-----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, EAhhhPyV5YYOTjQgEiSir41B83aIJHUwyFZEW/jKDmEevZ9irB4bH59CNNNZMowm s5AmamttOV+M91wi1NzLfg== 0000950133-97-001135.txt : 19970401 0000950133-97-001135.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950133-97-001135 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-20765 FILM NUMBER: 97569510 BUSINESS ADDRESS: STREET 1: 9401 LEE HIGHWAY STREET 2: STE 300 CITY: FAIRFAX STATE: VA ZIP: 22031 BUSINESS PHONE: 7032737500 MAIL ADDRESS: STREET 1: 9401 LEE HIGHWAY STREET 2: STE 300 CITY: FAIRFAX STATE: VA ZIP: 22031 10-K 1 SUNRISE ASSISTED LIVING, INC. FORM 10-K. 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 0-20765 SUNRISE ASSISTED LIVING, INC. ------------------------------------------------------ (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.) 9401 Lee Highway, Suite 300 Fairfax, VA 22031 ----------------------------------- --------------------- (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) 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 17, 1997 is $145,444,050. */ The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date is: Class: Common Stock, par value $.01 per share. Outstanding at March 17, 1997: 18,641,518 shares. Documents Incorporated by Reference: Part II: Portions of the Annual Report to Stockholders for the year ended December 31, 1996. Part III: Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held on April 28, 1997. - -------------- */ 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.................................................................... 19 Item 3. Legal Proceedings............................................................. 19 Item 4. Submission of Matters to a Vote of Security Holders........................... 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.................................................. 19 Item 6. Selected Financial Data....................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 20 Item 8. Financial Statements and Supplementary Data................................... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 20 PART III Item 10. Directors and Executive Officers.............................................. 20 Item 11. Executive Compensation........................................................ 20 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................................ 20 Item 13. Certain Relationships and Related Transactions................................ 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................................... 21 SIGNATURES ........................................................................................... 22
-2- 3 This Form 10-K contains certain forward-looking statements relating to the Company's development and acquisition program over the next three years that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the captions "Item 1. Business -- Facility Development," "--Facility Acquisitions" and "--Need For Additional Financing." Unless the context suggests otherwise, references in this Form 10-K to the "Company" or "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities. PART I ITEM 1. BUSINESS. GENERAL Sunrise Assisted Living, Inc. (the "Company" or "Sunrise") is a leading provider of assisted living services to the elderly. The Company currently operates 37 facilities in 11 states with a capacity of approximately 3,428 residents, including 32 facilities owned by the Company or in which it has ownership interests and five facilities managed for third parties. The Company had revenues of $47.3 million, and incurred a net loss of $4.8 million, in 1996. Approximately 99% of the Company's 1996 revenues were derived from private pay sources. The Company's three-year growth objective is to develop at least 52 new Sunrise model assisted living facilities with a capacity of approximately 4,680 residents. As of March 17, 1997, the Company has obtained zoning approval for 28 new facilities with a resident capacity of 2,463, including 22 facilities currently under construction. The Company has also entered into contracts to purchase 21 additional sites and to lease two additional sites, and is negotiating purchase terms for the remaining sites. During 1996, the Company completed development of four of its model facilities ( Raleigh, N.C., Pikesville, MD, Blue Bell, PA, and Columbia, MD). In addition to its construction and development plans, the Company plans to acquire up to 10 additional facilities over the next three years, including one facility located in Valencia, California (the "California Property") that was acquired in February 1997 for $13.75 million in cash. In October 1996, the Company completed its acquisition of five facilities located in the southeast United States (the "Southeast Properties") for an aggregate purchase price of $34.0 million in cash. See "--Facility Development" and "--Facility Acquisitions." On June 5, 1996, the Company completed its initial public offering and on October 31, 1996 the Company completed a follow-on public offering. Net proceeds to the Company from these two offerings totaled approximately $196.1 million. The net proceeds have been used as follows: $16.6 million in partial payment of the Company's long-term debt; $10.2 million to redeem previously outstanding shares of redeemable preferred stock; $47.8 million to acquire the Southeast Properties and the California Property; and the balance to fund continued development of new Sunrise model facilities, as well as for working capital and general corporate purposes. To achieve its growth objectives, the Company will need to obtain substantial additional resources to fund its development, construction and acquisition activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation." The Company was incorporated in Delaware on December 14, 1994 in order to combine various activities relating to the development, ownership and operation of the Sunrise assisted living facilities held by predecessor entities. The predecessor entities consisted of a management company, a development company, and various entities that held 100% ownership interests in 15 facilities, 50% ownership interests in five facilities and minority ownership interests in two facilities. -3- 4 THE ASSISTED LIVING INDUSTRY The Company believes that the assisted living industry is emerging as a preferred alternative to meet the growing demand for a cost-effective setting in which to care for the elderly who do not require the more intensive medical attention provided by a skilled nursing facility but cannot live independently due to physical or cognitive frailties. In general, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with activities of daily living ("ADLs"), such as bathing, eating, personal hygiene, grooming and dressing. Certain assisted living facilities may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Annual expenditures in the assisted living industry have been estimated to be approximately $12 billion, including facilities ranging from "board and care" to full-service assisted living facilities such as those operated by the Company. The Company believes that consumer preference and demographic trends will allow assisted living to remain one of the fastest growing segments of elder care. The assisted living industry is highly fragmented and characterized by numerous small operators. The scope of assisted living services varies substantially from one operator to another. Many smaller assisted living providers do not operate in purpose-built facilities, do not have professionally trained staff, and may provide only limited assistance with low-level care activities. The Company believes that few assisted living operators provide a comprehensive range of assisted living services, such as Alzheimer's care and other services designed to permit residents to "age in place" within the facility as they develop further physical or cognitive frailties. THE SUNRISE OPERATING PHILOSOPHY The Sunrise approach to assisted living is a unique combination of operating philosophy and a signature facility design. Since the first Sunrise facility opened in 1981, the Company's operating philosophy has been to provide care and services to its residents in a residential environment in a manner that: "nurtures the spirit, protects privacy, fosters individuality, personalizes services, enables freedom of choice, encourages independence, preserves dignity and involves family and friends." The Company believes that its operating philosophy is one of its strengths. Furthermore, in implementing its philosophy, the Company continuously seeks to refine and improve the care and services it offers. The elements of the operating philosophy focus on: the involvement of the resident and the resident's family in important care giving decisions; the Company's proprietary training programs for its management, Administrators and Care Managers; the Company's quality assurance programs; the full range of assisted living services offered by the Company; and the architecture and purpose-built design of Sunrise's "Victorian" model facilities. SERVICES The Company offers a full range of assisted living services based upon individual resident needs. Upon admission, the Company, the resident and the resident's family assess the level of care required and jointly develop a specific care plan. This care plan includes selection of resident accommodations and determination of the appropriate level of care. The care plan is periodically reviewed and updated by the Company, the resident and the resident's family. By offering a full range of services, including Basic Care, Assisted Living Plus Care ("Plus Care"), Medication Management and Alzheimer's Care, the Company can accommodate residents with a broad range of service needs and enable residents to age in place. In addition, upon admission the Company generally charges each new resident a one-time community fee typically equal to two months of daily resident fees, which is refundable on a prorated basis if the resident leaves the facility during the first 90 days. Daily resident fees are periodically revised based on increased care or modifications to a resident's care plan. -4- 5 The average daily resident fee for owned facilities operated by the Company for at least 12 months, excluding facilities with temporary vacancies due to renovations ("Same Facilities") was approximately $83 for 1996, $80 for 1995 and $75 for 1994. BASIC CARE The Company's Basic Care program is provided to all residents and includes: assistance with ADLs, such as eating, bathing, dressing, personal hygiene, and grooming; three meals per day served in a common dining room (including two seating times per meal); coordination of special diets; 24-hour security; emergency call systems in each unit; transportation to physician offices, stores and community services; assistance with coordination of physician care, physical therapy and other medical services; health promotion and related programs; personal laundry services; housekeeping services; and social and recreational activities. ASSISTED LIVING PLUS CARE Through the Company's Plus Care program, residents who require more frequent or intensive assistance or increased care or supervision are provided extra care and supervision. The Company charges an additional daily fee based on additional staff hours of care and services provided. The Plus Care program allows the Company, through consultation with the resident, the resident's family and the resident's personal physician, to create an individualized care and supervision program for residents who might otherwise have to move to a more medically intensive facility. At December 31, 1996, approximately 49% of the Company's assisted living residents participated in the Plus Care program. MEDICATION MANAGEMENT Many of the Company's residents also require assistance with medications. To the extent permitted by state law, the Medication Management program includes the storage of medications, the distribution of medications as directed by the resident's physician and compliance monitoring. The Company charges an additional fixed daily fee for this service. At December 31, 1996, approximately 57% of the Company's assisted living residents participated in the Medication Management program. ALZHEIMER'S CARE The Company believes its Alzheimer's Care called the Sunrise Reminiscence Program distinguishes it from many other assisted living providers who do not provide such specialized care. The Sunrise Reminiscence Program provides the attention, care programs and services needed to help cognitively impaired residents maintain a higher quality of life. Specially trained staff provide Basic Care and other specifically designed care and services to cognitively impaired residents in separate areas of facilities. The Company charges each cognitively impaired resident a daily fee that includes one hour of additional staff time per day. Cognitively impaired residents who require additional care and services pay a higher daily rate based on additional staff hours of care and services provided. At December 31, 1996, approximately 25% of the Company's assisted living residents participated in the Sunrise Reminiscence Program. THE SUNRISE "VICTORIAN" MODEL FACILITY The Company's signature Victorian model facility, first designed in 1985, is a freestanding, residential-style facility with a capacity of 70 to 110 residents. The building ranges in size from approximately 40,000 to 60,000 square feet and is built generally on sites ranging from two to five acres. Approximately 40% of the building is devoted to common areas and amenities, including reading rooms, family or living rooms and other areas (such as bistros and ice cream parlors) designed to promote interaction among residents. The Company has four basic building plan designs, which -5- 6 provide it with flexibility in adapting the model to a particular site. The building is usually two or three stories and of steel frame construction built to institutional health care standards but strongly residential in appearance. The interior layout is designed to promote a home-like environment, efficient delivery of resident care and resident independence. Resident units are functionally arranged to provide a "community-within-a-community" atmosphere. The model facility may be configured with as many as eight different types of resident units, including double occupancy units, single units and two- and three-room suites. Sitting areas on each floor serve as a family or living room. The ground level typically contains a kitchen and common dining area, administrative offices, a laundry room, a private dining room, library or living room, and bistro or ice cream parlor. Typically, one floor or one or two wings of a facility contain resident units and common areas, including separate dining facilities, specifically designed to serve residents with Alzheimer's disease or other special needs. The architectural and interior design concepts incorporate the Sunrise operating philosophy of protecting resident privacy, enabling freedom of choice, encouraging independence and fostering individuality in a homelike setting. The Company believes its model facility meets the desire of many individuals to move to a new residence at least as comfortable as their former home. The Company believes that its residential environments also accomplish several other objectives, including: (i) lessening the trauma of change for elderly residents and their families; (ii) achieving operational efficiencies through proven designs; (iii) facilitating resident mobility and ease of access by care givers; and (iv) differentiating the Company from other assisted living and long-term care operators. OWNED FACILITIES The table below sets forth certain information regarding owned facilities or facilities in which Sunrise has an ownership interest:
YEAR DEVELOPED SUNRISE OPENED BY OR MODEL RESIDENT OWNERSHIP FACILITY LOCATION SUNRISE ACQUIRED FACILITY CAPACITY PERCENTAGE(1) -------- -------- --------- ---------- -------- --------- -------------- Sunrise of Oakton Oakton, VA 1981 Acquired(2) 51 100.0% Sunrise of Leesburg Leesburg, VA 1984 Acquired(2) 35 100.0 Sunrise of Warrenton Warrenton, VA 1986 Acquired(2) 37 100.0 Sunrise of Arlington Arlington, VA 1988 Developed X 58 100.0 Sunrise of Bluemont Park Arlington, VA 1990 100.0 Potomac Developed X 59 Shenandoah Developed X 77 James Developed X 59 Sunrise of Mercer Island Seattle, WA 1990 Developed X 59 100.0 Sunrise of Fairfax Fairfax, VA 1990 Developed X 59 100.0(3) Sunrise of Queen Anne Seattle, WA 1991 Acquired 136 33.3(4) Sunrise of Frederick Frederick, MD 1992 Developed X 86 100.0 Sunrise of Countryside Sterling, VA 1992 100.0 East Building Developed(5) X 66 West Building Developed(5) X 64 Sunrise of Gunston Lorton, VA 1992 Developed(5) X 67 100.0 Sunrise of Atrium Boca Raton, FL 1992 Acquired 210 100.0 Sunrise of Falls Church Falls Church, VA 1993 Developed X 66 100.0 Sunrise of Village House Gaithersburg, MD 1993 Acquired 155(6) 80.0 Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(7) Sunrise of Gardner Park Peabody, MA 1994 Developed X 59 50.0(7)(8) Sunrise of Annapolis Annapolis, MD 1995 Developed X 88 51.0(8)(9)
-6- 7
Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0 Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 50.0(8)(10) Sunrise of Pikesville Pikesville, MD 1996 Developed X 103 51.0(8)(9) Huntcliff Summitt Atlanta, GA 1996 Acquired 254 100.0(11)(12) Sunrise of Northshore St. Petersburg, FL 1996 Acquired 157 100.0(11)(13) Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0(11) Sunrise of Columbus Columbus, GA 1996 Acquired 26 100.0(11) Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0(11) Sunrise of Blue Bell Philadelphia, PA 1996 Developed X 97 100.0 Sunrise of Columbia Columbia, MD 1996 Developed X 96 100.0 Sunrise of Hunter Mill Oakton, VA 1997 Developed X 96 100.0 Sunrise of Sterling Canyon Valencia, CA 1997 Acquired 130 100.0 ------ Total 2,810 ======
- ---------- (1) Fifteen of the wholly owned facilities (Oakton, Leesburg, Warrenton, Arlington, Bluemont Park (three facilities), Mercer Island, Fairfax, Frederick, Countryside (two facilities), Gunston, Atrium and Falls Church) serve as collateral for a $87.0 million mortgage loan. Ten other owned facilities are subject to one or more mortgages or deeds of trust that mature between 1998 and 2033 and bear interest at rates ranging from 6.875% to 9.125% annually as of December 31, 1996. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 6 of Notes to Consolidated and Combined Financial Statements. All facilities that are wholly owned by the Company are consolidated in the Consolidated and Combined Financial Statements. The Village House, Gardner Park and Raleigh facilities are held by limited liability companies or limited partnerships in which the Company holds the ownership interests indicated in the table. The Company is the general partner or managing member of such entities and through the partnership or operating agreements and the management agreements for the facilities the Company controls their ordinary course business operations. Therefore, the Village House, Gardner Park and Raleigh facilities are also consolidated in the Consolidated and Combined Financial Statements. The ordinary course business operations of the Queen Anne, Towson, Annapolis and Pikesville facilities are not currently controlled by the Company and, therefore, are accounted for under the equity method of accounting. (2) Each of these facilities has been redeveloped in a manner consistent with the Sunrise model. (3) Subject to long-term ground lease. (4) This property is held as a tenancy-in-common. The remaining ownership interests are owned by unaffiliated third parties. The Company manages this facility pursuant to a management contract that is subject to annual renewal at the option of the owners. (5) These facilities were initially developed by the Company for third parties and were subsequently acquired by the Company in 1992. (6) This facility is licensed for 40 assisted living residents. The remainder of the resident capacity is for independent living residents. (7) The remaining ownership interests are owned by third parties. Sunrise manages each of these facilities. -7- 8 (8) A current officer and a former employee of the Company each have a 25% ownership interest in this facility. Sunrise has the right to acquire these minority ownership interests for fair market value, as determined by an appraiser mutually agreeable to the parties. (9) Commencing on June 1, 1998, the third-party owner of the remaining interests in the limited partnership that owns this facility ("the Partnership") has the right to require the Company to buy the facility from the Partnership for 112 1/2% of its "appraised fair market value" as mutually agreed upon by the parties or, if they cannot agree, as determined by an appraiser mutually selected by the parties. Commencing three years after the date that the certificate of occupancy is received for the facility (November 1998 for Annapolis and April 1999 for Pikesville) and continuing for two years thereafter, the Company has the right to give written notice to such third-party owner that it desires to buy the facility from the Partnership for 112 1/2% of its appraised fair market value. If the Company has not given such notice during such two-year period, then the Company will be deemed to have given such notice. Such third-party owner will then give notice either that it consents to such a sale of the facility or that it does not consent. If the third-party does not consent to such sale, the management agreement for the facility with the Company would be extended for an additional seven-year period. After the expiration of such seven-year period, the third-party would have the right to require the Company to purchase, and the Company would have the right to purchase, the facility from the Partnership at 115% of appraised fair market value. If any person or entity acquires ownership of more than 50% of the outstanding voting stock of the Company (other than the Company, any subsidiary of the Company, Paul or Teresa Klaassen, the Company's co-founders, or any affiliate, associate or the estate of either founder), then the put rights held by the third party owner become immediately exercisable. (10) On March 17, 1997, the Company provided notice of its exercise of its option to purchase all of the third-party interests in the limited liability company that owns this facility. Under the terms of the purchase option, the purchase will be completed on or before May 1, 1997, the price will be the greater of (i) $0.8 million, or (ii) the third party's 50% interest multiplied by the net value of the limited liability company's business as determined by applying a 12.5% capitalization rate to the net operating income of the limited liability company, and subtracting limited liability company liabilities. (11) The Company intends to use these facilities as collateral for financing. (12) This facility is licensed for 24 assisted living residents. The remainder of the resident capacity is for independent living residents. Excludes 12 units owned by the occupants thereof. The occupants can require the Company to repurchase the units for their original purchase prices (aggregating approximately $1.9 million) under certain circumstances. The Company has a right to purchase the units at fair market value upon the happening of certain events and has a right of first refusal on sales of the units. (13) This facility is licensed for 26 skilled nursing residents. The remainder of the resident capacity is for assisted living residents. -8- 9 MANAGED FACILITIES The Company also manages facilities for third-party owners. The following table sets forth certain information regarding facilities currently being managed by the Company or for which the Company has entered into development contracts which provide that the Company will manage the facility following completion of construction:
SUNRISE CONTRACT MODEL RESIDENT INITIAL EXPIRATION FACILITY LOCATION FACILITY CAPACITY CONTRACT DATE DATE -------- -------- -------- -------- ------------- ---- Woodbury Lake Deptford, NJ X 87 March 1993 June 2001(1) Mill Run(2) Bristol, PA 186 April 1992 April 1997 Lincolnian(3) Fairfax, VA 84 June 1989 June 1997 John Bertram House Salem, MA 32 June 1994 Oct. 1998 Mount Laurel Mount Laurel, NJ X 90 May 1994(4) July 2021 Boston(5) Boston, MA 139 July 1995 Jan. 2002 ----- Total 618 =====
- ---------- (1) This contract is subject to two five-year renewals. Pursuant to the management agreement, the Company has a right of first refusal to purchase this facility if the owner receives a bona fide offer to purchase the facility during the term of the management agreement. (2) The Company owns $5.4 million carrying value of tax exempt mortgage bonds on this facility. See Note 4 of Notes to Consolidated and Combined Financial Statements. (3) The Company does not provide financial or accounting services for this facility. (4) This facility is currently under construction. The Company has entered into a development contract for this facility which provides that the Company will begin managing Mt. Laurel for a 25-year period following completion of construction. (5) This facility opened on November 12, 1996 and is licensed for 139 continuing care retirement community residents. The Company also manages two skilled nursing facilities, Pembrook and Prospect Park, located in West Chester and Prospect Park, Pennsylvania. The Pembrook facility has 240 beds and the Prospect Park facility has 180 beds. Both of these facilities are owned by a single unaffiliated nonprofit corporation. The management contracts for these facilities were initially entered into in May 1994 and expire in April 1999. The owner of these facilities has the option to terminate the management agreements in May 1997. The Company does not provide financial or accounting services for these facilities. FACILITY DEVELOPMENT The Company targets sites for development located in major metropolitan areas and their surrounding suburban communities. In evaluating a prospective market, the Company considers a number of factors, including population, income and age demographics, target site visibility, probability of obtaining zoning approvals, estimated level of market demand and the ability to maximize management resources in a specific market by clustering its development and operating activities. -9- 10 The Company continues to develop its Victorian model facilities in major metropolitan markets. During the next three years, the Company plans to develop at least 52 additional new Victorian model facilities with an aggregate capacity of approximately 4,680 residents. To date, the Company has obtained zoning approval for 28 new facilities with a resident capacity of approximately 2,463 residents, including 22 facilities currently under construction, and has contracts to purchase 21 additional sites and to lease two additional sites, and is currently negotiating purchase terms for the remaining sites. Historically, the Company has completed all but one of the facilities for which it has obtained zoning approval. The Company bases its development upon its "Victorian" model facility that it has developed and refined since the first model facility was designed in 1985. Use of a standard model allows the Company to control development costs, maintain facility consistency and improve operational efficiency. Use of the Sunrise model also creates "brand" awareness in the Company's markets. The primary milestones in the development process are (i) site selection and contract signing, (ii) zoning and site plan approval and (iii) completion of construction. Once a market has been identified, site selection and contract signing typically take approximately one to three months. Zoning and site plan approval generally take 10 to 12 months and are typically the most difficult steps in the development process due to the Company's selection of sites in established communities which usually require site rezoning. Facility construction normally takes 10 to 12 months. The Company believes its extensive development experience gives it an advantage relative to certain of its competitors in obtaining necessary governmental approvals and completing construction in a timely manner. After a facility receives a certificate of occupancy, residents usually begin to move in within one month. Since 1993, the total capitalized cost to develop, construct and open a Sunrise model facility, including land acquisition and construction costs, has ranged from approximately $5.5 million to $10.0 million. The cost of any particular facility may vary considerably based on a variety of site-specific factors. The Company's development activities are coordinated by its experienced 18-person development staff, which has extensive real estate acquisition, engineering, general construction and project management experience. Architectural design and hands-on construction functions are usually contracted to experienced outside architects and contractors. -10- 11 The following table sets forth certain information regarding Sunrise model facilities that either are owned and under construction or are subject to purchase contracts and zoned:
ESTIMATED DEVELOPMENT COMPLETION RESIDENT OWNERSHIP FACILITY LOCATION PHASE(1) DATE(2) CAPACITY PERCENTAGE -------- -------- -------- ------- -------- ---------- Sunrise of Petaluma Petaluma, CA Construction 1st Q 1997 84 100.0%(3)(5) Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 97 100.0 Building I metro region Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 71 100.0 Building II metro region Sunrise of Granite Run Philadelphia, PA Construction 2nd Q 1997 95 100.0 metro region Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 99 50.0(4)(5) Building I Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 74 50.0(4)(5) Building II Sunrise of Springfield Springfield Construction 2nd Q 1997 98 100.0 Sunrise of Old Tappan Old Tappan, NJ Construction 2nd Q 1997 95 100.0 Sunrise of Morris Plains Morris Plains, NJ Construction 2nd Q 1997 95 100.0 Sunrise of Rockville Rockville, MD Construction 3rd Q 1997 86 100.0 Sunrise of Alexandria Alexandria, VA Construction 3rd Q 1997 92 100.0(6) Sunrise of Wayne Wayne, NJ Construction 3rd Q 1997 90 100.0 Sunrise of Westfield Westfield, NJ Construction 3rd Q 1997 95 100.0 Sunrise of Norwood Boston, MA Construction 3rd Q 1997 90 100.0 metro region Sunrise of Wayland Boston, MA Construction 3rd Q 1997 68 100.0 metro region Sunrise of Fresno Fresno, CA Construction 4th Q 1997 84 100.0(3)(5) Sunrise of East Cobb Atlanta, GA Construction 4th Q 1997 96 100.0 metro region Sunrise of Decatur Decatur, GA Construction 4th Q 1997 96 100.0 Sunrise of Haverford Haverford, PA Construction 1st Q 1998 73 100.0 Sunrise of Glen Cove Glen Cove, NY Construction 1st Q 1998 80 100.0 Sunrise at Ivey Ridge Atlanta, GA Construction 1st Q 1998 97 100.0 metro region Sunrise of Walnut Creek Walnut Creek, CA Construction 1st Q 1998 85 100.0 Sunrise of Cohasset Cohasset, MA Zoned 1st half 1998 71 100.0 Sunrise of Pinehurst Denver, CO Zoned 1st half 1998 100 100.0 Sunrise of Holly Denver, CO Zoned 1st half 1998 97 100.0 metro region Sunrise of Danville Danville, CA Zoned 2nd half 1998 84 100.0 Sunrise of Huntcliff Atlanta, GA Zoned 2nd half 1998 96 100.0 Summit (Assisted Living Expansion) Sunrise of Paramus Paramus, NJ Zoned 2nd half 1998 75 100.0 -------- Total 2,463 =======
- ---------- (1) The Alexandria and Rockville facilities under construction are subject to one or more mortgages or deeds of trust that mature between April 2001 and April 2003 and bear interest at rates currently -11- 12 averaging approximately 8.4%. The Abington, Granite Run, Franconia, Old Tappan, Morris Plains, and Wayne and Norwood facilities are financed under one of the Company's credit facilities and are subject to one or more mortgages or deeds of trust that mature June 2001 and currently bear interest at a rate of approximately 8.4%. Norwood and Wayland facilities are financed under another one of the Company's credit facilities and are subject to one or more mortgages or deeds of trust that mature April 2002 and currently bear interest at a rate of approximately 8.1%. (2) There can be no assurance that construction delays will not be experienced. (3) Not a Sunrise model facility. Sunrise has entered into an operating lease with a third-party owner/developer who will complete the facility under a design reviewed and approved by Sunrise. (4) The remaining ownership interests are owned by unaffiliated third parties. Sunrise is the general partner or managing member of the limited partnership or limited liability company, respectively, that will lease the facility. (5) Will be operated under a 15-year operating lease, with two 10-year extension options. (6) Subject to a long-term ground lease. The Company has entered into purchase contracts for 21 additional sites and leases for two additional sites in North Carolina, Pennsylvania, Massachusetts, New Jersey, Connecticut, New York, Georgia, Illinois, Colorado, California and Washington. The Company has completed preliminary feasibility studies and submitted rezoning requests on five of such sites and is conducting preliminary feasibility studies on the remaining sites. The Company's development team is negotiating purchase terms on 18 additional sites identified for development. The Company's ability to achieve its development plans will depend upon a variety of factors, many of which are beyond the Company's control. There can be no assurance that the Company will not suffer delays in its development program, which could slow the Company's growth. The successful development of additional assisted living facilities will involve a number of risks, including the possibility that the Company may be unable to locate suitable sites at acceptable prices or may be unable to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy, licensing and other required governmental permits and authorizations. The Company may also incur construction costs that exceed original estimates, may not complete construction projects on schedule and may experience competition in the search for suitable development sites. The Company relies on third-party general contractors to construct its new assisted living facilities. There can be no assurance that the Company will not experience difficulties in working with general contractors and subcontractors, which could result in increased construction costs and delays. Further, facility development is subject to a number of contingencies over which the Company will have little control and that may adversely affect project cost and completion time, including shortages of, or the inability to obtain, labor or materials, the inability of the general contractor or subcontractors to perform under their contracts, strikes, adverse weather conditions and changes in applicable laws or regulations or in the method of applying such laws and regulations. Accordingly, if the Company is unable to achieve its development plans, its business, financial condition and results of operations could be adversely affected. -12- 13 FACILITY ACQUISITIONS The Company and its predecessors have completed 13 acquisitions, including the five Southeast Properties, the California Property, five acquisitions of long-term care facilities which have been repositioned to provide Sunrise assisted living services and two acquisitions of Sunrise model facilities initially developed for third parties. During the next three years, the Company plans to acquire up to 9 additional assisted living facilities or other properties that can be repositioned as Sunrise assisted living facilities. On January 10, 1997 the Company entered into three purchase-and-sale agreements, giving the Company the right to purchase three properties in Northern California for $17.6 million. The properties include a 74-unit assisted living community in the Napa Valley; a 73-unit assisted living property in Walnut Creek that is currently under construction (acquired by the Company on February 24, 1997); and a 3.5 acre site in Oakland Hills on which the Company plans to build a 75- to 80- unit assisted living facility. Because the purchase-and-sale agreements are subject to, among other things, the satisfactory completion by the Company of a financial, accounting, regulatory and property due diligence review, there is no assurance that the acquisition of the remaining two properties will be consummated. In evaluating possible acquisitions, the Company considers, among other factors, (i) location, construction quality, condition and design of the facility, (ii) current and projected facility cash flow, (iii) the ability to increase revenue, occupancy and cash flow by providing a full range of assisted living services, (iv) costs of facility repositioning (including renovations, if any) and (v) the extent to which the acquisition will complement the Company's development plans. There can be no assurance that the Company's acquisition of assisted living facilities will be completed at the rate currently expected, if at all. The success of the Company's acquisitions will be determined by numerous factors, including the Company's ability to identify suitable acquisition candidates, competition for such acquisitions, the purchase price, the financial performance of the facilities after acquisition and the ability of the Company to integrate effectively the operations of acquired facilities. Any failure by the Company to integrate or operate acquired facilities effectively may have a material adverse effect on the Company's business, financial condition and results of operations. NEED FOR ADDITIONAL FINANCING To achieve its growth objectives, the Company will need to obtain substantial additional resources to fund its development, construction and acquisition activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation." The Company expects that the number of owned and operated facilities will increase substantially as it pursues its development and acquisition programs for new assisted living facilities. This rapid growth will place significant demands on the Company's management resources. The Company's ability to manage its growth effectively will require it to continue to expand its operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. If the Company is unable to manage its growth effectively, its business, financial condition and results of operations could be adversely affected. COMPANY OPERATIONS OPERATING STRUCTURE The Company has centralized accounting, finance and other operational functions at the corporate headquarters and regional office levels in order to allow facility-based personnel to focus on resident care, consistent with the Company's operating philosophy. Headquarters staff members in Fairfax, Virginia are responsible for: the establishment of Company-wide policies and procedures relating to, among other things, resident care, facility design and facility operations; billing and collection; accounts payable; finance and accounting; management of the Company's development and -13- 14 acquisition activities; development of employee training materials and programs; and providing overall strategic direction to the Company. Regional staff are responsible for: overseeing all aspects of facility-based operations, including marketing activities; resident care; the hiring of Administrators, Care Managers and other facility-based personnel; compliance with applicable local and state regulatory requirements; and implementation of the Company's development and acquisition plans within a given geographic region. The Company is currently organized into several regions. Each of the regions is headed by a Regional Senior Vice President with extensive experience in the long-term care and assisted living industries. The regional staff typically consists of a Marketing Specialist, a Resident Care Specialist and a Human Resources Specialist. The Company's largest region (the Mid-Atlantic) also has separate Marketing Specialists for existing facilities and those in development, an Activities Specialist, a Regulatory Specialist, a Dietary Specialist and a Maintenance Specialist. The Company expects that all regions will create similar staff positions as the number of facilities in those regions increases. FACILITY STAFFING Each of the Company's facilities has an Administrator responsible for the day-to-day operations of the facility, including quality of care, social services and financial performance. Each Administrator receives specialized training from the Company. The Company believes that the quality and size of its facilities, coupled with its competitive compensation philosophy, have enabled it to attract high-quality, professional Administrators. The Administrator is supported by the Director of Resident Care, a nurse who oversees the Care Managers and is directly responsible for day-to-day care of the residents, and by the Director of Community Relations, who oversees marketing and outreach programs. Other key positions include the Director of Dining Services, the Activities Director, and in certain homes, the Director of Alzheimer's Care. Care Managers, who work on full-time, part-time and flex-time schedules, provide most of the hands-on resident care, such as bathing, dressing and other personalized care services (including housekeeping, meal service and resident activities). To the extent permitted by state law, nurses, or Care Managers who complete a special training program, supervise the storage and distribution of medications. The use of Care Managers to provide substantially all services to residents has the benefits of consistency and continuity in resident care. In most cases, the same Care Manager assists the resident in dressing, dining and coordinating daily activities. The number of Care Managers working in a facility varies according to the level of care required by the residents of the facility and the numbers of residents receiving Alzheimer's Care and Plus Care services. The number of Care Managers ranges from three (Leesburg facility) to 20 (Atrium facility) on the day shifts and from two Care Managers (Leesburg) to seven Care Managers (Atrium) on the night shift. The Company believes that its facilities can be most efficiently managed by maximizing direct resident and staff contact. Employees involved in resident care, including the administrative staff, are trained in the Care Manager duties and participate in supporting the care needs of the residents. Accounting functions are centralized so that administrative staff may devote substantially all of their time to care giving. STAFF EDUCATION AND TRAINING The Company has attracted, and continues to seek, highly dedicated, experienced personnel. The Company has adopted formal training procedures and review and evaluation procedures to help ensure quality care for its residents. The Company believes that education, training and development enhance the effectiveness of its employees. All employees are required to complete the Company's training program, which centers around its proprietary "Five-Star Educational Program." This program includes a core curriculum consisting of care basics, Alzheimer's care, resident care -14- 15 procedures and communication skills. For Care Managers who desire to advance into facility management, the Five-Star Education Program provides additional training in medical awareness and management skills. There are also leadership certifications in areas such as community relations, facility management, recruiting, staffing, human resources and regulations. Sunrise also has developed an "Administrator-in-Training ("AIT") Program" that places an Administrator trainee in an existing facility to learn the position based on hands-on experience and direct supervision from a current Administrator. The AIT Program is intended to ensure that enough Sunrise-trained professionals will be available to manage acquired and newly developed facilities. QUALITY ASSURANCE The Company coordinates quality assurance programs at each of its facilities through its corporate headquarters staff and through its regional offices. The Company's commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services provided by the Company. In addition to ongoing training and performance reviews of Care Managers and other employees, the Company's quality control measures include: Family and Resident Feedback. The Company surveys residents and family members on a regular basis to monitor the quality of services provided to residents. Approximately 30 days after moving into a facility, a resident or family member is surveyed by a Sunrise representative to inquire about their initial level of satisfaction. Thereafter, annual written surveys are used to appraise and monitor the level of satisfaction of residents and their families. A toll-free telephone line also is maintained which may be used at any time by a resident's family members to convey comments. Regular Facility Inspections. Facility inspections are conducted by regional vice presidents and other regional staff on at least a monthly basis. These inspections cover: the appearance of the exterior and grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; resident care plans; the quality of activities and the dining program; observance of residents in their daily living activities; and compliance with government regulations. Third-Party Reviews. To further evaluate customer service, the Company engages an independent service evaluation company to "mystery shop" the Company's facilities. These professionals assess the Company's performance from the perspective of a customer, without the inherent biases of a Company employee. Each facility is "shopped" at least three times per year in person, as well as one or more times per month by telephone. To evaluate medication management, third-party pharmacists conduct periodic reviews of on-site handling and storage of medications, record-keeping and coordination of medications. MARKETING AND SALES The Company's marketing strategy is intended to create awareness of the Company and its services among potential residents and their family members and referral sources, such as hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing facilities, home health agencies and social workers. A central marketing staff develops overall strategies for promoting the Company throughout its markets and monitors the success of the Company's marketing efforts. Each regional office generally has at least one Marketing Specialist and each facility typically has a Director of Community Relations who oversees marketing and outreach programs. In addition to direct contacts with prospective referral sources, the Company also relies on print advertising, yellow pages advertising, direct mail, signage and special events, such as grand openings for new facilities, health fairs and community receptions. -15- 16 THIRD-PARTY RESIDENT SERVICES While the Company serves the vast majority of a resident's needs with its own staff, certain services, such as physician care, infusion therapy, physical and speech therapy and other home health care services, may be provided to residents at Sunrise facilities by third parties. Company staff assist residents in locating qualified providers for such health care services. On October 8, 1996, the Company entered into an affiliation agreement with Jefferson Health System ("JHS"), an integrated health care system located in Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide residents of Sunrise facilities located in the Philadelphia metropolitan region, on a preferred (but non-exclusive) basis, with access to certain health care services offered by JHS. Such health care services may include hospital services, physician services, rehabilitation services, home health services and products and mental health services. COMPETITION The long-term care industry is highly competitive and the Company believes that the assisted living segment, in particular, will become even more competitive in the future. The Company will be competing with numerous other companies providing similar long-term care alternatives such as home health care agencies, facility-based service programs, retirement communities and convalescent centers. In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial. In pursuing its growth strategy, the Company expects to face competition in its efforts to develop and acquire assisted living facilities. Some of the Company's present and potential competitors are significantly larger and have, or may obtain, greater financial resources than the Company. Consequently, there can be no assurance that the Company will not encounter increased competition that could limit its ability to attract residents or expand its business and that could have a material adverse effect on its business, financial condition and results of operations. Moreover, if the development of new assisted living facilities outpaces demand for those facilities in certain markets, such markets may become saturated. Such an oversupply of facilities could cause the Company to experience decreased occupancy, depressed margins and lower operating results. Providers of assisted living and related services compete for residents primarily on the basis of quality of care, price, reputation, physical appearance of the facilities, services offered, family and physician preferences and location. As assisted living receives increased attention, the Company believes that competition will grow from new local and regional companies that operate, manage and develop assisted living facilities within the same geographic areas as the Company. STAFFING AND LABOR COSTS The Company competes with various health care services providers, including other elderly care providers, in attracting and retaining qualified or skilled personnel. A shortage of nurses or other trained personnel or general inflationary pressures may require the Company to enhance its wage and benefits package to compete effectively for personnel. In anticipation of the Company's growth plans, the Company's general and administrative expenses (which consist primarily of staffing and labor expenses, including hiring additional staff and increasing the salary and benefits of existing staff) have increased from 12.3% of operating revenue for 1994 to 18.5% of operating revenue for 1995 and 21.2% of operating revenue for 1996. There can be no assurance that the Company's labor costs will not continue to increase as a percentage of operating revenue. Any significant failure by the Company to attract and retain qualified employees, to control its labor costs or to match increases in its labor expenses with corresponding increases in revenues could have a material adverse effect on the Company's business, financial condition and results of operations. -16- 17 GOVERNMENT REGULATION The Company's facilities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities, although requirements vary from state to state. In general, these requirements address, among other things: personnel education, training, and records; facility services, including administration of medication, assistance with self-administration of medication, and limited nursing services; monitoring of resident wellness; physical plant specifications; furnishing of resident units; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities, including in some states the right to receive certain health care services from providers of a resident's choice. Certain of the Company's facilities are also licensed to provide independent living services which generally involve lower levels of resident assistance. In several states in which the Company operates or intends to operate, assisted living facilities also require a certificate of need before the facility can be opened. In most states, assisted living facilities also are subject to state or local building code, fire code and food service licensure or certification requirements. Like other health care facilities, assisted living facilities are subject to periodic survey or inspection by governmental authorities. From time to time in the ordinary course of business, the Company receives deficiency reports. The Company reviews such reports and seeks to take appropriate corrective action. Although most inspection deficiencies are resolved through a plan of correction, the reviewing agency typically is authorized to take action against a licensed facility where deficiencies are noted in the inspection process. Such action may include imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions. Any failure by the Company to comply with applicable requirements could have a material and adverse effect on the Company's business, financial condition and results of operations. Regulation of the assisted living industry is evolving and the Company's operations could also be adversely affected by, among other things, future regulatory developments such as mandatory increases in scope and quality of care to be afforded residents and revisions to licensing and certification standards. Increased regulatory requirements could increase costs of compliance with such requirements. Virginia state and local authorities initiated actions in 1995 alleging that the Company permitted non-ambulatory residents to reside at the Company's Gunston and Countryside facilities in violation of state licensure requirements and the state building code. The Company entered into consent decrees, pursuant to which it agreed to permit only ambulatory residents to reside at the facilities until the buildings had been upgraded to meet more stringent fire code requirements for non-ambulatory residents. During 1995, the Company made capital improvements to these two facilities at an aggregate cost of approximately $1.1 million. The Company recently has received the issuance of new licenses that would enable non-ambulatory residents to reside at these facilities. The Countryside license is provisional requiring reinspection by May 31, 1997. The Company also is subject to Federal and state anti-remuneration laws, such as the Medicare/ Medicaid anti-kickback law which govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. Similar state laws vary from state to state, are sometimes vague and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participation in (i.e., furnishing covered items or services to beneficiaries of) the Medicare and Medicaid programs. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. -17- 18 Management is not aware of any non-compliance by the Company with applicable regulatory requirements that would have a material adverse effect on the Company's financial condition or results of operations. ENVIRONMENTAL RISKS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the cost of removal or remediation of certain hazardous or toxic substances, including, without limitation, asbestos-containing materials, that could be located on, in or under such property. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. As a result, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company, or acquired or operated by the Company in the future, could have an adverse effect on the Company's business, financial condition and results of operations. Environmental audits performed on the Company's properties have not revealed any significant environmental liability that management believes would have a material adverse effect on the Company's business, financial condition or results of operations. No assurance can be given that existing environmental audits with respect to any of the Company's properties reveal all environmental liabilities. LIABILITY AND INSURANCE The Company's business entails an inherent risk of liability. In recent years, participants in the long-term care industry, including the Company, have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and significant legal costs. The Company is from time to time subject to such suits as a result of the nature of its business. The Company currently maintains insurance policies in amounts and with such coverage and deductibles as it believes are adequate, based on the nature and risks of its business, historical experience and industry standards. The Company also currently maintains professional liability insurance and general liability insurance. The Company's medical professional liability coverage is limited to $1,000,000 per occurrence and $3,000,000 in the aggregate for all claims per annual policy period. The non-medical professional liability insurance coverage is limited to $5,000,000 per wrongful act and $7,000,000 in the aggregate. The general liability insurance is limited to $1,000,000 per facility/per event, with additional specific limitations of $100,000 per event (premises damage), $5,000 per event (medical expenses) and $1,000 per event (resident's property damage). The Company also has an umbrella excess liability protection policy in the total amount of $25,000,000. There can be no assurance that claims will not arise which are in excess of the Company's insurance coverage or are not covered by the Company's insurance coverage. A successful claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect on the Company's financial condition and results of operations. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect on the Company's ability to attract residents or expand its business and would require management to devote time to matters unrelated to the operation of the Company's business. In addition, the -18- 19 Company's insurance policies must be renewed annually and there can be no assurance that the Company will be able to continue to obtain liability insurance coverage in the future or, if available, that such coverage will be available on acceptable terms. EMPLOYEES At December 31, 1996, the Company had 2,275 employees, including 1,385 full-time employees, of which 97 were employed at the Company's headquarters. The Company believes employee relations are good. ITEM 2. PROPERTIES. The Company leases its corporate and regional office space under various leases. The leases have terms of five years with an option to terminate after twelve months from the most recent expansion commencement, or January 1, 1997. The initial annual lease payments amount to $258,000, and the base rent is subject to annual increases based on the Consumer Price Index from a minimum of 2% to a maximum cap of 3% per year. Various other leases expire on June 15, 1999 and September 30, 2001. The Company also has entered into operating leases for four facilities and long-term ground lease related to another facility, each of which are currently under construction and are expected to commence operation in 1997. The operating lease terms vary from fifteen years, with two ten-year extension options to seventy-three years. The ground lease has a term of ninety-nine years. For information regarding facilities owned by the Company or in which it holds interests, see "Item 1. Business -- Owned Facilities" and "-- Facility Development." ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management of the Company, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "SNRZ." Other information set forth under the caption "Corporate Information" on page 37 of the Company's 1996 Annual Report to Stockholders is incorporated by reference herein. On January 19, 1996, the Company issued an aggregate of 1,000,000 shares of Series B Exchangeable Preferred Stock to three institutional investors and certain affiliates thereof for $10,000,000. These securities were issued without registration under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the exemption in Section 4(2) of the Securities Act. On March 19, 1996, the Company issued warrants covering 50,000 shares of Common Stock to a lender. The warrants have a per share exercise price equal to $17.00. These securities were issued -19- 20 without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. On May 28, 1996, the Company issued 52,500 shares of Common Stock to a director of the Company in exchange for a 30% membership interest held by the director in one of the Company's facilities. These securities were issued without registration under the Securities Act, in reliance upon the exemption in Section 4(2) of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA. The information set forth under the caption "Selected Financial and Operating Data" on page 18 of the Company's 1996 Annual Report to Stockholders is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 to 23 of the Company's 1996 Annual Report to Stockholders is incorporated by reference herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated and combined financial statements set forth on pages 24 to 34 of the Company's 1996 Annual Report to Stockholders are incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the captions "Election of Directors -- Information as to Nominees and Other Directors," "-- Other Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 2 to 5 and 14 in the Company's 1997 Annual Meeting Proxy Statement is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the captions "Compensation of Directors" and "Executive Compensation and Other Information" on pages 7 and 8 to 11 in the Company's 1997 Annual Meeting Proxy Statement is incorporated herein by reference. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the captions "Stock Owned by Management" and "Principal Holders of Voting Securities" on pages 24 to 27 of the Company's 1997 Annual Meeting Proxy Statement is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the caption "Certain Transactions" on page 14 and 15 of the Company's 1997 Annual Meeting Proxy Statement is incorporated by reference herein. -20- 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of documents filed as part of Form 10-K. (1) Financial Statements: Consolidated Balance Sheets -- December 31, 1996 and 1995. Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 and Combined Statement of Operations of Sunrise Entities for the year ended December 31, 1994. Consolidated Statements of Changes in Stockholders' (Deficit) Equity and Combined Statement of Owners' Deficit of Sunrise Entities. Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 and Combined Statement of Cash Flows of Sunrise Entities for the year ended December 31, 1994. Notes to Consolidated and Combined Financial Statements. Report of Independent Auditors. The remaining information appearing in the Company's 1996 Annual Report to Stockholders is not deemed to be filed as part of this Report, except as expressly provided herein. (2) Financial Statements Schedules: All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or are included in the consolidated financial statements. (3) Exhibits: The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Index to Exhibits on pages 25 to 30 and are incorporated by reference herein. (b) Reports on Form 8-K. None. (c) Exhibits. The Company hereby files as part of this Annual Report on Form 10-K the Exhibits listed in the Index to Exhibits. (d) Financial Statement Schedules. Not applicable. -21- 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUNRISE ASSISTED LIVING, INC. ----------------------------- Registrant By: /s/ PAUL J. KLAASSEN ----------------------------- Paul J. Klaassen Chairman of the Board, President and Chief Executive Officer 3/26/97 ----------------------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ PAUL J. KLAASSEN 3/26/97 --------------------------------- ----------------------------- Paul J. Klaassen Date Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /s/ DAVID W. FAEDER 3/31/97 --------------------------------- ----------------------------- David W. Faeder Date Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer) By: /s/ LARRY E. HULSE 3/31/97 --------------------------------- ----------------------------- Larry E. Hulse Date Controller (Principal Accounting Officer) By: /s/ RONALD V. APRAHAMIAN 3/26/97 --------------------------------- ----------------------------- Ronald V. Aprahamian Date Director -22- 23 By: --------------------------------- ----------------------------- Thomas J. Donohue Date Director By: /s/ RICHARD A. DOPPELT 3/26/97 --------------------------------- ----------------------------- Richard A. Doppelt Date Director By: /s/ TERESA M. KLAASSEN 3/31/97 --------------------------------- ----------------------------- Teresa M. Klaassen Date Executive Vice President, Secretary and Director By: /s/ SCOTT F. MEADOW 3/27/97 --------------------------------- ----------------------------- Scott F. Meadow Date Director By: /s/ DARCY J. MOORE 3/26/97 --------------------------------- ----------------------------- Darcy J. Moore Date Director By: /s/ TIMOTHY S. SMICK 3/31/97 --------------------------------- ----------------------------- Timothy S. Smick Date Executive Vice President, Chief Operating Officer and Director -23- 24 INDEX TO EXHIBITS Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ------- 2.1 Purchase and Sale Agreement dated July 31, 1996 between the Company and Laing Properties & Subsidiaries, Inc. (Exhibit 2.1 to the Company's Form S-1 Registration No. 333-13731). 2.2 Purchase Agreement dated October 4, 1996 by and between Sunrise Development, Inc., a wholly owned subsidiary of the Company, and Birtcher Properties, Ltd. (Exhibit 2.1 to the Company's Form 8-K dated February 17, 1997). 2.3 Amendment to Purchase Agreement dated December 5, 1996 between Sunrise Development, Inc. and Birtcher Properties, Ltd. (Exhibit 2.2 to the Company's Form 8-K dated February 17, 1997). 3.1 Restated Certificate of Incorporation of the Company (Exhibit 3.1 to the Company's Form S-1 Registration Statement No. 333- 13731). 3.2 Amended and Restated Bylaws of the Company (Exhibit 3.2 to the Company's Form S-1 Registration Statement No. 333-13731). 4.1 Form of Common Stock certificate (Exhibit 4.1 to the Company's Form S-1 Registration Statement No. 333-13731). 4.2 Stockholder Rights Agreement (Exhibit 4.2 to the Company's Form S-1 Registration Statement No. 333-13731). 10.1 Assignment and Contribution Agreement, effective as of January 4, 1995, by and between Paul and Teresa Klaassen and the Company (Exhibit 10.1.1 to the Company's Form S-1 Registration Statement No. 333-2582). 10.2 Assignment and Contribution Agreement, dated as of January 4, 1995, by and between Paul J. Klaassen and Teresa M. Klaassen, Sunrise Partners, L.P. and Sunrise Assisted Living Investments, Inc. (Exhibit 10.1.2 to the Company's Form S-1 Registration Statement No. 333-2582). -24- 25 Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ------- 10.3 Letter Agreement, dated January 4, 1995, from Paul J. Klaassen and Teresa M. Klaassen to the Series A Preferred Stockholders regarding cash distributions from Sunrise Retirement Investments, Inc., Sunrise Terrace of Gunston, Inc., Sunrise Terrace of Countryside, Inc. and Sunrise Atrium, Inc. (Exhibit 10.19 to the Company's Form S-1 Registration Statement No. 33-2852). 10.4 Series A and Series B Preferred Stock Purchase Agreement, dated as of December 19, 1994, by and between the Company and the purchasers listed therein (Exhibit 10.2 to the Company's Form S-1 Registration No. 333-2582). 10.5 Registration Agreement, dated January 4, 1995, by and among the Company, the Investors (as defined therein) and Paul and Teresa Klaassen (Exhibit 10.3 to the Company's Form S-1 Registration Statement No. 333-2582). 10.6 Promissory Note, dated June 8, 1994, executed by Sunrise Assisted Living Limited Partnership in favor of General Electric Capital Corporation (Exhibit 10.4 to the Company's Form S-1 Registration Statement No. 333-2582). 10.7 Indemnity Agreement dated as of June 8, 1994 by Paul J. Klaassen and Teresa M. Klaassen to and for the benefit of General Electric Capital Corporation (Exhibit 10.4.1 to the Company's Form S-1 Registration Statement No. 333-2582). 10.8 First Loan Modification Agreement dated as of February 15, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.2 to the Company's Form S-1 Registration Statement No. 333-2582). 10.9 Second Loan Modification Agreement dated as of May 1, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.3 to the Company's Form S-1 Registration Statement No. 333-2582). -25- 26 Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ------- 10.10 Letter Agreement dated as of May 1, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership (Exhibit 10.4.4 to the Company's Form S-1 Registration Statement No. 333-2582). 10.11 Letter agreement dated as of December 30, 1996 by and between General Electric Capital Corporation and Sunrise Assisted Living Partnership. 10.12 Third Loan Modification Agreement dated as of March 4, 1997 by and between General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership. 10.13 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Arlington, Bluemont Park and Falls Church) (Exhibit 10.5 to the Company's Form S-1 Registration Statement No. 333-2582). 10.14 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Gunston and Oakton) (Exhibit 10.6 to the Company's Form S-1 Registration Statement No. 333-2582). 10.15 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and financing Statement, dated as of June 8, 1994 (Fairfax Leasehold) (Exhibit 10.7 to the Company's Form S-1 Registration Statement No. 333-2582). 10.16 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Warrenton) (Exhibit 10.8 to the Company's Form S-1 Registration Statement No. 333-2582). 10.17 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Countryside and Leesburg) (Exhibit 10.9 to the Company's Form S-1 Registration Statement No. 333-2582). -26- 27 Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ------- 10.18 First Mortgage and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Boca Raton) (Exhibit 10.10 to the Company's Form S-1 Registration Statement No. 333-2582). 10.19 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated as of June 8, 1994 (Frederick) (Exhibit 10.11 to the Company's Form S-1 Registration Statement No. 333-2582). 10.20 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, Dated as of June 8, 1994 (Mercer Island) (Exhibit 10.12 to the Company's Form S-1 Registration Statement No. 333-2582). 10.21 1995 Stock Option Plan, as amended (Exhibit 10.13 to the Company's Form S-1 Registration Statement No. 333-2582). 10.22 1996 Directors' Stock Option Plan (Exhibit 10.13.1 to the Company's Form S-1 Registration Statement No. 333-2582). 10.23 Stock Option Agreement, entered into, effective as of January 4, 1995, by and between the Company and David W. Faeder (Exhibit 10.14 to the Company's Form S-1 Registration Statement No. 333-2582). 10.24 Amendment No. 1 to Stock Option Agreement by and between the Company and David W. Faeder (Exhibit 10.14.1 to the Company's Form S-1 Registration Statement No. 333-13731). 10.25 1996 Non-Incentive Stock Option Plan (Exhibit 4.5 to the Company's Form S-8 Registration Statement No. 333-21817). 10.26 Amended and Restated Lease Agreement and Assignment of Leasehold Right, dated June 6, 1994, by and among Barbara M. Volentine and Teresa M. Klaassen, the Executor of the Estate of Eldon J. Merritt, Sunrise Assisted Living Limited Partnership Assisted Living Group -- Fairfax Associates, and Sunrise Foundation, Inc. (Exhibit 10.15 to the Company's Form S-1 Registration Statement No. 333-2582). -27- 28 Page (by Sequential Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ------- 10.27 Ground Lease, dated June 7, 1994, by and between Sunrise Assisted Living Limited Partnership and Paul J. Klaassen and Teresa M. Klaassen (Exhibit 10.16 to the Company's Form S-1 Registration Statement No. 333-2582). 10.28 Amended and Restated Agreement of Sublease, Indemnification and Easements dated February 5, 1995 by and between Assisted Living Group -- Fairfax Associates and Sunrise Foundation, as amended (Exhibit 10.17 to the Company's Form S-1 Registration Statement No. 333-2582). 10.29 Sunrise Village House LLC Operating Agreement, dated as of April 15, 1993, by and between Paul J. Klaassen and Teresa M. Klaassen and Thomas Donohue and Elizabeth Donohue, as amended (Exhibit 10.18 to the Company's Form S-1 Registration Statement No. 333-2582). 10.30 Membership Interest Purchase Agreement among the Company and Thomas and Elizabeth Donohue (Exhibit 10.23 to the Company's Form S-1 Registration Statement No. 333-13731). 10.31 Loan Agreement, dated as of March 19, 1996, between the Company and Creditanstalt-Bankverein (Exhibit 10.20 to the Company's Form S-1 Registration Statement No. 333-2582). 10.32 Warrant Agreement, dated as of March 19, 1996, between the Company and Creditanstalt-Bankverein (Exhibit 10.21 to the Company's Form S-1 Registration Statement No. 333-2582). 10.33 Commitment Letter for $80,000,000 syndicated line of credit for Construction/Interim Loans from NationsBank, N.A. to an entity to be formed by Sunrise Assisted Living, Inc. (Exhibit 10.22 to the Company's Form S-1 Registration Statement No. 333-2582). 10.34 Form of Indemnification Agreement (Exhibit 10.24 to the Company's Form S-1 Registration Statement No. 333-2582). 13 1996 Annual Report to Stockholders (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K). -28- 29 Exhibit Numbering Number Identity of Exhibit System) - ------ ------------------- ------- 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule. -29- EX-10.11 2 LETTER AGREEMENT. 1 EXHIBIT 10.11 December 30, 1996 Sunrise Assisted Living Limited Partnership c/o Sunrise Retirement Homes and Communities 9401 Lee Highway, Suite 300 Fairfax, Virginia 22031 Attn: Paul J. Klaassen, Chairman Re: $95,000,000 loan (the "Loan") to Sunrise Assisted Living Limited Partnership ("SALLP") from General Electric Capital Corporation ("GECC") with respect to 12 assisted living properties (the "Properties"). Dear Paul: Reference is hereby made to the Loan from GECC ("Prior Lender") to SALLP ("Borrower") which Loan is evidenced and secured, in part, by the Amended and Restated Promissory Note dated June 6, 1996 (the "Note"), from Borrower to Prior Lender, in the maximum principal amount of $87,000,000. Reference is also hereby made to that certain letter from Prior Lender to Borrower dated May 1, 1996 (the "Transfer Letter", a copy of which is attached to this letter). All capitalized terms used herein shall have the respective meanings ascribed to such terms in the Note, unless otherwise defined herein. Pursuant to condition (ii) set forth in the Transfer Letter, Prior Lender requires, as one of the conditions to Sunrise Assisted Living, Inc. ("SALI") constituting a "Permitted Owner" under Section 1.23 of the mortgages and deeds of trust securing the Loan, that Paul J. Klaassen and/or Teresa Klaassen would retain ownership of at least 25% of the shares of common stock of SALI outstanding from time to time, with the full unrestricted authority and right to freely vote such shares, including without limitation, in connection with the election of members of the Board of Directors of SALI (condition ii) being referred to herein as the "Klaassen Ownership Condition"). You have requested that Great Oak, L.L.C., a Delaware limited liability company ("Great Oak"), which has succeeded, by assignment, to Prior Lender's interest in the Loan and the Loan Documents, waive and release the Klaassen Ownership Condition in order to permit Paul J. Klaassen and/or Teresa Klaassen to make certain charitable contributions of the shares of common stock of SALI owned and held by Paul J. Klaassen and/or Teresa Klaassen and to permit such stock to be used in connection with certain employee stock option programs. 2 Sunrise Assisted Living Limited Partnership December 30, 1996 Page 2 Subject to all of the terms, conditions, and limitations set forth herein, the Klaassen Ownership Condition shall not be a condition to SALI constituting a "Permitted Owner" (as such term is defined in Section 1.23 of the mortgages and deeds of trust securing the Loan) under Section 1.23 of the mortgages and deeds of trust securing the Loan. Nothing herein shall release any other condition set forth in the Transfer Letter and in the event that one or more of the conditions, other than the Klaassen Ownership Condition, set forth in the Transfer Letter are not satisfied at any time prior to the repayment in full of the Loan and all amounts owed in connection therewith, SALI shall not constitute a "Permitted Owner" and Great Oak reserves all rights and remedies available to it under applicable law and pursuant to the documents evidencing, securing and setting forth the terms of the Loan (the "Loan Documents") as a result of a transfer to a person or entity which is not a "Permitted Owner" in violation of Section 1.23 of the mortgages and deeds of trust securing the Loan. This letter and the agreements of Great Oak contained herein shall not constitute (i) a waiver, release, amendment or modification of any of the terms and provisions of the Loan Documents, including, without limitation, Section 1.23 of the mortgages and deeds of trust securing the Loan, or (ii) a course of conduct, dealing or performance. By your execution below you agree that the waiver granted hereby is a one-time, limited waiver and shall be narrowly construed. We shall not be obligated to grant any further waivers with regard to the same or related subject matters and no waiver shall be effective unless in writing. By your execution below you agree to pay all of GECC's and Great Oak's costs and expenses in connection with this letter, including, without limitation, legal fees and expenses. At our option this letter shall terminate and be of no further force and effect unless this letter is executed by Borrower, the indemnitors (on the acknowledgment attached hereto) and the guarantor (on the acknowledgment attached hereto) and returned to us on or before December 31, 1996. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 3 Sunrise Assisted Living Limited Partnership December 30, 1996 Page 3 Sincerely, Great Oak, L.L.C., a Delaware limited liability company By: General Electric Capital Corporation, a New York corporation, its manager By: /s/ David B. Henry ----------------------------------------- Name: David B. Henry ----------------------------------------- Its: Vice President ----------------------------------------- The terms and conditions of this letter are accepted and agreed to: SUNRISE ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership By: /s/ Paul J. Klaassen ------------------------------ Name: Paul J. Klaassen ------------------------------ Its: Chairman ------------------------------ Dated as of December 31, 1996 4 Sunrise Assisted Living Limited Partnership December 30, 1996 Page 4 Acknowledgment and Agreement by Indemnitors Each of the undersigned, an indemnitor under the Indemnity Agreement and Hazardous Substance Indemnity both dated June 8, 1994 and executed in connection with the Loan referenced in the foregoing letter, joins in the execution of the letter to acknowledge its terms and agrees that the terms and conditions of the foregoing letter shall not modify, amend, affect or diminish any of the obligations or liabilities of the indemnitors under the Indemnity Agreement or under the Hazardous Substance Indemnity. Dated as of December 31, 1996. /s/ Paul J. Klaassen /s/ Teresa M. Klaassen - -------------------------- ------------------------------ Paul J. Klaassen Teresa M. Klaassen Acknowledgment and Agreement by Guarantor The undersigned, guarantor under the Guaranty dated as of February 15, 1996 ("Second STI Guaranty") and executed in connection with the Loan referenced in the foregoing letter, joins in the execution of the letter to acknowledge its terms and agrees that the terms and conditions of the foregoing letter shall not modify, amend, affect or diminish any of the obligations or liabilities of the guarantor under the Second STI Guaranty. Dated as of December 31, 1996. Sunrise Terrace, Inc. a Virginia corporation By: /s/ Thomas B. Newell ------------------------------------------------ Name: Thomas B. Newell ------------------------------------------------ Its: Executive Vice President ------------------------------------------------ EX-10.12 3 MODIFICATION AGREEMENT. 1 EXHIBIT 10.12 THIRD LOAN MODIFICATION AGREEMENT This THIRD LOAN MODIFICATION AGREEMENT ("Agreement") is made and entered into as of this 4th day of March, 1997, by and between SUNRISE ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited ("Borrower") and GREAT OAK, LLC, a Delaware Limited Liability Company ("Lenders"). RECITALS A. Lender is the owner of the indebtedness (the "Loan") evidenced by that certain Amended and Restated Promissory Note dated June 6, 1996, executed by Borrower in favor of General Electric Capital Corporation ("GECC") in the principal face amount of $87,000,000 (the "Amended Note") B. The Loan is secured, in part, by mortgages and deeds of trust executed by Borrower listed on Schedule 1 attached hereto (as heretofore amended, modified and assigned, individually a "Mortgage" and collectively, the "Mortgages"), encumbering the real property and improvements legally described on Exhibit "A" attached hereto. C. The Mortgages and the other documents and instruments executed from time to time in connection with the Loan, as amended from time to time, are collectively referred to herein as the "Loan Documents". D. The Loan Documents were heretofore amended pursuant to the terms of that certain First Loan Modification Agreement dated as of February 15, 1996 and that certain Second Loan Modification Agreement dated as of May l, 1996, both executed by Borrower and GECC. E. Borrower and Lender have agreed to modify certain terms and provisions of the Amended Note. NOW, THEREFORE in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: AGREEMENT 1. The foregoing recitals are hereby incorporated by reference herein. 2. All initially capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them in the Amended Note. 3. Effective March 4, 1997, the term "Class B Contract Index Rate ", as used in the Amended Note, shall mean, with respect to the Class B Indebtedness, the rate of interest equal to one and three-quarters percent (1.75%) per annum in excess of the Libor Rate; 2 provided, however, that to and including March 3, 1997, the Class B Contract index Rate shall be equal to three and three-quarters percent (3.75%) per annum in excess of the Libor Rate. 4. From and after March 4, 1997 to and including March 3, 1999, the Class B Indebtedness may not be prepaid, in whole or in part; provided, however, that if at any time during the period March 4, 1998 to and including March 3, 1999, the Libor Rate increases to more than 5.9375% (the "Increase"), repayment of the whole or part of the Class B Indebtedness during the period commencing thirty (30) days from the effective date of the Increase, to and including sixty (60) days from the effective date of the Increase, shall be permitted. From and after March 4, 1999, to and including the Maturity Date, the provisions of the Amended Note, including without limitation, Section 6B. thereof, shall govern prepayment of the Class B Indebtedness. 5. Nothing contained herein shall be in construed as in any manner modifying that certain letter agreement dated December 30, 1996 executed by Lender and Borrower, a copy of which is attached hereto as Exhibit B. 6. Except as modified herein, the terms and provisions of the Amended Note remain unchanged and in full force and effect. In the event of any conflict or inconsistencies between the terms of the Amended Note or any of the other Loan Documents and the terms of this Agreement, the terms of this Agreement shall govern and control. Except as expressly modified or replaced pursuant to the terms of or as contemplated by this Agreement, the Loan Documents are in full force and effect and are hereby ratified and confirmed by Borrower and Lender. 7. This Agreement shall be binding upon and inure to the benefit of Lender and Borrower, and their respective heirs, legal representatives, successors and assigns subject to all limitations set forth in the Loan Documents. This Agreement is not intended to benefit any party other than the Borrower, the Lender, and the successors and assigns of the Lender and is specifically not intended to be for the benefit of any party other than those which are a party to this Agreement. 8. This Agreement may be executed in two or more counterparts, each of which may be executed by one or more of the parties hereto, but all of which, when taken together, shall constitute but one agreement. 9. The validity, meaning and effect of this Agreement shall be determined in accordance with the laws of the Commonwealth of Virginia applicable to contracts made to be performed in that State without regard to principles of conflicts of law. 10. Borrower's (and its partners') liability hereunder is limited as set forth in Section 17 of the Amended Note and Section 17 of the Amended Note is hereby incorporated by reference as if fully set forth herein. 3 IN WITNESS WHERE OF, the parties hereto have executed this document as of the day and year first above written Borrower: SUNRISE ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership By: Sunrise Assisted Living Investments, Inc. A Virginia corporation its general partner By: /s/ David W. Faeder ------------------------------------ David W. Faeder, Executive Vice-President By: /s/ Thomas B. Newell ------------------------------------ Thomas B. Newell, Executive Vice-President Lender GREAT OAK LLC, a Delaware limited liability company By: GE Capital Realty Group, Inc., a Texas corporation, its attorney-in-fact By: /s/ Joseph E. Jernigan ------------------------------------ Its: Vice President ------------------------------------ Prepared by and after recording return to: James B. Fadim, Esq. Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606-6404 (312) 876-7971 4 COMMONWEALTH OF VIRGINIA ) ) SS: COUNTY OF FAIRFAX ) Before me, a Notary Public, in and for said County, in the Commonwealth aforesaid, personally appeared David W. Faeder and Thomas B. Newell , the Executive Vice-Presidents of SUNRISE ASSISTED LIVING INVESTMENTS, INC., a Virginia corporation, the general partner of SUNRISE ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership, and acknowledge the execution of the foregoing instrument on behalf of the corporation, as such general partner. WITNESS my hand and Notarial Seal this 4 day of March, 1997 /s/ Mellissa A. Haynes ----------------------------------- Signature Mellissa A. Haynes ----------------------------------- Printed Name My Commission Expires.: - ---------------------------- March 31, 2000 STATE OF TEXAS ) ) SS. COUNTY OF DALLAS ) I, the undersigned, a Notary Public, in and for said County and State, DO HEREBY CERTIFY, that Joseph D Jernigan, personally known to me to be Vice President of GE CAPITAL REALTY GROUP, INC., a Texas corporation, acting as attorney-in-fact for GREAT OAK, TLC, a Delaware limited liability company, appeared before me this day in person and acknowledged that he signed and delivered the said instrument as the free and voluntary act of corporation, as said attorney-in-fact, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this 4 day of March, 1997. ----------------------------------- Signature /s/ Tonya J. Havland ----------------------------------- Printed Name Tonya J. Havland My Commission Expires: October 14, 1998 - ---------------------------- 5 CONSENT OF SUNRISE TERRACE, INC. TO THIRD LOAN MODIFICATION AGREEMENT Capitalized terms used herein without definition shall have the respective meanings ascribed thereto in the Amended and Restated Note dated June 6, 1996, executive by Sunrise Assisted Living limited Partnership in favor of General Electric Capital Corporation. The undersigned, as Guarantor pursuant to the Guaranty, hereby consents and agrees to all of the terms and conditions of the above and foregoing Third Loan Modification agreement dated as of March 4, 1997, and hereby remakes all of the covenants made and reaffirms all of the obligations to be performed by the undersigned as Guarantor under the Guaranty. The undersigned acknowledges and reaffirms that it remains liable under the Guaranty and that the Guaranty is in full force and effect. DATED: As of March 4, 1997 SUNRISE TERRACE, INC. a Virginia corporation By: /s/ David W. Faeder ----------------------------------------- David W. Faeder, Executive Vice-President By: /s/ Thomas B. Newell ----------------------------------------- Thomas B. Newell, Executive Vice-President 6 COMMONWEALTH OF VIRGINIA ) ) SS: COUNTY OF FAIRFAX ) I, the undersigned, a Notary Public, in and for said County, in the Commonwealth aforesaid, DO HEREBY CERTIFY, that David W. Faeder and Thomas B. Newell, personally known to me to be the Executive Vice-Presidents of Sunrise Terrace, inc., a Virginia corporation appeared before me this day in person and acknowledged that he signed and delivered the said instrument as the free and voluntary act of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal, this 4 day of March, 1997. /s/ Mellissa A. Haynes ----------------------------------- Signature Mellissa A. Haynes ----------------------------------- Printed Name My Commission Expires: March 31, 2000 - ---------------------------- 7 CONSENT OF INDEMNITORS Capitalized terms used herein without definition shall have the respective meanings ascribed there to in the Amended and Restated Note dated June 6, 1996, executed by Sunrise Assisted Living Limited Partnership in favor of General Electric Capital Corporation. Each of the undersigned, an indemnitor under the Indemnity Agreement and Hazardous Substance Indemnity both dated June 8, 1994 and executed in connection with the Loan, hereby acknowledges and consents to the execution of the above and foregoing Third Loan Modification Agreement dated as of March 4, 1997, and agrees that the terms and conditions thereof shall not modify, amend, affect, or diminish any of the obligations or liabilities of the indemnitors under the Indemnity Agreement or under the Hazardous Substance Indemnity Agreement. DATED: As of March 4, 1997 /s/ Paul J. Klaassen /s/ Teresa M. Klaassen - --------------------------- --------------------------- Paul J. Klaassen Teresa M. Klaassen COMMONWEALTH OF VIRGINIA ) ) SS. COUNTY OF FAIRFAX ) Before me, a Notary Public, in and for said County and in the Commonwealth aforesaid, personally appeared Paul J. Klaassen and Teresa Klaassen, and acknowledged their execution of the foregoing instrument. WITNESS my hand and Notarial Seal this 3 day of March, 1997. /s/ Mellissa A. Haynes --------------------------- Signature Mellissa A. Haynes --------------------------- Printed Name My Commission Expires: March 31, 2000 - ---------------------------- EX-13 4 ANNUAL REPORT. 1 EXHIBIT 13 1996 Annual Report SUNRISE ASSISTED LIVING, INC. LEADING A REVOLUTION IN LONG-TERM CARE [SUNRISE LOGO] [PHOTO of Exterior of a Sunrise Model Facility] 2 ABOUT OUR COVER: Fifteen years ago, there were few long-term care options open to seniors in America who could no longer live on their own but did not need skilled nursing care. Since then, the assisted living industry has emerged, offering thousands of seniors a new choice--the opportunity to receive the help they need with daily activities while living in a homelike, residential environment. Founded in 1981, Sunrise Assisted Living has been at the forefront of this emerging industry that is changing the face of long-term care in America. [PHOTO of Exterior of a Sunrise Model Facility] FINANCIAL AND OPERATING HIGHLIGHTS (in thousands)
