<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1996
REGISTRATION NO. 333-2582
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SUNRISE ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8361 54-1746596
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
9401 LEE HIGHWAY, SUITE 300
FAIRFAX, VIRGINIA 22031
(703) 273-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PAUL J. KLAASSEN
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
SUNRISE ASSISTED LIVING, INC.
9401 LEE HIGHWAY, SUITE 300
FAIRFAX, VIRGINIA 22031
(703) 273-7500
(NAME AND ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT J. WALDMAN, ESQ. J. VAUGHAN CURTIS, ESQ.
GEORGE P. BARSNESS, ESQ. NILS H. OKESON, ESQ.
HOGAN & HARTSON L.L.P. ALSTON & BIRD
555 THIRTEENTH STREET, N.W. 1201 WEST PEACHTREE STREET
WASHINGTON, D.C. 20004 ATLANTA, GA 30309-3424
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement. /
/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUNRISE ASSISTED LIVING, INC.
CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K,
ITEM 501(b), SHOWING THE LOCATION IN THE PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 LOCATION OR
ITEM NO. CAPTION CAPTION IN PROSPECTUS
-------- --------------------------------------------- -----------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................. Inside Front and Outside Back Cover
Pages; Additional Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors;
Business
4. Use of Proceeds.............................. Use of Proceeds
5. Determination of Offering Price.............. Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Outside Front Cover Page; Principal
and Selling Stockholders
8. Plan of Distribution......................... Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered... Description of Capital Stock
10. Interests of Named Experts and Counsel....... Legal Matters; Experts
11. Information with Respect to the Registrant... Outside Front Cover; Prospectus
Summary; The Company and its
Predecessors; Risk Factors;
Business; Use of Proceeds;
Dividend Policy; Capitalization;
Dilution; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Certain
Transactions; Principal and
Selling Stockholders; Description
of Capital Stock; Shares Eligible
for Future Sale; Consolidated and
Combined Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Not applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 7, 1996
, 1996
5,000,000 SHARES
[SUNRISE LOGO]
COMMON STOCK
All of the 5,000,000 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 750,000 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. It is currently estimated that the initial public offering
price will be between $17.00 and $19.00 per share. See "Underwriting" for a
discussion of the factors to be 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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
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(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 $1,200,000.
(3) The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days hereof, to purchase up to an aggregate of 750,000
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 $ , $ , and
$ , 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 , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
NATWEST SECURITIES LIMITED
<PAGE> 4
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> 5
[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> 6
[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> 7
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 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 $37.4 million in 1995 and $10.4 million for
the three months ended March 31, 1996. 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
Common Stock offered by the Company... 5,000,000 shares
Common Stock to be outstanding
after the Offering.................... 13,516,419 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
- ---------------
(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 $7.76 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> 8
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 $ 34,893 $ 8,396 $ 9,850
Management services income.... 605 1,078 1,604 1,830 2,498 498 597
------- ------- ------- ------- --------- ------- ----------
10,963 16,879 25,598 33,969 37,391 8,894 10,447
Operating expenses:
Facility operating expenses... 8,386 11,824 17,761 17,983 21,202 5,346 6,510
Facility development and pre-
opening expenses............ 189 231 474 263 1,201 204 184
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 3,042 760 882
------- ------- ------- ------- --------- ------- ----------
Income from operations.......... 777 1,814 2,530 8,380 5,071 1,262 750
Interest income............... 267 350 317 566 1,229 330 278
GECC mortgage interest
expense..................... -- -- -- (5,262) (15,562) (2,351) (2,339)
Other interest expense........ (1,115) (2,212) (3,808) (3,060) (1,320) (268) (478)
Equity in (losses) earnings on
investments in unconsolidated
partnerships.................. (754) (299) (104) 33 81 27 29
Minority interest............... 87 176 428 172 97 6 52
------- ------- ------- ------- --------- ------- ----------
(Loss) income before
extraordinary item............ (738) (171) (637) 829 (10,404) (994) (1,708)
Extraordinary item.............. -- -- -- 850 -- -- --
------- ------- ------- ------- --------- ------- ----------
Net (loss) income............... $ (738) $ (171) $ (637) $ 1,679 $ (10,404) $ (994) $ (1,708)
======= ======= ======= ======= ========= ======= ==========
PRO FORMA DATA(2):
Net loss per common share....... $ (1.18) $ (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........................................... 6,255 6,255 62,155
Working capital..................................................... 1,016 1,016 56,916
Total assets........................................................ 155,424 156,242 212,142
Total debt.......................................................... 144,769 144,769 128,169
Series A convertible preferred stock................................ 24,464 -- --
Series B exchangeable preferred stock............................... 10,000 10,000 --
Total common stockholders' (deficit) equity......................... (34,420) (9,011) 73,489
</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 and the issuance of 52,500 shares of Common Stock in
exchange for additional partnership interests in one facility, all upon
completion of the Offering. See "Certain Transactions." Does not include 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."
(3) Includes the Queen Anne and Towson facilities in which the Company owns
minority 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 $82.5 million of
net proceeds of the Offering.
4
<PAGE> 9
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 $10.4 million in 1995, or a net loss per
common share of $1.94, compared to net income (after a $0.9 million
extraordinary gain) of $1.7 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, or a net loss per common share of $0.37, compared to a net loss
of $1.0 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 $82.5 million assuming an
initial public offering price of $18.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company), pro forma stockholders' equity would have been $73.5 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
5
<PAGE> 10
performance of the facilities after acquisition and the ability of the Company
to integrate effectively the operations of acquired facilities. Any failure by
the Company to integrate or operate acquired facilities effectively may have a
material adverse effect on the Company's business, financial condition and
results of operations. 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 $144.8 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 $56.7
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 $71,000. 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
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interests in the facility. In the event of a default with respect to any such
indebtedness, the lender could avoid 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
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to compete effectively for personnel. In anticipation of the Company's growth
plans, the Company's general and administrative expenses (which consist
primarily of staffing and labor expenses, including hiring additional staff and
increasing the salary and benefits of existing staff) have increased from 7.9%
of operating revenue for 1993 to 12.3% of operating revenue for 1994 and 18.4%
of operating revenue for 1995. General and administrative expenses were 20.3% 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. Any failure by the Company to comply with
applicable requirements could have a material and adverse effect on the
Company's business, financial condition and results of operations. Regulation of
the assisted living industry is evolving and the Company's operations could also
be adversely affected by, among other things, future regulatory developments
such as mandatory increases in scope and quality of care to be afforded
residents and revisions to licensing and certification standards. Increased
regulatory requirements could increase costs of compliance with such
requirements.
Virginia state and local authorities initiated actions in 1995 alleging
that the Company permitted non-ambulatory residents to reside at the Company's
Gunston and Countryside facilities in violation of state licensure requirements
and the state building code. The Company entered into consent decrees, pursuant
to which it agreed to permit only ambulatory residents to reside at the
facilities until the buildings had been upgraded to meet more stringent fire
code requirements for non-ambulatory residents. During 1995, the Company made
capital improvements to these two facilities at an aggregate cost of
approximately $1.1 million. The Company 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.
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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 $55.9 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, 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.
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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 13,516,419 shares of
Common Stock outstanding. Of these shares, the 5,000,000 shares sold in the
Offering (or a maximum of 5,750,000, 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 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."
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<PAGE> 15
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 44.5% of
the outstanding Common Stock after completion of the Offering (39.0%, if the
Underwriters' over-allotment option is exercised in full). Executive officers
and directors as a group (including the Founders) will beneficially own
approximately 65.7% of the outstanding Common Stock after the Offering (60.2%,
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 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 $13.03, assuming an
initial public offering price of $18.00 per share. See "Dilution."
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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
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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 $15.6 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 5,000,000 shares of
Common Stock offered hereby are estimated to be approximately $82.5 million,
assuming an initial public offering price of $18.00 per share and after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company expects to use approximately $55.9
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."
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."
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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 and the issuance of 52,500 shares
of Common Stock in exchange for an additional ownership interest in one
facility, all upon the 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 (assuming an initial public offering
price of $18.00 per share and after deducting the estimated underwriting
discounts and commissions and offering expenses payable by the Company). 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..................................... $ 6,255 $ 6,255 $ 62,155
========= ======== ========
Long-term debt (including current portion).................... $ 144,769 $ 144,769 $ 128,169
Minority interests............................................ 1,593 1,466 1,466
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; 8,516,419 shares issued and outstanding,
pro forma; and 13,516,419 issued and outstanding,
pro forma as adjusted(1)................................. 60 85 135
Additional paid-in capital.................................. (19,331) 6,053 88,503
Accumulated deficit......................................... (15,149) (15,149) (15,149)
--------- -------- --------
Total common stockholders' (deficit) equity.............. (34,420) (9,011) 73,489
--------- -------- --------
Total capitalization................................ $ 146,406 $ 147,224 $ 203,124
========= ======== ========
</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 $7.76 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."
14
<PAGE> 19
DILUTION
The Company's net deficit in tangible book value at March 31, 1996 was
approximately $40.7 million, or $6.76 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 $15.3 million or $1.79 per share, after giving effect to the
conversion of the Series A Preferred Stock into 2,444,444 shares of Common Stock
and the issuance of 52,500 shares of Common Stock in exchange for an additional
ownership interest in one facility, all upon completion of the Offering. After
giving effect to the sale of the 5,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $18.00 per share,
the pro forma net tangible book value of the Common Stock at March 31, 1996
would have been approximately $67.2 million, or $4.97 per share. This represents
an immediate increase in pro forma net tangible book value of $11.73 per share
to existing stockholders and immediate dilution of $13.03 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>
Assumed initial public offering price(1)............................ $18.00
Net deficit in tangible book value prior to the Offering....... $(6.76)
Increase attributable to conversion of Series A Preferred
Stock......................................................... 4.97
--
Pro forma net deficit in tangible book value prior to the
Offering...................................................... (1.79)
Increase attributable to new investors......................... 6.76
Pro forma net tangible book value after the Offering................ 4.97
--
Dilution to new investors in the Offering........................... $13.03
==
</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 (based upon an assumed initial public offering
price of $18.00 per share):
<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 63.0% $ 5,373,407 5.6% $ 0.63
New investors............................ 5,000,000 37.0 90,000,000 94.4 18.00
---------- ------- ----------- -------
Total.......................... 13,516,419 100.0% $95,373,407 100.0% $ 7.06
========= ===== ========== =====
</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 $18.00 per
share (assuming an initial public offering price of $18.00 per share), with a
weighted average exercise price of $7.76 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."
15
<PAGE> 20
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 $ 34,893 $ 8,396 $ 9,850
Management services income...... 605 1,078 1,604 1,830 2,498 498 597
------- ------- ------- -------- -------- ---------- ----------
10,963 16,879 25,598 33,969 37,391 8,894 10,447
Operating expenses:
Facility operating expenses..... 8,386 11,824 17,761 17,983 21,202 5,346 6,510
Facility development and
preopening expenses........... 189 231 474 263 1,201 204 184
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 3,042 760 882
------- ------- ------- -------- -------- ---------- ----------
Income from operations............ 777 1,814 2,530 8,380 5,071 1,262 750
Interest income................. 267 350 317 566 1,229 330 278
GECC mortgage interest
expense....................... -- -- -- (5,262) (15,562)(2) (2,351) (2,339)
Other interest expense.......... (1,115) (2,212) (3,808) (3,060) (1,320) (268)
Equity in (losses) earnings on
investments in unconsolidated
partnerships.................... (754) (299) (104) 33 81 27 29
Minority interest................. 87 176 428 172 97 6 52
------- ------- ------- -------- -------- ---------- ----------
(Loss) income before extraordinary
item............................ (738) (171) (637) 829 (10,404) (994) (1,708)
Extraordinary item................ -- -- -- 850 -- -- --
------- ------- ------- -------- -------- ---------- ----------
Net (loss) income (3)............. $ (738) $ (171) $ (637) $ 1,679 $(10,404) $ (994) $ (1,708)
======== ======== ======== ========= ========= ========== ==========
Net loss per common share....... $ (1.94) $ (0.23) $ (0.37)
Weighted average common shares and
equivalents outstanding......... 6,381,683 6,381,683 6,525,377
PRO FORMA DATA (4):
Net loss per common share....... $ (1.18) $ (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>
16
<PAGE> 21
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1996
(IN THOUSANDS)
BALANCE SHEET DATA (1):
Cash and cash equivalents.......... $ 640 $ 2,499 $ 3,268 $ 8,113 $ 6,593 $ 6,255
Working capital (deficit) (8)...... (468) 741 1,848 (8,354) 629 1,016
Total assets....................... 18,146 50,866 61,365 108,953 136,165 155,424
Total debt......................... 13,997 45,405 55,207 109,762 134,051 144,769
Series A convertible preferred
stock............................ -- -- -- -- 23,963 24,464
Series B exchangeable preferred
stock............................ -- -- -- -- -- 10,000
Total common stockholders'
deficit.......................... (513) (1,716) (2,822) (16,124) (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 $0.7 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 $9.5 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 and the issuance of 52,500 shares of
Common Stock in exchange for an additional ownership interest in one
facility, all upon completion of the Offering. See "Certain
Transactions." Does not include 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."
(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 the Queen Anne and Towson facilities in which the Company owns
minority 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."
17
<PAGE> 22
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 94.3%,
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 5.7%,
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
18
<PAGE> 23
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 56.7 60.1 62.3
Facility development and pre-opening expenses... 1.9 0.8 3.2 2.3 1.8
General and administrative...................... 7.9 12.3 18.4 14.9 20.3
Depreciation and amortization................... 10.9 9.3 8.1 8.5 8.4
----- ----- ----- ----- -----
Income from operations............................ 9.9 24.7 13.6 14.2 7.2
Other income (expense):
Interest income................................. 1.2 1.7 3.3 3.7 2.7
Interest expense:
GECC mortgage interest expense............... -- (15.5) (41.6) (26.5) (22.4)
Other interest expense....................... (14.9) (9.0) (3.5) (3.0) (4.6)
----- ----- ----- ----- -----
Total interest expense.......................... (14.9) (24.5) (45.1) (29.5) (27.0)
----- ----- ----- ----- -----
Equity in (losses) earnings on investments in
unconsolidated partnerships.................. (0.4) 0.1 0.2 0.3 0.3
Minority interest............................... 1.7 0.5 0.3 0.1 0.5
----- ----- ----- ----- -----
(Loss) income before extraordinary item........... (2.5) 2.4 (27.8) -- --
Extraordinary item.............................. -- 2.5 -- -- --
----- ----- ----- ----- -----
Net (loss) income................................. (2.5)% 4.9% (27.8)% (11.2)% (16.4)%
===== ===== ===== ===== =====
</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%.
19
<PAGE> 24
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 17.5% to $10.4 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
17.3% to $9.8 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 Annapolis, Raleigh and Chanate
Lodge facilities ($1.1 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 20.0%, 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 27.1% to $9.7 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 21.8% to $6.5 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 Annapolis and Raleigh facilities and, to a lesser extent, the acquisition of
the Chanate Lodge facility comprised $0.7 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, and real estate taxes.
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 20.3% 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
increased 16.0% to $0.9 million from $0.8 million in the three months ended
March 31, 1995 due to the opening of the Annapolis and Raleigh facilities and
the acquisition of the Chanate Lodge facility.
20
<PAGE> 25
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 increased $0.2 million in the three months ended
March 31, 1996 compared to the three months ended March 31, 1995 as a result of
the opening of the Annapolis and Raleigh facilities and the acquisition of the
Chanate Lodge facility.
Net (loss) income. The Company incurred a net loss of $1.7 million in the
three months ended March 31, 1996, or a net loss per common share of $0.37,
compared to a net loss of $1.0 million in the three months ended March 31, 1995,
or a net loss per common share of $0.23. The increased loss was primarily
attributable to the $2.1 million increase in operating expenses, which was
offset, in part, by the $1.6 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 10.1% to $37.4
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 8.6% to $34.9 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 the 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 36.5%, to
$2.5 million from $1.8 million in 1994 due to a $0.4 million, or 26.2%, 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 26.3% to $32.3
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 17.9% to $21.2 million from
$18.0 million in 1994. As a percentage of operating revenue, facility operating
expenses in 1995 increased to 56.7% from 52.9% in 1994. Of the $3.2 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, $2.0 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, and the opening of the
Annapolis facility in November 1995.
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 $0.2 million. These increases were offset by an increase in
capitalized development expenses of $0.5 million.
21
<PAGE> 26
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 18.4% from 12.3% in 1994. Of the
$2.7 million increase in general and administrative expenses in 1995,
approximately 70.8% was related to labor costs including a $1.0 million increase
in salary and benefits expenses relating to the hiring in 1995 of 33 additional
headquarters and regional office management staff in anticipation of the
Company's growth plans, and $0.9 million related to salary increases and
benefits for existing staff. The remaining $0.8 million increase is attributable
to marketing, consulting, and public relations and other general expenses.
The provision for bad 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 3.7% 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 117.4% 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 102.9% to $16.9 million from $8.3 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 1995 also includes $0.7 million 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 56.9% 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 $10.4 million in
1995, or a net loss per common share of $1.94, compared to net income of $1.7
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 $6.7 million
increase in operating expenses, which were offset, in part, by the $3.4 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.
22
<PAGE> 27
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 five 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 118.5% to $8.3 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 19.6% 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.
23
<PAGE> 28
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 $1.7 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 $4.5 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 $144.8 million of outstanding debt (at a weighted average interest rate of
8.9%). Of such amount, the Company had $81.9 million of fixed rate debt at a
weighted average interest rate of 8.29%, $56.7 million of variable rate debt at
a weighted average interest rate of 9.78% 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 $1.3 million. At March 31,
1996, the Company had working capital of $1.0 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 $1.3 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 $6.6 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 $6.3 million.
Net cash used in investing activities totaled $30.1 million, $17.7 million
and $4.2 million in 1995, 1994 and 1993, respectively. Net cash used in
investing activities was $18.2 million for the three months ended March 31,
1996. The Company's investing activities included $24.5 million, $17.2 million
and $4.3 million in 1995, 1994 and 1993, respectively, and $17.5 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 $27.3
million compared to $19.8 million and $1.9 million provided in 1994 and 1993,
respectively. Financing activities provided net cash of $19.7 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 $10.7 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> 29
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 $12.1 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 $82.5 million assuming an initial public offering price of $18.00 per share
and after deducting estimated underwriting
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<PAGE> 30
discounts and commissions and offering expenses payable by the Company), pro
forma stockholders' equity would have been $72.5 million at that date. See
"Capitalization."
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. The rates charged for the
delivery of assisted living services are highly dependent upon local market
conditions. In addition, employee compensation expense is the principal cost
element of property operations. In the past, the Company has not been able to
fully offset the effects of inflation on salaries and other operating expenses
by increasing resident fees, and there can be no assurance that the Company will
be able to do so in the future.
26
<PAGE> 31
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 $37.4 million in 1995, and $10.4
million for the three months ended March 31, 1996. 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> 32
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 long-term
care 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.
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 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
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<PAGE> 33
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 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
29
<PAGE> 34
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 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
30
<PAGE> 35
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.
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<PAGE> 36
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, Annapolis, Pikesville and Raleigh facilities
are considered to be controlled by the Company and, therefore, are also
consolidated in the Consolidated and Combined Financial Statements. The
Queen Anne and Towson facilities are not 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."
(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.
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<PAGE> 37
(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) 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 prior to
April 28, 1999 at the greater of (i) $695,064, if purchased before April
28, 1997, $1,141,410, if purchased between April 28, 1997 and April 28,
1998, and $1,424,859, if purchased between April 28, 1998 and April 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 April 28,
1999, the purchase price of the third-party interest shall be determined by
an appraiser mutually agreeable to the parties.
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<PAGE> 38
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) Jan. 1999
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) Currently under construction. 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.
34
<PAGE> 39
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.
35
<PAGE> 40
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
36
<PAGE> 41
repositioned as Sunrise assisted living facilities. In evaluating possible
acquisitions, the Company considers, among other factors, (i) location,
construction quality, condition and design of the facility, (ii) current and
projected facility cash flow, (iii) the ability to increase revenue, occupancy
and cash flow by providing a full range of assisted living services, (iv) costs
of facility repositioning (including renovations, if any) and (v) the extent to
which the acquisition will complement the Company's development plans.
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 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.
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<PAGE> 42
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
38
<PAGE> 43
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.
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. 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.
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
39
<PAGE> 44
$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.
40
<PAGE> 45
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..................... 38 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
41
<PAGE> 46
Executive Officer of PersonaCare, Inc., a company which he co-founded and which
provided subacute, skilled nursing and assisted living care. From 1979 to 1981,
Mr. Smick was the Regional Operations Director for Manor Healthcare, a division
of ManorCare, Inc., a long-term care company.
Thomas B. Newell 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 Senior 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.
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<PAGE> 47
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.
