-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I5iwhJa+/Sm8a5IMX/+bR6O+yA0ZhwKX6tv3XD9lWmCqWof8FmluXu57+m45ZUjL nYxJzxRr/jXkstvAxXWzqw== 0000950133-01-500350.txt : 20010402 0000950133-01-500350.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950133-01-500350 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNRISE ASSISTED LIVING INC CENTRAL INDEX KEY: 0001011064 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 541746596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20765 FILM NUMBER: 1588072 BUSINESS ADDRESS: STREET 1: 7902 WESTPARK DR CITY: MCLEAN STATE: VA ZIP: 22102 BUSINESS PHONE: 7032737500 MAIL ADDRESS: STREET 1: 7902 WESTPARK DR CITY: MCLEAN STATE: VA ZIP: 22102 10-K 1 w47013e10-k.txt FORM 10-K // SUNRISE ASSISTED LIVING, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K [xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 0-20765 SUNRISE ASSISTED LIVING, INC. -------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 54-1746596 - -------------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7902 Westpark Drive McLean, VA 22102 - -------------------------------------------- ------------------------------------ (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 -------------------------------------- (Title of class) 5 1/2% Convertible Subordinated Notes due 2002 ---------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----- The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the registrant's common stock as of March 13, 2001 was $256,887,620. */ The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date is: Class: Common Stock, par value $.01 per share. Outstanding at March 13, 2001: 21,612,707 shares. - -------------------------- */ 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. 2 TABLE OF CONTENTS
Page(s) PART I Item 1. Business........................................................ 3 Item 2. Properties...................................................... 35 Item 3. Legal Proceedings............................................... 36 Item 4. Submission of Matters to a Vote of Security Holders............. 36 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.................................... 36 Item 6. Selected Financial Data......................................... 37 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 38 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.............................................. 54 Item 8. Financial Statements and Supplementary Data..................... 54 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 54 PART III Item 10. Directors and Executive Officers of the Registrant.............. 54 Item 11. Executive Compensation.......................................... 54 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 54 Item 13. Certain Relationships and Related Transactions.................. 55 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................................... 55 SIGNATURES............................................................................... 57
-2- 3 This Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Sunrise's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including development and construction risks, acquisition risks, licensing risks, business conditions, competition, Sunrise's ability to operate the Karrington properties profitably, the Company's ability to execute on its sale/manage back program, market factors that could affect the value of the Company's properties, changes in interest rates, risks of downturns in economic conditions generally, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere in this Form 10-K. Unless the context suggests otherwise, references in this Form 10-K to "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities. PART I ITEM 1. BUSINESS GENERAL Sunrise Assisted Living, Inc. is a provider of assisted living services to the elderly. Sunrise was incorporated in Delaware on December 14, 1994 to combine various activities relating to the development, ownership and operation of the Sunrise assisted living facilities held by predecessor entities. Sunrise currently operates 170 facilities in 25 states and one in the United Kingdom, with a resident capacity of more than 13,300 residents, including 151 facilities owned by Sunrise or in which it has ownership interests and 19 facilities managed for third parties. Sunrise had revenues of $344.8 million and net income of $24.3 million in 2000. Approximately 99% of Sunrise's revenues were derived from private pay sources. Sunrise's growth objectives include developing new Sunrise model assisted living facilities. Since its initial public offering in June 1996, Sunrise has completed development of 89 such facilities with a resident capacity of approximately 7,700 and has 24 facilities currently under construction with a resident capacity of approximately 2,100. Sunrise also has entered into contracts to purchase 40 additional sites, 21 of which are zoned, and to lease one additional site. Sunrise is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. See "--Facility Development" and "--Facility Acquisitions." -3- 4 A subsidiary of Sunrise has obtained a syndicated revolving credit facility for $400.0 million to be used for general corporate purposes, including the continued construction and development of assisted living facilities. Sunrise guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all assets of the subsidiary, consisting of 30 properties. Advances under the facility bear interest at LIBOR plus 1.75% (8.31% at December 31, 2000). The credit facility expires in July 2002. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." On June 6, 1997, Sunrise issued and sold $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002. These notes bear interest at 5 1/2% per annum payable semiannually on June 15 and December 15 of each year, and are convertible, at the option of the holder, into shares of Sunrise common stock at a conversion rate of $37.1875 per share, or 26.89 shares per $1,000 principal amount of the notes. The conversion rate is subject to customary anti-dilution adjustments. The notes rank junior in payment to substantially all indebtedness of Sunrise existing at the time of the issuance of the notes and subsequently incurred by it. The notes are redeemable at the option of Sunrise commencing June 15, 2000, at specified premiums. The holders of the notes may require Sunrise to repurchase the notes upon a change of control of Sunrise, as defined in the notes. On June 5, 1996, Sunrise completed its initial public offering. On October 31, 1996 Sunrise completed a follow-on public offering. Net proceeds to Sunrise from these two offerings totaled approximately $196.1 million. THE ASSISTED LIVING INDUSTRY Sunrise believes that the assisted living industry has emerged as a preferred alternative to meet the growing demand for a cost-effective setting in which to care for the elderly who do not require the more intensive medical attention provided by a skilled nursing facility but cannot live independently due to physical or cognitive frailties. In general, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with activities of daily living, such as bathing, eating, personal hygiene, grooming and dressing. Some assisted living facilities may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Unlike assisted living facilities, skilled nursing facilities provide 24-hour skilled nursing care, supervised by a registered nurse. Sunrise believes that consumer preference and demographic trends should allow assisted living to remain one of the fastest growing segments of elder care. -4- 5 The assisted living industry is highly fragmented and characterized by numerous small operators. The scope of assisted living services varies substantially from one operator to another. Many smaller assisted living providers do not operate in purpose-built facilities, do not have professionally trained staff, and may provide only limited assistance with low-level care activities. Sunrise believes that few assisted living operators provide a comprehensive range of assisted living services, such as Alzheimer's care and other services designed to permit residents to "age in place" within the facility as they develop further physical or cognitive frailties. THE SUNRISE OPERATING PHILOSOPHY The Sunrise approach to assisted living is a unique combination of operating philosophy and a signature facility design. Since the first Sunrise facility opened in 1981, Sunrise's operating philosophy has been to provide care and services to its residents in a residential environment in a manner that: "nurtures the spirit, protects privacy, fosters individuality, personalizes services, enables freedom of choice, encourages independence, preserves dignity and involves family and friends." Sunrise believes that its operating philosophy is one of its strengths. Furthermore, in implementing its philosophy, Sunrise continuously seeks to refine and improve the care and services it offers. The elements of the operating philosophy focus on: - - the involvement of the resident and the resident's family in important care giving decisions; - - Sunrise's proprietary training programs for its management, executive directors and care managers; - - Sunrise's quality assurance programs; - - the full range of assisted living services offered by Sunrise; and - - the architecture and purpose-built design of Sunrise's "Victorian" model facilities. SERVICES Sunrise offers a full range of assisted living services based upon individual resident needs. Upon move-in, Sunrise assesses the resident generally with the resident's family and physician to determine the level of care required and develops an individualized service plan. This individual service plan includes selection of resident accommodations and determination of the appropriate level of care. The plan is periodically reviewed and updated by Sunrise, and communicated to the resident and/or the resident's family. The range of services offered by -5- 6 Sunrise includes: Basic Care, consisting of assistance with activities of daily living and other personalized support services; Plus Care, consisting of more frequent and intensive assistance or increased care; and Reminiscence Care, consisting of care programs and services to help cognitively impaired residents, including residents with Alzheimer's disease. By offering a full range of services, Sunrise can accommodate residents with a broad range of service needs and enable residents to remain at Sunrise as their needs change. Daily net resident fees are generally revised annually whereas fees for additional care are revised when a change in care needs arises. The average daily resident fee, consisting of net resident fees plus additional care fees combined, for owned facilities opened or operated by Sunrise for at least 12 months, or that have achieved occupancy percentages of 95% or above, was approximately $106 for 2000, $97 for 1999, and $86 for 1998. BASIC CARE Sunrise's basic care program provided to all residents includes: - assistance with activities of daily living, such as eating, bathing, dressing, personal hygiene, and grooming; - three meals per day served in a common dining room, including two seating times per meal; - coordination of special diets; - 24-hour security; emergency call systems in each unit; - transportation to stores and community services; - assistance with coordination of physician care, physical therapy and other medical services; - health promotion and related programs; - housekeeping services; and - social and recreational activities. -6- 7 ASSISTED LIVING PLUS CARE Through Sunrise's plus care program, residents who require more frequent or intensive assistance or increased care or supervision are provided extra care and supervision. Sunrise charges an additional daily fee based on additional staff hours of care and services provided. The plus care program allows Sunrise, through consultation with the resident, the resident's family and the resident's personal physician, to create an individualized care and supervision program for residents who might otherwise have to move to a more medically intensive facility. At December 31, 2000, approximately 32% of Sunrise's assisted living residents participated in the plus care program. MEDICATION MANAGEMENT Many of Sunrise's residents also require assistance with medications. To the extent permitted by state law, the medication management program includes the storage of medications, the distribution of medications as directed by the resident's physician and compliance monitoring. Sunrise charges an additional fixed daily fee for this service. At December 31, 2000, approximately 43% of Sunrise's assisted living residents participated in the medication management program. REMINISCENCE CARE Sunrise believes its reminiscence care program distinguishes it from many other assisted living providers who do not provide such specialized care. Sunrise's reminiscence program provides the attention, care programs and services needed to help cognitively impaired residents, including residents with Alzheimer's disease, maintain a higher quality of life. Specially trained staff provide basic care and other specifically designed care and services to cognitively impaired residents, in separate areas of facilities. Sunrise charges each cognitively impaired resident a daily fee that includes additional staff time per resident per day. Cognitively impaired residents who require additional care and services pay a higher daily rate based on additional staff hours of care and services provided. At December 31, 2000, approximately 25% of Sunrise's assisted living residents participated in the reminiscence program. THE SUNRISE "VICTORIAN" MODEL FACILITY Sunrise's signature Victorian model facility, first designed in 1985, is a freestanding, residential-style facility generally with a capacity of 65 to 110 residents. The building ranges in size from approximately 37,000 to 65,000 square feet and is built generally on sites ranging from two to five acres. Approximately 40% of the building is devoted to common areas and amenities, including a reading room, activity room, family or living room and other areas, such as dining room and bistro, designed to promote interaction among residents. Sunrise has several -7- 8 basic building plan designs, which provide it with flexibility in adapting the model to a particular site. The building is usually two or three stories and of steel frame construction built to institutional health care standards but strongly residential in appearance. The interior layout is designed to promote a home-like environment, efficient delivery of resident care and resident independence. Resident units are functionally arranged to provide a "community-within-a-community" atmosphere. The model facility may be configured with as many as eight different types of resident units, including double occupancy units, single units and two- and three-room suites. Sitting areas on each floor serve as either family or living rooms. The ground level typically contains a kitchen and common dining area, administrative offices, a laundry room, a private dining room, library, living room, and bistro. Typically, one floor or one or two wings of a facility contain resident units and common areas, including separate dining facilities, specifically designed to serve residents with Alzheimer's disease or other special needs. The architectural and interior design concepts incorporate the Sunrise operating philosophy of protecting resident privacy, enabling freedom of choice, encouraging independence and fostering individuality in a homelike setting. Sunrise believes its model facility meets the desire of many individuals to move to a residence at least as comfortable as their former home. Sunrise believes that its residential environments also accomplish several other objectives, including: (1) lessening the trauma of change for elderly residents and their families; (2) achieving operational efficiencies through proven designs; (3) facilitating resident mobility and ease of access by care givers; and (4) differentiating Sunrise from other assisted living and long-term care operators. OWNED FACILITIES The table below sets forth certain information regarding owned facilities or facilities in which Sunrise has an ownership interest that are currently operating as well as those under construction or are subject to purchase contracts and zoned:
DEVELOPED, SUNRISE YEAR ---------- ------- OPENED ACQUIRED OR MODEL RESIDENT OWNERSHIP BY ----------- ----- -------- --------- FACILITY LOCATION SUNRISE CONSTR. STATUS FACILITY CAPACITY PERCENTAGE -------- -------- ------- -------------- -------- -------- ---------- Sunrise of Oakton Oakton, VA 1981 Acquired(2) 51 100.0%(1) Sunrise of Leesburg Leesburg, VA 1984 Acquired(2) 35 100.0(1) Sunrise of Warrenton Warrenton, VA 1986 Acquired(2) 37 100.0(1)
-8- 9 Sunrise of Arlington Arlington, VA 1988 Developed X 58 100.0(1) Sunrise at Bluemont Arlington, VA 1990 100.0(1) Park Potomac Developed X 59 Shenandoah Developed X 77 James Developed X 59 Sunrise of Mercer Seattle, WA 1990 Developed X 59 100.0(1) Island Sunrise of Fairfax Fairfax, VA 1990 Developed X 52 100.0(1)(3) Sunrise of Frederick Frederick, MD 1992 Developed X 78 100.0(1) Sunrise at Sterling, VA 1992 100.0(1) Countryside East Building Developed(4) X 66 West Building Developed(4) X 64 Sunrise of Gunston Lorton, VA 1992 Developed(4) X 67 100.0(1) Sunrise Atrium of Boca Raton, FL 1992 Acquired 196 100.0(1) Boca Raton Sunrise of Falls Falls Church, VA 1993 Developed X 66 100.0(1) Church Sunrise at Gaithersburg, MD 1993 Acquired 155(5) 100.0(1) Montgomery Village Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(1) Sunrise at Gardner Park Peabody, MA 1994 Developed X 59 50.0(1)(6) Sunrise of Santa Rosa Santa Rosa, CA 1996 Acquired 120 100.0(1) Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 100.0(7) Huntcliff Summit Atlanta, GA 1996 Acquired 251 100.0(1)(8) Sunrise at Northshore St. Petersburg,FL 1996 Acquired 162 100.0(1)(9) Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0
-9- 10 Sunrise at Columbus, GA 1996 Acquired 26 100.0 Brookside Glen Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0 Sunrise of Blue Bell Philadelphia, PA 1996 Developed X 97 100.0(7) Sunrise at Hunter Oakton, VA 1997 Developed X 90 25.0(13) Mill Sunrise at Sterling Valencia, CA 1997 Acquired 130 100.0(1) Canyon Sunrise of Napa Napa Valley, CA 1997 Acquired 65 100.0(1) Sunrise of Petaluma Petaluma, CA 1997 Developed 84 100.0(10) Sunrise of Springfield, VA 1997 Developed X 95 25.0(1)(16) Springfield Sunrise of Severna Severna Park, MD 1997 Developed X 93 50.0(3)(10) Park Building I Sunrise of Severna Severna Park, MD 1997 Developed X 66 50.0(3)(10) Park Building II Sunrise of Morris Morris Plains, NJ 1997 Developed X 92 25.0(1)(16) Plains Sunrise of Old Tappan Old Tappan, NJ 1997 Developed X 92 25.0(1)(16) Sunrise at Granite Granite Run, PA 1997 Developed X 104 25.0(1)(16) Run Sunrise of Abington Abington, PA 1997 Developed X 95 25.0(1)(16) Building I Sunrise of Abington Abington, PA 1997 Developed X 66 25.0(1)(16) Building II Sunrise of Alexandria Alexandria, VA 1997 Developed X 91 100.0(1)(3) Sunrise of Wayne Wayne, NJ 1997 Developed X 90 25.0(1)(16) Sunrise of Wayland Wayland, MA 1997 Developed X 71 25.0(13) Sunrise of Westfield Westfield, NJ 1997 Developed X 92 25.0(1)(16) Sunrise at East Cobb East Cobb, GA 1997 Developed X 94 100.0(1) Sunrise of Dunwoody Dunwoody, GA 1997 Acquired 30 100.0
-10- 11 Sunrise of Weston Weston, MA 1997 Acquired 31 100.0(1) Sunrise of Fresno Fresno, CA 1998 Developed 84 100.0(10) Sunrise of Haverford Haverford, PA 1998 Developed X 72 25.0(1)(16) Sunrise of Decatur Decatur, GA 1998 Developed X 92 25.0(1)(14) Sunrise of Walnut Walnut Creek, CA 1998 Developed X 85 25.0(1)(14) Creek Sunrise of Glen Cove Glen Cove, NY 1998 Developed X 91 25.0(1)(14) Sunrise at Ivey Ridge Ivey Ridge, GA 1998 Developed X 102 100.0(1) Sunrise of Cohasset Cohasset, MA 1998 Developed X 74 25.0(1)(14) Sunrise at Orchard Denver, CO 1998 Developed X 94 100.0(1) Sunrise of Pinehurst Denver, CO 1998 Developed X 102 100.0(1) Sunrise at Huntcliff Atlanta, GA 1998 Developed X 91 100.0(1) Summit Sunrise of Danville Danville, CA 1998 Developed X 86 100.0(10) Sunrise of Lafayette Lafayette Hill, PA 1998 Developed X 84 25.0(1)(14) Hill Sunrise of Bellevue Bellevue, WA 1998 Developed X 84 25.0(1)(14) Sunrise of Paramus Paramus, NJ 1998 Developed X 76 25.0(1)(14) Sunrise at West Essex Fairfield, NJ 1998 Developed X 94 25.0(13) Sunrise of Paoli Malvern, PA 1998 Developed X 98 25.0(1)(14) Sunrise of Mission Mission Viejo, CA 1998 Developed X 103 100.0(1) Viejo Sunrise at Oakland Oakland, CA 1998 Developed X 91 100.0(1) Hills Sunrise of Rochester Detroit, MI 1999 Developed X 101 9.0(1) Sunrise of East East Brunswick, NJ 1999 Developed X 94 9.0(1) Brunswick Sunrise on Providence Charlotte, NC 1999 Developed X 91 9.0(1)
-11- 12 Sunrise of Smithtown Long Island, NY 1999 Developed X 90 100.0(1) Sunrise of Buffalo Buffalo Grove, IL 1999 Developed X 94 100.0(1) Grove Sunrise at La Costa Carlsbad, CA 1999 Developed X 103 9.0(1) Sunrise of Naperville Naperville, IL 1999 Developed X 91 9.0(1) Sunrise of Richmond Richmond, VA 1999 Developed X 84 9.0(1) Sunrise at Canyon Riverside, CA 1999 Developed X 77 100.0(1) Crest Sunrise at Fleetwood Mt. Vernon, NY 1999 Developed X 96 100.0(1) Sunrise of Flossmoor Flossmoor, IL 1999 Developed X 74 100.0(1) Sunrise of Bloomingdale, IL 1999 Developed X 91 100.0(1) Bloomingdale Sunrise of Wilton Wilton, CT 1999 Developed X 74 100.0(1) Sunrise of Stamford Stamford, CT 1999 Developed X 76 9.0(1) Sunrise at North North Lynbrook, NY 1999 Developed X 98 9.0(1) Lynbrook Sunrise at Frognal Sidcup, London 1999 Developed X 139 20.1(1) House Sunrise of New City New City, NY 1999 Developed X 91 9.0(1) Karrington of Detroit, MI 1999 Acquired 80 100.0(1) Farmington Hills Karrington of Edina Minneapolis, MN 1999 Acquired 110 100.0(1) Karrington of Bexley Columbus, OH 1999 Acquired 61 100.0(10) Karrington at the Columbus, OH 1999 Acquired 61 100.0(10) Scioto Karrington at Tucker Columbus, OH 1999 Acquired 62 100.0(10) Creek Karrington Place for Columbus, OH 1999 Acquired 30 100.0(10)
-12- 13 the Memory Impaired Sunrise of Carmel Indianapolis, IN 1999 Acquired 66 100.0(10) Sunrise of Bath Akron, OH 1999 Acquired 77 100.0(10) Karrington of Gahanna Columbus, OH 1999 Acquired 54 100.0(10) Sunrise of Rocky Cleveland, OH 1999 Acquired 74 100.0(10) River Sunrise at Presque Erie, PA 1999 Acquired 79 100.0(10) Isle Bay Sunrise of Eastover Charlotte, NC 1999 Acquired 52 100.0 Sunrise of Poland Youngstown, OH 1999 Acquired 75 100.0 Sunrise of Ann Arbor Ann Arbor, MI 1999 Acquired 77 100.0(10) Sunrise of Shaker Cleveland, OH 1999 Acquired 68 100.0 Heights Sunrise at South Pittsburgh, PA 1999 Acquired 77 100.0(1) Hills Sunrise at Fall Indianapolis, IN 1999 Acquired 71 100.0 Creek Sunrise of Willow Indianapolis, IN 1999 Acquired 71 100.0 Lake Sunrise of Fort Fort Wayne, IN 1999 Acquired 71 100.0 Wayne Karrington of Wooster Wooster, OH 1999 Acquired 98(11) 100.0(3) Sunrise of South Charlotte Charlotte, NC 1999 Acquired 47 100.0(1) Sunrise of Monroeville Pittsburgh, PA 1999 Acquired 72 100.0(1) Karrington at St. Albuquerque, NM 1999 Acquired 32 19.9(1) Francis Place for the Memory Impaired Sunrise at Oakwood Dayton, OH 1999 Acquired 61 50.0 Sunrise of Colorado Colorado Springs, CO 1999 Acquired 74 19.9(1) Springs
-13- 14 Sunrise at of Kenwood Cincinnati, OH 1999 Acquired 77 35.0(1) Sunrise of Englewood Dayton, OH 1999 Acquired 58 19.9(1) Karrington of Albuquerque, NM 1999 Acquired 69 19.9(1) Albuquerque Sunrise of Findlay Findlay, OH 1999 Acquired 55 50.0(1) Karrington Cottages Bismarck, ND 1999 Acquired 20 100.0(1) of Bismark Karrington Cottages Waterloo, IA 1999 Acquired 20 100.0(1) of Waterloo Karrington of Bismark Bismarck, ND 1999 Acquired 76 100.0(1) Karrington Cottages Buffalo, MN 1999 Acquired 21 100.0(1) of Buffalo 1 Karrington Cottages Buffalo, MN 1999 Acquired 20 100.0(1) of Buffalo 2 Karrington of Buffalo Buffalo, MN 1999 Acquired 78 100.0(1) Karrington Cottages Rochester, MN 1999 Acquired 19 100.0(1) of Rochester 1 Karrington Cottages Rochester, MN 1999 Acquired 19 100.0(1) of Rochester 2 Karrington Cottages Rochester, MN 1999 Acquired 27 100.0(1) of Rochester 3 Karrington Cottages Rochester, MN 1999 Acquired 27 100.0(1) of Rochester 4 Karrington Cottages Rochester, MN 1999 Acquired 30 100.0(1) of Rochester 5 Karrington Cottages Mankato, MN 1999 Acquired 21 100.0(1) of Mankato Sunrise of Park Ridge Chicago, IL 1999 Acquired 128 100.0(1)(12) Sunrise at Northville Northville, MI 2000 Developed X 84 100.0(1) Sunrise of Hermosa Hermosa Beach, CA 2000 Developed X 96 100.0(1)(3) Beach
-14- 15 Sunrise of Exton Exton, PA 2000 Developed X 76 9.0(1) Sunrise of Westtown Westtown, PA 2000 Developed X 95 9.0(1) Karrington of Hamilton, OH 2000 Developed 58 100.0(1) Hamilton Karrington Cottages Rochester, MN 2000 Acquired 27 100.0(1) of Rochester 7 Karrington at Cincinnati, OH 2000 Developed 82 35.0(1) Finneytown Sunrise of Glen Ellyn Glen Ellyn, IL 2000 Developed X 102 9.0(1) Sunrise at Brooklyn, NY 2000 Developed 125 70.0(1) Sheepshead Bay Sunrise of Willowbrook, IL 2000 Developed X 98 100.0(1) Willowbrook Sunrise at Ann Ann Arbor, MI 2000 Developed X 86 9.0(1) Arbor North Sunrise of Cuyahoga Akron, OH 2000 Developed X 59 9.0(1) Falls Sunrise of Sunnyvale Sunnyvale, CA 2000 Developed X 96 9.0(1) Sunrise at Denver, CO 2000 Developed X 104 9.0(1) CherryCreek Sunrise at Parma Parma, OH 2000 Developed X 61 100.0(1) Sunrise of Baton Baton Rouge, LA 2000 Developed X 70 100.0(1) Rouge Sunrise of West West Bloomfield, 2000 Developed X 62 9.0(1) Bloomfield MI Sunrise of Woodcliff Woodcliff Lake, 2000 Developed X 102 9.0(1) Lake NJ Sunrise of Westminister, CO 2000 Developed X 94 100.0(1) Westminister Sunrise at Bayou - New Orleans, LA 2000 Developed X 91 100.0(1)(3) St. Johns
-15- 16 Sunrise of Tustin Tustin, CA 2000 Developed X 58 9.0(1) Sunrise of St . Louis, MO 2000 Developed X 91 100.0(1) Chesterfield Sunrise of Edgewater, NJ 2000 Developed X 84 9.0(1) Edgewater-Phase I Sunrise of Wall Wall Township, NJ 2000 Developed X 70 100.0(1) Sunrise of Claremont Claremont, CA 2000 Developed X 65 100.0(1) Rancho Sunrise of Alta Loma Cucamonga, CA 2001 Developed X 73 100.0(1) Sunrise at Colorado 2001 Developed X 65 9.0(1) University Park Springs, CO Sunrise of Crystal Crystal Lake, IL 2001 Developed X 71 9.0(1) Lake Sunrise of West West Hartford, 2001 Developed X 91 100.0(1) Hartford CT ------------ 11,673 ------------ Sunrise of Troy Troy, MI 1st half Construction X 70 100.0(1) 2001 Sunrise of Palos Park Palos Park, IL 1st half Construction X 102 100.0(1) 2001 Sunrise of Pacific Pacific Palisades, 1st half Construction X 47 100.0(1) Palisades CA 2001 Sunrise of Holbrook Holbrook, NY 1st half Construction X 95 9.0(1) 2001 Sunrise of Unionville Markham, ON 1st half Construction X 98 20.1 2001 Sunrise of Schaumburg Schaumburg, IL 2nd half Construction X 94 9.0 2001 Sunrise of Victoria Victoria, BC 2nd half Construction X 110 20.1(1) 2001
-16- 17 Sunrise at Mill Basin Brooklyn, NY 2nd half Construction X 118 70.0(1) 2001 Sunrise of Mississauga Mississaugua, 2nd half Construction X 101 20.1 ON 2001 Sunrise at Windsor Windsor, ON 2nd half Construction X 101 20.1 2001 Sunrise of Dix Hills Dix Hills, NY 1st half Construction X 91 100.0 2002 Sunrise of Arlington Arlington, MA 2nd half Construction X 102 100.0(1)(3) 2001 Sunrise of Gurnee Gurnee, IL 1st half Construction X 71 9.0 2002 Sunrise of Roseville Roseville, MN 2nd half Construction X 92 9.0 2001 Sunrise of Plainview Plainview, NY 2nd half Construction X 61 9.0 2001 Sunrise of Lincroft Lincroft, NJ 2nd half Construction X 72 9.0 2001 Sunrise of Oakville Oakville, ON 1st half Construction X 104 20.1 2002 Sunrise of Lynn Valley North Vancouver, 1st half Construction X 108 20.1 B.C. 2002 Sunrise of Marlboro Marlboro, NJ 1st half Construction X 77 100.0(1) 2002 Sunrise of East East Meadow, NY 1st half Construction X 98 100.0(3) Meadow 2002 Sunrise of Richmond Richmond Hill, 1st half Construction X 84 20.1 Hill ON 2002 Sunrise of White Oak Silver Spring, 1st half Construction 78 100.0 MD 2002 Sunrise at Virginia Surrey, UK 1st half Construction X 60 20.1 Water 2002
-17- 18 Sunrise of Bernards Basking Ridge, Zoned X 94 100.0 Township NJ Sunrise of Aurora Aurora, CO Zoned X 65 100.0 Sunrise of Burlington Burlington, ON Zoned X 77 20.1 Sunrise of Edgewater Edgewater, NJ Zoned X 84 100.0 II Sunrise of Farmington Zoned X 91 100.0 Farmington Hills Hills, MI Karrington Cottages Rochester, MN Zoned 30 100.0 of Rochester 6 Karrington Cottages Rochester, MN Zoned 30 100.0 of Rochester 8 Karrington Cottages Rochester, MN Zoned 22 100.0 of Rochester 9 Karrington of Dallas Dallas, TX Zoned 82 100.0 Karrington of Jackson, MS Zoned 82 100.0 Northpointe Sunrise at Canoga Canoga Park, CA Zoned X 78 100.0 Park Sunrise at East East Setauket, Zoned X 98 100.0 Setauket NY Sunrise of Washington, D.C. Zoned X 116 100.0 Washington, D.C. Sunrise of Pacific San Diego, CA Zoned X 60 100.0 Beach Sunrise of Fair Oaks Sacramento, CA Zoned X 71 100.0 Sunrise at Richmond St. Louis, MO Zoned X 78 100.0 Heights Sunrise of Naperville Naperville, IL Zoned X 95 100.0 Sunrise at Elstree Elstree, UK Zoned X 71 20.1 Manor
-18- 19 Sunrise of San San Gabriel, CA Zoned X 71 100.0 Gabriel Sunrise of Lincoln Lincoln Park, IL Zoned X 72 100.0 Park Sunrise of Boulder Boulder, CO Zoned X 101 100.0 ------------ 3,602 (16) ------------ Total 15,275 ============
