<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration Number(s)
333-2582 and 333-04845
PROSPECTUS
MAY 30, 1996
5,700,000 SHARES
[SUNRISE ASSISTED LIVING LOGO]
COMMON STOCK
All of the 5,700,000 shares of common stock, $0.01 par value per share
(the "Common Stock"), offered hereby are being sold by Sunrise Assisted Living,
Inc. ("Sunrise" or the "Company"). Up to 855,000 additional shares may be sold
by certain stockholders of the Company (the "Selling Stockholders") if the
Underwriters exercise their over-allotment option. See "Principal and Selling
Stockholders" and "Underwriting." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders.
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "SNRZ."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $20.00 $1.40 $18.60
Total(3)................................. $114,000,000 $7,980,000 $106,020,000
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days hereof, to purchase up to an aggregate of 855,000
additional shares of Common Stock at the price to the public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to the Public, Underwriting Discounts and Commissions, and
Proceeds to the Selling Stockholders will be $17,100,000, $1,197,000, and
$15,903,000, respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about June 5, 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
NATWEST SECURITIES LIMITED
<PAGE> 2
Sunrise Assisted Living Logo
SUNRISE MISSION STATEMENT
To serve with kindness, love and professionalism, while
demonstrating our commitment to the following principles:
<TABLE>
<S> <C> <C>
[Resident [Resident
Photo] Photo]
Nurturing the Spirit Personalizing Services
[Resident
Photo] [Resident
Enabling Freedom of Photo]
Choice [Facility Photo] Protecting Privacy
[Resident
[Resident Photo]
Photo] Encouraging
Fostering Individuality Independence
[Resident
[Resident Photo]
Photo] Involving Family and
Preserving Dignity Sunrise of Bluemont Park, VA (owned) Friends
</TABLE>
For United Kingdom Purchasers: The shares of Common Stock offered hereby may
not be offered or sold in the United Kingdom other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments, whether as principal or agent (except in circumstances that do not
constitute an offer to the public within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986) and this
Prospectus may only be issued or passed on to any person in the United Kingdom
if that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1995.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 3
[LEFT FACING PAGE OF GATEFOLD]
[SUNRISE ASSISTED LIVING LOGO]
[PHOTO OF REGISTERED NURSE [PHOTO OF SUNRISE CARE MANAGER
ASSISTING RESIDENT WITH TAKING HELPING RESIDENT WITH BATHING]
MEDICATION]
[PHOTO OF SUNRISE CARE MANAGER [PHOTO OF RESIDENTS ENJOYING
ASSISTING RESIDENT WITH EATING] AFTERNOON COFFEE AT SUNRISE OF
ANNAPOLIS]
[PHOTO OF EXTERIOR OF [PHOTO OF SITTING ROOM [PHOTO OF EXTERIOR OF
SUNRISE OF ANNAPOLIS] AT SUNRISE OF FALLS CHURCH] SUNRISE OF FALLS CHURCH]
<PAGE> 4
[RIGHT FACING PAGE OF GATEFOLD]
[SUNRISE ASSISTED LIVING LOGO]
TOP, LEFT TO RIGHT: Sunrise Registered
Nurse assists resident with taking
medication; Sunrise Care Managers help
residents with bathing and dressing
CENTER, LEFT TO RIGHT: Sunrise Care
Manager assists resident with eating; [PHOTO OF SUNRISE CARE MANAGER
Residents enjoy afternoon coffee at HELPING RESIDENT WITH DRESSING]
Sunrise of Annapolis, Maryland; Residents
in lobby at Sunrise of Annapolis; Sunrise
Registered Nurse takes a resident's blood
pressure.
BOTTOM, LEFT TO RIGHT: Signature Sunrise
Assisted Living facilities in Maryland and
Virginia (Sunrise of Annapolis, MD (joint
venture); sitting room, exterior and ice
cream parlor at Sunrise of Falls Church, VA
(owned); and Sunrise of Arlington, VA (owned)
[PHOTO OF RESIDENTS IN LOBBY AT [PHOTO OF REGISTERED NURSE TAKING
SUNRISE OF ANNAPOLIS] A RESIDENT'S BLOOD PRESSURE]
[PHOTO OF ICE CREAM PARLOR AT [PHOTO OF EXTERIOR OF SUNRISE
SUNRISE OF FALLS CHURCH] OF ARLINGTON]
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated and combined financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
specified, all information in this Prospectus reflects (i) conversion of
2,444,444 shares of Series A Convertible Preferred Stock of the Company (the
"Series A Preferred Stock") into an equal number of shares of Common Stock upon
completion of the Offering and (ii) redemption of 1,000,000 shares of Series B
Exchangeable Preferred Stock of the Company (the "Series B Preferred Stock") at
a redemption price of $10.00 per share (plus any accrued but unpaid dividends)
using a portion of the net proceeds of the Offering. Unless the context suggests
otherwise, references in this Prospectus to the "Company" or "Sunrise" mean
Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities.
THE COMPANY
Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") is a leading
provider of assisted living services to the elderly. The Company currently
operates 30 assisted living facilities in nine states with a capacity of
approximately 2,500 residents, including 16 facilities wholly owned by the
Company, seven facilities in which it has ownership interests and seven
facilities managed for third parties. The Company had revenues of $37.3 million
in 1995 and $9.7 million for the three months ended March 31, 1996, and incurred
net losses of $10.1 million and $1.7 million, respectively, for these periods.
Approximately 98% of these revenues were derived from private pay sources. The
Company's three-year growth objective is to develop and own at least 40 new
Sunrise assisted living facilities with a capacity of approximately 3,600
residents. To date, the Company has obtained zoning approval for 17 new
facilities with a total resident capacity of 1,560, including five facilities
currently under construction. The Company has also entered into contracts to
purchase 13 additional sites and is negotiating purchase terms for the remaining
identified sites. Since the first Sunrise facility opened in 1981, the Company
has developed 24 facilities, 16 of which it currently owns, and has completed
all facilities for which it obtained zoning approval. In addition to its
construction and development plans, the Company plans to acquire up to 15
additional facilities over the next three years.
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, 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. The assisted living industry is
highly fragmented and characterized by numerous small operators. The Company
believes that few assisted living operators provide a comprehensive range of
assisted living services which permit elderly residents to "age in place."
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 Company's objective is to capitalize on its 15-year history as a pioneer
and leading provider in the assisted living industry and on the growing demand
for assisted living as the preferred setting for elderly care. The Company's
strategy is to: (i) provide high-quality personalized resident care and
services; (ii) provide a full range of assisted living services; (iii) rapidly
develop the Sunrise model in targeted markets; (iv) maintain the depth and
quality of its management team; (v) pursue acquisitions and contract management
opportunities; and (vi) achieve the benefits of regional density by clustering
facilities.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..... 5,700,000 shares
Common Stock to be outstanding
after the Offering.................. 14,216,419 shares(1)
Use of Proceeds......................... To finance the development and
acquisition of additional assisted
living facilities, to prepay a 25%
mortgage participation interest and
certain other indebtedness, to redeem
the Series B Preferred Stock held by
persons who may be considered
affiliates of the Company and for
working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol........... SNRZ
</TABLE>
- ---------------
(1) Does not include (i) 1,315,266 shares of Common Stock subject to outstanding
options at March 31, 1996 at a weighted average exercise price of $7.80 per
share, (ii) 120,000 shares of Common Stock subject to options that the
Company has agreed to grant prior to completion of the Offering at an
exercise price per share equal to the initial public offering price, (iii)
up to 250,000 shares of Common Stock subject to options that the Company
expects to grant prior to completion of the Offering at an exercise price
per share equal to the initial public offering price, and (iv) outstanding
warrants for 50,000 shares of Common Stock at an exercise price per share
equal to 85% of the initial public offering price. Under the treasury stock
method of computation, outstanding options and warrants represent 755,902
common stock equivalents. See "Management -- 1996 Directors' Stock Option
Plan," "-- 1995 Stock Option Plan" and "-- Non-Plan Stock Option Grant" and
"Description of Capital Stock -- Warrants."
3
<PAGE> 6
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Operating revenue:
Resident fees................ $10,358 $15,801 $23,994 $32,139 $ 34,752 $ 8,396 $ 9,096
Management services income... 605 1,078 1,604 1,830 2,506 498 642
------- ------- ------- ------- --------- ------- ----------
10,963 16,879 25,598 33,969 37,258 8,894 9,738
Operating expenses:
Facility operating
expenses................... 8,386 11,824 17,761 17,983 21,010 5,346 6,064
Facility development and pre-
opening expenses........... 189 231 474 263 1,172 204 184
General and administrative... 993 1,655 2,034 4,183 6,875 1,322 2,121
Depreciation and
amortization............... 618 1,355 2,799 3,160 3,009 760 811
------- ------- ------- ------- --------- ------- ----------
Income from operations......... 777 1,814 2,530 8,380 5,192 1,262 558
Interest income.............. 267 350 317 566 1,229 330 277
GECC mortgage interest
expense.................... -- -- -- (5,529) (15,296) (2,465) (2,339)
Other interest expense....... (1,115) (2,212) (3,808) (3,060) (1,260) (268) (285)
Equity in (losses) earnings on
investments in unconsolidated
partnerships................. (754) (299) (104) 33 (9) 26 29
Minority interest.............. 87 176 428 172 7 6 52
------- ------- ------- ------- --------- ------- ----------
(Loss) income before
extraordinary item........... (738) (171) (637) 562 (10,137) (1,109) (1,708)
Extraordinary item............. -- -- -- 850 -- -- --
------- ------- ------- ------- --------- ------- ----------
Net (loss) income.............. $ (738) $ (171) $ (637) $ 1,412 $ (10,137) $(1,109) $ (1,708)
======= ======= ======= ======= ========= ======= ==========
PRO FORMA DATA(2):
Net loss per common share...... $ (1.15) $ (0.21)
Weighted average common shares
and equivalents
outstanding.................. 8,826,127 9,022,321
OPERATING AND OTHER DATA:
Facilities (at end of period):
Owned (3).................... 9 14 16 19 20 19 22
Managed...................... 2 5 7 9 8 8 8
------- ------- ------- ------- --------- ------- ----------
Total...................... 11 19 23 28 28 27 30
======= ======= ======= ======= ========= ======= ==========
Resident capacity (at end of
period):
Owned (3).................... 575 1,067 1,289 1,473 1,557 1,469 1,770
Managed...................... 143 549 652 772 712 712 712
------- ------- ------- ------- --------- ------- ----------
Total...................... 718 1,616 1,941 2,245 2,269 2,181 2,482
======= ======= ======= ======= ========= ======= ==========
Occupancy rate (4)............. 94.0% 94.8% 91.7% 91.8% 91.5%
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(5)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 6,046 $ 6,046 $ 82,966
Working capital..................................................... 2,459 2,459 79,379
Total assets........................................................ 139,793 139,793 217,531
Total debt.......................................................... 130,129 130,129 113,529
Series A convertible preferred stock................................ 24,464 -- --
Series B exchangeable preferred stock............................... 10,000 10,000 --
Total common stockholders' (deficit) equity......................... (34,420) (9,956) 94,509
</TABLE>
- ---------------
(1) The historical financial data for years prior to 1995 represent combined
historical financial data for the Company's predecessor entities. See Note 1
of Notes to Consolidated and Combined Financial Statements.
(2) Gives effect to conversion of the Series A Preferred Stock into 2,444,444
shares of Common Stock upon completion of the Offering.
(3) Includes all facilities wholly owned by the Company or in which the Company
owns interests. Prior to 1994, several of the owned facilities were leased
from predecessor entities.
(4) Based on monthly occupancy for owned facilities operated for at least 12
months, excluding facilities with temporary vacancies due to renovations or
resident relocation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Government Regulation."
(5) Gives effect to the receipt and application of an estimated $104.5 million
of net proceeds of the Offering and the issuance of 52,500 shares of Common
Stock in exchange for additional partnership interests in one facility upon
completion of the Offering. See "Certain Transactions." Also includes an
anticipated charge to earnings of approximately $1.0 million in the quarter
in which the Offering is completed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Anticipated
Charge to Earnings."
4
<PAGE> 7
RISK FACTORS
Prospective investors should carefully consider the factors set forth
below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Common Stock offered hereby.
RECENT NET LOSSES AND ANTICIPATED NET LOSS; STOCKHOLDERS' DEFICIT
The Company incurred a net loss of $10.1 million in 1995, compared to net
income (after a $0.9 million extraordinary gain) of $1.4 million in 1994 and a
net loss of $0.6 million in 1993. The Company incurred a net loss of $1.7
million for the three months ended March 31, 1996, compared to a net loss of
$1.1 million for the three months ended March 31, 1995. As a result of expenses
incurred to support its growth strategy, the Company anticipates that it will
incur a net loss in 1996 and may continue to do so thereafter if the Company
does not achieve its development objectives, a significant number of newly
developed assisted living facilities do not achieve break-even operating results
within the time expected or development, construction or operating expenses
exceed expectations. At March 31, 1996, the Company had a stockholders' deficit
of $34.4 million. After giving effect to the receipt and application of the net
proceeds of the Offering (estimated to be $104.5 million after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company), pro forma stockholders' equity would have been $94.5 million.
See "Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEVELOPMENT AND CONSTRUCTION RISKS
During the next three years, the Company plans to develop at least 40 new
Sunrise assisted living facilities with a capacity of approximately 3,600
residents. 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. See "Business -- The Sunrise Strategy" and "-- Facility
Development."
ACQUISITION RISKS; DIFFICULTIES OF INTEGRATION
In addition to developing additional assisted living facilities, over the
next three years the Company currently plans to acquire up to 15 additional
assisted living facilities or other properties that can be repositioned as
Sunrise assisted living facilities. The Company is actively pursuing acquisition
opportunities and has had discussions with a number of potential sellers
regarding potential acquisition transactions. Possible acquisition transactions
are in the early stage of review by the Company. The Company has not entered
into any agreements with respect to any material acquisitions. 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
5
<PAGE> 8
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. See
"Business -- The Sunrise Strategy" and "-- Facility Acquisitions."
NEED FOR ADDITIONAL FINANCING
To achieve its growth objectives, the Company will need to obtain
sufficient financial resources to fund its development, construction and
acquisition activities. The estimated cost to complete and lease up the 40 new
Sunrise model facilities targeted for completion over the next three years is
between $300 million and $400 million, which substantially exceeds the net
proceeds of the Offering. Accordingly, the Company's future growth will depend
on its ability to obtain additional financing on acceptable terms. The Company
currently estimates that the net proceeds of the Offering, together with
existing financing commitments and financing expected to be available, will be
sufficient to fund its development and acquisition programs for at least the
next 12 months. The Company will from time to time seek additional funding
through public or private financing sources, including equity or debt financing.
If additional funds are raised by issuing equity securities, the Company's
stockholders may experience dilution. There can be no assurance that adequate
funding will be available as needed or on terms acceptable to the Company. A
lack of funds may require the Company to delay or eliminate all or some of its
development projects and acquisition plans. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ADVERSE CONSEQUENCES OF INDEBTEDNESS AND OTHER OBLIGATIONS OF THE COMPANY
LEVERAGE. The Company was subject to mortgage, construction and other
indebtedness in an aggregate principal amount of approximately $128.4 million at
March 31, 1996. The Company intends to continue financing its properties through
mortgage financing and possibly operating leases or other financing vehicles,
including lines of credit. The amount of mortgage indebtedness and other debt
and debt related payments is expected to increase substantially as the Company
pursues its growth strategy. As a result, an increasing portion of the Company's
cash flow will be devoted to debt service and related payments and the Company
will continue to be subject to risks normally associated with leverage. The
consequences of such leverage include, but are not limited to, compliance with
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" or
"Selling Stockholders"), maintain ownership of at least 25% of the Common Stock
and that one of them serve as Chairman of the Board and President of the
Company, (iii) limit, among other things, the ability of the Company and certain
Company subsidiaries to borrow additional funds, dispose of assets and engage in
mergers or other business combinations, and (iv) prohibit the Company from
operating competing facilities within certain distances from mortgaged
facilities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 8 of Notes to
Consolidated and Combined Financial Statements.
RISK OF RISING INTEREST RATES. At March 31, 1996, approximately $42.2
million in principal amount of the Company's indebtedness bore interest at
floating rates. In addition, indebtedness that the Company may incur in the
future may also bear interest at a floating rate. Therefore, increases in
prevailing interest rates could increase the Company's interest payment
obligations and could have an adverse effect on the Company's business,
financial condition and results of operations. For example, a one-eighth of one
percent increase in interest rates would increase the Company's annual interest
expense by approximately $53,000. Approximately $8.0 million of floating rate
indebtedness will be prepaid using a portion of the net proceeds of the
Offering.
CONSEQUENCES OF DEFAULT. There can be no assurance that the Company will
generate sufficient cash flow from operations to cover required interest,
principal and any operating lease payments. Any payment or other default could
cause the lender to foreclose upon the facilities securing such indebtedness or,
in the case of an operating lease, could terminate the lease, with a consequent
loss of income and asset value to the Company. In certain cases, indebtedness
secured by a facility is also secured by a pledge of the Company's interests in
the facility. In the event of a default with respect to any such indebtedness,
the lender could avoid
6
<PAGE> 9
the judicial procedures required to foreclose on real property by foreclosing on
the pledge instead, thus accelerating the lender's acquisition of the facility.
Further, because of cross-default and cross-collateralization provisions in
certain of the Company's mortgages, a default by the Company on one of its
payment obligations could adversely affect a significant number of the Company's
other properties.
BOND FINANCING. Two facilities have been financed by bonds. In order to
continue to qualify for favorable tax treatment of the interest payable on these
bonds, the facilities must comply with certain federal income tax requirements,
principally pertaining to the maximum income level of a specified portion of the
residents. Failure to satisfy these requirements constitutes an event of default
under the bonds, thereby accelerating their maturity.
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.
See "Business -- Competition."
DIFFICULTIES OF MANAGING RAPID GROWTH
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. See "Business -- The Sunrise Strategy"
and "-- Facility Development" and "Management."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends on the services of Paul J. Klaassen, its Chairman of
the Board, President, Chief Executive Officer and co-founder; Teresa M.
Klaassen, its Executive Vice President and co-founder; and David W. Faeder, its
Executive Vice President and Chief Financial Officer. The loss of the services
of any such officers could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
depends on its ability to continue to attract and retain management personnel
who will be responsible for the day-to-day operations of its assisted living
facilities. If the Company is unable to hire qualified management personnel to
operate its assisted living facilities, the Company's business, financial
condition and results of operations could be adversely affected. See
"Management."
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
7
<PAGE> 10
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 7.9% of operating revenue for
1993 to 12.3% of operating revenue for 1994 and 18.5% of operating revenue for
1995. General and administrative expenses were 21.8% of operating revenue for
the three months ended March 31, 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GOVERNMENT REGULATION
The Company's assisted living facilities are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, although requirements vary from state to state. In
general, these requirements address, 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. 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. In March 1996,
Maryland state officials imposed a $3,000 civil money fine against the Company
for survey deficiencies at the Kensington facilities managed by the Company. The
Company is appealing such fine, which is the first fine assessed against the
Company in its 15-year history. On May 23, 1996, one of the Pennsylvania nursing
home facilities managed by the Company received notice from the Pennsylvania
Department of Health of a survey report stating that the facility was not in
compliance with the requirements of participation for the Medicare and Medicaid
programs. Therefore, the Pennsylvania survey agency report stated that a civil
monetary penalty of $50 to $3,000 per day will be imposed for the period
beginning March 12, 1996, the date the facility was first alleged to be out of
compliance, until the date the alleged deficiencies are corrected. The report
also stated that the agency will recommend a ban on payment for new
Medicare/Medicaid admissions if substantial compliance is not achieved within
three months after the last day of the survey identifying the alleged
non-compliance. The facility has not received confirmation or verification from
the Health Care Financing Administration of whether such remedies will be
imposed, or what the amount of any such penalty would be. The Company has
engaged counsel and intends to vigorously contest the survey report and the
imposition of a civil monetary penalty. The Company believes it has corrected
the alleged deficiencies contained in the survey report and intends to so advise
the Pennsylvania Department of Health in writing on May 31, 1996. 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
8
<PAGE> 11
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 is
awaiting the issuance of new licenses that would enable non-ambulatory residents
to reside at these facilities. During 1995, the Company also relocated
non-ambulatory residents from another Company-owned facility in Virginia whose
license prohibits non-ambulatory residents. During 1995, as a result of survey
deficiencies, Pennsylvania officials rescinded the regular licenses for the two
Company-managed skilled nursing facilities located in Pennsylvania and issued
six-month provisional licenses. The regular facility licenses have been
reinstated. Also in 1995, a local Maryland housing agency, citing a number of
factors, including a desire to seek competitive pricing bids, consideration of
other uses for the property and past survey results, advised the Company that it
will put the management contract for the Kensington facilities out for bid when
the existing management contract with the Company expires in September 1996.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, 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. Although the Company is
not a Medicare or Medicaid provider or supplier, it is subject to these laws
because (i) the state laws typically apply regardless of whether Medicare or
Medicaid payments are at issue, (ii) the Company manages two nursing homes in
Pennsylvania which are certified to participate in Medicare and Medicaid, and
(iii) as required under some state licensure laws, and for the convenience of
its residents, some of the Company's assisted living facilities maintain
contracts with certain health care providers and practitioners, including
pharmacies, visiting nurse organizations and hospices, through which the health
care providers make their health care items or services (some of which may be
covered by Medicare or Medicaid) available to facility residents. There can be
no assurance that such laws will be interpreted in a manner consistent with the
practices of the Company. See "Business -- Government Regulation."
DISCRETIONARY USE OF PROCEEDS
The Company will use approximately $8.6 million of the net proceeds of the
Offering to prepay a 25% mortgage participation interest and $8.0 million of the
net proceeds to prepay a portion of outstanding variable rate indebtedness.
Approximately $10.0 million of the net proceeds of the Offering will be used to
redeem the Series B Preferred Stock currently held by persons who may be
considered affiliates of the Company. The Company expects to use the remaining
net proceeds (estimated to be $77.9 million) to fund the development and
acquisition of additional assisted living facilities and for working capital and
general corporate purposes. The Company's management will, therefore, retain
broad discretion in allocating a significant portion of the net proceeds of the
Offering. See "Use of Proceeds."
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,
9
<PAGE> 12
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 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 $1,000,000 per wrongful act and
$2,000,000 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 (patient'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 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 14,216,419 shares of
Common Stock outstanding. Of these shares, the 5,700,000 shares sold in the
Offering (or a maximum of 6,555,000, if the Underwriters' over-allotment option
is exercised in full) will be freely tradable without restriction or limitation
under the Securities Act of 1933, as amended (the "Securities Act"), except for
any shares purchased by "affiliates" of the Company, as such term in defined in
Rule 144 promulgated under the Securities Act. The remaining 8,516,419 shares
are "restricted securities" within the meaning of Rule 144. Subject to certain
exceptions, the Company and all holders of outstanding shares of Common Stock
and optionees holding options to purchase a total of 908,331 shares of Common
Stock have agreed with the Underwriters, subject to certain exceptions, not to
sell or otherwise dispose of any shares of Common Stock, any options to purchase
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), except as to shares held by affiliates of DLJ, which require the prior
written consent of the representatives of the Underwriters other than DLJ. Up to
8,516,419 shares may be sold, subject to the limitations of Rule 144, beginning
in January 1997. After expiration of the lock-up period, the holders of all of
the restricted securities will be entitled to certain demand and/or incidental
registration rights
10
<PAGE> 13
with respect to such shares. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Common Stock. Further, the Company intends to register promptly
following completion of the Offering 1,748,065 shares of Common Stock reserved
for issuance pursuant to the Company's stock option programs, under which
options to purchase 1,435,266 shares will be outstanding upon completion of the
Offering, of which options for 300,000 shares will vest and become exercisable
effective upon completion of the Offering and options for 246,316 shares will
vest and become exercisable upon effectiveness of such registration. In
addition, warrants to purchase 50,000 shares of Common Stock are outstanding.
Sales of substantial amounts of shares of Common Stock in the public market
after the Offering or the perception that such sales could occur could adversely
affect the market price of the Common Stock and the Company's ability to raise
equity. See "Shares Eligible for Future Sale," "Management -- 1996 Directors'
Stock Option Plan", "-- 1995 Stock Option Plan" and "-- Non-Plan Stock Option
Grant" and "Underwriting."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price of the Common
Stock will be determined by negotiation between the Company and the
representatives of the Underwriters and may bear no relationship to the price at
which the Common Stock will trade after completion of the Offering. For factors
that will be considered in determining the initial public offering price, see
"Underwriting." After completion of the Offering, the market price of the Common
Stock could be subject to significant fluctuations in response to various
factors and events, including the liquidity of the market for the shares of
Common Stock, variations in the Company's operating results, changes in earnings
estimates by securities analysts, publicity regarding the industry or the
Company and the adoption of new statutes or regulations (or changes in the
interpretation of existing statutes or regulations) affecting the health care
industry in general or the assisted living industry in particular. In addition,
the stock market in recent years has experienced broad price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These market fluctuations may adversely affect the market
price of the shares of Common Stock.
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT
The Founders will beneficially own an aggregate of approximately 42.3% of
the outstanding Common Stock after completion of the Offering (36.3%, if the
Underwriters' over-allotment option is exercised in full). Executive officers
and directors as a group (including the Founders) will beneficially own
approximately 60.7% of the outstanding Common Stock after the Offering (54.9%,
if the Underwriters' over-allotment option is exercised in full). As a result,
the Founders and the Company's other executive officers and directors will have
significant influence over all matters requiring approval by the Company's
stockholders, including business combinations and the election of directors. See
"Principal and Selling Stockholders."
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation (the "Certificate") and
the Company's Amended and Restated Bylaws (the "Bylaws"), as well as Delaware
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of Common Stock. Certain of these provisions allow the Company to issue,
without stockholder approval, preferred stock having rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements, including advance notice and super-majority voting provisions,
that could make it more difficult for stockholders to effect certain corporate
actions. In addition, the Company's Board of Directors is divided into three
classes, each of which serves for a staggered three-year term, which may make it
more difficult for a third party to gain control of the Board of Directors. As a
Delaware corporation, the Company is subject to Section 203 of the Delaware
General Corporation Law which, in general, prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) for three
years following the date such person became an interested stockholder unless
certain
11
<PAGE> 14
conditions are satisfied. Pursuant to a Board resolution adopted at the time of
formation of the Company, the Section 203 limits do not apply to any "business
combination" between the Company and the Founders, their respective "affiliates"
or their respective estates. The Company also has adopted a Stockholder Rights
Agreement. See "Description of Capital Stock -- Stockholder Rights Agreement."
IMMEDIATE AND SUBSTANTIAL DILUTION
The existing stockholders of the Company acquired their shares of Common
Stock at an average cost substantially below the assumed initial public offering
price set forth on the cover page of this Prospectus. Therefore, purchasers of
Common Stock in the Offering will experience immediate and substantial dilution
in net tangible book value per share of approximately $13.70. See "Dilution."