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<PAGE> 48
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 (equivalent to $945,000, assuming an initial public offering
price of $18.00 per share). 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.
44
<PAGE> 49
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 $165,000 and he will receive options to purchase 120,000 shares
of Common Stock upon commencement of his employment. The option exercise price
will equal the initial public offering price.
45
<PAGE> 50
OPTION GRANTS
The following table sets forth certain information concerning the grant of
options to purchase Common Stock to each of the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE
SHARES OF TOTAL VALUE AT ASSUMED
COMMON OPTIONS ANNUAL RATES OF STOCK
STOCK GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------
NAME AND PRINCIPAL POSITION(S) GRANTED(1) YEAR ($/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.
46
<PAGE> 51
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
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<PAGE> 52
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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<PAGE> 53
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 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. 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
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<PAGE> 54
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 (equivalent to $945,000, assuming
an initial public offering price of $18.00 per share). 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.
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
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<PAGE> 55
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> 56
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% 44.5%
Teresa M. Klaassen (2)(3)......................... 6,019,475 70.7 44.5
David W. Faeder (2)(4)............................ 304,167 3.6 2.2
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 11.5 7.2
Scott F. Meadow (10).............................. 733,333 8.6 5.4
Darcy J. Moore (11)............................... 733,333 8.6 5.4
Allstate Insurance Company (12)................... 977,778 11.5 7.2
DLJ Capital Corporation (13)...................... 733,333 8.6 5.4
Frontenac VI Limited Partnership (14)............. 733,333 8.6 5.4
Sprout Growth II, L.P.(15)........................ 667,161 7.8 4.9
Executive officers and directors
as a group (11 persons) (16).................... 8,886,003 100.0% 63.9%
</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. Percentage of beneficial ownership prior to the Offering is based on
8,516,419 shares of Common Stock outstanding, which assumes conversion of
2,444,444 shares of Series A Preferred Stock into an equal number of shares
of Common Stock. Percentage of beneficial ownership after the Offering is
based on 13,516,419 shares of Common Stock to be outstanding, which number
includes 5,000,000 shares of Common Stock to be issued in the Offering.
(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 750,000 shares of
Common Stock and would beneficially own 5,269,475 shares (39.0%) 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.
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<PAGE> 57
(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.
(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
Senior 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> 58
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> 59
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 25% of the
Investors' Shares (defined below). 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 Certificate limits the
liability of directors to the Company or its stockholders to the full extent
permitted by
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<PAGE> 60
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 subsidiaries, on residents and
families served by the Company and its subsidiaries, on operations of the
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<PAGE> 61
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 Stock. All shares of Common Stock
issued by the Company between the date of adoption of the Rights
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<PAGE> 62
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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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
13,516,419 shares of Common Stock. The 5,000,000 shares sold in the Offering (or
a maximum of 5,750,000 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 1,798,065 shares of Common Stock for issuance upon the
exercise of options which have been granted, 300,000 of which 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 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 5,000,000 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...............
Alex. Brown & Sons Incorporated...................................
NatWest Securities Limited........................................
---------
Total................................................... 5,000,000
=========
</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 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 $
per share. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of $ 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 750,000
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 of 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
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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 5.4%
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 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 500,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including 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.
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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
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.
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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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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-24
Combined Balance Sheet as of December 31, 1993........................................ F-25
Combined Statement of Operations and Partners' Deficit for the year ended December 31,
1993................................................................................ F-26
Combined Statement of Cash Flows for the year ended December 31, 1993................. F-27
Notes to Combined Financial Statements................................................ F-28
</TABLE>
F-1
<PAGE> 69
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.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Washington, D.C.
February 15, 1996
except for Notes 10 and
Note 16, as to which the date is May 1, 1996
F-2
<PAGE> 70
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.
/s/Hoffman, Morrison & Fitzgerald P.C.
---------------------------------------
Hoffman, Morrison & Fitzgerald P.C.
Vienna, Virginia
March 13, 1996
F-3
<PAGE> 71
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>
DECEMBER 31, PRO FORMA
--------------------------- MARCH 31, MARCH 31,
1994 1995 ------------ ------------------
1996 1996
(UNAUDITED) (UNAUDITED-NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 8,113,371 $ 6,593,157 $ 6,254,911 $ 6,254,911
Accounts receivable, less allowance of
$50,000 and $235,000..................... 1,097,886 1,313,987 1,419,972 1,419,972
Prepaid and other current assets........... 1,017,402 975,804 2,481,962 2,481,962
------------ ------------ ------------ ------------------
Total current assets................ 10,228,659 8,882,948 10,156,845 10,156,845
Property and equipment, net.................. 95,294,729 117,070,569 133,809,419 133,809,419
Investment................................... -- 5,375,404 5,568,343 5,568,343
Restricted cash and cash equivalents......... 1,175,410 1,466,924 1,946,363 1,946,363
Other assets................................. 2,254,629 3,369,467 3,943,469 3,943,469
------------ ------------ ------------ ------------------
Total assets........................ $108,953,427 $136,165,312 $155,424,439 $155,424,439
============= ============= ============= ==================
LIABILITIES AND OWNERS'/STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...... $ 3,008,239 $ 6,720,274 $ 7,175,959 $ 7,175,959
Distribution payable....................... 9,646,167 -- 182,500 182,500
Deferred revenue........................... 950,789 1,154,359 1,309,448 1,309,448
Other current liabilities.................. 760,740 110,469 94,843 94,843
Current portion of long-term debt.......... 4,216,667 268,576 377,691 377,691
------------ ------------ ------------ ------------------
Total current liabilities........... 18,582,602 8,253,678 9,140,441 9,140,441
Notes payable to affiliated entities......... 1,610,231 1,735,138 1,716,338 1,716,338
Interests in unconsolidated partnerships..... 267,321 284,283 254,956 254,956
Long-term debt, less current maturities...... 103,935,457 132,047,774 142,675,441 142,675,441
------------ ------------ ------------ ------------------
Total liabilities................... 124,395,611 142,320,873 153,787,176 153,787,176
Minority interests........................... 681,944 1,654,699 1,593,066 1,593,066
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......... (16,986,649) -- -- --
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)........... -- (19,466,287) (19,331,287) 5,108,264
Accumulated deficit........................ -- (12,367,664) (15,148,706) (15,148,706)
------------ ------------ ------------ ------------------
Total owners'/stockholders'
deficit........................... (16,124,128) (31,773,756) (34,419,798) (9,955,803)
------------ ------------ ------------ ------------------
Total liabilities and
owners'/stockholders' deficit..... $108,953,427 $136,165,312 $155,424,439 $155,424,439
============= ============= ============= ==================
</TABLE>
See accompanying notes.
F-4
<PAGE> 72
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 $ 34,893,269 $ 8,396,309 $ 9,849,888
Management services
income.................. 1,604,367 1,829,707 2,497,523 497,572 597,283
----------- ----------- ------------ ----------- -----------
25,598,104 33,968,686 37,390,792 8,893,881 10,447,171
Operating expenses:
Facility operating
expenses................ 17,760,450 17,983,070 21,201,951 5,346,125 6,510,364
Facility development and
pre-opening expenses.... 474,206 262,825 1,200,604 203,620 183,900
General and
administrative.......... 2,034,340 4,182,777 6,875,006 1,321,639 2,120,663
Depreciation and
amortization............ 2,798,581 3,159,764 3,042,488 760,289 881,785
----------- ----------- ------------ ----------- -----------
23,067,577 25,588,436 32,320,049 7,631,673 9,696,712
Income from operations..... 2,530,527 8,380,250 5,070,743 1,262,208 750,459
Other income (expense):
Interest income......... 317,144 565,449 1,229,327 330,321 277,866
Interest expense:
GECC mortgage
interest........... -- (5,261,789) (15,562,287) (2,350,796) (2,339,388)
Other debt............ (3,808,093) (3,059,777) (1,319,612) (268,497) (478,222)
----------- ----------- ------------ ----------- -----------
Total interest expense..... (3,808,093) (8,321,566) (16,881,899) (2,619,293) (2,817,610)
Equity in (losses) earnings
on investments in
unconsolidated/non-combined
partnerships............... (104,382) 33,024 80,914 26,486 29,326
Minority interest............ 427,798 171,870 96,751 6,032 51,633
----------- ----------- ------------ ----------- -----------
(Loss) income before
extraordinary item......... (637,006) 829,027 (10,404,164) (994,246) (1,708,326)
Extraordinary item........... -- 850,000 -- -- --
----------- ----------- ------------ ----------- -----------
Net (loss) income............ $ (637,006) $ 1,679,027 $(10,404,164) $ (994,246) $(1,708,326)
=========== =========== ============ =========== ===========
Net loss per common and
common equivalent shares... $ (1.94) $ (0.23) $ (0.37)
Weighted average number of
common and common
equivalent shares
outstanding................ 6,381,683 6,381,683 6,525,377
Pro forma net loss per share
data
(Unaudited -- Note 2):
Net loss per common and
common equivalent
shares.................. $ (1.18) $ (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> 73
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 1,184,226 1,679,027
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 76,029 (16,124,128)
Issuance of common
stock for net
assets of Sunrise
Entities........... (10,500) (851,921) 17,062,678 6,019,375 60,194 (16,184,422) (76,029) --
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............. (10,404,164) (10,404,164)
Preferred return on
Series A
convertible
preferred stock.... (1,963,500) (1,963,500)
----------- ----------- --------------- --------- ------- ------------ ------------ ------------
Balance at December
31, 1995........... $ -- $ -- $ -- 6,019,475 $60,195 $(19,466,287) $(12,367,664) $(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 $(19,331,287) $(15,148,706) $(34,419,798)
========== ========== ============= ========= ======= ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 74
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 (UNAUDITED)1996
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................. $ (637,006) $ 1,679,027 $(10,404,164) $ (994,246) $ (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) (80,914) (51,656) (29,326)
Minority interest.............................. (427,798) (171,870) (96,751) (6,032) 9,339
Provision for bad debts........................ -- 123,368 185,256 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 3,042,488 760,289 881,785
Amortization of discount on long-term debt..... -- -- 724,000 -- 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) (401,357) 33,606 (247,980)
Prepaid and other current assets........... (89,766) (595,799) 41,598 (190,045) (1,506,160)
Other assets............................... -- 36,309 (379,776) 96,649 (103,350)
Increase (decrease):
Accounts payable and accrued expenses...... 1,341,388 (362,950) 3,712,035 748,009 455,684
Deferred revenue........................... 6,242 (298,909) 203,570 (298,096) 155,089
Other liabilities.......................... (97,069) -- (650,271) (626,201) (15,626)
----------- ------------ ------------ ----------- ------------
Net cash provided by (used in) operating
activities....................................... 3,070,360 2,736,096 1,295,714 (493,719) (1,852,576)
INVESTING ACTIVITIES
Increase in restricted cash and cash equivalents... 118,700 (552,631) (291,514) (320,673) (479,439)
Acquisition of interests in facilities............. (1,055,412) (5,513,607) --
Purchases of property and equipment................ (3,218,190) (11,650,798) (24,537,610) (2,381,738) (17,520,100)
Disposition of property and equipment.............. -- -- 24,586 22,889 --
Purchase of investment............................. -- -- (5,375,404) (5,000,000) (192,936)
Distribution from investment in unconsolidated
partnership...................................... -- 33,024 97,876 35,371 --
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities.............. (4,154,902) (17,684,012) (30,082,066) (7,644,151) (18,192,475)
FINANCING ACTIVITIES
Organization costs paid............................ -- (61,475) (2,482) (1,447) (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) -- (9,630,161) (389,717)
Distribution to stockholders of the Predecessor.... -- -- (9,646,167)
Additional net investment of minority interests.... 2,581,497 1,029,090 1,069,506 (294) (70,972)
Additional borrowings under long-term debt......... 923,538 101,976,095 21,088,135 2,852,845 10,718,861
Additional borrowings from related parties......... -- 675,899 --
Financing costs paid............................... (54,674) -- (1,037,882) (268,060) (335,030)
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) (93,000) (18,800)
----------- ------------ ------------ ----------- ------------
Net cash provided by financing activities.......... 1,853,958 19,793,172 27,266,138 12,971,890 19,706,805
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 769,416 4,845,256 (1,520,214) 4,834,020 (338,246)
Cash and cash equivalents at beginning of year..... 2,498,699 3,268,115 8,113,371 8,113,371 6,593,157
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of year........... $ 3,268,115 $ 8,113,371 $ 6,593,157 $12,947,391 $ 6,254,911
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-7
<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
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, four controlled limited partnerships and, two limited liability
companies that own facilities, in each of which the Company, through its
managing partnership or operating agreements, holds unilateral and perpetual
control. 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 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 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. At that date the
carrying value of the net operating assets of the facilities was stepped up by
$12,094,910 to reflect
F-8
<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)
1. ORGANIZATION AND PRESENTATION (CONTINUED)
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.
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, other than direct costs of
initiating leases and overhead, are capitalized and amortized over 36 months.
Initial direct lease acquisition costs are capitalized and amortized over 12
months. All other pre-rental costs are expensed as incurred.
F-9
<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)
Pre-rental costs and accumulated amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
<S> <C> <C>
Pre-rental costs................................................. $42,725 $444,706
Accumulated amortization......................................... (1,965) (17,819)
------- --------
$40,760 $426,887
======= ========
</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.
Deferred financing fees and accumulated amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
<S> <C> <C>
Deferred financing........................................... $2,233,750 $3,271,632
Accumulated amortization..................................... (162,393) (448,533)
---------- ----------
$2,071,357 $2,823,099
========== ==========
</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).
F-10
<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)
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.
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.
PRO FORMA 1995 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 1995 pro forma balance sheet
assumes that these securities were converted as of December 31, 1995. The 1995
pro forma loss per share assumes the conversion of the Series A Preferred Stock
as of January 1, 1995.
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.
F-11
<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)
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.
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 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.
F-12
<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)
3. NET LOSS PER COMMON SHARE
The following table summarizes the computations of share amounts used and
the computation of net loss per common share presented in the accompanying
statements of operations:
<TABLE>
<CAPTION>
DECEMBER PRO FORMA
31, 1995
1995 (UNAUDITED-NOTE 2)
<S> <C> <C>
Common and common equivalent shares:
Weighted average number of shares of common stock
outstanding during the period..................... 6,019,475 8,463,919
Options to purchase common stock issued within one
year of registration statement using the treasury
stock method...................................... 362,208 362,208
--------- --------
Total common and common equivalent shares of stock
considered outstanding during the year............ 6,381,683 8,826,127
========= ========
Net loss............................................ $10,404,164 $ 10,404,164
Adjustment to net loss for the 9% preferred return
of the series A convertible preferred stock....... 1,963,500 --
--------- --------
Equivalent net loss used in calculating net loss per
share............................................. $12,367,664 $ 10,404,164
========= ========
Net loss per common and common equivalent shares.... $ (1.94) $ (1.18)
</TABLE>
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 $ 14,191,063
Building and building improvements............ 40 yrs. 82,033,939 89,236,691
Furniture and equipment....................... 10 yrs. 8,960,081 10,860,619
---------- -----------
102,632,809 114,288,373
Less accumulated depreciation and
amortization................................ (12,539,785) (15,202,158)
---------- -----------
90,093,024 99,086,215
Construction in progress...................... 5,201,705 17,984,354
---------- -----------
$ 95,294,729 $117,070,569
========== ===========
</TABLE>
Interest capitalized during 1994 and 1995 was $137,896 and $657,037,
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.
F-13
<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)
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.
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.
F-14
<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)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
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 $153,592 and $176,031, 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 $82,400 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.
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>
F-15
<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
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.............. -- 8,600,000
Outstanding draws on construction notes payable.................. 358,874 9,895,437
Mortgage notes payable to Housing Opportunities Commission of
Montgomery County, Maryland (HOC).............................. 8,600,308 8,530,059
Notes payable secured by two operating facilities. Interest at
varying rates based upon LIBOR (6%) and the prime rate (8.75%)
ranged from 7.8% to 11.25%; amortizing on schedules that mature
in two to seven years.......................................... -- 11,551,677
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....................................................... -- (2,476,000)
------------ ------------
108,152,124 132,316,350
Less current portion........................................ (4,216,667) (268,576)
------------ ------------
$103,935,457 $132,047,774
============ ============
</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 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 payable and a discount on the GECC Mortgage was
recorded at the loan date. The cumulative amortization of the discount through
December 31, 1995 of $724,000 has been included as interest expense in 1995.
During 1995, the Company revised its estimate of the market value of the
properties
F-16
<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)
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 $24,443,550. 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.
Principal maturities of long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.................................................................. $ 268,576
1997.................................................................. 955,107
1998.................................................................. 5,371,740
1999.................................................................. 5,707,691
2000.................................................................. 3,530,934
Thereafter............................................................ 116,482,302
------------
$132,316,350
============
</TABLE>
Interest expense paid totaled $3,241,778, $6,220,886 and $10,291,261, 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.
F-17
<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)
8. LONG-TERM DEBT (CONTINUED)
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 $1,104,664
Under HOC mortgage, real estate tax escrows and
resident security deposits....................... 184,028 155,805
Other, certificates of deposit collateralizing a
note
payable.......................................... -- 206,455
---------- ----------
$1,175,410 $1,466,924
========== ==========
</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 (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 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.
F-18
<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)
9. INCOME TAXES (CONTINUED)
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>
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
F-19
<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)
10. STOCKHOLDERS' DEFICIT AND STOCK OPTION PLAN (CONTINUED)
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>
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
F-20
<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)
11. REDEEMABLE PREFERRED STOCK (CONTINUED)
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
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.
F-21
<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)
13. COMMITMENTS (CONTINUED)
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 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 $74,900,000 has an
estimated aggregate fair value of $75,200,000 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 $57,416,000 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
F-22
<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)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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.
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.
F-23
<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)
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 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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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
- ------------------------------------------------------
- ------------------------------------------------------
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........... 12
Use of Proceeds............................ 13
Dividend Policy............................ 13
Capitalization............................. 14
Dilution................................... 15
Selected Financial Data.................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 18
Business................................... 27
Management................................. 41
Certain Transactions....................... 49
Principal and Selling Stockholders......... 52
Description of Capital Stock............... 54
Shares Eligible for Future Sale............ 59
Underwriting............................... 60
Legal Matters.............................. 62
Experts.................................... 62
Change in Independent Accountants.......... 62
Additional Information..................... 63
Index to Financial Statements.............. F-1
</TABLE>
------------------------
UNTIL , 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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,000,000 SHARES
[SUNRISE LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
NATWEST SECURITIES LIMITED
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. The Company will bear all of such
expenses, except that to the extent the Underwriters exercise the over-allotment
option, the selling Stockholders will bear their proportionate share of the SEC
registration fee and Blue Sky fees and expenses. All amounts are estimated
except for the Securities and Exchange Commission registration fee and the
National Association of Securities Dealers, Inc. ("NASD") filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
<S> <C>
SEC registration fee...................................................... $37,673
NASD filing fee........................................................... 11,425
Nasdaq National Market entry fee.......................................... *
Blue Sky fees and expenses................................................ *
Accounting fees and expenses.............................................. *
Legal fees and expenses................................................... *
Printing and engraving expenses........................................... *
Registrar and transfer agent's fees....................................... *
Miscellaneous fees and expenses........................................... *
-------
Total........................................................... $ *
=======
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law (the "Delaware
Law"), a corporation may indemnify its directors, officers, employees and agents
and its former directors, officers, employees and agents and those who serve, at
the corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in non-derivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The Delaware Law
provides, however, that such person must have acted in good faith and in a
manner he or she reasonably believed to be in (or not opposed to) the best
interests of the corporation and, in the case of a criminal action, such person
must have had no reasonable cause to believe his or her conduct was unlawful. In
addition, the Delaware Law does not permit indemnification in an action or suit
by or in the right of the corporation, where such person has been adjudged
liable to the corporation, unless, and only to the extent that, a court
determines that such person fairly and reasonably is entitled to indemnity for
expenses the court deems proper in light of liability adjudication. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Company's Amended and Restated Bylaws (the "Bylaws") provide for
mandatory indemnification of directors and officers generally to the same extent
authorized by the Delaware Law. Under the Bylaws, the Company shall advance
expenses incurred by an officer or director in defending any such action if the
director or officer undertakes to repay such amount if it is determined that he
or she is not entitled to indemnification. The Company has obtained directors'
and officers' liability insurance.
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
II-1
<PAGE> 103
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 Underwriting Agreement provides for indemnification by the Underwriters
of the directors, officers and controlling persons of the Company against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 19, 1994, the Company issued 100 shares of Common Stock to Paul
and Teresa Klaassen (the "Founders") as part of the Company's initial
capitalization. These securities were issued without registration under the
Securities Act, in reliance upon the exemption in Section 4(2) of the Securities
Act.
