recorded at cost and subsequently adjusted for equity in net income (loss) and
cash contributions and distributions. The Company eliminates intercompany
profits on sales of services that are capitalized by the ventures. The Company's
interest in accumulated losses of unconsolidated assisted living facilities are
recorded below the Company's cost basis, which reflects the Company's
obligations as the general partner or managing member. The Company 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.
INTEREST RATE SWAPS
Interest rate swap transactions are designated with certain levels of
outstanding debt. 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 based on the accrual method of accounting. 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 the Company for the periods presented.
F-7
91
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Operating revenue consists of resident fee revenue, including resident
community fees, management services revenue, facility contract services revenue
and realized gain on assisted living facilities. Generally, resident community
fees approximating sixty times the daily residence fee are received from
potential residents upon occupancy. Resident community fees are recognized as
income over the first ninety days of the resident's stay and are ratably
refundable if the prospective resident does not move into the facility or moves
out of the facility within ninety days. All other 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
services revenue is comprised of revenue from management contracts and
development contracts. Revenue from management contracts is recognized in the
month in which it is earned in accordance with the terms of the management
contract. Facility contract services revenue is comprised of fees plus
reimbursable expenses of facilities operated with the Company's employees under
long-term operating agreements. Revenue from development contracts is recognized
over the term of the respective development contracts using the
percentage-of-completion method. Realized gain on assisted living facilities is
recognized upon consummation of the sale of assets unless a portion of the sale
is contingent upon future events or performance. Deferred gains on assets are
then recognized upon performance or resolution of the contingency.
INCOME TAXES
The Company 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
The Company 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. The Company 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.
SEGMENTS
Effective December 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 131, Disclosures about Segments
of an Enterprise and Related Information. Statement 131 establishes standards
for the way that a public company reports information about operating segments
in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. See Note 19 for information on the
Company's operating segments.
F-8
92
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, Reporting on the Costs of Start-up Activities, which is
effective for fiscal years beginning after December 15, 1998. SOP 98-5 provides
guidance on the financial reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. It is the Company's policy to capitalize certain costs incurred to
rent its facilities such as costs of model units, their furnishings and "grand
openings" in accordance with Statement of Financial Accounting Standards No. 67,
Accounting for Costs and Initial Rental Operation of Real Estate Projects.
Additionally, initial direct costs associated with originating lease
transactions are capitalized in accordance with SFAS No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases. Direct costs include employees' compensation and
payroll-related fringe benefits directly related to acquiring leases. All costs
of the Company's development and leasing activities which are not considered to
be within the scope of Statement 67 or Statement 91 are expensed as incurred.
SOP 98-5 states that the guidance provided by Statement 67 and Statement 91 is
not affected by the provisions of SOP 98-5. Therefore, the adoption of SOP 98-5
is not anticipated to affect results of operations or the financial position of
the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. Statement
133 standardizes the accounting for derivative instruments. The Company
participates in interest rate swap transactions, which would be considered
derivatives under Statement 133. The Company has not entered into any other
derivative transactions. For the three year period ended December 31, 1998, the
net effect of the interest rate swaps to the Company's results of operations has
not been material. Therefore, Statement 133 is not anticipated to affect results
of operations or the financial position of the Company.
RECLASSIFICATIONS
Certain 1997 and 1996 balances have been reclassified to conform with the
1998 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
-------------------------
ASSET LIVES 1998 1997
--------------- ------------ ------------
Land and land improvements 10-15 yrs. $ 80,263 $ 56,624
Building and building
improvements 40 yrs. 355,807 268,533
Furniture and equipment 3-10 yrs. 56,678 34,459
------------ ------------
492,748 359,616
Less accumulated depreciation
and amortization (38,504) (26,452)
------------ ------------
454,244 333,164
Construction in progress 58,464 90,451
------------ ------------
$512,708 $423,615
============ ============
Depreciation expense was $13.7 million, $7.4 million and $3.7 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
F-9
93
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,
----------------------
1998 1997
----------- ----------
LLC Note, interest accrues at LIBOR plus 5.0% (10.1%
at December 31, 1998) $23,795 $15,343
Promissory Note, interest accrued at prime through
March 1998 2,185 1,905
Promissory note, interest accrues at 8.0% 754 -
Note with Karrington, interest accrues at 10.0% 5,508 -
Note with United Kingdom joint venture, interest
accrues at 12.0% 3,431 -
----------- ----------
35,673 17,248
Current maturities (754) -
----------- ----------
$34,919 $17,248
=========== ==========
In October 1997, a wholly owned subsidiary of the Company jointly formed a
limited liability company ("LLC") with an unrelated third party in which the
Company's subsidiary owns a 9% minority interest. The purpose of the LLC is to
develop, construct and own assisted living facilities. The Company loaned the
LLC $15.0 million (the "LLC Note") to partially finance the initial development
and construction of six properties. The LLC Note to the Company's subsidiary is
subordinated to other lenders of the LLC. In September 1998, the Company and the
LLC amended the LLC Note 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 September 1997, a wholly owned subsidiary of the Company loaned $1.9
million ("Promissory Note") to owners of certain property on which the Company
plans to develop an assisted living facility. The proceeds of the Promissory
Note were used by the owners to retire a note previously outstanding and secured
by the same property. Immediately following issuance of the Promissory Note, the
wholly owned subsidiary of the Company entered into a purchase agreement with
the owners to acquire this property. The entire sum of principal and unpaid
accrued interest of the Promissory Note is due on the earliest to occur of: (1)
270 days following the termination of the purchase and sale agreement by either
the owners or the wholly owned subsidiary of the Company; (2) any breach of the
purchase agreement by the owners; or (3) the closing date as defined in the
purchase agreement. In April 1998, the Promissory Note was amended to increase
the loan by $250,000 and stop accruing interest.