- -------------------------------------------------------------------------------- (1) Serves as collateral for outstanding debt on facilities in which Sunrise has an ownership percentage. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and note 8 of notes to consolidated financial statements. All facilities that are wholly owned by Sunrise are consolidated in the consolidated financial statements. The Gardner Park, Severna Park, Sheepshead Bay, and Mill Basin facilities are held by limited liability companies or limited partnerships in which Sunrise holds the ownership interests indicated in the table. Sunrise is the general partner or managing member of these entities and through the partnership or operating agreements and the management agreements for the facilities Sunrise controls their ordinary course business operations. Therefore, the Gardner Park, Severna Park, Sheepshead Bay, and Mill Basin facilities are also consolidated in Sunrise's consolidated financial statements. The ordinary course business operations of the Towson, Rochester, East Brunswick, Providence, La Costa, Naperville, Richmond, Stamford, North Lynbrook, Frognal House, New City, Exton, Westtown, Finneytown, St. Francis Place, Oakwood, Colorado Springs, Kenwood, Englewood, Albuquerque, Findlay, Glen Ellyn, Ann Arbor, Akron, Sunnyvale, Cherry Creek, West Bloomfield, Woodcliff Lake, Tustin, Edgewater I, Huntermill, Wayland, West Essex, Decatur, Walnut Creek, Glen Cove, Cohasset, Lafayette Hills, Paramaus, Paoli, Bellevue, Abington, Granite Run, Haverford, Morris Plains, Old Tappan, Wayne, Westfield and Springfield facilities are not currently controlled by Sunrise and, therefore, are accounted for under the equity method of accounting. The remaining ownership interests in these facilities are owned by third parties. Sunrise manages each of these facilities. (2) Each of these facilities has been redeveloped in a manner consistent with the Sunrise model. (3) Subject to long-term ground lease. (4) These facilities were initially developed by Sunrise for third parties and were subsequently acquired by Sunrise in 1992. (5) This facility is licensed for 40 assisted living residents. The remainder of the resident capacity is for independent living residents. -19- 20 (6) A current officer and a former employee of Sunrise each have a 25% ownership interest in this facility. Sunrise has the right to acquire these minority ownership interests for fair market value, as determined by an appraiser mutually agreeable to the parties. (7) Serves as collateral for one of Sunrise's operating leases. See note 15 of notes to consolidated financial statements. (8) Excludes 10 units owned by the occupants of the units. The occupants can require Sunrise to repurchase the units for their original purchase prices, aggregating approximately $1.3 million, under specified circumstances. Sunrise has a right to purchase the units at fair market value upon the occurrence of specified events and has a right of first refusal on sales of the units. (9) This facility is licensed for 26 skilled nursing residents. The remainder of the resident capacity is for assisted living residents. (10) Sunrise leases these facilities under operating leases, which range from 3 to 20 years. See note 15 of notes to consolidated financial statements. (11) Includes 43 rental apartment units for which no independent or assisted living services are offered. (12) In February 2000, Sunrise acquired the remaining 30% minority interest of this facility. (13) On June 29, 2000, three facilities were sold to a real estate venture company in which Sunrise owns a 25% interest. (14) On September 30, 2000, eight facilities were sold to a real estate venture company in which Sunrise owns a 25% interest. (15) On December 28, 2000, two facilities were sold to a privately held real estate company. Sunrise will continue to provide day-to-day management of the communities of the communities under long-term operating agreements. (16) On February 23, 2001, nine facilities were sold to a real estate venture company in which Sunrise owns a 25% interest. (17) There can be no assurance that construction delays will not be experienced. FACILITY DEVELOPMENT Sunrise targets sites for development located in major metropolitan areas and their surrounding suburban communities. In evaluating a prospective market, Sunrise considers a number of factors, including: - population; - income and age demographics; -20- 21 - target site visibility; - probability of obtaining zoning approvals; - estimated level of market demand; and - the ability to maximize management resources in a specific market by clustering its development and operating activities. Sunrise continues to develop its Victorian model facilities in major metropolitan markets. Sunrise's growth objectives include developing new Sunrise model assisted living facilities. Since its initial public offering in June 1996, Sunrise has completed development of 89 such new model facilities with a resident capacity of approximately 7,700 and has 24 facilities under construction with resident capacity of approximately 2,100. Sunrise has also entered into contracts to purchase 40 additional sites and to lease one additional site. These sites are located in District of Columbia, Colorado, Louisiana, New Jersey, Connecticut, New York, Illinois, California, Missouri, Michigan, Pennsylvania, Washington, Texas, Mississippi, Virginia, Ontario, Vancouver and United Kingdom. Sunrise is pursuing additional development opportunities as market conditions warrant. Sunrise bases its development primarily upon its "Victorian" model facility that it has developed and refined since the first model facility was designed in 1985. Use of a standard model allows Sunrise to control development costs, maintain facility consistency and improve operational efficiency. Use of the Sunrise model also creates "brand" awareness in Sunrise's markets. The primary milestones in the development process are: - site selection and contract signing; - feasibility; - zoning, site plan approval and building permits; and - completion of construction. Once a market has been identified, site selection and contract signing typically take approximately three to nine months. Zoning and site plan approval generally take 12 months and are typically the most difficult steps in the development process due to Sunrise's selection of sites in mature communities which usually require site rezoning. Facility construction normally takes 10 to 12 months. Sunrise believes its extensive development experience gives it an advantage relative to certain of its competitors in obtaining necessary governmental approvals and completing construction in a timely manner. After a facility receives a certificate of occupancy, -21- 22 residents usually begin to move in within one month. Since 1993, the total capitalized cost to develop, construct and open a Sunrise model facility, including land acquisition and construction costs, has ranged from approximately $8.5 million to $20.0 million. The cost of any particular facility may vary considerably based on a variety of site-specific factors. Sunrise's development activities are coordinated by its experienced development staff, which has extensive real estate acquisition, engineering, general construction and project management experience. Architectural design and hands-on construction functions are contracted to experienced outside architects and contractors. The ability of Sunrise to achieve its development plans will depend upon a variety of factors, many of which will be outside the control of Sunrise. These factors include: - obtaining zoning, land use, building, occupancy, licensing and other required governmental permits for the construction of new facilities without experiencing significant delays; - completing construction of new facilities on budget and on schedule; - the ability to work with third-party contractors and subcontractors who construct the facilities; - shortages of labor or materials that could delay projects or make them more expensive; - adverse weather conditions that could delay projects; - finding suitable sites for future development activities at acceptable prices; and - addressing changes in laws and regulations or how existing laws and regulations are applied. Sunrise cannot assure that it will not experience delays in completing facilities under construction or in development or that it will be able to identify suitable sites at acceptable prices for future development activities. If it fails to achieve its development plans, its growth could slow, which would adversely impact its revenues and results of operations. -22- 23 FACILITY ACQUISITIONS Since its 1996 initial public offering, Sunrise has acquired nine existing independent living and assisted living facilities and has completed its acquisition of Karrington. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation." In evaluating possible acquisitions, Sunrise considers various factors, including: - location, construction quality, condition and design of the facility; - current and projected facility cash flow; - the ability to increase revenue, occupancy and cash flow by providing a full range of assisted living services; - costs of facility repositioning, including any renovations; and - the extent to which the acquisition will complement Sunrise's development plans. There can be no assurance that any acquisitions of additional assisted living facilities will be completed. The success of Sunrise's acquisitions will be determined by numerous factors, including Sunrise's ability to identify suitable acquisition candidates, competition for such acquisitions, the purchase price, the financial performance of the facilities after acquisition and the ability of Sunrise to integrate or operate acquired facilities. NEED FOR ADDITIONAL FINANCING AND MANAGEMENT OF GROWTH Sunrise will need to obtain substantial additional resources to fund its development, construction and acquisition activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation." Sunrise expects that the number of owned and operated facilities will increase as it pursues its development and acquisition programs for new assisted living facilities. This growth will place significant demands on Sunrise's management resources. Sunrise's ability to manage its growth effectively will require it to continue to expand its operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. If Sunrise is unable to manage its growth effectively, its business, revenues, expenses and operating results could be adversely affected. MANAGED FACILITIES Sunrise also manages for third-party owners 19 operating facilities and two facilities under development with total resident capacity of over 1,800, including one in Georgia, four in Maryland, four in Massachusetts, one in Nebraska, two in New Jersey, one in Pennsylvania, four -23- 24 in Virginia and two in California. The facilities in Georgia, Maryland, and New Jersey and one facility in Massachusetts and California are Sunrise model facilities. The management contract expiration dates range from June 2001 to September 2013. Sunrise owns $5.8 million carrying value of tax exempt mortgage bonds on the Pennsylvania facility. Under the management agreement for one of the New Jersey facilities, Sunrise has a right of first refusal to purchase the facility if the owner receives a bona fide offer to purchase the facility during the term of the management agreement. Sunrise does not provide financial or accounting services to one of the Virginia facilities. COMPANY OPERATIONS OPERATING STRUCTURE Sunrise has centralized accounting, finance and other operational functions at the corporate headquarters and regional office levels in order to allow facility-based personnel to focus on resident care, consistent with Sunrise's operating philosophy. Sunrise maintains its corporate headquarters office in McLean, Virginia and a business office in Fairfax, Virginia. The business office comprises mainly accounting and information technology staff, and the new Sunrise "At-Home" business is headquartered in the Fairfax office. Corporate staff members are responsible for: the establishment of Company-wide policies and procedures relating to resident care, employee hiring, training on retention, facility design and development, and facility operations; and accounting and finance functions including billing and collection, accounts payable, general finance and accounting, and tax planning and compliance; and providing overall strategic direction to Sunrise. Regional staff are responsible for: overseeing all aspects of facility-based operations, including marketing and sales activities; resident care; the hiring of facility executives, care managers and other facility-based personnel; compliance with applicable local and state regulatory requirements; and implementation of Sunrise's development and acquisition plans within a given geographic region. Sunrise is currently organized into four large geographic regions: Northeast, Mid-Atlantic and Southeast, Midwest and West, with multiple cluster regions under each. Sunrise has regional offices in Boston, MA, Long Island, NY, Paramus, NJ, Villanova, PA, Atlanta, GA, Chicago, IL, Columbus, OH, Claremont, CA, and Concord, CA that support the currently opened and/or to be opened properties in these markets. Sunrise also has regional offices in London, England and Toronto, Canada supporting the Sunrise homes open or under construction in those locations. Each of the regions is headed by either a vice president or director of operations with extensive experience in the senior housing, health care and assisted living industries. Each regional cluster is supported typically by a sales/marketing specialist, a resident care specialist, a human resources specialist and a dining services specialist. Sunrise expects that all regional clusters will create similar staff positions as the number of facilities in those regions increases. -24- 25 FACILITY STAFFING Each of Sunrise's facilities has an executive director responsible for the day-to-day operations of the facility, including: quality of care; resident services; sales and marketing; and financial performance. Each executive director receives specialized training from Sunrise. Sunrise believes that the quality and size of its facilities, coupled with its competitive compensation philosophy, have enabled it to attract high-quality, professional executive directors. The executive director is supported by (a) the department heads, who oversee the care and service of the facility's assisted living neighborhood and Alzheimer neighborhood, (b) a nurse, who serves as a case manager responsible for coordinating the services necessary to meet the health care needs of our residents and (c) the director of community relations, who is responsible for selling Sunrise services. Other key positions include the dining services coordinator, the program coordinator and, the maintenance coordinator Care managers, who work on full-time, part-time and flex-time schedules, provide most of the hands-on resident care, such as bathing, dressing and other personalized care services, including housekeeping, meal service and resident activities. As permitted by state law, nurses or care managers who complete a special training program supervise the storage and distribution of medications. The use of care managers to provide substantially all services to residents has the benefits of consistency and continuity in resident care. In most cases, the same care manager assists the resident in dressing, dining and coordinating daily activities. The number of care managers working in a facility varies according to the level of care required by the residents of the facility and the numbers of residents receiving Alzheimer's care and plus care services. The number of care managers ranges from three (Leesburg facility) to 20 (Atrium facility) on the day shifts and from two care managers (Leesburg) to seven care managers (Atrium) on the night shift. Sunrise believes that its facilities can be most efficiently managed by maximizing direct resident and staff contact. Employees involved in resident care, including the administrative staff, are trained in the care manager duties and participate in supporting the care needs of the residents. Accounting functions are centralized so that administrative staff may devote substantially all of their time to care giving. STAFF EDUCATION AND TRAINING Sunrise has attracted, and continues to seek, highly dedicated, experienced personnel. Sunrise has developed a formal training program, the "five star training program," which focuses on providing every employee with the appropriate skills that are required to ensure the highest quality of resident care. All managers and direct care staff must complete a comprehensive orientation and the core curriculum, which consists of basic resident care procedures, Alzheimer's care, communication systems, and activities and dining programming. For the -25- 26 supervisors of direct care staff, additional program levels provide education in medical awareness and management skills. For department managers, Sunrise has developed the "mentor program," which partners each new manager with an experienced, successful manager. Under this program, new managers typically receive several weeks of training including classroom, on the job and corporate orientation. Thereafter, the mentor maintains regular contact with the new manager to provide ongoing support and guidance. Region-based classroom training also is provided monthly for department managers in specialized areas, including Sunrise's "reminiscence program," the social and volunteer programs, human resources, staffing and scheduling and medication management. Sunrise also has developed the "executive director in training program," which offers a structured curriculum to train individuals to become executive directors at Sunrise. This program recruits successful, strong leaders from both Sunrise department head ranks as well as professionals from outside Sunrise and provides them with an accelerated training curriculum to prepare them to be Sunrise executive directors. QUALITY IMPROVEMENT PROCESSES Sunrise coordinates quality assurance programs at each of its facilities through its corporate headquarters staff and through its regional offices. Sunrise's commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services provided by Sunrise. In addition to ongoing training and performance reviews of care managers and other employees, Sunrise's quality control measures include: Family and Resident Feedback. Sunrise surveys residents and family members on a regular basis to monitor the quality of services provided to residents. Semi-annual and annual written surveys are used to appraise and monitor the level of satisfaction of residents and their families. A toll-free telephone line also is maintained which may be used at any time by a resident's family members to convey comments. Regular Facility Inspections. Facility inspections are conducted by regional operations staff on a regular basis. These inspections cover: the appearance of the exterior and grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; resident care plans; the quality of activities and the dining program; observance of residents in their daily living activities; and compliance with government regulations. Third-Party Reviews. To further evaluate customer service, Sunrise engages an independent service evaluation company to "mystery shop" Sunrise's facilities. These professionals assess Sunrise's performance from the perspective of a customer, without the -26- 27 inherent biases of a company employee. Each facility is "shopped" at least three times per year in person, as well as one or more times per month by telephone. To evaluate medication management, third-party pharmacists conduct periodic reviews of on-site handling and storage of medications, record-keeping and coordination of medications. SALES AND MARKETING Sunrise's sales and marketing strategy is intended to create awareness which reflect in visits to Sunrise and its services among potential residents and their family members and referral sources, such as hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing facilities, home health agencies and social workers resulting in personal visits to the property. A central marketing staff develops overall strategies for systems and programs promoting Sunrise throughout its markets and monitors the success of Sunrise's marketing efforts. Each regional cluster generally has at least one sales and marketing specialist and each property has at least one sales and marketing director of community relations who is responsible for implementing sales and marketing programs. In addition to direct contacts with prospective referral sources, Sunrise also relies on print and yellow page advertising, direct mail, signage, the internet, and open houses and special events, such as grand openings for new facilities, health fairs and various community receptions. THIRD-PARTY RESIDENT, MANAGEMENT AND DEVELOPMENT SERVICES While Sunrise serves the vast majority of a resident's needs with its own staff, some services, such as physician care, infusion therapy, physical and speech therapy and other home health care services, may be provided to residents at Sunrise facilities by third parties. Company staff assist residents in locating qualified providers for such health care services. In October 1996, Sunrise entered into an affiliation agreement with Jefferson Health System, an integrated health care system located in Philadelphia, Pennsylvania. Under this agreement, Jefferson Health System provides residents of Sunrise facilities located in the Philadelphia metropolitan region, on a preferred but non-exclusive basis, with access to various health care services offered by Jefferson Health System. These health care services may include hospital services, physician services, rehabilitation services, home health services and products and mental health services. Sunrise continues to capitalize on its brand awareness by accepting third-party management and development contracts. Sunrise previously entered into an agreement with Inova Health System Services, Inc., the largest not-for-profit integrated health care system in the Washington, D.C. metropolitan area, to manage Inova's two assisted living communities and provide development and management services for an additional four to eight assisted living communities with a total resident capacity of up to 800. -27- 28 Sunrise has also entered into unconsolidated joint venture arrangements with third parties to develop up to 37 projects in the United States, United Kingdom and Canada. The joint ventures have completed 13 assisted living facilities, 12 in the United States and one in the United Kingdom and are currently developing 13 assisted living facilities, three in the United States, two in the United Kingdom and eight in Canada. Sunrise is providing management and development services to the joint ventures on a contract-fee basis with rights to acquire the assets in the future. Sunrise has ownership interests in these joint ventures ranging from 9% to 20.1%. Sunrise is continuing its previously-announced plan of selling selected real estate assets, subject to market conditions, as a normal part of its operations while retaining long-term management through operating agreements, to include the potential sale of approximately 15 - 20 properties each year. This strategy of selling selected real estate assets as a normal part of operations should enable Sunrise to reduce debt, redeploy its capital into new development projects and realize gains on appreciated real estate. As of March 1, 2001, Sunrise has completed the sale of 26 facilities. Sunrise continues to operate the facilities under long-term operating agreements. COMPETITION The long-term care industry is competitive. Sunrise competes with numerous other companies that provide similar long-term care alternatives, such as home health care agencies, facility-based service programs, retirement communities, convalescent centers and other assisted living providers. Although some competitors are significantly larger, Sunrise believes there are no one or more dominant companies in the assisted living segment. In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. Although new construction of assisted living facilities have declined significantly, Sunrise has experienced and expects to continue to experience competition in their efforts to develop and acquire assisted living facilities. Some of the present and potential competitors of Sunrise are significantly larger and have, or may obtain, greater financial resources than Sunrise. Consequently, Sunrise cannot assure that it will not encounter competition that could limit its ability to attract residents or expand its business, which could have a material adverse effect on its revenues and earnings. OVERBUILDING IN THE ASSISTED LIVING INDUSTRY Sunrise believes that some assisted living markets have become or are on the verge of becoming overbuilt. As described above, regulation and other barriers to entry into the assisted living industry are not substantial. Although the construction of assisted living facilities has declined significantly, the development of new assisted living facilities could outpace demand. Overbuilding in Sunrise market areas could, therefore, cause Sunrise to experience decreased occupancy, depressed margins or lower operating results. -28- 29 STAFFING AND LABOR COSTS Sunrise competes with various health care services providers, including other elderly care providers, in attracting and retaining qualified and skilled personnel. A shortage of nurses or other trained personnel or general inflationary pressures may require that Sunrise enhance its pay and benefits package to compete effectively for such personnel. If there is an increase in these costs or if Sunrise fails to attract and retain qualified and skilled personnel, the business and financial results of Sunrise could be adversely affected. GOVERNMENT REGULATION Assisted living facilities and services are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. Although requirements vary from state to state, in general, these requirements address: - personnel education, training, and records; - facility services, including: -- administration of medication, -- assistance with self-administration of medication and -- limited nursing services; - monitoring of resident wellness; - physical plant specifications; - furnishing of resident units; - food and housekeeping services; - emergency evacuation plans; and - resident rights and responsibilities, including in some states the right to receive health care services from providers of a resident's choice. Some facilities are also licensed to provide independent living services, which generally involve lower levels of resident assistance. In some states, assisted living services are provided to residents through licensed home-healthcare agencies which are subject to additional regulations. Sunrise operates several licensed home-healthcare agencies. In several of the states -29- 30 in which Sunrise operates or intends to operate, assisted living facilities also require a certificate of need before the facility can be opened. In most states, assisted living facilities and services also are subject to state or local building code, fire code and food service licensing or certification requirements. Like other health care facilities, assisted living facilities and services are subject to periodic survey or inspection by governmental authorities. From time to time in the ordinary course of business, Sunrise receives deficiency reports, which it reviews to take appropriate corrective action. Although most inspection deficiencies are resolved through a plan of correction, the reviewing agency typically is authorized to take action against a licensed facility or home healthcare agency where deficiencies are noted in the inspection process. This action may include imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions. If Sunrise fails to comply with applicable requirements, its business and revenues could be materially and adversely affected. To date, none of the deficiency reports received by Sunrise has resulted in a suspension, fine or other disposition that has had a material adverse effect on its revenues. Regulation of the assisted living industry is evolving. Sunrise's operations could suffer if future regulatory developments, such as mandatory increases in scope and quality of care given to residents, are enacted and licensing and certification standards are revised. For example, if more states seek and obtain Medicaid waivers to authorize reimbursement for assisted living, the prospect of some federal regulation may become more likely. If the regulatory requirements increase, the costs of complying with those requirements could increase as well. Sunrise also is subject to federal and state anti-remuneration laws, such as the federal health care program anti-kickback law which governs various types of financial arrangements among health care providers and others who may be in a position to refer or recommend patients to these providers. This law prohibits direct and indirect payments that are intended to induce the referral of patients to, the arranging of services by, or the recommending of, a particular provider of health care items or services. The federal health care program anti-kickback law has been interpreted to apply to some contractual relationships between health care providers and sources of patient referral. Similar state laws vary from state to state, are sometimes vague and have rarely been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil or criminal penalties and exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the federal health care program. Sunrise cannot be sure that these laws will be interpreted consistently with its practices. ENVIRONMENTAL RISKS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removal or remediation of hazardous or toxic substances, including asbestos-containing materials, that -30- 31 could be located on, in or under a property. These laws and regulations often impose liability without regard to whether or not the owner or operator knew of, or was responsible for, the presence or release of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial. In addition, the liability of an owner or operator is generally not limited and could exceed the property's value and the aggregate assets of the owner or operator. An owner or operator or an entity that arranges for the disposal of hazardous or toxic substances at a disposal site also may be liable for the costs of any required remediation or removal of hazardous or toxic substances. Sunrise engages consultants to conduct Phase I environmental studies of development sites that are placed under contract. If the Phase I study indicates the existence of hazardous or toxic substances on the property, a Phase II study is requested and performed. The Phase I and Phase II reports, as applicable, may not reveal all environmental liabilities. There could be, therefore, material environmental liabilities of which Sunrise is unaware. In connection with the ownership or operation of its properties, Sunrise could be liable for the costs of remediation or removal of hazardous or toxic substances. Sunrise also could be liable for other costs, including governmental fines and damages for injuries to persons or properties. As a result, the presence, with or without Sunrise's knowledge, of hazardous or toxic substances at any property owned or operated by it, or acquired or operated by it in the future, could have an adverse effect on Sunrise's financial condition or earnings. MEDICAL WASTE Some of Sunrise's facilities generate infectious waste due to the illness or physical condition of the residents, including, for example, blood soaked bandages, swabs and other medical waste products and incontinence products of those residents diagnosed with an infectious disease. The management of infectious medical waste, including handling, storage, transportation, treatment and disposal, is subject to regulation under various laws, including federal and state liability laws. These environmental laws set forth the management requirements, as well as permit, record keeping, notice and reporting obligations. Each of Sunrise's facilities has an agreement with a waste management company for the proper disposal of all infectious medical waste. Any finding that Sunrise is not in compliance with these environmental laws could adversely affect its business operations and financial condition. Because these environmental laws are amended from time to time, Sunrise cannot predict when and to what extent liability may arise. In addition, because these environmental laws vary from state to state, expansion of Sunrise's operations to states where Sunrise does not currently operate may subject Sunrise to additional restrictions on the manner in which it operates its facilities. -31- 32 LIABILITY AND INSURANCE The assisted living business entails an inherent risk of liability. In recent years, Sunrise, as well as other participants in the assisted living industry, have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and significant legal costs. Sunrise maintains insurance policies in amounts and with the coverage and deductibles it believes are adequate, based on the nature and risks of our business, historical experience and industry standards. The insurance currently maintained by Sunrise has the following coverage limits:
Type of Coverage Coverage Limits Examples of Incidents Covered ---------------- --------------- ----------------------------- - General liability - $1,000,000 per - premises claims by occurrence/per facility, third parties, not with additional specific including residents limitations for particular categories of claims that - personal injury and fall under the general advertising injury liability category - independent contractors - fire damage to other rented locations - Health care - $1,000,000 per - negligence claims by professional occurrence/$3,000,000 total residents liability for all claims per policy year; coverage limits do not overlap with general liability coverage - Umbrella excess - $50,000,000 per policy - same as under general liability year; coverage is in excess liability and medical of the general liability liability professional and medical liability limits liability coverages
-32- 33 - Non-medical - $5,000,000 per wrongful - claims against professional act/$7,000,000 total; Sunrise's development liability coverage limits do not or management company overlap with general subsidiaries by third liability, medical parties for whom liability or umbrella Sunrise develops or excess liability limits manages properties - Property - $958,528,539 Blanket Real - "All Risk" of physical & Personal Property; loss or damage to $226,849,283 Blanket Sunrise property for Business Interruption; all perils unless $10,000,000 Flood & otherwise excluded Earthquake; $1,000,000 California Earthquake - Boiler & - $20,000,000 Equipment - Physical damage & Machinery Breakdown financial damage stemming from an accident to covered equipment - Builder's Risk - $13,000,000 Hard Costs; - Physical loss or $2,000,000 Soft Costs damage to building or other related property while under the course of construction. - Business Auto - $1,000,000 combined - Loss for Physical single limit; $1,000,000 damage by or to Hired/Non-Owned Liability; Sunrise's fleet. $1,000,000 Injuries to other Uninsured/underinsured persons & legal Motorists; $5,000 Medical liability imposed on Payments Sunrise for damage others.
-33- 34 - Workers - Statutory Limits; - Protects employees Compensation $1,000,000 Employers' against injury or Liability contracted disease arising out of and in the course of employment. - Comprehensive - $5,000,000 Employee - Dishonest acts Crime Dishonesty; $500,000 committed by an Depositors Forgery or employee including Alteration; $500,000 Monies theft of monies & & Securities securities, embezzlement & other forms of employee dishonesty. Has limited coverage for theft of resident's property. - Fiduciary - $1,000,000 Annual - Claims arising out of Aggregate the handling of employee pension, benefit & health & welfare plans. - California - $4,000,000 excess of - Physical loss or Earthquake property limits; damage to Sunrise $10,000,000 excess of property due to earth underlying $5,000,000 movement or earthquakes - Flood - $500,000 building; - Physical loss or $500,000 contents; Property damage to Sunrise's sites in excess of this property in a flood policy in a flood zone A zone A - Underground - $1,000,000 Annual - Third party bodily Storage Tank Aggregate injury & property damage that results from a confirmed release from a storage tank system.
-34- 35 Sunrise cannot be sure that claims will not arise that are in excess of its coverage or not covered by its policies. If a successful claim against Sunrise is made and it is not covered by insurance or exceeds the policy limits, Sunrise's financial condition and results of operations could be materially and adversely affected. Claims against Sunrise, regardless of their merit or eventual outcome, could also have a material adverse effect on its ability to attract residents or expand its business and could require Sunrise's management to devote time to matters unrelated to the operation of its business. Sunrise also has to renew its policies every year and it cannot be sure that it will be able to continue to obtain liability insurance coverage on acceptable terms. EMPLOYEES At December 31, 2000, Sunrise had 9,947 employees, including 5,946 full-time employees, of which 240 were employed at Sunrise's headquarters and business office. Sunrise believes employee relations are good. ITEM 2. PROPERTIES Sunrise leases its corporate and business offices, regional operations and development offices, and warehouse space under various leases. The leases have terms of five to twelve years. The corporate headquarters lease commenced upon completion of the building in July 1999 and expires in July 2011. The lease has an initial annual base rent of $1.2 million. The base rent escalates approximately 2.5% per year in accordance with a base rent schedule. In September 1999, Sunrise amended another corporate lease to increase the amount of leased premises and extend the maturity date to October 2004. The initial annual lease payments of the business office leases amount to $462,000, and the base rent is subject to annual increases based on the consumer price index from a minimum of 2% to a maximum cap of 3% per year. The initial annual base rent payments under the warehouse lease amount to $148,000, subject to annual increases of 3%. Also required are an amortization rent of $88,000 and a portion of operating expenses. Various other leases expire during 2001 and 2003. Sunrise has also entered into operating leases for eleven facilities and five long-term ground leases related to other facilities. The operating lease terms vary from 15 years, with two ten-year extension options, to 20 years and ground leases have terms of 30 to 99 years. For information regarding facilities owned by Sunrise or in which it holds interests, see " Item 1. Business - Owned Facilities" and "Facility Development." In December 1998, a subsidiary of Sunrise entered into a three year operating lease for six assisted living facilities. Sunrise has guaranteed the payment of all obligations of its subsidiary under the lease. There are no extension options. However, Sunrise has the option, 120 days prior to the expiration date of the lease, of either purchasing or selling all the leased properties. If Sunrise exercises its option to sell the properties and the proceeds from the sale -35- 36 exceed the obligation under the lease, Sunrise is entitled to the excess. However, if the proceeds from the sale are less than the obligation under the lease, Sunrise is obligated to fund the difference. Sunrise is responsible for the payment of real estate taxes, insurance and other operating expenses. The lease requires Sunrise to maintain specified coverage ratios, liquidity and net worth. These six leased properties were sublet to Karrington until the acquisition of Karrington in May 1999. During 2000, Sunrise purchased two of the properties for $17.7 million. ITEM 3. LEGAL PROCEEDINGS Sunrise is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management of Sunrise, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on Sunrise's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Sunrise's common stock is traded on the Nasdaq National Market under the symbol "SNRZ." Trading of the common stock commenced May 31, 1996. As of March 13, 2001, there were 261 stockholders of record. No cash dividends have been paid in the past, and none are expected to be paid in the foreseeable future. QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
Quarter Ended High Low - -------------------------------------------------------- March 31, 1999 $ 52.50 $ 30.50 June 30, 1999 45.00 29.88 September 30, 1999 35.50 24.00 December 31, 1999 26.63 9.25 Quarter Ended High Low - -------------------------------------------------------- March 31, 2000 $ 15.75 $12.00 June 30, 2000 20.00 12.38 September 30, 2000 24.13 15.00 December 31, 2000 31.00 18.69
-36- 37 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with Sunrise's Consolidated Financial Statements and notes thereto included elsewhere herein.
December 31, - ---------------------------------------------------------------------------------------------------------------- 2000 1999 (1) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) STATEMENT OF OPERATIONS DATA: Operating revenue $ 344,786 $ 255,219 $ 170,712 $ 89,884 $ 47,345 Facility operating expenses 169,966 131,055 88,834 53,286 28,274 Facility development and pre-rental expenses 6,226 7,184 5,197 5,586 2,420 General and administrative expenses 27,418 20,715 12,726 10,454 10,042 Depreciation and amortization expenses 33,902 25,448 21,650 10,592 4,048 Interest expense, net 37,566 21,750 15,430 4,613 6,425 Net income (loss) (2) 24,278 20,213 22,312 4,001 (4,760) Net income (loss) per common share: Basic 1.12 0.96 1.16 0.21 (0.52) Diluted 1.10 0.94 1.11 0.20 (0.52) BALANCE SHEET DATA (at end of period): Cash and cash equivalents $ 42,874 $ 53,540 $ 54,197 $ 82,643 $ 101,811 Working capital (34,063) 95,480 69,573 70,340 102,822 Total assets 1,132,346 1,101,413 683,411 556,260 342,839 Total debt 674,703 700,943 428,326 340,987 145,511 Stockholders' equity 354,045 335,124 227,655 195,340 185,824 OPERATING AND OTHER DATA: Earnings before interest, taxes, depreciation and amortization (3) $ 111,268 $ 75,239 $ 59,392 $ 19,206 $ 5,713 Net cash provided by operating activities 51,632 42,787 27,138 12,183 871 Net cash used in investing activities (23,413) (235,065) (146,471) (225,765) (112,608) Net cash (used in) provided by financing actives (38,885) 191,621 90,887 194,414 207,295 Facilities (at end of period): Owned 147 126 66 54 30 Managed 17 14 11 7 5 - ---------------------------------------------------------------------------------------------------------------- Total 164 140 77 61 35 ================================================================================================================ Resident capacity (at end of period): Owned 11,380 9,756 5,617 4,632 2,584 Managed 1,503 1,289 1,010 683 528 - ---------------------------------------------------------------------------------------------------------------- Total 12,883 11,045 6,627 5,315 3,112 ================================================================================================================ Occupancy rate (4) 94% 96% 94% 94% 94% - ----------------------------------------------------------------------------------------------------------------
(1) On May 14, 1999, Sunrise completed its acquisition of Karrington Health, Inc. through a tax-free, stock-for-stock transaction in which it issued 2.3 million common shares in exchange for all outstanding shares of Karrington and Karrington became a wholly owned subsidiary of Sunrise. The total transaction was valued at $85.1 milion and was accounted for using the purchase method of accounting and, accordingly, the results of operations of Karrington since the acquisition are included in Sunrise's financial information for 1999. See Note 13 of Notes to Consolidated Financial Statements. (2) Net income for 1999 includes non-recurring charges of $5.1 million ($4.0 million after tax). (3) Earnings before interest, taxes, depreciation and amortization is presented because Sunrise believes this data is used by some investors to evaluate Sunrise's ability to meet debt service requirements. Sunrise considers earnings before interest, taxes, depreciation and amortization to be an indicative measure of its operating performance due to the significance of Sunrise's long-lived assets and because this data can be used to measure Sunrise's ability to service debt, fund capital expenditures and expand its business. However, this data should not be considered as an alternative to net income, operating profit, cash flows from operations or any other operating or liquidity performance measure proscribed by generally accepted accounting principles. In addition, earnings before interest, taxes, depreciation and amortization as calculated by Sunrise may not be comparable to similarly titled measures reported by other companies. Interest expense, taxes, depreciation and amortization, which are not reflected in the presentation of earnings before interest, taxes, depreciation and amortization, have been, and will be incurred by Sunrise. Investors are cautioned that these excluded items are significant components in understanding and assessing Sunrise's financial performance. (4) Based on monthly occupancy for owned facilities, opened or operated for at least 12 months, or that have achieved occupancy percentages of 95% or above at the beginning of the year. The occupancy rate excludes facilities with temporary vacancies and resident relocations generally of between three to six months due to renovations. -37- 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information contained in the consolidated financial statements, including the related notes, and other financial information appearing elsewhere herein. This management's discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Sunrise's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including development and construction risks, acquisition risks, licensing risks, business conditions, competition, Sunrise's ability to operate Karrington properties profitably, the Company's ability to execute on its sale/manage back program, market factors that could affect the value of the Company's properties, changes in interest rates, risks of downturns in economic conditions generally, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere herein. Unless the context suggests otherwise, references herein to "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries. OVERVIEW Sunrise is a provider of assisted living services for seniors. Sunrise currently operates 170 facilities in 25 states and in the United Kingdom, with a resident capacity of more than 13,300 residents, including 151 facilities owned by Sunrise or in which it has ownership interests and 19 facilities managed for third parties. Sunrise provides assistance with the activities of daily living and other personalized support services in a residential setting for elderly residents who cannot live independently but who do not need the level of medical care provided in a skilled nursing facility. Sunrise also provides additional specialized care and services to residents with certain low acuity medical needs and residents with Alzheimer's disease or other forms of dementia. By offering this full range of services, Sunrise is able to accommodate the changing needs of residents as they age and develop further physical or cognitive frailties. Sunrise has continued to experience growth in operations during the year ended December 31, 2000 and continued to capitalize on its brand awareness by accepting third-party management and development contracts. During this period, Sunrise began operating 25 additional facilities in which it has an ownership interest and managing two additional facilities for independent third parties. Sunrise also entered into several third-party management and development contracts during 2000. As a result, total operating revenue increased substantially to $344.8 million for 2000 from $255.2 million for 1999, and correspondingly, earnings before interest, taxes, depreciation and amortization ("EBITDA") increased to $111.3 million for 2000 from $75.2 million for 1999. Average resident occupancy for stabilized facilities decreased to 94.2% for 2000 from 95.6% for 1999, and the average daily resident fee for these stabilized facilities increased to $106 for 2000 from $97 for 1999. Net income, however, increased to $24.2 million for 2000, or $1.10 per share (diluted), from $20.2 million for 1999, or $0.94 per share (diluted). The increase in net income between 2000 and 1999 was due in part to additional facilities operated in 2000 and an increase in property sales, offset, in part, by increases in -38- 39 interest expense. In prior years, recognizing tax benefits of certain net operating loss carryforwards offset income tax expense. Sunrise's growth objectives include developing new Sunrise model assisted living facilities and selectively acquiring existing facilities. Sunrise currently has 24 facilities under construction with a resident capacity of approximately 2,100. Sunrise has also entered into contracts to purchase 40 additional development sites, 21 of which are zoned, and to lease one additional site. Sunrise is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. In connection with the implementation of its growth plans, in prior years Sunrise made significant investments in its infrastructure through the addition of information technology, as well as additions to headquarters and regional staff. During 2000, Sunrise continued to invest in these areas to support both the growth of Sunrise and to provide expansion and enhancement to some of its existing computer and communication systems. Sunrise continues to execute its previously announced plan of selling selected real estate properties, subject to market conditions, as a normal part of its operations while retaining long-term management contracts. This strategy of selling selected real estate properties as a normal part of operations has and is expected to continue to enable Sunrise to reduce debt, re-deploy its capital into new development projects and realize gains on appreciated real estate. During 2000, Sunrise entered into definitive agreements for the sale of 22 properties (13 of which closed) for approximately $314.1 million. In February 2001, Sunrise closed the sale of the remaining nine properties. Sunrise has concluded its efforts to sell former Karrington operating properties held for sale. In September 2000, the Company sold two former Karrington operating properties for their book value of approximately $7.0 million. Sunrise terminated discussions to sell the remaining 14 operating properties held for sale because market conditions for selling such properties in secondary markets are depressed and the Company believes that it can obtain better prices in the future. Accordingly, these properties have been reclassified from assets held for sale to operating properties and the operations of these properties have been included in Sunrise's consolidated results beginning in the third quarter of 2000. Sunrise continues its efforts to explore international development and acquisition possibilities. To date, Sunrise has entered into a joint venture arrangement with a third party that is providing up to $55.3 million of the equity capital to develop up to 22 projects in the United Kingdom and Canada. Currently, the joint venture has one property operating in the United Kingdom, eight properties under development in Canada and two properties under development in the United Kingdom. Sunrise provides management and contract services to the joint venture on a contract-fee basis with rights to acquire the assets in the future. As of December 31, 2000, the third party has provided approximately $26.5 million and Sunrise has provided $2.4 million of equity capital to the joint venture. -39- 40 During the third quarter of 2000, Sunrise entered into an agreement with Schroder Ventures Life Sciences ("SVLS") to form a new business that will provide private pay assisted living services to frail seniors in their own homes. SVLS will initially hold a majority interest in the new business, Sunrise At-Home Senior Living, Inc. Under the venture agreements, Sunrise has the ability to acquire a 75% interest in Sunrise At-Home under certain conditions and has an option to purchase the SVLS ownership interest. Sunrise's Board of Directors has authorized the Company to repurchase its outstanding common stock and/or its outstanding 5 1/2% convertible subordinated notes up to an aggregate purchase price of $50.0 million over a period of 12 months. Sunrise expects to fund the repurchases from available funds and the continued execution of its property sale/manage back program. Sunrise has repurchased 585,000 shares of common stock at an average price of $16.66 per share through open-market purchases during the period from March 30, 2000 to December 31, 2000. RESULTS OF OPERATIONS Sunrise derives its revenues from three primary sources: (1) resident fees for the delivery of assisted living services, (2) management services income for management and contract services of facilities owned by third parties and (3) income from property sales. Historically, most of Sunrise's operating revenue has come from resident fees, which in 2000, 1999 and 1998 comprised 79.5%, 85.2% and 89.0% of total operating revenues, respectively. Residents, their families or other responsible parties typically pay resident fees monthly. In 2000, 1999 and 1998 approximately 99% of Sunrise's revenue was derived from private pay sources. Resident fees include revenue derived from basic care, community fees, plus care, Reminiscence(TM) and other resident related services. Plus care and Reminiscence(TM) fees are paid by residents who require personal care in excess of services provided under the basic care program. Management and contract services income represents fees from long-term contracts for facilities owned by unconsolidated joint ventures and other third party owners. Management services income includes management fees, which are generally in the range of 5% to 8% of a managed facility's total operating revenue for homes in operation, and consulting service fees for site acquisition, development services, facility design and construction management services. Management services income accounted for 11.2%, 12.1% and 9.8% of operating revenue in 2000, 1999 and 1998, respectively. Income from property sales represents the gain recognized from the sale of assisted living properties. Generally, upon sale of a property, Sunrise will enter into a long-term management agreement with the facility. Income from property sales accounted for 9.3%, 2.8% and 1.2% of operating revenues in 2000, 1999 and 1998, respectively. Sunrise classifies its operating expenses into the following categories: (1) facility operating, which include labor, food, marketing and other direct facility expenses; (2) management and contract services, which include operating expenses reimbursable to Sunrise; -40- 41 (3) facility development and pre-rental, which include non-capitalized development expenses and pre-rental labor and marketing expenses; (4) general and administrative, which primarily include headquarters and regional staff expenses and other overhead costs; (5) depreciation and amortization; and (6) facility lease, which represent rental expenses for facilities and property not owned by Sunrise. SUNRISE MANAGEMENT SERVICES Sunrise Management Services provides full-service assisted living management services, in the U.S. and internationally, for all communities owned or managed by Sunrise. In addition, the Sunrise Management Services division provides management and consulting services to third parties on market and site selection, pre-opening sales and marketing, start-up training, and management services for properties under development and construction. The following table sets forth the components of Sunrise Management Services net income (in thousands):
Year Ended December 31, - --------------------------------------------------------------------------------------------- 2000 1999 1998 - --------------------------------------------------------------------------------------------- Operating revenue: Management and contract services $227,278 $170,892 $107,137 Operating expenses: Management and contract services 186,095 137,494 89,929 General and administrative 18,470 13,216 7,751 Depreciation and amortization 1,495 947 479 - --------------------------------------------------------------------------------------------- Total operating expenses 206,060 151,657 98,159 - --------------------------------------------------------------------------------------------- Operating income 21,218 19,235 8,978 Provision for income taxes (8,275) (5,551) - --------------------------------------------------------------------------------------------- Sunrise Management Services net income $12,943 $13,684 $ 8,978 - ---------------------------------------------------------------------------------------------
Note: Management and contract services revenues include revenue from Sunrise Properties in the amounts of $195,302, $150,293 and $96,722 for the year ended December 31, 2000, 1999 and 1998, respectively. YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Operating Revenue. The Management Services division revenues include management and contract services revenues from third-party owners and internal management services revenues for services provided to the Sunrise Properties division. Internal fees reflect market-based fees for the management services. Total revenues for Sunrise Management Services increased 33% to $227.3 million for the year ended December 31, 2000 from $170.9 million for the year ended December 31, 1999. This increase was primarily due to the growth in the number of communities operated by the Management Services division. The total number of communities operated increased 17% to 164 for 2000, up from 140 communities in 1999. This growth resulted from the completion and opening of 25 additional facilities and the addition of two managed facilities, net of the sale of two -41- 42 former Karrington facilities that Sunrise will not continue to manage and the termination of one management contract with a third-party owner. Operating Expenses. The Management Services division operating expenses include all operating expenses of facilities managed for third-party owners and the Sunrise Properties division. Total operating expenses for the year ended December 31, 2000 increased 36% to $206.1 million from $151.7 million for the year ended December 31, 1999. Management and contract services expenses for the year ended December 31, 2000 increased $48.6 million, or 35%, to $186.1 million from $137.5 million for the year ended December 31, 1999. This increase was directly related to the increase in the number of communities operated by Management Services. General and administrative expenses increased $5.3 million to $18.5 million for the year ended December 31, 2000 from $13.2 million for the year ended December 31, 1999. The general and administrative expenses for the Management Services division have increased due to the substantial growth in the number of facilities operated during the last twelve months. YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Operating Revenue. Total revenues for Sunrise Management Services increased 60% to $170.9 million for the year ended December 31, 1999 from $107.1 million for the year ended December 31, 1998. This increase was primarily due to the growth in the number of communities operated by the Management Services division. The total number of communities operated increased 82% to 140 for 1999, up from 77 communities in 1998. This growth resulted from the completion and opening of 20 additional facilities, the acquisition of 42 facilities and the addition of 1 managed facility. Operating Expenses. Total operating expenses for the year ended December 31, 1999 increased 54% to $151.7 million from $98.2 million for the year ended December 31, 1998. Management and contract services expenses for the year ended December 31, 1999 increased $47.6 million, or 53%, to $137.5 million from $89.9 million for the year ended December 31, 1998. This increase was directly related to the increase in the number of communities operated by Management Services. General and administrative expenses increased $5.4 million to $13.2 million for the year ended December 31, 1999 from $7.8 million for the year ended December 31, 1998. The general and administrative expenses for the Management Services division increased due to the substantial growth in the number of facilities operated during 1999 as compared to 1998. SUNRISE PROPERTIES Sunrise Properties is responsible for all Sunrise real estate operations, including development, construction, project and permanent financing and property sales. As of December 31, 2000, the Sunrise Properties division wholly owned 102 communities, a 2% decrease over the 104 communities wholly owned as of December 31, 1999. In addition, Sunrise Properties has majority ownership interests in 4 communities and minority ownership interests in another 41 communities. -42- 43 The following table sets forth the components of Sunrise Properties net income (in thousands):