On January 4, 1995, the Company exchanged 6,019,375 shares of Common Stock
for (i) the equity interests of the Founders in the various asset partnerships
and other Sunrise entities that owned or had interests in 22 facilities, (ii)
100% of the capital stock of Sunrise Terrace Inc., the Company's management
subsidiary, and (iii) 100% of the capital stock of Sunrise Development Inc., the
Company's development subsidiary (collectively, the "Contribution Transaction").
In connection with the Contribution Transaction, the Sunrise entities made
distributions aggregating $9.6 million to, and the Company assumed $2.1 million
of indebtedness of, the Founders. These securities were issued without
registration under the Securities Act, in reliance upon the exemption in Section
4(2) of the Securities Act.
On January 4, 1995, the Company issued an aggregate of 2,444,444 shares of
Series A Convertible Preferred Stock to three institutional investors and
certain affiliates thereof (the "Series A Investors") for $21,999,996. These
securities were issued without registration under the Securities Act, in
reliance upon the exemption in Section 4(2) of the Securities Act.
On January 19, 1996, the Company issued an aggregate of 1,000,000 shares of
Series B Exchangeable Preferred Stock to the Series A Investors for $10,000,000.
These securities were issued without registration under the Securities Act, in
reliance upon the exemption in Section 4(2) of the Securities Act.
On March 19, 1996, the Company issued warrants covering 50,000 shares of
Common Stock to a lender. The warrants have a per share exercise price equal to
85% of the initial public offering price. These securities were issued without
registration under the Securities Act, in reliance upon the exemption in Section
4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
**1 Form of Underwriting Agreement
**3.1 Form of Restated Certificate of Incorporation of the Company
**3.2 Form of Amended and Restated By-laws of the Company
**4.1 Form of Common Stock certificate
**4.2 Form of Stockholder Rights Agreement
**5 Opinion of Hogan & Hartson L.L.P. regarding legality of shares being registered
*10.1 Assignment and Contribution Agreement, effective as of January 4, 1995, by and
between Paul and Teresa Klaassen and the Company
*10.2 Series A and Series B Preferred Stock Purchase Agreement, dated as of December 19,
1994, by and between the Company and the purchasers listed therein
*10.3 Registration Agreement, dated January 4, 1995, by and among the Company, the
Investors (as defined therein) and Paul and Teresa Klaassen
*10.4 Promissory Note, dated June 8, 1994, executed by Sunrise Assisted Living Limited
Partnership in favor of General Electric Capital Corporation
</TABLE>
II-2
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.4.1 Indemnity Agreement dated as of June 8, 1994 by Paul J. Klaassen and Teresa M.
Klaassen to and for the benefit of General Electric Capital Corporation
10.4.2 First Loan Modification Agreement dated as of February 15, 1996 by and between
General Electric Capital Corporation and Sunrise Assisted Living Limited Partnership
10.4.3 Second Loan Modification Agreement dated as of May 1, 1996 by and between General
Electric Capital Corporation and Sunrise Assisted Living Limited Partnership
10.4.4 Letter Agreement dated as of May 1, 1996 by and between General Electric Capital
Corporation and Sunrise Assisted Living Limited Partnership
*10.5 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents,
Fixture Filing and Financing Statement, dated as of June 8, 1994 (Arlington,
Bluemont Park, and Falls Church)
*10.6 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents,
Fixture Filing and Financing Statement, dated as of June 8, 1994 (Gunston and
Oakton)
*10.7 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents,
Fixture Filing and Financing Statement, dated as of June 8, 1994 (Fairfax Leasehold)
*10.8 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents,
Fixture Filing and Financing Statement, dated as of June 8, 1994 (Warrenton)
*10.9 Credit Line Deed of Trust and Security Agreement, Assignment of Leases and Rents,
Fixture Filing and Financing Statement, dated as of June 8, 1994 (Countryside and
Leesburg)
*10.10 First Mortgage and Security Agreement, Assignment of Leases and Rents, Fixture
Filing and Financing Statement, dated as of June 8, 1994 (Boca Raton)
*10.11 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture
Filing and Financing Statement, dated as of June 8, 1994 (Frederick)
*10.12 First Deed of Trust and Security Agreement, Assignment of Leases and Rents, Fixture
Filing and Financing Statement, dated as of June 8, 1994 (Mercer Island)
**10.13 Stock Option Plan, as amended*
*10.14 Stock Option Agreement, entered into, effective as of January 4, 1995, by and
between the Company and David W. Faeder
*10.15 Amended and Restated Lease Agreement and Assignment of Leasehold Right, dated June
6, 1994, by and among Barbara M. Volentine and Teresa M. Klaassen, the Executor of
the Estate of Eldon J. Merritt, Sunrise Assisted Living Limited Partnership,
Assisted Living Group--Fairfax Associates, and Sunrise Foundation, Inc.
*10.16 Ground Lease, dated June 7, 1994, by and between Sunrise Assisted Living Limited
Partnership and Paul J. Klaassen and Teresa M. Klaassen
*10.17 Amended and Restated Agreement of Sublease, Indemnification and Easements dated
February 5, 1995 by and between Assisted Living Group -- Fairfax Associates and
Sunrise Foundation, as amended
*10.18 Sunrise Village House LLC Operating Agreement, dated as of April 15, 1993, by and
between Paul J. Klaassen and Teresa M. Klaassen and Thomas Donohue and Elizabeth
Donohue, as amended
*10.19 Letter Agreement, dated January 4, 1995, from Paul J. Klaassen and Teresa M.
Klaassen to the Series A Preferred Stockholders regarding cash distributions from
Sunrise Retirement Investments, Inc., Sunrise Terrace of Gunston, Inc., Sunrise
Terrace of Countryside, Inc. and Sunrise Atrium, Inc.
*10.20 Loan Agreement, dated as of March 19, 1996, between the Company and Creditanstalt-
Bankverein
*10.21 Warrant Agreement, dated as of March 19, 1996, between the Company and
Creditanstalt-Bankverein
10.22 Commitment Letter for $80,000,000 syndicated line of credit for Construction/Interim
Loans from NationsBank, N.A. to an entity to be formed by Sunrise Assisted Living,
Inc.
16 Letter re change in Certifying Accountant
**21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Hoffman, Morrison & Fitzgerald P.C.
</TABLE>
II-3
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
**23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5)
*24 Power of attorney from officers and directors of the Company signing by an attorney
in fact (included on Signature Page)
27 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fairfax, Commonwealth of
Virginia, on the 7th day of May, 1996.
SUNRISE ASSISTED LIVING, INC.
By *
------------------------------------
Paul J. Klaassen
Chairman of the Board of Directors,
President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on May 7, 1996 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
<C> <S>
*
- -----------------------------------
PAUL J. KLAASSEN Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer)
- -----------------------------------
TERESA M. KLAASSEN Executive Vice President and Director
/s/ DAVID W. FAEDER
- -----------------------------------
DAVID W. FAEDER Executive Vice President, Chief Financial Officer and
Director (Principal Financial Officer)
/s/ LARRY E. HULSE
- -----------------------------------
LARRY E. HULSE Controller (Principal Accounting Officer)
*
- -----------------------------------
RONALD V. APRAHAMIAN Director
*
- -----------------------------------
THOMAS J. DONOHUE Director
*
- -----------------------------------
RICHARD A. DOPPELT Director
*
- -----------------------------------
SCOTT F. MEADOW Director
*
- -----------------------------------
DARCY J. MOORE Director
</TABLE>
- ---------------
* David W. Faeder, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to powers of attorney duly executed by
such persons and filed with the Securities and Exchange Commission.
/s/ DAVID W. FAEDER
- -----------------------------------
ATTORNEY-IN-FACT
II-5
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
<C> <S> <C>
**1 Form of Underwriting Agreement.......................................
**3.1 Form of Restated Certificate of Incorporation of the Company.........
**3.2 Form of Amended and Restated By-laws of the Company..................
**4.1 Form of Common Stock certificate.....................................
**4.2 Form of Stockholder Rights Agreement.................................
**5 Opinion of Hogan & Hartson L.L.P. regarding legality of shares being
registered...........................................................
*10.1 Assignment and Contribution Agreement, effective as of January 4,
1995, by and between Paul and Teresa Klaassen and the Company........
*10.2 Series A and Series B Preferred Stock Purchase Agreement, dated as of
December 19, 1994, by and between the Company and the purchasers
listed therein.......................................................
*10.3 Registration Agreement, dated January 4, 1995, by and among the
Company, the Investors (as defined therein) and Paul and Teresa
Klaassen.............................................................
*10.4 Promissory Note, dated June 8, 1994, executed by Sunrise Assisted
Living Limited Partnership in favor of General Electric Capital
Corporation..........................................................
10.4.1 Indemnity Agreement dated as of June 8, 1994 by Paul J. Klaassen and
Teresa M. Klaassen to and for the benefit of General Electric Capital
Corporation..........................................................
10.4.2 First Loan Modification Agreement dated as of February 15, 1996 by
and between General Electric Capital Corporation and Sunrise Assisted
Living Limited Partnership...........................................
10.4.3 Second Loan Modification Agreement dated as of May 1, 1996 by and
between General Electric Capital Corporation and Sunrise Assisted
Living Limited Partnership...........................................
10.4.4 Letter Agreement dated as of May 1, 1996 by and between General
Electric Capital Corporation and Sunrise Assisted Living Limited
Partnership..........................................................
*10.5 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated as of
June 8, 1994 (Arlington, Bluemont Park, and Falls Church)............
*10.6 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated as of
June 8, 1994 (Gunston and Oakton)....................................
*10.7 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated as of
June 8, 1994 (Fairfax Leasehold).....................................
*10.8 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated as of
June 8, 1994 (Warrenton).............................................
*10.9 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated as of
June 8, 1994 (Countryside and Leesburg)..............................
*10.10 First Mortgage and Security Agreement, Assignment of Leases and
Rents, Fixture Filing and Financing Statement, dated as of June 8,
1994 (Boca Raton)....................................................
*10.11 First Deed of Trust and Security Agreement, Assignment of Leases and
Rents, Fixture Filing and Financing Statement, dated as of June 8,
1994 (Frederick).....................................................
*10.12 First Deed of Trust and Security Agreement, Assignment of Leases and
Rents, Fixture Filing and Financing Statement, dated as of June 8,
1994 (Mercer Island).................................................
**10.13 Stock Option Plan, as amended*.......................................
</TABLE>
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
<C> <S> <C>
*10.14 Stock Option Agreement, entered into, effective as of January 4,
1995, by and between the Company and David W. Faeder.................
*10.15 Amended and Restated Lease Agreement and Assignment of Leasehold
Right, dated June 6, 1994, by and among Barbara M. Volentine and
Teresa M. Klaassen, the Executor of the Estate of Eldon J. Merritt,
Sunrise Assisted Living Limited Partnership, Assisted Living
Group--Fairfax Associates, and Sunrise Foundation, Inc...............
*10.16 Ground Lease, dated June 7, 1994, by and between Sunrise Assisted
Living Limited Partnership and Paul J. Klaassen and Teresa M.
Klaassen.............................................................
*10.17 Amended and Restated Agreement of Sublease, Indemnification and
Easements dated February 5, 1995 by and between Assisted Living
Group -- Fairfax Associates and Sunrise Foundation, as amended.......
*10.18 Sunrise Village House LLC Operating Agreement, dated as of April 15,
1993, by and between Paul J. Klaassen and Teresa M. Klaassen and
Thomas Donohue and Elizabeth Donohue, as amended.....................
*10.19 Letter Agreement, dated January 4, 1995, from Paul J. Klaassen and
Teresa M. Klaassen to the Series A Preferred Stockholders regarding
cash distributions from Sunrise Retirement Investments, Inc., Sunrise
Terrace of Gunston, Inc., Sunrise Terrace of Countryside, Inc. and
Sunrise Atrium, Inc..................................................
*10.20 Loan Agreement, dated as of March 19, 1996, between the Company and
Creditanstalt-Bankverein.............................................
*10.21 Warrant Agreement, dated as of March 19, 1996, between the Company
and Creditanstalt-Bankverein.........................................
10.22 Commitment Letter for $80,000,000 syndicated line of credit for
Construction/ Interim Loans from NationsBank, N.A. to an entity to be
formed by Sunrise Assisted Living, Inc...............................
16 Letter re change in Certifying Accountant............................
**21 Subsidiaries of the Company..........................................
23.1 Consent of Ernst & Young LLP.........................................
23.2 Consent of Hoffman, Morrison & Fitzgerald P.C........................
**23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5)............
*24 Power of attorney from officers and directors of the Company signing
by an attorney in fact (included on Signature Page)..................
27 Financial Data Schedule..............................................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 10.4.1
INDEMNITY AGREEMENT
This Indemnity Agreement ("Agreement") is made as of the 8th day of June,
1994, by PAUL J. KLAASSEN and TERESA M. KLAASSEN (individually, an "Indemnitor"
and, collectively, the "Indemnitors") to and for the benefit of GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC").
R E C I T A L S:
A. GECC has agreed to make a loan to Sunrise Assisted Living Limited
Partnership, a Virginia limited partnership ("Borrower") in the maximum
principal amount of Ninety-Five million Dollars ($95,000,000) (the "Loan").
The Loan is evidenced and secured by (i) a promissory note, of even date
herewith, executed by Borrower payable to the order of GECC (the "Note"), (ii)
seven (7) deeds of trust and one (1) mortgage, of even date herewith, from
Borrower to GECC (collectively, the "Deed of Trust"), and (iii) such other
documents evidencing and securing the Loan (the Note, Deed of Trust and such
other documents are hereinafter collectively referred to as the "Loan
Documents"). Terms not expressly defined herein shall have the same meanings
ascribed to such terms in each of the deeds of trust and mortgage which
comprise the Deed of Trust.
B. As a further condition to making the Loan, GECC requires the
Indemnitors to indemnify GECC as provided herein.
C. The Indemnitors are the stockholders of the general partner of
Borrower and the Indemnitors will derive financial benefit from the making of
the Loan. The execution and delivery of this Agreement by the Indemnitors is a
condition precedent to the performance by GECC of its obligations in connection
with the Loan.
A G R E E M E N T S:
In consideration of the Recitals set forth above and incorporated herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Indemnitors hereby agree as follows:
1. The Indemnitors hereby agree to indemnify, defend and hold harmless
GECC, GECC's directors, officers, agents and employees, and GECC's successors
and assigns (as set forth in Paragraph 4 below) from and against all claims,
demands, suits, proceedings, injunctive relief, orders, information requests,
notice letters, losses, costs, fines, penalties, judgments, damages (including
consequential damages suffered by a third party claimant and, with respect to
the matters set forth in
-1-
<PAGE> 2
subsection (xiv) below, any loss in value of the Properties) and expenses
(including reasonable attorneys' fees and expenses) of every kind and nature
whatsoever that arise out of any or all of the following: (i) Borrower's
failure to perform its obligation to properly account to GECC as mortgagee for
any proceeds of insurance or condemnation proceeds as required by the Deed of
Trust; (ii) Borrower's failure to comply with provisions of the Deed of Trust
prohibiting the sale or further encumbering of the collateral; (iii) Borrower's
attempt to interfere with GECC's rights under the assignment of rents or
letters of credit, if any, issued in connection with the Loan; (iv) Borrower's
failure to apply proceeds, as required by the Deed of Trust and other Loan
Documents, of rents and other income of the collateral toward the costs of
maintaining and operating the Property and to the payment of taxes, lien
claims, insurance premiums, other costs of the Property and debt service and
other indebtedness to the extent that the Deed of Trust or other Loan Documents
require such rents and income to be so applied; (v) Borrower's entering into or
modifying leases and residency agreements in violation of the provisions of the
Deed of Trust and other Loan Documents; (vi) Borrower's collection of rentals
and residency charges for periods of more than one month in advance under
leases and residency agreements of the Property; (vii) the receipt by Borrower
of monies in connection with the modification of any existing or future lease
or residency agreement or the entering into of a new lease or residency
agreement in violation of the applicable provisions of the Deed of Trust or
other Loan Documents; (viii) damage or destruction to the Property, including
their electrical, plumbing, heating or air conditioning systems or elevators,
except as a result of casualty; (ix) Borrower's failure to pay for any loss,
liability, damage, cost or expense (including attorney's fees) incurred by GECC
arising out of any claim or allegation made by Borrower, its successors or
assigns, or any creditor of Borrower, that the Note and the other Loan
Documents or the transactions contemplated thereby establish a joint venture or
partnership arrangement between Borrower and GECC; (x) the Borrower's failure
to utilize the net loan proceeds for Permitted Investments owned solely by
Borrower, Indemnitors, Guarantor or one or more Permitted Owners; (xi) any
claims, demands or suits by partners or investors in any entity controlled by
the Indemnitors or an Affiliated Entity (as defined in the Note) which owned or
had an interest in a Property which was "rolled-up" into the Borrower; (xii)
any brokerage commissions or finder's fees claimed by any broker or other party
in connection with the making of the Loan; (xiii) the exercise of any right or
remedy, or the assertion of any claim or demand, by Friendly Ice Cream
Corporation, a Massachusetts corporation, or its successors or assigns,
pursuant to that certain Easement and Agreement dated August 4, 1987 and
recorded in the county records of Fairfax County, Virginia in Book 6863 at Page
1171; (xiv) the failure of Borrower to obtain upon the expiration of the
existing
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<PAGE> 3
provisional license, all necessary permanent licenses, permits and approvals
required to operate the Property known as Sunrise Retirement Home at
Countryside, Sterling, Virginia as a "Home For Adults" under the Code of
Virginia, as amended; and (xv) the failure of Sunrise Foundation, Inc. a
Virginia corporation ("Sublessee"), and its successors and assigns, to pay any
amounts of rent, real estate tax and operating cost reimbursements and any
other amounts which are or become due and payable by such parties from time to
time pursuant to the terms of the Amended and Restated Agreement of Sublease,
Indemnification and Easements dated February 5, 1990 (as amended as of the date
hereof, the "Sublease") executed by Sublessee and Assisted Living Group-Fairfax
Associates, a Delaware general partnership, including, without limitation, the
Termination Payment (as such term is defined in the Sublease). Any and all
amounts described in subsection (xv) immediately above are collectively
referred to herein as the "Sublease Payments". Indemnitors acknowledge and
agree that Indemnitor's obligation to pay the Sublease Payments shall not be
modified, terminated, limited or reduced by (i) any amounts received or which
would be received as a result of the mitigation of damages under the Sublease
by the sublessor thereunder, including any amounts received or which would be
received by the sublessor thereunder through the reletting of the premises
demised pursuant to the Sublease, (ii) any judicial order or decision
(including any order or decision of any bankruptcy court or tribunal) or
arbitration award limiting or denying the enforceability of the obligations of
the Sublessee, or its successors and assigns, to pay the Sublease Payments in
accordance with the stated terms of the Sublease, or (iii) any rejection of the
Sublease in connection with bankruptcy or insolvency proceedings of or
affecting Subleasee, it being understood and agreed that the obligation of the
Indemnitors hereunder to pay the Sublease Payments pursuant to the stated terms
of the Sublease shall be absolute and unconditional, whether or not the
Sublessee, or its successors and assigns, shall be determined to be obligated
to pay the Sublease Payments.
2. The obligations of the Indemnitors under this Agreement
("Obligations") shall survive the foreclosure of the Deed of Trust or any one
or more of them, acceptance by GECC of a deed in lieu of foreclosure,
satisfaction of the Loan, and the release by GECC of the Loan Documents, and
shall be independent of and not limited by the obligations of Borrower to GECC
in connection with the Loan Documents; provided, however, that the obligations
of the Indemnitors hereunder shall terminate upon the repayment in full of all
principal, interest (including Base Interest, Cash Flow Interest and
Participation Interest, as such terms are defined in the Note) and other
amounts payable to GECC pursuant to the Note and other Loan Documents. The
rights of GECC under this Agreement shall be in addition to any other rights
and
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<PAGE> 4
remedies of GECC under the Guaranty (or any substitute therefor), any other
guaranty, any other Loan Document or at law.
3. Any amount due hereunder to GECC, not paid by the Indemnitors within
thirty (30) days after written demand from GECC with an explanation of the
amounts claimed, shall bear interest at the rate of interest
applicable following a default or Event of Default as set forth in the Note.
4. This Agreement shall (i) be binding upon the Indemnitors, the heirs
of the Indemnitors (to the extent the Indemnitor has heirs) and, the
Indemnitors' successors and assigns, and (ii) inure, together with all rights
and remedies of the GECC hereunder, to the benefit of the GECC, any
participants in the Loan, holders of any portion of the Loan and any assignees
of all or a portion of GECC's interest in the Loan.
5. In order to induce GECC to make the Loan, each Indemnitor makes the
representations and warranties to GECC set forth in this Paragraph 5. Each
Indemnitor acknowledges that but for the truth and accuracy of the matters
covered by the following representations and warranties, that GECC would not
have agreed to make the Loan.