In connection with the sale of the Company's minority interest in a
tenancy-in-common that owned one facility, a wholly owned subsidiary of the
Company accepted a promissory note in the amount of $850,000 in March 1998. The
promissory note accrues 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 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.
In November 1998, the Company agreed to loan up to $10.0 million to
Karrington Health, Inc., a Columbus-based leading assisted living provider,
under a revolving line of credit. The proceeds of the line of credit are used by
Karrington for use in operations. Interest on the outstanding principal balance
of the line of credit is due and payable monthly. The note was amended in March
1999 to provide up to $6.5 million of additional advances and to extend the
maturity to January 2000. The entire sum of principal and unpaid accrued
interest is due at maturity.
F-10
94
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1998, the Company agreed to make available up to approximately
$3.4 million to a subsidiary of a joint venture of the Company in the United
Kingdom under a revolving credit arrangement. Interest on advances made under
the credit arrangement accrues at 12.0%. The outstanding principal and unpaid
accrued interest are due November 2001.
Management believes the net carrying cost of the notes receivable
approximates market value at December 31, 1998 and 1997.
5. INVESTMENTS
The balances outstanding are as follows (in thousands):
FACE AMOUNT
DECEMBER 31,
--------------------
DESCRIPTION 1998 1997 INTEREST RATE MATURITY DATE
------------------------ ---------- --------- -------------------- ------------------------
Bonds:
Series A $ 5,000 $ 5,000 11% July 1, 2025
Series B 750 750 11% July 1, 2015
Series C 750 750 20% subject to July 1, 2010
available cash
---------- ---------
6,500 6,500
Bond discount (575) (750)
---------- ---------
5,925 5,750
---------- ---------
Mortgages 22,154 - 9.46% - 10.00% September 30, 2006 to
Mortgage premium 250 - September 30, 2010
---------- ---------
22,404 -
---------- ---------
$28,329 $ 5,750
========== =========
On March 1, 1995, the Company purchased all of the outstanding mortgage
revenue bonds used to finance a facility managed by the Company. 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 the
Company, to reduce their face amount to $5.8 million (Series A and C) and
provide the facility managed by the Company additional funding up to $750,000
for renovations (Series B). Interest only is payable until maturity.
Subsequent to June 30, 1995, all interest payments on these bonds are
current. The Company recognized $957,000, $783,000 and $752,000 in interest
income during 1998, 1997 and 1996, respectively, on this investment. The bond
discount is being recognized as interest income over the life of the loan
commencing in 1998. During 1998, the Company amortized $175,000 of the bond
discount.
On December 2, 1998, the Company purchased four separate first trust
mortgages, secured by Karrington properties for $22.4 million, which includes a
$0.3 million premium. The premium is being amortized over the life of the
mortgages. One of the mortgages matures on September 30, 2006 and the others
mature on September 30, 2010.
Management believes the net carrying cost of the investments approximates
market value at December 31, 1998 and 1997.
F-11
95
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets consist of the following (in thousands):
DECEMBER 31,
----------------------
1998 1997
----------- ----------
Restricted cash $ 3,032 $ 1,573
Deferred financing costs less amortization
of $3,670 and $1,935 5,761 7,459
Pre-rental costs less amortization
of $11,393 and $3,973 4,297 5,420
Other 1,697 622
----------- ----------
$14,787 $15,074
=========== ==========
Restricted cash consists of real estate tax escrows, operating reserves and
capital reserves related to the Company's debt agreements and resident deposits.