- --------------------------------------------------------------------------------------------- 2000 1999 1998 - --------------------------------------------------------------------------------------------- Operating revenue: Resident fees $274,236 $217,397 $151,878 Management and contract services 6,453 10,206 6,383 Income from property sales 32,121 7,017 2,036 - --------------------------------------------------------------------------------------------- Total operating revenue 312,810 234,620 160,297 Operating expenses: Facility operating 169,966 131,055 88,834 Management and contract services 25,138 19,238 7,888 Facility development and pre-rental 6,226 7,184 5,196 General and administrative 2,772 3,922 1,857 Depreciation and amortization 30,102 24,368 20,983 Facility lease 10,833 7,903 3,014 Non-recurring charge 5,069 - --------------------------------------------------------------------------------------------- Total operating expenses 245,037 198,739 127,772 - --------------------------------------------------------------------------------------------- Operating income 67,773 35,881 32,525 Interest expense, net (37,566) (21,750) (15,430) Equity in losses of unconsolidated assisted living facilities (2,941) (1,239) 54 Minority interest (203) (376) (508) Provision for income taxes (10,555) (3,370) - --------------------------------------------------------------------------------------------- Sunrise Properties net income $16,508 $9,146 $16,641 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
Note: Operating expenses include costs with Sunrise Management Services in the amounts of $195,302, $150,293 and $96,722 for the year ended December 31, 2000, 1999 and 1998, respectively. On June 29, 2000, Sunrise entered into a definitive agreement for the sale of 11 assisted living communities to a real estate venture company ("venture company") in which Sunrise owns a 25 percent interest. Also, on June 29, 2000, the venture company closed on three of the 11 properties, located in Wayland, Massachusetts, West Essex, New Jersey and Oakton, Virginia, for an aggregate sales price of $44 million. The transaction will result in up to $13.3 million in gain over the four quarters following the sale, subject to certain contingencies being met, of which $11.1 million was recognized during 2000. On September 29, 2000, the venture company closed on the remaining eight properties for an aggregate sales price of $111 million. The eight properties are located in seven states. The venture company assumed approximately $75 million of debt secured by the eight properties. The transaction will result in up to $26.0 million in gain over the four quarters following the sale, subject to certain contingencies being met, of which $13.1 million was recognized during 2000. The Sunrise Management Services division will continue to provide day-to-day management of the communities under long-term operating agreements. -43- 44 On December 28, 2000, Sunrise completed the sale of two properties for an aggregate sales price of $28.1 million. Following the sale, the Sunrise Management Services division will continue to operate the communities under a long-term operating agreement. The transaction will result in up to $7.8 million in gain over the four quarters following the sale, subject to certain contingencies being met, of which $1.8 million was recognized during 2000. In June 1999, Sunrise completed the sale of two assisted living facilities located in Columbia, Maryland and Norwood, Massachusetts for an aggregate sales price of $27.9 million in cash. The transaction resulted in the realization of $11.2 million in gain over the three quarters following the sale, of which the final $6.1 million was recognized during 2000. Previously, in September 1998, Sunrise completed the sale of two assisted living facilities located in Maryland for an aggregate sales price of $29.3 million in cash that will result in the realization of up to a $6.4 million gain. As of December 31, 2000, Sunrise has recognized $3.4 million of the gain. The remaining gain is deferred, the recognition of which is contingent upon future events. For tax purposes, the transactions are tax-free exchanges. Sunrise continues to operate the facilities under long-term operating agreements. YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Operating Revenue. Sunrise Properties revenues include resident fees from Sunrise owned properties, management service revenues from consulting and pre-opening services contracts with third parties, and income from the sales of owned communities. Sunrise Properties revenues increased 33% to $312.8 million for the year ended December 31, 2000 from $234.6 million for the year ended December 31, 1999. Resident fees, including community fees, for the year ended December 31, 2000 increased $56.8 million, or 26%, to $274.2 million from $217.4 million for the year ended December 31, 1999. This increase was due primarily to the inclusion for the year ended December 31, 2000 of approximately $11.8 million of resident fees generated from the operations of the 12 consolidated assisted living facilities open during the year ended December 31, 2000 that were not open during the year ended December 31, 1999. In addition, resident fees of $6.9 million were included in the year ended December 31, 2000 from properties previously held for sale. The remaining increase in resident fees was due primarily to a full year of operations for the Karrington facilities acquired in May 1999 and an increase in the average daily resident rate for facilities that were owned and operated by Sunrise during both periods. Average resident occupancy for Sunrise's 68 stabilized communities during 2000 was 94.2% compared to 95.6% for the 49 Sunrise communities stabilized during 1999. Comparing the 47 same-store properties for 2000 and 1999 (which excludes the Karrington facilities that are now stabilized) would have resulted in occupancy of 95.7% for both years. Sunrise defines stabilized communities as those it has owned and operated for at least 12 months or those that have achieved occupancy percentages of 95% or above at the beginning of the measurement period. -44- 45 Average daily rate for stabilized facilities during 2000 was $106 compared to $97 during 1999. For the 47 facilities currently owned which were stabilized in both 2000 and 1999, average daily rate increased from $97 to $102. The increase is due to the inclusion of additional prototype facilities that have higher basic care rates and a general increase in the basic care rate. Management and contract services revenue decreased $3.7 million to $6.5 million for the year ended December 31, 2000 from $10.2 million for the year ended December 31, 1999. This decrease is due to a reduction in the number of third-party pre-opening services contracts in place during each of the respective periods, and the stage of completion on each contract. There were 25 pre-opening services contracts in place during 2000 compared to 28 contracts for 1999. Operating Expenses. Sunrise Properties operating expenses for the year ended December 31, 2000 increased 23% to $245.0 million from $198.7 million for the year ended December 31, 1999. Facility operating expenses for the year ended December 31, 2000 increased 30% to $170.0 million from $131.1 million for the year ended December 31, 1999. Of the $38.9 million increase, approximately $7.9 million was attributable to expenses from operations of the 12 consolidated additional assisted living facilities open during 2000 that were not open during 1999. In addition, facility-operating expenses of $4.8 million were included in 2000 from properties previously held for sale. The remaining balance of the increase was primarily due to a full year of operations for the Karrington facilities acquired in May 1999 and an increase in labor and other expenses at facilities that were operational for a full year in both periods. Management and contract services expense represents amounts Sunrise Properties pays to Sunrise Management Services for management of its wholly owned and majority owned facilities. Management and contract services expense for the year ended December 31, 2000 increased $5.9 million to $25.1 million from $19.2 million for the year ended December 31, 1999. This increase is primarily attributable to the growth in the number of properties managed during 2000 compared to 1999. Depreciation and amortization for the year ended December 31, 2000 increased $5.7 million, or 23%, to $30.1 million from $24.4 million for the year ended December 31, 1999. This increase is primarily due to the increase in the number of facilities open during 2000 that were not open during 1999. Net Interest Expense. Net interest expense increased for the year ended December 31, 2000 to $37.6 million from $21.8 million for the year ended December 31, 1999. Of this $15.8 million increase, $5.3 million was due to additional borrowings and an increase in the variable interest rate under Sunrise's $400.0 million credit facility. The remaining increase is due to an overall increase in average borrowings during 2000 compared to 1999 and an increase to 7.61% in the weighted-average interest rate on Sunrise's variable rate debt for 2000 compared to 7.17% for 1999. -45- 46 YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Operating Revenue. Sunrise Properties revenues increased 46% to $234.6 million for the year ended December 31, 1999 from $160.3 million for the year ended December 31, 1998. Resident fees, including community fees, for the year ended December 31, 1999 increased $65.5 million, or 43%, to $217.4 million from $151.9 million for the year ended December 31, 1998. This increase was due primarily to the inclusion for the year ended December 31, 1999 of approximately $5.0 million of resident fees generated from the operations of the 10 consolidated assisted living facilities open during 1999 that were not open during 1998. In addition, approximately $26.2 million of resident fees were generated by the Karrington consolidated facilities from the date of acquisition through the end of 1999. The remaining increase in resident fees was due primarily to an increase in the average daily resident rate for facilities that were owned and operated by Sunrise during both periods. Average resident occupancy for Sunrise's 49 stabilized communities during 1999 was 95.6% compared to 94.3% for the 32 Sunrise communities stabilized during 1998. For the 29 stabilized facilities owned and operated in both 1999 and 1998, average resident occupancy increased from 94.2% to 95.4%. Sunrise defines stabilized communities as those it has owned and operated for at least 12 months or those that have achieved occupancy percentages of 95% or above at the beginning of the measurement period. Average daily rate for stabilized facilities during 1999 was $97 compared to $86 during 1998. For the 29 stabilized facilities owned and operated in both 1999 and 1998, average daily rate increased from $84 to $88. The increase is due to the inclusion of additional prototype facilities that have higher basic care rates and a general increase in the basic care rate. Management and contract services revenue increased $3.8 million to $10.2 million for the year ended December 31, 1999 from $6.4 million for the year ended December 31, 1998. This increase is due to an increase in the number of third-party pre-opening services contracts in place during each of the respective periods, and the stage of completion on each contract. There were 28 pre-opening services contracts in place during the year ended December 31, 1999 compared to 17 contracts for the year ended December 31, 1998. Operating Expenses. Sunrise Properties operating expenses for the year ended December 31, 1999 increased 55% to $198.7 million from $127.8 million for the year ended December 31, 1998. Facility operating expenses for the year ended December 31, 1999 increased 48% to $131.1 million from $88.8 million for the year ended December 31, 1998. Of the $42.3 million increase, approximately $3.0 million was attributable to expenses from operations of the 10 consolidated additional assisted living facilities open during the year ended December 31, 1999 that were not open during the same period in 1998. In addition, approximately $21.7 million of operating expenses were generated by the Karrington consolidated facilities from the date of acquisition through the end of 1999. The remaining -46- 47 balance of the increase was primarily due to an increase in labor and other expenses at facilities that were operational for a full year in both periods. Management and contract services expense for the year ended December 31, 1999 increased $11.3 million to $19.2 million from $7.9 million for the year ended December 31, 1998. This increase is primarily attributable to the growth in the number of properties managed during the year ended December 31, 1999 compared to the year ended December 31, 1998. Depreciation and amortization for the year ended December 31, 1999 increased $3.4 million, or 16%, to $24.4 million from $21.0 million for the year ended December 31, 1998. This increase is primarily due to the increase in the number of facilities open during the year ended December 31, 1999 that were not open during the same period in 1998. Net Interest Expense. Net interest expense increased for the year ended December 31, 1999 to $21.8 million from $15.4 million for the year ended December 31, 1998. Of this $6.4 million increase, $5.3 million was due to additional borrowings and an increase in the variable interest rate under Sunrise's $400.0 million credit facility. The remaining increase is due to an overall increase in total debt as of December 31, 1999 compared to December 31, 1998 and an increase to 7.45% in the weighted-average interest rate on Sunrise's variable rate debt for 1999 compared to 7.17% for 1998. CORPORATE EXPENSES Operating Expenses. Parent company operating expenses were $8.5 million, $3.7 million and $3.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. The increase was primarily due to the addition of personnel and other infrastructure in anticipation of the continuing growth of the company. Provision for Income Taxes. The provision for income taxes for Sunrise was $15.5 million, $7.8 million and $0.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. The increase is due to an increase in pre-tax income and an increase in the effective tax rate to 39% for 2000 compared to 28% for 1999 and 0% for 1998. Utilization of operations-related deferred tax benefits reduced Sunrise's federal and state income tax rates in both 1999 and 1998. Realization of the deferred tax asset of $19.4 million at December 31, 2000 is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Sunrise expects to fully utilize the loss carryforwards prior to expiration. -47- 48 LIQUIDITY AND CAPITAL RESOURCES To date, Sunrise has financed its operations from long-term borrowings, equity offerings and cash generated from operations. At December 31, 2000, Sunrise had $674.7 million of outstanding debt at a weighted average interest rate of 7.61%. Of the amount of outstanding debt, Sunrise had $352.8 million of fixed-rate debt, excluding a $0.2 million loan discount, at a weighted average interest rate of 6.91%, and $322.1 million of variable rate debt at a weighted average interest rate of 8.37%. Increases in prevailing interest rates could increase Sunrise's interest payment obligations relating to variable-rate debt. See Note 8 to Sunrise's consolidated financial statements for a detail of Sunrise's outstanding debt at December 31, 2000. Sunrise has entered into a swap transaction whereby, effective during the period June 18, 1998 through June 18, 2001, outstanding advances of up to $19.0 million LIBOR floating rate debt bear interest at a fixed rate based on a fixed LIBOR base rate of 7.30%. Sunrise recorded net interest expense in 2000, 1999 and 1998 in the amounts of $174,000, $511,000 and $227,000, respectively, for swap transactions. There are various financial covenants and other restrictions in Sunrise's debt instruments, including provisions which: - require it to meet specified financial tests. For example, Sunrise's $85.1 million multi-property mortgage, which is secured by 15 of its facilities, requires that these facilities maintain a cash flow to interest expense coverage ratio of at least 1.25 to 1. Sunrise's $400.0 million credit facility requires Sunrise to have a consolidated tangible net worth of at least $255.0 million, to maintain a consolidated minimum cash liquidity balance of at least $25.0 million and to meet other financial ratios. These tests are administered on a monthly or quarterly basis, depending on the covenant; - require consent for changes in management or control of Sunrise. For example, Sunrise's $400.0 million revolving credit facility requires the lender's consent for any merger where Paul Klaassen or Teresa Klaassen does not remain chairman of the board and chief executive officer of Sunrise; - restrict the ability of Sunrise subsidiaries to borrow additional funds, dispose of assets or engage in mergers or other business combinations without lender consent; and - require that Sunrise maintain minimum occupancy levels at its facilities to maintain designated levels of borrowings. For example, Sunrise's $400.0 million credit facility requires that 85% occupancy be achieved after 12 months for a newly opened facility and, following this 12-month period, be maintained at or above that level. At December 31, 2000, Sunrise had approximately $42.9 million in unrestricted cash and cash equivalents, including $4.3 million in high quality short-term investments (A1/P1 rated) and currently has $237.8 million of unused lines of credit. -48- 49 Working capital at December 31, 2000 was $51.0 million, excluding the $85.1 million multi-property mortgage due on May 31, 2001. Management anticipates extending the multi-property mortgage with the original lender prior to maturity. Excluding this multi-property mortgage, working capital decreased $44.5 million from $95.5 million at December 31, 1999 primarily due to a reclassification of assets held for sale to property and equipment, a decrease in prepaid and other current assets, and an increase in deferred revenue from property sales. Net cash provided by operating activities for 2000 and 1999 was approximately $51.6 million and $42.8 million, respectively. Net cash provided by operating activities for 2000 reflects the corresponding increase in the number of facilities operated by Sunrise at December 31, 2000 versus December 31, 1999. During 2000 and 1999, Sunrise used $23.4 million and $235.1 million, respectively, for investing activities. Investing activities included investment in property and equipment in the amounts of $46.3 million and $178.4 million, respectively, related to the construction of assisted living facilities, net of sales of facilities. In 2000, Sunrise also invested $152.8 million to facilitate the development of assisted living facilities with third parties, compared to $75.3 million in 1999. These investing activities were offset by proceeds from the sale of 15 assisted living facilities in 2000 amounting to $45.7 million plus $142.4 million of proceeds from investments and notes receivable. Net cash (used in)/provided by financing activities was ($38.9) million and $191.6 million for 2000 and 1999, respectively. Financing activities in 2000 and 1999 included additional borrowings of $187.3 million and $313.5 million, respectively, offset by debt repayments of $215.6 million and $122.1 million, respectively. The reduced level of borrowings and increased level of repayments are partially a result of Sunrise's strategy to sell certain assisted living facilities. The additional borrowings under Sunrise's credit facility during 2000 and 1999 were used to fund Sunrise's continued development of assisted living facilities. Sunrise currently estimates that the existing credit facilities, together with existing working capital, proceeds from sales of selected real estate assets as a normal part of its operations, financing commitments and financing expected to be available, will be sufficient to fund facilities currently under construction. Additional financing will, however, be required to complete additional development and to refinance existing indebtedness. Sunrise estimates that it will cost between $85 million and $200 million to complete the facilities Sunrise currently has under construction. Sunrise has entered into contracts to purchase and lease additional sites. The total contracted purchase price of these sites is $65.0 million. Sunrise estimates that it will cost between $349 million and $820 million to develop these properties. Sunrise expects that the cash flow from operations, together with borrowings under existing credit facilities, will be sufficient to fund the development sites for these additional properties for at least the next twelve months. Sunrise expects from time to time to seek additional funding through public or private financing sources, including equity or debt financing. There can be no assurance that such financing and refinancing will be available on acceptable terms. -49- 50 The ability of Sunrise to achieve its development plans will depend upon a variety of factors, many of which will be outside the control of Sunrise. These factors include: - obtaining zoning, land use, building, occupancy, licensing and other required governmental permits for the construction of new facilities without experiencing significant delays; - completing construction of new facilities on budget and on schedule; - the ability to work with third-party contractors and subcontractors who construct the facilities; - shortages of labor or materials that could delay projects or make them more expensive; - adverse weather conditions that could delay projects; - finding suitable sites for future development activities at acceptable prices; and - addressing changes in laws and regulations or how existing laws and regulations are applied. Sunrise cannot assure that it will not experience delays in completing facilities under construction or in development or that it will be able to identify suitable sites at acceptable prices for future development activities. If it fails to achieve its development plans, its growth could slow, which would adversely impact its revenues and results of operations. Sunrise's growth plan includes the acquisition of assisted living facilities or companies operating assisted living facilities. The success of Sunrise's acquisitions will be determined by numerous factors, including the Sunrise's ability to identify suitable acquisition candidates, competition for such acquisitions, the purchase price, the financial performance of the facilities after acquisition and the ability of Sunrise to integrate or operate acquired facilities effectively. Any failure to do so may have a material adverse effect on Sunrise's business, financial condition and results of operations. The long-term care industry is highly competitive and the assisted living segment is becoming increasingly competitive. Sunrise competes with numerous other companies that provide similar long-term care alternatives, such as home health care agencies, facility-based service programs, retirement communities, convalescent centers and other assisted living providers. In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. In pursuing its growth strategies, Sunrise has experienced and expects to continue to experience increased competition in its efforts to develop and acquire assisted living facilities. Some of the present and potential competitors of Sunrise are significantly larger and have, or may obtain, greater financial resources than Sunrise. Consequently, Sunrise cannot assure that it will not encounter increased competition that could limit its ability to attract residents or expand its business, which could have a material adverse effect on its revenues and earnings. Sunrise expects that the number of owned and operated facilities will continue to increase substantially as it pursues its development and acquisition programs for new assisted living facilities. This rapid growth will place significant demands on Sunrise's management resources. Sunrise's ability to manage its growth effectively will require it to continue to expand its -50- 51 operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. If Sunrise is unable to manage its growth effectively, its business, financial condition and results of operations could be adversely affected. Sunrise believes that some assisted living markets have become or are on the verge of becoming overbuilt. As described above, regulation and other barriers to entry into the assisted living industry are not substantial. Consequently, the development of new assisted living facilities could outpace demand. Overbuilding in Sunrise market areas could, therefore, cause Sunrise to experience decreased occupancy, depressed margins or lower operating results. Sunrise believes that each local market is different and Sunrise is and will continue to react in a variety of ways, including selective price discounting, to the specific competitive environment that exists in each market. MARKET RISK Sunrise is exposed to market risks related to fluctuations in interest rates on its notes receivable, investments and debt. The purpose of the following analyses is to provide a framework to understand the Company's sensitivity to hypothetical changes in interest rates as of December 31, 2000. Sunrise has investments in notes receivable and bonds. Investments in notes receivable are primarily with joint venture arrangements in which Sunrise has equity ownership percentages ranging from 9% to 20%. Investments in bonds are secured by the operating properties subject to the debt and are with properties that are managed by Sunrise. The majority of the investments have fixed rates. One of the notes has an adjustable rate. Sunrise utilizes a combination of debt and equity financing to fund its development, construction and acquisition activities. Sunrise seeks the financing at the most favorable terms available at the time. When seeking debt financing, Sunrise uses a combination of variable and fixed rate debt, whichever is more favorable in management's judgment at the time of financing. Sunrise has used interest rate swaps to manage the interest rates on some of its long-term borrowings. As of December 31, 2000, Sunrise had one interest rate swap agreement that effectively establishes fixed rates of 7.3% on up to $19.0 million of long-term debt until June 2001. Sunrise does not utilize forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. For fixed rate debt, changes in interest rates generally affect the fair market value of the debt, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact fair market value of the debt, but do affect the future earnings and cash flows. Sunrise generally cannot prepay fixed rate debt prior to maturity without penalty. Therefore, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until Sunrise would be required to refinance such debt. Holding the variable rate debt balance of $322.1 million at December 31, 2000 constant, each one-percentage point increase in interest rates would result in an increase in interest expense for the coming year of approximately $3.2 million. -51- 52 The table below details by category the principal amount, the average interest rates and the estimated fair market value. Some of the mortgage loans receivable and some items in the various categories of debt, excluding the convertible debentures, require periodic principal payments prior to the final maturity date. The fair value estimates for the mortgage loans receivable are based on the estimates of management and on rates currently prevailing for comparable loans. The fair market value estimates for debt securities are based on discounting future cash flows utilizing current rates offered to Sunrise for debt of the same type and remaining maturity. The fair market value estimate of the convertible notes is based on the market value at December 31, 2000.