12
<PAGE> 15
THE COMPANY AND ITS PREDECESSORS
The Company's predecessor was founded in 1981, and Sunrise Assisted Living,
Inc. was incorporated in Delaware on December 14, 1994. In January 1995, in
order to combine various activities relating to the development, ownership and
operation of the Sunrise assisted living facilities, the Founders contributed
all of their interests in various predecessor entities to the Company in
exchange for 100% of the Common Stock of the Company (the "Contribution
Transaction"). 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 (collectively, the "Sunrise Entities"). The net
assets contributed by the Founders in the Contribution Transaction had a
negative book value of $17.6 million after giving effect to: (i) the historical
cost, less depreciation, of the assets contributed; (ii) the GECC Mortgage (as
defined below); (iii) cash distributions totaling $9.6 million made in 1995 by
the Sunrise Entities to the Founders, a portion of which is expected to be used
to satisfy certain tax liabilities incurred by the Founders in the Contribution
Transaction; and (iv) $1.4 million of indebtedness (representing the discounted
value of $2.1 million of interest-free indebtedness) of the Founders assumed by
the Company as part of the Contribution Transaction. Immediately prior to the
Contribution Transaction in 1994, Sunrise Entities made distributions totaling
$5.9 million to the Founders. In addition, in January 1995, the Company issued
2,444,444 shares of Series A Convertible Preferred Stock in a private placement
to certain institutional investors (the "Series A Investors") for which the
Company received net proceeds of $20.2 million. See "Certain Transactions."
Prior to June 1994, 15 assisted living facilities now owned by the Company
were held in separate limited partnerships and other entities partially owned by
other parties. In June 1994, proceeds from the GECC Mortgage were used to
refinance $71.5 million of existing mortgages and to finance the $5.5 million
cash portion of the $48.3 million aggregate purchase price for all minority
ownership interests in these 15 facilities. After the minority ownership
interests in such facilities were acquired, the facilities were transferred to a
newly formed limited partnership, Sunrise Assisted Living Limited Partnership
("SALLP"), in exchange for limited partnership interests in that entity. The
carrying value of the net operating assets of the 15 facilities was stepped-up
by $12.1 million to reflect the excess of the purchase price over the original
book basis of $36.2 million of the interests acquired. The transfer of the
Founders' interests in the 15 facilities was recorded using their historical
book value. The Founders' interests in SALLP were contributed to the Company in
the Contribution Transaction. See "Certain Transactions."
Through SALLP, the Company currently has a $95.0 million principal amount
term loan (the "GECC Mortgage") in place with General Electric Capital
Corporation ("GECC"). The GECC Mortgage is evidenced by a single mortgage note
that has two portions, a $65.0 million fixed rate portion (the "Fixed Rate
Portion") and a $30.0 million floating rate portion (the "Floating Rate
Portion"). Repayment of the GECC Mortgage is secured by mortgages on the 15
facilities owned by SALLP (the "SALLP Properties") and by assignments of all of
SALLP's interest in the leases and rents at each of such mortgaged properties.
Each mortgage is cross-collateralized and cross-defaulted allowing GECC to
declare a default under any or all of the mortgages if SALLP fails to make any
payment of principal, interest, premium or any other sum due under the GECC
Mortgage.
The Fixed Rate Portion bears interest at 8.56%, matures May 31, 2001 and
requires periodic payments of interest only. The Floating Rate Portion bears
interest at 5.75% in excess of LIBOR (London interbank offered rate), matures
May 31, 2001 and requires periodic payments of interest only though June 1997,
after which time principal and interest payments are due using a 20-year
amortization schedule. If the debt service coverage ratio falls below 1.25:1 for
six consecutive months after September 30, 1996, principal payments accelerate
to the lesser of monthly net cash flow or amortization of the GECC Mortgage over
a 20-year period. In addition, GECC is entitled to a 25% participation interest
in the appreciation in value of the SALLP Properties at scheduled maturity or
upon prepayment and a monthly participation interest of 25% of cash flow in
excess of property operating expenses for the SALLP Properties, all of which
participation interest will be prepaid upon completion of the Offering. The GECC
Mortgage documents contain various representations, affirmative and negative
covenants and events of default, including a requirement that the Founders
maintain ownership of 25% of the Common Stock outstanding from time to time and
that one of the
13
<PAGE> 16
Founders serve as Chairman of the Board and President of the Company. See "Risk
Factors -- Adverse Consequences of Indebtedness and Other Obligations of the
Company."
In May 1996, the Company entered into a Loan Modification Agreement
regarding the GECC Mortgage whereby, upon consummation of the Offering, the
Company will pay GECC approximately $8.6 million as payment in full of GECC's
25% participating interest in cash flow and appreciation in the value of the
SALLP Properties. In addition, the Company will prepay $8.0 million of the
Floating Rate Portion. The interest rate applicable to the remaining balance of
the Floating Rate Portion will be reduced from LIBOR plus 5.75% to LIBOR plus
3.75%. See "Use of Proceeds." Had the Company modified the GECC loan documents
effective January 1, 1995, GECC Mortgage interest expense for 1995 would have
been approximately $7.8 million as compared to $15.3 million.
The Company's executive offices are located at 9401 Lee Highway, Suite 300,
Fairfax, Virginia 22031, and its telephone number is (703) 273-7500.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,700,000 shares of
Common Stock offered hereby are estimated to be approximately $104.5 million,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. The Company expects to use
approximately $77.9 million of the net proceeds to finance development and
acquisition of additional assisted living facilities and for working capital and
general corporate purposes. The Company will use approximately $8.6 million of
the net proceeds of the Offering to prepay the 25% GECC Mortgage participation
interest and $8.0 million of the net proceeds to prepay a portion of the
outstanding variable rate indebtedness on the GECC Mortgage. The Company will
use the remaining $10.0 million of net proceeds of the Offering to redeem the
Series B Preferred Stock held by the Series A Investors, some of whom may be
considered affiliates of the Company. See "Certain Transactions." Pending such
uses, the Company intends to invest the net proceeds in short-term,
investment-grade, interest-bearing securities or certificates of deposit. The
Company will not receive any proceeds from the sale of shares of Common Stock by
the Selling Stockholders if the Underwriters' exercise the over-allotment
option. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business -- The
Sunrise Strategy." The net proceeds to the Company from the issuance and sale in
January 1996 of $10.0 million of Series B Preferred Stock were used to fund the
equity portion of the acquisition of the Chanate Lodge acquired in February
1996, for development activities and for working capital and other general
corporate purposes.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and currently plans to retain future earnings, if any, to finance the
growth of the Company's business rather than to pay cash dividends. Payments of
any cash dividends in the future will depend on the financial condition, results
of operations and capital requirements of the Company as well as other factors
deemed to be relevant by the Board of Directors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
14
<PAGE> 17
CAPITALIZATION
The following table sets forth at March 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
giving effect to the conversion of 2,444,444 shares of Series A Preferred Stock
into an equal number of shares of Common Stock upon completion of the Offering,
and (iii) the pro forma capitalization as adjusted to reflect the receipt and
application of the estimated net proceeds from the Offering (after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by the Company), the issuance of 52,500 shares of Common Stock in exchange for
an additional ownership interest in one facility upon the completion of the
Offering and an anticipated charge to earnings of approximately $1.0 million in
the quarter in which the Offering is completed. The table should be read in
conjunction with the Consolidated and Combined Financial Statements and the
related notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents..................................... $ 6,046 $ 6,046 $ 82,966
========= ======== ========
Long-term debt (including current portion).................... 128,413 128,413 111,813
Minority interests............................................ 578 578 451
Redeemable preferred stock:
Preferred Stock, par value $.01 per share,
10,000,000 shares authorized:
2,444,444 shares of Series A Preferred Stock
issued and outstanding................................... 24,464 -- --
1,000,000 shares of Series B Preferred Stock issued and
outstanding.............................................. 10,000 10,000 --
Common stockholders' deficit:
Common Stock, $.01 par value, 60,000,000 shares
authorized; 6,019,475 shares issued and outstanding,
actual; 8,463,919 shares issued and outstanding,
pro forma; and 14,216,419 issued and outstanding,
pro forma as adjusted(1)................................. 60 85 142
Additional paid-in capital.................................. (19,598) 4,841 110,249
Accumulated deficit......................................... (14,882) (14,882) (15,882)
--------- -------- --------
Total common stockholders' (deficit) equity.............. (34,420) (9,956) 94,509
--------- -------- --------
Total capitalization................................ $ 129,035 $ 129,035 206,773
========= ======== ========
</TABLE>
- ---------------
(1) Does not include (i) 1,315,266 shares of Common Stock subject to outstanding
options at March 31, 1996 at a weighted average exercise price of $7.80 per
share, (ii) 120,000 shares of Common Stock subject to options that the
Company has agreed to grant prior to completion of the Offering at an
exercise price per share equal to the initial public offering price, (iii)
up to 250,000 shares of Common Stock subject to options that the Company
expects to grant prior to completion of the Offering at an exercise price
per share equal to the initial public offering price, and (iv) outstanding
warrants for 50,000 shares of Common Stock at an exercise price per share
equal to 85% of the initial public offering price. Under the treasury stock
method of computation, outstanding options and warrants represent 755,902
common stock equivalents. See "Management -- 1996 Directors' Stock Option
Plan," "-- 1995 Stock Option Plan" and "-- Non-Plan Stock Option Grant" and
"Description of Capital Stock -- Warrants."
15
<PAGE> 18
DILUTION
The Company's net deficit in tangible book value at March 31, 1996 was
approximately $40.3 million, or $6.71 per share. Net deficit in tangible book
value per share at March 31, 1996 is equal to the Company's total tangible
assets less its total liabilities, divided by the total number of outstanding
shares of Common Stock at that date. Pro forma net deficit tangible book value
at that date was $15.9 million or $1.88 per share, after giving effect to the
conversion of the Series A Preferred Stock into 2,444,444 shares of Common Stock
upon completion of the Offering. After giving effect to the sale of the
5,700,000 shares of Common Stock offered by the Company hereby at an initial
public offering price of $20.00 per share and the issuance of 52,500 shares of
Common Stock in exchange for an additional ownership interest in one facility,
the pro forma net tangible book value of the Common Stock at March 31, 1996
would have been approximately $89.5 million, or $6.30 per share. This represents
an immediate increase in pro forma net tangible book value of $13.01 per share
to existing stockholders and immediate dilution of $13.70 per share to
purchasers of Common Stock in the Offering. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price(1).................................... $20.00
Net deficit in tangible book value prior to the Offering....... $(6.71)
Increase attributable to conversion of Series A Preferred
Stock......................................................... 4.83
--
Pro forma net deficit in tangible book value prior to the
Offering...................................................... (1.88)
Increase attributable to new investors......................... 8.18
Pro forma net tangible book value after the Offering................ 6.30
------
Dilution to new investors in the Offering........................... $13.70
======
</TABLE>
The following table summarizes the differences between the existing
stockholders and the new investors with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)................ 8,516,419 59.9% $ 5,373,407 4.5% $ 0.63
New investors........................... 5,700,000 40.1 114,000,000 95.5 20.00
---------- ------- ------------ -------
Total......................... 14,216,419 100.0% $119,373,407 100.0% $ 8.40
========== ====== ============ =======
</TABLE>
- ---------------
(1) Before deducting underwriting discounts and commissions and offering
expenses to be paid by the Company.
(2) Includes 2,444,444 shares of Common Stock to be issued upon conversion of
the Series A Preferred Stock and 52,500 shares of Common Stock to be issued
in exchange for an additional ownership interest in one facility upon
completion of the Offering. Also includes $22.0 million of consideration
paid by the Series A Investors and the $17.6 million negative book value of
the assets contributed by the Founders in the Contribution Transaction. See
"The Company and its Predecessors."
The foregoing tables assume no exercise of: options to purchase 1,315,266
shares of Common Stock (i) at exercise prices ranging from $3.00 to $20.00 per
share, with a weighted average exercise price of $7.80 per share; (ii) options
to purchase 120,000 shares of Common Stock to be outstanding upon completion of
the Offering at an exercise price per share equal to the initial public offering
price; (iii) up to 250,000 shares of Common Stock subject to options that the
Company expects to grant prior to completion of the Offering at an exercise
price per share equal to the initial public offering price; and (iv) outstanding
warrants to purchase 50,000 shares of Common Stock at an exercise price per
share of 85% of the initial public offering price. To the extent that options or
warrants are exercised, there will be further dilution to new investors. See
"Management -- 1996 Directors' Stock Option Plan," "-- 1995 Stock Option Plan"
and "-- Non-Plan Stock Option Grant" and "Description of Capital
Stock -- Warrants."
16
<PAGE> 19
SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data for the three-month
periods ended March 31, 1995 and 1996 and for the year ended December 31, 1995
are derived from consolidated financial statements of the Company. The selected
financial data for the four years ended December 31, 1994 are derived from the
combined financial statements of Sunrise Entities. The financial statements of
the Company for the year ended December 31, 1995 and the combined financial
statements of Sunrise Entities for the year ended December 31, 1994 have been
audited by Ernst & Young LLP, independent auditors. The financial statements of
Sunrise Entities for the year ended December 31, 1993 have been audited by
Hoffman, Morrison & Fitzgerald P.C., independent auditors. The selected
financial data for the years ended December 31, 1991 and 1992 are derived from
unaudited combined financial statements of Sunrise Entities. The selected
financial data for the three-month periods ended March 31, 1995 and 1996 were
derived from unaudited consolidated financial statements of the Company. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. The data should be read in conjunction with the Consolidated and
Combined Financial Statements and related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Operating revenue:
Resident fees.................... $10,358 $15,801 $23,994 $ 32,139 $ 34,752 $ 8,396 $ 9,096
Management services income....... 605 1,078 1,604 1,830 2,506 498 642
------- ------- ------- -------- ---------- ------- ----------
10,963 16,879 25,598 33,969 37,258 8,894 9,738
Operating expenses:
Facility operating expenses...... 8,386 11,824 17,761 17,983 21,010 5,346 6,064
Facility development and
preopening expenses............ 189 231 474 263 1,172 204 184
General and administrative....... 993 1,655 2,034 4,183 6,875 1,322 2,121
Depreciation and amortization.... 618 1,355 2,799 3,160 3,009 760 811
------- ------- ------- -------- ---------- ------- ----------
Income from operations............. 777 1,814 2,530 8,380 5,192 1,262 558
Interest income.................. 267 350 317 566 1,229 330 277
GECC mortgage interest expense... -- -- -- (5,529) (15,296) (2,465) (2,339)
Other interest expense........... (1,115) (2,212) (3,808) (3,060) (1,260) (268) (285)
Equity in (losses) earnings on
investments in unconsolidated
partnerships..................... (754) (299) (104) 33 (9) 26 29
Minority interest.................. 87 176 428 172 7 6 52
------- ------- ------- -------- ---------- ------- ----------
(Loss) income before extraordinary
item............................. (738) (171) (637) 562 (10,137) (1,109) (1,708)
Extraordinary item................. -- -- -- 850 -- -- --
------- ------- ------- -------- ---------- ------- ----------
Net (loss) income (3).............. $ (738) $ (171) $ (637) $ 1,412 $ (10,137) $(1,109) $ (1,708)
======== ======== ======== ========= ========== ======== ==========
PRO FORMA DATA (4):
Net loss per common share........ $ (1.15) $ (0.21)
Weighted average common shares
and equivalents outstanding.... 8,826,127 9,022,321
OPERATING AND OTHER DATA (5):
Facilities (at end of period):
Owned (6)........................ 9 14 16 19 20 19 22
Managed.......................... 2 5 7 9 8 8 8
------- ------- ------- -------- ---------- ------- ----------
Total.......................... 11 19 23 28 28 27 30
======== ======== ======== ========= ========== ======== ==========
Resident capacity (at end of
period):
Owned (6)........................ 575 1,067 1,289 1,473 1,557 1,469 1,770
Managed.......................... 143 549 652 772 712 712 712
------- ------- ------- -------- ---------- ------- ----------
Total.......................... 718 1,616 1,941 2,245 2,269 2,181 2,482
======== ======== ======== ========= ========== ======== ==========
Occupancy rate (7)................. 94.0% 94.8% 91.7% 91.8% 91.5%
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
-------------------------------------------------
1991 1992 1993 1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Cash and cash equivalents.......... $ 640 $ 2,499 $ 3,268 $ 8,089 $ 6,252 $ 6,046
Working capital (deficit) (8)...... (468) 741 1,288 (7,305) 2,050 2,459
Total assets....................... 18,146 50,866 61,159 109,003 123,321 139,793
Total debt......................... 13,997 45,405 55,207 110,029 122,290 130,129
Series A convertible preferred
stock............................ -- -- -- -- 23,963 24,464
Series B exchangeable preferred
stock............................ -- -- -- -- -- 10,000
Total common stockholders'
deficit.......................... (513) (1,716) (2,925) (16,391) (31,774) (34,420)
</TABLE>
- ---------------
(1) The historical financial data for years prior to 1995 represent combined
historical financial data for Sunrise Entities. See Note 1 of Notes to
Consolidated and Combined Financial Statements.
(2) Includes $0.5 million of debt discount amortization, $5.4 million of
expense related to the 25% GECC participating interest in cash flow and
appreciation in the value of the SALLP Properties and $9.4 million of
additional interest expense related to the GECC Mortgage. Upon
consummation of the Offering, the Company will pay GECC approximately
$8.6 million to prepay GECC's 25% participating interest. In addition,
the Company will prepay $8.0 million of the floating rate portion of the
GECC Mortgage and the interest rate will be reduced on the floating rate
portion from LIBOR plus 5.75% to LIBOR plus 3.75%. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year Ended December 31, 1995 Compared to Year
Ended December 31, 1994."
(3) Sunrise Entities comprised partnerships, limited liability companies or
corporations that elected to be treated as S Corporations under Section
1362 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision or benefit for income taxes was included in their financial
statements because taxable income or loss passed through pro rata to the
owners. Pro forma tax provision is not provided for the years 1991-1994
because it is assumed that accumulated losses from 1991, 1992, and 1993
were utilized to offset any tax expense attributed to 1994 net income.
(4) Gives effect to conversion of the Series A Preferred Stock into
2,444,444 shares of Common Stock upon completion of the Offering.
(5) Operating and other data for 1994 reflect the purchase of all outside
interests in six previously leased and managed facilities and all
minority interests in seven consolidated facilities.
(6) Includes all facilities wholly owned by the Company or in which the
Company owns interests. Prior to 1994, several of the owned facilities
were leased from Sunrise Entities.
(7) Based on monthly occupancy for owned facilities operated for at least 12
months, excluding facilities with temporary vacancies due to renovations
or resident relocation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Government
Regulation."
(8) Working capital (deficit) at December 31, 1994 included a liability for
distributions made in connection with the formation of the Company. See
"Certain Transactions."
18
<PAGE> 21
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
in this Prospectus.
OVERVIEW
The Company presently operates 30 assisted living facilities in nine states
with a capacity of approximately 2,500 residents, including 23 facilities owned
by the Company or in which it has ownership interests and seven facilities
managed for third parties. The Company also operates two skilled nursing
facilities owned by a third party. As a leading provider of assisted living
services, 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 ("Extended 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 within a facility and develop further physical or cognitive frailties.
The Company's Founders opened the first Sunrise assisted living facility in
1981. In January 1995, the Founders contributed all of their interests in the
Sunrise 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 funded at closing and $10.0 million subject to a call exercised
by the Company in January 1996). See "The Company and its Predecessors."
During the next three years, the Company plans to develop at least 40 of
its model facilities in major metropolitan and suburban markets throughout the
United States. The estimated cost to complete and lease up the 40 new Sunrise
model facilities is between $300 million and $400 million. The Company
anticipates that it will use a combination of net proceeds of the Offering,
existing construction lines of credit, equity and debt financing and cash
generated from operations to fund this development activity. During the next
three years, the Company also plans to acquire up to 15 additional assisted
living facilities or other properties that can be repositioned as Sunrise
assisted living facilities. 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 $9.2 million.
The cost of any particular facility may vary considerably based on a variety of
site-specific factors. 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 Offering,
together with existing financing commitments and financing expected to be
available, will be sufficient to fund its development and acquisition programs
for at least the next 12 months. See "-- Liquidity and Capital Resources" and
"Risk Factors -- Need for Additional Financing."
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 1995
and for the three months ended March 31, 1996 comprised 93.3% and 93.4%,
respectively, of total operating revenues. Resident fees typically are paid
monthly by residents, their families or other responsible parties. In 1995 and
for the three months ended March 31, 1996, approximately 98% of the Company's
revenue was derived from private pay sources. Resident fees include revenue
derived from Basic Care, community fees, Extended Care, Alzheimer's Care and
other sources. Community fees are one-time fees generally payable by a resident
upon admission, and Extended 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 1995 and for the three
months ended March 31, 1996 accounted for the remaining 6.7% and 6.6%,
respectively, of revenues, consists of management fees which are generally in
the range of 4% to 6% of a managed facility's total operating revenues. Resident
fees (excluding community fees) and management fees are recognized as
19
<PAGE> 22
revenues when services are provided. Community fees (generally equal to 60 times
the daily resident fee) are recognized ratably over a three-month period.
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-opening expenses, which include non-capitalized development expenses and
pre-opening 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 1994 and, to a greater extent, in 1995 and the three months ended March 31,
1996 through the addition of headquarters and regional staff.
ANTICIPATED CHARGE TO EARNINGS
In order to avoid a possible change in the Company's ability to continue to
manage the Annapolis and Pikesville facilities resulting from the reduction in
the Founders' ownership interest in the Company following completion of the
Offering, the Company has agreed to make a $1.0 million cash payment to the
third-party limited partner in these two facilities in exchange for the transfer
to the Company by the third party of additional 1% partnership interests in each
facility and the elimination of any requirement for the Founders to maintain a
specified ownership interest in the Company. Substantially all of such cash
payment will be reflected as a charge to general and administrative expense in
the quarter in which the Offering is completed.
RESULTS OF OPERATIONS
The following table sets forth certain data from the respective
consolidated or combined statements of operations expressed as a percentage of
operating revenue:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses..................... 69.4(1) 52.9 56.4 60.1 62.3
Facility development and pre-opening expenses... 1.9 0.8 3.1 2.3 1.9
General and administrative...................... 7.9 12.3 18.5 14.9 21.8
Depreciation and amortization................... 10.9 9.3 8.1 8.5 8.3
----- ----- ----- ----- -----
Income from operations............................ 9.9 24.7 13.9 14.2 5.7
Other income (expense):
Interest income................................. 1.2 1.7 3.3 3.7 2.8
Interest expense:
GECC mortgage interest expense............... -- (16.3) (41.1) (27.7) (24.0)
Other interest expense....................... (14.9) (9.0) (3.4) (3.0) (2.9)
----- ----- ----- ----- -----
Total interest expense.......................... (14.9) (24.5) (45.1) (30.7) (26.9)
----- ----- ----- ----- -----
Equity in (losses) earnings on investments in
unconsolidated partnerships.................. (0.4) 0.1 -- 0.3 0.3
Minority interest............................... 1.7 0.5 -- 0.1 0.5
----- ----- ----- ----- -----
(Loss) income before extraordinary item........... (2.5) 1.7 (27.2) (12.5) (17.5)
Extraordinary item.............................. -- 2.5 -- -- --
----- ----- ----- ----- -----
Net (loss) income................................. (2.5)% 4.2% (27.2)% (12.5)% (17.5)%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes $2.7 million of rent expense related to six facilities leased in
1993 that were acquired in 1994. Excluding such rent expense, facility
operating expenses as a percentage of operating revenue would have been
58.9%.
20
<PAGE> 23
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1995
Operating Revenues. Operating revenue for the three months ended March 31,
1996 increased 9.5% to $9.7 million from $8.9 million for the three months ended
March 31, 1995 due primarily to the growth in resident fees. Resident fees
(including community fees and fees for Basic Care, Extended Care, Alzheimer's
Care and other services) for the three months ended March 31, 1996 increased
8.3% to $9.1 million from $8.4 million in the three months ended March 31, 1995.
This increase was due primarily to an increase in the average daily resident fee
($0.5 million), inclusion of the Raleigh and Chanate Lodge facilities ($0.3
million) and, to a lesser extent, the stabilization of the Gardner Park facility
which had been operated by the Company for more than 12 months, and was offset
partially by a decline in average resident occupancy. Resident occupancy
declined from 91.8% in the three months ended March 31, 1995 to 91.5% in the
three months ended March 31, 1996 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"). Resident occupancy was
88.8% in the three months ended March 31, 1996, 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.
The average daily resident fee (excluding community fees) for Same
Facilities increased 6.4% to $83 in the three months ended March 31, 1996 from
$78 in the three months ended March 31, 1995 primarily due to a 5.8% increase in
the average Basic Care rate to $73 in the three months ended March 31, 1996 from
$69 in the three months ended March 31, 1995 and an increase in the number of
residents receiving Extended Care and Alzheimer's Care services.
Management services income in the three months ended March 31, 1996
increased by $0.1 million, or 29.0%, to $0.6 million due primarily to the
increase in development consulting fees received.
Operating Expenses. Operating expenses in the three months ended March 31,
1996 increased 20.3% to $9.2 million from $7.6 million in the three months ended
March 31, 1995. The increase in operating expenses in the three months ended
March 31, 1996 was attributable primarily to growth in facility operating
expenses and general and administrative expenditures related to building the
Company's infrastructure in connection with growth plans.
Facility operating expenses for the three months ended March 31, 1996
increased 13.4% to $6.1 million from $5.3 million in the three months ended
March 31, 1995. As a percentage of operating revenue, facility operating
expenses in the three months ended March 31, 1996 increased to 62.3% from 60.1%
in the three months ended March 31, 1995. Salary increases for existing staff,
increased facility based staffing required to handle the increased number of
residents receiving Extended Care or Alzheimer's Care and training of
facility-based personnel comprised $0.3 million of the increase. The opening of
the Raleigh facility and, to a lesser extent, the acquisition of the Chanate
Lodge facility comprised $0.3 million of the increase. The balance of $0.2
million is comprised of a $0.2 million decrease in loss and legal accruals
combined with an aggregate $0.4 million increase in bad debt expense,
professional fees, maintenance and repairs, real estate taxes and other general
expenses.
General and administrative expenses in the three months ended March 31,
1996 increased 60.5% to $2.1 million from $1.3 million in the three months ended
March 31, 1995. As a percentage of operating revenue, general and administrative
expenses in the three months ended March 31, 1996 increased to 21.8% from 14.9%
in the three months ended March 31, 1995. Of the $0.8 million increase in
general and administrative expenses in the three months ended March 31, 1996,
$0.5 million relates to the hiring subsequent to March 31, 1995 of 30 additional
headquarters and regional office management staff in anticipation of the
Company's growth plans. The remaining $0.3 million is attributable to marketing,
consulting, and public relations, and the combination of accounting, rent,
office supplies, postage, telephone, travel and lodging.
Depreciation and amortization in the three months ended March 31, 1996
compared to the three months ended March 31, 1995 remained stable at $0.8
million.
21
<PAGE> 24
Other income (expense). Interest income remained relatively constant in
the three months ended March 31, 1996 compared to the three months ended March
31, 1995. Interest expense decreased $0.1 million in the three months ended
March 31, 1996 compared to the three months ended March 31, 1995 as a result of
a decrease in GECC Mortgage interest.