7. TRANSACTIONS WITH AFFILIATES
Included in prepaid expenses and other current assets are net receivables
from unconsolidated partnerships or limited liability companies of $11.8 million
and $4.1 million as of December 31, 1998 and 1997, respectively. Included in
other current liabilities are payables to unconsolidated partnerships or limited
liability companies of $0.6 million as of December 31, 1997. Net receivables
from and payables to 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,
-------------------------
1998 1997
------------- -----------
5 1/2% Convertible Subordinated Notes due 2002 $150,000 $150,000
Syndicated revolving credit facility 137,000 51,000
Multi-property / participating blanket first mortgage 86,187 86,718
Other mortgages and notes payable 56,151 54,700
Discount on multi-property mortgages less amortization of
$2,188 and $1,769 (1,012) (1,431)
------------- -----------
428,326 340,987
Current maturities (1,768) (5,462)
------------- -----------
$426,558 $335,525
============= ===========
Included in long-term debt is a note due to an employee and an entity
related to that employee. Interest accrues at 18% annually and principal is due
June 8, 1999. The balance of the note at December 31, 1998 and 1997 was $40,000.
On June 6, 1997, the Company 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 the Company commencing June 15, 2000, at specified premiums.
The holders of the convertible notes may require the Company to repurchase the
convertible notes upon a change of control of the Company, as defined in the
convertible notes. The net proceeds to the Company from the sale of the
convertible notes, after deducting underwriting discounts and offering expenses,
were approximately $145.6 million.
A subsidiary of the Company has obtained a syndicated revolving credit
facility for $250.0 million to be used for general corporate purposes, including
the continued construction and development of assisted living facilities. The
Company guarantees the repayment of all amounts outstanding under this credit
F-12
96
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
facility. The credit facility expires in December 2000 and includes two 12 month
extension options subject to the lender's approval. 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. Advances under the
facility bear interest at LIBOR plus 1.00% to LIBOR plus 1.50%. There were
$137.0 million of advances outstanding under this credit facility as of December
31, 1998.
The multi-property mortgage is collateralized by a blanket first mortgage
on all assets of a subsidiary of the Company, 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 $21.2
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 was reduced from LIBOR plus 5.75% to LIBOR plus 3.75% and effective
March 4, 1997, was further reduced to LIBOR plus 1.75%.
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 $419,000, $419,000 and $626,000 has been
included as interest expense in 1998, 1997 and 1996, respectively.
The other mortgages and notes payable relate primarily to 14 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 6.9% to 7.9% with remaining maturities ranging from
less than one to 35 years. These other mortgages and notes payable have total
available borrowings of $43.6 million as of December 31, 1998.
A subsidiary of the Company received a commitment for a $51.0 million
revolving construction credit facility. The credit facility provides for
construction and interim loans to finance the development of up to seven
assisted living facilities. As of December 31, 1998, the Company had closed
$32.1 million of the total commitment. The Company guarantees the repayment of
all amounts outstanding under this credit facility. The credit facility is for a
term of five years and is secured by cross-collateralized first mortgages on the
real property and liens on receivables. Advances under the credit facility bear
variable interest rates based upon LIBOR plus 2.00% to LIBOR plus 2.35%. There
were $4.7 million of advances outstanding under this facility as of December 31,
1998, which were included in other mortgages and notes.
A subsidiary of the Company has a $15.7 million revolving construction
credit facility. The credit facility provides for construction and interim loans
to finance the development of up to two assisted living facilities. The Company
guarantees the repayment of all amounts outstanding under this credit facility.
The credit facility is for a term of three years and is secured by
cross-collateralized first mortgages on the real property and improvements and
first liens on all other assets of the subsidiary. Advances under the credit
facility bear variable interest rates based upon LIBOR plus 1.25% to LIBOR plus
1.75%. There were no advances outstanding under this facility as of December 31,
1998.
The Company 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%. The Company has 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%. The Company recorded net
interest expense for 1998 and 1997 in the amounts of $227,000 and $17,000,
respectively, for swap transactions.