Years Ended December 31 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA(1) Operating revenue $ 47,345 $ 37,258 $ 33,969 $25,598 $16,879 Net (loss) income(2) (3) (4,760) (10,137) 1,412 (637) (171) EBITDA(4) 5,713 8,199 11,745 5,653 3,046 BALANCE SHEET DATA(1) Cash and cash equivalents 101,811 6,253 8,089 3,268 2,499 Total assets 342,839 123,321 109,003 61,159 50,866 Total debt 144,544 122,289 110,029 55,207 45,405 Stockholders' equity (deficit) 185,824 (31,774) (16,391) (2,925) (1,716) OPERATING AND OTHER DATA Facilities (at end of period): Owned(5) 30 20 19 16 14 Managed 5 8 9 7 5 Total 35 28 28 23 19 Occupancy rate(6) 94.1% 91.7% 94.8% 94.0% --
Notes (1) - (6): See notes to Selected Financial and Operating Data on page 18. OPERATING REVENUES (in millions)
'92 '93 '94 '95 '96 -- -- -- -- -- 16.9 25.6 34.0 37.3 47.3
RESIDENT CAPACITY OF OWNED AND MANAGED FACILITIES (in thousands)
'92 '93 '94 '95 '96 '97 -- -- -- -- -- -- 1.6 1.9 2.2 2.3 3.1 5.0*
* Resident capacity for 1997 includes the additional capacity of facilities currently under construction and expected to open in 1997. Note: All references to Sunrise Assisted Living or the Company refer to Sunrise Assisted Living, Inc. and its predecessors and subsidiaries. 3 NEW WAYS TO SERVE THE GROWING SENIOR CARE MARKET [PHOTO of Exterior of a Sunrise Model Facility] QUALITY CARE WITH A HEART FOR SERVICE [PHOTO of Family Member with Model] 2 LETTER TO SHAREHOLDERS Chairman, President and CEO Paul Klaassen outlines 1996 achievements and the Company's strategy for disciplined growth. 6 FIFTEEN YEARS OF GROWTH AND INNOVATION One of the leading and largest providers in the assisted living industry, Sunrise has been at the forefront of advocating and implementing new approaches to senior care. 8 LEADING A GROWING INDUSTRY Five key factors are contributing to the rapid growth of the assisted living industry. 10 A GROUNDBREAKING DESIGN The Company's Victorian-style model facility has been fine-tuned and time-tested to better serve the needs of assisted living residents. 12 A DEDICATION TO SERVICE The Sunrise approach to assisted living hinges on a respect for the diverse needs of seniors. 14 TAKING A FRESH APPROACH Sunrise has developed innovative programs for residents with Alzheimer's disease and related memory impairments. 16 POSITIONED FOR GROWTH The Company has an experienced, committed management team that is focused on making assisted living by Sunrise available to thousands more seniors across the country. CORPORATE PROFILE Sunrise Assisted Living, Inc. is one of the nation's leading providers of assisted living care for seniors. Founded in 1981, the Company is one of the oldest and largest in the industry, with 37 communities in 11 states and 22 more under construction as of March 17, 1997. The Sunrise Principles of Service focus on providing seniors with high quality, personalized care in a homelike, residential environment that encourages independence, protects privacy and fosters individuality. 1 4 [PHOTO] Paul J. Klaassen Chairman, President and Chief Executive Officer TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES: BY ANY MEASURE, THIS IS AN EXTRAORDINARY TIME FOR SUNRISE. Allow me to take just a moment to set the stage for you. When we opened the doors of the first Sunrise in Fairfax County, Virginia in 1981, our dream was to offer frail seniors who could no longer live on their own an alternative to traditional nursing home care. We knew many seniors didn't need the intensive medical care provided by nursing homes, but they wound up there anyway because there was nowhere else for them to go. We set out to offer these seniors another choice--one that would provide them with loving, personalized care in an attractive, homelike environment, and one that would encourage them to be as active and independent as they possibly could be. Fifteen years have passed since then, and an entire industry dedicated to this new approach is transforming long-term care in America. Sunrise has been at the forefront of this industry and has grown into a strong, dynamic company, filled with thousands of dedicated, professional caregivers and led by a team of skilled, experienced managers who have a vision and a plan for making assisted living by Sunrise available to thousands more seniors and their families throughout the country. It is a privilege and a pleasure to take the pulse of this dynamic, fast-growing company and report to you the highlights of what has been a very successful year. 1996 RESULTS We are very pleased with our 1996 financial performance. Our revenues for the year were up $10 million over 1995, and our fourth quarter revenues grew 56 percent over 1995 fourth quarter revenues. Our operating loss of $4.8 million was in line with our expectations and reflects the substantial investments we made during the year to build our corporate infrastructure. We continued to make these investments in people and systems during 1996 to support the completions and openings of a substantial number of new Sunrise communities in 1997 and 1998. 2 5 Our net loss also includes $4 million of depreciation and amortization expense because we own the majority of our assets. We believe this asset ownership strategy will provide the best long-term value for our shareholders. Our fourth quarter loss of $182,000 was a significant improvement over our 1995 fourth quarter loss of $7.8 million and moves us closer to profitability on an earnings per share basis. I should mention, too, that we reported positive cash flow from operations for the third consecutive year. FINANCE In finance last year, we also significantly enhanced Sunrise's balance sheet. On the equity side, we completed two successful public offerings, raising gross proceeds of $211.3 million. These offerings gave us the capital base to continue to execute our recently expanded growth plans, which include the aforementioned ownership of our own assets. We also maintain enough liquidity to be highly selective in looking at development and acquisition opportunities. On the debt side, from Jan. 1, 1996 through March 17, 1997 we received commitments for a total of $190 million from 12 lending institutions, including a $90 million commitment from our sector's first bank syndicate group, which was led by NationsBank. We believe we now have one of the best balance sheets and one of the lowest costs of capital in the assisted living sector. DEVELOPMENT In development, we have made significant progress in implementing our major metropolitan market strategy by expanding into four new states, opening five new model communities, beginning construction on 22 more and identifying many additional sites. Sunrise now has a presence in most of the top metropolitan markets in the country. We believe that to be successful in assisted living in the long run, a company must have three things:the best physical model, the best locations, and most importantly, excellent care through great execution. All three are critical for long-term success, and I am proud and confident to say that Sunrise scores high in each category. Our model, now in its eighth generation, is the most tested and refined in the industry, and our architecture and design team continues to improve it with each new community we build. We've successfully secured top locations in some of the best demographic zip codes in the U.S., and we believe our track record in operations is deeper and more experienced than that of any other provider in the country. HIGHLIGHTS - - Completed two successful public offerings, raising gross proceeds of $211.3 million. - - Achieved a market capitalization of $516.5 million by year-end. - - Received commitments for $190 million from 12 lending institutions. - - Opened five new communities and began construction on 22 more in major metropolitan markets. - - Acquired seven new assisted and independent living properties. - - Increased resident capacity of Sunrise-operated facilities to more than 3,300. - - Made further investments in the Company's infrastructure, adding several experienced senior managers and expanding our employee base to nearly 2,400 to support our aggressive yet disciplined growth plans. 3 6 We're proud of the special role we've played in the emergence of this new industry--helping to define the field, introducing cutting-edge new building models and operational systems, and setting financial benchmarks. ACQUISITIONS On the acquisitions side, we are continuing to selectively purchase strategic senior living assets across the country on which we're proud to put the Sunrise name. During 1996, we acquired six assisted and independent living communities. In 1997 so far, we have acquired one additional property and signed a contract to purchase one more. OPERATIONS In operations, we have been rewarded with very high occupancy levels in our existing homes and rapid fill-up in our new communities. We've also enhanced Sunrise quality assurance programs and recruitment and training efforts to ensure our residents consistent, high quality care that is delivered by caring, dedicated professionals. Undergirding the progress I've just outlined is Sunrise's belief in the sacred value of each human life. Out of this belief have come our fundamental Principles of Service--principles such as encouraging independence, preserving dignity and fostering individuality, which have become defining hallmarks of the assisted living industry. Our approach to caregiving has evolved from and is guided by these principles. Sunrise team members share two other values:a belief in the joy of service and a sense of mission or calling to this work. Consistently delivering warm, loving, safe and high-quality [PHOTO of Exterior of a Sunrise Model Facility] 4 7 environments and quality care to frail human beings is special work. Sunrise team members recognize this special responsibility, and we look for others to join us who share this sense of calling. We also believe that true happiness comes from service. This is no old-fashioned homily at Sunrise. It is a fundamental, core value we look for in anyone who joins the Company. I want to personally thank all Sunrise employees for honoring these values in your daily work and for the tremendous effort you put forth in 1996 to carry on and expand our Company traditions. OUR VALUES We're proud of the special role we've played in the emergence of this new industry--helping to define the field, introducing cutting-edge new building models and operational systems, and setting financial benchmarks. We're also pleased with the accomplishments I've just outlined --an aggressive yet disciplined growth plan that is on or ahead of schedule, continued investments in people and infrastructure to support that growth, and balance-sheet strength. We are not, however, content. In this emerging industry, we know that the best assisted living care has yet to be invented. And that motivates us to continually seek ways to improve our care and thereby maintain our tradition of leadership and standard-setting in the industry. On this foundation of time-tested leadership and experience, we approach the future with confidence and excitement. On behalf of the entire Sunrise team, I want to express our appreciation to you--our shareholders, residents and families--who have placed your trust in us. We look forward to serving you in the years ahead. Sincerely, /s/ PAUL J. KLAASSAN - --------------------------------- Paul J. Klaassen Chairman, President and Chief Executive Officer March 17, 1997 [PHOTO of Exterior of a Sunrise Model Facility] We completed two successful public offerings, raising gross proceeds of $211.3 million, and received commitments for $190 million from 12 lending institutions, giving us a capital base of $401.3 million to execute our recently expanded growth plans. 5 8 [PHOTO of Sunrise Care Manager with Resident] [PHOTO of Exterior of a Sunrise Model Facility] [PHOTO of Resident] [PHOTO of Sunrise Care Manager Assisting Resident with Eating] [PHOTO] Sunrise Executive Vice President Terry Klaassen visits with Sunrise of Annapolis resident Arthur Janushek. In 1981, Terry and Paul Klaassen opened and personally provided live-in care at the first Sunrise community in Fairfax County, Va. 6 9 15 YEARS OF GROWTH AND INNOVATION In 15 years, Sunrise Assisted Living has grown from a single residence in Northern Virginia to a network of 37 owned and managed facilities in 11 states, as of March 17, 1997. With 22 new assisted living facilities under construction and many more in earlier stages of development, Sunrise expects to operate more than 90 communities by year-end 1999. Today, the Company is one of the largest and most experienced in the growing assisted living industry. Assisted living offers personalized care and supportive services in a homelike, residential environment for seniors who need some assistance with activities of daily living but who do not have complex medical needs that require skilled nursing care. The industry evolved out of a consumer desire for an alternative to traditional long-term care options such as nursing homes and home health care. Sunrise offers seniors a range of services, from assistance with basic activities of daily living--such as help with bathing, eating and dressing--to medication management and Alzheimer's care. COMPANY HISTORY Fifteen years ago, Sunrise founders Paul and Terry Klaassen were among the first to recognize the need for a new approach to long-term care. Seeing a gap in the market for high-quality, residential-style senior care facilities, they opened their first Sunrise Assisted Living community in Fairfax County, Va. in 1981 by renovating a former nursing home. Caring for residents and training the staff themselves, the Klaassens developed a new approach to delivering high-quality, personalized care that has set industry standards. By 1985, the Company had renovated and opened two more communities in Warrenton and Leesburg, Va. As the Sunrise operating philosophy evolved, it became clear that the new approach to long-term care could be better executed if a new building was designed to specifically support assisted living care. As a result, based on seven years of operating experience, in 1988 Sunrise opened its first model community, a 60-resident community in Arlington, Va. especially designed for assisted living. Based on a Victorian-style manor home, that model has won numerous awards, and the design has been refined each year since then to reflect Sunrise's growing understanding of how to better serve seniors and their families. DEVELOPMENT AND ACQUISITIONS Recognized as a premier, full-service provider, the Company is now developing clusters of communities in major metropolitan areas and surrounding suburban markets throughout the country. In some cases, Sunrise has initially expanded into new markets through acquisitions. For example, in 1996 Sunrise acquired six assisted and independent living communities in California, Florida, Georgia and South Carolina. And, in February 1997, the Company completed the acquisition of a property in Valencia, Calif., and the first of a planned three-property acquisition from the California-based WindChime Group, LTD. by acquiring a property currently under construction in Walnut Creek, Calif., an area east of San Francisco Bay. These acquisitions will give Sunrise an immediate presence with high-quality communities in several major markets the Company has targeted for development. [PHOTO] "My mother-in-law loves it at Sunrise. There's always something for her to do: she plays cards, does crafts and enjoys her friends. That means we can go to bed at night feeling at ease with her care and not the least bit guilty about her being there. We're very, very happy with Sunrise and have recommended it to others." - -- Linda Stevens, R.N. 7 10 [PHOTO of Interior of Sunrise Model Facility] "Not only is assisted living far more palatable than life in a nursing home--the facilities are residential rather than institutional--but it's also cheaper, crucial in the era of managed care." "Promising Industries for 1997," FORTUNE, December 23, 1996 [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Two Residents and Two Models] "With the number of Americans age 85 and older projected to increase from 3.7 million last year to 6 million in 2010, the assisted-living concept is hot. Last year the industry generated $12 billion in revenues; it's expected to grow by almost 20% a year for the next three to five years." "Up & Comers: Sunrise Assisted Living," FORBES, February 24, 1997 8 11 LEADING A GROWING INDUSTRY The assisted living industry has enjoyed dramatic growth in the last decade. Introduced in the U.S. in the early 1980s, it has become a $12 billion industry and is growing at an estimated 15 to 20 percent per year. Already one of the fastest growing segments of the overall health care delivery system, analysts predict the assisted living industry will grow to $20 billion by the year 2000 and reach $75 billion by the year 2005. A number of factors are driving this growth. They include: CONSUMER PREFERENCE. Many seniors who are unable to live at home but who do not have complex medical needs prefer the homelike environment and individualized care of assisted living to the often restrictive and institutional settings of traditional nursing homes. With its new approach to care and environments, assisted living is filling an important niche in the long-term care market. GROWTH OF THE AGING POPULATION. The 85-plus age group--the primary market for assisted living--is projected to be the fastest growing population segment between 1990 and 2020. It is expected to more than double from 3.1 to 7 million people by 2020 and to increase to 18.9 million by 2050 when the baby boomers reach their 80s. Because functional limitations increase with age, an estimated 30 to 60 percent of people over 85 need some form of assistance with basic daily activities such as eating, bathing, dressing and walking--needs that can often be met by assisted living. COST ADVANTAGES. Assisted living generally costs less than skilled nursing and home health care. And while many nursing homes rely on Medicaid and Medicare reimbursements, more than 95 percent of services in publicly-traded assisted living companies are reimbursed through private pay. Over time, given cost-containment pressures within the health care industry, affordability should play an increasing role in a shift toward assisted living. A SHIFT IN DEMAND. While the senior population is growing, the supply of skilled nursing home beds per 1,000 persons 85 and older is declining. Nursing homes are increasingly focused on higher acuity patients with higher reimbursement profiles, creating a need for assisted living for those who do not have complex medical needs. Many lower-acuity nursing home residents are also shifting to assisted living because of its affordability and the higher degree of freedom and independence it offers. In fact, recent studies by the U.S. Department of Health and Human Services found that between 25 and 40 percent of nursing home residents could be more appropriately cared for in less costly and less institutional environments such as assisted living. CHANGING FAMILY DYNAMICS. Due to several socioeconomic trends, many adult children are no longer able to care for elderly parents in their own homes. These trends include the increased participation of women in the work force, the geographic dispersion of families throughout the country, and rising divorce rates. Assisted living buyers or decision-makers are typically children in the 45 to 64 age range who are looking for care for their elderly parents. Interestingly, a recent study by the American Association of Retired Persons (AARP)revealed that 80 percent of the seniors surveyed, if given a choice, would prefer not to live with their children. [PHOTO] "I had a stroke in 1995 and my doctor said I could no longer live at home without 24-hour care. My three children have families and responsibilities of their own and couldn't do it, so we decided on Sunrise of Annapolis. I love it here because it has a homey, warm feeling and lots of natural light, and the care managers are wonderful. I'm a widow, and Sunrise gives me the security of 24-hour emergency watch in case I get sick. The company is wonderful, my neighbors are great, and there's a real sense of community here." - -- Lela Vieser [PHOTO] "My mother's care at Sunrise has been of such quality that our family has been continually reassured of her well being. Sunrise, in our view, is seldom equaled and never surpassed in assisted living." - -- James C. Pfautz Major General, USAF (Ret.) 9 12 [PHOTO of Sunrise Model Facility Under Construction] [PHOTO of Sunrise Model Facility Under Construction] [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Construction Worker at Sunrise Model Facility Under Construction] The grand staircase at the center of every Sunrise model facility is symbolic of the architecture and lifestyle of an elegant Victorian manor home. [PHOTO] [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Sunrise Model Facility Under Construction] - - 37 communities currently operated - - 22 under construction - - 23 sites under contract As of March 17, 1997 10 13 A GROUNDBREAKING DESIGN The success of assisted living rests, in large measure, with the fact that it offers a comfortable, residential-style environment, in contrast to the institutional settings traditionally associated senior care. The distinction at Sunrise Assisted Living is dramatic down to the smallest detail. Each Sunrise model facility has the look and feel of a well-appointed, Victorian manor home. Large, low windows, incandescent and non-fluorescent lighting, and carpeting are found throughout. Hallways are rare, with rooms instead often opening up to other rooms. Where hallways do exist, they are short and wide, resembling those in a private home. Because, over the course of a lifetime, people generally prefer to "trade up" each time they move to a new home, a special effort is made at Sunrise to ensure that what may well be a resident's last home is particularly elegant and that much finer than the home they left behind. That effort extends to the smallest detail--lush, richly colored upholstery, fresh cut flowers and linen table cloths are standard fare at every Sunrise community. Even the hand rails along the walls, necessary in a residence for seniors, are disguised as decorative chair rails. Every aspect of Sunrise's model design serves the central purpose of creating a warm, comfortable environment--a place where residents and their families can feel at home. Each community is kept small, accommodating 70 to 110 residents, and interior rooms are sized to residential scale. Sunrise's unique design provides residents with a community-within-a-community: A series of "neighborhoods" consisting of clusters of private resident rooms surround a central parlor which leads, in turn, to common areas for dining and socializing. SUNRISE INTERIORS Convinced that environment has an enormous impact on people's health and well-being, Sunrise interiors are elegantly furnished and accessorized by Martha Child Interiors, a design firm owned by Sunrise, to create a sense of warmth, comfort and stimulation. Resident neighborhoods are decorated in themes for increased interest and to help residents locate their suites. Walls are covered with art work, clocks and decorative plates, and common areas feature flowers, candlesticks and figurines throughout. The first residence built according to Sunrise's model design, a 60-resident home in Arlington, Virginia, opened in 1988. Since then, the design has been fine-tuned and time-tested, to better serve the needs of assisted living residents and their families. For example, when experience revealed that family and friends prefer to visit with residents in public areas rather than always gathering in a resident's private room, Sunrise increased common area space in each residence to approximately 40 percent of the total space to make frequent visits by family and friends more comfortable and enjoyable. The building design is integral to the successful implementation of the Sunrise operating philosophy that promotes the independence, privacy and well-being of residents and their families. Standard design elements include sun porches, gardens and walking paths; a small, private dining room where residents can entertain family and guests; and a bistro/ice cream parlor/cafe that is always open for snacks and entertaining guests. All of these elements work together to support the needs of Sunrise residents and their families. [PHOTO] "Sunrise environments are highly residential in character and achieve a natural balance between beauty and utility." - -- Victor Regnier, FAIA Professor, School of Architecture Andrus Gerontology Center University of Southern California, and Sunrise Consulting Architect 11 14 PRINCIPLES OF SERVICE Sunrise pledges to serve with kindness, love and professionalism, while demonstrating a commitment to the following principles: PRESERVING DIGNITY Each resident is esteemed as a unique individual whose life and experiences are valued and respected. ENCOURAGING INDEPENDENCE Residents have a right to be as independent as they possibly can be. Through a combination of services and assistance, Sunrise whenever possible encourages each resident's self-reliance. ENABLING FREEDOM OF CHOICE Residents make their own choices and create their own schedules. Each one decides what to do and when to do it. After all, it's their life--and it's their home. PERSONALIZING SERVICES Personal, one-on-one attention in a caring, home-like setting can help seniors maintain a sense of dignity, purpose and self-esteem. PROTECTING PRIVACY While assisting residents with personal needs such as bathing, dressing and toileting, Sunrise is committed to protecting each resident's privacy and dignity. FOSTERING INDIVIDUALITY Quality care and assistance include recognizing the interests, abilities and routines of each individual resident. Programs, activities and daily care are flexible with residents' personal needs and preferences. NURTURING THE SPIRIT From wellness care and assistance with activities of daily living, to a full calendar of activities and the social interaction that makes life meaningful and enjoyable, Sunrise cares for the whole person--mind, body and spirit. INVOLVING FAMILY AND FRIENDS Sunrise is not like traditional long-term care facilities with set visiting hours. Residents' friends and family are always welcome, and their involvement is wholeheartedly encouraged. [PHOTO] [PHOTO] [PHOTO] Assisted living strikes a balance between independence and care, offering residents the assistance they need while still assuring them privacy, dignity and freedom of choice. Sunrise residents are encouraged to get up and dressed every morning. They have the option of spending the day as they choose, taking advantage of a variety of activities, including exercise and wellness programs and up to six different planned social and recreational opportunities each day. 12 15 A DEDICATION TO SERVICE Sunrise offers a full range of assisted living services, from basic care through Alzheimer's care, enabling many residents to "age in place" as their needs change. Most Sunrise residents need assistance with some activities of daily living, such as eating, bathing and dressing, as well as support with transportation, coordination with physicians, housekeeping and other services. Sunrise also offers medication management, incontinence products and services programs, and a special program for residents with Alzheimer's disease and other forms of memory impairment. These programs are tailored to the individual needs of each resident, monitored over time and adjusted as needed, to provide personalized care to each individual resident. In this range of assisted living services, Sunrise is dedicated to serving residents with high-quality, compassionate care that is consistent with its Principles of Service that appear on the facing page. These principles are the foundation of the Company's operating philosophy and are at the core of every aspect of Sunrise's operations--from building design and development through program development and staff training. SUNRISE FIVE-STAR TRAINING PROGRAM For 15 years, Sunrise has played a leadership role in setting industry standards by developing innovative programs and creating special Sunrise Signatures that distinguish the Company from other assisted living providers. One such program is the Company's unique Five-Star Training Program that it developed to help caregivers increase their knowledge and sharpen their skills. Understanding that the key to delivering high-quality, personalized care is a well-trained staff of dedicated, compassionate caregivers, Sunrise has continually refined this five-level training program to ensure that it enables team members not only to achieve competency in various areas, but to understand how to implement the Company's Principles of Service in their day-to-day work in Sunrise communities. Another Sunrise program that is unique to the industry is its caressable pets program, designed to enhance the emotional well-being of residents. Because pets can bring joy and offer comfort and unconditional love to residents, every Sunrise home has a dog or cat living on the premises. A number of Sunrise communities also have intergenerational programs that serve the educational needs of children while providing love, attention and stimulation for seniors. For example, at Sunrise of Gunston, Va., seniors with educational backgrounds tutor first-graders in reading and phonics at the local school. And at Sunrise of Fairfax, Va., students from the Talent Houseschool next door join seniors regularly for activities ranging from baking and singing to reading and arts and crafts. SUNRISE SIGNATURES Recognizing that extra little touches can make a world of difference in quality of life, Sunrise has further differentiated itself from other assisted living providers through its Sunrise Signatures--unique services, programs and features that are found in every Sunrise community. For example, once a week, fresh bread is baked in the kitchen of every Sunrise residence, and freshly cut flowers are on display every day in the foyers, dining rooms and public restrooms of every Sunrise home. In the common areas, a box of children's toys is always available for visiting families, and a photo album displaying resident activities is always on hand. These and other Sunrise Signatures are part of the ongoing process of creating a strong sense of place where Sunrise residents and their families feel comfortable and at home. [PHOTO] "Being a caregiver means helping others, caring for them and taking after them the way you would if they were your own family and living in your own home." - -- Nina Brown Sunrise care manager [PHOTO] "Our residents need assistance from people whose focus is not `how can I get through this day,' but rather, `how can I help this resident have a great day.'" - -- Cindy Eller Sunrise team member 13 16 "...Sunrise homes are furnished with `life skills stations,' such as a nursery and office, and staff members frequently pull out `reminiscence kits' for the residents to enjoy....