Net (loss) income. The Company incurred a net loss of $1.7 million in the
three months ended March 31, 1996, compared to a net loss of $1.1 million in the
three months ended March 31, 1995. The increased loss was primarily attributable
to the $1.5 million increase in operating expenses, which was offset, in part,
by the $0.8 million increase in operating revenue. The Company did not recognize
any income tax expense in the three months ended March 31, 1996 because of such
net loss.
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 (including community fees and fees for Basic Care, Extended Care,
Alzheimer's Care and other services) 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), and was offset partially by $0.8 million
due to a 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. See
"Management."
The average daily resident fee (excluding community fees) for Same
Facilities 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 Extended 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-opening 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 Extended
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, the renovation and opening of a portion of the Village
House facility providing assisted living services.
Facility development and pre-opening 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-opening 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
22
<PAGE> 25
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 debt was $0.2 million and $0.1 million in 1995 and
1994, respectively. Receivable balances are reviewed on a monthly basis and a
provision for bad debts is established as needed for those balances that in the
judgment of management are uncollectible. 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. See "Risk
Factors -- Government Regulation."
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 the
SALLP 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 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 the GECC
Mortgage. The GECC Mortgage interest expense increased by $4.2 million, or
79.4%, in 1995 reflecting the inclusion of an additional five months of interest
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 the GECC Mortgage. Such discount is being
amortized over the term of the GECC Mortgage. GECC Mortgage interest expense for
1995, totaling $5.4 million, represents accrual of interest expense relating to
the 25% participation interest and is based upon an increase during 1995 in the
estimated market value of facilities securing the GECC Mortgage.
A Loan Modification Agreement with GECC was entered into in May 1996. The
terms of the agreement provide that upon consummation of Offering, the Company
will pay GECC approximately $8.6 million as payment in full of all participation
interest due and payable pursuant to the GECC Mortgage. In addition, the Company
will pay GECC $8.0 million to be applied to prepay a portion of the variable
rate indebtedness. GECC will reduce the interest rate applicable to the
outstanding portion of variable rate indebtedness from LIBOR plus 5.75% to LIBOR
plus 3.75%. Had the Company modified the GECC loan documents effective January
1, 1995, GECC Mortgage interest expense for 1995 would have been approximately
$7.8 million as compared to $15.6 million.
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 GECC Mortgage.
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 the GECC 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 income tax expense in 1995 because of such net
loss. At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $3.9 million which expire in 2010. See Note
9 of Notes to Consolidated and Combined Financial Statements.
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<PAGE> 26
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Operating Revenue. Operating revenue for 1994 increased 32.7% to $34.0
million from $25.6 million in 1993 due primarily to the growth in resident fees.
Resident fees for 1994 increased 33.9% to $32.1 million from $24.0 million in
1993. This increase was primarily due to the inclusion of a full year of
resident fees from the Falls Church and Village House facilities, and the
acquisition of the majority ownership interest in the Mercer Island facility
which contributed $2.5 million and $1.9 million, respectively, to this increase.
The remaining increase was a result of higher average resident occupancy. The
average daily resident fee (excluding community fees) and the average Basic Care
rate for Same Facilities of $75 and $68, respectively, was unchanged from 1993.
Management services income for 1994 increased 14.0% to $1.8 million from
$1.6 million in 1993 due to an increase in the number of facilities managed by
the Company to 11 in 1994 from seven in 1993.
Operating Expenses. Operating expenses for 1994 increased 10.9% to $25.6
million from $23.1 million in 1993. The increase in operating expenses in 1994
was primarily attributable to growth in general and administrative expenses and
depreciation and amortization. Facility-based expenses were essentially flat in
1994 compared to 1993.
Facility operating expenses for 1994 were $18.0 million compared to $17.8
million in 1993. Facility operating expenses for 1993 included $2.7 million of
rental expense related to six facilities leased by the Company in 1993 that were
acquired in 1994. Excluding such rent expense, facility operating expenses would
have been $15.0 million in 1993, or 58.9% of operating revenue for that year
compared to 52.9% for 1994. Before such rent expense in 1993, the facility
operating expenses increased 19.4% to $18.0 million from $15.0 million in 1993.
Of such increase, approximately $1.1 million was attributable to the inclusion
of a full year of operations of the Falls Church and Village House facilities,
$1.1 million was attributable to the acquisition of the Mercer Island facility
that was managed by the Company in 1993 and $0.3 million was attributable to the
opening of the Gardner Park facility in 1994. The remaining balance consists of
a $0.9 million increase in labor costs offset, in part, by a $0.4 million
decline in other operating expenses such as professional fees, advertising,
taxes and utilities.
Facility development and pre-opening expenses for 1994 decreased to $0.3
million from $0.5 million. This decrease was attributable to a $0.5 million
increase in development labor costs offset by an increase of $0.7 million in
capitalized costs. There were no capitalized costs in 1993 because there was
limited internal development activity.
General and administrative expenses in 1994 increased 105.6% to $4.2
million from $2.0 million in 1993 primarily due to an increase in salary and
benefits expenses. As a percentage of operating revenue, general and
administrative expenses in 1994 increased to 12.3% from 7.9% in 1993. Of the
increase in general and administrative expenses in 1994, approximately 40.1% was
related to salary and benefits expenses relating to salary increases and hiring
of additional headquarters and regional office management staff. The additional
increase was related to $0.4 million of bad debt and legal expense accruals, a
$0.1 million increase in training and consulting fees, and increases in other
general and corporate expenses such as marketing, telephone and rent.
Depreciation and amortization for 1994 increased by 12.9% to $3.2 million
from $2.8 million in 1993. The majority of this increase was related to $1.0
million of depreciation expense on the six facilities leased by the Company in
1993 that were acquired in 1994. In 1994, the Sunrise Entities increased the
estimated useful life of property and equipment, which had the effect of
reducing depreciation expense by $0.4 million.
Other income (expense). Interest income for 1994 increased by $0.3 million
to $0.6 million from $0.3 million in 1993. The increase in interest income is
primarily attributable to higher cash balances from funds received as a result
of the creation of a new debt facility in June 1994. Interest expense for 1994
increased by 125.5% to $8.6 million from $3.8 million in 1993, and is primarily
attributable to seven months of interest expense on the GECC Mortgage. Interest
expense on other debt declined 19.7% to $3.1 million from $3.8 million in 1993,
primarily due to the repayment of $71.5 million of debt with a portion of the
proceeds from the GECC Mortgage.
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<PAGE> 27
Extraordinary item. In 1994, $3.4 million of second-trust mortgages
related to two predecessor limited partnerships were pre-paid in full for $2.5
million. The prepayment at a discount was reflected as a $0.9 million
extraordinary gain.
Net (loss) income. The Company had net income (after the $0.9 million
extraordinary item) of $1.4 million in 1994 compared to a net loss of $0.6
million in 1993. The improvement in operating results for 1994 resulted
primarily from the $0.9 million gain recorded on the prepayment at a discount of
the two second-trust mortgages and an $8.4 million increase in operating
revenue, which were offset, in part, by $4.8 million of additional interest
expense. For 1994 and prior periods, Sunrise Entities consisted of partnerships,
limited liability companies or corporations that elected to be treated as S
Corporations under the Internal Revenue Code of 1986, as amended. Accordingly,
no provision or benefit for income taxes was made because taxable income or loss
passed through to the owners of those entities.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations from long-term borrowings,
the private placement of equity securities and cash generated from operations.
In June 1994, the Company obtained the GECC Mortgage and used the proceeds to
consolidate $71.5 million of debt on 15 facilities, as well as to finance the
acquisition of all other interests in the limited partnerships and other
entities that previously held such facilities. At March 31, 1996, the Company
had $128.4 million of outstanding debt (at a weighted average interest rate of
9.0%). Of such amount, the Company had $80.0 million of fixed rate debt at a
weighted average interest rate of 8.31%, $42.2 million of variable rate debt at
a weighted average interest rate of 10.19% and an accrued participation interest
obligation of approximately $8.6 million relating to the GECC Mortgage, less a
$2.4 million loan discount on the GECC Mortgage. The GECC Mortgage includes a
requirement that the Founders continue to own at least 25% of the outstanding
shares of Common Stock and that one of the Founders serve as Chairman of the
Board and President of the Company. See Note 8 of Notes to Consolidated and
Combined Financial Statements. In January 1995, the Company issued and sold
2,444,444 shares of Series A 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 Preferred Stock, receiving
$10.0 million in net proceeds. The Series B Preferred Stock, which has a
cumulative 9% dividend payable quarterly when, as and if declared by the Board
of Directors, will be redeemed with a portion of the net proceeds of the
Offering. Cash provided by operations in 1995 totaled $0.9 million. At March 31,
1996, the Company had working capital of $2.5 million. In February 1996, the
Company acquired Chanate Lodge, a 120-unit assisted living facility located in
Santa Rosa, California. The acquisition price was $8.5 million, including the
assumption of $5.3 million of existing mortgage indebtedness.
Cash provided by operating activities was $0.9 million for 1995, as
compared to $2.7 million for 1994 and $3.1 million for 1993. Cash used for
operating activities was $1.9 million for the three months ended March 31, 1996.
Unrestricted cash balances were $6.3 million, $8.1 million and $3.3 million at
December 31, 1995, 1994 and 1993, respectively. At March 31, 1996, the
unrestricted cash balance was $6.0 million.
Net cash used in investing activities totaled $17.9 million, $17.0 million
and $4.2 million in 1995, 1994 and 1993, respectively. Net cash used in
investing activities was $15.2 million for the three months ended March 31,
1996. The Company's investing activities included $12.8 million, $10.6 million
and $4.3 million in 1995, 1994 and 1993, respectively, and $14.5 million for the
three months ended March 31, 1996, related to the Company's development
activities. Investing activities in 1995 included the purchase of $5.4 million
carrying value 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 GECC Mortgage. See Note 4 of Notes to
Consolidated and Combined Financial Statements.
During 1995, the Company's financing activities provided net cash of $15.1
million compared to $19.1 million and $1.9 million provided in 1994 and 1993,
respectively. Financing activities provided net cash of $16.9 million for the
three months ended March 31, 1996, including $10.0 million of net proceeds from
the sale of the Series B Preferred Stock and $7.8 million in additional
borrowings. In 1995, $16.8 million was provided by additional borrowings
relating primarily to the construction of facilities, and $20.2 million in net
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<PAGE> 28
proceeds was provided by the issuance of Series A 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. In 1993, amortization of principal amounts
outstanding exceeded new borrowings by $0.7 million. See Note 6 of Notes to
Consolidated and Combined Financial Statements.
The Company's growth strategy contemplates the development during the next
three years of at least 40 of its model facilities with a capacity of
approximately 3,600 residents. To date, the Company has obtained zoning approval
for 17 new facilities with a resident capacity of 1,560 residents, including
five facilities under construction, and has entered into contracts to purchase
13 additional sites. During the next three years the Company also plans to
acquire up to 15 assisted living facilities or other properties that can be
repositioned as Sunrise assisted living facilities. In March 1996, the Company
obtained 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 the greater of (i) the lender's prime lending rate
and (ii) the Federal funds rate plus one-half of one percent.
In April 1996, the Company obtained a commitment from a financial
institution for an $80 million line of credit for construction and interim loans
to finance the development of up to 10 assisted living facilities by a wholly
owned subsidiary of the Company. The Company will guaranty repayment of all
amounts outstanding under this line of credit. The line of credit will be for a
term of five years and will be secured by cross-collateralized first mortgages
on the real property and improvements and first liens on all other assets of the
borrower subsidiary. With respect to each advance, payments of interest only are
required for the first two years and payments of interest and principal are
required thereafter, based on a 20-year amortization schedule. Advances under
the line of credit bear interest at a rate per annum, fluctuating daily,
depending upon the stabilization level of each developed facility. The interest
rate will range from LIBOR plus 2.9% to LIBOR plus 1.7%. Construction of all 10
facilities to be financed by the line of credit must be commenced within 18
months of the closing of the line of credit.
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 Founders maintain
ownership of at least 25% of the Common Stock and that one of them serve as
Chairman of the Board and President of the Company, (iii) 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 (iv) prohibit the Company from operating competing facilities
within certain distances from mortgaged facilities. See "Risk Factors -- Adverse
Consequences of Indebtedness and Other Obligations of the Company."
The estimated cost to complete and lease up the 40 new Sunrise model
facilities targeted for completion over the next three years is between $300
million and $400 million, which substantially exceeds the net proceeds of the
Offering. The Company expects that the net proceeds of the Offering, together
with existing financing commitments and additional financing the Company
anticipates will be available, will be sufficient to fund its development and
acquisition programs for at least the next 12 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. See "Risk Factors -- Need for Additional
Financing."
At March 31, 1996, the Company had a stockholders' deficit of $34.4
million, which resulted primarily from the aggregate net losses of $11.8 million
recorded in 1995 and the three months ended March 31, 1996, the $16.1 million
negative book value of the net assets contributed by the Founders in the
Contribution Transaction and $1.4 million of indebtedness (representing the
discounted value of $2.1 million of interest-free indebtedness) of the Founders
assumed by the Company in the Contribution Transaction. After giving effect to
the receipt and application of the net proceeds from the Offering (estimated to
be $104.5 million after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company), pro forma
stockholders' equity would have been $94.5 million at that date. See
"Capitalization."
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<PAGE> 29
IMPACT OF CERTAIN ACCOUNTING STANDARDS
In March 1995, the Company purchased all of the outstanding mortgage
revenue bonds used to finance a facility managed by the Company. At March 31,
1996, these bonds had an aggregate carrying value of $5.6 million and are
classified as available for sale in accordance with Financial Accounting
Standards Board Statement No. 115, Accounting for Certain Investments in Debt
and Equity Securities. As a result of such classification, unrealized holding
gains or losses, net of the related tax effect, is recorded as a separate
component of stockholders' (deficit) equity. At March 31, 1996, the net carrying
cost of the bonds approximated market value and, accordingly, there were no
unrealized holding gains or losses, net of the related tax effect, on these
bonds at that date. See Note 5 of Notes to Consolidated and Combined Financial
Statements.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. The Statement allows for a
fair value based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for
stock-based compensation arrangements under Opinion No. 25, Statement No. 123
requires disclosure of the pro forma effect on net income and earnings per share
of its fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of the statement, if earlier. The Company adopted
Statement No. 123 in the first quarter of 1996 and elected to continue to
account for stock-based compensation arrangements under APB Opinion No. 25.
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.
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<PAGE> 30
BUSINESS
OVERVIEW
Sunrise is a leading provider of assisted living services to the elderly.
The Company currently operates 30 assisted living facilities in nine states with
a capacity of approximately 2,500 residents, including 23 facilities owned by
the Company or in which it has ownership interests and seven facilities managed
for third parties. The Company had revenues of $37.3 million in 1995 and $9.7
million for the three months ended March 31, 1996, and incurred net losses of
$10.1 million and $1.7 million, respectively, for these periods. Approximately
98% of these revenues were derived from private pay sources. The Company's
three-year growth objective is to develop at least 40 new Sunrise assisted
living facilities with a capacity of approximately 3,600 residents. To date, the
Company has obtained zoning approval for 17 new facilities with a resident
capacity of 1,560, including five facilities currently under construction. The
Company has also entered into contracts to purchase 13 additional sites and is
negotiating purchase terms for the remaining identified sites. Since the first
Sunrise facility opened in 1981, the Company has developed 24 facilities, 16 of
which it currently owns, and has completed all facilities for which it obtained
zoning approval. In addition to its construction and development plans, the
Company plans to acquire up to 15 additional facilities over the next three
years.
The Company's objective is to capitalize on its 15-year history as a
pioneer and leading provider in the assisted living industry and on the growing
demand for assisted living as the preferred setting for elderly care. The
Company's strategy is to (i) provide high-quality personalized resident care and
services, (ii) provide a full range of assisted living services, (iii) rapidly
develop the Sunrise model in targeted markets, (iv) maintain the depth and
quality of its management team, (v) pursue acquisitions and contract management
opportunities, and (vi) achieve the benefits of regional density by clustering
facilities.
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 Company believes that assisted living is one of the fastest growing
segments of elder care and will continue to experience significant growth due to
the following:
CONSUMER PREFERENCE. The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents and their
families in which to care for the frail elderly. Assisted living offers
residents greater independence and allows them to age in place in a residential
setting, which the Company believes results in a higher quality of life than
that experienced in more institutional or clinical settings, such as skilled
nursing facilities.
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<PAGE> 31
FAVORABLE DEMOGRAPHIC TRENDS. As illustrated below, the number of seniors
85 years and older is estimated to increase by approximately 42% during the
1990s from 3.1 million seniors in 1990 to approximately 4.3 million seniors in
2000. It is estimated that total U.S. population will increase by approximately
11% during the same period. It is further estimated that approximately 57% of
the population of seniors over age 85 need assistance with ADLs and more than
one-half of such seniors develop Alzheimer's disease or other forms of dementia.
In addition, the growing affluence of the elderly has made assisted living more
affordable.
<TABLE>
<CAPTION>
85 YEARS AND OVER
FASTEST GROWING POPULATION IN U.S.
1990 2000
---- ----
<S> <C> <C>
85 YEARS AND OVER 0% 42%
TOTAL POPULATION 0% 11%
</TABLE>
Source: U.S. Bureau of Census
SUPPLY/DEMAND IMBALANCE. As illustrated below, the supply of skilled
nursing home beds per 1,000 persons 85 years of age and older is declining. This
decline may be attributed to several factors, including the aging of the
population and the implementation of moratoriums on the granting of certificates
of need for new skilled nursing facilities. In addition, many skilled nursing
facilities are focusing on higher acuity patients with higher reimbursement
profiles. As a result, fewer skilled nursing beds are available for the
increasing number of elderly who need assistance with ADLs but do not require
significant medical attention. The Company believes that the supply of assisted
living beds has increased substantially since 1980 to satisfy a portion of this
demand.
DECLINE IN NURSING BEDS PER THOUSAND
FOR INDIVIDUALS 85 YEARS OR OLDER
<TABLE>
<CAPTION>
1967 1976 1980 1986 1990 2000E
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
BEDS PER THOUSAND 540 690 650 540 500 350
</TABLE>
Source: U.S. Bureau of Census
COST ADVANTAGES. Studies show that the annual cost per patient for skilled
nursing care averaged approximately $35,000 in 1993. This average includes both
government and private payors. In contrast, the annual per patient cost for
assisted living care averaged approximately $24,000 in 1993. Because rates paid
by
29
<PAGE> 32
private pay patients in skilled nursing facilities are much higher than
government reimbursement rates, the comparable cost advantage of assisted living
over a private pay skilled nursing facility rate is even greater. The Company
also believes that the cost of assisted living compares favorably with home
health care, particularly when the costs associated with housing and meal
preparation are added to the costs of home health care.
CHANGING FAMILY DYNAMICS. As a result of the growing number of two-income
families, many children are not able to care for elderly parents in their own
homes. Two-income families are, however, better able to provide financial
support for elderly parents. In addition, other factors, such as the growth in
the divorce rate and single-parent households, as well as the increasing
geographic dispersion of families, have contributed to the growing inability of
children to care for aging parents in the home.
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.
THE SUNRISE STRATEGY
The principal elements of the Company's strategy are as follows:
PROVIDE HIGH-QUALITY PERSONALIZED RESIDENT CARE AND SERVICES. The Company
strives to provide its residents with the highest quality personalized care and
services. During the admission process, the Company develops a care plan for
each resident based on a professional assessment and family consultation. The
care plan is updated periodically by the Company, the resident and family
members based upon the individual needs of the resident. The Company also has an
extensive quality assurance program directed by regional- and facility-based
nurses and other staff who periodically review performance of Care Managers, as
well as other staff, and conduct monthly facility inspections.
PROVIDE A FULL RANGE OF ASSISTED LIVING SERVICES. The Company provides a
full range of assisted living services, which enables its residents to age in
place. The Company also offers special care programs for those residents who
suffer from Alzheimer's disease or other forms of dementia. As a result,
residents are able to continue living in a Sunrise facility unless they develop
medical conditions requiring institutional care available only in a skilled
nursing facility or acute care hospital.
RAPIDLY DEVELOP THE SUNRISE MODEL IN TARGETED MARKETS. During the next
three years, the Company plans to develop at least 40 of its "Victorian" model
facilities in major metropolitan areas and surrounding suburban markets
throughout the United States. To date, the Company has obtained zoning approval
for 17 new facilities, including five facilities currently under construction,
and has entered into contracts to purchase 13 additional sites and is
negotiating purchase terms for the remaining identified sites. Since the first
Sunrise facility opened in 1981, the Company has developed 24 facilities, 16 of
which it currently owns, and completed all facilities for which it obtained
zoning approval. The Company believes it is well-positioned to achieve its
growth plans based on its reputation as a high-quality provider of assisted
living services, as well as its proven model facility and its experienced
development team.
MAINTAIN DEPTH AND QUALITY OF MANAGEMENT TEAM. In anticipation of its
rapid development plans, the Company has made a significant investment in
actively recruiting and developing a management team with extensive experience
in the long-term care and assisted living industries. The Company believes that
the depth
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<PAGE> 33
and experience of its over 90-person headquarters and regional management team
is unmatched in the assisted living industry and positions the Company to
effectively manage its growth plans. The Company's 12 most senior operations
managers have an average of 12 years experience in the assisted living industry.
The Company has also created formal training programs for its management
personnel, Administrators and Care Managers. In addition, the Company has an
advisory board consisting of medical, geriatric care and interior and
architectural design professionals who periodically advise the Company regarding
trends in elderly care and the design of the Company's model facility.
PURSUE ACQUISITIONS AND MANAGEMENT CONTRACT OPPORTUNITIES. During the next
three years, the Company plans to acquire up to 15 additional assisted living
facilities or other properties that can be repositioned as Sunrise assisted
living facilities. The Company anticipates that the majority of these
acquisitions will be targeted at new markets as a method of entering the market
more quickly than the development process would otherwise permit. In other
cases, the Company may enter into facility management contracts to establish or
expand its market presence. The Company is actively pursuing acquisition
opportunities and has had discussions with a number of potential sellers
regarding potential acquisition transactions. Possible acquisition transactions
are in the early stage of review by the Company. The Company has not entered
into any agreements with respect to any material acquisitions.
ACHIEVE THE BENEFITS OF REGIONAL DENSITY BY CLUSTERING FACILITIES. The
Company's development and acquisition strategies focus on clustering facilities
to achieve maximum regional density. This allows the Company to achieve
operational and management efficiencies while delivering high-quality care and
services within its target markets. Regional density also allows the Company to
benefit from community familiarity with assisted living generally and the
Sunrise model in particular.
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,
Extended 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 modifications to a resident's care plan.
The average daily resident fee for Same Facilities was approximately $83
for the three months ended March 31, 1996, $80 for 1995 and $75 for each of 1994
and 1993. The average daily Basic Care rate for Same Facilities was
approximately $73 for the three months ended March 31, 1996, $71 for 1995 and
$68 for each of 1994 and 1993.
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.
EXTENDED CARE
Through the Company's Extended Care program, residents who require more
frequent or intensive assistance or increased care or supervision due to
incontinence or wandering are provided extra care and supervision. The Company
charges an additional daily fee based on additional staff hours of care and
services
31
<PAGE> 34
provided. The Extended 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 March 31,
1996, approximately 43% of the Company's residents participated in the Company's
Extended Care program.
MEDICATION MANAGEMENT
Many of the Company's residents also require assistance with medications.
To the extent permitted by state law, the Company's 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 March 31, 1996,
approximately 49% of the Company's assisted living residents participated in the
Company's Medication Management program.
ALZHEIMER'S CARE
The Company believes its Alzheimer's Care program distinguishes it from
many other assisted living providers who do not provide such specialized care.
The Alzheimer's Care 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 March 31, 1996, approximately 26%
of the Company's residents participated in the Alzheimer's Care 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 80 to 120
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 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 home-like 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.
32
<PAGE> 35
OWNED FACILITIES
The table below sets forth certain information regarding owned facilities
or facilities in which Sunrise has an ownership interest:
<TABLE>
<CAPTION>
YEAR DEVELOPED SUNRISE
OPENED BY OR MODEL RESIDENT OWNERSHIP
FACILITY LOCATION SUNRISE ACQUIRED FACILITY CAPACITY PERCENTAGE(1)
<S> <C> <C> <C> <C> <C> <C>
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
--------
195
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
--------
130
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) 50.0(7)
Sunrise of Towson Towson, MD 1994 Developed 'X' 66 13.9(8)
Sunrise of Gardner Park Peabody, MA 1994 Developed 'X' 59 50.0(8)(9)
Sunrise of Annapolis Annapolis, MD 1995 Developed 'X' 88 51.0(8)(10)
Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0
Sunrise of Raleigh Raleigh, NC 1996 Developed 'X' 93 50.0(8)(11)
Sunrise of Pikesville Pikesville, MD 1996 Developed 'X' 103 51.0(8)(10)
--------
Total 1,873
========
</TABLE>
- ---------------
(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 the GECC Mortgage. The other eight owned facilities
are subject to one or more mortgages or deeds of trust that mature between
1998 and 2033 and bear interest at market rates, ranging from 6.875% to
10.75% annually as of March 31, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note 8 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. See "Certain Transactions."
33
<PAGE> 36
(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) Sunrise manages this facility. Thomas J. Donohue, a director of the
Company, owns a 30% ownership interest in this facility jointly with his
wife. The Company has an option to acquire, and the Donohues have the right
to require the Company to purchase, their interest in this facility. Upon
completion of the Offering, the Company intends to purchase the Donohues'
interest in this facility in exchange for 52,500 shares of Common Stock.
Following such purchase, the Company will have an 80% ownership interest in
this facility. See "Certain Transactions."
(8) The remaining ownership interests are owned by third parties. Sunrise
manages each of these facilities.
(9) 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.
(10) 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 110% 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 51% of the
outstanding voting stock of the Company (other than the Company, any
subsidiary of the Company, the Founders or any affiliate, associate or the
estate of either Founder), then the put rights held by the third party
owner become immediately exercisable. The third-party owner currently holds
a 50% limited partnership interest in these facilities. The Company has
agreed to purchase from the third-party a 1% partnership interest in each
of the facilities upon completion of the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Anticipated Charge to Earnings."
(11) On the earlier of the date that this facility has maintained an occupancy
of 84 residents for 30 consecutive days or August 22, 1998, the Company has
the option to purchase all or any part of the third-party interests in the
limited liability company that owns this facility. If the Company's
purchase option is exercised prior to July 28, 1999, the price will be the
greater of (i) $819,726, if purchased before July 28, 1997, $1,212,048, if
purchased between July 28, 1997 and July 28, 1998, and $1,498,803, if
purchased between July 28, 1998 and July 27, 1999; 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, all as determined by the accountant
regularly employed by the limited liability company. If Sunrise elects to
exercise its option on or after July 28, 1999, the purchase price of the
third-party interest shall be determined by an appraiser mutually agreeable
to the parties.