Estimated Fair Maturity Date Market (dollars in thousands) 2001 2002 2003 2004 2005 Thereafter Value ---- ---- ---- ---- ---- ---------- ----- ASSETS Notes receivable Fixed rate $9,127 $18,242 -- -- -- $36,152 $63,521 Average interest rate 10.5% 10.0% -- -- -- 11.3% -- Variable rate -- $998 -- $22,599 -- -- $23,597 Average interest rate -- 11.5% -- 11.6% -- -- -- Investments Bonds -- -- -- -- -- $5,750 $5,750 Average interest rate -- -- -- -- -- 11.0% -- LIABILITIES Debt Fixed rate $67,238 $10,573 $2,444 $2,639 $2,741 $117,155 $198,530 Average interest rate 8.5% 7.1% 7.7% 7.7% 7.6% 7.7% -- Variable rate $49,991 $194,173 $55,188 $10,943 $7,393 $4,400 $322,088 Average interest rate 8.5% 8.4% 8.6% 8.3% 8.3% 4.7% -- Convertible notes -- $150,000 -- -- -- -- $137,629 Average interest rate -- 5.5% -- -- -- -- --
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No 137 and 138, which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Statement No. 133 standardizes the accounting for derivative instruments. Sunrise participates in interest rate swap transactions, which would be considered derivatives under Statement No. 133. Sunrise has not entered into any other derivative transactions. Because of Sunrise's minimal use of derivatives, Statement No. 133 is not anticipated to materially affect results of operations or the financial position of Sunrise. IMPACT OF INFLATION Resident fees from owned assisted living facilities and management services income from facilities operated by Sunrise for third parties are the primary sources of revenue. These revenues are affected by daily resident fee rates and facility occupancy rates. The rates charged for the -52- 53 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. -53- 54 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative and qualitative disclosure about market risk appears in the liquidity and capital resources, market risk section of item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements appear on pages F-1 through F-27. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the sections "Election of Directors - Information as to Nominees and Other Directors," "--Other Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance" in Sunrise's 2001 Annual Meeting Proxy Statement, which Sunrise intends to file within 120 days after its fiscal year-end, is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION The information contained in the sections "Compensation of Directors" and "Executive Compensation and Other Information" in Sunrise's 2001 Annual Meeting Proxy Statement, which Sunrise intends to file within 120 days after its fiscal year-end, is incorporated by reference herein. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the sections "Stock Owned by Management" and "Principal Holders of Voting Securities" in Sunrise's 2001 Annual Meeting Proxy Statement, which Sunrise intends to file within 120 days after its fiscal year-end, is incorporated by reference herein. -54- 55 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the sections "Certain Transactions" in Sunrise's 2001 Annual Meeting Proxy Statement, which Sunrise intends to file within 120 days after its fiscal year-end, is incorporated by reference herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of documents filed as part of Form 10-K.
Page ---- (1) Financial Statements: Report of Independent Auditors. F-1 Consolidated Balance Sheets -- December 31, 2000 and 1999. F-2 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. F-5 Notes to Consolidated Financial Statements. F-6 (2) Financial Statements Schedules: All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable or are included in the consolidated financial statements. (3) Exhibits: Sunrise files as part of this Annual Report on Form 10-K the Exhibits listed in the Index to Exhibits.
(b) Reports on Form 8-K. On March 9, 2000, Sunrise filed a Form 8-K with the Securities and Exchange Commission announcing the date of its 2000 annual meeting of stockholders. -55- 56 On October 13, 2000, Sunrise filed a Form 8-K with the Securities and Exchange Commission announcing it had completed the sale of eight properties. (c) Exhibits. Sunrise hereby files as part of this Annual Report on Form 10-K the Exhibits listed in the Index to Exhibits. (d) Financial Statement Schedules. Not applicable. -56- 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUNRISE ASSISTED LIVING, INC. ------------------------------------ Registrant By: /s/ Paul J. Klaassen -------------------------------- Paul J. Klaassen Chairman of the Board and Chief Executive Officer 3/30/01 -------------------------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Paul J. Klaassen 3/30/01 ------------------------- ----------------------------- Paul J. Klaassen Date Chairman of the Board, and Chief Executive Officer (Principal Executive Officer) By: /s/ Larry E. Hulse 3/30/01 -------------------------- ----------------------------- Larry E. Hulse Date Chief Financial Officer (Principal Financial Officer) -57- 58 By: /s/ Carl G. Adams 3/30/01 -------------------------- ----------------------------- Carl G. Adams Date Chief Accounting Officer (Principal Accounting Officer) By: /s/ David W. Faeder 3/30/01 ---------------------------- ----------------------------- David W. Faeder Date Vice Chairman of the Board Director By: -------------------------- ----------------------------- Ronald V. Aprahamian Date Director By: -------------------------- ----------------------------- Craig R. Callen Date Director By: ---------------------- ----------------------------- David G. Bradley Date Director By: /s/ Thomas J. Donohue 3/30/01 ----------------------- ----------------------------- Thomas J. Donohue Date Director By: /s/ Teresa M. Klaassen 3/30/01 ------------------------ ----------------------------- Teresa M. Klaassen Date Executive Vice President, Secretary and Director By: /s/ Pete A. Klisares 3/30/01 ----------------------------- ----------------------------- Pete A. Klisares Date Director By: /s/ J. Douglas Holladay 3/30/01 -------------------------------- ----------------------------- J. Douglas Holladay Date Director -58- 59 INDEX TO EXHIBITS
Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ---------- 3.1 Restated Certificate of Incorporation of Sunrise (Exhibit 3.1 to Sunrise's Form S-1 Registration Statement No. 333- 13731). 3.2 Amended and Restated Bylaws of Sunrise, as amended (Exhibit 3 to Sunrise's Form 10-Q for the quarter ended September 30, 1997). 4.1 Form of common stock certificate (Exhibit 4.1 to Sunrise's Form S-1 Registration Statement No. 333-13731). 4.2 Stockholder Rights Agreement (Exhibit 4.2 to Sunrise's Form S-1 Registration Statement No. 333-13731). 4.3 Amendment No. 1 to Rights Agreement, dated as of December 17, 1998, between Sunrise and First Union National Bank of North Carolina (Exhibit 99(a) to Sunrise's Form 8-K dated December 18, 1998). 10.1 Assignment and Contribution Agreement, effective as of January 4, 1995, by and between Paul and Teresa Klaassen and Sunrise (Exhibit 10.1.1 to Sunrise's Form S-1 Registration Statement No. 333-2582).
-59- 60 10.2 Assignment and Contribution Agreement, dated as of January 4, 1995, by and between Paul J. Klaassen and Teresa M. Klaassen, Sunrise Partners, L.P. and Sunrise Assisted Living Investments, Inc. (Exhibit 10.1.2 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.3 Letter Agreement, dated January 4, 1995, from Paul J. Klaassen and Teresa M. Klaassen to the Series A Preferred Stockholders regarding cash distributions from Sunrise Retirement Investments, Inc., Sunrise Terrace of Gunston, Inc., Sunrise Terrace of Countryside, Inc. and Sunrise Atrium, Inc. (Exhibit 10.19 to Sunrise's Form S-1 Registration Statement No. 33-2852). 10.4 Registration Agreement, dated January 4, 1995, by and among Sunrise, the Investors (as defined therein) and Paul and Teresa Klaassen (Exhibit 10.3 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.5 Promissory Note, dated June 8, 1994, executed by Sunrise Assisted Living Limited Partnership in favor of General Electric Capital Corporation (Exhibit 10.4 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.6 Indemnity Agreement dated as of June 8, 1994 by Paul J. Klaassen and Teresa M. Klaassen to and for the benefit of General Electric Capital Corporation (Exhibit 10.4.1 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.7 First Loan Modification Agreement dated as of February 15, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.2 to Sunrise's Form S-1 Registration Statement No. 333-2582).
-60- 61 10.8 Second Loan Modification Agreement dated as of May 1, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.3 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.9 Letter Agreement dated as of May 1, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.4 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.10 Letter agreement dated as of December 30, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Partnership (Exhibit 10.11 to Sunrise's 1996 Form 10-K). 10.11 Third Loan Modification Agreement dated as of March 4, 1997 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.11 to Sunrise's 1997 Form 10-K). 10.12 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Arlington, Bluemont Park and Falls Church) (Exhibit 10.5 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.13 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Gunston and Oakton) (Exhibit 10.6 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.14 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and financing Statement, dated as of June 8, 1994 (Fairfax Leasehold) (Exhibit 10.7 to Sunrise's Form S-1 Registration Statement No. 333-2582).
-61- 62 10.15 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Warrenton) (Exhibit 10.8 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.16 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Countryside and Leesburg) (Exhibit 10.9 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.17 First Mortgage and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Boca Raton) (Exhibit 10.10 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.18 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Frederick) (Exhibit 10.11 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.19 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, Dated as of June 8, 1994 (Mercer Island) (Exhibit 10.12 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.20 Amended and Restated Lease Agreement and Assignment of Leasehold Right, dated June 6, 1994, by and among Barbara M. Volentine and Teresa M. Klaassen, the Executor of the Estate of Eldon J. Merritt, Sunrise Assisted Living Limited Partnership Assisted Living Group -- Fairfax Associates, and Sunrise Foundation, Inc. (Exhibit
-62- 63 10.15 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.21 Ground Lease, dated June 7, 1994, by and between Sunrise Assisted Living Limited Partnership and Paul J. Klaassen and Teresa M. Klaassen (Exhibit 10.16 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.22 Amended and Restated Agreement of Sublease, Indemnification and Easements dated February 5, 1995 by and between Assisted Living Group -- Fairfax Associates and Sunrise Foundation, as amended (Exhibit 10.17 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.23 Indenture, dated as of June 5, 1997, between Sunrise and First Union National Bank of Virginia, as trustee (Exhibit 4.1 to Sunrise's Form 10-Q for the quarter ended June 30, 1997). 10.24 Amended, Restated, Consolidated and Increased Master Promissory Note dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.1 to Sunrise's 1997 Form 10-K). 10.25 Amended and Restated Financing and Security Agreement dated as of December 23, 1997 by and between NationsBank, N.A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.2 to Sunrise's 1997 Form 10-K). 10.26 Amended and Restated Master Construction Loan Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.3 to Sunrise's 1997 Form 10-K).
-63- 64 10.27 Management Fee Subordination Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.4 to Sunrise's 1997 Form 10-K). 10.28 Amended and Restated Pledge, Assignment and Security Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.5 to Sunrise's 1997 Form 10-K). 10.29 Master Guaranty of Performance dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.6 to Sunrise's 1997 Form 10-K) 10.30 Amended and Restated Collateral Assignment of Operating Agreements and Management Contracts dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.7 to Sunrise's 1997 Form 10-K). 10.31 Amended and Restated Collateral Assignment of Licenses, Participation Agreements and Resident Agreements dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East Assisted Living Limited Partnership (Exhibit 10.31.8 to Sunrise's 1997 Form 10-K). 10.32 Amended and Restated Master Guarantee of Payment Agreement dated as of December 23, 1997 by and between NationsBank, N. A. as agent and for certain additional lenders and Sunrise East
-64- 65 Assisted Living Limited Partnership (Exhibit 10.31.9 to Sunrise's 1997 Form 10-K). 10.33 +Form of Indemnification Agreement (Exhibit 10.24 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.34 + 1995 Stock Option Plan, as amended Exhibit 10.20 to Sunrise's 1997 Form 10-K). 10.35 + 1996 Directors' Stock Option Plan, as amended. 10.36 + Stock Option Agreement, entered into, effective as of January 4, 1995, by and between Sunrise and David W. Faeder (Exhibit 10.14 to Sunrise's Form S-1 Registration Statement No. 333-2582). 10.37 + 1996 Non-Incentive Stock Option Plan, as amended (Exhibit 10.24 to Sunrise's 1997 Form 10-K). 10.38 + 1997 Stock Option Plan, as amended (Exhibit 10.25 to Sunrise's 1997 Form 10-K). 10.39 + 1998 Stock Option Plan, as amended. (Exhibit 10.41 to Sunrise's 1998 Form 10-K) 10.40 + 1999 Stock Option Plan (Exhibit 10.1 to Sunrise's Form 10-Q for the quarter ended March 31, 1999). 10.41 Trust Agreement, dated as of December 2, 1998, between the several holders from time to time parties thereto, as the holders, and First Security Bank, National Association, as the Owner Trustee (Sunrise Trust 1998-1) (Exhibit 2.2 to Sunrise's Form 8-K dated December 17, 1998). 10.42 Credit Agreement, dated as of December 2, 1998, among First Security Bank, National Association, not individually, except as expressly stated therein, but solely as the Owner Trustee under the Sunrise Trust 1998-1, as the Borrower, the several lenders from time to time parties thereto, and NationsBank,
-65- 66 N.A., as the Agent (Exhibit 2.3 to Sunrise's Form 8-K dated December 17, 1998). 10.43 Participation Agreement, dated as of December 2, 1998, among Sunrise Midwest Leasing, L.L.C., as the Construction Agent and as the Lessee, Sunrise, as the Guarantor, First Security Bank, National Association, not individually, except as expressly stated therein, but solely as the Owner Trustee under the Sunrise Trust 1998-1, the various banks and other lending institutions which are parties thereto from time to time, as the holders, the various banks and other lending institutions which are parties thereto from time to time, as the lenders, and NationsBank, N.A., as the Agent for the Lenders and respecting the Security Documents, as the Agent for the Lenders and the Holders, to the extent of their interests (Exhibit 2.4 to Sunrise's Form 8-K dated December 17, 1998). 10.44 Security Agreement, dated as of December 2, 1998, between First Security Bank, National Association, not individually, but solely as the owner trustee under the Sunrise Trust 1998-1 and NationsBank, N.A., as the agent for the lenders and the holders and accepted and agreed to by Sunrise Midwest Leasing, L.L.C. (Exhibit 2.5 to Sunrise's Form 8-K dated December 17, 1998). 10.45 Lease Agreement, dated as of December 2, 1998, between First Security Bank, National Association, not individually, but solely as the Owner Trustee under the Sunrise Trust 1998-1, as Lessor and Sunrise Midwest Leasing, L.L.C., as Lessee (Exhibit 2.6 to Sunrise's Form 8-K dated December 17, 1998). 10.46 Cross-Collateralization, Cross-Default, and Mortgage Modification Agreement, dated as of May 20, 1999, by and among Sunrise Borrowers (as defined in the agreement) and GMAC Commercial
-66- 67 Mortgage Corporation (Exhibit 10.1 to Sunrise's Form 10-Q for the quarter ended June 30, 1999). 10.47 Form of Exceptions to Non-Recourse Guaranty (Multistate), dated as of May 20, 1999, between Sunrise Borrower (as defined in the guaranty) and GMAC Commercial Mortgage Corporation (Exhibit 10.2 to Sunrise's Form 10-Q for the quarter ended June 30, 1999). 10.48 Second Amended and Restated Financial and Security Agreement dated as of July 29, 1999 by and between Bank of America, N.A. (formerly NationsBank, N.A.) as agent for certain additional lenders and Sunrise East Assisted Living Limited Partnership and other subsidiaries of Sunrise (Exhibit 10.48 to Sunrise's 1999 Form 10-K) 10.49 Second Amended, Restated and Increased Master Promissory Note dated as of July 29, 1999 by and between Bank of America, N.A., (formerly NationsBank, N.A.) as agent for certain additional lenders and Sunrise East Assisted Living Limited Partnership and other subsidiaries of Sunrise (as amended) (Exhibit 10.49 to Sunrise's 1999 Form 10-K) 10.50 Second Amended and Restated Master Guaranty of Payment Agreement dated as of July 29, 1999 by and between Bank of America, N.A., (formerly NationsBank, N.A.) as agent for certain additional lenders and Sunrise (Exhibit 10.50 to Sunrise's 1999 Form 10-K) 10.51 Confirmation of and Amendment to Master Guaranty of Performance dated as of July 29, 1999 by and between Bank of America, N.A., (formerly NationsBank, N.A.) as agent for certain additional lenders and Sunrise (Exhibit 10.51 to Sunrise's 1999 Form 10-K)
-67- 68 10.52 Omnibus Confirmation of and Amendment to Security Documents dated July 29, 1999 by Sunrise and certain subsidiaries, as Assignors, in favor of Bank of America, N.A., (formerly NationsBank, N.A.) as agent for certain additional lenders (Exhibit 10.52 to Sunrise's 1999 Form 10-K) 10.53 Third Amended and Restated Financial and Security Agreement dated as of March 14, 2000 by and between Bank of America, N.A. (formerly NationsBank, N.A.) as agent for certain additional lenders and Sunrise East Assisted Living Limited Partnership and other subsidiaries of Sunrise (Exhibit 10.53 to Sunrise's 1999 Form 10-K) 10.54 Third Amended and Restated Master Guaranty of Payment Agreement dated as of March 14, 2000 by and between Bank of America, N.A., (formerly NationsBank, N.A.) as agent for certain additional lenders and Sunrise East Assisted Living Limited Partnership and other subsidiaries of Sunrise (Exhibit 10.54 to Sunrise's 1999 Form 10-K) 10.55 Amendment No. 1 to Certain Operative Agreements, dated as of March 14, 2000, among Sunrise Midwest Leasing, L.L.C., as the Construction Agent and Lessee, Sunrise as the Guarantor, First Security Bank, National Association, not individually but solely as the Owner Trustee under the Sunrise Trust 1998-1, the various banks and other lending institutions which are parties thereto, as Lenders, and Bank of America, N.A., as the Agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and Holders, to the extent of their interests (Exhibit 10.55 to Sunrise's 1999 Form 10-K)
-68- 69 10.56 Form of Multifamily Note (Multistate), dated as of May 20, 1999, between Sunrise Borrower (as defined in the note) and GMAC Commercial Mortgage Corporation (Exhibit 10.3 to Sunrise's Form 10-Q for the quarter ended June 30, 1999). 10.57 Form of Multifamily Mortgage, Assignment of Rents and Security Agreement, dated as of May 20, 1999, between Sunrise Borrower (as defined in the mortgage) and GMAC Commercial Mortgage (Exhibit 10.4 to Sunrise's Form 10-Q for the quarter ended June 30, 1999). 10.58 Amendment No. 1 to Stock Option Agreement by and between Sunrise and David W. Faeder (Exhibit 10.14.1 to Sunrise's Form S-1 Registration Statement No. 333-13731). 10.59 Cross-Collateralization Agreement, dated as of March 22, 2000 by and among GMAC Commercial Mortgage Corporation and Sunrise Borrowers (as defined in the agreement) (Exhibit 10.1 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.60 Form of Multifamily Note (Multistate), dated as of March 22, 2000, by and among GMAC Commercial Mortgage Corporation and Sunrise Borrowers (as defined in the note) (Exhibit 10.2 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.61 Form of Multifamily Mortgage, Assignment of Rents and Security Agreement, dated as of March 22, 2000 by and among GMAC Commercial Mortgage Corporation and Sunrise Borrowers (as defined in the mortgage) (Exhibit 10.3 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.62 Form of Limited Guaranty, dated as of March 22, 2000, by and among GMAC Commercial Mortgage Corporation and Sunrise Borrowers (as defined in
-69- 70 the guaranty) (Exhibit 10.4 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.63 + Chief Executive Officer Severance Plan (Exhibit 10.5 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.64 + Senior Executive Officer Severance Plan (Exhibit 10.6 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.65 + Consulting Agreement dated as of April 1, 2000 by and between Sunrise and David W. Faeder (Exhibit 10.7 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.66 + 1996 Non-Incentive Stock Option Plan, as amended (Exhibit 10.8 to Sunrise's Form 10-Q for the quarter ended March 31, 2000) 10.67 Limited Liability Company Agreement of Metropolitan Senior Housing, LLC, a Delaware Limited Liability Company, dated as of June 29, 2000 (Exhibit 10.1 to Sunrise's Form 10-Q for the quarter ended June 30, 2000) 10.68 Purchase and Sale Agreement dated as of June 29, 2000, by and between certain Sunrise affiliates and Metropolitan Senior Housing, LLC for the sale of three (3) properties (Exhibit 10.2 to Sunrise's Form 10-Q for the quarter ended June 30, 2000) 10.69 Purchase and Sale Agreement dated as of June 29, 2000, by and between certain Sunrise affiliates and Metropolitan Senior Housing, LLC for the sale of eight (8) properties (Exhibit 10.3 to Sunrise's Form 10-Q for the quarter ended June 30, 2000) 10.70 + Employment Agreement, dated as of September 12, 2000, by and between Sunrise Assisted Living,
-70- 71 Inc. and Paul J. Klaassen (Exhibit 10.1 to Sunrise's Form 10-Q for the quarter ended September 30, 2000) 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors.