A. Any and all balance sheets, net worth statements, and other
financial data with respect to each Indemnitor which have heretofore been
given to GECC by or on behalf of such Indemnitor fairly and accurately
present the financial condition of such Indemnitor as of the respective
dates thereof, and, since the respective dates thereof, there has been no
materially adverse change in the financial condition of such Indemnitor.
B. The execution, delivery, and performance by each Indemnitor of
this Indemnity Agreement do not and will not contravene or conflict with
(i) any law, order, rule, regulation, writ, injunction, or decree now in
effect of any government, governmental instrumentality or court having
jurisdiction over such Indemnitor, or (ii) any contractual restriction
binding on or affecting such Indemnitor or such Indemnitor's property or
assets.
C. This Indemnity Agreement creates legal, valid, and binding
obligations of each Indemnitor enforceable against such Indemnitor in
accordance with its terms and with respect to the Indemnitors which are
corporations, has been duly authorized, executed and delivered.
D. Except as disclosed in writing to GECC, (i) there is no action,
proceeding, or investigation pending or, to the knowledge of each
Indemnitor, threatened or affecting
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<PAGE> 5
such Indemnitor, which may adversely affect such Indemnitor's ability to
fulfill the Indemnitor's obligations under this Agreement, (ii) there are
no judgments or orders for the payment of money rendered against the
Indemnitor for an amount in excess of $10,000 which have been undischarged
for a period of ten (10) or more consecutive days and the enforcement of
which is not stayed by reason of a pending appeal or otherwise, and (iii)
no Indemnitor is in default under any agreements to which such Indemnitor
is a party.
E. Each Indemnitor has disclosed all events, conditions, and facts
known to such Indemnitor which could have any material adverse effect on
the financial condition of the Indemnitor. No representation or warranty
by any Indemnitor contained herein, nor any schedule, certificate, or
other document furnished by any Indemnitor to GECC in connection with this
Agreement contains any material misstatement of fact or omits to state a
material fact or any fact necessary to make the statements contained
therein not misleading, to the extent such items were known to such
Indemnitor or should have been known to such Indemnitor in the exercise of
due diligence and reasonable care.
F. There are no facts or circumstances of any kind or nature
whatsoever of which any Indemnitor is aware which could in any way impair
or prevent such Indemnitor from performing such Indemnitor's obligations
under this Agreement in any material respect.
G. Each Indemnitor has reviewed and approved the Note and the other
Loan Documents. All statements set forth in the Recitals of this
Agreement are true and correct.
Each of the foregoing representations and warranties shall be deemed made
and remade on the Initial Disbursement Date and each advance of Loan proceeds
thereunder. Each Indemnitor hereby agrees to indemnify and hold GECC free and
harmless from and against all loss, cost, damage and expense, including
reasonable attorney's fees and costs, which GECC may sustain by reason of the
inaccuracy or breach of any of the foregoing representations and warranties
made by such Indemnitor as of the date the foregoing representations and
warranties are made and are deemed remade.
6. With respect to the interpretation of this Agreement only, in the
event of any inconsistencies or conflicts between the terms of this Agreement
and the terms of the other Loan Documents (including any exculpatory language
contained therein), the terms of this Agreement shall govern and control. This
Agreement does not benefit, or create any rights or defenses in, Borrower.
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<PAGE> 6
7. The liability of the Indemnitors under this Agreement shall in no way
be limited, impaired or otherwise affected by, and the Indemnitors hereby
consent to and agree to be bound by, any amendment or modification of the
provisions of the Loan Documents. In addition, the liability of the
Indemnitors under this Agreement shall in no way be limited, impaired or
otherwise affected by (i) any extensions of time for or waivers of performance
of any covenants or obligations set forth in any of the Loan Documents, (ii)
any sale, assignment or transfer of the Note, the Deed of Trust or the other
Loan Documents (or any part thereof) or any sale or transfer of all or part of
the property or other security for the Loan, (iii) any exculpatory provision in
any of the Loan Documents limiting GECC's recourse to property encumbered by
the Deed of Trust or to any other security, or limiting GECC's rights to pursue
any available remedies (including obtaining a deficiency judgment) against
Borrower, (iv) the release of Borrower or any other person from performance or
observance of any of the agreements, covenants, terms or conditions contained
in any of the Loan Documents by operation of law, GECC's voluntary act, or
otherwise, (v) the release or substitution in whole or in part of any security
for the Note, (vi) GECC's failure to perfect, protect, secure or insure any
security interest or lien given or granted as security for the performance of
the obligations and covenants of Borrower pursuant to the Note and other Loan
Documents, (vii) the foreclosure of the Deed of Trust, acceptance of a deed to
all or part of the Property in lieu of foreclosure of the Deed of Trust or
other realization by GECC upon the security for the Loan, or (viii) any delay
by GECC in its choice of remedies under the Loan Documents, which the passage
of time and events may or may not prove to have been the best choice to
maximize recovery by GECC at the lowest cost to the Indemnitors, it being
understood that such choice of remedies will necessarily be and should properly
be a matter of business judgment, which the passage of time and events may or
may not prove to have been the best choice to maximize recovery by GECC at the
lowest cost to Borrower and/or Indemnitor. It is the intention of the parties
that such choice by GECC be given conclusive effect regardless of such
subsequent developments.
8. The Indemnitors hereby waive (i) notice of acceptance of this
Agreement by GECC and any and all notices and demands of every kind which may
be required to be given by any statute, rule or law, (ii) any defense, right of
set-off or other claim which the Indemnitors or Borrower may have against GECC
or the holder of the Note, and (iii) presentment for payment, demand for
payment, notice of nonpayment or dishonor, protest and notice of protest,
diligence in collection and any and all formalities which otherwise might be
legally required to charge the Indemnitor with liability hereunder. No
modification or waiver of any of the provisions of this Agreement shall be
binding upon GECC except as expressly set forth in a writing duly signed and
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<PAGE> 7
delivered on behalf of GECC. Without limiting the generality of the foregoing,
the Indemnitors hereby waive any defense which may arise by reason of (A) the
incapacity, lack of authority, death or disability of, or revocation hereof by,
any person or persons, (B) the failure of the GECC to file or enforce any claim
against the estate (in probate, bankruptcy or any other proceedings) of any
person or persons, or (C) any defense based upon an election of remedies by the
GECC, including, without limitation, an election to proceed by non-judicial
foreclosure or which destroys or otherwise impairs the subrogation rights of
the Indemnitor or any other right of the Indemnitors to proceed against the
Borrower.
9. This Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the internal laws of the
Commonwealth of Virginia (without regard to principles of conflicts of laws)
and any applicable laws of the United States of America.
10. The Indemnitors' obligations hereunder shall in no way be impaired,
reduced or released by reason of (i) GECC's omission or delay to exercise any
right described herein (except as specifically provided in Paragraph 3 above);
or (ii) any act or omission of GECC in connection with any notice, demand,
warning or claim regarding violations of codes, laws or ordinances governing
the Property (except as specifically provided in Paragraph 3 above). Any
indebtedness of Borrower to Indemnitor now or hereafter existing is hereby
subordinated to the Obligations. Indemnitors agree that, until the entire
indebtedness under the Loan has been paid in full, Indemnitors will not seek,
accept, or retain for Indemnitors' own accounts, any payment from Borrower on
account of such subordinated debt. Any payments to Indemnitors on account of
such subordinated debt shall be collected and received by Indemnitors in trust
for GECC and shall be paid over to GECC on account of the indebtedness under
the Loan without impairing or releasing the obligations of Indemnitors
hereunder.
11. The Indemnitors waive and release any claim (within the meaning of 11
U.S.C. Section 101, et seq.) which the Indemnitors may have against Borrower
arising from a payment made by the Indemnitors under this Agreement and agree
not to assert or take advantage of any subrogation rights of the Indemnitors or
any right of the Indemnitors to proceed against Borrower for reimbursement. It
is expressly understood that the waivers and agreements of the Indemnitors set
forth above constitute additional and cumulative benefits given to GECC for its
security and as an inducement for its extension of credit to Borrower.
12. Any notice, demand, request or other communication which any party
hereto may be required or may desire to give hereunder
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<PAGE> 8
shall be in writing and shall be deemed to have been properly delivered if
delivered in the manner set forth in Section 3.2 of the Deed of Trust.
13. The Indemnitors hereby submit to personal jurisdiction in the
Commonwealth of Virginia for the enforcement of this Agreement and waives any
and all personal rights to object to such jurisdiction for the purposes of
litigation to enforce this Agreement. The Indemnitors hereby consent to the
jurisdiction of either the Circuit Court of Fairfax County, Virginia, or the
United States District Court for the Eastern District of Virginia, in any
action, suit, or proceeding which GECC may at any time wish to file in
connection with this Agreement or any related matter. The Indemnitors hereby
agree that an action, suit, or proceeding to enforce this Agreement may be
brought in any state or federal court in the Commonwealth of Virginia and
hereby waive any objection which the Indemnitors may have to the laying of the
venue of any such action, suit, or proceeding in any such court; provided,
however, that the provisions of this Paragraph 13 shall not be deemed to
preclude GECC from filing any such action, suit, or proceeding in any other
appropriate forum.
14. THE INDEMNITORS AND GECC EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY
JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT UNDER THIS
INDEMNITY AGREEMENT OR ANY OTHER LOAN DOCUMENT RELATING HERETO AND AGREE THAT
ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A
JURY.
15. The parties hereto intend and believe that each provision in this
Agreement comports with all applicable local, state and federal laws and
judicial decisions. However, if any provision or provisions, or if any portion
of any provision or provisions, in this Agreement is found by a court of law to
be in violation of any applicable local, state or federal ordinance, statute,
law, administrative or judicial decision, or public policy, and if such court
should declare such portion, provision or provisions of this Agreement to be
illegal, invalid, unlawful, void or unenforceable as written, then it is the
intent of all parties hereto that such portion, provision or provisions shall
be given force to the fullest possible extent that they are legal, valid and
enforceable, that the remainder of this Agreement shall be construed as if such
illegal, invalid, unlawful, void or unenforceable portion, provision or
provisions were not contained therein, and that the rights, obligations and
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<PAGE> 9
interest of GECC or the successor in interest to GECC under the remainder of
this Agreement shall continue in full force and effect.
16. The liability of the Indemnitors under this Agreement shall be joint
and several.
17. Indemnitors acknowledge Borrower's obligation under the Deed of Trust
to maintain key person life insurance on the Paul Klaassen in an amount not
less than $20,000,000, and agree that Borrower's failure to so maintain such
policy or policies shall constitute an event of default under the terms of this
Agreement. Notwithstanding the foregoing, for a forty-five (45) day period
after the initial disbursement of the Loan, Borrower shall have the right to
deliver to GECC, in lieu of the Key Person Life Policy (as such term is defined
in the Mortgage), certificates of in-force life insurance policies on the lives
of Indemnitors in form and substance acceptable to GECC, which policies shall
designate GECC as the sole beneficiary thereunder and shall constitute the Key
Person Life Policy for the purposes of the Deed of Trust.
18. In the event the Debt Service Coverage Ratio (as defined in the Note)
falls below 1.25, Indemnitors shall deliver to GECC, as collateral for their
obligations under this Agreement, an unconditional and irrevocable letter of
credit (i) naming GECC as sole beneficiary, (ii) in an amount equal to two (2)
months interest on the Class (B) Indebtedness (as defined in the Note)
calculated at the then applicable Class B Contract Index Rate (as defined in
the Note), and (iii) bearing an expiration date not earlier than one (1) year
from the date of the initial disbursement of the Loan (such letter of credit,
as amended from time to time, together with any replacements or extensions
thereof, is referred to herein as the "Letter of Credit"). The Letter of
Credit shall be maintained in full force and effect and the expiration date
thereof extended until the repayment in full of the outstanding balance of the
Loan and all Participation Interest payable to GECC pursuant to the terms of
the Note. Each replacement or extension of the Letter of Credit shall be
unconditional, irrevocable and otherwise in form and substance satisfactory to
GECC in its sole discretion, shall bear an expiration date not less than one
(1) year following the date of issuance and shall be drawn on a United States
financial institution acceptable to GECC in its sole discretion. The Letter of
Credit may be drawn upon by GECC upon either (i) the occurrence of a default by
Indemnitors in the performance of their obligations under this Agreement or
that certain Hazardous Substances Indemnity Agreement, dated as of even date
herewith, by Indemnitors to and for the benefit of GECC, or (ii) the failure of
Borrower to replace or extend the Letter of Credit in accordance with the terms
of this Section 18 not less than thirty
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<PAGE> 10
(30) days prior to the expiration date of the Letter of Credit. The Letter of
Credit, to the extent not previously drawn against, will be released by GECC
upon the repayment of the Loan in full, including GECC's Participation Interest
(as defined in the Note). Notwithstanding the foregoing, GECC shall be under
no obligation to release the Letter of Credit, if, at the time of such proposed
release, GECC has notified Borrower or the Indemnitors of an unsatisfied
obligation of Indemnitors under this Agreement and such obligation remains
unsatisfied. The Letter of Credit shall specify that GECC may draw in full or
in part thereon by certifying to the issuer thereof that a breach of this
Agreement has occurred entitling GECC to draw thereunder.
19. Within ninety (90) days after the end of each fiscal year,
Indemnitors agree to furnish to GECC annual financial statements which are (i)
prepared in accordance with generally accepted accounting principles
consistently applied, (ii) in scope and detail satisfactory to GECC, and (iii)
certified to GECC by Indemnitors.
IN WITNESS WHEREOF, the Indemnitors have executed this Agreement as of the
date first written above.
/s/ PAUL J. KLAASSEN
------------------------
PAUL J. KLAASSEN
/s/ TERESA M. KLAASSEN
------------------------
TERESA M. KLAASSEN
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<PAGE> 1
EXHIBIT 10.4.2
FIRST LOAN MODIFICATION AGREEMENT
THIS FIRST LOAN MODIFICATION AGREEMENT ("Agreement") is made and
entered into as of this 15th day of February, 1996 by and between General
Electric Capital Corporation, a New York corporation ("Lender"), and Sunrise
Assisted Living Limited Partnership, a Virginia limited partnership
("Borrower").
RECITALS
A. Lender has made a loan in the maximum principal amount of
$95,000,000 (the "Loan") to Borrower. The Loan is evidenced by the Promissory
Note executed by Borrower dated June 8, 1994 in the maximum principal amount of
the Loan (the "Note") and secured by (i) the mortgages and deeds of trust all
executed by Borrower and dated June 8, 1994 listed on Schedule I attached
hereto (individually, a "Mortgage" and, collectively, the "Mortgages")
encumbering the real property and improvements legally described on EXHIBIT "A"
attached hereto, (ii) a Holdback Agreement dated June 8, 1994 executed by
Borrower and Lender (the "Holdback Agreement"), (iii) the Assignment of
Intangible Property, Contracts and Ancillary Documents dated June 8, 1994
executed by Borrower (the "Assignment"), (iv) the Indemnity Agreement
("Indemnity Agreement") and Hazardous Substances Indemnity (the "Hazardous
Substances Indemnity") both dated June 8, 1994 and executed by Paul J. Klaassen
and Teresa M. Klaassen and (v) such other documents and instruments as were
executed from time to time in connection with the Loan. The Note, the
Mortgages, the Holdback Agreement, the Assignment, the Indemnity Agreement, the
Hazardous Substances Indemnity Agreement and such other documents and
instruments executed from time to time in connection with the Loan (including
this Agreement), as amended from time to time, are collectively referred to
herein as the "Loan Documents". In connection with the Loan, Sunrise Terrace,
Inc., a Virginia corporation ("STI") executed and delivered to Lender a
Guaranty dated June 8, 1994 (the "Original STI Guaranty"). STI has previously
been released from all liability under the Original STI Guaranty. All
capitalized terms used herein shall have the respective meanings ascribed to
such terms in the Note, unless otherwise defined herein.
B. Borrower has requested the consent of Lender to acquire the site
located at 2863 and 2865 Hunter Mill Road, Oakton, Virginia (the "Hunter Mill
Site") and develop a facility (the "Hunter Mill Facility") on the Hunter Mill
Site consisting of approximately 75 assisted living units and related
facilities providing services to approximately 100 residents requiring a level
of care commonly referred to as "higher acuity elderly" and offering an
Alzheimer's disease and dementia care program that is complementary to the
program offered at the currently existing Property located in Oakton, Va.
Notwithstanding the provisions of Section 1.27 of the Mortgages encumbering the
Properties located in Oakton and Fairfax, Va. and Paragraph 11.04 of the
Management Services Agreement dated June 8, 1994 executed by Borrower and
Sunrise Terrace Inc. (the "Management Agreement"), Lender has agreed to consent
to the acquisition of the Hunter Mill Site and the development of the Hunter
Mill Facility subject to the terms and conditions set forth herein.
<PAGE> 2
C. Borrower has informed Lender that it intends to attempt to
consummate an IPO which would involve the public offering of shares in Sunrise
Assisted Living, Inc., a Virginia corporation ("SALI"), which is an Affiliate
of Borrower (the "SALI IPO").
D. Borrower and Lender desire to modify the terms and provisions of
the Loan Documents to reflect the foregoing and as otherwise set forth herein.
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
1. The foregoing recitals are hereby incorporated by reference
herein.
2. The obligation of Lender to enter into this Agreement and perform
its obligations hereunder shall be subject to the satisfaction by Borrower of
the following conditions precedent:
(a) Borrower shall provide to Lender an endorsement to the
title policies provided to Lender in connection with the Loan, in
form satisfactory to Lender, reflecting the execution, delivery and
recording of this Agreement in Fairfax County, Va. and showing no new
exceptions not approved by Lender;
(b) Borrower shall provide to Lender evidence satisfactory to
Lender of Borrower's authority to execute and deliver this Agreement,
including an opinion of Borrower's in-house counsel; and
(c) Borrower shall pay all costs and expenses incurred by
Lender in connection with this Agreement and the transactions to be
consummated pursuant to this Agreement, including attorney's fees and
expenses.
3. Notwithstanding the provisions of Section 1.27 of the Mortgages
encumbering the Properties located in Oakton and Fairfax, Va. and Paragraph
11.04 of the Management Agreement, Lender consents to the acquisition of the
Hunter Mill Site and the development of the Hunter Mill Facility (the "Hunter
Mill Consent"). The granting of the Hunter Mill Consent shall not be deemed to
be a course of dealing or a course of conduct and shall not constitute a waiver
of any term or provision of the Loan Documents, including the provisions of
Section 1.27 of the Mortgages and Paragraph 11.04 of the Management Agreement.
As a condition precedent to and as consideration for the granting of the Hunter
Mill Consent, Borrower and Lender agree to the following:
(i) Borrower shall cause STI to execute and deliver a Guaranty in
the form set forth
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<PAGE> 3
in Exhibit B attached hereto.
(ii) Borrower covenants and agrees that at all times prior to the
repayment in full of the Loan and all amounts owed pursuant to the Loan
Documents, including all amounts of Participation Interest, (i) Borrower shall
continue to own, operate and control, and STI or another Affiliate of Borrower
shall continue to manage, the Hunter Mill Facility, (ii) residents of the
Properties located in Fairfax and Oakton, Va. will not be solicited to move to
the Hunter Mill Facility, (iii) Borrower shall use its best efforts (and cause
STI to use its best efforts) to market and lease to residents the Properties
located in Fairfax and Oakton, Va., and (iv) Borrower shall not (and Borrower
shall cause STI not to) discourage prospective residents interested in the
Properties located in Fairfax and Oakton, Va., from pursuing residency at such
Properties or steer any such prospective residents to the Hunter Mill Facility.
The failure of Borrower to comply with the foregoing covenants and agreements
shall constitute an Event of Default under the Note and the other Loan
Documents.
4. The Note is hereby modified as follows:
(i) The following sentence shall be added to the end of the
definition of "Economic Value" appearing in the Note:
"Notwithstanding anything to the contrary set forth herein, if
"Economic Value" is determined at any time during which the
conditions set forth in Section 3.D.(l)(C) are not satisfied
and Participation Interest is not calculated based on the
amounts set forth in Section 3.D.(l)(C), then "Economic Value"
shall be calculated by assuming that occupancy at the
Properties located in Fairfax and Oakton, Va. is the greater of
(x) actual occupancy, or (y) ninety-five percent (95%)
occupancy."