34
<PAGE> 37
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:
<TABLE>
<CAPTION>
SUNRISE CONTRACT
MODEL RESIDENT INITIAL EXPIRATION
FACILITY LOCATION FACILITY CAPACITY CONTRACT DATE DATE
<S> <C> <C> <C> <C> <C>
Woodbury Lake Deptford, NJ 'X' 87 March 1993 June 1996(1)
Kensington Kensington, MD July 1993 Sept. 1996(2)
Groves 'X' 70
Highlands 'X' 67
Woodlands 'X' 70
---
207
Mill Run (3) Bristol, PA 186 April 1992 April 1997
Lincolnia(4) Fairfax, VA 84 June 1989 June 1996
John Bertram House Salem, MA 32 June 1994 Oct. 1998
Mount Laurel Mount Laurel, NJ 'X' 90 May 1994(5) July 2021
Boston Boston, MA 139 July 1995(5) Jan. 2002
---
Total 825
======
</TABLE>
- ---------------
(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) Upon expiration of the contract, the Company intends to submit a bid to
continue managing the facility. See "Risk Factors -- Government Regulation."
(3) The Company owns $5.4 million carrying value of tax exempt mortgage bonds on
this facility. See Note 5 of Notes to Consolidated and Combined Financial
Statements.
(4) The Company does not provide financial or accounting services for this
facility.
(5) The Company anticipates construction of this facility will begin before July
1996. As of the dates shown, the Company has entered into development
contracts for these facilities which provide that the Company will begin
managing Mt. Laurel for a 25-year period and the Boston facility for a
three-year period, following completion of construction.
35
<PAGE> 38
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.
The Company has developed 24 of its Victorian model facilities, 16 of which
it currently owns. During the next three years, the Company plans to develop at
least 40 additional Victorian model facilities with an aggregate capacity of
over 3,600 residents. To date, the Company has obtained zoning approval for 17
new facilities, including five facilities currently under construction, and has
contracts to purchase 13 additional sites and is currently negotiating purchase
terms for the remaining identified sites. Historically, the Company has
completed all 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. See "Risk
Factors -- Development and Construction Risks" and "-- Need for Additional
Financing."
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 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 immediately. 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 $9.2 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.
36
<PAGE> 39
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:
<TABLE>
<CAPTION>
ESTIMATED
DEVELOPMENT COMPLETION RESIDENT OWNERSHIP
FACILITY LOCATION PHASE(1) DATE (2) CAPACITY PERCENTAGE
<S> <C> <C> <C> <C> <C>
Sunrise of Blue Bell Philadelphia, PA Construction 4th Q 1996 97 100.0
metro region
Sunrise of Columbia Columbia, MD Construction 1st Q 1997 96 100.0
Sunrise of Hunter Mill Hunter Mill, VA Construction 1st Q 1997 96 100.0
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 Granite Run, PA Zoned 1st half 1997 95 100.0
Sunrise of Petaluma Petaluma, CA Zoned 1st half 1997 84 100.0(3)(5)
Sunrise of Severna Park Severna Park, MD Zoned 1st half 1997 99 50.0(4)(5)
Building I
Sunrise of Severna Park Severna Park, MD Zoned 1st half 1997 74 50.0(4)(5)
Building II
Sunrise of Springfield Springfield, MA Zoned 1st half 1997 97 100.0
Sunrise of Franconia Franconia, VA Zoned 1st half 1997 98 100.0
Sunrise of Rockville Rockville, MD Zoned 1st half 1997 86 100.0
Sunrise of Alexandria Alexandria, VA Zoned 1st half 1997 92 100.0(6)
Sunrise of Old Tappan Old Tappan, NJ Zoned 2nd half 1997 95 100.0
Sunrise of Morris Plains Morris Plains, NJ Zoned 2nd half 1997 95 100.0
Sunrise of Wayne Wayne, NJ Zoned 2nd half 1997 90 100.0
Sunrise of Westfield Westfield, NJ Zoned 2nd half 1997 95 100.0
-----
Total 1,557
=====
</TABLE>
- ---------------
(1) The Columbia, Blue Bell and Hunter Mill facilities under construction are
subject to one or more mortgages or deeds of trust that mature between
December 2002 and April 2003 and bear interest at market rates currently
averaging approximately 7.5%.
(2) There can be no assurance that construction delays will not be experienced.
See "Risk Factors -- Development and Construction Risks."
(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 13 additional sites in
Maryland, Pennsylvania, New Jersey, Connecticut, New York, Georgia and
Washington. The Company has completed preliminary feasibility studies and
submitted rezoning requests on eight of such sites and is conducting preliminary
feasibility studies on the remaining sites. The Company's development team is
negotiating purchase terms on additional sites identified for development.
FACILITY ACQUISITIONS
The Company and its predecessors have completed seven acquisitions,
including 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 15 additional assisted living
facilities or other properties that can be repositioned as Sunrise assisted
living facilities. In evaluating possible acquisitions, the Company considers,
37
<PAGE> 40
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.
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 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 four regions (Mid-Atlantic,
Pennsylvania/New Jersey, New England and Western). 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 two largest regions also have 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 assisted living 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 Extended 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 assisted living 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.
38
<PAGE> 41
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 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. This program has trained over 30 Administrators since
1985. 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 assisted
living 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 assisted living 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.
39
<PAGE> 42
Approximately six months prior to opening a facility, the Company opens its
pre-leasing center and begins marketing to referral sources. At that time, the
Company's staff also begins to accept deposits from prospective residents. Since
1993, the Company's new development facilities have been at least 45% pre-leased
when opened, and such facilities have achieved, on average, 90% occupancy within
10 months or less after opening.
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.
COMPETITION
Providers of assisted living 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. Some of the Company's existing and potential competitors have
significantly greater resources than does the Company. See "Risk
Factors -- Competition."
GOVERNMENT REGULATION
The Company's assisted living facilities are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, although requirements vary from state to state. In
general, these requirements address, 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. 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. In March 1996,
Maryland state officials imposed a $3,000 civil fine against the Company for
survey deficiencies at the Kensington facilities managed by the Company. The
Company is appealing such fine, which is the first fine assessed against the
Company in its 15-year history. On May 23, 1996, one of the Pennsylvania nursing
home facilities managed by the Company received notice from the Pennsylvania
Department of Health of a survey report stating that the facility was not in
compliance with the requirements of participation for the Medicare and Medicaid
programs. Therefore, the Pennsylvania survey agency report stated that a civil
monetary penalty of $50 to $3,000 per day will be imposed for the period
beginning March 12, 1996, the date the facility was first alleged to be out of
compliance, until the date the alleged deficiencies are corrected. The report
also stated that the agency will recommend a ban on payment for new
Medicare/Medicaid admissions if substantial compliance is not achieved within
three months after the last day of the survey identifying the alleged
non-compliance. The facility has not received confirmation or verification from
the Health Care Financing Administration of whether such remedies will be
imposed, or what the amount of any such penalty would be. The Company has
engaged counsel and intends to vigorously contest the survey report and the
imposition of a civil monetary penalty. The Company believes it has corrected
the alleged deficiencies contained in the survey report and intends to so advise
the Pennsylvania Department of Health in writing on May 31, 1996. Any failure by
the Company to comply with applicable
40
<PAGE> 43
requirements could have a material and adverse effect on the Company's business,
financial condition and results of operations.
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 facility
until the building had been upgraded to meet the more stringent fire code
requirements applicable to facilities that house non-ambulatory residents.
During 1995, the Company made capital improvements to these two facilities at an
aggregate cost of $1.1 million. The Company is awaiting the issuance of new
licenses that would enable non-ambulatory residents to reside at these
facilities. During 1995, the Company relocated non-ambulatory residents from
another Company-owned facility in Virginia whose license prohibits
non-ambulatory residents. During 1995, as a result of survey deficiencies,
Pennsylvania officials rescinded the regular licenses for the two Company-
managed skilled nursing facilities located in Pennsylvania and issued six-month
provisional licenses. The regular facility licenses have since been reinstated.
Also in 1995, a local Maryland housing agency, citing a number of factors,
including a desire to seek competitive pricing bids, consideration of other uses
for the property and past survey results, advised the Company that it will put
the management contract for the Kensington facility out for bid when the
existing management contract with the Company expires in September 1996.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, 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. Although the Company is
not a Medicare or Medicaid provider or supplier, it is subject to these laws
because (i) the state laws typically apply regardless of whether Medicare or
Medicaid payments are at issue, (ii) the Company manages two nursing homes in
Pennsylvania which are certified to participate in Medicare and Medicaid, and
(iii) as required under some state licensure laws, and for the convenience of
its residents, some of the Company's assisted living facilities maintain
contracts with certain health care providers and practitioners, including
pharmacies, visiting nurse organizations and hospices, through which the health
care providers make their health care items or services (some of which may be
covered by Medicare or Medicaid) available to facility residents. There can be
no assurance that such laws will be interpreted in a manner consistent with the
practices of the Company. See "Risk Factors -- Government Regulation."
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.
EMPLOYEES
At March 31, 1996, the Company had 1,768 employees, including 1,168
full-time employees, of which 83 were employed at the Company's headquarters.
The Company believes employee relations are very good.
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.
41
<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
<S> <C> <C>
Paul J. Klaassen(1)(2)............... 38 Chairman of the Board of Directors, President
and Chief Executive Officer
Teresa M. Klaassen(1)(2)............. 40 Executive Vice President, Secretary and
Director
David W. Faeder(1)................... 39 Executive Vice President, Chief Financial
Officer and Director
Timothy S. Smick..................... 44 Executive Vice President and Chief Operating
Officer
Thomas B. Newell..................... 39 Executive Vice President and General Counsel
of the Company and President of Sunrise
Development, Inc.
Brian C. Swinton..................... 51 Executive Vice President, Sales and Marketing
Ronald V. Aprahamian(3)(4)........... 49 Director
Thomas J. Donohue(3)(4).............. 57 Director
Richard A. Doppelt(4)................ 40 Director
Scott F. Meadow(2)(3)................ 42 Director
Darcy J. Moore....................... 39 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Stock Option Committee.
(3) Member of the Compensation Committee.
(4) Member of the Audit Committee.
Messrs. Doppelt and Meadow and Ms. Moore have been designated as Series A
directors, Messrs. Aprahamian and Donohue have been designated as non-management
directors and Messrs. Klaassen and Faeder and Ms. Klaassen have been designated
as management directors, pursuant to the Stockholders' Agreement dated as of
January 4, 1995 among the Company, Paul J. Klaassen, Teresa M. Klaassen and the
Series A Investors (the "Stockholders' Agreement"). The Stockholders' Agreement
terminates upon completion of the Offering.
Paul J. Klaassen, a co-founder of the Company, has served as Chairman of
the Board, President and Chief Executive Officer since 1981. Mr. Klaassen is the
founding Chairman of the Assisted Living Facilities Association of America
("ALFAA"), the largest assisted living industry trade association. Mr. Klaassen
also serves on the editorial advisory boards of Contemporary Long Term Care,
Retirement Housing Report, Assisted Living Today and Assisted Living Briefing
magazines.
Teresa M. Klaassen, a co-founder of the Company, has served as a director
and Executive Vice President and Secretary since 1981. Ms. Klaassen is a
founding member of ALFAA and currently serves on the boards of directors of
several long-term care organizations.
David W. Faeder has served as a director, Executive Vice President and
Chief Financial Officer since 1993. 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 has served as Executive Vice President and Chief Operating
Officer of the Company since February 1996. From 1994 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 which he co-founded and which provided
subacute, skilled
42
<PAGE> 45
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 has served as Executive Vice President and General Counsel
of the Company and President of Sunrise Development, Inc. since January 1996.
From 1989 to January 1996, Mr. Newell was a partner with the law firm of Watt
Tieder & Hoffar, where his practice concentrated on all aspects of commercial
and real estate development transactions and where he represented the Company
for more than five years.
Brian C. Swinton will join the Company as Executive Vice President, Sales
and Marketing, on May 31, 1996. From January 1994 to April 1996, Mr. Swinton was
a Senior Vice President of Forum Group, Inc., a developer and operator of
retirement communities and assisted living facilities, where his
responsibilities included marketing, sales and product development. From 1986 to
1994, Mr. Swinton served as Vice President, Sales, Marketing and Product
Development at Marriott International, where he was responsible for designing,
developing, marketing and the initial operations of the Brighton Gardens
assisted living concept.
Ronald V. Aprahamian has been a director of the Company since February
1995. Mr. Aprahamian has been Chairman of the Board and Chief Executive Officer
of The Compucare Company, a health care information technology company, since
1988. Mr. Aprahamian also is a director of Metrocall, Inc., a paging company.
Thomas J. Donohue has been a director of the Company since February 1995.
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. Mr. Donohue is a director of: the National Football League Alumni
Association; IPAC, an international consulting firm; Newmyer Associates, a
Washington, D.C. firm that tracks and analyzes public policy; and the Hudson
Institute. In addition, Mr. Donohue served on the President's Commission on
Intermodal Transportation.
Richard A. Doppelt has been a director of the Company since January 1995.
Mr. Doppelt is Venture Group Manager of Allstate Venture Capital, a division of
Allstate Insurance Company. He has been a member of Allstate Venture Capital
since 1987. Prior to joining Allstate, he practiced as a corporate attorney with
the law firm of Morrison & Foerster. Mr. Doppelt is a director of several
privately held companies.
Scott F. Meadow has been a director of the Company since February 1996. Mr.
Meadow also served as a director of the Company from December 1994 to August
1995. Mr. Meadow has been a Vice President of The Sprout Group, the venture
capital division of DLJ Capital Corporation, since February 1996. From 1992 to
1995, Mr. Meadow was a General Partner of Frontenac Company, a venture capital
firm. From 1982 to 1992, he was a general partner of William Blair Venture
Partners, a venture capital firm. Mr. Meadow is a director of
Medpartners/Mullikin Inc., a physician practice management company, as well as
several privately held companies.
Darcy J. Moore has been a director of the Company since February 1996. Ms.
Moore has been a General Partner of Frontenac Company, a venture capital firm,
since 1992. From 1990 to 1992, Ms. Moore served as an Associate of the venture
capital firm of William Blair Venture Partners. Ms. Moore 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.
The Board of Directors is divided into three classes, each consisting of
approximately one-third of the total number of directors. There are currently
eight directors. Class I directors, consisting of Messrs. Klaassen and Doppelt,
will hold office until the 1998 annual meeting of stockholders; Class II
directors, consisting of Ms. Klaassen, Ms. Moore and Mr. Aprahamian, will hold
office until the 1999 annual meeting of stockholders; and Class III directors,
consisting of Messrs. Faeder, Meadow and Donohue, will hold office until the
1997 annual meeting of stockholders. Paul J. Klaassen and Teresa M. Klaassen are
husband and wife. No other family relationship exists among the Company's
directors and officers.
43
<PAGE> 46
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. The members of the Executive Committee are Messrs.
Klaassen and Faeder and Ms. Klaassen. The Executive Committee has been delegated
all of the powers of the Board of Directors to the extent permitted under the
Delaware General Corporation Law.
Audit Committee. The members of the Audit Committee are Messrs.
Aprahamian, Donohue and Doppelt, all of whom are non-employee directors. The
Audit Committee, among other things, makes recommendations concerning the
engagement of independent auditors, reviews the results and scope of the annual
audit and other services provided by the Company's independent auditors and
reviews the adequacy of the Company's internal accounting controls.
Compensation Committee. The members of the Compensation Committee are
Messrs. Donohue, Aprahamian and Meadow, all of whom are non-employee directors.
The Compensation Committee makes recommendations to the full Board of Directors
concerning salary and bonus compensation and benefits for executive officers of
the Company.
Stock Option Committee. The members of the Stock Option Committee are
Messrs. Klaassen and Meadow and Ms. Klaassen. The Stock Option Committee has the
power and authority to take all actions and make all determinations under the
Company's 1995 Stock Option Plan, including the grant of options thereunder.
COMPENSATION OF DIRECTORS
Non-employee directors are reimbursed for expenses actually incurred in
connection with attending meetings of the Board of Directors. In 1995, Messrs.
Aprahamian and Donohue each received a grant of a ten-year non-incentive stock
option for 6,666 shares of Common Stock at an exercise price of $3.00 per share
and in 1996, they each received grants of ten-year non-incentive stock options
for 3,334 shares of Common Stock at an exercise price of $10.50 per share and
15,000 shares of Common Stock at an exercise price equal to the initial public
offering price. Options for 10,000 shares vest upon filing of a Form S-8
Registration Statement. Following completion of the Offering, options for the
remaining 15,000 shares vest one-third on each anniversary date thereafter.
1996 DIRECTORS' STOCK OPTION 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 a
Series A director) is eligible to receive options under the Company's 1996
Directors' Stock Option Plan (the "Director Plan"). An aggregate of 50,000
shares of Common Stock are reserved for issuance to participants under the
Director Plan. Each non-employee director whose commencement of service is after
April 25, 1996, the effective date of the Director Plan, and before termination
of the Plan shall be granted an initial option, as of the date of the director's
commencement of service, to purchase 10,000 shares of Common Stock. An
additional option to purchase 5,000 shares of Common Stock will be granted
immediately after each subsequent annual meeting of the Company's stockholders
(commencing with the 1997 annual meeting) occurring before the Director Plan
terminates to each non-employee director who is then serving on the Board. In
the event of any changes in the Common Stock by reason of stock dividends,
split-ups, recapitalizations, mergers, consolidations, combinations or other
exchanges of shares and the like, appropriate adjustments will be made by the
Board of Directors to the number of shares of Common Stock available for
issuance under the Director Plan, the number of shares subject to outstanding
options and/or the exercise price per share of outstanding options.
Options granted under the Director Plan give the option holder the right to
purchase Common Stock at a price fixed in the stock option agreement executed by
the option holder and the Company at the time of grant. 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. "Fair market value" for purposes of the Director
Plan generally will be equal to the closing price for the Common Stock on the
day prior to the date of grant. 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.
44
<PAGE> 47
Options granted under the Director Plan vest immediately. All options to be
granted under the Director Plan will be non-incentive stock options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1995, Messrs. Aprahamian, Donohue and Meadow served on the
Compensation Committee. In 1993, Mr. Donohue, jointly with his wife, made a
capital contribution of $500,000 in exchange for a 30% membership interest in
Sunrise Village House LLC, a limited liability company (the "LLC") that owns the
Village House facility. The Company owns a 50% membership interest in, and is
the managing member of, the LLC, and manages the facility pursuant to a
management contract that expires in 2003. The Company has an option exercisable
on or after April 1, 2000 to purchase the Donohues' interest at fair market
value and, after such date, the Donohues have the option to require the Company
to purchase their interest in the LLC at fair market value. Distributions made
by the LLC to the Donohues in 1993, 1994 and 1995 aggregated $18,700, $35,616
and $40,295, respectively. Upon completion of the Offering, the Company intends
to purchase the Donohues' 30% interest in the LLC in exchange for 52,500 shares
of Common Stock. The purchase price was determined based on a valuation of the
facility prepared by the Company based primarily upon a capitalization of net
operating income from the facility. The Donohues will have incidental
registration rights with respect to their shares. On January 4, 1995 and on
January 14, 1996, DLJ Capital Corporation and Sprout Growth II, L.P. (entities
affiliated with Mr. Meadow) purchased an aggregate of 733,333 shares of Series A
Preferred Stock at $9.00 per share and an aggregate of 300,000 shares of Series
B Preferred Stock at $10.00 per share, respectively. The Series A Preferred
Stock will convert into an equal number of shares of Common Stock upon
completion of the Offering and the Series B Preferred Stock will be redeemed by
the Company for $10.00 per share (plus any accrued but unpaid dividends) with a
portion of the net proceeds of the Offering.
The Company has entered into a Registration Agreement with the Series A
Investors. For a description of the terms of the Registration Agreement, see
"Description of Capital Stock -- Registration Rights."
Scott F. Meadow, a director of the Company, is an executive officer of The
Sprout Group, the venture capital division of DLJ Capital Corporation. DLJ
Capital Corporation is an affiliate of DLJ, the lead managing underwriter of the
Offering. See "Underwriting."
ADVISORY BOARD
The Company has an advisory board consisting of professionals who meet
periodically to advise the Board of Directors and management regarding resident
care, design improvements to the Sunrise model facility, and other matters
relating to the Company's facilities and services. The current members of the
Advisory Board include:
Nathan Billig, M.D. is a professor in the Department of Psychiatry at
Georgetown University Medical Center, and is Director of the Geriatric
Psychiatry Program. He is the author of Growing Older and Wiser, and
professional publications related to geriatric psychiatry and coincidence of
medical and psychiatric disorders.
Victor Regnier, AIA is a professor and the former Dean, School of
Architecture, University of Southern California. He is the author of (i) Housing
the Aged: Design Directives and Policy Considerations, (ii) Assisted Living
Housing for the Elderly: Design Innovations from the United States and Europe,
and (iii) Assisted Living for the Frail and Aged: Innovations in Design,
Management and Financing. Mr. Regnier is a fellow in both the American Institute
of Architects and the Gerontological Society of America.
Dean J. Storer, M.D. is an Associate Clinical Professor, Department of
Psychiatry, George Washington University Medical Center. He is the Medical
Director of a large geriatric psychiatry group practice whose primary focus is
on the diagnosis of dementia and treatment of its associated problems.
45
<PAGE> 48
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information concerning the
compensation paid to the Company's Chief Executive Officer and each of the other
two most highly compensated executive officers whose salary exceeded $100,000 in
1995 for services rendered in all capacities to the Company for fiscal 1995. The
table also sets forth certain summary information concerning the compensation
rate for two other individuals who became executive officers subsequent to
fiscal 1995. All of the executive officers named below are referred to herein as
the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION/
ANNUAL COMPENSATION AWARD
------------------- ------------
SHARES OF
COMMON STOCK
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY OPTIONS(1) COMPENSATION(2)
<S> <C> <C> <C>
Paul J. Klaassen............................ $ 200,000 -- $ 2,310
Chairman of the Board, President and
Chief Executive Officer
Teresa M. Klaassen.......................... 100,000 -- 1,818
Executive Vice President and Secretary
David W. Faeder............................. 175,000 466,666 2,310
Executive Vice President and Chief
Financial Officer
Timothy S. Smick(3)......................... 175,000 141,666 --
Executive Vice President and Chief
Operating Officer
Thomas B. Newell(4)......................... 175,000 129,999 --
Executive Vice President and General
Counsel of the Company and President of
Sunrise
Development, Inc.
</TABLE>
- ---------------
(1) Includes options granted through February 1996.
(2) Represents matching contributions made by the Company under its 401(k) plan.
(3) Mr. Smick joined the Company in February 1996. Salary information shown for
Mr. Smick is for 1996.
(4) Mr. Newell joined the Company in January 1996. Salary information shown for
Mr. Newell is for 1996.
Brian C. Swinton is expected to join the Company as Executive Vice
President, Sales and Marketing on May 31, 1996. Mr. Swinton's initial annual
salary will be $165,000 and he will receive options to purchase 120,000 shares
of Common Stock upon commencement of his employment. The option exercise price
will equal the initial public offering price.
46
<PAGE> 49
OPTION GRANTS
The following table sets forth certain information concerning the grant of
options to purchase Common Stock to each of the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE
SHARES OF TOTAL VALUE AT ASSUMED
COMMON OPTIONS ANNUAL RATES OF STOCK
STOCK GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------
NAME AND PRINCIPAL POSITION(S) GRANTED(1) YEAR ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
David W. Faeder................ 450,000(2) 31.0% $ 8.00 01/04/05 $2,264,021 $5,737,473
Executive Vice President and 16,666(3) 1.2 10.50 02/15/06 110,052 278,898
Chief Financial Officer
Timothy S. Smick............... 141,666(3) 11.0 10.50 02/15/06 935,476 2,370,681
Executive Vice President and
Chief Operating Officer
Thomas B. Newell............... 3,333 0.2 3.00 05/15/05 6,288 15,936
Executive Vice President and 63,333 4.4 7.50 11/19/05 298,723 757,024
General Counsel of the 63,333(3) 4.4 10.50 02/15/06 418,212 1,059,833
Company and President of
Sunrise Development, Inc.
</TABLE>
- ---------------
(1) All options included in this table vest 25% upon effectiveness of a
registration statement on Form S-8 to be filed promptly following completion
of the Offering and 25% on each of the next three anniversary dates thereof,
except as otherwise indicated. The vesting of Mr. Newell's options
accelerate in the event of involuntary termination of employment (other than
for cause).
(2) See "-- Non-Plan Stock Option Grant" for the terms of 450,000 of Mr.
Faeder's options.
(3) Granted in February 1996.
Mr. Swinton will be granted stock options for 120,000 shares at an exercise
price equal to the initial public offering price upon commencement of his
employment on May 31, 1996. Prior to completion of the Offering, the Company
anticipates granting additional options to purchase up to 250,000 shares of
Common Stock at an exercise price per share equal to the initial public offering
price to executive officers and other employees of the Company.
FISCAL YEAR-END VALUES OF STOCK OPTIONS
The following table sets forth certain information concerning the fiscal
year-end value of unexercised stock options held by the named executive
officers. None of the named executive officers exercised any options during
fiscal 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS(1) IN-THE-MONEY OPTIONS(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
David W. Faeder............................ -- 466,666 -- --
Timothy S. Smick........................... -- 141,666 -- --
Thomas B. Newell........................... -- 129,999 -- $14,999
</TABLE>
- ---------------
(1) Includes options granted in February 1996.
(2) There was no public trading market for the Common Stock at December 31,
1995. These values have been calculated on the basis of a per share price of
$7.50, the fair market value of the Common Stock as determined by the Board
of Directors on December 15, 1995, less the applicable exercise price,
multiplied by the number of shares underlying such options.
47
<PAGE> 50
FEBRUARY 1996 OPTION GRANTS
On February 15, 1996 and February 29, 1996, the Company granted a total of
327,000 stock options at an exercise price of $10.50 per share. The Company
believes that these options were granted at no less than fair market value.
Accordingly, no compensation expense was recorded for these options. Subsequent
to the date of the grants, the Company negotiated a loan modification with GECC,
pursuant to which GECC agreed to accept a prepayment, payable upon consummation
of the Offering, of $8.6 million for its 25% participation interest in the cash
flow and increase in value of the SALLP Properties. GECC also agreed to a
reduction in the interest rate on the floating rate portion of the GECC Mortgage
from LIBOR plus 5.75% to LIBOR plus 3.75%, in exchange for an $8.0 million
prepayment of the variable rate portion of the GECC Mortgage payable upon
consummation of the Offering. Had the Company entered into the GECC loan
modification effective January 1, 1995, GECC mortgage interest expense for 1995
would have been approximately $7.8 million compared to $15.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company believes that the fair market value of its Common Stock
significantly increased as a result of the loan modification completed on May 1,
1996 because it eliminated the uncertainty and the financial impact of GECC's
25% participation interest in cash flow and property appreciation. In addition,
the market price for publicly traded assisted living companies increased
significantly following the February 1996 grant dates. Due to these factors, if
the February 1996 options had been granted at an exercise price of $10.50 per
share subsequent to the GECC loan modification and the increase in the market
prices of comparable publicly traded companies, they would have been deemed
compensatory in an amount reflecting the difference between the mid-point of the
initial public offering price range, discounted by approximately 25%, and the
exercise price of the options. The Company believes that approximately a 25%
discount to the mid-point of the range would be appropriate given the Company's
status as a private company until completion of the Offering and, among other
factors: (i) the Founders' continued ownership of 100% of the Common Stock; (ii)
the mandatory redemption features, dividend preferences and other rights of the
Series A Investors which continue until completion of the Offering; (iii)
illiquidity of the Common Stock subject to the options; (iv) option vesting and
exercise conditions; (v) risk associated with completion of the Offering; and
(vi) market pricing uncertainties.