`It's a more positive approach to taking care of somebody with Alzheimer's,' [Sunrise employee Melanie] McKibbin said. `We incorporate a lot of what they remember into their lives, and this brings about a sense of comfort, security and recognition. It helps to alleviate the fear of the unknown and gives them something to hold onto that they're comfortable with.' " - -- "Calming the Confusion of Alzheimer's," THE WASHINGTON POST, Feb. 20, 1997 [PHOTO of Residents] [PHOTO of Residents] [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Interior of Sunrise Model Facility] [PHOTO of Resident with Child] [PHOTO of Resident with Dog] [PHOTO of Resident] 14 17 TAKING A FRESH APPROACH According to the Alzheimer's Association, four million Americans have Alzheimer's, a progressive, degenerative disease that affects cognitive function. Half the population over age 85 reportedly has the disease and, by 2050, Alzheimer's disease is expected to affect 14 million people. Its symptoms include confusion and loss of short-term memory, making it increasingly difficult for people to care for themselves. To meet the needs of residents with Alzheimer's disease and related memory impairments, Sunrise has developed an innovative program that incorporates best practices in Alzheimer's care from around the world. Called the Sunrise Reminiscence Program, the program was developed in accordance with the Alzheimer's Association's Guidelines for Dignity and incorporates elements that help stimulate the memories and senses of residents with Alzheimer's disease. REMINISCENCE LIFE SKILLS CENTERS The Sunrise Reminiscence Program uses special Life Skills centers and kits to help residents with memory impairments tap into their memories and find pleasure in reenacting moments from their past. The content of the centers and kits varies depending on the personal histories and interests of the residents in each particular Reminiscence Neighborhood, but faux nurseries and offices (see photos, left), along with sewingboxes, tool kits and wedding memorabilia, are often used to help residents find joy and comfort in remembering important moments and activities from their pasts. Other program elements help residents connect with the world around them through music and multi-sensory experiences, including textural art that encourages touching--an important source of stimulation for seniors with Alzheimer's disease. REMINISCENCE NEIGHBORHOOD DESIGN Many Sunrise communities feature dedicated, secure areas that are specially designed for residents with Alzheimer's disease and related memory impairments. Called Reminiscence Neighborhoods, these areas include circular wandering paths throughout that allow residents to more easily find their way back to their suites. Reminiscence Neighborhood kitchens feature specially-designed low counters that are used for therapeutic activities such as flower arranging and group games, as well as everyday dining purposes. Alzheimer's team member offices are designed with windows and Dutch doors to enable team members to remain in contact with residents even while they work on care plans or visit with family members. Caring for residents with Alzheimer's disease requires special skills, an understanding of the nature of this degenerative illness, and a patient and loving disposition. Sunrise Alzheimer's caregivers receive training to help them better communicate and build strong relationships with residents. It is not unusual to find a Sunrise team member in a Reminiscence Neighborhood dancing with a resident, looking at old family photographs or listening to a favorite opera. Helping residents with Alzheimer's disease enjoy each day is a primary objective of the Sunrise Reminiscence Program. [PHOTO] "Sunrise offers seniors with Alzheimer's disease a high quality of life by providing them with the structure, consistency and supervision they need while preserving their dignity and encouraging their independence. That's a difficult balance to strike, but Sunrise does an excellent job." - -- Dean J. Storer, M.D. Board-Certified Geriatric Psychiatrist [PHOTO] "My wife Joanne has Alzheimer's disease, and I pray each day for her health and happiness and for her peace and contentment. I think Sunrise has given her that, and the whole family does." - -- Paul E. Schratwieser 15 18 [PHOTO] From left to right: Paul J. Klaassen, Chairman, President and Chief Executive Officer; Teresa M. Klaassen, Executive Vice President and Secretary; Timothy S. Smick, Executive Vice President and Chief Operating Officer; David W. Faeder, Executive Vice President and Chief Financial Officer; Brian C. Swinton, Executive Vice President, Sales and Marketing; and Thomas B. Newell, Executive Vice President, General Counsel and President of Sunrise Development Inc. POSITIONED FOR GROWTH With a 15-year history as an innovator and leading provider in the assisted living industry and a working capital base of more than $100 million, Sunrise is well-positioned to capitalize on the growing demand for assisted living care. The Company has a vision for making assisted living by Sunrise available to thousands more seniors and their families across the country over the next several years, and an aggressive yet disciplined plan to carry out that vision. The Sunrise growth strategy includes plans to develop at least 52 new model Sunrise communities in targeted markets by the end of 1999. The Company plans to develop clusters of the new facilities in most of the top 20 metropolitan and suburban markets in the U.S. Sunrise's growth strategy also includes plans to acquire select properties as a strategy for entering new markets or strengthening its presence in recently-entered markets. The Company plans to acquire up to nine additional facilities by the end of 1999. In total, Sunrise expects to operate more than 90 facilities by year-end 1999, enabling it to serve thousands more seniors and their families throughout the country. Managing this growth will require experience and skill. To date, Sunrise recruitment efforts have paid off in a strong management team with expertise and many years of experience in operations, development, acquisitions and other key areas of the assisted living field. With more than 130 team members on its regional and headquarters staffs, and more than 2,000 on the Sunrise field staff in homes throughout the U.S., a strong infrastructure is in place for aggressive yet disciplined growth. 16 19 INDEX TO FINANCIAL AND OTHER INFORMATION 18 Selected Financial and Operating Data 19 Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Consolidated Balance Sheets as of December 31, 1996 and 1995 25 Consolidated Statements of Operations of the Company for the years ended December 31, 1996 and 1995 and Combined Statement of Operations of Sunrise Entities for the year ended December 31, 1994 26 Consolidated Statement of Changes in Stockholders' Equity (Deficit) of the Company and Combined Statement of Owner's Deficit of Sunrise Entities 27 Consolidated Statements of Cash Flows of the Company for the years ended December 31, 1996 and 1995 and Combined Statement of Cash Flows of Sunrise Entities for the year ended December 31, 1994 28 Notes to Consolidated and Combined Financial Statements 34 Report of Independent Auditors 35 Board of Directors, Officers and Senior Management 36 Facilities Listing and Location Map 17 20 Sunrise Assisted Living, Inc. - -------------------------------------------------------------------------------- SELECTED FINANCIAL AND OPERATING DATA
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------- (in thousands, except operating and other data) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA(1): Operating revenue $ 47,345 $ 37,258 $ 33,969 $25,598 $16,879 Facility operating expenses 28,457 21,010 17,983 17,761 11,824 Facility development and pre-rental expenses 2,367 1,172 263 474 231 General and administrative expenses 10,042 6,875 4,183 2,034 1,655 Depreciation and amortization 4,048 3,009 3,160 2,799 1,355 Interest expense, net 6,425 15,327 8,023 3,491 1,862 (Loss) income before extraordinary item (4,760) (10,137) 562 (637) (171) Extraordinary item -- -- 850 -- -- Net (loss) income(2) (3) (4,760) (10,137) 1,412 (637) (171) EBITDA(4) 5,713 8,199 11,745 5,653 3,046 BALANCE SHEET DATA(1): Cash and cash equivalents $101,811 $ 6,253 $ 8,089 $ 3,268 $ 2,499 Working capital (deficit) 101,855 2,051 (7,305) 1,288 741 Total assets 342,839 123,321 109,003 61,159 50,866 Total debt 144,544 122,289 110,029 55,207 45,405 Series A convertible preferred stock -- 23,964 -- -- -- Stockholders' equity (deficit) 185,824 (31,774) (16,391) (2,925) (1,716) OPERATING AND OTHER DATA: Facilities (at end of period): Owned(5) 30 20 19 16 14 Managed 5 8 9 7 5 Total 35 28 28 23 19 Resident capacity (at end of period): Owned(5) 2,584 1,557 1,473 1,289 1,067 Managed 528 712 772 652 549 Total 3,112 2,269 2,245 1,941 1,616 Occupancy rate(6) 94.1% 91.7% 94.8% 94.0% --
(1) See Notes 1 and 10 of Notes to Consolidated and Combined Financial Statements. The historical financial data for years prior to 1995 represent combined historical financial data for Sunrise Entities. (2) Net loss per common equivalent shares was $0.51 for the year ended December 31, 1996. (3) Net loss for 1996 includes a one-time unusual charge of $981,000. See Note 16 of Notes to Consolidated and Combined Financial Statements. (4) Earnings before interest, taxes, depreciation and amortization expense. The Company has included information concerning EBITDA because it understands that such information is used by certain investors as one measure of a company's operating performance. EBITDA is not determined in accordance with GAAP, is not indicative of cash provided by operating activities and should not be considered in isolation or as a substitute for measures of performance determined in accordance with GAAP. (5) Includes all facilities wholly owned by the Company or in which it owns interests. Prior to 1994, several of the owned facilities were leased from predecessor entities. (6) Based on monthly occupancy for owned facilities operated for at least 12 months, excluding facilities with temporary vacancies due to renovations or resident relocation. 18 21 Sunrise Assisted Living, Inc. - ------------------------------------------------------------------------------- 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 and Combined Financial Statements, including the related notes thereto, and the other financial information appearing elsewhere herein. This Management's Discussion and Analysis contains certain forward-looking statements relating to the Company's development and acquisition programs over the next three years that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth elsewhere herein under "Liquidity and Capital Resources." Unless the context suggests otherwise, references herein to the "Company" or "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities. OVERVIEW The Company is a leading provider of assisted living services to the elderly. The Company currently operates 37 facilities in 11 states with a capacity of approximately 3,340 residents, including 32 facilities owned by the Company or in which it has ownership interests and five facilities managed for third parties. The Company also operates two skilled nursing facilities owned by a third party. The Company provides assistance with the activities of daily living and other personalized support services ("Basic Care") 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. The Company also provides additional specialized care and services to residents with certain low acuity medical needs--Assisted Living Plus Care ("Plus Care") and residents with Alzheimer's disease or other forms of dementia ("Alzheimer's Care"). By offering this full range of services, the Company is able to accommodate the changing needs of residents as they age and develop further physical or cognitive frailties. In January 1995, Paul J. Klaassen and Teresa M. Klaassen, the Company's co-founders, contributed all of their interests in certain predecessor entities to the Company in exchange for 100% of the Common Stock and simultaneously raised $32.0 million in a private placement of Preferred Stock ($22.0 million Series A Convertible Preferred Stock funded at closing and $10.0 million of Series B Exchangeable Preferred Stock subject to a call exercised by the Company in January 1996). On June 5, 1996, the Company completed its initial public offering ("the Initial Offering"). The net proceeds to the Company from the Initial Offering, after deducting underwriting discount and offering expenses, were approximately $104.3 million. Upon completion of the Initial Offering, all of the outstanding Series A Convertible Preferred Stock was converted automatically into an equal number of shares of Common Stock and all of the outstanding Series B Exchangeable Preferred Stock was redeemed using a portion of the proceeds of the Initial Offering. On October 30, 1996, the Company completed a second public offering (the "Second Offering"). The net proceeds to the Company from the Second Offering, after deducting underwriting discount and estimated offering expenses, were approximately $91.8 million. During 1996, the Company completed the acquisition of six assisted and independent living facilities, one in Santa Rosa, California and five in the Southeast United States, for a total purchase price of $42.5 million. In addition, the Company purchased an additional 30% interest in one of the Company's facilities in exchange for 52,500 shares of Common Stock. On February 5, 1997, the Company acquired an assisted and independent living facility in Valencia, California. The acquisition price was $13.8 million in cash. On January 10, 1997, the Company entered into three purchase-and-sale agreements with one party, giving the Company the right to purchase three properties in Northern California for $17.6 million. One such property was acquired for $8.4 million on February 24, 1997. In addition, the Company completed development of four of its model facilities (Raleigh, NC; Pikesville, MD; Bluebell, PA; and Columbia, MD) which opened and began operations during 1996 and one (Oakton, VA) in 1997. Over the next three years, the Company plans to develop at least 52 of its model facilities in major metropolitan and suburban markets throughout the United States. During the next three years, the Company also plans to acquire up to 9 additional assisted living facilities or other properties that can be repositioned as Sunrise assisted living facilities. In order to achieve its growth plans, the Company will be required to obtain a substantial amount of additional financing. The Company currently estimates that the net proceeds to the Company of the Initial and Second Offerings, together with existing working capital, financing commitments and financing expected to be available, will be sufficient to fund its development and acquisition programs for at least the next 18 months. See "-- Liquidity and Capital Resources". The Company derives its revenues from two primary sources: (i) resident fees for the delivery of assisted living services and (ii) management services income for management of facilities owned by third parties. Historically, most of the Company's operating revenue has come from resident fees, which in 1996 and 1995 comprised 93.3% of total operating revenue. Resident fees typically are paid monthly by residents, their families or other responsible parties. In 1996 and 1995, approximately 99% of the Company's revenue was derived from private pay sources. Resident fees include revenue derived from Basic Care, community fees, Plus Care, Alzheimer's Care and other sources. Community fees are one-time fees generally equal to 60 times the daily resident fee payable by a resident upon admission. Plus Care and Alzheimer's Care fees are paid by residents who require personal care in excess of services provided under the Basic Care program. Management services income, which in 1996 and 1995 accounted for the remaining 6.7% of revenue, consists of management fees which are generally in the range of 5% to 7% of a managed facility's total operating revenue. The Company classifies its operating expenses into the following categories: (i) facility operating expenses, which include labor, food, marketing and other direct facility expenses; (ii) facility development and pre-rental expenses, which include non-capitalized development expenses and pre-rental labor and marketing expenses; (iii) general and administrative expenses, which primarily include headquarters and regional staff expenses and other overhead costs; and (iv) depreciation and amortization. In anticipation of its growth plans, the Company made significant investments in its infrastructure in 1996 and 1995, and, to a lesser extent, in 1994 through the addition of headquarters and regional staff. 19 22 RESULTS OF OPERATIONS The following table sets forth certain operating data expressed as a percentage of operating revenue:
Years Ended December 31, - -------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------- Operating revenue 100.0% 100.0% 100.0% Operating expenses: Facility operating expenses 60.1 56.4 52.9 Facility development and pre-rental expenses 5.0 3.1 0.8 General and administrative 21.2 18.5 12.3 Depreciation and amortization 8.5 8.1 9.3 - -------------------------------------------------------------------- Income from operations 5.1 13.9 24.7 Other income (expense): Interest income 7.0 3.3 1.7 Interest expense (20.5) (44.5) (25.3) Equity in (losses) earnings of unconsolidated partnerships -- -- 0.1 Minority interests 0.5 -- 0.5 Unusual charge (2.1) -- -- - -------------------------------------------------------------------- (Loss) income before extraordinary item (10.1) (27.2) 1.7 Extraordinary item -- -- 2.5 - -------------------------------------------------------------------- Net (loss) income (10.1)% (27.2)% 4.2% ====================================================================
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 Operating Revenue. Operating revenue for 1996 increased 27.1% to $47.3 million from $37.3 million in 1995 due primarily to the growth in resident fees. Resident fees (including community fees and fees for Basic Care, Plus Care, Alzheimer's Care and other services) for 1996 increased 27.1% to $44.2 million from $34.8 million in 1995. This increase was due primarily to the inclusion, in 1996, of six acquired facilities with total revenue of $4.5 million, three newly developed facilities with revenue totaling $2.2 million and additional revenue generated by increases in the average resident occupancy and average daily rate for owned facilities operated by the Company for at least 12 months totaling $1.1 million and $1.3 million, respectively. Average resident occupancy for owned facilities operated by the Company for at least 12 months, excluding facilities with temporary vacancies due to renovations or resident relocations ("Same Facilities"), was 94.1% in 1996, compared to 91.7% for 1995. Resident occupancy, including vacancies attributable to renovations at two facilities in order to meet requirements for accepting non-ambulatory residents and the relocation of non-ambulatory residents at a third facility, increased to 92.5% for 1996 compared to 89.6% for 1995. The average daily resident fee (excluding community fees) for owned facilities operated by the Company for at least 12 months increased to $83 for 1996 from $80 for 1995 primarily due to an increase in the Basic Care rate in 1996 and an increase in the number of residents receiving Plus Care and Alzheimer's Care. Management services income for 1996 increased by $0.7 million, or 26.7%, to $3.2 million from $2.5 million in 1995 due to an increase in management fees and one-time consulting fees. Operating Expenses. Operating expenses for 1996 increased 40.1% to $44.9 million from $32.1 million in 1995. The increase in operating expenses in 1996 is attributable primarily to growth in facility operating and general and administrative expenses. Facility operating expenses for 1996 increased 35.4% to $28.5 million from $21.0 million in 1995. As a percentage of operating revenue, facility operating expenses in 1996 increased to 60.1% from 56.4% in 1995. Of the $7.5 million increase in facility operating expenses, $5.0 million was attributable to the opening in 1996 of three newly developed facilities as well as the acquisition of six facilities. The remaining $2.5 million increase was due to an increase in salaries, benefits, training, marketing and other general expenses at existing facilities. Facility development and pre-rental expenses for 1996 increased by 102% to $2.4 million from $1.2 million in 1995. This increase was due to a $0.7 million increase in non-capitalized labor and related development costs, a $0.7 million increase in start up costs offset, in part, by a $0.2 million increase in other capitalized costs. There were 20 facilities under construction at December 31, 1996 compared to 6 facilities at December 31, 1995. General and administrative expenses in 1996 increased 46.1% to $10.0 million from $6.9 million in 1995. As a percentage of operating revenue, general and administrative expenses increased to 21.2% in 1996 from 18.5% in 1995. Of the $3.2 million increase in general and administrative expenses in 1996, approximately 47.3% was related to labor costs. The remaining increase of $1.7 million was attributable to marketing, consulting, taxes, travel and other general expenses. The provision for bad debts was $0.7 million in 1996 and $0.2 million in 1995, respectively. Of the $0.5 million increase, $0.2 million relates to a one-time consulting fee and $0.3 million relates to certain subordinated management fees. Depreciation and amortization in 1996 increased 34.5% to $4.0 million from $3.0 million in 1995 primarily due to the opening of three developed facilities and the acquisition of six other facilities and amortization of $0.3 million of capitalized pre-rental costs over twelve months. Other income (expense). Interest income for 1996 increased 168.3% to $3.3 million from $1.2 million in 1995 primarily due to a $1.7 million increase from the investment of funds received from the Initial and Second Offerings and interest earned on $5.8 million of revenue bonds purchased in March 1995 (the Company has an option to purchase the facility subject to the revenue bonds, at any time, for fair market value). Interest expense for 1996 decreased 41.3% to $9.7 million from $16.6 million in 1995. In June 1996, the Company paid approximately $8.6 million to a lender as payment in full of a 25% participation interest. During 1995, the Company recorded $5.4 million of expense related to such participation interest. In addition, the Company paid $8.0 million to prepay a portion of the variable rate indebtedness. The lender reduced the interest rate applicable to the $22.0 million outstanding portion of variable rate indebtedness from LIBOR plus 5.75% to LIBOR plus 3.75%. On March 4, 1997, the Company entered into an agreement with the lender reducing further the interest rate from LIBOR plus 3.75% down to LIBOR plus 1.75%. Unusual Charge. In order to avoid a possible change in the Company's ability to continue to manage two facilities resulting from the reduction in the Klaassens' ownership interest in the Company following completion of the Company's Initial Offering in June 1996, the Company made a $1.0 million cash payment to the third-party limited partner in these two facilities in exchange 20 23 for the transfer to the Company by the third party of additional 1% partnership interests in each facility (with a total book value of $18,700) and the elimination of any requirement for the Klaassens' to maintain a specified ownership interest in the Company. This was reflected as an unusual charge during 1996. Net (loss) income. The Company incurred a net loss of $4.8 million in 1996, compared to a net loss of $10.1 million in 1995. The reduction in the net loss for 1996 resulted primarily from a $10.1 million increase in operating revenue coupled with a $6.8 million decrease in interest expense and a $2.0 million increase in interest income offset, in part, by a $12.8 million increase in operating expenses and a $1.0 million unusual charge. The Company did not recognize any Federal income tax expense in 1996 because of such net loss. At December 31, 1996, the Company had net operating loss carryforwards for income tax purposes of approximately $15.7 million which expire in years 2010 and 2011. See Note 12 of Notes to Consolidated and Combined Financial Statements. YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 Operating Revenue. Operating revenue for 1995 increased 9.7% to $37.3 million from $34.0 million in 1994 due primarily to the growth in resident fees. Resident fees for 1995 increased 8.1% to $34.8 million from $32.1 million in 1994. This increase was due primarily to $1.9 million of additional revenue generated by an increase in the Basic Care rate and the inclusion of a full year of resident fees of $1.4 million for the Gardner Park facility (opened in September 1994), which was offset partially by an $0.8 million decline in average resident occupancy. Resident occupancy fell from 94.8% to 91.7% in 1995 for Same Facilities. Resident