(ii) Section 3.B.(ii) of the Note is hereby amended and restated in
its entirety as follows:
"(ii) In the event that the Debt Service Coverage Ratio is less than
1.25 for any six (6) consecutive month period ending on or
after September 30, 1996 and prior to the repayment in full of
the Outstanding Loan Balance (a "Debt Service Coverage
Shortfall"), then Borrower shall pay to GECC, commencing the
twenty-fifth day of the first calendar month following such
Debt Service Coverage Shortfall, and on the twenty-fifth day of
each calendar month thereafter until the Debt Service Coverage
Ratio equals or exceeds 1.25 for a six (6) consecutive month
period, an amount, to be applied to repay the Class B
Indebtedness (or, in the event the Class B Indebtedness has
been repaid prior to the repayment in full of the Class A
Indebtedness, to be applied to repay the Class A Indebtedness),
equal to the lesser of (a) one hundred percent (100%) of Net
Cash Flow for the calendar month immediately preceding the
month in
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which such payment is made, or (b) the amount required to fully
amortize, over a twenty-year period, the outstanding balance of
the Class A Indebtedness and the Class B Indebtedness existing
as of the date any such Debt Service Coverage Shortfall occurs.
The Debt Service Coverage Ratio existing from time to time
shall be determined or verified by GECC through audits
conducted pursuant to Section 23 of this Note. Borrower and
GECC agree that (i) no Mandatory Principal Payments shall be
owed by Borrower for any six (6) consecutive calendar month
period commencing prior to April 1, 1996 and ending prior to
September 30, 1996, and (ii) in calculating the Debt Service
Coverage Ratio pursuant to this Section 3.B.(ii) for a "six (6)
consecutive calendar month period," such calculation shall be
made on the basis of a single, aggregated period of six
consecutive calendar months rather than on the basis of six (6)
separate consecutive one calendar month periods (the latter
interpretation of the method of calculation which had been
proposed by Borrower and not agreed to by Lender)."
(iii) The following Section shall be added following Section 25
appearing in the Note:
"26. Indemnification. Borrower shall indemnify, defend
and hold Lender harmless from and against any and all losses,
liabilities, claims, damages and expenses incurred by Lender in
connection with the Loan or one or more of the Properties
arising from or relating to any claims of third parties, except
to the extent caused by Lender's gross negligence or willful
misconduct."
5. Borrower agrees that all costs and expenses incurred or rental
credits granted by Borrower in connection with building code and licensing
issues with respect to the Properties located in Sterling, Lorton and Fairfax,
Va. which were the subject of an adjusting journal entry in Borrower's
financial statements made in September, 1995 (affecting Borrower's financial
statements for prior months) shall be excluded from the calculation of Cash
Flow and Net Cash Flow for the Properties for the purpose of calculating Cash
Flow Interest. In addition, Borrower agrees that the amount of the Management
Fee (as defined in the Mortgages) to be included in the calculation of Total
Expenses for the Properties for the purpose of calculating Cash Flow Interest
through March 31, 1996 shall not exceed three percent (3%) of Revenues. The
parties acknowledge and agree that commencing on April 1, 1996, the amount of
the Management Fee (as defined in the Mortgage) that may be paid by Borrower
and, to the extent actually paid by Borrower, included in the calculation of
Total Expenses for the Properties for the purpose of calculating Cash Flow
Interest may be increased to an amount not to exceed five percent (5%) of
Revenues.
6. Borrower hereby confirms that the SALI IPO (or any variation
thereof) constitutes an "IPO" for the purposes of determining Participation
Interest pursuant to the terms of the Note and that, upon the occurrence of the
SALI IPO (or any variation thereof), the
-4-
<PAGE> 5
conditions set forth in Section 3.D.(1)(C) of the Note shall be deemed
satisfied and Participation Interest shall be calculated based on the amounts
set forth in Section 3.D.(1)(C) of the Note.
7. All references contained in any of the Loan Documents to any of
the other Loan Documents shall refer to such Loan Documents as amended herein.
In the event of any inconsistency between the terms of the Loan Documents and
the terms of this Agreement, the terms of this Agreement shall control. Except
as expressly modified or replaced pursuant to the terms of or as contemplated
by this Agreement, the Loan Documents are in full force and effect and are
hereby ratified and confirmed by Borrower and Lender.
8. This Agreement shall be binding upon and inure to the benefit
of Lender and Borrower, and their respective heirs, legal representatives,
successors and assigns subject to all limitations currently set forth in the
Loan Documents. This Agreement is not intended to benefit any party other than
the Borrower, the Lender, and the successors and assigns of the Lender and is
specifically not intended to be for the benefit of any party other than those
which are a party to this Agreement.
9. This Agreement may be executed in two or more counterparts,
each of which may be executed by one or more of the parties hereto, but all of
which, when taken together, shall constitute but one agreement.
10. The validity, meaning and effect of this Agreement shall be
determined in accordance with the laws of the Commonwealth of Virginia
applicable to contracts made to be performed in that State without regard to
principles of conflicts of law.
-5-
<PAGE> 6
11. Borrower's (and its partners') liability herewith is limited as
set forth in Section 17 of the Note and Section 17 of the Note is hereby
incorporated by reference as if fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this document as
of the day and year first above written.
BORROWER:
SUNRISE ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia
limited general partnership
By: Sunrise Assisted Living Investments, Inc. a Virginia
corporation, its general partner
By: /s/ PAUL J. KLAASSEN
----------------------------
Its President
--------------------------
LENDER:
GENERAL ELECTRIC CAPITAL CORPORATION, a New York
corporation
By: /s/ ROBERT C. SKELLY
----------------------------
Its Project Manager
--------------------------
Prepared by and after
recording return to:
Gary Fox, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
-6-
<PAGE> 7
STATE OF VIRGINIA )
) SS:
COUNTY OF FAIRFAX )
Before me, a Notary Public, in and for said County and State,
personally appeared Paul J. Klaassen, the President of SUNRISE ASSISTED LIVING
INVESTMENTS, INC., a Virginia corporation, the general partner of SUNRISE
ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership, and
acknowledged the execution of the foregoing instrument on behalf of the
corporation, as such general partner.
WITNESS my hand and Notarial Seal this 15th day of February, 1996.
/s/ LINDA BOLINO
---------------------------------
Signature
LINDA BOLINO
---------------------------------
Printed Name
My Commission Expires:
12/31/96
- ---------------------
-7-
<PAGE> 8
STATE OF PENNSYLVANIA )
) SS:
COUNTY OF PHILADELPHIA )
Before me, a Notary Public, in and for said County and State,
personally appeared Robert C. Skelly, the Proj. Mgr. of GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation, and acknowledged the execution of
the foregoing instrument on behalf of the corporation.
WITNESS my hand and Notarial Seal this 20th day of February, 1996.
/s/ CATHERINE C. KELLY
--------------------------------------------
Signature Notarial Seal
[NOTARIAL SEAL] Catherine C. Kelly, Notary Public
Philadelphia, Philadelphia County
My Commission Expires Feb. 10, 1997
--------------------------------------------
Member, Pennsylvania Association
of Notaries
Printed Name
My Commission Expires:
2-10-97
- ---------------------
-8-
<PAGE> 1
EXHIBIT 10.4.3
SECOND LOAN MODIFICATION AGREEMENT
THIS SECOND LOAN MODIFICATION AGREEMENT ("Agreement") is made and
entered into as of this 1st day of May, 1996 by and between General Electric
Capital Corporation, a New York corporation ("Lender"), and Sunrise Assisted
Living Limited Partnership, a Virginia limited partnership ("Borrower").
RECITALS
A. Lender has made a loan in the maximum principal amount of
$95,000,000 (the "Loan") to Borrower. The Loan is evidenced by the Promissory
Note executed by Borrower dated June 8, 1994 in the maximum principal amount of
the Loan (the "Note") and secured by (i) the mortgages and deeds of trust all
executed by Borrower and dated June 8, 1994 listed on Schedule I attached
hereto (individually, a "Mortgage" and, collectively, the "Mortgages")
encumbering the real property and improvements legally described on EXHIBIT "A"
attached hereto, (ii) a Holdback Agreement dated June 8, 1994 executed by
Borrower and Lender (the "Holdback Agreement"), (iii) the Assignment of
Intangible Property, Contracts and Ancillary Documents dated June 8, 1994
executed by Borrower (the "Assignment"), (iv) the Indemnity Agreement
("Indemnity Agreement") and Hazardous Substances Indemnity (the "Hazardous
Substances Indemnity") both dated June 8, 1994 and executed by Paul J. Klaassen
and Teresa M. Klaassen and (v) such other documents and instruments as were
executed from time to time in connection with the Loan. In connection with the
Loan, Sunrise Terrace, Inc., a Virginia corporation ("STI") executed and
delivered to Lender a Guaranty dated June 8, 1994 (the "Original STI
Guaranty"). STI has previously been released from all liability under the
Original STI Guaranty. The Note, the Mortgages, the Holdback Agreement, the
Assignment, the Indemnity Agreement, the Hazardous Substances Indemnity
Agreement and such other documents and instruments executed from time to time
in connection with the Loan (including the First Amendment, the Second STI
Guaranty, as such terms are hereinafter defined, and this Agreement), as
amended from time to time, are collectively referred to herein as the "Loan
Documents".
B. The Loan Documents were amended pursuant to the terms of the
First Loan Modification Agreement (the "First Amendment") dated as of February
15, 1996 executed by Borrower and Lender. Pursuant to the First Amendment, STI
executed and delivered to Lender a Guaranty (the "Second STI Guaranty") dated
as of February 15, 1996. All capitalized terms used herein shall have the
respective meanings ascribed to such terms in the Note, unless otherwise
defined herein.
C. Borrower has informed Lender that it intends to attempt to
consummate an IPO which would involve the public offering of shares of common
stock of Sunrise Assisted Living, Inc., a Delaware corporation ("SALI"), which
is an Affiliate of Borrower (the "SALI IPO"). In connection with the SALI IPO,
Borrower and Lender have agreed to consummate the transactions described in
this Agreement and modify the Loan Documents as set forth in this Agreement,
subject to the terms and conditions set forth in this Agreement.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
1. The foregoing recitals are hereby incorporated by reference herein.
2. On the date (the "Closing Date") which is two (2) business days
following the earliest date upon which the underwriters in the SALI IPO
deliver the proceeds of the SALI IPO to SALI (which is anticipated to occur not
later than July 31, 1996), Borrower agrees to make the payments described in
subsections (a), (b) and (f) immediately below (collectively, the "Payments")
and provide to Lender the items described in subsections (c), (d) and (e)
immediately below (collectively, the "Closing Deliveries"):
(a) Borrower shall pay to Lender, in immediately
available funds (simultaneously with the Class B Indebtedness
Payment, as hereinafter defined), as payment in full of (1)
Cash Flow Interest accruing under the Note from and after
the Closing Date (but not Cash Flow Interest accruing
prior to the Closing Date, which shall remain payable by
Borrower pursuant to the terms of the Note, whether or not
the amount of such Cash Flow Interest is due and owing as
of the Closing Date), and (2) all Participation Interest due
and payable pursuant to the Note, the sum (the "Participation
Interest Payment") of (i) the amount of $8,633,000, and
(ii) the product of (x) $2,956, multiplied by (y) the
number of days following June 7, 1996 upon which
the Participation Interest Payment is paid to Lender and all
other conditions precedent set forth in this Agreement are
satisfied in full.
(b) Borrower shall pay to Lender, in immediately
available funds (simultaneously with the Participation
Interest Payment), the amount of $8,000,000 (the "Class
B Indebtedness Payment"), to be applied to repay a portion of
the Class B Indebtedness.
(c) Borrower shall execute and deliver to Lender an
amended and restated promissory note, in form and substance
satisfactory to Lender, evidencing the Loan (the "Amended
and Restated Note") which shall (i) contain the modifications
and terms specifically described in Paragraph 3 below, and
(ii) otherwise be in form and substance identical to the Note.
(d) Borrower shall provide to Lender an endorsement
to the title policies provided to Lender in connection
with the Loan, in form satisfactory to Lender, reflecting
the execution, delivery and recording of this Agreement in
the recorder's offices where each of the Mortgages were
recorded and showing no new exceptions not approved by
Lender;
-2-
<PAGE> 3
(e) Borrower shall provide to Lender evidence
satisfactory to Lender of Borrower's authority to execute
and deliver this Agreement, including an opinion of
Borrower's in-house counsel; and
(f) Borrower shall pay all costs and expenses
incurred by Lender in connection with this Agreement and
the transactions to be consummated pursuant to this
Agreement, including attorney's fees and expenses.
3. On the Closing Date, the Note shall be amended and restated in
its entirety by the Amended and Restated Note, which shall contain the
following modifications to the terms of this Note:
(i) The obligation of Borrower to pay (1) Cash Flow
Interest accruing under the Note from and after the Closing
Date (but not Cash Flow Interest accruing prior to the Closing
Date, which shall remain payable by Borrower pursuant to the
terms of the Note, whether or not the amount of such Cash
Flow Interest is due and owing as of the Closing Date), and
(2) Participation Interest currently set forth in the Note
shall be deemed fully satisfied and all provisions of the
Note relating to the payment and calculation of Cash Flow
Interest and Participation Interest shall be deleted from the
Amended and Restated Note.
(ii) The amount of the Class B Indebtedness to be
evidenced by the Amended and Restated Note shall be reduced
by the amount of the Class B indebtedness Payment:
(iii) The Class B Contract Index Rate contained in
the Amended and Restated Note applicable to the Class B
Indebtedness shall be reduced from the rate currently set
forth in the Note so as to equal three and three-quarters
percent (3.75%) per annum in excess of the Libor Rate.
(iv) The restrictions on prepayment of the Class B
Indebtedness currently set forth in Section 6.B of the Note
shall be modified so as to permit prepayment of the Class B
Indebtedness in whole or in part upon thirty days prior
written notice to Lender.
4. The obligations and agreements of Lender to (i) modify the Loan
Documents as set forth in this Agreement, and (ii) accept the Participation
Interest Payment in full satisfaction of Borrower's obligations to pay Cash
Flow Interest accruing from and after the Closing Date and Participation
Interest pursuant to the Note, shall at Lender's option terminate and be of no
further force or effect if: (A) the Closing Date has not occurred, and
Lender has not received the Payments and the Closing Deliveries, on or before
July 31, 1996, or (B) there exists any Event of Default on the Closing
Date.
5. The failure of Borrower to, not later than the Closing Date,
perform its obligations under this Agreement to (i) pay in full to Lender all
of the Payments, and (ii)
-3-
<PAGE> 4
provide to Lender the Closing Deliveries, in accordance with the terms of this
Agreement, shall constitute an Event of Default under the Loan Documents.
6. Upon the occurrence of the Closing Date, (i) all references contained
in any of the Loan Documents to the Note shall be deemed to refer to the
Amended and Restated Note, and (ii) in the event of any inconsistency between
the terms of the Loan Documents and the terms of this Agreement, the terms of
this Agreement shall control. Except as expressly modified or replaced
pursuant of the terms of or as contemplated by this Agreement, the Loan
Documents are in full force and effect and are hereby ratified and confirmed by
Borrower and Lender.
7. This Agreement shall be binding upon and inure to the benefit of
Lender and Borrower, and their respective heirs, legal representatives,
successors and assigns subject to all limitations currently set forth in the
Loan Documents. This Agreement is not intended to benefit any party other than
the Borrower, the Lender, and the successors and assigns of the Lender and is
specifically not intended to be for the benefit of any party other than those
which are a party to this Agreement.
8. This Agreement may be executed in two or more counterparts, each of
which may be executed by one or more of the parties hereto, but all of which,
when taken together, shall constitute but one agreement.
9. The validity, meaning and effect of this Agreement shall be
determined in accordance with the laws of the Commonwealth of Virginia
applicable to contracts made to be performed in that State without regard to
principles of conflicts of law.
-4-
<PAGE> 5
10. Borrower's (and its partners') liability hereunder is limited as
set forth in Section 17 of the Note and Section 17 of the Note is hereby
incorporated by reference as if fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this document as
of the day and year first above written.
BORROWER:
SUNRISE ASSISTED LIVING LIMITED
PARTNERSHIP, a Virginia limited general
partnership
By: Sunrise Assisted Living Investments, Inc.
a Virginia Corporation, its general partner
By: [sig]
--------------------------------
Its: EVP
----------------------------
LENDER:
GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation
By: /s/ ROBERT C. SKELLY
--------------------------------
Its: AUTHORIZED SIGNATORY
--------------------------
Prepared by and after
recording return to:
Gary Fox, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
-5-
<PAGE> 6
STATE OF VIRGINIA )
) SS:
COUNTY OF FAIRFAX )
Before me, a Notary Public, in and for said County and State,
personally appeared David Faeder, the Exec. V.P. of SUNRISE ASSISTED LIVING
INVESTMENTS, INC., a Virginia corporation, the general partner of SUNRISE
ASSISTED LIVING LIMITED PARTNERSHIP, a Virginia limited partnership, and
acknowledged the execution of the foregoing instrument on behalf of the
corporation, as such general partner.
WITNESS my hand and Notarial Seal this 1st day of May, 1996
/s/ LINDA BOLINO
--------------------------
Signature
Linda Bolino
--------------------------
Printed Name
My Commission Expires:
12/31/96
- ---------------------
-6-
<PAGE> 7
STATE OF PENNSYLVANIA )
) SS:
COUNTY OF PHILADELPHIA )
Before me, a Notary Public, in and for said County and State,
personally appeared Robert Skelly, the authorized signatory of GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation, and acknowledged the
execution of the foregoing instrument on behalf of the corporation.
WITNESS my hand and Notarial Seal this 1st day of May, 1996.
/s/ CATHERINE C. KELLY
----------------------------
Signature
Catherine C. Kelly
-----------------------------
Printed Name
My Commission Expires:
2-10-97
- ---------------------
-7-
<PAGE> 1
EXHIBIT 10.4.4
[GE CAPITAL LETTERHEAD]
May 1, 1996
VIA FEDERAL EXPRESS
Sunrise Assisted Living Limited Partnership
c/o Sunrise Retirement Homes and Communities
9401 Lee Highway #300
Fairfax, Virginia 22031
Attn: Thomas Newell
Re: $95,000,000 loan (the "Loan") to Sunrise Assisted Living
Limited Partnership ("SALLP") from General Electric Capital
Corporation ("GECC") with respect to 12 assisted living
properties (the "Properties").
Dear Tom,
This letter is in response to your correspondence dated February 23,
1996 regarding the anticipated initial public offering of shares of common
stock of Sunrise Assisted Living, Inc. ("SALI"), the 99% limited partner of
SALLP and the 100% owner of the stock of Sunrise Assisted Living Investments,
Inc., the general partner of SALLP (the "SALI IPO").
Effective upon consummation of the SALI IPO, and provided there exists
no event of default under the Loan (including without limitation, the Second
Loan Modification of even date herewith) at such time, GECC hereby confirms
that following the initial public offering of shares in SALI, SALI will
constitute a "Permitted Owner" (as such term is defined in Section 1.23 of the
mortgages and deeds of trust securing the Loan), subject to the continuing
satisfaction of the conditions set for the below at all times prior to the
repayment in full of the Loan and all amounts owed to GECC in connection
therewith:
(i) Paul J. Klaassen and/or Teresa Klaassen shall serve in the
capacity of Chairman of the Board of Directors and President of SALI, and the
by-laws of SALI shall provide that the Chairman of the Board of Directors and
President of SALI shall have all attendant rights, powers and responsibilities
customarily incident to such positions, and the certificate of incorporation
of SALI and any shareholder agreements or other documents entered into by or
binding on SALI, Paul J. Klaassen or Teresa Klaassen will not contain any
contradictory provisions;
<PAGE> 2
Sunrise Assisted Living Limited Partnership
May, 1, 1996
Page 2
(ii) Paul J. Klaassen and/or Teresa Klaassen shall retain
ownership of at least 25% of the shares of common stock of SALI outstanding
from time to time, with the full unrestricted authority and right to freely
vote such shares, including, without limitation, in connection with the
election of members of the Board of Directors of SALI;
(iii) The by-laws of SALI shall provide that the election
of the Board of Directors of SALI shall be determined on the basis of a
plurality vote, and the certificate of incorporation of SALI and any
shareholder agreements or other documents entered into by or binding on SALI,
Paul J. Klaassen or Teresa Klaassen will not contain any contradictory
provisions; and
(iv) There shall exist no terms or provisions in the certificate of
incorporation and by-laws of SALI, or in any shareholder agreements or other
documents entered into by or binding upon SALI, Paul J. Klaassen or Teresa
Klaassen, restricting the authority or right of any shareholders of SALI to
freely vote their shares, including, without limitation, in connection with
the election of members of the Board of Directors of SALI.
In the event that one or more of the conditions set forth above are
not satisfied at any time prior to the repayment in full of the Loan and all
amounts owed to GECC in connection therewith, SALI shall not constitute a
"Permitted Owner" (as such term is defined in Section 1.23 of the mortgages and
deeds of trust securing the Loan) and GECC reserves all rights and remedies
available to it under applicable law and pursuant to the documents evidencing,
securing and setting forth the terms of the Loan (the "Loan Documents") as a
result of a transfer to a person or entity which is not a "Permitted Owner" in
violation of Section 1.23 of the mortgages and deeds of trust securing the
Loan.
This consent shall, at Lender's option, terminate and be of no further
force or effect if the SALI IPO is not consummated on or before July 31, 1996.