1995 STOCK OPTION PLAN
The Sunrise Assisted Living, Inc. 1995 Stock Option Plan, as amended (the
"Stock Option Plan"), provides for the granting of options to acquire Common
Stock ("Options"), which may be either incentive stock options (an "ISO") or
nonqualified stock options (an "NSO"). The Stock Option Plan is administered by
the Stock Option Committee of the Board of Directors, and all full-time
employees or any other individual (including non-employee directors of, or
consultants or advisors providing bona fide services to, the Company) whose
participation in the Stock Option Plan is determined by the Stock Option
Committee to be in the best interests of the Company are eligible to receive
Option grants thereunder. The Stock Option Plan does not have a termination
date, but a grant of an ISO may not occur 10 years after the effective date of
the Stock Option Plan. Receipt of Option grants under the Stock Option Plan is
contingent upon the execution by each prospective Option holder of an agreement
in such form as the Stock Option Committee will from time to time determine.
The Stock Option Plan provides for the grant of Options to purchase up to
1,298,065 shares of Common Stock. The purchase price per share of Common Stock
subject to an Option is fixed by the Stock Option Committee when the Option is
granted. Options to purchase no more than 250,000 shares of Common Stock may be
granted to any one eligible individual during the first 10 years after the
effective date of the Stock Option Plan and 50,000 shares per year thereafter.
The terms of Options granted under the Stock Option Plan, including the vesting
provisions of such Options, are established at the time of grant. No person may
receive any ISO if, at the time of grant, such person owns directly or
indirectly more than 10% of the total combined voting power of the Company
unless the Option price is at least 110% of the fair market value of the Common
Stock and the exercise period of such ISO is by its terms limited to five years.
There is also a $100,000 limit on the value of Common Stock (determined at the
time of grant) covered by ISOs that first become exercisable by an optionee in
any calendar year. No option granted to a reporting person under Section 16 of
the Securities
48
<PAGE> 51
Exchange Act of 1934 (the "Exchange Act") may be exercisable during the first
six months after the date of grant.
Payment for shares purchased under the Stock Option Plan may be made: (i)
in cash or in cash equivalents; (ii) if permitted by the Option agreement, by
exchanging shares of Common Stock with a fair market value equal to or less than
the total Option price plus cash for any difference; (iii) if permitted by the
Option agreement, by delivery of a promissory note of the person exercising the
Option; (iv) if permitted by the Option agreement, by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an Option equal in value to the exercise price; or (v) by a combination of the
foregoing. Payment in full of the option price need not accompany the written
notice of exercise provided the notice directs that the stock certificate for
the shares for which the option is exercised be delivered to a licensed broker
acceptable to the Company as the agent for the individual exercising the option
and, at the time such stock certificate is delivered, the broker tenders to the
Company cash (or cash equivalents acceptable to the Company) equal to the option
price.
In the event of stock splits, stock dividends, recapitalizations,
combinations of shares or certain other events, the Stock Option Plan provides
for adjustment of: (i) the number of shares available for Option grants,
including the maximum number of shares that may be granted to any one
individual, and (ii) the number of shares and the per share exercise price for
shares subject to unexercised Options. Upon any dissolution or liquidation of
the Company, the sale of substantially all of the Company's assets, a merger,
reorganization or consolidation in which the Company is not the surviving
corporation or any other transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving corporation) approved by
the Board which results in any person or entity owning 80% or more of the total
combined voting power of all classes of stock of the Company, the Stock Option
Plan and the Options issued thereunder will terminate, unless provision is made
in connection with such transaction for the continuation of the plans and/or the
assumption of the Options or for the substitution for such Options of new
options covering the stock of a successor corporation or a parent or subsidiary
thereof, with appropriate adjustment as to the number and kinds of shares and
the per share exercise price.
Options granted under the Stock Option Plan are non-transferable except by
will or by the laws of descent and distribution upon the death of the Option
holder, with the exception (other than, unless permissible under Rule 16b-3, an
optionee who is, or during the preceding six months has been, a reporting person
under Section 16 of the Exchange Act) of certain allowable transfers to such
holder's family members or to a trust established and maintained for the benefit
of such holder or such holder's family members.
Options granted to date under the Stock Option Plan generally terminate:
(i) upon termination of employment for any reason (to the extent the Option has
not vested); (ii) upon termination of employment for cause (whether or not the
Option has vested); (iii) one year after termination of employment due to death
or disability (to the extent the Option has vested); and (iv) three months after
the optionee's termination of employment other than for cause, death or
disability (to the extent the Option has vested). The Board of Directors may
terminate or amend the Stock Option Plan at any time; provided, however, that
any amendment by the Board which, if not approved by the Company's stockholders
in accordance with applicable requirements of Rule 16b-3, would cause the Plan
to not comply with Rule 16b-3 (or any successor rule or other regulatory
requirements) or the Internal Revenue Code of 1986, as amended, shall not be
effective unless approved by the affirmative vote of stockholders who hold more
than 50% of the combined voting power of the outstanding shares of voting stock
of the Company present or represented, and entitled to vote thereon at a duly
constituted stockholders' meeting.
NON-PLAN STOCK OPTION GRANT
The Company has granted 450,000 non-qualified stock options outside of the
Stock Option Plan to David W. Faeder pursuant to a Stock Option Agreement, as
amended, effective as of January 4, 1995 (the "Faeder Option Agreement"). The
exercise price of such non-plan options is $8.00 per share. The fair market
value of the Common Stock on January 4, 1995 was estimated to be $3.00 per
share. Such non-plan options vest as follows: 300,000 shares become exercisable
when the Common Stock price reaches $15.75 per share; 75,000
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shares become exercisable when the Common Stock price reaches $25.00 per share
or if there is a merger, consolidation or any sale of all or substantially all
of the assets of the Company that requires the consent or vote of the holders of
Common Stock (a "Fundamental Change") or upon any liquidation, dissolution or
winding up of the Company (a "Liquidation"); and options for 75,000 shares
become exercisable when the Common Stock price reaches $30.00 per share or there
is a Fundamental Change or Liquidation. All of such options vest in accordance
with the foregoing whether or not Mr. Faeder is employed by the Company at the
time of vesting, subject to forfeiture as described in the following paragraph;
provided, however, with respect to a Fundamental Change or Liquidation, Mr.
Faeder must be employed by the Company on the date of such Fundamental Change or
Liquidation in order for vesting to occur. In any case, all options become
exercisable in approximately six years, when Mr. Faeder reaches age 45, if he
has been continuously providing services to the Company since the date of the
Faeder Option Agreement.
In general, Mr. Faeder's non-plan options expire 10 years after the date of
grant and are non-transferable except in the event of death or disability. If
Mr. Faeder's employment with the Company terminates by reason of death or
permanent and total disability, his non-plan options, whether or not then
exercisable, may be exercised within five years after such death or disability.
If Mr. Faeder's employment is terminated for "cause" (as defined in the Faeder
Option Agreement) by the Company or voluntarily by Mr. Faeder without "good
reason" (as defined in the Faeder Option Agreement), the non-plan options are
forfeited. Termination of Mr. Faeder's employment by the Company without cause
or voluntarily by Mr. Faeder for good reason does not result in forfeiture of
his non-plan options.
Mr. Faeder's non-plan options contain provisions providing for adjustment
of the number of shares and the per share exercise price for shares subject to
unexercised options in connection with certain changes in the outstanding
shares, such as a recapitalization.
401(K) PLAN
The Company has adopted a contributory retirement plan (the "401(k) Plan")
for its employees age 21 and over with at least one year of service to the
Company. The 401(k) Plan is designed to provide tax-deferred income to the
Company's employees in accordance with the provisions of Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"). The 401(k) Plan provides
that each participant may contribute up to 16% of his or her salary (not to
exceed the annual statutory limit). The Company makes a matching contribution to
each participant's account equal to 25% of such participant's contribution up to
7% of such participant's annual compensation. Matching contributions made by the
Company in 1995 totaled $80,198. Upon death, disability, retirement or other
termination of employment, participants may elect to receive periodic or lump
sum distributions from the 401(k) Plan. Participants also may make withdrawals
from the 401(k) Plan in cases of demonstrated hardship.
CERTAIN TRANSACTIONS
The Company leases certain real property on which the Fairfax facility is
located from Teresa M. Klaassen and her sister pursuant to a 99-year ground
lease dated June 5, 1986 (the "Ground Lease"). The Ground Lease provides for
monthly rent of $21,272, as adjusted annually based on the Consumer Price Index.
Annual rent expense under the ground lease for 1993, 1994 and 1995 was $241,896,
$248,496 and $255,258, respectively. The Company has subleased approximately 50%
of the property subject to the Ground Lease to Sunrise Foundation, Inc., a
not-for-profit organization operated by the Founders ("Sunrise Foundation"),
which operates a school and day care center on the property. The sublease
terminates upon expiration of the Ground Lease and provides for monthly rent
equal to 50% of all of the rent payable under the Ground Lease. Sunrise
Foundation also reimburses the Company for use of office facilities and support
services. Reimbursements for the years ended December 31, 1993, 1994 and 1995
were $60,000 for each year. The Company believes that, at the time entered into,
the terms of the lease and sublease were no less favorable to the Company than
those which it could have obtained from an unaffiliated third party.
The Founders lease certain real property located in Fairfax County,
Virginia for use as a residence pursuant to a 99-year ground lease with the
Company entered into in June 1994. The rent is $1.00 per month.
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This property is part of a parcel, which includes the Oakton facility, that was
transferred by the Founders to the Company in connection with obtaining the GECC
Mortgage. Rather than attempting to subdivide the parcel, which would have
caused a significant delay in consummation of that transaction, the Company
agreed to lease the Founders' residence back to them as a condition to the
transfer of the property.
In connection with the Contribution Transaction, in 1995 the Sunrise
Entities made distributions aggregating $9.6 million to, and the Company assumed
$1.4 million of indebtedness (representing the discounted value of $2.1 million
of interest-free indebtedness) of, the Founders. A portion of the cash
distributions is expected to be used to pay tax liabilities incurred by the
Founders in the Contribution Transaction. See Note 1 of Notes to Consolidated
and Combined Financial Statements. In 1996, one of the Sunrise Entities made an
additional $390,000 distribution to the Founders relating to prior period net
income. Immediately prior to the Contribution Transaction in 1994, Sunrise
Entities made distributions totaling $5.9 million to the Founders. See "The
Company and its Predecessors."
Sunrise Terrace, Inc., a wholly owned subsidiary of the Company, made
various advances to the Founders in 1993 and 1994. The largest amount
outstanding in 1993 was $954,000 and in 1994 was $1.2 million. The Founders
repaid such advances in full in 1994.
Prior to June 1994, 15 assisted living facilities now owned by the Company
were held in separate limited partnerships and other entities partially owned by
other parties. In June 1994, proceeds from the GECC Mortgage were used to
refinance $71.5 million of existing mortgages and $5.5 million to finance the
acquisition of all minority ownership interests in these 15 facilities. The
minority ownership interests in such facilities were acquired by the Founders
and those facilities were transferred to a newly formed limited partnership,
SALLP, in exchange for limited partnership interests in that entity. The
Founders' interests in SALLP were contributed to the Company in the Contribution
Transaction.
In 1993, Thomas J. Donohue, a director of the Company, jointly with his
wife, made a capital contribution of $500,000 in exchange for a 30% membership
interest in Sunrise Village House LLC, a limited liability company (the "LLC")
that owns the Village House facility. The Company owns a 50% membership interest
in, and is the managing member of, the LLC, and manages the facility pursuant to
a management contract that expires in 2003. The Company has an option
exercisable at any time on or after April 1, 2000 to purchase the Donohues'
interest at the greater of (i) 30% of the gross assets of the LLC less 30% of
the liabilities of the LLC as of the date notice of exercise of the option is
given; or (ii) the sum of the Donohues' capital contributions to the LLC and an
amount equal to 8% cumulative interest on their outstanding net capital
contribution to the LLC during the period between commencement of the LLC and
date of settlement, less any distributions to the Donohues under the LLC
agreement. After such date, the Donohues have the option (exercisable annually
on April 1) to require the Company to purchase their interest in the LLC at such
price. Distributions made by the LLC to the Donohues in 1993, 1994 and 1995
aggregated $18,700, $35,616 and $40,295, respectively. Upon completion of the
Offering, the Company intends to purchase the Donohues' 30% interest in the LLC
in exchange for 52,500 shares of Common Stock. The purchase price was determined
based on a valuation of the facility prepared by the Company based primarily
upon a capitalization of net operating income from the facility. The Donohues
will have incidental registration rights with respect to their shares.
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<PAGE> 54
The table below sets forth (i) the number of shares of Series A Preferred
Stock issued by the Company for $9.00 per share on January 4, 1995 and (ii) the
number of shares of Series B Preferred Stock issued by the Company for $10.00
per share on January 19, 1996, to certain entities affiliated with directors of
the Company. The Series A Preferred Stock will convert into an equal number of
shares of Common Stock upon completion of the Offering, and the Series B
Preferred Stock will be redeemed by the Company for $10.00 per share (plus any
accrued but unpaid dividends) with a portion of the net proceeds of the
Offering.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF SHARES OF
SERIES A SERIES B
PREFERRED PREFERRED
ENTITY/DIRECTOR STOCK (1) STOCK
<S> <C> <C>
Allstate Insurance Company and affiliated entities/
Richard A. Doppelt............................................... 977,778 400,000
DLJ Capital Corporation and Sprout Growth II, L.P./
Scott F. Meadow.................................................. 733,333 300,000
Frontenac VI Limited Partnership/
Darcy J. Moore................................................... 733,333 300,000
</TABLE>
- ---------------
(1) See "Principal and Selling Stockholders" for a description of the beneficial
ownership of these shares.
The Company has entered into a Registration Agreement with the Series A
Investors. For a description of the terms of the Registration Agreement, see
"Description of Capital Stock -- Registration Rights."
Scott F. Meadow, a director of the Company, is an executive officer of The
Sprout Group, a venture capital division of DLJ Capital Corporation. DLJ Capital
Corporation is an affiliate of DLJ, the lead managing underwriter of the
Offering. See "Underwriting."
The Company has adopted a policy that all future transactions between the
Company and its executive officers, directors and other affiliates must be (i)
approved by a majority of the members of the Board of Directors and by a
majority of the disinterested members of the Board of Directors and (ii) on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
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<PAGE> 55
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of April 30, 1996 and as adjusted to
reflect the sale of the shares offered hereby, by (i) each person known by the
Company to be the beneficial owner of more than five percent of the Common
Stock; (ii) each director of the Company; (iii) each named executive officer of
the Company; and (iv) all executive officers and directors of the Company as a
group. Footnote (3) to the table also sets forth certain information with
respect to the beneficial ownership of the Selling Stockholders, assuming the
Underwriters exercise their over-allotment option in full.
<TABLE>
<CAPTION>
PERCENT OF OWNERSHIP
-------------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED (1) OFFERING OFFERING
<S> <C> <C> <C>
Paul J. Klaassen (2)(3)........................... 6,019,475 70.7% 42.3%
Teresa M. Klaassen (2)(3)......................... 6,019,475 70.7 42.3
David W. Faeder (2)(4)............................ 304,167 3.6 2.1
Timothy S. Smick (2)(5)........................... 35,417 * *
Thomas B. Newell (2)(6)........................... 32,500 * *
Ronald V. Aprahamian (7).......................... 10,000 * *
Thomas J. Donohue (8)............................. 10,000 * *
Richard A. Doppelt(9)............................. 977,778 16.2 6.9
Scott F. Meadow (10).............................. 733,333 10.9 5.2
Darcy J. Moore (11)............................... 733,333 10.9 5.2
Allstate Insurance Company (12)................... 977,778 16.2 6.9
DLJ Capital Corporation (13)...................... 733,333 10.9 5.2
Frontenac VI Limited Partnership (14)............. 733,333 10.9 5.2
Sprout Growth II, L.P.(15)........................ 667,161 10.0 4.7
Executive officers and directors
as a group (11 persons) (16).................... 8,886,003 100.0% 60.7%
</TABLE>
- ---------------
* Less than one percent.
(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or
indirectly, through any contract, arrangement, undertaking, relationship or
otherwise has or shares voting power and/or investment power and as to
which such person has the right to acquire such voting and/or investment
power within 60 days. Percentage of beneficial ownership as to any person
as of a particular date is calculated by dividing the number of shares
beneficially owned by such person by the sum of the number of shares
outstanding as of such date and the number of shares as to which such
person has the right to acquire voting and/or investment power within 60
days.
(2) The business address of the named person is c/o the Company, 9401 Lee
Highway, Suite 300, Fairfax, VA 22031.
(3) The Founders hold these shares jointly. If the Underwriters exercise their
over-allotment option in full, the Founders would sell 855,000 shares of
Common Stock and would beneficially own 5,164,475 shares (36.3%) of the
Common Stock outstanding after the Offering.
(4) Represents 300,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days and 4,167 shares issuable upon the exercise
of stock options that are exercisable upon effectiveness of a registration
statement on Form S-8 to be filed promptly following completion of the
Offering.
(5) Represents 35,417 shares issuable upon the exercise of stock options that
are exercisable upon effectiveness of a registration statement of Form S-8
to be filed promptly following completion of the Offering.
(6) Represents 32,500 shares issuable upon the exercise of stock options that
are exercisable upon effectiveness of a registration statement on Form S-8
to be filed promptly following completion of the Offering.
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<PAGE> 56
(7) The business address of the named person is c/o The Compucare Company,
12110 Sunset Hills Drive, Reston, VA 22090. Represents 10,000 shares
issuable upon the exercise of stock options that are exercisable upon
effectiveness of a registration statement on Form S-8 to be filed promptly
following completion of the Offering.
(8) The business address of the named person is c/o American Trucking
Association, 2200 Mill Road, Alexandria, VA 22314. Represents 10,000 shares
issuable upon the exercise of stock options that are exercisable within 60
days. Does not include 52,500 shares of Common Stock expected to be issued
upon completion of the Offering in exchange for an ownership interest in
one of the Company's facilities. See "Certain Transactions."
(9) The business address of the named person is c/o Allstate Insurance Company,
Northbrook, IL 60062. Represents 547,555 shares beneficially owned by
Allstate Insurance Company and 342,222 shares beneficially owned by
Allstate Life Insurance. Also includes shares held in trust for the benefit
of Allstate Retirement Plan (48,889 shares) and Agents Pension Plan (39,112
shares) by Continental Trust Company, as trustee. Mr. Doppelt is Venture
Group Manager of Allstate Venture Capital, an affiliate of these companies,
and in such capacity may be deemed to share beneficial ownership with
respect to such shares; however, he disclaims any beneficial ownership
except to the extent of his pecuniary interest therein.
(10) The business address of the named person is c/o The Sprout Group, 277 Park
Avenue, New York, NY 10172. Represents 667,161 shares beneficially owned by
Sprout Growth II, L.P. ("Sprout") and 66,172 shares beneficially owned by
DLJ Capital Corporation ("DLJ Capital"). Mr. Meadow is a general partner of
DLJ Growth Associates II, L.P., which is a general partner of Sprout, and a
Vice President of The Sprout Group, a division of DLJ Capital. Mr. Meadow
may be deemed to share beneficial ownership with respect to such shares;
however, he disclaims any beneficial ownership, except to the extent of his
pecuniary interest therein.
(11) The business address of the named person is c/o Frontenac Company, 135 S.
LaSalle Street, 38th Floor, Chicago, IL 60603. Represents 733,333 shares
beneficially owned by Frontenac VI Limited Partnership ("Frontenac VI").
Frontenac Company is the general partner of Frontenac VI. Ms. Moore is a
general partner of Frontenac Company. In such capacity, Ms. Moore may be
deemed to share beneficial ownership with respect to such shares; however,
she disclaims beneficial ownership thereof except to the extent of her
pecuniary interest therein.
(12) The business address of Allstate Insurance Company is Northbrook, IL 60062.
Includes shares owned by Allstate Insurance Company (547,555 shares) and
Allstate Life Insurance Company (342,222 shares). These Allstate entities
are affiliates through interrelated ownership and/or control. Also includes
shares held in trust for the benefit of Allstate Retirement Plan (48,889
shares) and Agents Pension Plan (39,112 shares) by Continental Trust
Company, as trustee, as to which Allstate Insurance Company disclaims
beneficial ownership except to the extent of its pecuniary interest
therein.
(13) The business address of DLJ Capital is 277 Park Avenue, New York, NY 10172.
Includes 667,161 shares beneficially owned by Sprout of which DLJ Capital
is the managing general partner. In such capacity, DLJ Capital may be
deemed to share beneficial ownership with respect to such shares. Sprout is
one of a number of funds associated with The Sprout Group, a division of
DLJ Capital. DLJ Capital is a wholly owned subsidiary of Donaldson, Lufkin
& Jenrette, Inc. ("DLJ, Inc."), a publicly held holding company which is
traded on the New York Stock Exchange. DLJ, the lead managing underwriter,
is also a wholly owned subsidiary of DLJ, Inc.
(14) The business address of Frontenac VI is 135 S. LaSalle Street, 38th Floor,
Chicago, IL 60603.
(15) The business address of Sprout is 277 Park Avenue, New York, NY 10172. For
a description of the affiliation between Sprout and DLJ, see note (13)
above.
(16) See notes (3), (4), (5), (6), (7), (8), (9), (10) and (11) above. Includes
an additional 30,000 shares issuable upon the exercise of stock options
that are exercisable upon effectiveness of a registration statement on Form
S-8 to be filed promptly following completion of the Offering.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the Company's authorized capital stock
will consist of 60,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), and 10,000,000 shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock"). At December 31, 1995, there were outstanding
6,019,475 shares of Common Stock and 2,444,444 shares of Series A Preferred
Stock. On January 19, 1996, the Company issued and sold 1,000,000 shares of
Series B Preferred Stock. Upon completion of the Offering, all of the
outstanding shares of Series A Preferred Stock will be converted into an equal
number of shares of Common Stock and all of the outstanding shares of Series B
Preferred Stock will be redeemed by the Company. All of the currently
outstanding shares of Common Stock and Preferred Stock are validly issued, fully
paid and nonassessable under the Delaware General Corporation Law (the "DGCL").
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Restated Certificate of
Incorporation (the "Certificate") which will be filed with the Delaware
Secretary of State and become effective promptly following completion of the
Offering, and by the provisions of applicable law. A copy of the form of
Certificate is included as an exhibit to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share on all
matters submitted to a vote of stockholders. The Certificate does not provide
for cumulative voting, and accordingly, the holders of a majority of the shares
of Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. The Certificate provides that whenever
there is paid, or declared and set aside for payment, to the holders of the
outstanding shares of any class of stock having preference over the Common Stock
as to the payment of dividends, the full amount of dividends and of sinking fund
or retirement fund or other retirement payments, if any, to which such holders
are entitled, then dividends may be paid on the Common Stock out of any assets
legally available therefor, but only when and as declared by the Board of
Directors. The Certificate also provides that in the event of any liquidation,
dissolution or winding up of the Company, after there is paid to or set aside
for the holders of any class of stock having preference over the Common Stock
the full amount to which such holders are entitled, then the holders of the
Common Stock, shall be entitled, after payment or provision for payment of all
debts and liabilities of the Company, to receive the remaining assets of the
Company available for distribution, in cash or in kind. The holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of Common Stock will be subject to
the rights of the holders of any shares of any series of Preferred Stock that
the Company may issue in the future.
PREFERRED STOCK
The Certificate provides that the Board of Directors of the Company is
authorized to issue Preferred Stock in series and to fix and state the voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights of the shares of
each such series and the qualifications, limitations and restrictions thereof.
Such action may be taken by the Board without stockholder approval. Under the
Certificate, each share of each series of Preferred Stock is to have the same
relative rights as, and be identical in all respects with, all other shares of
the same series. While providing flexibility in connection with possible
financings, acquisitions and other corporate purposes, the issuance of Preferred
Stock, among other things, could adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, be used as a means of
discouraging, delaying or preventing a change in control of the Company. There
will be no shares of Preferred Stock outstanding upon completion of the Offering
and the Company has no present plan to issue shares of its Preferred Stock.
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<PAGE> 58
WARRANTS
In March 1996, the Company obtained a $13.0 million unsecured line of
credit. As part of such transaction, 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 equal to 85% of the initial public offering price,
subject to various anti-dilution adjustments. The warrants may be exercised at
any time through March 19, 2006. The Company has also granted to the lender
incidental registration rights with respect to the shares of Common Stock
underlying the warrants. The Company is required to bear the expenses of any
such registrations.
REGISTRATION RIGHTS
The Founders, as holders of 6,019,475 shares of outstanding Common Stock
(the "Founders' Shares"), the holders of 2,444,444 shares of Common Stock
issuable upon conversion of the Series A Preferred Stock or their respective
transferees and any employee, officer, agent, consultant or director of the
Company or any subsidiary who hereafter owns, directly or indirectly, 1% more of
the outstanding Common Stock (on a fully diluted basis) whom the Company permits
to become a party to the Registration Agreement (defined below) are entitled to
certain rights with respect to the registration of such shares (the "Registrable
Securities") under the Securities Act. These rights are provided under the terms
of the Registration Agreement, dated January 4, 1995, between the Company and
the holders of the Registrable Securities (the "Registration Agreement"). The
following summary of certain provisions of the Registration Agreement does not
purport to be complete and is subject to, and qualified in its entirety by, the
Registration Agreement.
Demand Registration. Pursuant to the terms of the Registration Agreement,
upon the earlier of (i) an Initial Public Offering or (ii) January 4, 1998,
holders of Registrable Securities may request that the Company offer some or all
of such Registrable Securities to the public pursuant to an effective
registration statement under the Securities Act. Registration on Form S-1 may be
demanded by either of the Founders or by the holders of not less than a majority
of the Investors' Shares (defined below), provided that the holders requesting
registration on Form S-1 must be requesting registration of not less than 25% of
the Registrable Securities held by such holders. Registration on Form S-3 may be
demanded by either 25% of the holders of Investors' Shares or by holders of 25%
of the then outstanding Founders' Shares, provided that the aggregate offering
value of the Registrable Securities requested to be included in such
registration must be reasonably expected to equal at least $1 million. The
holders have the right to require the Company to file a registration statement
on Form S-1 two times and on Form S-3 an unlimited number of times. However, the
Company is obligated to pay registration expenses only for the first two
registrations on Form S-3. The Company is also required to give notice of such
requested registration to all holders of all Registrable Securities of the
Company. If a demand registration is an underwritten public offering and the
managing underwriter advises the Company that the number of Registrable
Securities and other securities being registered exceeds the number of
securities which can be sold in such offering without having a material adverse
effect on the offering, the Company may cut back pro rata the number of
Registrable Securities and other securities being registered. "Investors'
Shares" means any shares of Common Stock held of record by stockholders other
than the Founders, including shares issued or issuable upon the conversion of
the Series A Preferred Stock.