occupancy was 89.6% in 1995 including vacancies attributable to renovating two facilities in order to meet requirements for accepting non-ambulatory residents and relocating non-ambulatory residents at a third facility. Same Facility resident occupancy declined in 1995 largely as a result of a decline in resident occupancy at two facilities. At these two facilities, the Company has made management changes and instituted new marketing programs. In addition, the Company strengthened its senior management team by hiring a new chief operating officer. The average daily resident fee (excluding community fees) for owned facilities operated by the Company for at least 12 months increased 6.7% to $80 in 1995 from $75 in 1994 primarily due to a 4.4% increase in the average Basic Care rate from $68 in 1994 to $71 in 1995 and an increase in the number of residents receiving Plus Care and Alzheimer's Care services. Management services income for 1995 increased by $0.7 million, or 37.0%, to $2.5 million from $1.8 million in 1994 due to a $0.4 million, or 26.8%, increase in management fees related to a full year of income from four management contracts entered into in 1994, and from ancillary services totaling $0.3 million. Operating Expenses. Operating expenses for 1995 increased 25.3% to $32.0 million from $25.6 million in 1994. The increase in operating expenses in 1995 is attributable primarily to growth in facility operating expenses, facility development and pre-rental expenses and general and administrative expenditures related to building the Company's infrastructure in connection with its growth plans. Facility operating expenses for 1995 increased 16.8% to $21.0 million from $18.0 million in 1994. As a percentage of operating revenue, facility operating expenses in 1995 increased to 56.4% from 52.9% in 1994. Of the $3.0 million increase in facility operating expenses in 1995, $1.2 million was attributable to combination of salary increases for existing staff, increased facility-based staffing required to handle the increased number of residents receiving Plus Care or Alzheimer's Care and training of facility-based personnel. The balance of the increase, $1.8 million, was due to the inclusion of a full year of operations at the Gardner Park facility, other facility expenses such as food, marketing, and legal, and the renovation and opening of a portion of the Village House facility providing assisted living services. Facility development and pre-rental expenses for 1995 increased $0.9 million to $1.2 million from $0.3 million in 1994. The increase was due to an increase in development activities. Labor costs increased $0.4 million, unrecoverable direct costs increased $0.6 million, and pre-rental expenses increased $0.1 million. These increases were offset by an increase in capitalized development expenses of $0.4 million. General and administrative expenses in 1995 increased 64.4% to $6.9 million from $4.2 million in 1994. As a percentage of operating revenue, general and administrative expenses in 1995 increased to 18.5% from 12.3% in 1994. Of the $2.7 million increase in general and administrative expenses in 1995, approximately 70.8% was related to labor costs including a $1.0 million increase in salary and benefits expenses relating to the hiring in 1995 of 33 additional headquarters and regional office management staff in anticipation of the Company's growth plans, and $0.9 million related to salary increases and benefits for existing staff. The remaining $0.8 million increase is attributable to marketing, consulting, and public relations and other general expenses. The provision for bad debts was $0.2 million and $0.1 million in 1995 and 1994, respectively. During 1994, the Company also accrued $0.3 million to recognize anticipated losses on one of its management contracts. Also in 1994, the Company accrued $0.1 million in anticipation of actions taken by Virginia state and local authorities regarding licensure and state building code violations. No loss accruals were recorded in 1995. Depreciation and amortization in 1995 decreased 4.8% to $3.0 million from $3.2 million in 1994. In 1994, certain predecessor limited partnerships wrote off $0.2 million of deferred financing costs. These costs were expensed prior to June 8, 1994 when the Company acquired all minority ownership interests in 15 properties utilizing a new debt facility. Other income (expense). Interest income for 1995 increased 117.3% to $1.2 million from $0.6 million in 1994 primarily due to a $0.4 million increase related to the purchase in 1995, for $5.0 million, of revenue bonds secured by a Company-managed facility and a $0.2 million increase due to higher cash balances related to the January 1995 private placement of Series A Convertible Preferred Stock. Interest expense for 1995 increased 92.8% to $16.6 million from $8.6 million in 1994. The increase in interest expense primarily was attributable to a $95.0 million mortgage obtained by the Company in June 1994. Interest expense increased by $4.2 million, or 79.4%, in 1995 reflecting the inclusion of an additional five months of interest on such mortgage compared to 1994. Interest expense for 1994 and 1995 includes $0.3 million and $0.5 million, respectively, of amortization expense, which relates to a $3.2 million loan discount recorded on such mortgage. Such discount is being amortized over 21 24 the term of the mortgage. Interest expense for 1995, totaling $5.4 million, includes accrual of interest expense relating to a 25% participation interest and is based upon an increase during 1995 in the estimated market value of facilities securing the mortgage. Interest expense related to other debt for 1995 decreased 58.8% to $1.3 million from $3.1 million in 1994, due to the repayment of $71.5 million of debt with a portion of the proceeds from the $95.0 million mortgage obtained in June 1994. Net (loss) income. The Company incurred a net loss of $10.1 million in 1995, compared to net income of $1.4 million (after a $0.9 million extraordinary item) in 1994. The net loss in 1995 resulted primarily from the $6.1 million of expense recorded in 1995 relating to mortgage loan discount and participation interest and the $6.5 million increase in operating expenses, which were offset, in part, by the $3.3 million increase in operating revenue. The Company did not recognize any Federal income tax expense in 1995 because of such net loss. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has financed its operations from long-term borrowings, equity offerings and cash generated from operations. At December 31, 1996, the Company had $143.1 million of outstanding debt (excluding notes payable to affiliates) at a weighted average interest rate of 8.4%. Of such amount, the Company had $77.9 million of fixed-rate debt (excluding a $1.8 million loan discount) at a weighted average interest rate of 8.3%, and $65.2 million of variable-rate debt at a weighted average interest rate of 8.5%. Increases in prevailing interest rates could increase the Company's interest payment obligations relating to variable-rate debt. See Note 6 of Notes to Consolidated and Combined Financial Statements. In January 1995, the Company issued and sold 2,444,444 shares of Series A Convertible Preferred Stock in a private placement for which the Company received gross proceeds of $22.0 million. In January 1996, the Company issued and sold 1,000,000 shares of Series B Exchangeable Preferred Stock, receiving $10.0 million in net proceeds. On June 5, 1996, the Company completed its Initial Offering. The net proceeds to the Company from the Initial Offering, after deducting underwriting discount and offering expenses, were approximately $104.3 million. Uses of the net proceeds from the Initial Offering included $16.6 million in partial payment of the Company's long-term debt, $10.2 million to redeem all outstanding shares of Series B Exchangeable Preferred Stock and $34.0 million to acquire five facilities in southeast United States. On October 30, 1996, the Company completed the Second Offering. The net proceeds to the Company from the Second Offering, after deducting underwriting discount and estimated offering expenses, were approximately $91.8 million. The Company expects to use the balance of the net proceeds from the Initial and Second Offerings to fund continued development of up to 52 new Sunrise model facilities and up to 9 planned acquisitions over the next three years as well as for working capital and general corporate purposes. Working capital increased to $101.9 million at December 31, 1996, compared to $2.1 million as of December 31, 1995, primarily from the net proceeds received from the Initial and Second Offerings. Cash provided by operating activities was $1.7 million for 1996, including a $1.0 million payment to a third-party limited partner which was charged to expenses, as compared to $0.9 million for 1995 and $2.7 million for 1994. Unrestricted cash balances were $101.8 million and $6.3 million at December 31, 1996 and 1995, respectively. Net cash used in investing activities totaled $113.5 million, $17.9 million and $17.0 million in 1996, 1995 and 1994, respectively. The Company's investing activities included $104.6 million, $12.6 million and $16.1 million in 1996, 1995 and 1994, respectively, related to the Company's development activities. Investing activities in 1996 also included the purchase of $8.1 million of marketable securities. Investing activities in 1995 included the purchase of $5.4 million of tax exempt mortgage revenue bonds. Investing activities in 1994 included the purchase of minority interests in 15 facilities using net proceeds of $5.5 million from the $95.0 million mortgage obtained in June 1994. During 1996, the Company's financing activities provided net cash of $207.3 million compared to $15.1 million and $19.1 million provided in 1995 and 1994, respectively. Cash was provided by the Company's Initial and Second Offerings, described above, as well as $28.9 million provided by additional borrowings. During 1996, the Company paid $8.6 million as payment in full of the 25% participating interest in cash flow and appreciation in the value of certain properties. In addition, the Company prepaid $8.0 million of its variable rate debt, paid $0.3 million in dividends to holders of Series B Exchangeable Preferred Stock, and $1.4 million in various financing costs. In 1995, $9.3 million was provided by additional borrowings relating primarily to the construction of facilities, and $20.2 million in net proceeds was provided by the issuance of Series A Convertible Preferred Stock. In addition, $9.6 million in cash distributions were made in 1995. During 1994, the Company consolidated its permanent financing on 15 facilities. Net cash provided by additional borrowings amounted to $25.1 million. The Company received cash contributions of $3.6 million and paid out dividends and distributions during 1994 totaling $10.5 million. The Company's growth strategy contemplates the development during the next three years of at least 52 of its model facilities with a capacity of approximately 4,680 residents. To date, the Company has obtained zoning approval for 28 new facilities with a resident capacity of approximately 2,463 residents, including 22 facilities under construction, and has entered into contracts to purchase 21 additional sites, and is negotiating purchase terms for the remaining sites. During the next three years, the Company also plans to acquire up to 9 assisted living facilities or other properties that can be repositioned as Sunrise assisted living facilities. The estimated cost to complete and lease up the 52 new Sunrise model facilities targeted for completion over the next three years is between $310 million and $520 million, which substantially exceeds the net proceeds of the Initial and Second Offerings and existing working capital and financing arrangements. The Company currently estimates that the net proceeds of the Initial and Second Offerings, together with existing working capital and financing commitments and financing expected to be available, will be sufficient to fund its development and acquisition programs for at least the next 18 months. Substantial additional financing will be required to complete the Company's growth plans and to refinance existing indebtedness if cash flows from operations do not increase as a result of planned growth. There can be no assurance that such financing will be available on acceptable terms. The Company's ability to achieve its development plans will depend upon a variety of factors, many of which are beyond the Company's control. There can be no assurance that the Company will not suffer delays in its development 22 25 program, which could slow the Company's growth. The successful development of additional assisted living facilities will involve a number of risks, including the possibility that the Company may be unable to locate suitable sites at acceptable prices or may be unable to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy, licensing and other required governmental permits and authorizations. The Company may also incur construction costs that exceed original estimates, may not complete construction projects on schedule and may experience competition in the search for suitable development sites. The Company relies on third-party general contractors to construct its new assisted living facilities. There can be no assurance that the Company will not experience difficulties in working with general contractors and subcontractors, which could result in increased construction costs and delays. Further, facility development is subject to a number of contingencies over which the Company will have little control and that may adversely affect project cost and completion time, including shortages of, or the inability to obtain, labor or materials, the inability of the general contractor or subcontractor to perform under their contracts, strikes, adverse weather conditions and changes in applicable laws or regulations or in the method of applying such laws and regulations. Accordingly, if the Company is unable to achieve its development plans, its business, financial condition and results of operations could be adversely affected. In addition, there can be no assurance that the Company's acquisition of assisted living facilities will be completed at the rate currently expected, if at all. The success of the Company's acquisitions will be determined by numerous factors, including the Company's ability to identify suitable acquisition candidates, competition for such acquisitions, the purchase price, the financial performance of the facilities after acquisition, and the ability of the Company to integrate or operate acquired facilities effectively may have a material adverse effect on the Company's business, financial condition and results of operations. The Company has obtained a commitment (subject to certain conditions including syndication) from a financial institution for a $90.0 million credit facility for construction and interim loans to finance the development of up to 10 assisted living facilities by a wholly owned subsidiary of the Company. To date, of this total credit facility, the Company has closed $58.0 million. The Company guaranteed the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of five years and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all other assets of the subsidiary. Advances under the credit facility bear interest at rates from LIBOR plus 1.7% to LIBOR plus 2.9%. As part of this credit facility, the Company has entered into a swap transaction whereby effective during the period June 18, 1998 through June 18, 2001, outstanding advances of up to $19.0 million under this credit facility, or other LIBOR floating rate debt, bear interest at a fixed rate based on a fixed LIBOR base rate of 7.3%. A subsidiary of the Company has received a commitment for a $51.0 million revolving construction credit facility. On February 14, 1997, the Company closed $8.2 million of the total commitment. The credit facility provides for construction and interim loans to finance the development of up to seven assisted living facilities. The Company has agreed to guarantee the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of five years and is secured by cross-collateralized first mortgages on the real property and liens on receivables. Advances under the credit facility bear variable interest rates based upon LIBOR plus 2.25% to LIBOR plus 2.60%. There were no amounts outstanding under this credit facility at December 31, 1996. In March 1996, the Company also obtained a $13.0 million, five-year unsecured credit facility to be used for development and acquisitions and working capital needs. There were no amounts outstanding with this credit facility at December 31, 1996. The Company's financing documents contain financial covenants and other restrictions that (i) require the Company to meet certain financial tests and maintain certain escrows of funds, (ii) require that the Company's founders, Paul Klaassen and Teresa Klaassen (the "Founders"), maintain ownership of at least 20% of the Common Stock and that one of them serves as Chairman of the Board and President of the Company, (iii) require consent for changes in management or control of the Company, (iv) limit, among other things, the ability of the Company and certain of its subsidiaries to borrow additional funds, dispose of assets and engage in mergers or other business combinations, and (v) prohibit the Company from operating competing facilities within certain distances from mortgaged facilities. At December 31, 1996, the Company had stockholders' equity of $185.8 million compared to a stockholders' deficit of $31.8 million at December 31, 1995. The change resulted primarily from (i) adding the receipt of net proceeds from the Company's Initial and Second Offerings of $196.1 million, conversion of Series A Convertible Preferred Stock into an equal number of common shares for $24.0 million, $2.9 million from other common shares issued, including the exercise of stock options, and $0.1 million from the issuance of common stock warrants, and (ii) subtracting $0.7 million relating to distributions made prior to completion of the Company's Initial Offering and dividends paid on Series B Exchangeable Preferred Stock that has been redeemed and net loss for 1996 of $4.8 million. IMPACT OF INFLATION Resident fees from Company-owned assisted living facilities and management services income from facilities operated by the Company for third parties are the primary sources of revenue for the Company. These revenues are affected by daily resident fee rates and facility occupancy rates. The rates charged for the delivery of assisted living services are highly dependent upon local market conditions and the competitive environment in which the facilities operate. In addition, employee compensation expense is the principal cost element of property operations. Employee compensation, including salary increases and the hiring of additional staff to support the Company's growth plans, has recently had a negative impact on operating margins and may continue to do so in the foreseeable future. Substantially all of the Company's resident agreements are for terms of one year and allow, at the time of renewal, for adjustments in the daily fees payable thereunder, and thus may enable the Company to seek increases in daily fees due to inflation or other factors. Any such increase would be subject to market and competitive conditions and could result in a decrease in occupancy of the Company's facilities. The Company believes, however, that the short-term nature of its resident agreements generally serves to reduce the risk to the Company of the adverse effect of inflation. There can be no assurance that resident fees will increase or that costs will not continue to increase due to inflation or other causes. 23 26 Sunrise Assisted Living, Inc. - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
December 31, - ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $101,811 $ 6,253 Accounts receivable, less allowance of $927 and $235 1,522 1,005 Marketable securities 8,322 -- Prepaid expenses and other current assets 2,394 2,643 - ---------------------------------------------------------------------------------------------------------------------------- Total current assets 114,049 9,901 Property and equipment, net 216,711 104,317 Investment 5,750 5,375 Restricted cash and cash equivalents 1,720 1,261 Other assets 4,609 2,467 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $342,839 $123,321 ============================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 8,331 $ 6,547 Deferred revenue 2,988 904 Other current liabilities 103 131 Current maturities of long-term debt 772 268 - ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 12,194 7,850 Notes payable to affiliated partnerships 1,421 1,735 Interests in unconsolidated partnerships 822 620 Long-term debt, less current maturities 142,351 120,286 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 156,788 130,491 Minority interests 227 640 Preferred stock, $0.01 par value, 10,000,000 shares authorized: Series A convertible preferred stock, convertible and redeemable; $9 stated value and liquidation value of $9; plus preferred return; 2,444,444 shares issued and outstanding in 1995 -- 23,964 Common stock, $0.01 par value, 60,000,000 shares authorized, 18,529,869 and 6,019,475 shares issued and outstanding 1996 and 1995 185 60 Contributed capital (deficiency) 201,274 (19,733) Accumulated deficit (15,635) (12,101) - ---------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity (deficit) 185,824 (31,774) - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $342,839 $123,321 ============================================================================================================================
See accompanying notes. 24 27 Sunrise Assisted Living, Inc. - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1996 and 1995 COMBINED STATEMENT OF OPERATIONS OF SUNRISE ENTITIES for the year ended December 31, 1994
December 31, - ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Operating revenue: Resident fees $44,171 $ 34,752 $32,139 Management services income 3,174 2,506 1,830 - ---------------------------------------------------------------------------------------------------------------------------- 47,345 37,258 33,969 Operating expenses: Facility operating expenses 28,457 21,010 17,983 Facility development and pre-rental expenses 2,367 1,172 263 General and administrative 10,042 6,875 4,183 Depreciation and amortization 4,048 3,009 3,160 - ---------------------------------------------------------------------------------------------------------------------------- 44,914 32,066 25,589 Income from operations 2,431 5,192 8,380 Other income (expense): Interest income 3,297 1,229 566 Interest expense (9,722) (16,556) (8,589) - ---------------------------------------------------------------------------------------------------------------------------- Total other expense (6,425) (15,327) (8,023) Equity in (losses) earnings of unconsolidated partnerships (12) (9) 33 Minority interests 227 7 172 Unusual charge (Note 16) (981) -- -- - ---------------------------------------------------------------------------------------------------------------------------- (Loss) income before extraordinary item (4,760) (10,137) 562 Extraordinary item -- -- 850 - ---------------------------------------------------------------------------------------------------------------------------- Net (loss) income $(4,760) $(10,137) $ 1,412 ============================================================================================================================ Net loss per common equivalent shares (Note 9) $ (0.51) =============================================================================================== Supplemental net loss per common equivalent shares (Unaudited-- Note 9) $ (0.40) $ (1.15) ==============================================================================================================
See accompanying notes. 25 28 Sunrise Assisted Living, Inc. - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMBINED STATEMENT OF OWNERS' DEFICIT OF SUNRISE ENTITIES
Additional Accumulated Common Paid-In- Owners' Stock of Capital of Deficit of Shares of Common Contributed Sunrise Sunrise Sunrise Common Stock Capital Accumulated (in thousands) Entities Entities Entities Stock Amount (Deficiency) Deficit Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1993 $ 11 $ 823 $ (6,502) $ 2,642 $ (3,026) Acquisition of interests not previously owned by principal shareholders 3,847 3,847 Contribution of partnership capital 3,550 3,550 Other capital contributions 29 29 Dividends (3,750) (3,750) Cash distributions (16,433) (16,433) Other distributions (2,020) (2,020) Net income 495 917 1,412 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 11 852 (17,063) -- -- -- (191) (16,391) Issuance of common stock for the net assets of Sunrise Entities (11) (852) 17,063 6,019 $ 60 $(16,451) 191 -- Liability of stockholder assumed at formation (1,448) (1,448) Cost of issuance of Series A convertible preferred stock (1,834) (1,834) Net loss (10,137) (10,137) Preferred return on Series A convertible preferred stock (1,964) (1,964) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 -- -- -- 6,019 60 (19,733) (12,101) (31,774) Issuance of common stock warrants 135 135 Preferred return on Series A convertible preferred stock (858) (858) Distributions to stockholders (390) (390) Issuance of common stock-- Initial Offering 5,700 57 104,237 104,294 Conversion of Series A convertible preferred stock to common stock 2,444 24 24,798 24,822 Forfeiture of preferred return on Series A convertible preferred stock (2,822) 2,822 Dividends paid on Series B exchangeable preferred stock (348) (348) Issuance of common stock to acquire interest in facility 53 945 945 Exercise of employee options for common stock 259 3 1,964 1,967 Issuance of common stock-- Second Offering 4,055 41 91,750 91,791 Net loss (4,760) (4,760) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 $ -- $ -- $ -- 18,530 $185 $201,274 $(15,635) $185,824 ====================================================================================================================================
See accompanying notes. 26 29 Sunrise Assisted Living, Inc. - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1996 and 1995 COMBINED STATEMENT OF CASH FLOWS OF SUNRISE ENTITIES for the year ended December 31, 1994
December 31, - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Operating activities Net (loss) income $ (4,760) $ (10,137) $ 1,412 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Equity in losses (earnings) of unconsolidated partnerships 12 9 (33) Minority interests (227) (7) (172) Provision for bad debts 734 185 123 Provision for loss accrual -- -- 350 Extraordinary gain on extinguishment of debt -- -- (850) Accretion of interest on short-term securities (215) -- -- Depreciation and amortization 4,048 3,009 3,160 Amortization of financing costs and discount on long-term debt 714 457 267 Accrual of participation mortgage interest -- 5,400 -- Changes in assets and liabilities: (Increase) decrease: Accounts receivable (1,250) (407) (300) Prepaid expenses and other current assets 249 (238) (596) Other assets (1,420) (855) 37 Increase (decrease): Accounts payable and accrued expenses 1,784 3,539 (363) Deferred revenue 2,084 (47) (299) Other liabilities (28) 36 -- - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 1,725 944 2,736 Investing activities Increase in restricted cash and cash equivalents (459) (85) (552) Investment in property and equipment (104,634) (12,570) (16,111) Disposition of property and equipment -- 25 -- Purchase of investment (375) (5,375) -- Net purchases of marketable securities (8,107) Distribution from investment in unconsolidated partnerships 113 98 (374) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (113,462) (17,907) (17,037) Financing activities Organization costs paid -- -- (61) Net proceeds from sale of Series A convertible preferred stock -- 20,166 -- Net proceeds from sale of Series B exchangeable preferred stock 10,000 -- -- Redemption of Series B exchangeable preferred stock (10,000) -- -- Dividends paid on Series B exchangeable preferred stock (348) -- -- Net proceeds from Initial Offering of common stock 104,294 -- -- Net proceeds from Second Offering of common stock 91,791 Net proceeds from exercised options 1,967 -- -- Contributions from partners -- -- 3,550 Distributions to stockholders/partners (390) (9,646) (6,786) Net investment of minority interests (41) (35) 1,024 Additional borrowings under long-term debt 28,870 9,326 101,976 Repayment of long-term debt (17,165) (4,296) (76,841) Financing costs paid (1,369) (313) -- Dividends -- -- (3,750) Additional borrowings from related parties -- -- 10 Repayment of related party note payable (314) (75) -- - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 207,295 15,127 19,122 - ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 95,558 (1,836) 4,821 Cash and cash equivalents at beginning of year 6,253 8,089 3,268 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 101,811 $ 6,253 $ 8,089 ==============================================================================================================================