- ---------------- + Represents management contract or compensatory plan or arrangement. -71- 72 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Sunrise Assisted Living, Inc. We have audited the accompanying consolidated balance sheets of Sunrise Assisted Living, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunrise Assisted Living, Inc. as of December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. McLean, Virginia March 7, 2001 /s/ Ernst & Young LLP F-1 73 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, --------------------------- 2000 1999 ------------ ------------- ASSETS Current Assets: Cash and cash equivalents $ 42,874 $ 53,540 Accounts receivable, net 25,467 15,441 Notes receivable 9,127 1,051 Deferred income taxes, net 19,448 8,221 Assets held for sale - 33,724 Prepaid expenses and other current assets 35,874 52,530 ------------ ------------- Total current assets 132,790 164,507 Property and equipment, net 812,937 763,306 Notes receivable 77,991 59,654 Management contracts and leaseholds, net 24,142 33,994 Costs in excess of assets acquired, net 33,709 35,412 Investments in unconsolidated assisted living facilities 27,773 20,435 Investments 5,750 5,750 Other assets 17,254 18,355 ------------ ------------- Total assets $ 1,132,346 $ 1,101,413 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 4,932 $ 4,114 Accrued expenses and other current liabilities 22,890 21,335 Deferred revenue 21,977 7,475 Current maturities of long-term debt 117,054 36,103 ------------ ------------- Total current liabilities 166,853 69,027 Long-term debt, less current maturities 557,649 664,840 Investments in unconsolidated assisted living facilities 3,353 2,561 Deferred income taxes, net 44,247 22,128 Other long-term liabilities 3,407 3,985 ------------ ------------- Total liabilities 775,509 762,541 Minority interests 2,792 3,748 Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding - - Common stock, $0.01 par value, 60,000,000 shares authorized, 21,595,569 and 21,938,742 shares issued and outstanding in 2000 and 1999 216 219 Additional paid-in capital 298,660 304,014 Retained earnings 55,169 30,891 ------------ ------------- Total stockholders' equity 354,045 335,124 ------------ ------------- Total liabilities and stockholders' equity $ 1,132,346 $ 1,101,413 ============ =============
See accompanying notes. F-2 74 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Year Ended December 31, -------------------------------------- 2000 1999 1998 ----------- ------------ ------------ Operating revenue: Resident fees $ 274,236 $ 217,397 $ 151,878 Management and contract services 38,429 30,805 16,798 Income from property sales 32,121 7,017 2,036 ----------- ------------ ------------ Total operating revenue 344,786 255,219 170,712 ----------- ------------ ------------ Operating expenses: Facility operating 169,966 131,055 88,834 Facility contract services 15,931 6,439 1,095 Facility development and pre-rental 6,226 7,184 5,197 General and administrative 27,418 20,715 12,726 Depreciation and amortization 33,902 25,448 21,650 Facility lease 10,833 7,903 3,014 Non-recurring charges - 5,069 - ----------- ------------ ------------ Total operating expenses 264,276 203,813 132,516 ----------- ------------ ------------ Income from operations 80,510 51,406 38,196 Other income (expense): Interest income 12,412 10,849 6,695 Interest expense (49,978) (32,599) (22,125) ----------- ------------ ------------ Total other expense (37,566) (21,750) (15,430) Equity in (losses) earnings of unconsolidated assisted living facilities (2,941) (1,239) 54 Minority interests (203) (376) (508) ----------- ------------ ------------ Income before income taxes 39,800 28,041 22,312 Provision for income taxes (15,522) (7,828) - ----------- ------------ ------------ Net income $ 24,278 $ 20,213 $ 22,312 =========== ============ ============ Net income per common share: Basic $ 1.12 $ 0.96 $ 1.16 =========== ============ ============ Diluted $ 1.10 $ 0.94 $ 1.11 =========== ============ ============
See accompanying notes. F-3 75 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Shares of Common Retained Common Stock Additional Earnings Stock Amount Paid-in Capital (Deficit) Total -------- --------- --------------- --------- ---------- Balance at December 31, 1997 19,028 $ 190 $ 206,784 $ (11,634) $195,340 Exercise of employee options and warrants for common stock 418 4 6,352 6,356 Tax effect from the exercise of non- qualified stock options 3,647 3,647 Net income 22,312 22,312 -------- --------- --------------- --------- ---------- Balance at December 31, 1998 19,446 194 216,783 10,678 227,655 Exercise of employee options for common stock 214 2 3,666 3,668 Issuance of common stock to acquire Karrington 2,279 23 75,663 75,686 Tax effect from the exercise of non- qualified stock options 7,902 7,902 Net income 20,213 20,213 -------- --------- --------------- --------- ---------- Balance at December 31, 1999 21,939 219 304,014 30,891 335,124 Exercise of employee options for common stock 242 3 3,233 3,236 Repurchase of common stock (585) (6) (9,641) (9,647) Tax effect from the exercise of non- qualified stock options 1,054 1,054 Net income 24,278 24,278 -------- --------- --------------- --------- ---------- Balance at December 31, 2000 21,596 $ 216 $ 298,660 $ 55,169 $354,045 ======== ========= =============== ========= ==========
See accompanying notes. F-4 76 SUNRISE ASSISTED LIVING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ----------------------------------- 2000 1999 1998 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 24,278 $ 20,213 $ 22,312 Adjustments to reconcile net income to net cash provided by operating activities: Income from property sales (16,900) (70) (551) Equity in losses (earnings) of unconsolidated assisted living facilities 2,941 1,239 (54) Minority interests 203 376 508 Provision for bad debts 1,250 1,380 521 Provision for deferred income taxes 15,522 1,930 - Depreciation and amortization 33,902 25,448 21,650 Amortization of financing costs and discount on long-term debt 3,754 2,676 2,084 Amortization of discount on investments - (566) (175) Non-recurring charges - 3,786 - Changes in operating assets and liabilities: (Increase) decrease: Accounts receivable (11,895) 2,793 (12,490) Assets held for sale - (1,054) - Prepaid expenses and other current assets 1,008 (71) (1,555) Other assets 218 2,623 (5,778) Increase (decrease): Accounts payable and accrued expenses (3,448) (13,243) (49) Deferred revenue (929) 94 (1,105) Other liabilities 1,728 (4,767) 1,820 ----------- ----------- ----------- Net cash provided by operating activities 51,632 42,787 27,138 ----------- ----------- ----------- INVESTING ACTIVITIES Investment in property and equipment (46,268) (178,443) (126,167) Proceeds from sales of assets 45,704 26,923 28,552 Increase in investments and notes receivable (152,809) (75,259) (45,315) Proceeds from investments and notes receivable 142,422 7,574 - Increase in restricted cash and cash equivalents (830) (727) (1,459) Contributions to investments in unconsolidated assisted living facilities (10,534) (1,519) (742) Acquisition of interests in facilities (1,098) (13,614) (1,340) ----------- ----------- ----------- Net cash used in investing activities (23,413) (235,065) (146,471) ----------- ----------- ----------- FINANCING ACTIVITIES Additional borrowings under long-term debt 187,302 313,529 108,000 Repayment of long-term debt (215,569) (122,079) (23,369) Net proceeds from exercised options 3,235 3,668 6,356 Net investment of minority interests (1,088) 1,000 - Financing costs paid (3,118) (4,497) (100) Repurchase of stock (9,647) - - ----------- ----------- ----------- Net cash (used in) provided by financing activities (38,885) 191,621 90,887 ----------- ----------- ----------- Net decrease in cash and cash equivalents (10,666) (657) (28,446) Cash and cash equivalents at beginning of year 53,540 54,197 82,643 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 42,874 $ 53,540 $ 54,197 =========== =========== ===========
See accompanying notes. F-5 77 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRESENTATION Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") is a provider of assisted living services for seniors. Assisted living services provide a residence, meals and non-medical assistance to elderly residents for a monthly fee. Sunrise's services are generally not covered by health insurance and therefore monthly fees are generally payable by the residents, their family, or another responsible party. Sunrise was incorporated in Delaware on December 14, 1994. The consolidated financial statements include Sunrise's wholly owned subsidiaries that manage, own and develop assisted living facilities. The consolidated financial statements also include one limited partnership which owns a facility (Sunrise of Gardner Park) in which Sunrise owns a 50% partnership interest and controls the limited partnership through its status as the manager of the facility and as the sole general partner with the unilateral ability under the partnership agreement to conduct the ordinary course of business of the partnership. In addition, the consolidated financial statements include three limited liability companies. One of the limited liability companies owns two facilities (Sunrise of Severna Park) in which Sunrise owns a 50% membership interest. The other two limited liability companies own one facility each (Sunrise of Sheepshead Bay and Sunrise of Mill Basin) in which Sunrise owns a 70% membership interest. Sunrise controls the three limited liability companies through its status as the manager of the facilities and as sole managing member of the limited liability companies with unilateral ability under the operating agreements to conduct the ordinary course of business of the companies. It is Sunrise's policy to consolidate non-wholly owned interests when, through its managing partnership or operating agreements, status as manager of the facility and sole general partner or managing member, Sunrise holds the unilateral ability to conduct the ordinary course of business of the facility. In February 2000, Sunrise acquired the remaining 30% minority interest in Sunrise of Park Ridge, in which Sunrise previously had a 70% membership interest. 2. SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Sunrise considers cash and cash equivalents to include currency on hand, demand deposits, and all highly liquid investments with a maturity of three months or less at the date of purchase. ALLOWANCE FOR DOUBTFUL ACCOUNTS Details of the allowance for doubtful accounts receivable are as follows (in thousands):
DECEMBER 31, -------------------------------- 2000 1999 1998 -------------------------------- Beginning balance $3,716 $2,080 $1,798 Acquired allowance - 786 -- Provision for bad debts 1,250 1,380 521 Accounts written off (1,311) (530) (239) -------------------------------- Ending balance $3,655 $3,716 $2,080 ================================
F-6 78 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and include interest and property taxes capitalized on long-term construction projects during the construction period, as well as other costs directly related to the development and construction of facilities. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Property and equipment are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. Sunrise measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Construction in progress includes pre-acquisition costs and other direct costs related to acquisition, development and construction of facilities including certain direct and indirect costs of Sunrise's development subsidiary. If a project is abandoned, any costs previously capitalized are expensed. INTANGIBLE ASSETS Intangible assets relate primarily to the acquisition of Karrington Health, Inc. and are comprised of management contracts, leaseholds and costs in excess of assets acquired. Costs in excess of assets acquired represent costs of business acquisitions in excess of the fair value of identifiable net assets acquired. Such costs are being amortized over 38 years using the straight-line method. Management contracts and leaseholds are also amortized using the straight-line method over periods ranging from 11 to 40 years. The carrying amounts of all intangible assets are reviewed for impairment when indicators of impairment are identified. If the review indicates that the intangible assets are not expected to be recoverable based on the undiscounted cash flows of the acquired assets over the remaining amortization periods, the carrying value of the intangible assets will be adjusted. PRE-RENTAL COSTS Costs incurred to initially rent facilities are capitalized and amortized over 12 months. All other pre-rental costs are expensed as incurred. DEFERRED FINANCING COSTS Costs incurred in connection with obtaining permanent financing for Company-owned facilities have been deferred and are amortized over the term of the financing. INVESTMENTS IN UNCONSOLIDATED ASSISTED LIVING FACILITIES Sunrise owns non-controlling interests in 60 assisted living facilities, some of which are currently under development. Sunrise's interests, through limited liability companies and partnerships, range from nine to 50 percent. Sunrise does not control these entities as major business decisions require approval by the other partners or members. Accordingly, these investments are accounted for under the equity method, where the investments are recorded at cost and subsequently are adjusted for equity in net income (losses) and cash contributions and distributions. Sunrise eliminates intercompany profits on sales of services that are capitalized by the ventures. Differences between the carrying value of investments and the underlying equity in net assets of the investee are amortized on a straight line basis over the estimated useful life of the investments. Sunrise's interests in accumulated losses of unconsolidated assisted living facilities are recorded below Sunrise's cost basis, which reflects Sunrise's obligations as the general partner or managing member. Sunrise has no liability for any other material commitments or contingencies of partnerships or limited liability companies in which it is a general partner or managing member. As of December 31, 2000, the carrying value of investments in the net assets of unconsolidated assisted living facilities exceeded the underlying equity in net assets of the investees by $3.8 million. F-7 79 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INTEREST RATE SWAPS Interest rate swap transactions are designated with certain outstanding debt instruments. Amounts received or paid on the interest rate swaps are recorded on an accrual basis as an adjustment to the related interest expense of the outstanding debt. The fair value of and changes in fair value as a result of changes in market interest rates for the interest rate swap agreements are not reflected in the financial statements. Gains and losses on terminations of interest rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized into interest expense over the remaining term of the original contract life of the terminated swap agreement. In the event of early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss. There were no gains or losses on terminations of interest swap agreements recognized by Sunrise for the periods presented. REVENUE RECOGNITION Operating revenue consists of resident fee revenue, including resident community fees, management services revenue, facility contract services revenue and realized gain upon sale of assisted living facilities. Resident fee revenue is recognized when services are rendered. Agreements with residents are for a term of one year and are cancelable by residents with thirty days notice. Management and contract services revenue is comprised of revenue from management contracts, development contracts and facility contracts. Revenue from management contracts is recognized in the month in which it is earned in accordance with the terms of the management contract. Revenue from development contracts is recognized over the term of the respective development contracts using the percentage-of-completion method. Revenue from facility contract services is comprised of fees plus reimbursable expenses of facilities operated with Sunrise's employees under long-term operating agreements. Income from property sales is recognized upon consummation of the sale of properties unless a portion of the sale is contingent upon future events or performance. Deferred gains are then recognized upon performance or resolution of the contingency. INCOME TAXES Sunrise accounts for income taxes under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax bases of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. STOCK-BASED COMPENSATION Sunrise grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Sunrise accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly recognizes no compensation expense for the stock option grants. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and 138, which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Statement No. 133 standardizes the accounting for derivative instruments. Sunrise participates in interest rate swap transactions, which would be considered derivatives under Statement No. 133. Sunrise has not entered into any other derivative transactions. Because of Sunrise's minimal use of derivatives, Statement No. 133 is not anticipated to materially affect results of operations or the financial position of Sunrise. F-8 80 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RECLASSIFICATIONS Certain 1999 and 1998 balances have been reclassified to conform with the 2000 presentation. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, ---------------------- ASSET LIVES 2000 1999 ---------------------- Land and land improvements 10-15 yrs. $122,794 $115,516 Building and building Improvements 40 yrs. 576,820 520,502 Furniture and equipment 3-10 yrs. 82,982 76,072 ---------------------- 782,596 712,090 Less accumulated depreciation And amortization (72,335) (55,983) ---------------------- 710,261 656,107 Construction in progress 102,676 107,199 ---------------------- $812,937 $763,306 ======================
Depreciation expense was $25.2 million, $18.6 million and $13.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. F-9 81 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. NOTES RECEIVABLE Notes receivable plus accrued interest consist of the following (in thousands):
DECEMBER 31, ------------------- 2000 1999 ------------------- LLC Note I, interest accrues at LIBOR plus 5.0% (11.6% at December 31, 2000) $22,599 $24,799 LLC Note II, interest accrues at 10.0% 8,534 7,797 LLC Note III, interest accrues at 10.0% 18,242 16,632 LLC Note IV, interest accrues at 10.0% 17,685 6,054 LLC Note V, interest accrues at 15.0% 9,388 - Note I with United Kingdom joint venture, variable interest 5,125 3,829 Note II with United Kingdom joint venture, interest accrues at 15.0% 696 - ADG Note, interest accrues at 10.0% 544 543 Promissory Note, interest accrued at 8.0% - 562 Property Note, interest accrues at 7.75% 3,016 - Promissory Note, interest accrues at 11.5% through March 2001 and 13.5% thereafter 999 - Other notes receivable 290 489 ------------------- 87,118 60,705 Current maturities (9,127) (1,051) ------------------- $77,991 $59,654 ===================
In October 1997, a wholly owned subsidiary of Sunrise jointly formed a limited liability company ("LLC I") with an unrelated third party in which Sunrise's subsidiary owns a 9% minority interest. The purpose of LLC I is to develop, construct and own assisted living facilities. Sunrise loaned LLC I $15.0 million (the "LLC Note I") to partially finance the initial development and construction of six properties. The LLC Note I to Sunrise's subsidiary is subordinated to other lenders of LLC I. In September 1998, Sunrise and LLC I amended the LLC Note I to increase the loan by $6.0 million to a total of $21.0 million in order to partially finance the initial development and construction of two additional properties. Principal and interest are due October 2003. In January 1999, a wholly owned subsidiary of Sunrise jointly formed a limited liability company ("LLC II") in which Sunrise's subsidiary owns a 9% minority interest. The purpose of LLC II is to develop, construct and own assisted living facilities. Sunrise loaned LLC II $7.3 million (the "LLC Note II") to partially finance the initial development and construction of four properties. The LLC Note II to Sunrise's subsidiary is subordinated to other lenders of LLC II. The principal amount of the loan and accrued interest are due on the earlier of March 30, 2006 or termination of the management agreement between the parties. See Note 17 Related-Party Transactions, Joint Ventures. In March 1999, a wholly owned subsidiary of Sunrise jointly formed a limited liability company ("LLC III") in which Sunrise's subsidiary owns a 9% minority interest. The purpose of LLC III is to develop, construct and own assisted living facilities. Sunrise loaned LLC III $15.8 million (the "LLC Note III") to partially finance the initial development and construction of five properties. The LLC Note III to Sunrise's subsidiary is subordinated to other lenders of LLC III. The principal amount of the loan and accrued interest are due on July 1, 2002. See Note 17 Related-Party Transactions, Joint Ventures. In March 1999, a wholly owned subsidiary of Sunrise jointly formed a limited liability company ("LLC IV") in which Sunrise's subsidiary owns a 9% minority interest. The purpose of LLC IV is to develop, construct, and own assisted living facilities. Sunrise loaned LLC IV $6.0 million (the "LLC Note IV") to F-10 82 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) partially finance the initial development and construction of six properties. In December 1999, Sunrise and LLC IV amended the LLC Note IV to increase the loan by $10.0 million. The LLC Note IV to Sunrise's subsidiary is subordinated to other lenders of LLC IV. The principal amount of the loan and accrued interest are due on the earlier of December 31, 2006 or termination of the management agreement between the parties. See Note 17 Related-Party Transactions, Joint Ventures. In December 2000, a wholly owned subsidiary of Sunrise jointly formed a limited liability company ("LLC V") with an unrelated third party in which Sunrise's subsidiary owns a 9% minority interest. The purpose of LLC V is to develop, construct and own assisted living facilities. Sunrise has committed to loan LLC V $17.4 million (the "LLC Note V") to partially finance the initial development and construction of five properties. The LLC Note V to Sunrise's subsidiary is subordinated to other lenders of LLC V. The principal amount of the loan and accrued interest are due on December 16, 2007. In November 1998, Sunrise agreed to make available up to approximately $3.4 million ("Note I") to a subsidiary of a joint venture of Sunrise in the United Kingdom under a revolving credit arrangement. During 2000, Sunrise advanced an additional $1.4 million to the joint venture. Interest on the first $3.4 million of advances made under Note I accrues at 12.0%. Interest on the additional $1.4 million of advances accrues at a variable rate based on LIBOR plus 2.0% (8.56% at December 31, 2000). The outstanding principal and unpaid accrued interest are due November 2001. See Note 17 Related-Party Transactions, Joint Ventures. In 2000, Sunrise agreed to make available up to approximately $1.4 million ("Note II") to a subsidiary of a joint venture of Sunrise in the United Kingdom under a promissory note. Interest on amounts outstanding under Note II accrues at 15.0%. A portion of the outstanding principal and unpaid accrued interest was converted to an investment in the joint venture and the remainder was repaid in full in January 2001. See Note 17 Related-Party Transactions, Joint Ventures. In January 1999, a facility, in which Sunrise has a controlling interest, accepted a $0.5 million promissory note ("ADG Note") from its minority owner. The ADG Note accrues interest at 10% per annum and is due annually beginning February 22, 2000. The principal balance plus accrued and unpaid interest are due on February 22, 2009. In connection with the sale of Sunrise's minority interest in a tenancy-in-common that owned one facility, a wholly owned subsidiary of Sunrise accepted a promissory note in the amount of $850,000 in March 1998. The promissory note accrued interest at 8.0% per annum and was due in September 1998. In October 1998, the promissory note was amended to extend the maturity date to August 1, 1999 and modify the payment terms to include a payment due in October 1998, which has been received, followed by quarterly payments of principal and interest. Under the terms of the amended promissory note, the promissory note was in default as of August 1, 1999. The promissory note was paid in full in February 2000. In June 1999, a wholly owned subsidiary of Sunrise loaned $200,000 ("Property Note") to owners of certain property on which Sunrise plans to develop an assisted living community. Immediately following issuance of the Property Note, the wholly owned subsidiary of Sunrise entered into a purchase agreement with the owners to acquire this property. In January 2000, an additional $2.6 million was advanced to the owners of the property for a total of $2.8 million. The principal and unpaid accrued interest are due in 2001. In September 2000, a wholly owned subsidiary of Sunrise agreed to make available up to $1.25 million ("Promissory Note") to the purchaser of two former Karrington operating properties located in Ohio. The Promissory Note is secured by a second mortgage and is subordinated to the purchaser's first mortgage. The Promissory Note accrues interest at 11.5% through March 2001 and 13.5% thereafter. The outstanding principal and unpaid accrued interest are due September 2002. The note was repaid in January 2001. F-11 83 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Management believes the net carrying cost of the notes receivable approximates market value at December 31, 2000 and 1999. 5. INVESTMENTS The balances outstanding are as follows (in thousands):