Incidental Registration. In addition, the Registration Agreement provides
that if the Company at any time proposes to register any of its securities under
the Securities Act, on a form other than Form S-4 or S-8, the holders of
Registrable Securities are entitled to have their shares included in such
registration statement on a pro rata basis, subject to certain other terms and
conditions.
The Company has agreed under the Registration Agreement to indemnify the
selling holders of the Registrable Securities against certain liabilities under
the Securities Act.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability. Section 102(b)(7) of the DGCL
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b)(7) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The
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<PAGE> 59
Certificate limits the liability of directors to the Company or its stockholders
to the full extent permitted by Section 102(b)(7). Specifically, directors of
the Company are not personally liable for monetary damages to the Company or its
stockholders for breach of the director's fiduciary duty as a director, except
for liability: (i) for any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL; or (iv) for any transaction from which the
director derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the Bylaws
provide for mandatory indemnification of directors and officers of the Company
against an expense, liability and loss to which they may become subject, or
which they may incur as a result of being or having been a director or officer
of the Company. In addition, the Company must advance or reimburse directors and
officers for expenses incurred by them in connection with indemnifiable claims.
Prior to completion of the Offering, the Company intends to enter into
separate indemnification agreements with its directors and officers. Each
indemnification agreement provides for, among other things: (i) indemnification
against any and all expenses, liabilities and losses (including attorneys' fees,
judgments, fines, taxes, penalties and amounts paid in settlement) of any claim
against an indemnified party unless it is determined, as provided in the
indemnification agreement, that indemnification is not permitted under
applicable law and (ii) prompt advancement of expenses to any indemnified party
in connection with his or her defense against any claim.
The Company also maintains directors' and officers' liability insurance.
CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, the Certificate and the Bylaws will
contain, among other things, certain provisions described below that may reduce
the likelihood of a change in the Board of Directors or voting control of the
Company without the consent of the Board of Directors. These provisions could
have the effect of discouraging, delaying, or preventing tender offers or
takeover attempts that some or a majority of the stockholders might consider to
be in the stockholders' best interest, including offers or attempts that might
result in a premium over the market price for the Common Stock.
Classified Board. The number of directors of the Company shall be such
number as from time to time is fixed by, or in the manner provided in, the
Bylaws within the range of a minimum of two and a maximum of eleven directors
specified in the Certificate. Pursuant to the Bylaws, the number of directors
within the range set forth in the Certificate shall be determined by resolution
of the Board passed by at least two-thirds of the directors then in office.
Directors are divided into three classes, each consisting of approximately
one-third of the total number of directors. The term of office of each class is
three years and expires in successive years at the time of the annual meeting of
stockholders.
Filling of Board Vacancies; Removal. Any vacancy occurring in the Board of
Directors, including any vacancy created by an increase in the number of
directors, shall be filled for the unexpired term by the concurring vote of a
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for the remainder of the full term of the
class in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. Directors
may only be removed with cause by the affirmative vote of the holders of at
least a majority of the outstanding shares of capital stock then entitled to
vote at an election of directors.
Other Constituencies. The Board of Directors, when evaluating any offer,
bid, proposal or similar communication of another party to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or consolidate
the Company with or into another corporation or corporations, or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Company and its stockholders,
give due consideration to all relevant factors, including, without limitation,
the social, economic and regulatory effects on the Company, on employees,
providers and payors of the Company and its
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<PAGE> 60
subsidiaries, on residents and families served by the Company and its
subsidiaries, on operations of the Company's subsidiaries and on the communities
in which the Company and its subsidiaries operate or are located.
Stockholder Action by Unanimous Written Consent. Any action required or
permitted to be taken by the stockholders must be effected at a duly called
annual or special meeting of such holders and may not be effected by any consent
in writing by such holders, unless such consent is unanimous.
Call of Special Meetings. Special meetings of stockholders may be called
at any time but only by the Chairman of the Board, the President, by a majority
of the directors then in office or by stockholders possessing at least 25% of
the voting power of the issued and outstanding voting stock entitled to vote
generally in the election of directors.
Bylaw Amendments. The stockholders may amend the Bylaws by the affirmative
vote of the holders of at least two-thirds of the outstanding shares of stock of
the Company entitled to vote thereon. Directors may also amend the Bylaws by a
two-thirds vote of the directors then in office.
Certificate Amendments. Except as set forth in the Certificate or as
otherwise specifically required by law, no amendment of any provision of the
Certificate shall be made unless such amendment has been first proposed by the
Board of Directors upon the affirmative vote of at least two-thirds of the
directors then in office and thereafter approved by the affirmative vote of the
holders of at least a majority of the outstanding shares of stock of the Company
entitled to vote thereon; provided however, if such amendment is to the
provisions described above or the provisions in the Certificate relating to the
authorized number of shares of Preferred Stock, Board authority to issue
Preferred Stock or the limitation on directors liability, such amendment must be
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of stock entitled to vote thereon.
Stockholder Nominations and Proposals. With certain exceptions, the
Company's Bylaws require that stockholders intending to present nominations for
directors or other business for consideration at a meeting of stockholders
notify the Company's Secretary by the later of 60 days before the date of the
meeting and 15 days after the date notice of the meeting is mailed or public
notice of the meeting is given.
Certain Statutory Provisions. Section 203 of the DGCL provides, in
general, that a stockholder acquiring more than 15% of the outstanding voting
shares of a corporation subject to the statute (an "Interested Stockholder"),
but less than 85% of such shares, may not engage in certain "Business
Combinations" with the corporation for a period of three years subsequent to the
date on which the stockholder became an Interested Stockholder unless (i) prior
to such date the corporation's board of directors approved either the Business
Combination or the transaction in which the stockholder became in Interested
Stockholder or (ii) the Business Combination is approved by the corporation's
board of directors and authorized by a vote of at least two-thirds of the
outstanding voting stock of the corporation not owned by the Interested
Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder or a transaction in which the Interested Stockholder
receives certain other benefits.
Pursuant to a Board resolution adopted at the time of formation of the
Company, the Section 203 limits do not apply to any "Business Combination"
between the Company and the Founders, their respective "affiliates" or their
respective estates.
STOCKHOLDER RIGHTS AGREEMENT
The Board of Directors has adopted a Stockholder Rights Agreement ("Rights
Agreement") and declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of Common
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<PAGE> 61
Stock. 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),
or the date, if any, on which the Rights are redeemed will have Rights attached
to them. The Rights will expire ten years after adoption of the Rights
Agreement, unless earlier redeemed or exchanged. Each Right, when exercisable,
entitles the holder to purchase one one-thousandth of a share of Series C Junior
Participating Preferred Stock ("Preferred Stock") at a price of $85.00 (the
"Purchase Price"). Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
The Rights Agreement will provide that the Rights initially attach to all
certificates representing shares of Common Stock then outstanding. 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 of affiliated or
associated persons (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. Notwithstanding the foregoing, neither of the Founders (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." Until the
Distribution Date, the Rights will be evidenced by the Common Stock
certificates, and will be transferred with, and only with, the Common Stock
certificates.
If a Person becomes the beneficial owner of 20% or more of the then
outstanding shares of Common Stock (except pursuant to an offer for all
outstanding shares of Common Stock which the Outside Directors determine to be
fair to and otherwise in the best interests of the Company and its
stockholders), each holder of a Right will, after the end of a redemption
period, have the right to exercise the Right by purchasing Common Stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times such amount.
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 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 of the Right.
In general, the Board of Directors of the Company 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. Under certain circumstances, the decision to redeem
the Rights will require the concurrence of a majority of the Continuing
Directors, defined as any member of the Board of Directors who was a member of
the Board of Directors prior to the date of the Rights Agreement, and any person
who is subsequently elected to the Board if such person is recommended or
approved by a majority of the Continuing Directors. The term "Outside Directors"
means "Continuing Directors" who are not officers of the Company.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company.
The Rights, however, will not interfere with any merger or other business
combination approved by the Board of Directors since the Board may, at its
option, at any time prior to any person becoming an Acquiring Person, redeem all
rights or amend the Rights Agreement to exempt the person from the Rights
Agreement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.
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<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
14,216,419 shares of Common Stock. The 5,700,000 shares sold in the Offering (or
a maximum of 6,555,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless held by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 8,516,419 shares outstanding are "restricted securities" as that term
is defined under Rule 144 and were issued by the Company in private transactions
in reliance upon one or more exemptions under the Securities Act. Such
restricted securities may be resold in a public distribution only if registered
under the Securities Act (which registration is contemplated with respect to all
of such restricted securities as described below) or pursuant to an exemption
therefrom, including Rule 144. Certain of the existing stockholders and
executive officers and directors of the Company have agreed, subject to certain
exceptions, that they will not sell any shares of Common Stock prior to the
expiration of 180 days from the date of this Prospectus without the prior
written consent of DLJ, except as to shares held by affiliates of DLJ which
require the consent of representatives of the Underwriters other than DLJ,
subject to certain exceptions.
In addition to the outstanding shares of Common Stock, the Company has
reserved for issuance 1,748,065 shares of Common Stock pursuant to the Company's
stock option programs, under which options to purchase 1,435,266 shares will be
outstanding upon completion of the Offering, of which options for 300,000 shares
are exercisable within 60 days of the date of this Prospectus and 246,316 of
which are exercisable upon the effectiveness of a registration statement on Form
S-8 to be filed promptly following completion of the Offering. In addition,
warrants to purchase 50,000 shares of Common Stock are outstanding.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least two years is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the two-year holding period, to sell shares of Common Stock. A person
who is deemed not to have been an "affiliate" of the Company at any time during
the 90 days preceding a sale by such person, and who has beneficially owned such
shares for at least three years, would be entitled to sell such shares without
regard to the volume limitations described above.
The Commission has proposed to amend the holding period required by Rule
144 to permit sales of "restricted securities" after one year rather than two
years (and two years rather than three years for "non-affiliates" under Rule
144(k)). If such proposed amendment is adopted, restricted securities would
become freely tradable (subject to any applicable contractual restrictions) at
correspondingly earlier dates.
Subject to certain exceptions, the Company and all holders of outstanding
shares of Common Stock and optionees holding options to purchase a total of
908,331 shares of Common Stock have agreed, subject to certain exceptions, with
the Underwriters not to sell or otherwise dispose of any shares of Common Stock,
any options to purchase Common Stock or any securities convertible into or
exchangeable for shares of Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of DLJ, except as to shares
held by affiliates of DLJ which require the prior written consent of the
representatives of the Underwriters, other than DLJ.
Upon the completion of the Offering, options and warrants which could be
exercised for the purchase of 576,935 shares of Common Stock (after the passage
of applicable time vesting periods) will not be subject to the lock-up
restrictions discussed above. Of such 576,935 shares of Common Stock issuable
upon the exercise of such options and warrants, 181,734 options and warrants
will become exercisable within 60 days after completion of the Offering.
After the Offering, the holders of 8,516,419 shares of Common Stock or
their transferees will be entitled to certain rights with respect to the
registration of such shares for sale under the Securities Act. See "Description
of Capital Stock -- Registration Rights."
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UNDERWRITING
Subject to the terms and certain conditions contained in the Underwriting
Agreement, the underwriters named below (the "Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Alex. Brown & Sons
Incorporated and NatWest Securities Limited are acting as representatives
(collectively, the "Representatives"), have severally agreed to purchase from
the Company an aggregate of 5,700,000 shares of Common Stock. The number of
shares of Common Stock that each Underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............... 1,332,668
Alex. Brown & Sons Incorporated................................... 1,332,666
NatWest Securities Limited........................................ 1,332,666
Bear, Stearns & Co. Inc. ......................................... 74,000
CS First Boston Corporation....................................... 74,000
Cowen & Company................................................... 74,000
Dean Witter Reynolds Inc. ........................................ 74,000
Deutsche Morgan Grenfell/C.J. Lawrence Inc. ...................... 74,000
A.G. Edwards & Sons, Inc. ........................................ 74,000
Hambrecht & Quist LLC............................................. 74,000
Montgomery Securities............................................. 74,000
Morgan Stanley & Co. Incorporated................................. 74,000
PaineWebber Incorporated.......................................... 74,000
Prudential Securities Incorporated................................ 74,000
Salomon Brothers Inc.............................................. 74,000
Smith Barney Inc. ................................................ 74,000
Advest, Inc. ..................................................... 37,000
Robert W. Baird & Co. Incorporated................................ 37,000
J.C. Bradford & Co. .............................................. 37,000
Crowell, Weedon & Co. ............................................ 37,000
Equitable Securities Corporation.................................. 37,000
First Albany Corporation.......................................... 37,000
First of Michigan Corporation..................................... 37,000
Interstate/Johnson Lane Corporation............................... 37,000
Johnston, Lemon & Co. Incorporated................................ 37,000
Legg Mason Wood Walker Incorporated............................... 37,000
McDonald & Company Securities, Inc. .............................. 37,000
Needham & Company, Inc. .......................................... 37,000
Ragen MacKenzie Incorporated...................................... 37,000
Raymond James & Associates, Inc. ................................. 37,000
Scott & Stringfellow Inc. ........................................ 37,000
Sutro & Co. Incorporated.......................................... 37,000
Tucker Anthony Incorporated....................................... 37,000
Wessels, Arnold & Henderson....................................... 37,000
Wheat, First Securities, Inc. .................................... 37,000
Van Kasper & Company.............................................. 37,000
---------
Total................................................... 5,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters
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<PAGE> 64
by counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all the shares of Common Stock offered hereby (other than the
shares of the Common Stock covered by the over-allotment option described below)
if any are taken.
Prior to the Offering, there has been no established trading market for the
shares of Common Stock. The initial price to the public for the shares of Common
Stock offered hereby has been determined by negotiation between the Company and
the Representatives. The factors considered in determining the initial price to
the public include the history of and the prospects for the industry in which
the Company competes, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the recent market prices of securities of generally
comparable companies, and the general condition of the securities markets at the
time of the Offering.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public initially at the price to the public set
forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not to exceed $0.84
per share. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of $0.10 per share to any other Underwriter and certain other
dealers.
The Founders have granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 855,000
additional shares of Common Stock at the initial public offering price less
underwriting discounts and commissions, solely to cover over-allotments. To the
extent that the Underwriters exercise such option, each of the Underwriters will
be committed, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
such Underwriter's name in the preceding table bears to the total number of
shares offered.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer any Common Stock within the United States, its
territories or possessions, or to persons who are citizens thereof or residents
therein. The Underwriting Agreement does not limit sale of the Common Stock
offered hereby outside of the United States.
NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments
(whether as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom; and (c) it has only
issued or passed on and will only issue or pass on, in the United Kingdom, any
document that consists of or any part of listing particulars, supplementary
listing particulars, or any other document required or permitted to be published
by listing rules under Part IV of the Act, to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.
Certain affiliates of DLJ beneficially own an aggregate of 733,333 shares
of Series A Preferred Stock which, upon consummation of the Offering, will
automatically convert to 733,333 shares of Common Stock and will represent 5.2%
of the outstanding Common Stock. Such entities also own 300,000 shares of Series
B Preferred Stock which will be redeemed using a portion of the net proceeds
from the Offering. Because affiliates of DLJ beneficially own more than ten
percent of the preferred equity of the Company (prior to giving effect to the
conversion thereof upon consummation of the Offering), the Offering is being
conducted in accordance with the applicable provisions of Schedule E to the
By-Laws of the National Association of
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<PAGE> 65
Securities Dealers, Inc. In accordance with these requirements, Alex. Brown &
Sons Incorporated (the "Independent Underwriter") is assuming the
responsibilities of acting as "qualified independent underwriter" and will
recommend the maximum public offering price for the shares of Common Stock in
compliance with the requirements of Schedule E. In connection with the Offering,
the Independent Underwriter is performing due diligence investigations and is
reviewing and participating in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part. The initial public
offering price of the Common Stock will be no higher than the price recommended
by the Independent Underwriter.
Pursuant to the Stockholders' Agreement entered into in connection with the
issuance of the Series A Preferred Stock, Sprout and DLJ Capital, both
affiliates of DLJ, have the right to designate one member of the Board of
Directors. Their current designee is Scott F. Meadow. Mr. Meadow is a general
partner of DLJ Growth Associates II, L.P., which is a general partner of Sprout,
and a Senior Vice President of The Sprout Group, a division of DLJ Capital. DLJ
Capital is a wholly owned subsidiary of DLJ, Inc. DLJ, the lead managing
underwriter, is also a wholly owned subsidiary of DLJ, Inc. The Stockholders'
Agreement will terminate upon completion of the Offering.
The Underwriters do not intend to confirm sales of shares of Common Stock
to any accounts over which they exercise discretionary authority.
Subject to certain exceptions, the Company and certain of its existing
stockholders and directors and executive officers have agreed not to offer,
sell, contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible or exchangeable into any shares of Common Stock prior
to the expiration of 180 days from the date of this Prospectus, without the
prior written consent of DLJ, except as to shares held by affiliates of DLJ
which require the prior written consent of the Representatives other than DLJ.
See "Shares Eligible for Future Sale."
At the request of the Company, up to 300,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including directors
and employees of the Company and other entities with whom directors of the
Company are affiliated, and members of their families. The price of such shares
to such persons will be the initial public offering price set forth on the cover
of this Prospectus. The number of shares available to the general public will be
reduced to the extent those persons purchase reserved shares. Any shares not so
purchased will be offered hereby at the public offering price set forth on the
cover of this Prospectus.
This Prospectus may also be used by DLJ in connection with offers and sales
of shares of Common Stock in market making transactions at negotiated prices
related to prevailing market prices at the time of sale. DLJ may not act as
principal or agent in such transactions.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Hogan & Hartson L.L.P., Washington, D.C. Alston & Bird, Atlanta,
Georgia, is acting as counsel for the Underwriters in connection with certain
legal matters relating to the sale of Common Stock offered hereby.
EXPERTS
The consolidated financial statements of Sunrise Assisted Living, Inc. as
of December 31, 1995, and for the year then ended, and the combined financial
statements of Sunrise Entities as of December 31, 1994 and for the year then
ended, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of the firm as experts in accounting and auditing. The
combined financial statements of Sunrise Entities for the year ended December
31, 1993 and the combined financial statements of Acquired Entities of Sunrise
as of December 31, 1993 and for the year then ended, have been audited by
Hoffman, Morrison & Fitzgerald P.C., independent auditors, as set forth in their
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<PAGE> 66
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of the firm as experts in accounting and
auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
In November 1994, the Company's Board of Director's decided to retain Ernst
& Young LLP as the independent accountants for the Company and replaced the
Company's former accountants. There were no disagreements with the former
accountants regarding accounting principles or practices, financial statement
disclosure, or auditing scope or procedures. The former accountants' report on
Sunrise Entities, for the year ended December 31, 1993, included herein, did not
contain an adverse opinion or a disclaimer of an opinion or qualifications as to
uncertainty, audit scope or accounting principles. Prior to retaining Ernst &
Young LLP, the Company had not consulted with Ernst & Young LLP regarding
accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
Statements herein concerning the contents of any contract or other document are
not necessarily complete and in each instance reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, each such statement being qualified by and subject to such reference
in all respects.
As a result of the Offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith will file reports and other information with the
Commission. Reports, registration statements, proxy statements, and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549.
The Company intends to furnish holders of the Common Stock with annual
reports containing among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law.
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<PAGE> 67
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUNRISE ASSISTED LIVING, INC. AND SUNRISE ENTITIES
Report of Independent Auditors........................................................ F-2
Report of Independent Auditors........................................................ F-3
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and as of December 31,
1995 of the Company and Combined Balance Sheets as of December 31, 1994 of the
Sunrise Entities.................................................................... F-4
Consolidated Statements of Operations of the Company for the three months ended March
31, 1996 and 1995 (unaudited) and for the year ended December 31, 1995 and Combined
Statements of Operations of the Sunrise Entities for each of the two years ended
December 31, 1994................................................................... F-5
Consolidated Statement of Changes in Stockholders' Deficit of the Company and Combined
Statement of Owners' Deficit of the Sunrise Entities................................ F-6
Consolidated Statements of Cash Flows of the Company for the three months ended March
31, 1996 and 1995 (unaudited) and for the year ended December 31, 1995 and Combined
Statements of Cash Flows of the Sunrise Entities for each of the two years ended
December 31, 1994................................................................... F-7
Notes to Consolidated and Combined Financial Statements............................... F-8
ACQUIRED ENTITIES OF SUNRISE
Independent Auditors' Report.......................................................... F-25
Combined Balance Sheet as of December 31, 1993........................................ F-26
Combined Statement of Operations and Partners' Deficit for the year ended December 31,
1993................................................................................ F-27
Combined Statement of Cash Flows for the year ended December 31, 1993................. F-28
Notes to Combined Financial Statements................................................ F-29
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Sunrise Assisted Living, Inc.
We have audited the accompanying consolidated balance sheet of Sunrise
Assisted Living, Inc. (the "Company") as of December 31, 1995, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. We also have audited the combined balance sheet of Sunrise
Entities (the predecessor to the Company, see Note 1) as of December 31, 1994,
and the related combined statements of operations, owners' deficit, and cash
flows for the year then ended. 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, 1995, and the consolidated results of
its operations and its cash flows for the year 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 financial position of Sunrise Entities as of December 31, 1994, and the
combined results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Washington, D.C.
February 15, 1996
except for Notes 10 and
Note 16, as to which the date is May 28, 1996
F-2
<PAGE> 69
INDEPENDENT AUDITORS' REPORT
To the Partners and Stockholders
Sunrise Entities
We have audited the accompanying combined statements of operations and
partners'/stockholders' deficits and cash flows of Sunrise Entities
(collectively, the "Company") for the year ended December 31, 1993. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined 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 audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Sunrise Entities for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
Hoffman, Morrison & Fitzgerald P.C.
Vienna, Virginia
March 13, 1996
F-3
<PAGE> 70
CONSOLIDATED BALANCE SHEET OF SUNRISE ASSISTED LIVING, INC.
AS OF MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995
AND THE COMBINED BALANCE SHEET OF SUNRISE ENTITIES
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
--------------------------- ------------ ------------------
1994 1995 1996 1996
(UNAUDITED) (UNAUDITED-NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 8,088,655 $ 6,252,449 $ 6,045,890 $ 6,045,890
Accounts receivable, less allowance of
$50,000 and $235,000..................... 1,097,886 1,319,429 1,409,564 1,409,564
Prepaid and other current assets........... 2,090,644 2,328,571 3,851,122 3,851,122
------------ ------------ ------------ ---------------
Total current assets................ 11,277,185 9,900,449 11,306,576 11,306,576
Property and equipment, net.................. 94,296,103 104,317,117 118,118,449 118,118,449
Investment................................... -- 5,375,404 5,568,343 5,568,343
Restricted cash and cash equivalents......... 1,175,410 1,260,470 1,739,277 1,739,277
Other assets................................. 2,254,629 2,467,421 3,060,555 3,060,555
------------ ------------ ------------ ---------------
Total assets........................ $109,003,327 $123,320,861 $139,793,200 $139,793,200
============= ============= ============= ===============
LIABILITIES AND OWNERS'/STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...... $ 3,008,239 $ 6,547,122 $ 7,039,528 $ 7,039,528
Distribution payable....................... 9,646,167 -- 182,500 182,500
Deferred revenue........................... 950,789 903,711 1,133,005 1,133,005
Other current liabilities.................. 760,740 130,669 115,043 115,043
Current portion of long-term debt.......... 4,216,667 268,576 377,691 377,691
------------ ------------ ------------ ---------------
Total current liabilities........... 18,582,602 7,850,078 8,847,767 8,847,767
Notes payable to affiliated entities......... 1,610,231 1,735,138 1,716,338 1,716,338
Interests in unconsolidated partnerships..... 322,221 620,014 571,303 571,103
Long-term debt, less current maturities...... 104,202,457 120,285,996 128,035,286 128,035,286
------------ ------------ ------------ ---------------
Total liabilities................... 124,717,511 130,491,226 139,170,694 139,170,494
Minority interests........................... 676,944 639,895 578,309 578,309
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 9%
preferred return;
2,444,444 shares issued and
outstanding............................ -- 23,963,496 24,463,995 --
Series B exchangeable preferred stock,
exchangeable and redeemable; cumulative
dividend at 9%; $10 stated value and
liquidation
value of $10 plus any accrued and
unpaid
dividends; none issued and
outstanding............................ 10,000,000 10,000,000
Owners'/Stockholders' deficit:
Common stock of predecessor................ 10,501 -- -- --
Additional paid-in capital of
predecessor.............................. 852,020 -- -- --
Accumulated deficit of predecessor......... (17,253,649) -- -- --
Common stock, $0.01 par value, 60,000,000
shares authorized, 6,019,475 shares
issued and outstanding (8,463,919 pro
forma 1995 issued and outstanding)....... -- 60,195 60,195 84,639
Contributed capital (deficiency)........... -- (19,733,287) (19,598,287) 4,841,264
Accumulated deficit........................ -- (12,100,664) (14,881,706) (14,881,706)
------------ ------------ ------------ ---------------
Total owners'/stockholders'
deficit........................... (16,391,128) (31,773,756) (34,419,798) (9,955,803)
------------ ------------ ------------ ---------------
Total liabilities and
owners'/stockholders' deficit..... $109,003,327 $123,320,861 $139,793,200 $139,793,200
============= ============= ============= ===============
</TABLE>
See accompanying notes.
F-4
<PAGE> 71
CONSOLIDATED STATEMENT OF OPERATIONS OF SUNRISE ASSISTED LIVING, INC.