F-13
97
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There are various financial covenants and other restrictions in the
Company's debt instruments, including provisions which: (1) require it to meet
specified financial tests. For example, the Company's $86.2 million
multi-property mortgage, which is secured by 15 of its 76 facilities, requires
that these facilities maintain a cash flow to interest expense coverage ratio of
at least 1.25 to 1. The Company's $250.0 million credit facility requires the
Company to have a consolidated tangible net worth of at least $178.3 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 the
Company. For example, the Company's $250.0 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
the Company; (3) restrict the ability of the Company's subsidiaries to borrow
additional funds, dispose of assets or engage in mergers or other business
combinations without lender consent; and (4) require that the Company maintain
minimum occupancy levels at its facilities. For example, the Company's $250.0
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.
Principal maturities of long-term debt as of December 31, 1998, are as
follows (in thousands):
1999 $ 1,768
2000 138,646
2001 88,881
2002 177,641
2003 2,707
Thereafter 18,683
-------------
$428,326
=============
Interest paid totaled $23.8 million, $16.9 million and $10.6 million in
1998, 1997 and 1996, respectively. Interest capitalized was $4.2 million, $7.0
million and $2.0 million in 1998, 1997 and 1996, respectively.
9. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In 1995, the Company issued 2,444,444 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") at $9.00 per share net of
issuance costs of $1.8 million. Each Series A Preferred stockholder was
obligated to purchase, upon call by the Company, its pro rata portion of
1,000,000 shares of Series B Exchangeable Preferred Stock for $10.00 per share,
or $10.0 million. On January 19, 1996, the Company exercised the call.
In May of 1996, the Company issued to one of its lenders warrants to
purchase a total of 50,000 shares of common stock. The per share exercise price
of the warrants was $17.00. The warrants were exercised in March 1998.
On June 5, 1996, the Company successfully completed an initial public
offering of its common stock. A total of 5,700,000 shares were sold by the
Company in the initial public offering at a price of $20.00 per share for gross
proceeds of $114.0 million. The net proceeds to the Company from the initial
public offering, after deducting underwriting discount and offering expenses,
were approximately $104.3 million. Concurrently, all of the 2,444,444
outstanding shares of Series A Convertible Preferred Stock of the Company issued
in 1995 were converted into an equal number of shares of common stock. Preferred
return of $2.8 million through the conversion date was forfeited upon
conversion. Additionally, the Company redeemed all 1,000,000 shares of Series B
Exchangeable Preferred Stock at a redemption price of $10.00 per share plus
accrued dividends of $165,000.
On October 30, 1996, the Company successfully completed a follow-on
offering of its common stock. A total of 4,055,241 shares were sold by the
Company in the follow-on offering at a price of $24.00 per share for gross
proceeds of approximately $97.3 million. The net proceeds to the Company from
the follow-on offering, after deducting underwriting discount and offering
expenses, were approximately $91.8 million.
F-14
98
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS
The Company has stock option plans providing for the grant of incentive and
nonqualified stock options to employees, directors, consultants and advisors.
These plans provide for the grant of options to purchase up to 5,723,065 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. The Company also has a stock option agreement with one of
its senior executives. The agreement, as amended, was effective as of January 4,
1995 and covers 450,000 shares of common stock that have been reserved for
issuance at an exercise price of $8.00. At December 31, 1998, 22,000 options
were outstanding, all of which are exercisable and will expire in six years.
In September 1998, the Company 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 is a member of the Board
of Directors but not an officer or employee of the Company or any of its
subsidiaries (other than the persons elected as director representatives of the
holders of Series A Preferred Stock) is eligible to receive options under the
Directors' Plan. An aggregate of 75,000 shares of common stock are reserved for
issuance to participants under the Directors' Plan. The option exercise price
will not be less than the fair market value of a share of common stock on the
date the option is granted. The period for exercising an option begins six
months after the option is granted and generally ends ten years from the date
the option is granted. Options granted under the Directors' Plan vest
immediately. All options to be granted under the Directors' Plan will be
non-incentive stock options. As of December 31, 1998, 40,000 options had been
granted.
A summary of the Company's stock option activity and related information for
the years ended December 31 are presented below:
1998 1997 1996
--------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
- -------------------------------- ---------- ---------------- --------- --------------- --------- ---------------
Outstanding-beginning of year 3,156 $22.76 2,557 $17.79 952 $ 6.50
Granted 3,417 32.81 1,384 27.84 1,911 21.74
Exercised (384) 16.39 (498) 11.16 (258) 7.64
Canceled (2,019) 36.51 (287) 23.29 (48) 5.82
---------- --------- ---------
Outstanding-end of year 4,170 24.93 3,156 22.76 2,557 17.79
========== ========= =========
Options exercisable at year-end 1,055 667 527
Weighted-average fair value of
options granted during the
year $16.80 $14.65 $13.36
F-15
99
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE
- --------------------- ---------------- -------------------- ---------------- --------------- ----------------
$ 3.00 - $ 8.00 228 6.7 $ 5.54 144 $ 5.63
8.01 - 20.00 362 7.3 17.04 214 16.81
20.01 - 25.63 3,107 8.6 24.96 657 25.11
25.64 - 44.56 473 9.9 40.18 40 39.02
---------------- ---------------
4,170 1,055
================ ===============
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, Accounting for Stock-Based Compensation, and
has been determined as if the Company 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 1998, 1997 and
1996: 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 45.0%.