This letter and the agreements of GECC contained herein shall not
constitute (i) a waiver, release, amendment or modification of any of the
terms and provisions of the Loan Documents, including, without limitation,
Section 1.23 of the mortgages and deeds of trust securing the Loan, or (ii) a
course of conduct, dealing or performance.
Very Truly Yours,
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/Robert C. Skelly
-------------------
R.C. Skelly
<PAGE> 1
EXHIBIT 10.22
NATIONSBANK
March 26, 1996
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
9401 Lee Highway, Suite 300
Fairfax, Virginia 22031
Attention: Mr. David W. Faeder
Chief Financial Officer
Re: $80,000,000 Syndicated Line of Credit for Construction/
Interim Loans (the "Credit Facility") from NationsBank,
N.A. to an Entity to be Formed by Sunrise Assisted Living,
Inc.
Ladies and Gentlemen:
NationsBank, N.A. (the "Lender") is pleased to inform you that your
request for the above-referenced Credit Facility has been approved, upon
satisfaction of and subject to each of the terms and conditions hereinafter set
forth:
1. THE BORROWER: Provided the syndication of the Credit Facility is
completed subject to the provisions of Paragraph 3 hereof, the Credit Facility
shall be made available to a wholly-owned subsidiary to be formed by Sunrise
Assisted Living, Inc., a Delaware corporation (the "Borrower").
2. AGGREGATE PRINCIPAL AMOUNT: The Credit Facility shall be in the
aggregate amount of Eighty Million Dollars ($80,000,000) or so much thereof as
may be advanced to or for the account of the Borrower pursuant to up to ten
(10) Loans (as hereinafter defined).
3. SYNDICATION OF CREDIT FACILITY: The Lender's commitment to make the
Credit Facility available to the Borrower pursuant to the terms of this
commitment is expressly conditioned upon each and all of the following: (a) the
Lender shall have obtained the commitment of one or more additional banks
either to participate in or act as a co-lender for the Credit Facility on a pro
rata basis (the "Bank Group"), (b) the Lender's share of the Credit Facility
maximum amount will not exceed $18,000,000 and (c) the Lender shall serve as
agent for itself and all other such banks under the terms of an agreement which
shall be in all respects satisfactory to the Lender.
4. MASTER CREDIT FACILITY AND PROJECT LOANS: The Credit Facility will be
composed of a master facility pursuant to which
<PAGE> 2
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 2
individual construction/interim loans (each, a "Loan," collectively, the
"Loans") will be made to the Borrower to finance the construction and lease-up
phases of each of not more than ten (10) assisted living facilities or
independent living facilities (each a "Project," collectively, the "Projects")
taken from among the list of twelve (12) possible Projects located in Virginia,
Pennsylvania, New Jersey, Massachusetts and Maryland and listed on Exhibit A
attached hereto. All of the twelve Projects will be pre-approved for a Loan
pursuant to the conditions of closing the Credit Facility (as set forth herein)
and the Borrower will be permitted to select the ten (10) projects for which
Loans will be made under the Credit Facility. The maximum amount of each Loan
will be the lesser of (a) eighty percent (80%) of the cost of the applicable
Project as verified by the Lender or (b) seventy-five percent (75%) of the
appraised value. All Loans under the Credit Facility and all other obligations
in connection with the Credit Facility shall be cross-collateralized and
cross-defaulted in all respects.
5. INTEREST RATE INCENTIVE PRICING: Interest on the entire outstanding
principal balance of each Loan shall accrue and be payable at whichever of the
following interest rates is applicable at a floating rate equal to the daily
London Interbank Offered Rate for three-month U.S. Dollar deposits as quoted by
the Lender as of 11:00 A.M. (Baltimore time), which rate shall be adjusted for
any Federal Reserve Board reserve requirements imposed upon the Lender from
time to time (the "LIBOR Rate") plus that certain number of basis points per
annum applicable pursuant to the conditions set forth below. Interest shall be
computed for the actual number of days which have elapsed from the date of each
advance of a portion of the Loan proceeds calculated on the basis of a 360-day
year.
<TABLE>
<CAPTION>
PERIOD/PRE-CONDITIONS RATE
--------------------- ----
<S> <C>
(a) Construction Phase/Lease-Up LIBOR Rate
Phase. (Defined as the period from plus 290 basis
the applicable Loan Closing until points
the Project satisfies one of the
sets of pre-conditions to a rate
change set forth below).
(b) Stabilization Phase I. (Defined LIBOR Rate
as the period following three (3) plus 250 basis
consecutive calendar months with points
a minimum Resident Occupancy of
80% and a minimum ratio of EBITDA
(as hereinafter defined), for the
same three-month period, to
Debt Service (as hereinafter defined)
for the same three-month
</TABLE>
<PAGE> 3
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 3
<TABLE>
<S> <C>
period (calculated on a fully
amortizing basis at a Treasury Rate
constant to be negotiated with the
Borrower) of not less than 1.15 to 1.0.
(c) Stabilization Phase 2. (Defined LIBOR Rate
as the period following completion plus 190 basis
of the Guarantor's initial public points
offering ("IPO"), provided such IPO
raises at least $70,000,000 in net
proceeds, and achievement of a ratio
of Funded Debt (as hereinafter
defined) to EBITDA for the prior 12-
month period, of between 5.0 and
6.0 to 1.0).
(d) Stabilization Phase 3. (Defined LIBOR Rate
as the period following completion plus 170 basis
of the Guarantor's IPO, provided points
such IPO raises at least $70,000,000
in net proceeds and achievement of
a ratio of Funded Debt to EBITDA for
the prior 12-month period of less
than 5.0 to 1.0).
</TABLE>
6. AMORTIZATION: Principal and interest shall be due and payable monthly
during the term of each Loan as follows:
(a) Interest only on the outstanding principal balance of the Loan
shall be due and payable on the fifteenth (15th) day of the first (1st) month
following the Loan Closing (as hereinafter defined) and on the fifteenth (15th)
day of each and every month thereafter for a total of twenty-four (24)
consecutive months; and
(b) Commencing on the fifteenth (15th) day of the twenty-fifth
(25th) month following the Loan Closing and continuing on the fifteenth (15th)
day of each and every month thereafter for a total of thirty-six (36)
consecutive additional months (or such fewer number of months as may be
applicable under the particular Loan in question), principal shall be due and
payable based on a twenty (20) year straight-line amortization schedule applied
to the principal sum then outstanding; and
(c) The outstanding principal balance of the Loan and all accrued
and unpaid interest thereon shall be due and owing at the applicable Maturity
Date.
7. MATURITY: Each Loan shall mature and the entire principal balance of
the Loan, together with all accrued and unpaid interest
<PAGE> 4
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 4
thereon, shall be due and payable on a date (each a "Maturity Date") which is
up to sixty (60) months from the date of the execution and delivery of the
documents evidencing and securing the applicable Loan (the "Loan Closing")
provided, however, that the Maturity Date will be not later than the date which
is sixty (60) months following the execution of the Master Note, the
Construction Loan Agreement and the Financing Agreement (the "Facility
Closing").
8. PURPOSE AND APPLICATION OF LOAN PROCEEDS: The sole purpose of each
Loan shall be to (a) finance the acquisition by the Borrower of the land which
is the site of such (the "Premises"), (b) to finance the construction on the
Premises of a Project containing between 57 and 79 residential units and common
facilities and consisting of approximately 54,000 to 57,000 square feet of
space, more or less (the "Improvements"; each Premises and its Improvements
being hereinafter collectively referred to as a "Property") and (c) the
advancing of the Operating Reserve (as hereinafter defined). Unless otherwise
agreed to by the Lender and to the extent specifically permitted by the Lender,
the proceeds of each Loan shall be advanced by the Lender to the Borrower for
the payment of the following costs and expenses of the Borrower related to the
development of the Premises and the construction of the Improvements and for no
other purpose: (a) for the payment of interest when due without further
authorization or consent of the Borrower; (b) for the actual cost of the
Premises and all labor, services, materials, supervision, construction fees and
the like reasonably incurred by the Borrower in connection with the
construction upon the Premises of the Improvements in accordance with the plans
and specifications to be approved by the Lender; (c) for the actual cost of
pre-opening expenses and operations of the Project to the extent of operating
deficits; and (d) for the actual cost of commitment fees, extension fees,
appraisal fees, closing or settlement costs, fees of attorneys, engineers,
architects and accountants, insurance and bond premiums, ad valorem real estate
taxes and other costs directly related to the development of the Premises and
the construction of the Improvements.
9. SECURITY FOR THE CREDIT FACILITY: (a) Collateral. The Credit
Facility shall be secured by all of the following property and assets of the
Borrower, wherever situated (the "Collateral"):
(i) a first lien deed of trust or mortgage, as applicable,
(individually, a "Deed of Trust," collectively, the "Deeds of Trust") on the
fee simple interest held by the Borrower in each of the Premises and each
Project and all other Improvements now or hereafter located thereon;
(ii) a first lien security interest in all fixtures, building
materials and all other machinery, equipment and other
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March 26, 1996
Page 5
personalty used or installed by the Borrower on each of the Premises or in the
Improvements constructed thereon;
(iii) an assignment by the Borrower of all of its right, title and
interest on and to any and all leases and subleases of each Property
(collectively, the "Leases"), if any, and all rents, income, and profits
arising out of or connected with each Property;
(iv) an assignment by the Borrower of all of its right, title and
interest under all construction, architectural and design contracts and plans
and specification;
(v) a first lien security interest in all of the following property
to the extent permitted by law:
(A) all accounts pertaining to the Property (or any part
thereof), whether now owned or hereafter created or acquired by the Borrower,
and all proceeds and products of such accounts (the "Accounts"), including, but
not limited to, accounts receivable from insurance carriers, Medicare,
Medicaid, the Veterans Administration and private accounts into which the
proceeds of all or any portion of the Accounts may be now or hereafter
deposited;
(B) all general intangibles pertaining to the Property (or any
part thereof), whether now owned or hereafter acquired by the Borrower, and all
proceeds and products of such general intangibles;
(C) all chattel paper pertaining to each Property (or any part
thereof), whether now owned or hereafter acquired by the Borrower, and all
proceeds and products of such chattel paper;
(D) all inventory, whether now owned or hereafter acquired by
the Borrower and located on the Premises or in the Improvements, and all
proceeds and products of such inventory; and
(E) all notes, notes receivable, drafts, acceptances and
similar instruments and documents, both now owned and hereafter created or
acquired with respect to the Property (or any part thereof);
(vi) an assignment of all right, title and interest of the Borrower
in and to the management contract by and between the Borrower and Sunrise
Terrace, Inc., a Virginia corporation (the "Management Company"), with respect
to the management of each Project (each "Management Contract," collectively,
the "Management Contracts"), and any and all other management contracts and
operating agreements now or hereafter entered into by the Borrower with respect
to the management, operation or use of the Project;
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March 26, 1996
Page 6
(vii) an assignment to the extent permitted by law of all right,
title and interest of the Borrower or the Management Company, as applicable, in
and to any and all service agreements, employment contracts, physician
contracts and participation agreements and any other agreements pertaining to
the Property or services to be performed in connection with the operation of
the Project; and
(viii) an assignment to the extent permitted by the Borrower of its
rights under any and all resident agreements (collectively, the "Resident
Agreements") and residence fees pertaining to each Property and in connection
with the operation of the Project; and
(ix) an assignment to the extent permitted by law by the Borrower of
its right (if any) to receive payment under all third-party payor contracts, if
any, other than Medicare and Medicaid; and
(x) an assignment of all right, title and interest of the Borrower
in and to all licenses, operating permits and other governmental
authorizations, including but not limited to any certificate of need issued to
the Borrower or any Project, necessary or desirable to the operation of each
Project as an assisted living facility under applicable law (the "Licenses").
(b) Pledge of Stock. In addition, the Guarantor (as hereinafter
defined), which is or shall be the owner of one-hundred percent (100%) of the
stock in the Borrower, shall pledge, assign and deliver such stock (the
"Stock") to Lender as security for repayment of the Loans. The term
"Collateral" as used in this Commitment shall mean and include the Stock.
10. MANAGEMENT AGREEMENT: Prior to the Credit Facility Closing, the
Borrower shall provide the Lender with a proposed form of management agreement
(the "Management Agreement") to be entered into by the Borrower with the
Management Company. The terms and provisions of the Management Agreement shall
be fully approved by the Lender prior to closing. The interest of the Borrower
in the Management Agreement shall be assigned to the Lender as security for the
Credit Facility. Payment of all management fees to the Management Company
pursuant to the Management Agreement (the "Management Fees") shall be
subordinate to the Borrower's obligations under the Financing Documents,
however, payments of Management Fees may be made as contracted for until the
occurrence of an Event of Default (as it shall be defined in the Financing and
Security Agreement to be executed in connection with the Credit Facility). The
Management Agreement shall provide that the Borrower may terminate such
agreement, at the discretion of the Borrower, upon thirty (30) days' prior
written notice to the Management Company; the Management Company shall
acknowledge and consent in
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March 26, 1996
Page 7
writing to the assignment by the Borrower of its rights under the Management
Agreement to the Lender. Pursuant to the Financing Documents, the Borrower
shall agree to enter into a management agreement with an independent manager,
acceptable to the Lender in its reasonable discretion, as and when directed by
the Lender if the Management Agreement has been terminated pursuant to the
immediately preceding sentence; and it shall constitute an Event of Default (as
defined in the Financing Documents) under the Loan Documents if the Borrower
fails to do so.
11. GUARANTIES: Sunrise Assisted Living, Inc., a Delaware corporation
("SALI") (the "Guarantors") shall unconditionally and irrevocably, guaranty
repayment of the Loans and completion of the Borrower's obligations under the
Financing Documents (as hereinafter defined) pursuant to the terms of a
guaranty of payment (the "Payment Guaranty") and a guaranty of completion
(collectively with the Payment Guaranty, the "Guaranties"), each satisfactory
to the Lender, to be executed at the time of the Facility Closing by the
Guarantor in favor of the Lender. The Guaranties shall include a waiver of
jury trial clause.
PURSUANT TO THE GUARANTIES, THE GUARANTOR SHALL AGREE THAT UPON THEIR
FAILURE TO PAY ANY LOAN OR OTHER OBLIGATIONS UNDER THE FINANCING AGREEMENT OR
THE CONSTRUCTION LOAN AGREEMENT EXECUTED IN CONNECTION THEREWITH AND/OR THE
OTHER FINANCING DOCUMENTS WHEN AND AS THE SAME ARE DUE AND PAYABLE, AN
ATTORNEY-IN-FACT SHALL BE AUTHORIZED TO APPEAR FOR THE GUARANTOR AND CONFESS
JUDGMENT AGAINST THE GUARANTOR FOR THE SUMS THEN DUE, TOGETHER WITH INTEREST,
COURT COSTS AND ATTORNEYS' FEES EQUAL TO FIFTEEN PERCENT (15%).
The Lender will provide the Borrower and the Guarantor with a side letter
regarding the attorney's fees to be collected in connection with such confessed
judgment.
12. PREPAYMENT: The Borrower shall have the right to prepay any Loan in
full or in part, at any time and from time to time, upon fifteen (15) days'
prior written notice to the Lender without premium or penalty. Unless an Event
of Default has occurred, any partial prepayment shall be applied first to
accrued and unpaid interest next to the outstanding principal balance of the
Loan due and owing at maturity, and thereafter, when applicable, to the unpaid
principal installments in the inverse order of maturity. The foregoing
notwithstanding, the Borrower may fully prepay no less than three (3) Loans at
any one time and at no time prior to the repayment in full and termination of
the Credit Facility shall there be fewer than four (4) Loans outstanding and
four (4) Properties securing the Credit Facility.
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March 26, 1996
Page 8
13. COMMITMENT FEE AND LOAN ADMINISTRATION FEES: The obligation of the
Lender and the other participants in the bank group to make the Credit Facility
available shall be contingent upon the Borrower's payment to the Lender of a
non-refundable commitment fee in the amount of fifty (50) basis points $400,000
which shall be considered earned upon acceptance of this commitment but which
shall be due and payable one-half at the Facility Closing and one-half at the
earlier of (a) the date which is 18 months after the Facility Closing or (b) on
a pro rata basis at each Loan Closing occurring after the Facility Closing;
provided, that any remaining unpaid commitment fee shall be paid on the date
which is eighteen (18) months following the Facility Closing. The payment of
this fee in no way lessens the Borrower's obligation to close the Credit
Facility in accordance with the terms of this commitment. If the Credit
Facility is not closed for any reason except a reason beyond the Borrower's
control, the commitment fee payable pursuant to this Paragraph 13 will be
reduced to $200,000, plus any out-of-pocket expenses of the Lender incurred
pursuant to Paragraph 14. Such reduced fee shall be deemed to be compensation
to the Lender for its issuance of this commitment and its participation in the
financing described herein and is in addition to all costs required to be paid
by the Borrower pursuant to Paragraph 14 of this commitment letter.
Simultaneously with the making of each Loan, the Borrower shall pay a loan
administration fee to the Lender in the amount of $3500.
14. EXPENSES: The Borrower's acceptance of the commitment shall
constitute its unconditional agreement to pay all reasonable fees, commissions,
costs, charges, taxes, travel expenses and other expenses incurred by the
Lender and/or any member of the Bank Group in connection with this commitment
and the making available of the Credit Facility, whether or not the Credit
Facility closes, including but not limited to, fees and expenses of counsel for
the Lender and any member of the Bank Group, appraisal fees, fees of Inspecting
Engineers (as hereinafter defined), fees and charges for surveys, environmental
audits, examination of title to each of the Premises and mortgagee title
insurance thereon, insurance and bond premiums, mortgage taxes, transfer taxes
and all recording fees and charges.
15. APPRAISALS: (a) The Lender's obligation to make available the Credit
Facility shall be subject to the receipt by the Lender of an appraisal of each
Property from an appraiser designated by the Lender. The basis of the
appraisal calculation shown on the appraisal report and all other aspects of
the appraisal report must be satisfactory to the Lender in all respects. The
appraisal report shall not be released by the Lender to the Borrower unless the
Borrower signs the Lender's standard appraisal release form. The Borrower
shall reimburse the Lender for all costs and expenses
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March 26, 1996
Page 9
incurred by the Lender in connection with the preparation and review of such
appraisal.
(b) In addition, the Lender shall have the right but not the
obligation to require annual updated appraisals of any or all of the Projects,
which appraisals shall be prepared by an appraiser or appraisers designated by
the Lender and shall be in all respects acceptable to the Lender which
appraisals shall include, if deemed necessary by the Lender, in its sole
discretion, updated discounted cash flow analysis, inspections of and
commentary on the physical status of the applicable Project and an engineering
review. Each of such appraisals, when reviewed by the Lender, must indicate a
value in the Property such that the sum of then current outstanding principal
balance of the Loan for such Project plus any amount then remaining to be
advanced under the applicable Note (as hereinafter defined) does not exceed
seventy-five percent (75%) of the actual appraised value of the Property, as
determined by the Lender. The basis of the appraisal calculations shown on
such appraisal reports and all other aspects of the appraisal reports must be
satisfactory to the Lender in all respects. The release of such appraisal
reports by the Lender to the Borrower shall be at the Lender's sole option if
the Borrower has not paid the cost of such appraisal. If the Borrower has paid
the cost of the appraisal, a copy of the appraisal will be provided to the
Borrower upon its signing of the Lender's standard appraisal release letter.
The Borrower shall reimburse the Lender upon demand for all costs and expenses
incurred by the Lender with respect to the preparation and review of all future
appraisals required pursuant to the terms hereof.
16. CONSTRUCTION PERIOD: Construction of the Improvements for each
Project shall commence within thirty (30) days from the date of the Loan
Closing for such Project and shall be completed within fifteen (15) months
after the Loan Closing (the "Completion Deadline"), time being of the essence
(each a "Construction Phase"). Failure to complete any Project by the
Completion Deadline shall constitute an Event of Default under the Financing
Documents.
17. DOCUMENTATION: The Credit Facility shall be evidenced by a master
term note in the maximum principal sum of $80,000,000 (the "Master Note").