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE COMBINED STATEMENT OF OPERATIONS OF SUNRISE ENTITIES
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
DECEMBER 31, THREE MONTHS ENDED
------------------------------------------ MARCH 31,
1993 1994 1995 --------------------------
1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Resident fees.............. $23,993,737 $32,138,979 $ 34,752,023 $ 8,396,309 $ 9,096,093
Management services
income.................. 1,604,367 1,829,707 2,505,903 497,572 641,902
----------- ----------- ------------ ----------- -----------
25,598,104 33,968,686 37,257,926 8,893,881 9,737,995
Operating expenses:
Facility operating
expenses................ 17,760,450 17,983,070 21,010,486 5,346,125 6,064,400
Facility development and
pre-opening expenses.... 474,206 262,825 1,171,843 203,620 183,900
General and
administrative.......... 2,034,340 4,182,777 6,875,006 1,321,639 2,120,764
Depreciation and
amortization............ 2,798,581 3,159,764 3,008,639 760,289 810,682
----------- ----------- ------------ ----------- -----------
23,067,577 25,588,436 32,065,974 7,631,673 9,179,746
Income from operations..... 2,530,527 8,380,250 5,191,952 1,262,208 558,249
Other income (expense):
Interest income......... 317,144 565,449 1,228,789 330,321 277,234
Interest expense:
GECC mortgage
interest........... -- (5,528,789) (15,295,287) (2,465,046) (2,339,389)
Other debt............ (3,808,093) (3,059,777) (1,260,292) (268,497) (285,385)
----------- ----------- ------------ ----------- -----------
Total interest expense..... (3,808,093) (8,588,566) (16,555,579) (2,733,543) (2,624,774)
Equity in (losses) earnings
on investments in
unconsolidated/non-combined
partnerships............... (104,382) 33,024 (9,081) 26,486 29,379
Minority interest............ 427,798 171,870 6,755 6,032 51,586
----------- ----------- ------------ ----------- -----------
(Loss) income before
extraordinary item......... (637,006) 562,027 (10,137,164) (1,108,496) (1,708,326)
Extraordinary item........... -- 850,000 -- -- --
----------- ----------- ------------ ----------- -----------
Net (loss) income............ $ (637,006) $ 1,412,027 $(10,137,164) $(1,108,496) $(1,708,326)
=========== =========== ============ =========== ===========
Pro forma net loss per share
data
(Unaudited -- Note 3):
Net loss per common and
common equivalent
shares.................. $ (1.15) $ (0.21)
Weighted average number of
common and common
equivalent shares
outstanding............. 8,826,127 9,022,321
</TABLE>
See accompanying notes.
F-5
<PAGE> 72
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT OF THE COMPANY AND
COMBINED STATEMENT OF OWNERS' DEFICIT OF THE SUNRISE ENTITIES
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID-IN- OWNERS' DEFICIT
STOCK OF CAPITAL OF OF SHARES OF COMMON CONTRIBUTED
SUNRISE SUNRISE SUNRISE COMMON STOCK CAPITAL ACCUMULATED
ENTITIES ENTITIES ENTITIES STOCK AMOUNT (DEFICIENCY) DEFICIT TOTAL
----------- ----------- --------------- --------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1992........... $ 10,500 $ 822,568 $ (4,370,189) $ 1,600,729 $ (1,936,392)
Contribution of
partnership
capital............ 33,022 33,022
Distributions........ (457,814) (29,354) (487,168)
Net loss............. (1,707,434) 1,070,428 (637,006)
----------- ----------- --------------- --------- ------- ------------ ------------ ------------
Balance at December
31, 1993........... 10,500 822,568 (6,502,415) 2,641,803 (3,027,544)
Acquisition of
interests not
previously owned by
principal
shareholders....... 3,846,815 3,846,815
Contribution of
partnership
capital............ 3,550,336 3,550,336
Other capital
contributions...... 29,353 29,353
Dividends............ (3,750,000) (3,750,000)
Cash distributions... (16,432,652) (16,432,652)
Other
distributions...... (2,019,563) (2,019,563)
Net income........... 494,801 917,226 1,412,027
Initial
capitalization of
Sunrise Assisted
Living, Inc........ 100 $ 1 $ 99 100
----------- ----------- --------------- --------- ------- ------------ ------------ ------------
Combined balance at
December 31, 1994.. 10,500 851,921 (17,062,678) 100 1 99 (190,971) (16,391,128)
Issuance of common
stock for net
assets of Sunrise
Entities........... (10,500) (851,921) 17,062,678 6,019,375 60,194 (16,451,422) 190,971 --
Liability of
Stockholder assumed
at formation....... (1,447,561) (1,447,561)
Cost of issuance of
Series A
convertible
preferred stock.... (1,834,403) (1,834,403)
Net loss............. (10,137,164) (10,137,164)
Preferred return on
Series A
convertible
preferred stock.... (1,963,500) (1,963,500)
----------- ----------- --------------- --------- ------- ------------ ------------ ------------
Balance at December
31, 1995........... $ -- $ -- $ -- 6,019,475 $60,195 $(19,733,287) $(12,100,664) $(31,773,756)
Issuance of common
stock warrants..... 135,000 135,000
Preferred return on
Series A
convertible
preferred stock.... (500,500) (500,500)
Dividends payable on
Series B
exchangeable
preferred stock.... (182,500) (182,500)
Distributions to
stockholders....... (389,716) (389,716)
Net loss............. (1,708,326) (1,708,326)
----------- ----------- --------------- --------- ------- ------------ ------------ ------------
Balance March 31,
1996 (Unaudited)... $ -- $ -- $ -- 6,019,475 $60,195 $(19,598,287) $(14,881,706) $(34,419,798)
========== ========== ============= ========= ======= ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 73
CONSOLIDATED STATEMENT OF CASH FLOWS OF SUNRISE ASSISTED LIVING, INC.
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED) AND
YEAR ENDED DECEMBER 31, 1995 AND THE
COMBINED STATEMENT OF CASH FLOWS OF SUNRISE ENTITIES
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
DECEMBER 31, 31,
------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................. $ (637,006) $ 1,412,027 $(10,137,164) $(1,108,496) $ (1,708,326)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Equity in losses (earnings) on investment in
unconsolidated/non-combined partnerships..... 104,382 (33,024) 9,081 (26,486) (29,379)
Minority interest.............................. (427,798) (171,870) (6,755) (6,032) (51,586)
Provision for bad debts........................ -- 123,368 185,257 34,004 141,995
Provision for loss accrual..................... -- 350,000 -- -- --
--
Extraordinary gain on extinguishment of debt... -- (850,000) -- -- --
Depreciation and amortization.................. 2,798,581 3,159,764 3,008,639 760,289 810,682
Amortization of discount on long-term debt..... -- 267,000 457,000 114,250 114,300
Accrual of participation mortgage interest..... -- -- 5,400,000 -- --
Interest included in convertible obligations... 105,658 -- -- -- --
Conversion of accrued interest into note
payable...................................... 222,098 -- -- -- --
Changes in assets and liabilities:
(Increase) decrease:
Accounts receivable........................ (256,350) (299,820) (406,799) 33,606 (232,130)
Prepaid and other current assets........... (89,766) (595,799) (237,927) (187,992) (1,522,553)
Other assets............................... -- 36,309 (854,429) 502,608 (103,350)
Increase (decrease):
Accounts payable and accrued expenses...... 1,341,388 (362,950) 3,538,883 748,009 492,405
Deferred revenue........................... 6,242 (298,909) (47,078) (298,096) 229,294
Other liabilities.......................... (97,069) -- 35,726 (4,608) (15,626)
----------- ------------ ------------ ----------- ------------
Net cash provided by (used in) operating
activities....................................... 3,070,360 2,736,096 944,434 561,056 (1,874,274)
INVESTING ACTIVITIES
Increase in restricted cash and cash equivalents... 118,700 (552,631) (85,060) (320,673) (478,807)
Acquisition of interests in facilities............. (1,055,412) (5,458,707) 195,936 29,594 (192,936)
Purchases of property and equipment................ (3,218,190) (10,652,172) (12,765,570) (1,320,533) (14,530,942)
Disposition of property and equipment.............. -- -- 24,586 22,889 --
Purchase of investment............................. -- -- (5,375,404) (5,000,000) --
Distribution from investment in unconsolidated
partnership...................................... -- (374,419) 97,876 31,586 (19,332)
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities.............. (4,154,902) (17,037,929) (17,907,636) (6,557,137) (15,222,017)
FINANCING ACTIVITIES
Organization costs paid............................ -- (61,475) (264) (380) (101,156)
Net proceeds from sale of common stock and Series A
convertible preferred stock...................... -- 100 20,165,593 20,165,593 --
Net proceeds from sale of Series B exchangeable
stock............................................ -- -- -- -- 10,000,000
Contributions from partners........................ 28,022 3,550,336 -- -- --
Distributions to partners.......................... (2,397) (6,786,485) (9,646,167) (9,630,161) (389,717)
Distribution to stockholders of the Predecessor.... -- -- -- -- --
Additional net investment of minority interests.... 2,581,497 1,024,090 (35,394) (15,394) (10,000)
Additional borrowings under long-term debt......... 923,538 101,976,095 9,326,357 551,975 7,840,485
Additional borrowings from related parties......... -- 10,100 -- --
Financing costs paid............................... (54,674) -- (312,564) (169,873) (334,699)
Repayment of long-term debt........................ (1,622,028) (76,840,388) (4,295,472) (53,586) (96,381)
Dividends.......................................... -- (3,750,000) -- -- --
Repayment of related party note payable............ -- -- (75,093) (18,774) (18,800)
----------- ------------ ------------ ----------- ------------
Net cash provided by financing activities.......... 1,853,958 19,122,373 15,126,996 10,829,400 16,889,732
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 769,416 4,820,540 (1,836,206) 4,833,319 (206,559)
Cash and cash equivalents at beginning of year..... 2,498,699 3,268,115 8,088,655 8,088,655 6,252,449
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of year........... $ 3,268,115 $ 8,088,655 $ 6,252,449 $12,921,974 $ 6,045,890
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 74
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRESENTATION
Sunrise Assisted Living, Inc. (the "Company") does business in the assisted
living segment of providing elder care services. The Company operates, manages
and develops assisted living facilities. The facilities provide a residence,
meals and non-medical assistance to elderly residents for a monthly fee.
Agreements with residents are for a term of one year and are cancelable by
residents with thirty days notice. The Company's services are generally not
covered by health insurance and so the 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 (Sunrise Terrace, Inc.), own (Sunrise Assisted Living
Limited Partnership), and develop (Sunrise Development, Inc.) assisted living
facilities, and also include one limited partnership which owns a facility
(Gardner Park) in which the Company owns a 50% partnership interest and controls
the limited partnership through its status as the manager of the facility and as
the sole general partner with the unilateral ability under the partnership
agreement to conduct the ordinary course of business of the partnership, and two
limited liability companies which own facilities (Village House and Raleigh).
For the limited liability company which owns the Village House facility, the
Company owns a 50% membership interest and has entered into an agreement to
acquire an additional 30% membership interest, acts as the sole manager of the
limited liability company and the manager of the facility, and has the ability
under the operating agreement to unilaterally conduct the ordinary course of
business of the limited liability company. For the limited liability company
which owns the Raleigh facility, the Company owns a 50% membership interest, has
the right on 45 days notice to acquire the remaining interests for a price
specified in the operating agreement, acts as the sole manager of the limited
liability company and the manager of the facility, and under the terms of the
operating agreement has the unilateral right to conduct the ordinary course of
business of the limited liability company. All significant intercompany
transactions and accounts have been eliminated. The Company accounts for other
significant partnership investments in which it is the general partner and/or
manager on the equity method, including Sunrise Homes of Towson, L.P. (13.9%
ownership interest) and Sunrise of Queen Anne (33% tenancy-in-common ownership
interest) because the Company is able to significantly influence both the
operating and financial decisions of these facilities. The Company also has
accounted under the equity method for its partnership investment in the limited
partnerships which own the Annapolis and Pikesville facilities. In those
partnerships, the Company is the sole general partner, has a 50% ownership
interest and has entered into an agreement to acquire an additional 1% ownership
interest. The Company's ability to conduct the ordinary course of business of
the partnership is currently limited by certain limited partner approval
requirements.
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 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 $1,834,403 to seven
institutional investors. In addition, the Company assumed notes payable of
$2,090,000 at January 4, 1995 (see Note 8). Concurrent with the January 4, 1995
transaction, Sunrise Entities distributed an aggregate $9,606,000 in cash to the
majority stockholders, which was recognized as a distribution payable in Sunrise
Entities' December 31, 1994 combined financial statements.
The historical financial statements for the years ended December 31, 1994
and 1993 represent the combined historical results of operations and financial
condition of Sunrise Entities. Sunrise Entities recorded their interests in the
Acquired Entities of Sunrise under the equity method prior to June 8, 1994.
Sunrise Entities, which prior to January 4, 1995 developed, managed and owned
assisted living facilities, consist of a
F-8
<PAGE> 75
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND PRESENTATION (CONTINUED)
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 in operating assisted living facilities
or development projects. All of the operations and equity interests of Sunrise
Entities were held by the majority stockholder of the Company and were
transferred to the Company on January 4, 1995, in exchange for Common Stock of
the Company. All significant intercompany transactions and accounts have been
eliminated in the combined financial statements.
Prior to June 8, 1994, 15 of the assisted living facilities now owned by
the Company were held in separate limited partnerships partially owned by other
parties. Four of the facilities were not previously controlled by the Sunrise
Entities. The Sunrise Entities owned 47%, 48%, 29% and 25%, respectively of
these facilities. The combined net assets of the 15 facilities consisted of
$75,492,931 of total assets, including $263,008 of cash and $77,645,513 of
liabilities. On June 8, 1994, a new debt facility (see Note 8) was used to
finance the acquisition of all outside interests and refinance approximately
$71,500,000 of existing long-term debt of the facilities. The aggregate purchase
price of the outside interests was $48,319,245. At the acquisition date the
carrying value of the net operating assets of the facilities was stepped up by
$12,094,910 to reflect the excess of the purchase price over the book basis of
the interests acquired (i.e., the acquisition of an interest not previously
earned) that was not previously owned by the Company's principal stockholders.
Disclosures made herein with respect to the years ended December 31, 1993
and 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 and consists
of daily resident fees, resident community fees and other ancillary services.
Generally, resident community fees approximating sixty times the daily residence
fee are received from potential residents upon occupancy. Resident community
fees are ratably refundable if the prospective resident does not move into the
facility or moves out of the facility within ninety days. Community fees
received are recognized as income over the first ninety days of the resident's
stay. Revenue from management contracts is recognized in the month in which it
is earned in accordance with the terms of the management contract.
F-9
<PAGE> 76
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCES FOR DOUBTFUL ACCOUNTS
Details of the allowance for doubtful accounts receivable are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Beginning balance..................................... $ -- $ -- $ 50,000
Bad debt expense...................................... -- 123,000 185,000
Accounts written off.................................. -- (73,000) --
--------- --------- --------
Ending balance........................................ $ -- $ 50,000 $235,000
========= ========= ========
</TABLE>
PROVISION FOR LOSS ACCRUALS
During 1994, the Company recorded a loss accrual amounting to $250,000 to
recognize anticipated losses on one of its management contracts. Also in 1994,
the Company accrued $100,000 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.
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 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
<S> <C> <C>
Pre-rental costs................................................. $42,725 $253,557
Accumulated amortization......................................... (1,965) (11,393)
------- --------
$40,760 $242,164
======= ========
</TABLE>
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 at rates intended to amortize the cost of the related
assets over their estimated useful lives.
During 1994, Sunrise Entities changed the estimated useful life of
furniture and equipment from seven to ten years and of buildings from 31.5 to 40
years. The changes had the effect of reducing depreciation expense by $402,069
in 1994.
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.
F-10
<PAGE> 77
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred financing fees and accumulated amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
<S> <C> <C>
Deferred financing........................................... $2,233,750 $2,546,319
Accumulated amortization..................................... (162,393) (438,385)
---------- ----------
$2,071,357 $2,107,934
========== ==========
</TABLE>
ORGANIZATION COSTS
Costs incurred in connection with the organization of the Company have been
capitalized and are being amortized ratably over five years.
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).
All of Sunrise Entities were partnerships, limited liability corporations
or were corporations that elected to be treated as an S Corporation under
Section 1362 of the Internal Revenue Code. Therefore, no provision or benefit
for income taxes was included in the Predecessor's financial statements because
taxable income or loss passed through pro rata to the owners of the Predecessor.
PRO FORMA NET LOSS PER 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 (SEC) 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 the
contemplated initial filing of the registration statement relating to the
initial public offering ("IPO"), have been included in the computation of net
loss per share as if they were outstanding for all periods presented (using the
treasury method assuming repurchase of common stock at the estimated IPO 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 IPO, options under the treasury stock method will be included to the
extent they are dilutive. Weighted average shares used to calculate the pro
forma net loss per share for the year ended December 31, 1995 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 as contemplated by the IPO.
F-11
<PAGE> 78
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA 1996 BALANCE SHEET (UNAUDITED)
As more fully described elsewhere in the accompanying footnotes, the Series
A Preferred Stock will automatically convert to 2,444,444 shares of Common Stock
upon the closing of an initial public offering that meets certain conditions. As
the Company is currently in registration for an initial public offering that
meets the conversion criteria, the accompanying 1996 pro forma balance sheet
assumes that these securities were converted as of March 31, 1996. The pro forma
loss per share assumes the conversion of the Series A Preferred Stock as of the
beginning of the period.
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.
NON-CASH TRANSACTION
In 1993 the Company assumed a note payable of $8,550,000 as the primary
consideration for the acquisition of the Village House facility.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and accordingly
recognizes no compensation expense for the stock option grants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement 121 in
the first quarter of 1996 and the effect is not material to the Company's
operations or financial position taken as a whole. Under SFAS No. 121, 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.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value-based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value-based
accounting for those arrangements. These disclosure requirements are effective
for fiscal years beginning after
F-12
<PAGE> 79
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 15, 1995, or upon initial adoption of the statement, if earlier. The
Company adopted Statement No. 123 in the first quarter of 1996 and has elected
to continue to account for stock-based compensation arrangements under APB
Opinion No. 25.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
OTHER
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 1993 and 1994 balances have been reclassified to conform with the
1995 presentation.
3. PRO FORMA NET LOSS PER COMMON SHARE
The following table summarizes the computations of share amounts used and
the computation of pro forma net loss per common share presented in the
accompanying statements of operations:
<TABLE>
<CAPTION>
PRO FORMA
1995
(UNAUDITED-NOTE 2)
<S> <C>
Common and common equivalent shares:
Weighted average number of shares of common stock outstanding
during the period............................................. 8,463,919
Options to purchase common stock issued within one year of
registration statement using the treasury stock method........ 362,208
---------
Total common and common equivalent shares of stock considered
outstanding during the year................................... 8,826,127
=========
Net loss........................................................ $ 10,137,164
=========
Net loss per common and common equivalent shares................ $ (1.15)
</TABLE>
F-13
<PAGE> 80
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
ASSET LIVES 1994 1995
<S> <C> <C> <C>
Land and land improvements.................... 10 yrs. $ 11,638,789 $ 13,071,971
Building and building improvements............ 40 yrs. 82,033,939 83,012,889
Furniture and equipment....................... 10 yrs. 8,960,081 10,403,810
---------- ----------
102,632,809 106,488,670
Less accumulated depreciation and
amortization................................ (12,539,785) (15,184,945)
---------- ----------
90,093,024 91,303,725
Construction in progress...................... 4,203,079 13,013,392
---------- ----------
$ 94,296,103 $104,317,117
========== ==========
</TABLE>
Interest capitalized during 1994 and 1995 was $137,896 and $166,960,
respectively.
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, Sunrise
Development, Inc. If a project is abandoned, any costs previously capitalized
are expensed.
5. 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 for renovations (Series
B). The renovation bond allows for draws up to $750,000 as construction
continues at the facility. Interest only is payable until maturity. The balances
outstanding at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
DESCRIPTION FACE AMOUNT INTEREST RATE MATURITY DATE
<S> <C> <C> <C>
Series A......................... $5,000,000 11% July 1, 2025
Series B......................... 375,404 11% July 1, 2015
Series C......................... 750,000 20% subject to available cash July 1, 2010
Bond discount.................... (750,000)
---------
$5,375,404
=========
</TABLE>
Subsequent to June 30, 1995 all interest payments on these bonds are
current. The Company recognized $443,069 in interest income during 1995 on this
investment. The bond discount ($750,000 at December 31, 1995) will be recognized
as income over the life of the loan. 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, 1995.
F-14
<PAGE> 81
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS
SUNRISE FOUNDATION, INC.
The majority stockholders operate a school and a day care center through a
not-for-profit organization, Sunrise Foundation, Inc. ("SFI"). SFI reimburses
the Company monthly for use of office facilities and support services.
Reimbursements were $60,000 per year in 1993, 1994 and 1995. Such amounts are
included in management services income.
GROUND LEASE
The Company has a ninety-nine year ground lease with a stockholder and the
stockholder's relative. The ground lease expires in May 2085. The basic monthly
rent is adjusted annually based on the CPI. Rent expense under this lease was
$241,896, $248,496 and $255,258 for the years ended December 31, 1993, 1994 and
1995, 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
$120,948, $124,248 and $127,629 for the years ended December 31, 1993, 1994 and
1995 respectively. Rent expense, included in facility operating expenses, is
recorded net of the sublease income.
OTHER
The majority stockholders 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. The Company owns a 50% membership
interest, is the managing member and manages the facility pursuant to a
management contract that expires in 2003. Distributions made by the Company to
the director in 1993, 1994 and 1995 aggregated $18,700, $35,616 and $40,295,
respectively. The operating agreement of the facility requires the facility to
repurchase the minority interests at the lessor of (i) the facility's fair
market value or (ii) return of the investor's contributed capital assuming on 8%
return net of distributions. The repurchase right is exercisable beginning in
2000.
7. RECEIVABLES AND PAYABLES FROM AFFILIATES
Included in prepaid and other current assets are net receivables from
unconsolidated partnership investments of $1,073,242 and $1,359,164, as of
December 31, 1994 and 1995, respectively. Included in other assets are notes
receivable from officers of the Company amounting to $43,401 and $109,348 as of
December 31, 1994 and 1995, respectively.
Included in other current liabilities is $714,295 and $102,601 payable to
affiliates as of December 31, 1994 and 1995, respectively. Also included in
other liabilities in 1994 is $671,000 payable to minority owners, which pertains
to advances for construction activities prior to obtaining a construction loan.
F-15
<PAGE> 82
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. RECEIVABLES AND PAYABLES FROM AFFILIATES (CONTINUED)
Notes payable to affiliated entities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
<S> <C> <C>
Notes to related limited partnerships, principal and interest
due December 31, 1999. Interest accrues at 8% annually...... $1,510,231 $1,435,138
Two notes due to an employee and an entity related to that
employee of $60,000 and $40,000, respectively. Interest
accrues at $1,890 annually, principal due June 5, 1999...... 100,000 100,000
Note payable assumed upon formation of the Company due
December 31, 1999 bearing no interest....................... -- 200,000
---------- ----------
$1,610,231 $1,735,138
========= =========
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
<S> <C> <C>
Multi-Property/Participating Blanket First Mortgage (the "GECC
Mortgage")..................................................... $ 95,000,000 $ 95,000,000
Accrued participation interest on the GECC Mortgage.............. 3,200,000 8,600,000
Outstanding draws on construction notes payable.................. 358,874 9,685,336
Mortgage notes payable to Housing Opportunities Commission of
Montgomery County, Maryland (HOC).............................. 8,600,308 8,530,059
Notes payable dated June 6, 1994 to three individual parties..... -- 1,170,544
Other notes and capital leases................................... 92,942 44,633
Line of credit................................................... 4,100,000 --
Discount on the GECC Mortgage long-term debt less amortization of
$724,000....................................................... (2,933,000) (2,476,000)
------------ ------------
108,419,124 120,554,572
Less current portion........................................ (4,216,667) (268,576)
------------ ------------
$104,202,457 $120,285,996
============ ============
</TABLE>
The GECC Mortgage is collateralized by a blanket first mortgage on all
assets of a subsidiary of the Company. Such assets had a book value of
approximately $80 million at December 31, 1995. The GECC Mortgage consists of
two separate debt classes. Class (A) in the amount of $65,000,000 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 $30,000,000 bears a variable interest rate of
one month LIBOR rate plus 5.75% (11.75% at December 31, 1995). Class (B) is
interest only until July 1, 1997 at which time principal and interest payments
are due using a twenty-year amortization schedule. Effective September 30, 1996,
Sunrise Assisted Living Limited Partnership is required to meet a minimum debt
service coverage ratio or principal payments accelerate to the lesser of monthly
net cash flow or amortization of the loan over a twenty-year period. Each month,
the lender can receive additional interest based on 25% of net cash flows as
specified in the loan documents, which amounted to $347,000 in 1995 and $370,000
in 1994 and has a 25% participation interest payable at maturity
F-16
<PAGE> 83
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT (CONTINUED)
computed at either the date of maturity, initial public offering of securities
by Sunrise Assisted Living Limited Partnership or one of its affiliates, or sale
of the operating assets. The terms of the loan contain certain covenants and
prepayment restrictions. Additionally, the current majority stockholders must
maintain a 25% interest in the Company.
The GECC Mortgage requires Sunrise Assisted Living Limited Partnership to
maintain certain restricted cash balances. These restricted cash and cash
equivalent balances consist of escrows for an operating reserve of fifteen days
of total Sunrise Assisted Living Limited Partnership expenses, a capital reserve
of 3% of monthly revenues of Sunrise Assisted Living Limited Partnership and a
real estate tax escrow.
A participation interest of $3,200,000 payable in connection with the GECC
Mortgage was recorded at the loan date. A corresponding amount was recorded as
loan discount that will be amortized over the life of the loan. Amortization of
the discount of $267,000 and $457,000 has been included as interest expense in
1994 and 1995, respectively. During 1995, the Company revised its estimate of
the market value of the properties financed by the GECC Mortgage. Additional
participation interest on the GECC 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 construction notes have total available borrowings of $14,934,000. The
notes bear interest based on various published interest rate indices. At
December 31, 1995, interest rates on the notes ranged from 7.8% to 11%,
remaining maturities ranged from four to seven years, and the notes were secured
by four facilities under construction.
The mortgage notes payable to HOC have monthly payments of $56,714,
including interest at 7.25%, due monthly through June 2033. Additional payments
of approximately $21,070 are also made monthly for taxes, insurance and
replacement reserves. The notes are insured by the Maryland Housing Fund for
which the Company pays an annual fee of .5% of the outstanding note balance and
are collateralized by a deed of trust on the applicable facility and an
assignment of rents from that facility. One of the notes, totaling $200,000, is
also guaranteed by certain stockholders. The notes payable to individuals were
part of the $2,090,000 and liabilities assumed upon the formation of the Company
(see Note 1). The Notes are interest free and are recorded net of imputed
interest at 8.56% (fixed rate of the GECC Mortgage). The principal amount is
payable in 132 equal consecutive monthly installments beginning July 1, 1994.
The notes are due in full on June 1, 2005.
The HOC mortgage notes also place certain restrictions on operations
including maintenance of escrow accounts for real estate taxes and property
replacement reserves.
The line of credit was due May 31, 1995. Interest accrued at a rate equal
to two hundred basis points over the thirty-day LIBOR rate. Borrowing on the
line was used to purchase an assisted living facility.
F-17
<PAGE> 84
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT (CONTINUED)
Principal maturities of long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.................................................................. $ 268,576
1997.................................................................. 605,250
1998.................................................................. 4,959,563
1999.................................................................. 5,087,653
2000.................................................................. 912,351
Thereafter............................................................ 108,721,179
------------
$120,554,572
============
</TABLE>
Interest expense paid totaled $3,241,778, $6,220,886 and $10,231,941, in
1993, 1994 and 1995, respectively, of which $0, $17,288 and $18,000 in 1993,
1994 and 1995, respectively, is related to notes payable to related parties.
Substantially all of the Company's property and equipment is subject to
mortgages or other pledges.