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 the Company'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. The Company's
pro forma information follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------- ------------ -----------
Net income (loss):
As reported $22,312 $ 4,001 $(4,760)
Pro forma $13,368 $(4,019) $(9,551)
Diluted net income (loss) per share:
As reported $ 1.11 $ 0.20 $ (0.52)
Pro forma $ 0.67 $ (0.21) $ (0.94)
11. STOCKHOLDERS RIGHTS AGREEMENT
The Board of Directors adopted a Stockholders Rights Agreement ("Rights
Agreement") effective April 25, 1996. All shares of common stock issued by the
Company 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 the Company.
F-16
100
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 or 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 the Company'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) the Company 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 the Company'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
the Company generally may redeem the rights at a price of $0.005 per right at
any time until ten days after an Acquiring Person has been identified as such.
12. NET INCOME (LOSS) PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income (loss) per common share amounts presented in the accompanying
consolidated statements of operations (in thousands, expect per share amounts):
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
Numerator:
Net income (loss) $22,312 $ 4,001 $ (4,760)
Dividend preference attributable to
Series A Preferred Stock - - (858)
Dividends attributable to Series B
Exchangeable Preferred Stock - - (348)
----------------- --------------- ----------------
Numerator for basic and diluted net income
(loss) per share $22,312 $ 4,001 $ (5,966)
================= =============== ================
Denominator:
Denominator for basic net income (loss)
per common share-weighted average shares 19,288 18,722 11,474
Effect of dilutive securities:
Employee stock options and warrants 744 1,161 -
----------------- ---------------- ----------------
Denominator for diluted net income
(loss) per common share-weighted
average shares plus assumed conversions 20,032 19,883 11,474
================= ================ ================
Basic net income (loss) per common share $ 1.16 $ 0.21 $ (0.52)
================= ================ ================
Diluted net income (loss) per common share $ 1.11 $ 0.20 $ (0.52)
================= ================ ================
F-17
101
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain shares issuable upon the exercise of stock options or conversion of
redeemable convertible preferred stock or convertible notes have been excluded
from the computation because the effect of their inclusion would be
anti-dilutive. Subsequent to the Company's initial public offering, options are
included under the treasury stock method to the extent they are dilutive.
13. ACQUISITIONS AND DISPOSITIONS
On February 5, 1997, the Company acquired a 120-unit assisted and
independent living facility in Valencia, California and on August 19, 1997, the
Company purchased a 76-unit assisted living facility in Napa, California. The
Company had initially leased the Napa facility on April 1, 1997. On December 24,
1997, the Company acquired a 30-unit assisted and independent living facility in
Dunwoody, Georgia and on December 31, 1997, the Company purchased a 29-unit
assisted living facility located in Weston, Massachusetts. The combined
acquisition price for all four facilities totaled $27.1 million.
On May 1, 1997, the Company purchased the minority 50% interest held by an
unrelated third party in a facility located in Raleigh, North Carolina. The
purchase price of approximately $1.0 million was based on a buy-out schedule
specified in the operating agreement of the limited liability company that holds
title to the property.
On October 1, 1997, the Company purchased each of the remaining 49%
interests held by an unrelated third party in facilities located in Annapolis
and Pikesville, Maryland for a purchase price of $3.1 million and $2.9 million,
respectively. In September 1998, the Company completed the sale of these
facilities for an aggregate purchase price of $29.3 million in cash. The Company
will realize up to a $6.4 million gain from the transaction over a maximum of
15 quarters. The Company recognized a gain of $1.5 million on the sale in 1998.
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. The Company will continue operating the facilities under long-term
operating agreements.
Each acquisition was accounted for using the purchase method with
operations of the acquired facilities included in the Company's consolidated
statement of operations beginning on their respective purchase dates. Purchase
prices were allocated to assets acquired and liabilities assumed based upon
estimated fair values at the time of purchase. No amounts were allocated to
goodwill.
In March 1998, the Company sold its minority interest in a tenancy-in-
common that owned one facility resulting in a $0.5 million realized gain.