Each Loan shall be evidenced by an individual note in the maximum principal sum
of that Loan issued under the Master Note (each, a "Note," collectively, the
"Notes"). The availability under the Master Note will be reduced by the
aggregate maximum face amounts of the Notes then outstanding. Advances under
each Note shall be made pursuant to the terms of a master construction loan
agreement to be executed by the Borrower at the time of the Facility Closing
(the "Construction Loan Agreement") and a Loan Closing checklist pertaining to
each Project. All instruments and documents required hereby or affecting the
Property, securing the Credit
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March 26, 1996
Page 10
Facility or any Loan or relating to the Borrower's capacity and authority to
obtain the Credit Facility and to execute the Financing Documents (as
hereinafter defined) and such other documents, instruments, opinions,
assurances, consents and approvals as the Lender may request and all procedures
connected herewith shall be subject to the approval, as to form and substance,
of the Lender and the Lender's counsel. All of the documents evidencing and
securing the Credit Facility (the "Financing Documents"), including without
limitation, the Master Note, the Notes, the Deeds of Trust, the Construction
Loan Agreement, the Financing Agreement and the Guaranties, and all other
documents evidencing or securing the Credit Facility or the Loans shall be
prepared by counsel for the Lender unless otherwise expressly agreed to by the
Lender. In addition to those items specifically set forth in this commitment,
the Borrower shall furnish to the Lender, prior to the Loan Closing, such
additional instruments, documents, opinions and materials as the Lender may
reasonably require, all of which shall be satisfactory to the Lender in all
respects. The Loan Documents shall provide that termination of the Management
Agreement without the prior written consent of the Lender shall constitute an
Event of Default under the Financing Documents. The Financing Documents will
provide that, after the occurrence of an Event of a Default under the Financing
Documents, the Lender may cause management of any or all of the Projects to be
transferred to one or more management companies designated by the Lender.
THE BORROWER SHALL AGREE THAT UPON ITS FAILURE TO PAY ANY LOAN OR OTHER
OBLIGATIONS UNDER THE CONSTRUCTION LOAN AGREEMENT OR THE FINANCING AGREEMENT
EXECUTED IN CONNECTION THEREWITH AND/OR THE OTHER FINANCING DOCUMENTS WHEN AND
AS THE SAME ARE DUE AND PAYABLE, AN ATTORNEY-IN-FACT SHALL BE AUTHORIZED TO
APPEAR FOR THE BORROWER AND CONFESS JUDGMENT AGAINST THE BORROWER FOR THE SUMS
THEN DUE, TOGETHER WITH INTEREST, COURT COSTS AND ATTORNEYS' FEES EQUAL TO
FIFTEEN PERCENT (15%). THE LENDER WILL PROVIDE TO THE BORROWER A SIDE LETTER
REGARDING THE ENFORCEMENT OF A CONFESSED JUDGMENT FOR ATTORNEYS FEES.
THE BORROWER, THE GUARANTOR AND THE LENDER SHALL MUTUALLY AGREE TO WAIVE
TRIAL BY JURY WITH RESPECT TO ALL MATTERS RELATING TO THE CREDIT FACILITY, THE
OTHER OBLIGATIONS, THE CONSTRUCTION LOAN AGREEMENT, THE FINANCING AGREEMENT AND
THE OTHER DOCUMENTS EXECUTED IN CONNECTION THEREWITH.
18. SURVEYS: Not less than twenty-one (21) days prior to any Loan
Closing, the Borrower shall furnish to the Lender, for approval by the Lender,
six (6) copies of a survey of each of the twelve (12) Projects not more than 60
days old and any recorded subdivision plats relating thereto. The surveys
shall be certified to the title company and to the Lender and shall show
dimensions and locations of
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March 26, 1996
Page 11
any improvements, easements, rights of way, adjoining sites, encroachments and
the extent thereof, established building lines and street lines, and distance
to, and names of the nearest intersecting streets and such other details as the
Lender may request. During the course of construction of any Project, the
Borrower shall provide the Lender with such additional surveys as requested or
required by the Lender on the recommendation of the Inspecting Engineer or the
title company, including but not limited to, a revised survey showing such
details as the Lender may request including, but not limited to, the locations
of the foundations of any Project when completed and an affidavit from the
surveyor that setbacks are in conformity with current zoning restrictions.
19. TITLE INSURANCE: A mortgagee title insurance binder with a commitment
to issue a title insurance policy in the most current ALTA form in the amount
of the Credit Facility insuring the liens of the Deeds of Trust recorded as of
the Facility Closing subject only to those exceptions to title as are approved
by the Lender and its counsel, and including a commitment to issue a title
policy on all twelve (12) possible Projects and with affirmative insurance on
such matters as the Lender may require shall be furnished to the Lender not
less than twenty-one (21) days prior to the applicable Loan Closing along with
copies of all exceptions applicable to all twelve (12) Projects. The title
binder shall be issued by a company acceptable to the Lender, and shall contain
such terms and coverage as the Lender and its counsel shall deem acceptable.
The mortgagee title insurance policy when issued shall not contain any survey
exceptions. The Lender reserves the right to require commitments for
reinsurance and direct access in amounts and from insurers acceptable to the
Lender. In connection with each subsequent Loan Closing, the title policy
shall be endorsed to insure the lien of the applicable Deed of Trust.
20. CONSTRUCTION DOCUMENTS: Not less than twenty-one (21) days prior to
any Loan Closing, the Borrower shall provide to the Lender the following items
relating to the development of the Premises and the construction of the
Improvements thereon covered by the Loan Closing and such additional documents
as may be requested by the Lender's Real Estate Loan Administration area by
separate letter or otherwise, each of which shall be in all respects acceptable
to the Lender and its counsel:
(a) Final plans and specifications (the "Plans") for the Project,
which shall be signed and sealed by the Borrower's architects and approved in
writing by the Lender, an independent inspecting architect and/or engineer
designated by the Lender (the "Inspecting Engineers") and any other party
deemed necessary by the Lender. The Borrower shall provide evidence to the
Lender that the
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March 26, 1996
Page 12
Plans have been reviewed and approved by any appropriate governmental agency
having jurisdiction over the Project.
(b) A detailed trade breakdown on forms acceptable to the Lender of
the cost of the Improvements for the Project, verified in writing by the
Borrower's architect, an itemization on forms acceptable to the Lender of
non-construction and land costs, verified by the Lender, and a Loan budget for
the Project. If the sum of the direct construction costs, the cost of the
Premises, the estimated non-construction costs and the Operating Reserve for
the Project, in the sole judgment of the Lender, exceeds the amount of the Loan
for that Project, the Borrower shall be required to invest the excess in the
Property or deposit such excess with the Lender in an account pledged in a
manner satisfactory to the Lender prior to any advance by the Lender of the
Loan proceeds. In no event, however, shall the amount of the Loan exceed
eighty percent (80%) of the aggregate amount of the estimated costs as
determined above. The Lender currently estimates the Borrower's required
equity investment to be not less than $20,000,000 in the aggregate,
representing twenty percent (20%) of such costs. The investment by the
Borrower of twenty percent (20%) of the Project cost prior to the applicable
Loan Closing shall be demonstrated to the Lender's satisfaction.
(c) The final site plan for the Property approved by all necessary
governmental authorities.
(d) A projection of the progress of construction of the Improvements
for the Project by months and a report in form satisfactory to the Lender
indicating the monthly projected Loan advances for the balance of proceeds of
the applicable Loan.
(e) The architect's contract for all the Project, the general
construction contract for the Project (which shall be a fixed price contract)
and all subcontracts for the Project as required by the Lender, as well as the
identity of the architect, the general contractor for the Project and
subcontractors for the Project. The Borrower shall furnish the Lender with
such information regarding the architect, the general contractor(s) and
subcontractors as the Lender may request.
(f) The undertaking of the general contractor, those subcontractors
designated by the Lender and of the Borrower's architect to continue
performance in connection with the Project on the Lender's behalf without
additional costs in the event of default by the Borrower under any of the
Financing Documents and not to permit nor execute any change order increasing
the price of the Improvements or materially altering the scope of the
Improvements.
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March 26, 1996
Page 13
(g) Evidence of workers' compensation and public liability and
property damage insurance coverage for the general contractor and those
subcontractors designated by the Lender in amounts, form and by companies
acceptable to the Lender.
(h) All required building and other governmental permits and
licenses and evidence of compliance with all zoning, environmental and other
laws, ordinances, rules, regulations and restrictions affecting the Premises,
construction of the Improvements and consummation of the transaction.
(i) Evidence from the utility and public service companies and
municipalities servicing the Premises that water, sewer, electric, telephone
and gas services will be available to the Premises in sufficient quantities
upon completion of the Improvements; and such additional evidence as the
Inspecting Engineers and the Lender may deem necessary with respect to the
availability of all required utilities upon completion of the Improvements.
(j) Evidence satisfactory to the Lender regarding the current and
past pollution control practices at the Property in connection with the
discharge, emission, handling, disposal or existence of materials and
substances controlled by federal, state or local laws and regulations
("Controlled Hazardous Substances"), which shall include a Phase I
environmental audit of the Premises prepared by a person or firm acceptable to
the Lender.
(k) Soil reports demonstrating that the soil conditions of the
Premises are suitable for the construction of the Improvements. Among other
things, such reports must evidence to the Lender's satisfaction that there are
no Hydric Soils (as hereinafter defined) on the Premises. The term "Hydric
Soils" shall mean any soil category upon which building would be prohibited or
restricted under applicable governmental requirements (including, without
limitation, those imposed by the U.S. Army Corps of Engineers based upon its
guidelines as to, among other things, soil, vegetation and effect on the
ecosystem).
(l) Evidence that the Improvements when constructed will comply with
all legal requirements regarding access and facilities for handicapped or
disabled persons, including, without limitation and to the extent applicable,
The Federal Architectural Barriers Act (42 U.S.C. Section 4151 et seq.), The
Fair Housing Amendments Act of 1988 (42 U.S.C. Section 3601 et seq.), The
Americans With Disabilities Act of 1990 (42 U.S.C. Section 12101 et seq.), The
Rehabilitation Act of 1973 (29 U.S.C. Section 794) and any applicable state
statutes relating to access and facilities for handicapped or disabled persons.
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Page 14
(m) Payment and performance bonds from the general contractor and/or
those subcontractors designated by the Lender, with companies and in amounts
and form satisfactory to the Lender, which bonds shall contain a dual obligee
rider indicating the Lender's interest as mortgagee.
21. REQUISITIONS UNDER THE LOANS: Advances under each Loan Agreement will
be administered by the Lender's Real Estate Loan Administration group.
Advances shall be made not more frequently than monthly and shall be based upon
inspections and certifications by or on behalf of the Lender demonstrating that
the work for which funds are being advanced has been completed in a manner
satisfactory to the Lender. The following provisions shall also be applicable
to advances under each Loan:
(a) All requisitions shall be made on forms approved by the Lender.
All requisitions for direct construction costs shall be approved by or on
behalf of the Lender. If an advance is requested at the Facility Closing or
any Loan Closing, the Borrower shall furnish to the Lender not less than five
(5) business days prior to the Facility Closing or such Loan Closing, as
applicable, a requisition detailing the purpose and application of the proceeds
of the advance. The Lender will fund monthly requisitions within five (5)
business days after their receipt.
(b) The proceeds of each Loan shall be advanced by the Lender to the
Borrower pursuant to a loan budget for the applicable Project approved by the
Lender which shall be attached as exhibits to the Construction Loan Agreement
(as the same may be amended from time to time with the mutual consent of the
Borrower and the Lender, each a "Budget"). Each Budget shall include the
following categories to the satisfaction of the Lender: an interest reserve, a
hard cost contingency reserve, a reserve for such Project's start-up operating
reserve (each an "Operating Reserve") and a development fee payable to the
Borrower (each a "Development Fee"). No advances from the Operating Reserve
will be made until both a certificate of occupancy has been issued by the
applicable governmental authorities and if applicable to the Project, an
operating license has been issued for the Project appropriate governmental
authority (the "License"). After the earlier of issuance of a Certificate of
Occupancy or the expiration of the Construction Phase, no further advances
shall be made from the interest reserve. Not more than fifty percent (50%) of
the Development Fee for any project may be advanced during the Construction
Phase of any Loan. Such portion of the Development Fee will be advanced
ratably with the first 12 monthly draws. The remaining fifty percent (50%) of
the Development Fee will serve as a soft cost contingency reserve which may be
advanced to cover any negative Budget variances within any Budget category
other than the acquisition cost of the Premises or hard
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March 26, 1996
Page 15
costs. Once the Resident Occupancy (as hereinafter defined) is at eighty
percent (80%) for three (3) consecutive months and the ratio of actual EBITDA
to the Borrower's actual debt service for the Loan which funded construction of
such Project, is not less than 1.0 to 1.0 for the same three (3) month period,
the remaining Development Fee will be disbursed to the Borrower upon the
Borrower's request. With the prior approval of the Lender which approval will
not be unreasonably withheld, any cost savings affecting any approved budget
category, whether actual or estimated, which the Borrower shall demonstrate to
the reasonable satisfaction of the Lender may be reallocated by the Borrower to
another Loan Budget Category. Each disbursement from the contingency reserve,
if any, shall be subject to approval by the Lender based upon its reasonable
discretion as to the amount and purpose for which such disbursement will be
used.
(c) The Borrower shall furnish the Lender with lien waivers signed
by the general contractor for all work done and materials supplied that are
included in the current requisition. Such lien waivers will be in the form of
AIA forms G706 and G706A.
(d) The Lender shall disburse not more than 90% of each requisition
for direct construction costs on any Loan until construction of the
Improvements financed under that Loan is 50% complete, as determined by or on
behalf of the Lender; thereafter, the Lender shall disburse not more than 95%
of each requisition for direct construction costs. The final holdback of
direct construction costs will be retained by the Lender until (i) construction
of the Project is completed and approved by the architect and the Inspecting
Engineers, (ii) a certificate of occupancy has been issued for the
Improvements, and (iii) all final mechanics' lien waivers have been furnished
to the Lender.
(e) Advances will also be contingent upon a current examination of
title to the date of each advance, which must be satisfactory to the Lender.
(f) The Lender shall have no obligation to make any advance if at
the time such advance is requested and/or is proposed to be funded, there
exists a default or an event which upon notice or lapse of time or both would
constitute a default under the Loan Agreement.
22. LIMITATION ADVANCES. Construction of all ten (10) Projects chosen by
the Borrower must be commenced within eighteen (18) months of the Facility
Closing (the "Commencement Deadline"). No Project for which construction has
not commenced by the Commencement Deadline will be permitted to draw under its
Loan for any purpose at any time after the Commencement Deadline.
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Page 16
23. INSURANCE REQUIREMENTS: During the term of the Credit Facility, the
Borrower shall maintain or cause to be maintained insurance coverages in
accordance with the following terms and conditions and the Lender shall have
been supplied with original policies or, at the Lender's option, binders or
certificates evidencing the following coverages:
(a) During any period of construction on any Premises, the Borrower
shall maintain or cause to be maintained on and for such Property, at all
times, builder's risk, fire and extended coverage insurance, including
vandalism and malicious mischief endorsements covering the Improvements in the
form of an "all risk", 100% non-reporting policy and containing such other
extended coverage as may be required by the Lender in an amount to be
designated by the Lender as to the insurable value of the Property, which
policy shall be converted to a standard hazard insurance policy for such
Property with extended coverage endorsement and insurance for boiler or
pressure vessel explosion (if there are boilers or pressure vessels located on
the Property), upon completion of the Improvements thereon. The policy shall
indicate the Lender's interest as first mortgagee, shall prohibit cancellation
or reduction in coverage upon less than thirty (30) days prior written notice
to the Lender and shall be in form and issued by companies acceptable to the
Lender. In no event shall such insurance contain a co-insurance provision.
(b) The Borrower shall also maintain or cause to be maintained
comprehensive public liability and property damage insurance coverage for the
Borrower. Such insurance shall be issued in limits of not less than $5,000,000
for each Project shall be in form and issued by companies acceptable to the
Lender, shall name the Lender as a certificate holder and shall prohibit
cancellation or reduction in coverage upon less than thirty (30) days prior
written notice to the Lender.
(c) The Borrower shall also maintain business interruption insurance
with respect to each Project once a certificate of occupancy has been issued
for such Project in an amount equal to at least twelve (12) months' debt
service on the applicable Loan and in form and issued by a company acceptable
to the Lender in all respects.
(d) To the extent that health care professionals are employed by the
Management Company or the Borrower, medical liability, malpractice and other
health care professional liability insurance protecting the Borrower and the
Management Company, as the case may be, against claims arising from the
professional services performed by the Borrower or the Management Company, as
the case may be, with limits of (A) not less than One Million Dollars
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Page 17
($1,000,000) with respect to injury or death for each person or occurrence,
and (B) not less than Three Million Dollars ($3,000,000) in the aggregate for
claims made for injury or death in any one year, and an umbrella policy
insuring against such liability in an aggregate amount of Five Million Dollars
($5,000,000).
(e) At least thirty (30) days prior to the expiration date of each
and every insurance policy required by this commitment, the Borrower shall
obtain and deliver to the Lender a renewal or substitute policy meeting the
requirements hereof.
24. FLOOD INSURANCE: If, on the date of each Loan Closing or at any time
thereafter, the applicable Premises are in an area that has been identified by
the Federal Emergency Management Agency as having special flood and mud slide
hazards and in which the sale of flood insurance has been made available under
the Flood Disaster Protection Act of 1973, the Borrower shall procure a flood
insurance policy for such Property in form satisfactory to the Lender. For
those Premises which are not in an area having special flood and mud slide
hazards, the Borrower shall deliver to the Lender, prior to each Loan Closing,
evidence satisfactory to the Lender that flood insurance is not required by the
terms hereof.
25. FINANCIAL STATEMENTS: At the time of the Facility Closing, the
Borrower and the Guarantor, as applicable, shall warrant to the Lender that
there has been no Material Adverse Change in the financial condition of the
Borrower or the Guarantor from that shown on the financial statements of the
Borrower and the Guarantor that were delivered to the Lender as a part of, or
in connection with, the application for the Loan. The Financing Documents
shall provide that the Borrower shall furnish or cause to be furnished to the
Lender the following financial information at the times indicated:
(a) As soon as available, but in no event more than one hundred
twenty (120) days after the close of each of the Borrower's and the Guarantor's
fiscal years, (1) a copy of the Borrower's and the Guarantor's consolidated and
consolidating financial statements for the year in question, in form and detail
satisfactory to the Lender, prepared in accordance with generally accepted
accounting principles, consistently applied, and certified by an independent
certified public accountant satisfactory to the Lender, which financial
statements shall include a balance sheet as of the end of such fiscal year, and
a representation (which may be contained in the notes thereto) as to whether or
not anything in such independent accountant's examination has revealed the
occurrence of an event which constitutes an Event of Default under the
Financing Documents, or which would constitute such an Event of Default with
the giving of notice or the lapse of time or both, and, if so, stating the
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March 26, 1996
Page 18
facts with respect thereto; (2) The related statements of operations and
retained earnings and cash statements for such fiscal year in a format
acceptable to the Lender, and (3) a letter or opinion of the independent
accountant who examined and certified the annual financial statement relating
to the Borrower, stating whether anything in such independent accountant's
examination has revealed the occurrence of an event which constitutes an Event
of Default under the Financing Documents, or which would constitute such an
Event of Default with the giving of notice or the lapse of time or both, and,
if so, stating the facts with respect thereto;
(b) As soon as available, but in no event more than forty-five (45)
days after the end of each of the Borrower's and Guarantor's fiscal quarter,
internally prepared consolidated and consolidating financial statements of the
Borrower and the Guarantor as of the close of such period and income and
expense statements for the Borrower and the Guarantor for such period,
certified as to accuracy by the chief financial officer of the Borrower and the
Guarantor, respectively;
(c) Beginning with the first calendar month of the operations, as
soon as available but in no event more than thirty (30) days after the last day
of each calendar month, financial statements of the Borrower for such month,
including an income and expense statement for such period and census and
billing reports with respect to each Project for such period;
(d) As soon as available, but in no event later than thirty (30)
days prior to the end of each of the Borrower's fiscal years an annual budget
for the next fiscal year with respect to each Project, including all proposed
and anticipated capital expenditures, which budget shall be in form and detail
acceptable to the Lender and meet such other specifications as the Lender shall
reasonably require;
(e) As soon as available but in no event more than thirty (30) days
after the date of filing, the federal and state income tax returns for the
Borrower and the Guarantor for the year in question as well as any requests for
extensions filed in connection therewith; and
(f) In the event the IPO is completed, the Guarantor shall provide
to the Lender copies of any 10K or 10Q reports filed with the Securities
Exchange Commission; any 10k report shall be furnished to the Lender within
ninety (90) days of the date of filing thereof and any 10Q report shall be
filed within forty-five (45) days of the date of filing.
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(g) With reasonable promptness, such additional information, reports
or statements as the Lender may from time to time reasonably request; and
(h) All required financial statements shall be accompanied by a
certificate of compliance with the applicable financial covenants signed by a
responsible officer of the Borrower or Guarantor and shall include the Borrower
or Guarantor's computation of such covenants.
26. OTHER COVENANTS: The Financing Documents will also contain the
affirmative and negative covenants set forth in this Paragraph with respect to
the Borrower and the Guarantor, as well as such other customary affirmative and
negative covenants pertaining to the Borrower and Guarantor as are customarily
required by the Lender in connection with its making of loans similar to the
Loans or the Credit Facility.