Restricted cash and cash equivalents at December 31 consists of the
following:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Under the GECC Mortgage, real estate tax escrows,
operating and capital reserves................... $ 991,382 $1,104,665
Under HOC mortgage, real estate tax escrows and
resident security deposits....................... 184,028 155,805
---------- ----------
$1,175,410 $1,260,470
========== ==========
</TABLE>
9. 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 subchapter S corporations, all of
which passed through tax liabilities and benefits to the owners. The transfer of
assets at the formation of the Company was taxable, in part to the owners.
Accordingly, the tax basis of a majority of the property and equipment of the
Company exceeds its respective book basis for financial reporting purposes. The
tax effects of temporary differences that give rise to significant
F-18
<PAGE> 85
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
portions of the deferred tax assets and deferred tax liabilities recognized as
of the date of formation of the Company and at December 31, 1995 are presented
below:
<TABLE>
<CAPTION>
JANUARY 4, DECEMBER 31,
1995 1995
<S> <C> <C>
Deferred tax assets:
Property and equipment.................................. $ 6,598,370 $ 6,664,396
Participating interest.................................. -- 2,480,220
Operating loss carryforward............................. -- 1,562,860
Deferred revenue........................................ 349,269 363,442
Bad debt allowance...................................... 20,250 95,175
----------- ------------
Total gross deferred tax assets........................... 6,967,889 11,166,093
Less valuation allowance.................................. (6,967,889) (11,166,093)
Deferred tax liabilities.................................. -- --
----------- ------------
Net deferred tax amount................................... $ -- $ --
=========== ============
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $3,860,000 which expire in 2010. 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 $11.2 million as of December 31, 1995.
Significant components of the provision for income taxes are as follows for
the year ended:
<TABLE>
<CAPTION>
DECEMBER
31, 1995
<S> <C>
Current:
Federal........................................................... $ --
State............................................................. --
-----------
Total current........................................................ --
Deferred:
Federal........................................................... (3,524,418)
State............................................................. (673,786)
Increase in valuation allowance................................... 4,198,204
-----------
Total deferred....................................................... $ --
===========
</TABLE>
The effective tax rate on income before income taxes varies from the
statutory federal income tax rate for the year ended December 31, 1995 as
follows:
<TABLE>
<S> <C>
Statutory rate........................................................ (34)%
State taxes, net...................................................... (6)
Valuation allowance................................................... 40
----
-
0%
=====
</TABLE>
F-19
<PAGE> 86
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' DEFICIT AND STOCK OPTION PLAN
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 has 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. The Company has a stock option plan providing for the grant of
incentive and nonqualified stock options to employees, directors, consultants
and advisors. Pursuant to the Plan, 998,065 shares of Common Stock have been
reserved for issuance. At December 31, 1995 the following options have been
granted:
<TABLE>
<CAPTION>
DATE OF GRANT NO. OF SHARES GRANTED EXERCISE PRICE
<S> <C> <C>
May 16, 1995.................................. 257,100 $ 3.00
November 17 ,1995............................. 63,333 $ 7.50
December 15, 1995............................. 181,167 $ 7.50
December 15, 1995............................. 6,666 $ 3.75
</TABLE>
No shares have been forfeited. Options expire ten years from date of grant
and will vest 25% each year beginning on the earlier of December 31, 1999 or the
effectiveness of a Registration Statement on Form S-8 following the completion
of the proposed initial public offering by the Company.
The Company also has a stock option agreement with one of its senior
executives who currently is not a stockholder of the Company. 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. No
compensation has been attributed to the options. These options expire in ten
years and are exercisable in 2001 or when the "trigger price" or per share
market value of outstanding Common Shares reaches a certain value as follows:
<TABLE>
<CAPTION>
SHARES EXERCISABLE TRIGGER PRICE
<S> <C>
300,000......................................................... $ 15.75
75,000......................................................... $ 25.00
75,000......................................................... $ 30.00
</TABLE>
A total of 3,892,509 shares of Common Stock have been reserved for stock
option plans and conversion of preferred stock (see Note 11).
Common Stock at December 31, 1994, was comprised of the following:
<TABLE>
<S> <C>
Sunrise Terrace Inc. Common Stock , $1 par value, 10,000 shares authorized
and outstanding.......................................................... $10,000
Sunrise Development Inc. Common Stock, $10.00 par value, 5,000 shares
authorized, 50 outstanding............................................... 500
Sunrise Assisted Living Inc. Common Stock, $.01 par value 60,000,000 shares
authorized, 100 shares outstanding....................................... 1
-------
$10,501
=======
</TABLE>
F-20
<PAGE> 87
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. REDEEMABLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of $0.01 par value of
preferred stock, of which 2,444,444 shares have been designated Series A
Convertible Preferred Stock and of which 3,199,995 shares have been designated
Series B Exchangeable Preferred Stock.
The Series A Convertible Preferred Stock (Series A Preferred Stock) has a
9% preferred return, compounded annually, payable, together with the stated
value of $9 per share, upon redemption. The Series A Preferred Stock can be
redeemed at the earlier of 2002, or if a qualified public offering has not
occurred by December 30, 1998, or if a change in ownership of the Company has
occurred by June 15, 1997. The preferred return of $1,963,500 through December
31, 1995 is forfeited upon conversion to shares of Common Stock upon completion
of a qualified public offering. Series A Preferred Stock is currently
convertible to 2,444,444 shares of Common Stock which have been reserved.
The holders of Series A Preferred Stock shares are entitled to vote on all
matters submitted to a vote of the stockholders of the Company and to have the
number of votes equal to the number of whole shares of Common Stock into which
each share of Series A Preferred Stock is then convertible. Each Series A
stockholder is 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.
The Series B Exchangeable Preferred Stock (Series B Preferred Stock) has a
9% cumulative dividend payable quarterly and has no conversion rights. Each
share of Series B may be redeemed at the option of the holder beginning in 2002
or earlier under specified circumstances. If the gross proceeds provided in an
initial public offering are greater than $35,000,000, all shares of Series B
Preferred Stock are required to be redeemed at a redemption price of $10.00 per
share plus an amount in cash equal to any accrued but unpaid dividends on the
Series B shares.
Shares of Series B are exchangeable, at the option of the Company, for
subordinated debt bearing interest of 9% per annum. In general, Series B
stockholders are not entitled to vote on any matters submitted to a vote of the
stockholders of the Company.
12. EXTRAORDINARY ITEM
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.
13. 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
1996 to 1998, 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,
1995, would have been $2,129,124. 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 interest
F-21
<PAGE> 88
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS (CONTINUED)
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, 1995.
The Company leases its corporate office space under various leases that
expire on September 30, 1996 and February 1999. The base rent increases by fixed
amounts and is subject to additional annual increases based on the Consumer
Price Index. The Company is also responsible for its proportionate share of
annual increases in operating expense and property taxes.
Future minimum lease payments under office and equipment leases as of
December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................................. $202,392
1997.............................................................. 62,934
1998.............................................................. 62,934
1999.............................................................. 20,712
--------
348,972
Less sublease rentals............................................. 4,604
--------
$344,368
========
</TABLE>
Included in general and administrative expenses is rent expense amounting
to $215,688, $227,452 and $183,230 for the years ended December 31, 1993, 1994
and 1995, respectively.
The Company's growth strategy is to develop at least 40 new assisted living
facilities over the next three years. In conjunction with the growth strategy,
at December 31, 1995, the Company had four facilities under construction. Total
project costs for these four facilities is expected to be approximately $36.4
million of which $18.6 million has been incurred. In addition, the Company has
entered into contracts to purchase an additional 12 property sites for future
development. Total contracted purchase price of these sites amounts to $14.4
million.
In accordance with the formation agreements of two consolidated
subsidiaries, the Company is required to repurchase the minority interests in
those subsidiaries. These rights can be exercised beginning 2000 and 2001
respectively for each or the two facilities and would be based upon 110% of the
facilities estimated fair market value or 115% if exercised after twelve years.
The aggregate carrying value of the minority interest for the two consolidated
subsidiaries was $1,104,804 at December 31, 1995.
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 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 and the Predecessor
F-22
<PAGE> 89
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. PROFIT-SHARING PLAN (CONTINUED)
totaled $20,711, $38,594 and $80,198 during 1993, 1994 and 1995, respectively.
No discretionary profit-sharing contributions were made during 1993, 1994 or
1995.
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 5.
Cash equivalents, accounts receivable, accounts payable and accrued
expenses, 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 $74,745,000 has an
estimated aggregate fair value of $75,000,000 at December 31, 1995. 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 $45,810,000 at December 31, 1995.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1995. 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, 1995 and current estimates of
fair value may differ from the amounts presented herein.
16. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
On March 19, 1996, the board of directors authorized management of the
Company to file a registration statement with the SEC permitting the Company to
sell shares of its Common Stock to the public. If the initial public offering is
closed under the terms presently anticipated, all of the Series A Preferred
Stock outstanding will automatically convert into 2,444,444 shares of Common
Stock. The Company will use a portion of the net proceeds from the offering to
redeem 1,000,000 shares of Series B Preferred Exchangeable Stock issued on
January 19, 1996. The redemption price will be $10.00 per share plus any accrued
but unpaid dividends.
ACQUISITION
The Company acquired a 120-unit assisted living facility in February 1996
which will be accounted for using the purchase method. The acquisition price was
$8,480,000 including the assumption of the existing mortgage amounting to
approximately $5,260,000. The total purchase price will be allocated to the
building and other real property. The acquired facility had approximately $2.4
million of operating revenue in 1995.
F-23
<PAGE> 90
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
CREDIT FACILITIES
In March 1996, the Company obtained 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 the greater of
(i) the lender's prime lending rate and (ii) the Federal funds rate plus
one-half of one percent.
MODIFICATION OF GECC MORTGAGE
On May 1, 1996, the Company entered into a Loan Modification Agreement
regarding the GECC Mortgage whereby upon consummation of the Company's initial
public offering, the Company will pay the lender $8.6 million as payment in full
of all participation interest due and payable pursuant to the GECC Mortgage. In
addition, the Company will pay the lender $8 million to be applied to repay a
portion of the Class B debt. The lender will then reduce the interest rate
applicable to the outstanding portion of Class B debt from LIBOR plus 5.75% to
LIBOR plus 3.75%. Had the Company modified the loan documents effective January
1, 1995, GECC Mortgage interest for 1995 would have been approximately $7.8
million instead of $15.6 million.
PENNSYLVANIA SURVEY REPORT
On May 23, 1996, one of the Pennsylvania nursing home facilities managed by
the Company received notice from the Pennsylvania Department of Health of a
survey report stating that the facility was not in compliance with the
requirements of participation for the Medicare and Medicaid programs. Therefore,
the Pennsylvania survey agency report stated that a civil monetary penalty of
$50 to $3,000 per day will be imposed for the period beginning March 12, 1996,
the date the facility was first alleged to be out of compliance, until the date
the alleged deficiencies are corrected. The report also stated that the agency
will recommend a ban on payment for new Medicare/Medicaid admissions if
substantial compliance is not achieved within three months after the last day of
the survey identifying the alleged non-compliance. The facility has not received
confirmation or verification from the Health Care Financing Administration of
whether such remedies will be imposed, or what the amount of any such penalty
would be. The Company has engaged counsel and intends to vigorously contest the
survey report and the imposition of a civil monetary penalty.
17. 1996 STOCK OPTION GRANTS (UNAUDITED)
On February 15, 1996 and February 29, 1996, the Company granted stock
options for a total of 327,000 shares of Common Stock at an exercise price of
$10.50 per share. The Company believes that these options were granted at no
less than fair market value. Accordingly, no compensation expense was recorded
for these options. The Company believes that events subsequent to February 29,
1996 substantially increased the value of its Common Stock. The market price for
publicly traded assisted living companies increased significantly. In addition,
as discussed in Note 16, subsequent to the date of the grants, the Company
commenced and completed negotiations for a loan modification with GECC. The loan
modification eliminated the uncertainty and financial impact of GECC's 25%
participation in cash flow and property appreciation.
The Company believes if the stock option grants had been made after the
events described above at that same exercise price, these option grants would be
deemed compensatory in an amount reflecting the difference
F-24
<PAGE> 91
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
17. 1996 STOCK OPTION GRANTS (UNAUDITED) (CONTINUED)
between the mid-point of the initial public offering filing range, discounted by
approximately 25%, and the exercise price of the options. The Company believes
that approximately a 25% discount to the mid-point of the range would be
appropriate given the Company's status as a private company until completion of
the Offering and, among other factors: (i) the Founders' continued ownership of
100% of the Common Stock; (ii) mandatory redemption features, dividend
preferences and other rights of the Series A Investors which continue until
completion of the Offering; (iii) illiquidity of the Common Stock subject to the
options; (iv) option vesting and exercise conditions; (v) risk associated with
completion of the Offering; and (vi) market pricing uncertainties. Since it is
the Company's policy to grant stock options at fair market value, the exercise
price per share would have been substantially higher if the February 1996 stock
option grants had been made subsequent to the events described above.
F-25
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
To the Partners
Acquired Entities of Sunrise
We have audited the accompanying combined balance sheet of Acquired Entities of
Sunrise as of December 31, 1993 and the related combined statements of
operations and partners' deficit, and cash flows for the year then ended. These
combined financial statements are the responsibility of the Acquired Entities of
Sunrise's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined 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 audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Acquired Entities of
Sunrise as of December 31, 1993 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Hoffman, Morrison & Fitzgerald P.C.
Vienna, Virginia
March 13, 1996
F-26
<PAGE> 93
COMBINED BALANCE SHEET
ACQUIRED ENTITIES OF SUNRISE
<TABLE>
<CAPTION>
DECEMBER 31,
1993
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 9,960
Other current assets....................................................... 18,782
------------
Total current assets............................................... 28,742
Property and equipment, net.................................................. 24,188,751
Note receivable from affiliate............................................... 100,417
Organization, leasing costs and deferred financing costs, net of accumulated
amortization of $956,787................................................... 137,844
------------
Total assets....................................................... $24,455,754
============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...................................... $ 133,054
Current portion of long-term debt.......................................... 317,835
------------
Total current liabilities.......................................... 450,889
Notes payable to affiliates.................................................. 554,789
Long-term debt............................................................... 29,038,310
------------
Total liabilities.................................................. 30,043,988
Partners' deficit............................................................ (5,588,234 )
------------
Total liabilities and partners' deficit............................ $24,455,754
============
</TABLE>
See accompanying notes.
F-27
<PAGE> 94
COMBINED STATEMENT OF OPERATIONS AND PARTNERS' DEFICIT
ACQUIRED ENTITIES OF SUNRISE
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
DECEMBER
31,
<S> <C>
Operating revenue:
Resident fees............................................................... $ 1,709,747
Building rental income...................................................... 2,695,096
-----------
4,404,843
Operating expenses:
Facility operating expenses................................................. 1,161,068
Depreciation and amortization............................................... 1,169,122
-----------
2,330,190
-----------
Income from operations........................................................ 2,074,653
Other income (expense):
Interest income............................................................. 7,226
Interest expense............................................................ (2,164,925)
-----------
Net loss...................................................................... (83,046)
Partners' deficit, beginning of year.......................................... (4,988,647)
Partners' distributions....................................................... (516,541)
------------
Partners' deficit, end of year................................................ $(5,588,234)
============
</TABLE>
See accompanying notes.
F-28
<PAGE> 95
COMBINED STATEMENT OF CASH FLOWS
ACQUIRED ENTITIES OF SUNRISE
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
DECEMBER
31,
<S> <C>
OPERATING ACTIVITIES
Net loss....................................................................... $ (83,046)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................ 1,169,122
Increase in other current assets............................................. (345)
Decrease in accounts payable and accrued expenses............................ (4,337)
-----------
Net cash provided by operating activities...................................... 1,081,394
-----------
INVESTING ACTIVITIES
Acquisition of property and equipment.......................................... (23,062)
-----------
Net cash used in investing activities.......................................... (23,062)
-----------
FINANCING ACTIVITIES
Payments on long-term debt..................................................... (603,141)
Borrowings of long-term debt................................................... 114,320
Net advances to affiliates..................................................... (10,477)
Repayment of loans to affiliates............................................... 2,547
Distributions to Founders...................................................... (516,541)
Financing costs paid........................................................... (44,763)
-----------
Net cash used in financing activities.......................................... (1,058,055)
-----------
Net increase in cash and cash equivalents...................................... 277
Cash and cash equivalents at beginning of year................................. 9,683
-----------
Cash and cash equivalents at end of year....................................... $ 9,960
===========
</TABLE>
See accompanying notes.
F-29
<PAGE> 96
ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Sunrise Assisted Living, Inc. (the "Company") does business in the assisted
living segment of providing elder care services. The Company consists of
entities that manage (Sunrise Terrace, Inc. or "STI"), own (Sunrise Assisted
Living Limited Partnership or "SALLP"), and develop (Sunrise Development, Inc.
or "SDI") assisted living facilities as well as other limited partnerships and
limited liability corporations that own facilities all of which are owned or
controlled by Paul and Teresa Klaassen ("the Founders"). The facilities provide
a residence, meals and nonmedical assistance to elderly residents for a monthly
fee. Agreements with residents are for a term of one year and are cancelable by
residents with thirty days notice. These services are generally not covered by
health insurance, so the monthly fees are generally payable by the residents,
their family or another responsible party.
SALLP was formed in May 1994 and began operations in June 1994. The
Founders contributed their interests in fifteen independent and assisted living
facilities to SALLP. At this time, SALLP used its debt facility (see Note 7) to
finance the acquisition of all outside interests in the facilities. At the
completion of this transaction, SALLP owned 100% of the facilities. The
operating assets of the facilities were recorded at their historical value
adjusted to reflect the excess of the Founders' basis in the partnerships over
the book value of their proportionate interests in the partnerships contributed
and the excess of the purchase price over the book basis of the minority
interest acquired.
In January 1995, a newly formed corporation, Sunrise Assisted Living Inc.
(the "Company") exchanged 6,019,375 shares of common stock for the equity
interests of the Founders in the various Sunrise entities. Simultaneously the
Company sold 2,444,444 shares of Series A Convertible Preferred stock at $9.00
per share. The Series A Convertible Preferred Stock has a 9% preferred return,
payable if the redemption rights, which commence in 2002, are exercised. The
Series A Preferred Stock contains various requirements based on conversion and
exercising rights.
The accompanying combined financial statements do not include all of the
Sunrise Entities, and therefore, are not intended to reflect the combined
balance sheet and operations of the entire Sunrise organization. These combined
financial statements include entities in which the Founders held a minority,
non-controlling interest in 1993, and which were subsequently acquired by SALLP.
The combined financial statements include the following entities
(collectively referred to as the "Acquired Entities of Sunrise"):
Mercer Sunrise Associates Limited Partnership ("Mercer")
The Wilson Group Limited Partnership ("Wilson")
The Fairfield Group Limited Partnership ("Fairfield")
The Glebe Group Limited Partnership ("Glebe")
2. PRINCIPLES OF COMBINATION
The combined financial statements include the combined balance sheet,
statements of operations and partners' deficit, and cash flows as of and for the
year ended December 31, 1993, of the above entities in which the Founders held a
minority, non-controlling interest ranging from 25% to 47%. Effective June 8,
1994, the Founders acquired most of the equity of these entities (see Note 7).
Receivables, payables, revenues and expenses generated between the Acquired
Entities of Sunrise have been eliminated in the combined financial statements.
F-30
<PAGE> 97
ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Resident fee revenue is recognized when services are rendered and consist
of daily resident fees, resident community fees and other ancillary services.
Generally, resident community fees approximating sixty times the daily residence
fee are received from potential residents upon application. Resident community
fees are ratably refundable if the prospective resident does not move into the
facility or moves out of the facility within ninety days. Community fees
received are recognized as income over the first ninety days of the resident's
stay.
PROPERTY AND EQUIPMENT
Property and equipment are stated at the lower of cost or net realizable
value. Depreciation is computed using the straight-line method at rates intended
to amortize the cost of the related assets over their estimated useful lives.
Estimated useful life for furniture and equipment was 5-7 years and for
buildings was 30 years.
ORGANIZATION, LEASING AND DEFERRED FINANCING COSTS
Costs associated with the organization of certain of the entities are
amortized using the straight-line method over sixty months. Deferred financing
costs are amortized using the straight-line method over the related loan term.
Certain leasing costs of the communities are amortized using the straight-line
method over the one year term of the related lease.
INCOME TAXES
All of the entities included in these financial statements are
partnerships. Therefore, no provision for income taxes has been included in the
accompanying combined financial statements since taxable income or loss passes
through pro rata to the owners of the individual entities.
CASH EQUIVALENTS
For purposes of the combined statement of cash flows, unrestricted cash and
all highly liquid debt instruments purchased with a maturity of three months or
less are considered to be cash and cash equivalents.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1993:
<TABLE>
<S> <C>
Land................................................................... $ 2,931,760
Buildings and building improvements.................................... 23,712,471
Furniture and equipment................................................ 2,348,942
-----------
28,993,173
Less accumulated depreciation.......................................... (4,804,422)
-----------
$24,188,751
===========
</TABLE>
5. RELATED-PARTY TRANSACTIONS
MANAGEMENT SERVICES
Mercer is managed by STI under a management agreement. The management
agreement has a term of five years and provides for fees based on a percentage
of the monthly gross receipts and a fixed fee. This
F-31
<PAGE> 98
ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED-PARTY TRANSACTIONS (CONTINUED)
agreement was terminated in June 1994 when controlling interest of Mercer was
purchased by the Founders. Management fee expense for the year ended December
31, 1993 was $128,077.
LEASE COMMITMENTS
Wilson, Glebe and Fairfield are leased to STI. All of the leases require
rental payments at least equal to the total of the principal and interest
payments on the underlying mortgage debt and expire at varying dates through
April 1995. These leases were terminated in June 1994 when the controlling
interests of the entities were purchased by the Founders.
NOTES RECEIVABLE FROM AFFILIATE
In 1992, Glebe loaned $103,974 at an interest rate of 7% to another Sunrise
controlled entity in Oakton, Virginia. The amount was fully repaid in June 1994.
6. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consisted of the following at December 31,
1993:
<TABLE>
<S> <C>
Mercer had two outstanding notes payable to STI at various interest rates
from prime plus 1.5% to 12%, due 1995 through 1999...................... $522,622
Mercer had an outstanding note payable to an affiliate, due on demand..... 32,167
---------
$554,789
=========
</TABLE>
7. LONG-TERM DEBT
In 1994, various mortgages and other notes payable were refinanced in
conjunction with the formation of SALLP (see Note 1) and consolidated into two
separate debt classes, collateralized by a blanket first mortgage on all assets
of SALLP which includes the Acquired Entities of Sunrise. The GECC Mortgage is
collateralized by a blanket first mortgage on all assets of SALLP. The GECC
Mortgage consists of two separate debt classes. Classes (A) of $65,000,000 bears
a fixed interest rate of 8.56% and is interest only until the maturity date of
May 31, 2001. Class (B) of $30,000,000 bears a variable interest rate of one
month LIBOR rate plus 5.75%. Class (B) is interest only until July 1, 1997 at
which time principal and interest payments are due using a twenty-year
amortization schedule. Effective September 30, 1996, Sunrise Assisted Living
Limited Partnership is required to meet a minimum debt service coverage ratio or
principal payments accelerate to the lessor of monthly net cash flow or based on
net cash flows as specified in the loan documents and has a 25% participation
interest payable at maturity computed at either the date of maturity, initial
public offering of securities by Sunrise Assisted Living Limited Partnership or
one of its affiliates, or sale of the operating assets. The terms of the loan
contain certain covenants and prepayment restrictions. Additionally, the current
majority stockholders must maintain a 25% interest in the Company. No contingent
interest applies to 1993.
The GECC Mortgage requires Sunrise Assisted Living Limited Partnership to
maintain certain restricted cash balances. These restricted cash and cash
equivalent balances consist of escrows for an operating reserve of fifteen days
of total Sunrise Assisted Living Limited Partnership expenses, a capital reserve
of 3% of monthly revenues of Sunrise Assisted Living Limited Partnership and a
real estate tax escrow.
F-32
<PAGE> 99
ACQUIRED ENTITIES OF SUNRISE
DECEMBER 31, 1993
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
Principal maturities of long-term debt as of December 31, 1993, after
adjusting for the refinancing, are as follows:
<TABLE>
<S> <C>
1994................................................................... $ 317,835
1995................................................................... 11,673
1996................................................................... --
1997................................................................... --
1998................................................................... --
Thereafter............................................................. 29,026,637
---------
$29,356,145
=========
</TABLE>
A note payable with a bank was refinanced for $106,000. Interest paid
during 1993 was $2,168,670.
8. PROFIT SHARING PLAN
The employees of Acquired Entities of Sunrise may participate in a profit
sharing plan (the "Plan") under Internal Revenue Code Section 401(k) sponsored
by STI. The Plan contains two elements: a salary reduction arrangement and a
discretionary profit sharing plan. All full-time employees who have twelve
months of employment with an affiliate are eligible to participate in the Plan.
The salary reduction arrangement allows for employees to defer certain amounts
of their compensation.
The Plan provides, among other things, that the employer will contribute
$0.25 for every dollar the employee contributes, up to 7% of their compensation.
Employer matching contributions totaled $3,074 during 1993. No discretionary
profit-sharing contribution was made during 1993.
F-33
<PAGE> 100
[SUNRISE ASSISTED LIVING LOGO]
[PHOTO OF RESIDENT AT [PHOTO OF SUNRISE CO-FOUNDER
SUNRISE OF ANNAPOLIS] TERESA KLAASSEN VISITING WITH
RESIDENTS]
TOP, LEFT TO RIGHT: Resident
relaxes in living room at
Sunrise of Annapolis; Sunrise
co-founder Teresa Klaassen
visits with residents.
CENTER, LEFT TO RIGHT: Individual
interests of residents are
[PHOTO OF RESIDENT] cultivated at Sunrise; Sunrise
intergenerational programs
bring seniors and youth together.
BOTTOM, LEFT TO RIGHT: Sunrise
Assisted Living facilities in
California and Florida (Chanate
Lodge, CA (owned) and interior
and exterior at Sunrise of
Atrium, FL (owned))
[PHOTO OF INTERGENERATIONAL
PROGRAM BRINGING SENIORS AND
YOUTH TOGETHER]
[PHOTO OF EXTERIOR [PHOTO OF INTERIOR [PHOTO OF EXTERIOR
Of CHANATE LODGE] OF SUNRISE OF ATRIUM] OF SUNRISE OF ATRIUM]
<PAGE> 101
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK
OFFERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 5
The Company and its Predecessors........... 13
Use of Proceeds............................ 14
Dividend Policy............................ 14
Capitalization............................. 15
Dilution................................... 16
Selected Financial Data.................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 28
Management................................. 42
Certain Transactions....................... 50
Principal and Selling Stockholders......... 53
Description of Capital Stock............... 55
Shares Eligible for Future Sale............ 60
Underwriting............................... 61
Legal Matters.............................. 63
Experts.................................... 63
Change in Independent Accountants.......... 64
Additional Information..................... 64
Index to Financial Statements.............. F-1
</TABLE>
------------------------
UNTIL JUNE 24, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
5,700,000 SHARES
[SUNRISE ASSISTED LIVING LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
NATWEST SECURITIES LIMITED
MAY 30, 1996
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