The pro forma unaudited results of operation, assuming consummation of each
purchase as of January 1, 1997, are as follows (in thousands, except per share
amount):
YEAR ENDED
DECEMBER 31,
1997
-----------------
Operating revenue $ 97,190
Net income $ 4,117
Diluted net income per common share $ 0.21
F-18
102
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 18, 1998, the Company entered into a merger agreement to acquire
Karrington Health, Inc., a Columbus-based leading assisted living provider, as
amended on March 4, 1999. The Company plans to purchase Karrington in a
tax-free, stock-for-stock transaction valued at approximately $94.9 million. The
transaction will be accounted for using the purchase method of accounting.
Under the amended merger agreement, Karrington would become a wholly owned
subsidiary of the Company and each issued and outstanding Karrington common
share, other than shares for which dissenters' rights are exercised, would be
automatically converted into the right to receive 0.3333 of a share of the
Company's common stock. Subject to satisfaction of the conditions set forth in
the amended merger agreement, including approval of the amended merger
agreement by Karrington shareholders, the Company expects to consummate its
acquisition of Karrington during the second quarter of 1999.
14. COMMITMENTS
The Company leases its corporate office, regional offices, development
offices and warehouse space under various leases. The corporate lease has a term
of five years and expires in September 2001. The initial annual lease payments
amount to $311,000, 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 1999 and 2003.
During 1998, the Company entered into an agreement to lease new office space
for its corporate headquarters. The lease has a term of 12 years beginning when
the building is completed. 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.
The Company has also entered into operating leases for six facilities. Three
commenced operations during 1997, two commenced operations in 1998, and the
other is to commence operation in 1999. The operating lease terms vary from 15
years, with two ten-year extension options to 50 years. Also leased are three
ground leases related to two facilities in operation and one under construction.
In February 1999, the Company purchased one facility subject to an operating
lease and which is currently under construction. Lease terms range from 75 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 the Company entered into a three year
operating lease for six assisted living facilities. The Company has guaranteed
the payment of all obligations of its subsidiary under the lease. There are no
extension options, however, the Company 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, the Company is
entitled to the excess. However, if the proceeds from the sale are less than the
obligation under the lease, the Company is obligated to fund the difference. The
Company is responsible for the payment of real estate taxes, insurance and other
operating expenses. The lease requires the Company to maintain certain coverage
ratios, liquidity and net worth. These six leased properties are currently
subleased to Karrington under operating leases which expire in May 2010 through
May 2011.
F-19
103
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under office, equipment, ground and other
operating leases as of December 31, 1998 are as follows (in thousands):
1999 $ 8,418
2000 10,611
2001 51,038
2002 6,572
2003 6,404
Thereafter 85,154
--------------
$168,197
==============
The Company has entered into contracts to purchase and lease additional
sites. Total contracted purchase price of these sites is $73.7 million. The
Company is pursing additional development opportunities and also plans to
acquire additional facilities as market conditions warrant.
15. 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. Prior to formation of the
Company on January 4, 1995, equity interests in partnerships in predecessor
entities were held in partnerships, limited liability companies and subchapter S
corporations, all of which passed through tax liabilities and benefits to the
owners. The transfer of assets at the formation of the Company was taxable, in
part, to the owners. Accordingly, the tax basis of a majority of the property
and equipment of the Company exceeds its respective book basis for financial
reporting purposes.
The primary components of the Company's net deferred tax asset are as
follows (in thousands):
DECEMBER 31,
----------- -----------
1998 1997
----------- -----------
Deferred tax assets:
Property and equipment $ 2,116 $ 8,636
Operating loss carryforward 7,776 7,921
Deferred revenue - 379
Accrued expenses 1,719 888
Other 1,280 1,100
----------- -----------
Total gross deferred tax assets 12,891 18,924
Less valuation allowance (8,569) (18,334)
Deferred tax liabilities (344) (590)
----------- -----------
Net deferred tax amount $ 3,978 $ -
=========== ===========
At December 31, 1998, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $19.7 million which
expire from 2010 through 2012. At December 31, 1998, the Company had alternative
minimum tax credits of approximately $79,000 available to offset future federal
tax liabilities. These tax credits do not expire.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards. Based
on historical net operating losses and no assurance that the Company will
generate any earnings or any specific level of earnings in future years, the
Company established a valuation allowance on the net deferred tax assets at
December 31, 1998 and 1997. Approximately $6.0 million of the valuation
allowance in 1998 and 1997 resulted from the tax benefit of non-qualified stock
options that have not been recognized for tax purposes. When the valuation
allowance is released, the tax benefit will be credited directly to equity.