FACE AMOUNT DECEMBER 31, ----------------- DESCRIPTION 2000 1999 INTEREST RATE MATURITY DATE ---------------------------------------------------------------------------- Bonds: Series A $5,000 $5,000 11% July 1, 2025 Series B 750 750 11% July 1, 2015 ----------------- $5,750 $5,750 =================
On March 1, 1995, Sunrise purchased all of the outstanding mortgage revenue bonds used to finance a facility managed by Sunrise. The 10% Bucks County Industrial Development Authority, First Mortgage Revenue Bonds, July 1, 2019, having a face value of $12.5 million, were purchased for $5.0 million. The bonds were in financial default when purchased. On June 30, 1995, the bonds were restructured, at no gain or loss to Sunrise, to reduce their face amount to $5.8 million (Series A and C) and provide the facility managed by Sunrise additional funding up to $750,000 for renovations (Series B). Interest only is payable until maturity. In March 1999, the Series C bonds were paid in full. Subsequent to June 30, 1995, all interest payments on these bonds are current. Sunrise recognized $632,000, $721,000 and $957,000 in interest income during 2000, 1999 and 1998, respectively, on this investment. The bond discount for the Series C bonds was being recognized as interest income over the life of the loan commencing in 1998. Sunrise amortized $575,000 and $175,000 of the bond discount in 1999 and 1998, respectively. Management believes the net carrying cost of the investments approximates market value at December 31, 2000 and 1999. 6. INTANGIBLES AND OTHER ASSETS Intangible assets consist of the following (dollars in thousands):
DECEMBER 31, ------------------ 2000 1999 ESTIMATED USEFUL LIFE -------------------------------- Management contracts, less accumulated amortization of $709 and $250 $ 6,679 $ 7,138 11-20 years Leaseholds, less accumulated amortization of $1,118 and $584 17,463 26,856 18-40 years ------------------ $ 24,142 $ 33,994 ================== Costs in excess of assets acquired, less accumulated amortization of $1,244 and $474 $ 33,709 $ 35,412 38 years ===================
F-12 84 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other assets consist of the following (in thousands):
DECEMBER 31, ------------------ 2000 1999 ------------------ Restricted cash $5,211 $4,380 Deferred financing costs less amortization of $8,876 and $6,045 7,539 8,705 Pre-rental costs less amortization of $16,437 and $15,896 3,783 4,707 Other 721 563 ------------------ $17,254 $18,355 ==================
Restricted cash consists of real estate tax escrows, operating reserves and capital reserves related to Sunrise's debt agreements and resident deposits. 7. TRANSACTIONS WITH UNCONSOLIDATED ENTITIES Included in prepaid expenses and other current assets are net receivables from unconsolidated partnerships or limited liability companies of $21.2 million and $38.6 million as of December 31, 2000 and 1999, respectively. Included in other current liabilities are net payables to unconsolidated partnerships or limited liability companies of $3.0 million and $1.6 million in 2000 and 1999, respectively. Net receivables from unconsolidated partnerships or limited liability companies relate primarily to development activities. 8. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, --------------------- 2000 1999 --------------------- 5 1/2% Convertible Subordinated Notes due 2002 $150,000 $150,000 Syndicated revolving credit facility 177,456 209,972 Multi-property/participating blanket first mortgage 85,109 85,602 Multi-property first mortgage 85,868 87,242 Other mortgages and notes payable 176,445 168,720 Discount on the multi-property mortgage less amortization of $3,025 and $2,607 (175) (593) --------------------- 674,703 700,943 Current maturities (117,054) (36,103) --------------------- $557,649 $664,840 =====================
On June 6, 1997, Sunrise issued and sold $150.0 million aggregate principal amount of 5 1/2% convertible subordinated notes due 2002. The convertible notes bear interest at 5 1/2% per annum payable semiannually on June 15 and December 15 of each year, beginning on December 15, 1997. The conversion price is $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000 principal amount of the convertible notes). The convertible notes are redeemable at the option of Sunrise commencing June 15, 2000, at specified premiums. The holders of the convertible notes may require Sunrise to repurchase the convertible notes upon a change of control of Sunrise as defined in the convertible notes. F-13 85 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A subsidiary of Sunrise has obtained a syndicated revolving credit facility for $400.0 million to be used for general corporate purposes, including the continued construction and development of assisted living facilities. Sunrise guarantees the repayment of all amounts outstanding under this credit facility. The credit facility is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all assets of the subsidiary, consisting of 30 properties. Advances under the facility bear interest at LIBOR plus 1.75% (8.31% at December 31, 2000). The credit facility expires in July 2002. There were $177.5 million of advances outstanding under this credit facility as of December 31, 2000. The multi-property mortgage is collateralized by a blanket first mortgage on all assets of a subsidiary of Sunrise, consisting of 15 facilities. The multi-property mortgage consists of two separate debt classes. Class A in the amount of $65.0 million bears a fixed interest rate of 8.56% and is interest only until the maturity date of May 31, 2001. Class B in the amount of $20.1 million bears a variable interest rate. Class B was interest only until July 1, 1997 at which time principal and interest payments were due using a 20-year amortization schedule. The interest rate applicable to the floating rate debt is LIBOR plus 1.75% (8.31% at December 31, 2000). A participation interest of $3.2 million payable in connection with the multi-property mortgage was recorded at the loan date. A corresponding amount recorded as a loan discount is being amortized over the life of the loan. Amortization of the discount of $418,000 has been included as interest expense in 2000, 1999 and 1998. In May 1999, Sunrise entered into a multi-property first mortgage for $88.0 million secured by eight properties. The loan accrues interest at 7.14% and matures on June 1, 2009. The proceeds were used to reduce the balance of one of Sunrise's credit facilities and, as a result, convert a portion of Sunrise's variable rate debt into debt with a fixed rate. At December 31, 2000, $85.9 million was outstanding. In March 2000, Sunrise entered into a multi-property first mortgage for $75.0 million secured by eight properties. The loan accrues interest at 8.66% and matures in April 2007. The proceeds of the loan were used to repay $59.0 million of floating rate construction debt and to help fund Sunrise's development and stock repurchase programs. The eight properties securing the debt were sold on September 29, 2000 to a joint venture in which Sunrise has a 25% interest. The joint venture assumed the debt with an outstanding balance of $74.6 million as of September 30, 2000. In 1999, included in long-term debt is a note due to an employee and an entity related to that employee. Interest accrued at 18% annually and principal was due June 8, 1999. In October 1999, the principal balance plus accrued and unpaid interest under the promissory note was paid in full. The other mortgages and notes payable relate primarily to 29 facilities whereby outstanding balances are collateralized by the total assets of the respective facility. Payments of principal and interest are made monthly. Interest rates range from 4.7% to 10.0% with remaining maturities ranging from less than one to 33 years. These other mortgages and notes payable have total borrowings of $176.4 million as of December 31, 2000, which include $55.2 million of debt assumed through the acquisition of Karrington. Sunrise has entered into a swap transaction whereby, effective during the period June 18, 1998 through June 18, 2001, outstanding advances of up to $19.0 million under LIBOR floating rate debt bear interest at a fixed rate based on a fixed LIBOR base rate of 7.30%. Sunrise entered into another swap transaction whereby, effective during the period August 20, 1997 through April 1, 2003, outstanding advances of up to $7.0 million under LIBOR floating rate debt bear interest at a fixed LIBOR base rate of 7.14%. In November 1999, Sunrise settled the $7.0 million swap transaction. There was no gain or loss on the settlement. There are various financial covenants and other restrictions in Sunrise's debt instruments, including provisions which: (1) require it to meet certain financial tests. For example, Sunrise's $85.1 million multi-property mortgage, which is secured by 15 of its facilities, requires that these facilities maintain a cash flow to interest expense coverage ratio of at least 1.25 to 1. Sunrise's $400.0 million credit facility F-14 86 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) requires Sunrise to have a consolidated tangible net worth of at least $255.0 million and to maintain a consolidated minimum cash liquidity balance of at least $25.0 million. These tests are administered on a monthly or quarterly basis, depending on the covenant; (2) require consent for changes in management or control of Sunrise. For example, Sunrise's $400.0 million revolving credit facility requires the lender's consent for any merger where Paul Klaassen or Teresa Klaassen does not remain chairman of the board and chief executive officer of Sunrise; (3) restrict the ability of Sunrise's subsidiaries to borrow additional funds, dispose of assets or engage in mergers or other business combinations without lender consent; and (4) require that Sunrise maintain minimum occupancy levels at its facilities. For example, Sunrise's $400.0 million credit facility requires that 85% occupancy be achieved after 12 months for newly opened facilities and, following this 12-month period, be maintained at or above that level. Principal maturities of long-term debt as of December 31, 2000 are as follows (in thousands): 2001 $117,054 2002 354,746 2003 57,632 2004 13,582 2005 10,134 Thereafter 121,555 ----------- $674,703 ===========
Interest paid totaled $52.2 million, $35.7 million and $23.8 million in 2000, 1999 and 1998, respectively. Interest capitalized was $6.1 million, $6.3 million and $4.2 million in 2000, 1999 and 1998, respectively. As of December 31, 2000, Sunrise has $11.3 million in unused letters of credit that have been pledged for the benefit of certain lending institutions and municipalities. The letters of credit expire within two years. 9. STOCKHOLDERS' EQUITY On May 14, 1999, Sunrise completed its acquisition of Karrington Health, Inc. through a tax-free, stock-for-stock transaction in which it issued 2.3 million common shares in exchange for all the outstanding shares of Karrington and Karrington became a wholly owned subsidiary of Sunrise. The total transaction was valued at $85.1 million, including merger and stock issuance costs of $8.4 million and the fair value of assumed employee stock options of $1.5 million. Sunrise's Board of Directors has authorized Sunrise to repurchase its outstanding common stock and/or its outstanding 5 1/2% convertible subordinated notes up to an aggregate purchase price of $50.0 million over a period of 12 months. Under the stock repurchase program, Sunrise is authorized to repurchase Company common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors. The stock repurchase program does not obligate Sunrise to repurchase any specific number of shares, and repurchases pursuant to the program may be suspended or resumed at any time or from time to time without further notice or announcement. Sunrise repurchased 585,000 shares of common stock at an average price of $16.66 per share through open-market purchases during 2000. F-15 87 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLANS Sunrise has stock option plans providing for the grant of incentive and nonqualified stock options to employees, directors, consultants and advisors. At December 31, 2000, these plans provided for the grant of options to purchase up to 7,323,910 shares of common stock. The option exercise price and vesting provisions of the options are fixed when the option is granted. The options expire ten years from the date of grant and generally vest over a four-year period. The option exercise price is not less than the fair market value of a share of common stock on the date the option is granted. In September 1998, Sunrise canceled 1.6 million options granted to employees at exercise prices greater than $29.00 and granted an equal number of options with an exercise price of $25.00. In connection with the new grants certain vesting periods of the executive officers were extended. On April 25, 1996, the Board of Directors adopted the 1996 Directors' Stock Option Plan (the "Directors' Plan"). Any director who was a member of the Board of Directors but not an officer or employee of Sunrise or any of its subsidiaries (other than the persons elected as director representatives of the holders of Series A Preferred Stock) was eligible to receive options under the Directors' Plan. In March 2000, the Directors' Plan was terminated. An aggregate of 75,000 shares of common stock is reserved for issuance under existing option agreements. The option exercise price is not less than the fair market value of a share of common stock on the date the option was granted. The period for exercising an option begins six months after the option was granted and generally ends ten years from the date the option was granted. Options granted under the Directors' Plan vested immediately. All options granted under the Directors' Plan are non-incentive stock options. As of December 31, 2000, 75,000 options remained outstanding under the plan. A summary of Sunrise's stock option activity, and related information for the years ended December 31 are presented below:
2000 1999 1998 ---------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE OPTIONS (000) PRICE (000) PRICE (000) PRICE - ---------------------------------------------------------------------------------------------------------- Outstanding-beginning of year 5,250 $ 23.28 4,170 $ 24.93 3,156 $ 22.76 Granted 1,905 15.93 1,712 23.02 3,417 32.81 Exercised (242) 13.77 (213) 17.24 (384) 16.39 Canceled (954) 28.57 (419) 30.39 (2,019) 36.51 -------- -------- ------- Outstanding-end of year 5,959 5,250 23.28 4,170 24.93 ======== ======== ======= Options exercisable at year-end 2,523 1,853 1,055 Weighted-average fair value of options granted during the year $11.78 $16.46 $16.80
F-16 88 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE - -------------------------------------------------------------------------------------------- $ 3.00 - $ 8.00 85 4.7 $ 5.03 85 $ 5.03 8.01 - 20.00 2,505 8.8 14.52 530 15.69 20.01 - 25.63 2,456 6.6 24.96 1,606 25.01 25.64 - 44.56 913 8.3 31.78 302 34.87 ------------ ------------ 5,959 2,523 ============ ============
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, Accounting for Stock-Based Compensation, and has been determined as if Sunrise had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998: risk-free interest rate of 4.4% to 6.5%; dividend yield of 0%; expected lives of 7 to 10 years; and volatility of 36.8% to 57.54%. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Sunrise's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures below, the estimated fair value of the options is amortized to expense over the options' vesting period. Sunrise's pro forma information follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 ---------- ---------- --------- Net income: As reported $24,278 $20,213 $22,312 Pro forma $7,686 $7,882 $13,368 Diluted net income per share: As reported $1.10 $0.94 $1.11 Pro forma $0.35 $0.37 $0.67
11. STOCKHOLDER RIGHTS AGREEMENT The Board of Directors adopted a Stockholders Rights Agreement ("Rights Agreement") effective April 25, 1996, as amended. All shares of common stock issued by Sunrise between the date of adoption of the Rights Agreement and the Distribution Date (as defined below) have rights attached to them. The rights expire ten years after adoption of the Rights Agreement. Each right, when exercisable, entitles the holder to purchase one one-thousandth of a share of Series C Junior Participating Preferred Stock at a price of $85.00 (the "Purchase Price"). Until a right is exercised, the holder thereof will have no rights as a stockholder of Sunrise. The rights initially attach to the common stock. The rights will separate from the common stock and a distribution of rights certificates will occur (a "Distribution Date") upon the earlier to occur of (1) ten days following a public announcement that a person or group (an "Acquiring Person") has acquired, or obtained F-17 89 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the right to acquire, beneficial ownership of 20% or more of the outstanding shares of common stock (the "Stock Acquisition Date") or (2) ten business days (or such later date as the Board of Directors may determine) following the commencement of a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person of 20% or more of the outstanding shares of common stock. However, neither Paul J. Klaassen nor Teresa M. Klaassen (nor their affiliates, associates and estates), each of whom, as of the date of adoption of the Rights Agreement, beneficially owned in excess of 20% of the outstanding shares of common stock, will be deemed an "Acquiring Person," unless they acquire an additional 2% of the common stock which was outstanding at the time of completion of Sunrise's initial public offering. In general, if a person becomes the beneficial owner of 20% or more of the then outstanding shares of common stock, each holder of a right may exercise the right by purchasing common stock having a value equal to two times the Purchase Price. If at any time following the Stock Acquisition Date (1) Sunrise is acquired in a merger or other business combination transaction in which it is not the surviving corporation (other than a merger which follows an offer described in the preceding paragraph), or (2) 50% or more of Sunrise's assets or earning power is sold or transferred, each holder of a right shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price. The Board of Directors of Sunrise generally may redeem the rights at a price of $.005 per right at any time until ten days after an Acquiring Person has been identified as such. 12. NET INCOME PER COMMON SHARE The following table summarizes the computation of basic and diluted net income per common share amounts presented in the accompanying consolidated statements of operations (in thousands, expect per share amounts):
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ------------------------------------------ Numerator: Net income $24,278 $20,213 $ 22,312 ========================================== Denominator: Denominator for basic net income per common share-weighted average shares 21,654 21,045 19,288 Effect of dilutive securities: Employee stock options 366 544 744 ------------------------------------------ Denominator for diluted net income per common share-weighted average shares plus assumed conversions 22,020 21,589 20,032 ========================================== Basic net income per common share $ 1.12 $ 0.96 $ 1.16 ========================================== Diluted net income per common share $ 1.10 $ 0.94 $ 1.11 ==========================================
Certain shares issuable upon the exercise of stock options or convertible notes have been excluded from the computation because the effect of their inclusion would be anti-dilutive. Options are included under the treasury stock method to the extent they are dilutive. 13. ACQUISITIONS AND DISPOSITIONS In March 1998, Sunrise sold its minority interest in a tenancy-in-common that owned one facility resulting in a $0.5 million realized gain. F-18 90 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In September 1998, Sunrise completed the sale of two facilities for an aggregate sales price of $29.3 million in cash. Sunrise will realize up to a $6.4 million gain from the transaction over a maximum of 15 quarters. Sunrise recognized a gain of $1.9 million and $1.5 million on the sale in 1999 and 1998, respectively. The remaining gain was deferred, the recognition of which is contingent upon future events. For tax purposes, the transaction is treated as a tax-free exchange. Sunrise operates the two facilities under long-term operating agreements. In June 1999, Sunrise completed the sale of two facilities for an aggregate sales price of $27.9 million in cash. Sunrise realized an $11.2 million gain from the transaction over three quarters. Sunrise recognized a gain of $5.1 million on the sale in 1999 and $6.1 million in 2000. For tax purposes, the transaction is treated as a tax-free exchange. Sunrise operates the two facilities under long-term operating agreements. On May 14, 1999, Sunrise completed its acquisition of Karrington Health, Inc. through a tax-free, stock-for-stock transaction in which it issued 2.3 million common shares in exchange for all the outstanding shares of Karrington and Karrington became a wholly owned subsidiary of Sunrise. The total transaction was valued at $85.1 million, including merger and stock issuance costs of $8.4 million and the fair value of assumed employee stock options of $1.5 million. Karrington operates assisted living facilities providing services to the elderly. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of Karrington for the period from May 14, 1999 (excluding assets held for sale) are included in the accompanying consolidated financial statements. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over the estimated fair value of the net assets acquired was $35.1 million. Sunrise acquired cash of $2.4 million in the Karrington acquisition, which is included in the statement of cash flows. The remainder of the Karrington transaction was a non-cash transaction for the statement of cash flows. Sunrise recorded non-recurring charges of $5.1 million during 1999, of which $4.4 million related to the consolidation and integration of the acquired operations and development pipeline of Karrington and $0.7 million related to the termination of a property acquisition agreement. Of the $5.1 million non-recurring charges, $3.8 million were non-cash transactions. The following unaudited pro forma information presents the results of operations of Sunrise for the year ended December 31, 1999, as if the acquisition of Karrington had taken place as of January 1, 1999. This pro forma information excludes the results of operations of the assets held for sale. See Note 14 Assets Held For Sale. (in thousands, except per share amounts)
1999 ------------ Revenue $ 268,074 Net income 13,101 Basic earnings per share 0.60 Diluted earnings per share 0.58
These pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future. On June 29, 2000, Sunrise entered into a definitive agreement for the sale of 11 assisted living communities to a real estate venture company in which Sunrise owns a 25 percent interest. Also, on June 29, 2000, the venture company closed on three of the 11 properties, located in Wayland, Massachusetts, West Essex, New Jersey and Oakton, Virginia, for an aggregate sales price of $44 million. The transaction will result in up to $13.3 million in gain over the four quarters following the sale, subject to certain contingencies being met, of which $11.1 million was recognized in 2000. On F-19 91 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) September 29, 2000, the venture company closed on the remaining eight properties for an aggregate sales price of $111 million. The eight properties are located in seven states. The venture company assumed approximately $75 million of debt secured by the eight properties. The transaction will result in up to $26.0 million in gain over the four quarters following the sale, subject to certain contingencies being met, of which $13.1 million was recognized in 2000. Sunrise will continue to provide day-to-day management of the communities under long-term operating agreements. On December 28, 2000, Sunrise sold its entire interest in two assisted living communities located in Rockville, Maryland, and San Mateo, California, to a privately held real estate company for a purchase price of $28.1 million. The transaction will result in up to $7.8 million in gain over the four quarters following the sale, subject to certain contingencies being met, of which $1.8 million was recognized during 2000. Sunrise will continue to provide day-to-day management of the communities under long-term operating agreements. On December 28, 2000, Sunrise entered into a definitive agreement to sell nine assisted living communities to a limited partnership for an aggregate sales price of $131.0 million. Sunrise will continue to operate the communities under long-term management agreements and Sunrise will retain a 25% ownership interest in the limited partnership. The nine communities are located in three states. Sunrise closed on this sale on February 23, 2001. 14. ASSETS HELD FOR SALE In connection with its acquisition of Karrington, Sunrise intended to sell 16 of Karrington's operating properties. Sunrise has concluded its efforts to sell these former Karrington operating properties held for sale. In September 2000, the Company sold two former Karrington operating properties for their book value of approximately $7.0 million. Sunrise terminated discussions to sell the remaining 14 operating properties held for sale because market conditions for selling these properties in secondary markets are depressed and the Company believes that it can obtain better prices in the future. Accordingly, these properties have been reclassified from assets held for sale to operating properties and the operations of these properties have been included in Sunrise's consolidated results beginning in the third quarter of 2000. 15. COMMITMENTS Sunrise leases its corporate offices, regional offices, development offices and warehouse space under various leases. During 1998, Sunrise entered into an agreement to lease new office space for its corporate headquarters. The lease commenced upon completion of the building in July 1999 and expires in July 2011. The lease has an initial annual base rent of $1.2 million. The base rent escalates approximately 2.5% per year in accordance with a base rent schedule. In September 1999, Sunrise amended another corporate lease to increase the amount of leased premises and extend the maturity date to October 2004. The initial annual lease payments amount to $462,000, and the base rent is subject to annual increases based on the consumer price index from a minimum of 2% to a maximum cap of 3% per year. The warehouse lease has a term of seven years and expires in May 2004. The initial annual base rent payments amount to $148,000, subject to annual increases of 3%. Also required are an amortization rent of $88,000 and a portion of operating expenses. Various other leases expire between 2001 and 2003. Sunrise has also entered into operating leases for five facilities. Two facilities commenced operations during 1997, two facilities commenced operations in 1998, and the other facility commenced operations in 1999. In May 1999 in connection with the acquisition of Karrington, Sunrise assumed six operating leases for six assisted living properties and a ground lease. The operating lease terms vary from 15-20 years, with two ten-year extension options. Sunrise also has four other ground leases related to two facilities in operation and two facilities under construction. Lease terms range from 30 to 99 years and are subject to annual increases based on the consumer price index and/or stated increases in the lease. In December 1998, a subsidiary of Sunrise entered into a three-year operating lease for six assisted living facilities. Sunrise has guaranteed the payment of all obligations of its subsidiary under the lease. F-20 92 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) There are no extension options, however Sunrise has the option, 120 days prior to the expiration date of the lease, of either purchasing or selling all the leased properties. If the company exercises its option to sell the properties and the proceeds from the sale exceed the obligation under the lease, Sunrise is entitled to the excess. However, if the proceeds from the sale are less than the obligation under the lease, Sunrise is obligated to fund the difference. Sunrise is responsible for the payment of real estate taxes, insurance and other operating expenses. The lease requires Sunrise to maintain certain coverage ratios, liquidity and net worth. These six leased properties were sublet to Karrington until the acquisition of Karrington in May 1999. During 2000, Sunrise purchased two of the properties for $17.7 million. Future minimum lease payments under office, equipment, ground and other operating leases as of December 31, 2000 are as follows (in thousands): 2001 $ 36,703 2002 11,013 2003 10,850 2004 10,618 2005 10,182 Thereafter 134,183 -------------- $213,549 ==============
Sunrise has entered into contracts to purchase and lease additional sites. Total contracted purchase price of these sites is $61.8 million. Sunrise is pursing additional development opportunities and also plans to acquire additional facilities as market conditions warrant. 16. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The primary components of Sunrise's net deferred tax asset are as follows (in thousands):
DECEMBER 31, ------------------- 2000 1999 ------------------- Deferred tax assets: Operating loss carryforward $ 11,632 $ 18,386 Accrued expenses 5,792 3,525 Other 2,024 2,001 ------------------- Total deferred tax assets 19,448 23,912 ------------------- Deferred tax liabilities: Property and equipment (41,128) (37,177) Other (3119) (642) ------------------- Total deferred tax liabilities (44,247) (37,819) ------------------- Net deferred tax liability $(24,799) $(13,907) ===================
F-21 93 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On May 14, 1999, Sunrise completed its acquisition of Karrington Health, Inc. through a tax-free, stock-for-stock transaction. The acquisition was accounted for using the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. Accordingly, the book basis of a majority of the property and equipment acquired from Karrington exceeds its respective tax basis. A net deferred tax liability of approximately $35.5 million was recorded at the time of purchase to account for the Karrington acquisition. At December 31, 2000, Sunrise had federal net operating loss carryforwards available to offset future taxable income of approximately $29.2 million, which expire from 2010 through 2019. This amount includes approximately $11.9 million of net operating loss carryforwards acquired from Karrington, which are subject to certain limitations on utilization. At December 31, 2000, Sunrise had alternative minimum tax credits of approximately $0.7 million available to offset future federal tax liabilities. These tax credits do not expire. Various Sunrise entities have fully utilized their net operating loss carryforwards for state tax purposes. Realization of the net deferred tax asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Sunrise expects to fully utilize the loss carryforward prior to expiration. Significant components of the provision for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 ----------------------------------------- Current: Federal $ 1,501 $ 4,738 $ 3,521 State 2,754 1,160 457 ----------------------------------------- Total current 4,255 5,898 3,978 Deferred: Federal 11,235 4,507 3,891 State 32 (8) 1,897 Decrease in valuation allowance - (2,569) (9,766) ----------------------------------------- Total deferred 11,267 1,930 (3,978) ----------------------------------------- Total tax expense $ 15,522 $ 7,828 $ - =========================================
In 2000, 1999 and 1998, Sunrise paid federal and state income taxes of $2.8 million, $1.8 million and $0.9 million, respectively. Current taxes payable for 2000 and 1999 have been reduced by approximately $1.1 million and $7.9 million, respectively, reflecting the tax benefit to Sunrise of employee stock options exercised during the year. The tax benefit has been recognized as an increase to additional paid-in capital. The differences between the tax provision calculated at the statutory federal income tax rate and the actual tax provision recorded for each year are as follows:
YEAR ENDED DECEMBER 31, 2000 1999 1998 ------------------------------------ Statutory rate 35% 35% 35% State taxes, net 7 7 6 Tax exempt interest (1) (3) (4) Other (2) (2) 7 Valuation allowance - (9) (44) ------------------------------------ 39% 28% 0% ====================================
F-22 94 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. RELATED-PARTY TRANSACTIONS SUNRISE ASSISTED LIVING FOUNDATION Paul and Teresa Klaassen, Sunrise's founders, operate two schools, including day care centers, through a not-for-profit organization, Sunrise Assisted Living Foundation, Inc. ("SALF"). SALF reimbursed Sunrise monthly for use of office facilities and support services in the amounts of $84,000 in 2000, 1999 and 1998. Such amounts are included in operating revenue. During 1999, a subsidiary of SALF provided certain health care services to residents of Sunrise facilities located in Illinois. The SALF subsidiary entered into various administrative, accounting and collection service agreements with Sunrise affiliates. The service agreements allow for reimbursement of costs of service plus a management fee. Sunrise recognized management fees of $204,000 and $49,000 in 2000 and 1999, respectively. As of December 31, 2000, Sunrise had a receivable of $0.4 million from SALF under such service agreements. GROUND LEASE Sunrise has a 99 year ground lease with one of Sunrise's founders. The ground lease expires in May 2085. The basic monthly rent is adjusted annually based on the consumer price index. Rent expense under this lease was $262,000 for each of the years ended December 31, 2000, 1999 and 1998. Sunrise subleases one-half of this ground lease to SALF. The sublease expires in May 2085 and requires payments equal to 50% of all payments made by Sunrise under the ground lease. Sublease rental income was $131,000 for each of the years ended December 31, 2000, 1999 and 1998. Lease expense is recorded net of the sublease income. JOINT VENTURES Sunrise has entered into unconsolidated joint venture arrangements with a third party that is providing up to $70.8 million of the equity capital to develop up to 37 projects in the United States, United Kingdom and Canada. A director of Sunrise is a managing director in the third party that is providing the equity capital and a former director of Sunrise is a general partner in the third party. The joint ventures have completed 13 assisted living facilities, 12 in the United States and one in the United Kingdom and are currently developing 13 assisted living facilities, three in the United States, two in the United Kingdom and eight in Canada. Sunrise is providing management and development services to the joint ventures on a contract-fee basis with rights to acquire the assets in the future and has agreed to invest up to $4.3 million of equity capital in the joint ventures. Sunrise recognized development fees from these joint ventures of $7.4 million and $12.7 million, respectively, in 2000 and 1999. As of December 31, 2000 and 1999, the third party had provided approximately $42.0 million and $22.5 million, respectively, and Sunrise has provided $4.4 million and $2.0 million, respectively, of equity capital to the joint ventures. 18. PROFIT-SHARING PLAN Sunrise has a profit-sharing plan (the "Plan") under Internal Revenue Code Section 401(k). All employees of Sunrise are covered by the Plan and are eligible to participate in the Plan after meeting certain eligibility requirements. The Plan contains three elements -- employee salary contributions, discretionary matching employer contributions and special discretionary employer contributions. Deferred salary contributions are made through pre-tax salary deferrals of between 1% and 16%. Matching contributions made by Sunrise totaled $347,000, $278,000 and $177,000 during 2000, 1999 and 1998, respectively. Sunrise has made amendments to the Plan that will be effective January 1, 2001. Employees will vest in their matching employer contributions 100% over four years at 25% each year. When an employee reaches 5 years of service, Sunrise will contribute $0.50 for every dollar the employee contributes up to 7% F-23 95 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of the employee's annual compensation. If the employee has less than 5 years of service, the employer contribution will be $0.25 for every dollar the employee contributes up to 7% of the employee's annual compensation. The Plan has eliminated the discretionary matching contributions, all employees who earn $85,000 or less annually are eligible to receive regular matching contributions by Sunrise provided the employee meets certain eligibility requirements. 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair value were determined by management, using available market information and valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Sunrise could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have an effect on the estimated fair value amounts. The fair values of the notes receivable and investments are discussed in Notes 4 and 5. Cash equivalents, accounts receivable, accounts payable and accrued expenses, marketable securities, investments and other current assets and liabilities are carried at amounts which reasonably approximate their fair values. Fixed rate debt with an aggregate carrying value of $352.8 million, excluding a $0.2 million loan discount, has an estimated aggregate fair value of $336.2 million at December 31, 2000. Estimated fair value of fixed rate debt is based on interest rates currently available to Sunrise for issuance of debt with similar terms and remaining maturities. The estimated fair value of Sunrise's variable rate debt is estimated to be approximately equal to its carrying value of $322.1 million at December 31, 2000. The interest rate swap related to floating rate debt (see Note 8) has an estimated fair value of $0.1 million at December 31, 2000. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2000. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, these amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2000 and current estimates of fair value may differ from the amounts presented herein. 20. INFORMATION ABOUT SUNRISE'S SEGMENTS In the first quarter of 2000, Sunrise reorganized and began reporting the results of its two operating divisions - Sunrise Management Services and Sunrise Properties . Sunrise Assisted Living, Inc. continues as the parent company of each division and develops Sunrise's strategy and overall business plan and coordinates the activities of all business divisions. The Sunrise Management Services division provides full-service assisted living management services, in the U.S. and internationally, for all homes owned by Sunrise or managed by Sunrise for third-parties. The Sunrise Management Services division also provides consulting services on market and site selection and pre-opening sales and marketing. The Sunrise Properties division is responsible for all Sunrise real estate operations, including development, construction, property management, project and permanent financing, real estate and property sales. Prior year segments have been restated to reflect current segments. F-24 96 SUNRISE ASSISTED LIVING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Segment information is as follows (in thousands):
YEAR ENDED DECEMBER 31, 2000 1999 1998 --------- ---------- --------- Operating Revenue: Sunrise Management Services $227,278 $170,892 $107,137 Sunrise Properties 312,810 234,620 160,297 Elimination of intersegment revenue (195,302) (150,293) (96,722) ---------- ---------- --------- Total consolidated operating revenue 344,786 255,219 170,712 ---------- ---------- --------- Operating Expenses: Sunrise Management Services 206,060 151,657 98,159 Sunrise Properties 245,037 198,739 127,772 Elimination of intersegment expenses (195,302) (150,293) (96,722) ---------- ---------- --------- Total consolidated operating expenses 255,795 200,103 129,209 ---------- ---------- --------- Segment operating income 88,991 55,116 41,503 Reconciliation to net income: Corporate operating expenses 8,481 3,710 3,307 ---------- ---------- --------- Income from operations 80,510 51,406 38,196 Interest expense, net (37,566) (21,750) (15,430) Equity in losses of unconsolidated assisted living facilities (2,941) (1,239) 54 Minority interests (203) (376) (508) Provision for income taxes (15,522) (7,828) - ---------- ---------- --------- Total consolidated net income $ 24,278 $ 20,213 $ 22,312 ========== ========== =========
Management services revenue from operations in England were $0.7 million and $0.8 million for 2000 and 1999, respectively. Management services revenue from operations in Canada were $2.4 million and $1.2 million for 2000 and 1999, respectively. The remaining revenues and all long-lived assets are domestic. 21. QUARTERLY RESULT OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the fiscal quarters: (in thousands, except per share amounts):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------- -------------- ------------ ----------- 2000 - ---- Operating revenue $76,802 $82,329 $90,484 $95,171 Net income 4,094 4,901 6,486 8,797 Diluted net income per Common share $ 0.19 $ 0.22 $ 0.30 $ 0.39 1999 - ---- Operating revenue 51,378 61,524 68,133 74,184 Net income 7,226 5,416 3,711 3,860 Diluted net income per Common share $ 0.35 $ 0.25 $ 0.17 $ 0.18
The sum of diluted net income per common share for the four quarters in 2000 and 1999 may not equal diluted net income per common share for the year due to the changes in the number of weighted average shares outstanding and fluctuations in the market price of Sunrise's common stock during the year. F-25 EX-21 2 w47013ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Sunrise Assisted Living, Inc. List of Subsidiaries
Direct or Indirect Jurisdiction Subsidiaries Ownership of Incorporation - ------------------ ---------------------- --------------------- Sunrise Assisted Living Management, Inc. 100% Virginia Sunrise Development, Inc. 100% Virginia Sunrise Assisted Living Investments, Inc. 100% Virginia Sunrise Assisted Living Limited Partnership 100% Virginia Martha Child, Inc. 100% Virginia Sunrise Partners, L. P. 100% Virginia Sunrise at Gardner Park Limited Partnership 50% Massachusetts Sunrise of Raleigh, LLC 100% North Carolina Sunrise Village House, LLC 100% Maryland Sunrise Assisted Living Limited Partnership II 100% Virginia Sunrise Assisted Living Limited Partnership III 100% Pennsylvania Sunrise Assisted Living Limited Partnership VII 100% Maryland Sunrise Assisted Living Limited Partnership VIII 100% California Independence Home Care Agency, Inc. 100% Washington Sunrise Homes of Towson Limited Partnership 100% Maryland Sunrise East Assisted Living Limited Partnership 100% Virginia Sunrise of Alexandria Assisted Living, L.P. 100% Virginia Sunrise Huntcliff Assisted Living Limited Partnership 100% Georgia Sunrise Augusta Assisted Living Limited Partnership 100% Georgia Sunrise Columbus Assisted Living Limited Partnership 100% Georgia Sunrise Greenville Assisted Living Limited Partnership 100% South Carolina Sunrise Northshore Assisted Living Limited Partnership 100% Florida NAH/ Sunrise Severna Park, LLC 50% Maryland Sunrise Napa Assisted Living Limited Partnership 100% California Sunrise West Assisted Living Limited Partnership 100% California Sunrise Sterling Canyon Assisted Living Limited Partnership 100% California Sunrise Ivey Ridge Assisted Living Limited Partnership 100% Georgia Sunrise East Cobb Assisted Living Limited Partnership 100% Georgia Sunrise Pinehurst Assisted Living Limited Partnership 100% Colorado Sunrise Holly Assisted Living Limited Partnership 100% Colorado Sunrise Oakland Assisted Living Limited Partnership 100% California Sunrise Scotch Plains Assisted Living, L.P. 100% New Jersey Sunrise Chanate Assisted Living, L.P. 100% California Sunrise Dunwoody Assisted Living, L.P. 100% Georgia
2 Sunrise Weston Assisted Living, L.P. 100% Massachusetts AL Investments, L.L.C. 9% Virginia Sunrise Arlington Heights Assisted Living 100% Illinois Limited Partnership Sunrise SEAL, L.L.C. 100% Virginia Sunrise Riverside Assisted Living, L.P. 100% California Sunrise TFE Acquisitions, L.L.C. 100% Virginia Sunrise Midwest Mortgage, L.L.C. 100% Virginia Sunrise Midwest Leasing, L.L.C. 100% Virginia ADG on Sheepshead Bay, LLC 70% New York Sunrise Hermosa Beach Assisted Living, L.L.C. 100% California Sunrise Buffalo Grove Assisted Living, L.L.C. 100% Illinois AL II Investments, L.L.C. 9% Virginia Sunrise Assisted Living Limited 100% United Kingdom Sunrise Assisted Living Holdings (Jersey) Limited 14.5% States of Jersey, Channel Islands AL III Investments, L.L.C. 9% Virginia AL IV Investments, L.L.C. 9% Virginia Atlantic-Sunrise, L.L.C. 70% New York Sunrise Mission Viejo Assisted Living, L.L.C. 100% Virginia Sunrise Baton Rouge Assisted Living, L.L.C. 100% Louisiana Sunrise Beverly Hills Assisted Living, L.L.C. 100% Virginia Sunrise Connecticut Avenue Assisted Living, L.L.C 100% Washington, D.C. Sunrise Edina Assisted Living, L.L.C. 100% Minnesota Sunrise Fall Creek Assisted Living, L.L.C. 100% Indiana Sunrise Farmington Hills Assisted Living, L.L.C. 100% Michigan Sunrise Fort Wayne Assisted Living, L.L.C. 100% Indiana Sunrise New Orleans Assisted Living, L.L.C. 100% Louisiana Sunrise Pacific Beach Assisted Living, L.L.C. 100% Virginia Sunrise Parma Assisted Living, L.L.C. 100% Ohio Sunrise Hamilton Assisted Living, L.L.C. 100% Ohio Sunrise Shaker Heights Assisted Living, L.L.C. 100% Ohio Sunrise Rancho Cucamonga Assisted Living, L.L.C. 100% Virginia Sunrise Westminster Assisted Living, L.L.C. 100% Colorado Sunrise Willow Lake Assisted Living, L.L.C. 100% Indiana Sunrise Abington Assisted Living, L.L.C. 100% Pennsylvania Sunrise Granite Run Assisted Living, L.L.C. 100% Pennsylvania Sunrise Old Tappan Assisted Living, L.L.C. 100% New Jersey Sunrise Haverford Assisted Living, L.L.C. 100% Pennsylvania Sunrise West Field Assisted Living, L.L.C. 100% New Jersey Sunrise Morris Plains Assisted Living, L.L.C. 100% New Jersey Sunrise Springfield Assisted Living, L.L.C. 100% Virginia Sunrise Wayne Assisted Living, L. L.C. 100% New Jersey Sunrise Claremont Assisted Living, L.P. 100% California Sunrise Chesterfield Assisted Living, L.L.C. 100% Missouri AL V Investments, L.L.C. 9% Virginia Sunrise Basking Ridge Assisted Living, L.L.C. 100% New Jersey Sunrise Arlington, MA Assisted Living, L.L.C. 100% Massachusetts Sunrise West Hartford Assisted Living, L.L.C. 100% Connecticut Sunrise Pacific Palisades Assisted Living, L.P. 100% California Sunrise Eastover Assisted Living, L.L.C. 100% North Carolina Sunrise Poland Assisted Living, L.L.C. 100% Ohio Sunrise Troy Assisted Living, L.L.C. 100% Michigan
3 Sunrise Aurora Assisted Living, L.L.C. 100% Colorado Sunrise Dix Hills Assisted Living, L.L.C. 100% New York Dignity Home Care, Inc. 100% New York Sunrise North Assisted Living Ltd. 100% New Brunswick Sunrise of Park Ridge, L.L.C. 100% Illinois Sunrise of McLean, L.L.C. 40% Virginia Metropolitan Senior Housing, L.L.C. 25% Delaware Kensington Cottages Corporation of America, Inc. 100% Illinois Karrington Operating Company, Inc. 100% Illinois
EX-23 3 w47013ex23.txt CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements pertaining to: the 1995 Stock Option Plan as amended, 1996 Directors' Stock Option Plan, and the Stock Option Agreement entered into, effective January 4, 1995, by and between Sunrise Assisted Living, INC. and Dave Faeder (Form S-8 No. 33-05257); Sunrise Assisted Living, Inc. 1996 Non-Incentive Stock Option Plan (Form S-8, No. 333-21817); 1997 Stock Option Plan (Forms S-8, No.333-26837); the $150 million of 5 1/2% Convertible Subordinated Notes due 2002 (Form S-3, No. 333-34365); the 1996 Directors' Stock Option Plan, as Amended (Form S-8, No. 333-57291); the 1998 Stock Option Plan (Form S-8, No. 333-57293); the 1999 Stock Option Plan (Form S-8, No. 333-78313); the Karrington Health, Inc. 1996 Incentive Stock Plan (Form S-8, No. 333-78543); and the 2000 Stock Option Plan (Form S-8, No. 333-38432), respectively, of our report dated March 7, 2001, with respect to the consolidated financial statements of Sunrise Assisted Living, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP McLean, VA March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----