See accompanying notes. 27 30 Sunrise Assisted Living, Inc. - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS as of and for the years ended December 31, 1996 and 1995 and Sunrise Entities as of for the year ended December 31, 1994 1. ORGANIZATION AND PRESENTATION Sunrise Assisted Living, Inc. (the "Company") is a leading provider of assisted living services for the elderly. Assisted living services provide a residence, meals and non-medical assistance to elderly residents for a monthly fee. The Company's services are generally not covered by health insurance and therefore monthly fees are generally payable by the residents, their family, or another responsible party. The consolidated financial statements include the Company's wholly owned subsidiaries that manage, own and develop assisted living facilities. The consolidated financial statements also include subsidiaries that own facilities in which the Company has equity interests ranging from 50% to 80%. It is the Company's policy to consolidate non-wholly owned interests when, through its managing partnership or operating agreements, status as manager of the facility and sole general partner, the Company holds unilateral ability to conduct the ordinary course of business of the facility. All significant intercompany transactions and accounts have been eliminated. The Company accounts for other significant interests on the equity method, because the Company is able to influence significantly both the operating and financial decisions. The Company was incorporated in Delaware on December 14, 1994. On January 4, 1995, the Company issued 6,019,375 shares of Common Stock to the majority stockholders in exchange for all of the equity interests in predecessor entities (the "Sunrise Entities"). The equity interests were recorded at the historical cost of the majority stockholders (i.e., a reorganization of entities under common control). Simultaneously, the Company sold 2,444,444 shares of Series A Convertible Preferred Stock at $9.00 per share net of issuance costs of $1.8 million. In addition, the Company assumed notes payable of $2.1 million at January 4, 1995 (see Note 6). Concurrent with the January 4, 1995 transaction, Sunrise Entities distributed an aggregate $9.6 million in cash to the majority stockholders, which was recognized as a distribution payable in Sunrise Entities' December 31, 1994 combined financial statements. The Company effected a three-for-one stock split of the Company's Common Stock and increased the number of authorized shares of Common Stock from 20,000,000 to 60,000,000, effective July 11, 1995. Pursuant to the authorization of the Board of Directors and stockholders, the Company effected on March 20, 1996 a one-for-three stock split. All share amounts reflected herein reflect the one-for-three stock split. Authorized shares of Common Stock remain 60,000,000. On June 5, 1996, the Company successfully completed an initial public offering (the "Initial Offering") of its Common Stock. A total of 5,700,000 shares were sold by the Company in the Initial Offering at a price of $20 per share for gross proceeds of $114.0 million. The net proceeds to the Company from the Initial Offering, after deducting underwriting discount and offering expenses, were approximately $104.3 million. On October 30, 1996, the Company successfully completed a second public offering (the "Second Offering") of its Common Stock. A total of 4,055,241 shares were sold by the Company in the Second Offering at a price of $24 per share for gross proceeds of approximately $97.3 million. The net proceeds to the Company from the Second Offering, after deducting underwriting discount and offering expenses, were approximately $91.8 million. The historical financial statements for the year ended December 31, 1994 represent the combined historical results of operations and financial condition of Sunrise Entities. Sunrise Entities, which prior to January 4, 1995 managed, developed and owned assisted living facilities, consist of a management company, a development company, interests in limited partnerships and limited liability companies that owned assisted living facilities and other limited partnerships used to hold equity interests in operating assisted living facilities or development projects. All significant intercompany transactions and accounts have been eliminated in the combined financial statements. Disclosures made herein with respect to the year ended December 31, 1994 are to be read as disclosures of Sunrise Entities. All disclosures made in reference to periods subsequent to December 31, 1994, except those specifically identified as relating to transactions prior to the formation of the Company, are disclosures of the Company. 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. REVENUE RECOGNITION Resident fee revenue is recognized when services are rendered. Generally, resident community fees approximating sixty times the daily residence fee are received from potential residents upon occupancy. Resident community fees are recognized as income over the first ninety days of the resident's stay and are ratably refundable if the prospective resident does not move into the facility or moves out of the facility within ninety days. Agreements with residents are for a term of one year and are cancelable by residents with thirty days notice. Revenue from management contracts is recognized in the month in which it is earned in accordance with the terms of the management contract. ALLOWANCE FOR DOUBTFUL ACCOUNTS Details of the allowance for doubtful accounts receivable are as follows:
(in thousands) 1996 1995 - ------------------------------------------------------------ Beginning balance $235 $ 50 Provisions for bad debts 734 185 Accounts written off (42) -- - ------------------------------------------------------------ Ending balance $927 $235 ============================================================
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. Pre-rental costs and accumulated amortization included in other assets are as follows:
December 31, - ------------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------------- Pre-rental costs $1,674 $253 Accumulated amortization (345) (11) - ------------------------------------------------------------- $1,329 $242 =============================================================
PROPERTY AND EQUIPMENT Property and equipment are recorded at the lower of cost or net realizable value and include interest and property taxes capitalized on long-term construction projects during the construction period, as well as other costs directly related to the development and construction of facilities. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The Company adopted Statement of Financial Accounting Standards ("SFAS") No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in 1996. The adoption of SFAS No. 121 did not have a material effect on the Company's operations or financial position taken as a whole. Property and equipment of the Company are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Construction in progress includes pre-acquisition costs and other direct costs related to acquisition, development and construction of facilities including certain direct costs of the Company's development subsidiary. If a project is abandoned, any costs previously capitalized are expensed. 28 31 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 using the effective interest method. Deferred financing fees and accumulated amortization are as follows :
December 31, - ------------------------------------------------------------ (in thousands) 1996 1995 - ------------------------------------------------------------ Deferred financing fees $3,915 $2,546 Accumulated amortization (948) (438) - ------------------------------------------------------------ $2,967 $2,108 ============================================================
INCOME TAXES Income taxes are provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis (temporary differences). CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to include currency on hand, demand deposits, and all highly liquid investments with a maturity of three months or less at the date of purchase. MARKETABLE SECURITIES At December 31, 1996, marketable securities consisted of high-quality commercial paper with maturities not greater than 182 days at date of purchase. These securities are classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115 ("SFAS 115"). The carrying amount of these securities approximates their market value at December 31, 1996. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price generally equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and accordingly recognizes no compensation expense for the stock option grants. INTERESTS IN UNCONSOLIDATED PARTNERSHIPS The Company's interest in accumulated losses of unconsolidated partnership's distributions are recorded below the Company's cost basis, which reflects the Company's obligations as the general partner. The Company has no liability for any other material commitments or contingencies of partnerships in which it is a general partner. RECLASSIFICATIONS Certain 1995 and 1994 balances have been reclassified to conform with the 1996 presentation. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
December 31, - ------------------------------------------------------------------- (in thousands) Asset Lives 1996 1995 - ------------------------------------------------------------------- Land and land improvements 10 yrs. $ 25,362 $ 13,072 Building and building improvements 40 yrs. 137,369 83,013 Furniture and equipment 10 yrs. 14,996 10,404 - ------------------------------------------------------------------- 177,727 106,489 Less accumulated depreciation and amortization (18,609) (15,185) - ------------------------------------------------------------------- 159,118 91,304 Construction in progress 57,593 13,013 - ------------------------------------------------------------------- $216,711 $104,317 ===================================================================
4. INVESTMENT On March 1, 1995, the Company purchased all of the outstanding mortgage revenue bonds used to finance a facility managed by the Company. The 10% Bucks County Industrial Development Authority, First Mortgage Revenue Bonds, July 1, 2019, having a face value of $12.5 million, were purchased for $5,000,000. The bonds were in financial default when purchased. On June 30, 1995, the bonds were restructured, at no gain or loss to the Company, to reduce their face amount to $5,750,000 (Series A and C) and provide the facility managed by the Company additional funding up to $750,000 for renovations (Series B). Interest only is payable until maturity. The balances outstanding at December 31, 1996 and 1995 are as follows:
Face Amount December 31, - --------------------------------- Description 1996 1995 Interest Rate Maturity Date - ----------------------------------------------------------------------- Series A $5,000 $5,000 11% July 1, 2025 Series B 750 375 11% July 1, 2015 Series C 750 750 20% subject to July 1, 2010 available cash Bond discount (750) (750) - --------------------------------- $5,750 $5,375 =================================
Subsequent to June 30, 1995, all interest payments on these bonds are current. The Company recognized $752,000 and $443,000 of interest income during 1996 and 1995, respectively, on this investment. These bonds are classified as available-for-sale in accordance with SFAS 115. Management believes the net carrying cost of the bonds approximates market value at December 31, 1996 and 1995. 5. RECEIVABLES AND PAYABLES FROM AFFILIATES Included in prepaid and other current assets are net receivables from unconsolidated partnerships of $1.0 million and $1.4 million as of December 31, 1996 and 1995, respectively. Notes payable to affiliated entities consisted of the following:
December 31, - ----------------------------------------------------------------------------- (in thousands) 1996 1995 - ----------------------------------------------------------------------------- Notes to related limited partnerships, principal and interest due December 31, 1999. Interest accrues at 8% annually $1,381 $1,435 Notes due to an employee and an entity related to that employee. Interest accrues at 18% annually, principal due June 5, 1999 40 100 Note payable assumed upon formation of the Company due December 31, 1999, bearing no interest -- 200 - ----------------------------------------------------------------------------- $1,421 $1,735 =============================================================================
6. LONG-TERM DEBT Long-term debt consists of the following:
December 31, - -------------------------------------------------------------------------- (in thousands) 1996 1995 - -------------------------------------------------------------------------- Multi-Property/Participating Blanket First Mortgage (the "Multi-Property Mortgage") $ 87,000 $ 95,000 Other mortgages and notes payable 25,158 9,745 Accrued participation interest -- 8,600 Outstanding draws on construction notes payable 32,815 9,685 Line of credit -- -- Discount on the Multi-Property Mortgage long-term debt less amortization of $1,350 and $724 (1,850) (2,476) - -------------------------------------------------------------------------- 143,123 120,554 Current maturities (772) (268) - -------------------------------------------------------------------------- $142,351 $120,286 ==========================================================================
29 32 The Multi-Property Mortgage is collateralized by a blanket first mortgage on all assets of a subsidiary of the Company, consisting of 15 facilities which had a book value of approximately $79.0 million at December 31, 1996. 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 $22.0 million bears a variable interest rate. Class (B) is interest only until July 1, 1997 at which time principal and interest payments are due using a twenty-year amortization schedule. In June 1996, the Company prepaid $8.0 million of its variable rate debt. The interest rate applicable to the remaining balance of the floating rate debt was reduced from LIBOR plus 5.75% to LIBOR plus 3.75% and effective March 4, 1997, it was further reduced to LIBOR plus 1.75%. The lender received additional interest based on 25% of net cash flows as specified in the loan documents, which amounted to $10,000 in 1996, $347,000 in 1995 and $370,000 in 1994. In June 1996, the Company paid the lender $8.6 million as payment in full of the lender's 25% participating interest in cash flow and appreciation in the value of certain properties. A participation interest of $3.2 million payable in connection with the Multi-Property Mortgage was recorded at the loan date. A corresponding amount was recorded as loan discount and is being amortized over the life of the loan. Amortization of the discount of $626,000, $457,000 and $267,000 has been included as interest expense in 1996, 1995 and 1994, respectively. During 1995, the Company revised its estimate of the market value of the properties financed by the Multi-Property Mortgage. Additional participation interest on the Multi-Property Mortgage of $5.4 million was accrued and expensed through December 31, 1995 based on the increase in the properties' estimated market value during 1995. The other mortgages and notes payable relate primarily to four facilities whereby outstanding balances are collateralized by the total assets of the respective facility. The book value of such assets at December 31, 1996 was $32.7 million. Payments of principal and interest are paid monthly. Interest rates range from 6.875% to 8.75% with remaining maturities ranging from two to thirty-seven years. The Company has obtained a commitment (subject to certain conditions including syndication) from a financial institution for a $90.0 million credit facility for construction and interim loans to finance the development of up to 10 assisted living facilities of a wholly-owned subsidiary of the Company. As of December 31, 1996, the Company had closed $58.0 million of the total commitment. The Company guaranteed the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of five years and is secured by cross-collateralized first mortgages on the real property and improvements and first liens on all other assets of the subsidiary. Advances under the facility bear interest at rates from LIBOR plus 1.70% to LIBOR plus 2.90%. As part of this line, the Company has entered into a swap transaction whereby effective during the period June 18, 1998 through June 18, 2001, outstanding advances of up to $19.0 million under this credit facility, or other LIBOR floating rate debt, bear interest at a fixed rate based on a fixed LIBOR base rate of 7.3%. As of December 31, 1996 there were $10.4 million of advances outstanding under this facility secured by six facilities. On October 3, 1996, a subsidiary of the Company received a commit-ment for a $51.0 million revolving construction credit facility to develop up to seven assisted living facilities. On February 14, 1997, the Company closed $8.2 million of the total commitment. The Company has guaranteed the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of five years and is secured by cross-collateralized first mortgages on the real property and liens on receivables. Advances under the credit facility bear variable interest rates based upon LIBOR plus 2.25% to LIBOR plus 2.60%. There were no amounts outstanding under this credit facility at December 31, 1996. Other construction notes have total available borrowings of $39.3 million. The notes bear interest based on various published interest rate indices. At December 31, 1996, interest rates on the notes ranged from 7.53% to 8.48%, remaining maturities ranged from four to seven years, and the notes were secured by five facilities. The Company also has a $13.0 million unsecured credit facility to be used for development and acquisitions and working capital needs. The credit facility is for a term of five years. Advances under the facility bear interest at a rate per annum, fluctuating daily, equal to (at the Company's choice) either one and one-half of one percent plus the greater of (i) the lender's prime lending rate and (ii) the Federal funds rate plus one-half of one percent, or the average LIBOR rate for 1,2,3, and 6 months, divided by one minus a reserve percentage. The reserve percentage is that of maximum reserve requirement for member banks of the Federal Reserve System in New York City. The Company issued to the lender warrants to purchase a total of 50,000 shares of common stock. The per share exercise price of the warrants is $17.00. There were no amounts outstanding under the unsecured credit facility at December 31, 1996. The Company's financing documents contain financial covenants and other restrictions that (i) require the Company to meet certain financial tests and maintain certain escrows of funds, (ii) require that the Company's founders, Paul Klaassen and Teresa Klaassen (the "Founders"), maintain ownership of at least 20% of the Common Stock and that one of them serves as Chairman of the Board and President of the Company, (iii) require consent for changes in management or control of the Company, (iv) limit, among other things, the ability of the Company and certain of its subsidiaries to borrow additional funds, dispose of assets and engage in mergers or other business combinations, and (v) prohibit the Company from operating competing facilities within certain distances from mortgaged facilities. Principal maturities of long-term debt as of December 31, 1996 are as follows: (in thousands) - ------------------------------------------------------------ 1997 $ 772 1998 5,140 1999 7,338 2000 1,270 2001 102,162 Thereafter 26,441 - ------------------------------------------------------------ $143,123 ============================================================
Interest paid totaled $10.6 million, $10.2 million and $6.2 million in 1996, 1995 and 1994, respectively, of which $13,000, $18,000 and $17,000 in 1996, 1995 and 1994, respectively, are related to notes payable to related parties. Interest capitalized was $2.0 million, $167,000, and $138,000 in 1996, 1995 and 1994, respectively. Restricted cash and cash equivalents at December 31 consists of the following:
(in thousands) 1996 1995 - --------------------------------------------------------------------------- Under the Multi-Property Mortgage, real estate tax escrows, operating and capital reserves $ 769 $1,105 Other mortgage related real estate tax escrows and resident security deposits 951 156 - --------------------------------------------------------------------------- $1,720 $1,261 ===========================================================================
In June 1994, $3,350,000 of second-trust mortgages related to two of the predecessor limited partnerships, were prepaid for $2,500,000. The gain on prepayment has been reflected as an $850,000 extraordinary gain in the combined statements of operations. 7. REDEEMABLE PREFERRED STOCK The Company has authorized 10,000,000 shares of $0.01 par value of preferred stock. On January 4, 1995, the Company issued 2,444,444 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred Stock had a 9% preferred return, compounded annually, payable, together with 30 33 the stated value of $9 per share, upon redemption. On June 5, 1996, all of the 2,444,444 outstanding shares of Series A Preferred Stock of the Company were converted into an equal number of shares of Common Stock. Preferred return of $2,821,500 through the conversion date was forfeited upon conversion. Each Series A Preferred stockholder was obligated to purchase, upon call by the Company, its pro rata portion of 1,000,000 shares of Series B Exchangeable Preferred Stock for $10 per share, or $10,000,000. On January 19, 1996, the Company exercised the call. Upon completion of the Initial Offering on June 5, 1996, the Company redeemed all 1,000,000 shares of Series B Exchangeable Preferred Stock at a redemption price of $10 per share plus accrued dividends of $165,000. 8. STOCK OPTION PLANS AND STOCKHOLDER RIGHTS AGREEMENT The Company has stock option plans providing for the grant of incentive and nonqualified stock options to employees, directors, consultants and advisors. These plans provide for the grant of options to purchase up to 2,398,065 shares of Common Stock. The option exercise price and vesting provisions of such 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 generally not less than the fair market value of a share of Common Stock on the date the option is granted. The Company also has a stock option agreement with one of its senior executives. The agreement, as amended, is effective as of January 4, 1995 and covers 450,000 shares of Common Stock that have been reserved for issuance at an exercise price of $8.00. The remaining 300,000 options outstanding expire in ten years of which 225,000 are exercisable. A summary of the Company's stock option activity, and related information for the years ended December 31, are presented below:
1996 1995 -------------------------------------------------- Weighted- Weighted- Shares Average Shares Average Options (000) Exercise Price (000) Exercise Price - --------------------------------------------------------------------------------------- Outstanding at beginning of year 952 $ 6.50 0 Granted 1,911 21.74 958 $6.50 Exercised (258) 7.64 0 Forfeited (48) 5.82 (6) 6.30 Expired -- -- - --------------------------------------------------------------------------------------- Outstanding-- end of year 2,557 $17.79 952 $6.50 =======================================================================================
The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------------------- Weighted- Weighted- Weighted- Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices (000) Contractual LifePrice (000) Price - -------------------------------------------------------------------------------- $ 3.00 to 8.00 689 8.43 $ 6.41 308 $ 7.11 10.50 to 20.00 707 9.30 16.15 161 17.29 21.50 to 25.63 1,161 9.95 25.54 58 25.63 - -------------------------------------------------------------------------------- 2,557 527 ================================================================================
On April 25, 1996, the Board of Directors adopted the 1996 Directors' Stock Option Plan (the "Directors' Plan"). Any director who is a member of the Board of Directors' who is not an officer or employee of the Company or any of its subsidiaries (other than the persons elected as director representatives of the holders of Series A Preferred Stock) is eligible to receive options under the Directors' Plan. An aggregate of 50,000 shares of Common Stock are reserved for issuance to participants under the Directors' Plan. The option exercise price will not be less than the fair market value of a share of Common Stock on the date the option is granted. The period for exercising an option begins six months after the option is granted and generally ends ten years from the date the option is granted. Options granted under the Directors' Plan vest immediately. All options to be granted under the Directors' Plan will be non-incentive stock options. As of December 31, 1996, no options have been granted. Pro forma information regarding net income and earnings (loss) per share is required by Statement of Financial Accounting Standards No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995: risk-free interest rate of 6.2 to 6.5 percent; dividend yield of 0 percent; expected lives of 7 to 10 years; and volatility of 36.8 percent. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
December 31, - ------------------------------------------------------------------ (in thousands, except per share data) 1996 1995 - ------------------------------------------------------------------ Net Loss As reported $(4,760) $(10,137) Pro forma $(9,551) $(10,377) Loss per share As reported $ (0.51) Pro forma $ (0.92)
The weighted average fair value of options granted during 1996 and 1995 were $13.36 and $1.78, respectively. The Board of Directors has adopted a Stockholders Rights Agreement ("Rights Agreement") effective April 25, 1996. All shares of Common Stock issued by the Company between the date of adoption of the Rights Agreement and the Distribution Date (as defined below) have rights attached to them. The Rights expire ten years after adoption of the Rights Agreement. Each right, when exercisable, entitles the holder to purchase one one-thousandth of a share of Series C Junior Participating Preferred Stock at a price of $85.00 (the "Purchase Price"). Until a right is exercised, the holder thereof will have no rights as a stockholder of the Company. 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 (i) 10 days following a public announcement that a person or group (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date") or (ii) 10 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 outstanding at the time of completion of the Company's Initial 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 (i) the Company is acquired in a merger or other business combination transaction in which it is not the surviving corporation (other than a merger which follows an offer described in the preceding paragraph), or (ii) 50% or more of 31 34 the Company's assets or earning power is sold or transferred, each holder of a right shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price. The Board of Directors of the Company generally may redeem the rights at a price of $.005 per right at any time until ten days after an acquiring person has been identified as such. 9. HISTORICAL AND SUPPLEMENTAL NET LOSS PER COMMON SHARE The Company's net loss per share calculations are based upon the weighted average number of shares of Common Stock outstanding. Pursuant to the requirements of the Securities and Exchange Commission Staff Accounting Bulletin No. 83, options to purchase Common Stock issued at prices below the initial public offering price during the twelve months immediately preceding initial filing of the registration statement relating to the Initial Offering, have been included in the computation of net loss per share as if they were outstanding through the date of the Initial Offering (using the treasury stock method assuming repurchase of common stock at the estimated Initial Offering price). Other shares issuable upon the exercise of stock options or conversion of redeemable convertible preferred stock have been excluded from the computation because the effect of their inclusion would be anti-dilutive. Subsequent to the Company's Initial Offering, options are included under the treasury stock method to the extent they are dilutive. Weighted average shares used to calculate the supplemental net loss per share differs from the weighted average on a historical basis due to the inclusion of the shares of Common Stock resulting from the assumed conversion at the beginning of the applicable period of the Series A Preferred Stock. The following table summarizes the computations of share amounts used and the computation of supplemental net loss per common share presented in the accompanying consolidated statements of operations:
1996 1995 - ---------------------------------------------------------------------------------------- Historical Supplemental Supplemental - ---------------------------------------------------------------------------------------- unaudited unaudited Net loss per share data: Common and common equivalent shares: Weighted average number of shares of common stock outstanding during the period 11,473,772 11,473,772 6,019,475 Options to purchase common stock issued within one year of Initial Offering using treasury stock method 215,630 215,630 362,208 Adjustment to reflect conversion of Series A Preferred Stock as of January 1, 1995 -- 1,041,894 2,444,444 - --------------------------------------------------------------------------------------- Total common and common equivalent shares of stock considered outstanding during the period 11,689,402 12,731,296 8,826,127 ======================================================================================= Net loss $ (4,760,000) $ (4,760,000) $(10,137,000) Dividend preference attributable to Series A Preferred Stock (858,000) -- -- Dividends attributable to Series B Exchangeable Preferred Stock (348,000) (348,000) -- - --------------------------------------------------------------------------------------- Net loss attributable to common stockholders $ (5,966,000) $ (5,108,000) $(10,137,000) ======================================================================================= Net loss per common equivalent shares $ (0.51) $ (0.40) $ (1.15) =======================================================================================
10. ACQUISITIONS On February 29, 1996, the Company acquired a 120-unit assisted living facility located in Santa Rosa, California. The acquisition price was $8.5 million including the assumption of the existing mortgage of $5.2 million. On May 28, 1996, the Company purchased an additional 30% interest held by a director in one of the Company's facilities in exchange for 52,500 shares of Common Stock. The purchase price of $945,000 was determined based on a valuation of the facility prepared by the Company based primarily upon the present value of net operating income from the facility. On October 8, 1996, the Company completed its purchase of five facilities consisting of 498 total units located in the southeast United States for $34.0 million in cash. On February 5, 1997, the Company acquired a 120-unit assisted and independent living facility in Valencia, California. The acquisition price was $13.8 million in cash. The pro forma unaudited results of operation for the years ended December 31, 1996 and 1995, assuming consummation of each purchase as of January 1, are as follows:
December 31, - --------------------------------------------------------------- (in thousands, except per share data) 1996 1995 - --------------------------------------------------------------- Net operating revenue $59,267 $52,499 Net loss $(1,909) $(7,296) Net loss per common and common equivalent share $ (0.27)
11. COMMITMENTS On June 8, 1994 the Company exchanged a minority interest in an operating facility for all of the operating assets of three related limited partnerships (the "LPs"). The Company does not directly own any interest in the LPs. In addition, the Company has unconditionally guaranteed that it will fund any shortfall in cash required by the three LPs, to honor the LPs' commitments in 1997, to provide a guaranteed 9% return to the limited partners and to repurchase the limited partnership interests of the limited partners. The combined cash shortfall, if the repurchase had been completed at December 31, 1996, would have been approximately $2.5 million. The guarantees are considered to be contingent acquisition costs. The actual amount of cash shortfall of the LPs, if any, will depend on the cash distributions and residual value of the minority interests transferred to the LPs. If the Company is required to fund any cash shortfall in accordance with the guarantees, the carrying value of the net assets required in the exchange would be increased. The Company does not have any requirement to fund this or any other cash shortfall as of December 31, 1996. The Company leases its corporate and regional office space under various leases. The leases have terms of five years with an option to terminate after twelve months from the most recent expansion commencement, or January 1, 1997. The initial annual lease payments amount to $258,000, and the base rent is subject to annual increases based on the Consumer Price Index from a minimum of 2% to a maximum cap of 3% per year. Various other leases expire on June 15, 1999 and September 30, 2001. The Company also has entered into operating leases for four facilities and a long-term ground lease related to another facility, each of which are currently under construction and are expected to commence operations in 1997. The operating lease terms vary from fifteen years, with two ten-year extension options to seventy-three years. The ground lease has a term of ninety-nine years. Future minimum lease payments under office equipment, ground and operating leases as of December 31, 1996 are as follows: (in thousands) - ------------------------------------------------------------ 1997 $1,207 1998 1,949 1999 1,920 2000 1,864 2001 1,781 - ------------------------------------------------------------ $8,721 ============================================================
The Company's growth strategy is to develop at least 52 new assisted living facilities over the next three years. In conjunction with the growth strategy, the Company had 22 facilities under construction at March 4, 1997. Total project 32 35 costs for these 22 facilities is expected to be approximately $196.7 million of which $81.3 million has been incurred as of March 4, 1997. In addition, the Company has entered into contracts to purchase an additional 21 property sites and lease two additional sites for future development. Total contracted purchase price of these sites amounts to $26.6 million. In accordance with the formation agreements of two unconsolidated affiliates, the Company can be required to repurchase the remaining interests in those affiliates. These rights can be exercised beginning 2001 and 2002 respectively for each of the two facilities and will be based upon 112.5% of the facilities appraised fair market value or 115% if exercised after twelve years. The aggregate carrying value of the remaining interests for the two unconsolidated affiliates was $0.8 million at December 31, 1996. On January 10, 1997 the Company entered into three purchase-and-sale agreements, giving the Company the right to purchase three properties in Northern California for $17.6 million. The properties include a 74-unit assisted living community in the Napa Valley; a 73-unit assisted living property in Walnut Creek that is currently under construction (acquired by the Company on February 24, 1997); and a 3.5 acre site in Oakland Hills on which the Company plans to build a 75- to 80-unit assisted living facility. Because the purchase-and-sale agreements are subject to, among other things, the satisfactory completion by the Company of a financial, accounting, regulatory and property due diligence review, there is no assurance that the acquisition of the remaining two properties will be consummated. 12. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Prior to formation of the Company on January 4, 1995 (see Note 1) Sunrise Entities were held in partnerships, limited liability companies, and S corporations, all of which passed through tax liabilities and benefits to the owners. The transfer of assets at the formation of the Company was taxable, in part to the owners. Accordingly, the tax basis of a majority of the property and equipment of the Company exceeds its respective book basis for financial reporting purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities recognized as of December 31, 1996 and 1995 are presented below:
December 31, - ------------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------------- Deferred tax assets: Property and equipment $ 6,409 $ 6,664 Participating interest -- 3,483 Operating loss carryforward 6,452 1,563 Deferred revenue 1,485 364 Other 1,654 95 - --------------------------------------------------------------- Total gross deferred tax assets 16,000 12,169 Less valuation allowance (15,236) (11,166) Deferred tax liabilities: Loan discount (764) (1,003) - --------------------------------------------------------------- Net deferred tax amount $ -- $ -- ===============================================================
At December 31, 1996, the Company had net operating loss carryforwards for income tax purposes of approximately $15.7 million which expire from 2010 through 2011. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company is in a cumulative pretax loss for the latest three years for financial reporting purposes. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that the Company will generate any earnings or any specific level of earnings in future years. Therefore, the Company established a valuation allowance on deferred tax assets of approximately $15.2 million as of December 31, 1996. Significant components of the provision for income taxes are as follows for the years ended:
December 31 - ------------------------------------------------------------ (in thousands) 1996 1995 - ------------------------------------------------------------ Current: Federal $ -- $ -- State -- -- Total current -- -- - ------------------------------------------------------------ Deferred: Federal (3,348) (3,524) State (722) (674) Increase in valuation allowance 4,070 4,198 - ------------------------------------------------------------ Total deferred $ -- $ -- ============================================================
The effective tax rate on income before income taxes varies from the statutory federal income tax rate for the years ended December 31 as follows:
1996 1995 - -------------------------------------------------------------- Statutory rate (34)% (34)% State taxes, net (7) (6) Valuation allowance 41 40 - -------------------------------------------------------------- 0% 0% ==============================================================
13. RELATED-PARTY TRANSACTIONS SUNRISE FOUNDATION, INC. Stockholders who are officers of the Company operate a school and a day care center through a not-for-profit organization, Sunrise Foundation, Inc. ("SFI"). SFI reimbursed the Company monthly for use of office facilities and support services in the amounts of $60,000 per year in 1996, 1995 and 1994. Such amounts are included in management services income. GROUND LEASE The Company has a ninety-nine year ground lease with one of the Company's Founders. The ground lease expires in May 2085. The basic monthly rent is adjusted annually based on the CPI. Rent expense under this lease was $262,000, $255,000 and $248,496 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company subleases one-half of this ground lease to SFI. The sublease expires in May 2085 and requires payments equal to 50% of all payments made by the Company under the ground lease. Sublease rental income was $132,000, $127,000 and $124,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Rent expense, included in facility operating expenses, is recorded net of the sublease income. OTHER The Founders lease certain real property located in Fairfax County, Virginia for use as a residence pursuant to a ninety-nine year ground lease with the Company dated June 7, 1994. The rent is $1.00 per month. This property is part of a parcel, which includes a facility, that was transferred to the Company on June 8, 1994. A director of the Company made a capital contribution of $500,000 in exchange for a 30% membership interest in a limited liability company which operates one of the Company's facilities. On May 28, 1996, the Company purchased the 30% interest in exchange for 52,500 shares of Common Stock (see Note 10). Distributions made by the Company to the director in 1996, 1995 and 1994 aggregated $41,000, $40,000 and $36,000, respectively. 14. PROFIT-SHARING PLAN The Company has a profit-sharing plan (the "Plan") under Internal Revenue Code Section 401(k). All employees of the Company are covered by the Plan. The Plan contains three elements -- employee salary contributions, matching employer contributions, and special discretionary employer contributions. All 33 36 full-time employees who have twelve months of employment are eligible to participate in the Plan. Deferred salary contributions are made through pre-tax salary deferrals of between 1% and 16%. The Plan provides that the employer will contribute $0.25 for every dollar the employee contributes, up to 7% of the employee's compensation. Matching contributions made by the Company totaled $88,000, $80,000 and $39,000 during 1996, 1995 and 1994, respectively. No discretionary profit-sharing contributions were made during 1996, 1995 or 1994. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair value were determined by management, using available market information and valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have an effect on the estimated fair value amounts. The fair value of the investment is discussed in Note 4. 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 $77.9 million (excluding a $1.8 million loan discount) has an estimated aggregate fair value of $78.9 million at December 31, 1996. Estimated fair value of fixed rate debt is based on interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities. The estimated fair value of the Company's variable rate debt is estimated to be approximately equal to its carrying value of $65.2 million at December 31, 1996. The interest rate swap related to $19.0 million of LIBOR floating rate debt (see Note 6) has an estimated fair value of $(148,000) at December 31, 1996. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1996. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1996 and current estimates of fair value may differ from the amounts presented herein. 16. UNUSUAL CHARGE To avoid a possible change in the Company's ability to continue to manage two facilities resulting from the reduction in the ownership interest in the Company of Paul J. Klaassen, the Company's Chairman of the Board, President, Chief Executive Officer and co-founder, and Teresa M. Klaassen, the Company's Executive Vice President and co-founder (collectively, the "Founders") following the Initial Offering, the Company made a $1,000,000 cash payment to the third-party limited partner in these two facilities in June, 1996. The payment was made in exchange for the transfer to the Company by the third-party of additional 1% partnership interests in each facility with a total book value of $18,700 and the elimination of any requirement for the Founders to maintain a specified ownership interest in the Company. 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the fiscal quarters since the consummation of the Initial Offering on June 5, 1996:
Quarter Ended 1996 - ------------------------------------------------------------------------------- (in thousands, except per share data) June 30, Sept. 30, Dec. 31, - ------------------------------------------------------------------------------- Total operating revenues $11,262 $11,567 $14,778 Net loss (2,379) (490) (182) Net loss per share $(0.33) $ (0.03) $ (.01)
REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Sunrise Assisted Living, Inc. We have audited the accompanying consolidated balance sheets of Sunrise Assisted Living, Inc. (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for the years then ended. We also have audited the combined statements of operations, owners' deficit, and cash flows of Sunrise Entities (the predecessor to the Company, see Note 1) for the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunrise Assisted Living, Inc. as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Further, in our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of operations and cash flows of Sunrise Entities for the year ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Washington, D.C. March 4, 1997 34 37 OFFICERS PAUL J. KLAASSEN, Co-founder of Sunrise Assisted Living, Inc. and Chairman of the Board, President and Chief Executive Officer Mr. Klaassen was a founding chairman of the Assisted Living Federation of America ("ALFA"), the largest assisted living industry trade association. Mr. Klaassen also served on the editorial advisor boards of Contemporary Long Term Care, Retirement Housing Report, Assisted Living Today and Assisted Living Briefing magazines. TERESA M. KLAASSEN, Co-founder of Sunrise Assisted Living, Inc. and Executive Vice President and Secretary Ms. Klaassen was a founding member of ALFA and currently serves on the boards of several long-term care organizations. DAVID W. FAEDER, Executive Vice President and Chief Financial Officer From 1991 to 1993, Mr. Faeder was a vice president of CS First Boston Corporation, serving in both the investment banking and fixed income departments. From 1984 to 1991, Mr. Faeder served as a vice president of Morgan Stanley, where he worked in the Real Estate Capital Markets Group. TIMOTHY S. SMICK, Executive Vice President and Chief Operating Officer From 1995 to 1996, Mr. Smick was a senior housing consultant to LaSalle Advisory Ltd., a pension fund advisory company. From 1984 to 1994, Mr. Smick was the chairman and chief executive officer of PersonaCare Inc., a company he co-founded that provided subacute, skilled nursing and assisted living care. From 1979 to 1981, Mr. Smick was the regional operations director for Manor Healthcare, a division of ManorCare, Inc., a long-term care company. THOMAS B. NEWELL, Executive Vice President, General Counsel and President of Sunrise Development, Inc. From 1989 to January 1996, Mr. Newell was a partner with the law firm of Watt Tieder & Hoffar, where his practice concentrated on all aspects of commercial and real estate development transactions and where he represented Sunrise Assisted Living for more than five years. BRIAN C. SWINTON, Executive Vice President, Sales and Marketing From 1994 to April 1996, Mr. Swinton was a senior vice president of Forum Group Inc., a developer and operator of retirement communities and assisted living facilities. From 1986 to 1994, Mr. Swinton served as vice president, sales, marketing and product development at Marriot International in their senior living division. OTHER SENIOR MANAGEMENT OF COMPANY SUBSIDIARIES WILLIAM F. CARNEY Senior Vice President of Operations/Northeast-Southeast Region MARTHA L. CHILD President, Martha Child Interiors, Inc. DWAYNE J. CLARK Executive Vice President of Operations/Western Region HARLEY D. COOK Senior Vice President of Development KATHLEEN M. DEZIO Senior Vice President of Corporate Communications and Public Affairs DANIEL B. GORHAM Senior Vice President of Acquisitions LARRY E. HULSE Senior Vice President and Chief Accounting Officer JAMES S. POPE Senior Vice President of Finance CATHERINE SCOTT-ASPLEN Senior Vice President of Operations/Maryland Homes RICHARD W. SLOSSON Senior Vice President of Construction TIFFANY L. TOMASSO Executive Vice President of Operations/Mid-Atlantic Region BOARD OF DIRECTORS PAUL J. KLAASSEN Co-founder and Chairman of the Board, President and Chief Executive Officer TERESA M. KLAASSEN Co-founder and Executive Vice President and Secretary DAVID W. FAEDER Executive Vice President and Chief Financial Officer TIMOTHY S. SMICK Executive Vice President and Chief Operating Officer RONALD V. APRAHAMIAN Mr. Aprahamian was chairman of the board and chief executive officer of the Compucare Company, a health care information technology company, from 1988 to 1996. He also is a director of Metrocall, Inc., a paging company. THOMAS J. DONOHUE Mr. Donohue has been the president and chief executive officer of the American Trucking Association, the national trade organization of the trucking industry, since 1984. He is a director of: Marymount University; IPAC, an international consulting firm; Newmyer Associates, a Washington, D.C. public policy firm; and the Hudson Institute. RICHARD A. DOPPELT Mr. Doppelt is venture group manager of Allstate Venture Capital, a division of Allstate Insurance Company. He is currently a director of Au Bon Pain-Midwest, Levy restaurants, and Bell Microproducts, and an advisory board member of The Environmental Venture Fund. SCOTT F. MEADOW Mr. Meadow is a vice president of The Sprout Group, the venture capital division of DLJ Capital Corporation. He has been a general partner of Frontenac Company; general partner of William Blair Venture Partners, and is a director of Medpartners/Mullikin Inc., a physician practice management company. DARCY J. MOORE Ms. Moore is a general partner of Frontenac Company, a venture capital firm, and an associate of William Blair Venture Partners. She is a director of Healthcare Resource Management, Inc., a radiology services company; Nurse On Call, Inc. a demand management company; and ElderHealth, Inc., an elder care company. 35 38 A GROWING NETWORK [MAP] COMMUNITIES Open 37 Under Construction 22 Under Contract 23 SUNRISE ASSISTED LIVING RESIDENCES CALIFORNIA Sunrise at The Chanate Santa Rosa, California 707.575.7503 Sunrise of Fresno(2) Fresno, California 209.325.8170 Sunrise at Sterling Canyon(1) Valencia, California 805.253.3551 Sunrise of Petaluma(2) Petaluma, California 707.776.2885 Sunrise of Walnut Creek(3) Walnut Creek, California 888.434.4648 COLORADO Sunrise at Pinehurst(3) Denver, Colorado 888.434.4648 FLORIDA Sunrise Atrium of Boca Raton Boca Raton, Florida 407.750.7555 Sunrise at North Shore A Senior Living Community St. Petersburg, Florida 813.823.1571 GEORGIA Sunrise of Augusta Augusta, Georgia 706.738.6003 Sunrise at Brookside Glen Columbus, Georgia 706.322.3040 Sunrise of Decatur(2) Decatur, Georgia 404.377.6111 Sunrise of East Cobb(2) Marietta, Georgia 770.509.0919 Huntcliff Summit by Sunrise(1) Atlanta, Georgia 770.552.3000 Sunrise at Ivey Ridge(3) Alpharetta, Georgia 770.475.6622 MARYLAND Sunrise of Annapolis Annapolis, Maryland 410.266.1400 Sunrise of Columbia Columbia, Maryland 410.531.1444 Sunrise of Frederick Frederick, Maryland 301.663.9500 Sunrise of Rockville(2) Rockville, Maryland 301.309.0500 Sunrise of Severna Park(1, 2) Severna Park, Maryland 410.544.7200 Sunrise of Towson Towson, Maryland 410.296.8900 Sunrise of Pikesville Pikesville, Maryland 410.602.0033 The Sunrise Village House(1) Montgomery Village, Maryland 301.921.0445 MASSACHUSETTS Sunrise at Gardner Park Peabody, Massachusetts 508.532.3200 John Bertram House(4) Salem, Massachusetts 508.744.1002 John Bertram House of Swampscott(2,4) Swampscott, Massachusetts 617.595.1991 Sunrise of Norwood(2) Norwood, Massachusetts 617.762.1333 Springhouse, Inc.(4) A Non-profit Continuing Care Retirement Community Boston, Massachusetts 617.522.0043 Sunrise of Wayland(2) Wayland, Massachusetts 508.358.0035 NEW JERSEY Sunrise of Morris Plains(2) Morris Plains, New Jersey 201.538.7878 Sunrise of Old Tappan(2) Old Tappan, New Jersey 201.722.8787 Sunrise of Wayne(2) Wayne, New Jersey 201.628.4900 Sunrise of Westfield(2) Westfield, New Jersey 908.317.3030 Sunrise of Mount Laurel(2) Mount Laurel, New Jersey 609.222.1213 Sunrise at Woodbury Lake(4) Woodbury, New Jersey 609.848.8777 NEW YORK Sunrise of Glen Cove(3) Glen Cove, New York 888-434-4648 NORTH CAROLINA Sunrise of Raleigh Raleigh, North Carolina 919.787.0777 PENNSYLVANIA Sunrise of Abington(1, 2) Abington, Pennsylvania 215.576.8899 Sunrise of Blue Bell Blue Bell, Pennsylvania 215.619.2777 Sunrise at Granite Run(2) Media, Pennsylvania 610.566.3535 Sunrise of Haverford(3) Haverford, Pennsylvania 610.896.9777 Mill Run(4) Bristol, Pennsylvania 215.788.3310 SOUTH CAROLINA Sunrise of Greenville Greenville, South Carolina 864.627.8700 VIRGINIA Sunrise of Alexandria(2) Alexandria, Virginia 703.212.7666 Sunrise of Arlington Arlington, Virginia 703.524.5300 Sunrise at Bluemont Park(1) Arlington, Virginia The James 703.536.1050 The Shenandoah 703.536.1060 The Potomac 703.536.1070 Sunrise at Countryside(1) Sterling, Virginia 703.430.0681 Sunrise of Fairfax Fairfax, Virginia 703.691.0046 Sunrise of Falls Church Falls Church, Virginia 703.534.2700 Sunrise of Springfield(2) Springfield, Virginia 703.922.6800 Sunrise of Gunston Lorton, Virginia 703.550.2400 Sunrise at Hunter Mill Oakton, Virginia 703.255.1006 Sunrise of Leesburg Leesburg, Virginia 703.777.1971 Sunrise of Oakton Oakton, Virginia 703.255.2050 Sunrise of Warrenton Warrenton, Virginia 540.349.9001 The Lincolnian(1, 4) Alexandria, Virginia 703.914.0333 WASHINGTON Sunrise of Mercer Island Mercer Island, Washington 206.232.6565 Sunrise of Queen Anne An Independent Living Residence Seattle, Washington 206.282.5777 (1) An Independent & Assisted Living Residence (2) Opening in 1997 (3) Opening in 1998 (4) Managed Facility 36 39 CORPORATE INFORMATION CORPORATE HEADQUARTERS Sunrise Assisted Living, Inc. 9401 Lee Highway, Suite 300 Fairfax, VA 22031 703.273.7500 TRANSFER AGENT AND REGISTRAR First Union National Bank of North Carolina 230 South Tryon Street Charlotte, NC 28288 ANNUAL MEETING DATE The Company will hold its annual meeting of stockholders on Monday, April 28, 1997 at 9:00 a.m. at: Ritz-carlton, Tysons Corner 1700 Tysons Boulevard McLean, Virginia 22102 703.506.4300 FORM 10-K Copies of Form 10-K filed with the Securities and Exchange Commission are available with-out charge upon written request addressed to Investor Relations at the corporate headquarters. STOCK INFORMATION The Company's common stock is listed and traded publicly on the Nasdaq National Market under the symbol SNRZ. Trading of the common stock commenced May 31, 1996. As of March 17, 1997, there were 39 stockholders of record. No cash dividends have been paid in the past, and none are expected in the foreseeable future. QUARTERLY MARKET PRICE RANGE OF COMMON
Quarter Ended High Low - ----------------------------------- June 30, 1996 $25.75 $23.00 September 30, 1996 30.00 21.50 December 31, 1996 28.75 23.00
Design: Financial Communications, Inc. Bethesda, MD (C)Sunrise Assisted Living, Inc., 1997 Photography: Craig Thompson, David Galen, Jerry Staley, Stan Flint and Dennis Brock. 40 [PHOTO] [PHOTO] [PHOTO] The real leaders in the revolution in long-term care are the caregivers. These seven Sunrise team members represent the more than 2,000 employees who work in Sunrise communities across the country, providing residents with high-quality, personalized and compassionate care. [PHOTO] [PHOTO] Clockwise, from top left: Betty Barton, Concierge; Richard Woods, Jr., Dietary Coordinator; Tammy Harless, Program Coordinator, with Sunrise resident Julia Jordan; Kimberly Beazley, Shift Supervisor and Medicine Technician, with Sunrise resident Ilene Keats; A. Douglas Markland, Jr., Maintenance Coordinator; Kevin Hunter, Executive Director; Jan Fleming, LPN and Wellness Nurse, with Sunrise resident Katherine Costley. [PHOTO] [PHOTO] [SUNRISE LOGO] 9401 Lee Highway Suite 300 Fairfax, Virginia 22031 703.273.7500 EX-21 5 SUBSIDIARIES. 1 EXHIBIT 21 Sunrise Assisted Living, Inc. List of Subsidiaries
Direct or Indirect Jurisdiction Subsidiaries Ownership of Incorporation - ------------ ------------------ ---------------- Sunrise Terrace, Inc. 100% Virginia Sunrise Development, Inc. 100% Virginia Sunrise Assisted Living Investments, Inc. 100% Virginia Sunrise Assisted Living Limited Partnership 100% Virginia Sunrise Assisted Limited Partnership 100% Virginia Sunrise at Gardner Park Limited Partnership 50% Massachusetts Sunrise of Raleigh, LLC 50% North Carolina Sunrise Village House, LLC 80% Maryland Sunrise Assisted Living Limited Partnership II 100% Virginia Sunrise Assisted Living Limited Partnership III 100% Pennsylvania Sunrise Assisted Living Limited Partnership IV 100% New Jersey Sunrise Assisted Living Limited Partnership V 100% New Jersey Sunrise Assisted Living Limited Partnership VI 100% New Jersey Sunrise Assisted Living Limited Partnership VII 100% Maryland Sunrise Assisted Living Limited Partnership VIII 100% California Sunrise Assisted Living of Abington, L.P. 100% Pennsylvania Sunrise Assisted Living of Granite Run, L.P. 100% Pennsylvania Sunrise Assisted Living of Franconia, L.P. 100% Virginia Independence Home Care Agency, Inc. 100% Washington Sunrise Homes of Towson LLC 100% Maryland Sunrise East Assisted Living Limited Partnership 100% Virginia Sunrise of Alexandria Assisted Living, L.P. 100% Virginia Sunrise of Rockville Assisted Living Limited Partnership 100% Maryland 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 Sunrise of Westfield Assisted Living, L.P. 100% Maryland NAH/Sunrise Severna Park, LLC 50% Maryland Sunrise Wayland Assisted Living Limited Partnership 100% Massachusetts Sunrise Norwood Assisted Living Limited Partnership 100% Massachusetts Sunrise Napa Assisted Living Limited Partnership 100% California Sunrise Walnut Creek Assisted Living Limited Partnership 100% California Sunrise West Assisted Living Limited Partnership 100% California Sunrise Sterling Canyon Assisted Living Limited Partnership 100% California Sunrise Decatur Assisted Living Limited Partnership 100% Georgia Sunrise Ivey Ridge Assisted Living Limited Partnership 100% Georgia Sunrise East Cobb Assisted Living Limited Partnership 100% Georgia Sunrise Glen Cove Assisted Living Limited Partnership 100% New York
EX-23 6 CONSENT. 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Annual Report (Form 10-K) of Sunrise Assisted Living, Inc. of our report dated March 4, 1997, included in the 1996 Annual Report to Stockholders of Sunrise Assisted Living, Inc. We also 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 David W. Faeder, (Form S-8 No. 333-05257) and the Sunrise Assisted Living, Inc. 1996 Non-Incentive Stock Option Plan (Form S-8 No. 333-21817), respectively, of our report dated March 4, 1997 with respect to the consolidated financial statements of Sunrise Assisted Living, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Washington, D.C. March 26, 1997 EX-27 7 FDS.
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 101,811 8,322 2,449 927 0 114,049 235,320 18,609 342,839 12,194 142,351 0 0 185 185,639 342,839 0 47,345 0 44,914 0 727 9,722 (4,760) 0 (4,760) 0 0 0 (4,760) (0.51) (0.51)
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