F-20
104
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the provision for income taxes are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
--------------- --------------- ----------------
1998 1997 1996
--------------- --------------- ----------------
Current:
Federal $ 3,521 $ - $ -
State 457 - -
--------------- --------------- ----------------
Total current $ 3,978 $ - $ -
=============== =============== ================
Deferred:
Federal $ 3,891 $ (2,553) $ (3,348)
State 1,897 (545) (722)
(Decrease) increase in valuation allowance (9,766) 3,098 4,070
--------------- --------------- ----------------
Total deferred $ (3,978) $ - $ -
=============== =============== ================
In 1998, 1997 and 1996, the Company paid income taxes of $0.9 million, $0.1
million and $8,000, respectively. Current taxes payable for 1998 have been
reduced by approximately $3.6 million reflecting the tax benefit to the Company
of employee stock options exercised during the year. The tax benefit has been
recognized as an increase to 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,
1998 1997 1996
------------- -------------- --------------
Statutory rate 35% 34% (34)%
State taxes, net 6 7 (7)
Tax exempt interest (4) (7) -
Stock options - (96) -
Other 7 5 -
Valuation allowance (44) 57 41
-------------- ------------- --------------
0% 0% 0%
============== ============= ==============
16. RELATED-PARTY TRANSACTIONS
SUNRISE ASSISTED LIVING FOUNDATION
Paul and Teresa Klaassen, the Company's founders, operate two schools,
including day care centers, through a not-for-profit organization, Sunrise
Assisted Living Foundation ("SALF"). SALF reimbursed the Company monthly for use
of office facilities and support services in the amounts of $84,000 in 1998,
$68,000 in 1997 and $60,000 in 1996. Such amounts are included in operating
revenue.
GROUND LEASE
The Company has a 99 year ground lease with one of the Company'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 the years ended December 31, 1998, 1997 and 1996. The Company
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 the Company
under the ground lease. Sublease rental income was $131,000, $131,000 and
$132,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Lease expense is recorded net of the sublease income.
F-21
105
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JOINT VENTURE
The Company 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. A director of the Company is a
general partner in the third party that is providing the equity capital. The
joint venture has acquired a property near London, England on which it is
developing an independent living, an assisted living and an Alzheimer's care
facility. The joint venture also has assumed purchase contracts for two
properties in Canada, on which it intends to develop assisted living facilities.
The Company will provide management and development services to the joint
venture on a contract-fee basis with rights to acquire the assets in the future
and has agreed to invest up to $2.8 million of equity capital in the joint
venture. As of December 31, 1998, the third party has provided approximately
$5.1 million and the Company has provided $0.4 million of equity capital to the
joint venture.
17. PROFIT-SHARING PLAN
The Company has a profit-sharing plan (the "Plan") under Internal Revenue
Code Section 401(k). All employees of the Company 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%. Prior to April 1, 1997, the Plan provided that
the employer contribute $0.25 for every dollar the employee contributes, up to
7% of the employee's annual compensation. In April 1997, the Company amended the
regular matching contributions to discretionary matching contributions. Matching
contributions made by the Company totaled $177,000, $121,000 and $88,000 during
1998, 1997 and 1996, respectively. No discretionary profit-sharing contributions
were made during these periods.
18. 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 the Company 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 investments and notes receivable 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 $260.3 million,
excluding a $1.0 million loan discount, has an estimated aggregate fair value of
$269.8 million at December 31, 1998. Estimated fair value of fixed rate debt is
based on interest rates currently available to the Company for issuance of debt
with similar terms and remaining maturities. The estimated fair value of the
Company's variable rate debt is estimated to be approximately equal to its
carrying value of $169.0 million at December 31, 1998. The interest rate swaps
related to floating rate debt (see Note 8) has an estimated fair value of $0.9
million at December 31, 1998.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1998. 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, 1998 and current estimates of
fair value may differ from the amounts presented herein.
F-22
106
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. INFORMATION ABOUT THE COMPANY'S SEGMENTS
The Company primarily derives income from two types of services: (1)
resident services and (2) management services. Resident services are further
segmented into two stages of operations consisting of stabilized facilities and
lease-up facilities. Stabilized facilities represent owned facilities opened or
operated by the Company for at least 12 months, or that have achieved occupancy
percentages of 95% or above. Lease-up facilities represent those facilities
owned by the Company that are operating in their early stages but are not
considered stabilized. Management services include fees from long-term
management contracts or development contracts for facilities owned by
unconsolidated joint ventures and other third party owners.
The Company evaluates performance for stabilized and lease-up facilities
based on a measure of segment operating income (defined as resident fees less
facility operating expenses). The Company evaluates performance for management
services based on the amount of revenues and expenses recognized versus
forecasted revenues and expenses in a predetermined business plan.
The Company's stabilized and lease-up segments offer the same products and
services; however, the segments are managed separately because they have
significantly different revenues, operating income and occupancy. The types of
products and services these segments derive their revenues primarily include
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 (Basic Care); additional specialized care and services
to residents with certain low acuity medical needs (Plus Care); and specialized
services for residents with Alzheimer's disease or other forms of dementia
(Reminiscence Care).
Management services is a separate business unit of the Company and is
managed separately because of different marketing strategies and revenue
structures. Management services derive its revenues through fees associated
with management, development and consulting services for third-parties and
unconsolidated joint ventures that own and/or operate assisted living facilities
and for facilities owned and consolidated by the Company.
F-23
107
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment information is as follows (in thousands):
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- -----------
Operating Revenue:
Resident services:
Stabilized $ 83,029 $54,888 $ 41,426
Lease-up 68,849 30,756 2,745
Management services:
External 16,798 4,240 3,174
Internal 7,888 4,538 2,344
Other 2,036 - -
Elimination of intersegment revenue (7,888) (4,538) (2,344)
----------- ---------- -----------
Total consolidated operating revenue 170,712 89,884 47,345
----------- ---------- -----------
Operating Expenses:
Resident services:
Stabilized 53,663 36,802 28,374
Lease-up 43,059 21,022 2,244
Management services 13,746 11,814 11,209
Elimination of intersegment expenses (7,888) (4,538) (2,344)
----------- ---------- -----------
Total consolidated operating expenses 102,580 65,100 39,483
----------- ---------- -----------
Segment operating income 68,132 24,784 7,862
Reconciliation to net income (loss):
Facility pre-rental 3,194 3,126 837
General and administrative 2,078 1,100 416
Depreciation and amortization 21,650 10,592 4,048
Facility lease 3,014 1,532 130
---------- ----------- -----------
Income from operations 38,196 8,434 2,431
Interest expense, net (15,430) (4,613) (6,425)
Equity in earnings (losses) of unconsolidated assisted
living facilities 54 88 (12)
Minority interests (508) 92 227
Unusual charge - - (981)
----------- ---------- -----------
Total consolidated net income (loss) $ 22,312 $ 4,001 $ (4,760)
=========== ========== ===========
AS OF DECEMBER 31,
1998 1997
Assets: --------------- ----------------
- -------
Stabilized facilities $ 219,794 $ 167,088
Lease-up facilities 89,552 125,964
Other segment assets 8,511 47,309
Corporate 365,554 215,899
--------------- ----------------
Total consolidated assets $ 683,411 $ 556,260
=============== ================
Other revenues for the year ended December 31, 1998 consist of realized
gains on the sale of assisted living facilities (see Note 13 for further
discussion).
Management services revenue from operations in England was $703,000 for the
year ended December 31, 1998. The remaining revenues and all long-lived assets
are domestic.
F-24
108
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. UNUSUAL CHARGE
To avoid a possible change in the Company's ability to continue to manage
two facilities resulting from the reduction in the ownership interest in the
Company of Paul J. Klaassen, the Company's Chairman of the Board, Chief
Executive Officer and co-founder, and Teresa M. Klaassen, the Company's
Executive Vice President and co-founder following the Company's initial public
offering, the Company made a $1.0 million cash payment to the third-party
limited partner in these two facilities in June 1996. The payment was made in
exchange for the transfer to the Company by the third-party of additional 1%
partnership interests in each facility with a total book value of $18,700 and
the elimination of any requirement for the Klaassens to maintain a specified
ownership interest in the Company.
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the fiscal
quarters indicated (in thousands, except per share amounts):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------------- --------------- -------------
1998
- ----
Operating revenue $ 34,912 $ 40,454 $ 46,152 $ 49,194
Net income $ 3,623 $ 4,586 $ 6,686 $ 7,417
Diluted net income per
common share $ 0.18 $ 0.23 $ 0.33 $ 0.36
1997
- ----
Operating revenue $ 16,544 $ 18,655 $ 24,264 $ 30,421
Net income $ 134 $ 376 $ 1,318 $ 2,173
Diluted net income per
common share $ 0.01 $ 0.02 $ 0.07 $ 0.11
The sum of diluted net income per common share for the four quarters in 1998
and 1997 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 the Company's common stock during the year.
F-25