(a) Affirmative Covenants of the Borrower. The Borrower shall
covenant and agree to the following, among other things, until the Credit
Facility has terminated and all Loans and all other of the Borrower's
obligations under the Financing Documents (collectively, the "Obligations")
have been paid and performed in full:
(i) Subordination. Subordinate, and cause the stockholders of
the Borrower to subordinate, all dividends and other corporate distributions of
the Borrower to principal and interest payments on the Loans; provided,
however, that the Borrower may pay corporate distributions to stockholders of
the Borrower prior to the occurrence of an Event of Default (as it will be
defined in the Financing Agreement) and (1) so long as the payment of any such
dividends or distributions will not result in the occurrence of an Event of
Default and (2) subject to limitations set forth in Paragraph 26(b)(iii).
(ii) Financial Covenants. The following definitions shall apply
to the financial covenants or elsewhere in this commitment letter:
"Borrower Debt Service" means for any period of determination an
amount equal to the total of the aggregate amount of all payments in principal
and interest in respect of Funded Debt of the Borrower scheduled to be due and
payable during such period, other than payments of principal due at maturity.
"Borrower EBITDA" means for the Borrower, earnings before
interest, federal and state income taxes, depreciation, amortization, but after
an imputed Replacement Reserve for all
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Projects and a Management Fee for all Projects equal to the greater of 5% of
gross revenues or the actual Management Fee paid to the Management Company.
"EBITDA" means with respect to a given Project, such Project's
earnings before interest, federal and state income taxes, depreciation,
amortization, but after an imputed Replacement Reserve and a Management Fee
equal to the greater of 5% of gross revenues or the actual Management Fee paid
to the Management Company.
"Funded Debt" of the Borrower, at any time means the sum at such
time of (a) indebtedness of the Borrower for borrowed money or for the deferred
purchase price of property or services, (b) any obligations of the Borrower in
respect of letters of credit, banker's or other acceptances or similar
obligations issued or created for the account of the Borrower, (c) lease
obligations of the Borrower which have been or should be, in accordance with
GAAP, capitalized on the books of the Borrower, (d) all liabilities secured by
any lien on any property owned by the Borrower, to the extent attached to the
Borrower's interest in such property, even though the Borrower has not assumed
or become liable for the payment thereof, and (e) any obligation of the
Borrower or a Commonly Controlled Entity to a Multiemployer Plan; but excluding
trade and other accounts payable in the ordinary course of business in
accordance with customary trade terms and which are not overdue (as determined
in accordance with customary trade practices) or which are being disputed in
good faith by the Borrower and for which adequate reserves are being provided
on the books of the Borrower in accordance with GAAP.
"Material Adverse Change" means a significant adverse change in
a Person's financial position or capacity including but not limited to
significant adverse changes in (a) liquidity (b) gross revenues (c) total
expenses (d) such Person's net worth or (e) ability to meet payment obligations
under such person's existing funded debt, existing indebtedness, the Credit
Facility and/or existing contingent liabilities.
"Operating Month" means a full calendar month after the issuance
of a certificate of occupancy for any Facility.
"Debt Service" means for any period of determination and with
respect to any given Project, an amount equal to the total of the aggregate
amount of all payments of principal and interest in respect of the Loan for
such Project scheduled to be due and payable during such period.
"Replacement Reserves" means $250 per year per living unit in
the Facility.
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"Resident Occupancy" means the number of residents who are in
occupancy at a Facility and paying fees pursuant to a resident agreement
divided by the pro forma resident capacity for such Facility as shown on
Exhibit A.
(1) Fixed Charge Coverage Ratio. Starting after the
issuance of an occupancy permit for any given Project, such Project shall
maintain a ratio of EBITDA to Debt Service for the Loan relating to such
Project equal to not less than 1.0 to 1.0 for the second (2nd) fiscal quarter,
a ratio of 1.1 to 1.0 for the third (3rd) fiscal quarter and a ratio of 1.25 to
1.0 for the fourth (4th) fiscal quarter and thereafter measured as of the end
of each fiscal quarter on a rolling four-quarter basis.
(2) Minimum occupancy. Each Project which is funded with
a Loan will achieve and maintain a minimum Resident Occupancy of (A) 60% by the
sixth (6th) Operating Month, (B) 75% by the ninth (9th) Operating Month and (C)
85% by the twelfth (12th) Operating Month and thereafter.
(iii) Notification of Certain Events. Promptly notify the
Lender upon obtaining knowledge of the occurrence of any of the following:
(A) any Event of Default under the Financing Documents;
(B) any event, development or circumstance whereby the
financial statements furnished under the Loan Documents fail in any material
respect to present fairly the financial condition and operational results of
the Borrower;
(C) any judicial, administrative or arbitral proceeding
pending against the Borrower in any judicial or administrative proceeding known
by the Borrower to be threatened against it which, if adversely decided, could
materially adversely affect its financial condition or operations (present or
prospective);
(D) (1) the revocation, suspension, probation,
restriction., limitation or refusal to renew, or the pending, revocation,
suspension, probation, restriction, limitation, or refusal to renew, of any
License, or (2) the decertification, revocation, suspension, probation,
restriction, limitation, or refusal to renew, or the pending, decertification,
revocation, suspension, probation, restriction, limitation, or refusal to renew
any participation or eligibility in any third party payor program in which the
Borrower elects to participate including, without limitation, Medicare,
Medicaid, other private insurer programs, or
<PAGE> 22
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March 26, 1996
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any accreditation of the Borrower, or (3) the issuance or pending issuance of
any License for a period of less than twelve (12) months, as a consequence of
sanctions imposed by any governmental authority, or (4) the assessment or
pending assessment, of any civil or criminal penalties by any governmental
authority, any third party payor or any accreditation organization or Person if
any, which could materially adversely affect the financial condition or
operations of the Borrower or any Affiliate (present or prospective) as
determined by the Lender in its sole but reasonable discretion (for purposes of
this subparagraph (D), "Affiliate" means an entity in which Paul J. and Teresa
M. Klaassen and/or an entity which they control holds, individually,
collectively, an ownership interest equal to twenty-five percent (25%) or
more);
(E) any other development in the business or affairs of
the Borrower which may be a Material Adverse Change;
(F) any action, including, but not limited to, the filing
of any certificate of need application if required by law, the amendment of any
Facility License or certification, or the issuance of any new License or
certification for any Facility, under which the Borrower proposes (1) to
develop a new facility or service and/or (2) to eliminate, materially expand or
material reduce any service; and
(G) any actual or potential contingent liability of the
Borrower of $50,000 or more,
in each case describing in detail satisfactory to the Lender the nature thereof
and, in the case of notification under this subparagraph (iii), the action the
Borrower proposes to take with respect thereto or a statement that the Borrower
intends to take no action and explanation of the reasons for such inaction. In
addition, the Borrower will furnish to the Lender immediately after receipt
thereof copies of all administrative notices material to Borrower's business
and operation of any Facility and all responses by or on behalf of the Borrower
with respect to such administrative notices.
(iv) Participation in Reimbursement Programs. In the event that
the Borrower elects to participate in any plans and/or programs for third-party
payment and/or reimbursement, and the revenues derived from a single plan or
program exceed ten percent (10%) of the gross revenues of any Facility,
continue its participation in any and all such plans and/or programs for
third-party payment and/or reimbursement from, and claims against, private
insurers or programs for payment and/or reimbursement from federal, state and
local governmental agencies and/or private or quasi-public insurers including,
without limitation, Managed Care Plans, Medicaid
<PAGE> 23
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and Medicare and the Veterans Administration (as determined by the Borrower in
the good faith exercise of its prudent and commercially reasonable business
judgment), while participating in such plans, the Borrower shall comply with
any and all rules, regulations, standards, procedures and degrees necessary to
maintain the Borrower's participation in any such third party payment or
reimbursement program or plan.
(b) Negative Covenants of the Borrower. The Financing Documents
shall provide that until the Loans and the other Obligations have been paid or
performed in full, the Borrower will not, without the prior written consent of
the Lender:
(i) Borrowings. Create, incur, assume or suffer to exist any
liability for borrowed money other than the Credit Facility.
(ii) Mortgages and Pledges. Create, incur, assume or suffer to
exist any mortgage, pledge, lien or other encumbrance of any kind upon, or any
security interest in, any of its property or assets, whether now owned or
hereafter acquired.
(iii) Distributions to Stockholders. Make any distributions to
Stockholders of the Borrower unless no Event of Default exists, all
construction has been completed on all Facilities covered by Loans and all
remaining availability under the Master Note has been terminated and the
Borrower's ratio of Borrower EBITDA after taking into account the proposed
distribution itself, is at least 1.25 times the Borrower Debt Service computed
quarterly on a rolling four-quarter basis and at such time or times as the
Borrower has at least $2,000,000 in liquid assets, both before and after such
distribution, verified to the Lender's satisfaction.
(iv) Sale or Transfer of Assets. Directly or indirectly enter
into any arrangement whereby the Borrower shall sell, lease, transfer, assign
or otherwise dispose of more than $25,000 of its assets in any one year or
$100,000 in the aggregate during the term of the Loan.
(v) Advances and Loans. Make loans or advances to any person,
firm, joint venture or corporation, including, without limitation, partners and
employees of the Borrower.
(vi) Contingent Liabilities. Assume, guarantee, endorse,
contingently agree to purchase or otherwise become liable upon the obligation
of any person, firm, joint venture, corporation or other entity, except by the
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business.
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Page 24
(vii) Sale of Accounts Receivable. Sell, discount, transfer,
assign, or otherwise dispose of any receivables of any Project such as accounts
receivable, notes receivable, installment or conditional sales agreements or
any other rights to receive income, revenues or moneys, however evidenced.
(viii) Licenses. Allow any license, permit, right, franchise or
privilege necessary for the ownership or operation of any Project for the
purposes for which any Project is intended to be used to lapse, be suspended or
be forfeited.
(ix) Amendments; Terminations. Amend or terminate or agree to
amend or terminate any License, participation agreement, any Management
Agreement, or, except in the ordinary course of business or as otherwise agreed
in the Financing Documents, any other operating agreements which may be entered
into by the Borrower with respect to any Project, or consent to or waive any
material provisions thereof.
(x) ERISA Compliance. (A) Restate or amend any Plan established
and maintained by the Borrower or any Commonly Controlled Entity (as defined in
ERISA) and subject to the requirements of ERISA, in a manner designed to
disqualify such Plan and its related trusts under the applicable requirements
of the Code; (B) permit any partners of the Borrower or any Commonly Controlled
Entity to materially adversely affect the qualified tax-exempt status of any
Plan or related trusts of the Borrower or any Commonly Controlled Entity under
the Code; (C) engage in or permit any Commonly Controlled Entity to engage in
any Prohibited Transaction; (D) incur or permit any Commonly Controlled Entity
to incur any Accumulated Funding Deficiency, whether or not waived, in
connection with any Plan; (E) take or permit any Commonly Controlled Entity to
take any action or fail to take any action which causes a termination of any
Plan in a manner which could result in the imposition of a lien on the property
of the Borrower or any Commonly Controlled Entity pursuant to Section 4068 of
ERISA; (F) fail to notify the Lender that notice has been received of a
"termination" (as defined in ERISA) of any Multiemployer Plan to which the
Borrower or any Commonly Controlled Entity has an obligation to contribute; (G)
incur or permit any Commonly Controlled Entity to incur a "complete withdrawal"
or "partial withdrawal" (as defined in ERISA) from any Multiemployer Plan to
which the Borrower or any Commonly Controlled Entity has an obligation to
contribute; or (H) fail to notify the Lender that notice has been received from
the administrator of any Multiemployer Plan to which the Borrower or any
Commonly Controlled Entity has an obligation to contribute that any such Plan
will be placed in "reorganization" (as defined in ERISA).
<PAGE> 25
Sunrise Entity to be Formed
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Page 25
(xi) Repurchase, redeem or retire any of the stock of the
Borrower.
(c) Affirmative Covenants of the Guarantor. The Guarantor shall
covenant to pay all applicable taxes, assessments and governmental charges,
maintain insurance required under the terms of the Loan Agreement and this
commitment letter, maintain its existence as a Delaware corporation, comply
with all applicable laws and regulations of governmental authorities, and
provide reasonable access to the Lender to its books and records.
In addition, the Guarantor shall covenant and agree to the following, until the
Loans and all other of the Obligations have been paid and performed in full:
(i) Minimum Tangible Net Worth. Maintain, on a consolidated
basis with all subsidiaries, at all times during the term of the Loan a minimum
Tangible Net Worth of not less than $3,000,000 until the IPO occurs. Following
the completion of the IPO, the minimum Tangible Net Worth shall be the sum of
$3,000,000 plus the net proceeds of the IPO to the Guarantor. "Tangible Net
Worth" means, at any time, the sum at such time of Net Worth (as defined by
GAAP) less the total of (i) all assets which would be classified as intangible
assets under GAAP, including goodwill, trademarks, trademark applications,
trade names, service marks, patent applications and licenses, and deferred
charges, (ii) applicable reserves, allowances and other similar properly
deductible items to the extent such reserves, allowances and other similar
properly deductible items have not been previously deducted by the Lender in
the calculation of Net Worth, (iii) any revaluation or other write-up in book
value of assets subsequent to the date of the most recent financial statements
delivered to the Lender, (iv) the amount of all loans and advances to, or
investments in, any Person, excluding cash equivalents and deposit accounts
maintained by the Borrower with any financial institution and (v) advances or
loans made to or receivables from any affiliates or any stockholder of the
Guarantor or any affiliate.
(ii) Minimum Liquidity. Maintain, on an individual basis (i.e.
parent company only), minimum liquid assets (as defined by GAAP) at all times
during the term of the Credit Facility of the greater of $5,000,000 or 90 days
of debt service coverage on all of the Guarantor's direct and contingent
liabilities by maintaining in a deposit account with the Lender not less than
the amount of such required minimum liquidity in collected funds.
(iii) Notification of Certain Events. Promptly notify the
Lender upon obtaining knowledge of the occurrence of any of the following:
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(A) any Event of Default under the Financing Documents;
(B) any event, development or circumstance whereby the
financial statements furnished under the Financing Documents fail in any
material respect to present fairly, in accordance with GAAP, the financial
condition and operational results of the Guarantor;
(C) any judicial, administrative or arbitral proceeding
pending against the Guarantor in any judicial or administrative proceeding
known by the Guarantor to be threatened against it which, if adversely decided,
could materially adversely affect its financial condition or operations
(present or prospective);
(D) (1) the revocation, suspension, probation,
restriction, limitation or refusal to renew, or the pending, revocation,
suspension, probation, restriction, limitation, or refusal to renew, of any
License held by the Borrower, the Guarantor or the Management Company, or (2)
the decertification, revocation, suspension, probation, restriction,
limitation, or refusal to renew, or the pending, decertification, revocation,
suspension, probation, restriction, limitation, or refusal to renew any
participation or eligibility in any third party payor program in which the
Borrower, the Guarantor or Management Company elects to participate, including,
without limitation, Medicare, Medicaid, or private insurer, or any
accreditation of the Guarantor or Management Company, or (3) the issuance or
pending issuance of any license for a period of less than twelve (12) months,
as a consequence of sanctions imposed by any governmental authority, or (4) the
assessment or pending assessment, of any civil or criminal penalties by any
government authority, any third party payor or any accreditation organization
or Person, if any, which could materially adversely affect the financial
condition or operations of the Guarantor or the Management Company as
determined by the Lender in its sole but reasonable discretion; and
(E) any other development in the business or affairs of
the Guarantor or the Management Company which may be a Material Adverse Change;
and
(F) any action, including, but not limited to, the filing
of any certificate of need application if required by law, the amendment of any
facility license or certification, or the issuance of any new license or
certification for any Project under which the Guarantor or the Management
Company proposes (1) to develop a new facility or service and/or (2) eliminate,
materially expand or materially reduce any service, in each case describing in
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detail satisfactory to the Lender the nature thereof and, in the case of
notification under this clause (iii), the action the Guarantor or the
Management Company proposes to take with respect thereto or a statement that
the Guarantor or the Management Company intends to take no action and an
explanation of the reasons for such inaction. In addition, the Guarantor or
the Management Company will furnish to the Lender immediately after receipt
thereof copies of all administrative notices material to the Guarantor's or the
Management Company's business and operation of the Project and all responses by
or on behalf of the Guarantor or the Management Company with respect to such
administrative notices.
(iv) Inspection Reports. Furnish to the Lender copies of any
and all annual inspections performed by any Governmental Authority or
accreditation or certification organization with respect to any Project.
(d) Negative Covenants of the Guarantor. The Loan Documents shall
provide that until the Credit Facility is terminated and the Loans and the
other Obligations have been paid or performed in full, the Guarantor will not,
without the prior written consent of the Lender:
(i) Merger, Acquisition or Sale of Assets. Enter into any
merger or consolidation or amalgamation, wind up or dissolve itself (or suffer
any liquidation or dissolution), or acquire all or substantially all of the
assets of any person, firm, joint venture or corporation or sell, lease, or
otherwise dispose of any substantial portion of its assets (except assets
disposed of in the ordinary course of business).
(ii) Subsidiaries. Create or otherwise acquire any subsidiaries
if such creation or acquisition will result in a Material Adverse Change.
(iii) Additional Stock and Transfers of Stock. The Guarantor
shall not issue or grant any option or right to purchase, any of its capital
stock except as set forth herein. Paul J. Klaassen and Teresa M. Klaassen, who
are the existing stockholders of the Guarantor, will not pledge, assign,
transfer or encumber any of their stock in the Guarantor or otherwise transfer
or encumber their voting control; provided, however, this requirement shall not
be applicable after completion of an IPO if following the IPO: (1) the
Guarantor is an entity whose common equity is registered under an applicable
Federal Securities Act and is traded on a National Securities Exchange or
NASDAQ national market, (2) Paul J. Klaassen and Teresa M. Klaassen own at
least twenty-five percent (25%) of the voting securities in the Guarantor to
assure their ability to elect a majority of the Guarantor's Board of Directors,
Board of Managers
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or General Partners, as the case may be, and (3) either Paul J. Klaassen or
Teresa M. Klaassen is the Chief Executive Officer or Chairman of the Board with
day-to-day responsibility for managing the businesses of the Guarantor; and
provided, further, the Guarantor shall provide prompt written notice to Lender
of a transfer of stock in the Guarantor, specifying the name, address and
telephone number of each such transferee and the percentage of Stock in the
Guarantor acquired by it.
(iv) Licenses. Allow any license, permit, right, franchise or
privilege necessary for the ownership or operation of any Project for the
purposes for which such Project is intended to be used to lapse, be suspended
or be forfeited.
(v) ERISA Compliance. (A) Restate or amend any Plan established
and maintained by the Guarantor or any Commonly Controlled Entity and subject
to the requirements of ERISA, in a manner designed to disqualify such Plan and
its related trusts under the applicable requirements of the Code; (B) permit
any officer of the Guarantor or any Commonly Controlled Entity to materially
adversely affect the qualified tax-exempt status of any Plan or related trusts
of the Guarantor or any Commonly Controlled Entity under the Code; (C) engage
in or permit any Commonly Controlled Entity to engage in any Prohibited
Transaction; (D) incur or permit any Commonly Controlled Entity to incur any
Accumulated Funding Deficiency, whether or not waived, in connection with any
Plan; (E) take or permit any Commonly Controlled Entity to take any action or
fail to take any action which causes a termination of any Plan in a manner
which could result in the imposition of a lien on the property of the Guarantor
or any Commonly Controlled Entity pursuant to Section 4068 of ERISA; (F) fail
to notify the Lender that notice has been received of a "termination" (as
defined in ERISA) of any Multiemployer Plan to which the Guarantor or any
Commonly Controlled Entity has an obligation to contribute; (G) incur or permit
any Commonly Controlled Entity to incur a "complete withdrawal" or "partial
withdrawal" (as defined in ERISA) from any Multiemployer Plan to which the
Guarantor or any Commonly Controlled Entity has an obligation to contribute; or
(H) fail to notify the Lender that notice has been received from the
administrator of any Multiemployer Plan to which the Guarantor or any Commonly
Controlled Entity has an obligation to contribute that any such Plan will be
placed in "reorganization" (as defined in ERISA).
27. LEASES: All leases, subleases, income, rents and profits covering
each Property, or any portion thereof, shall be assigned to the Lender as
additional security for the Credit Facility. Any and all leases of any portion
of the Property (other than Resident Agreements) may only be entered into with
the prior written consent of the Lender. Prior to the occurrence of an event
of default under
<PAGE> 29
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 29
any of the Loan Documents, the Borrower shall have a license to collect upon,
but not prior to accrual, all rents, income and profits from the Property.
Unless otherwise agreed to by the Lender, each lease affecting any Property, or
any portion thereof, shall (i) be at market rents, (ii) be subordinate to the
lien of the applicable Deed of Trust, (iii) contain attornment language
requiring each tenant to attorn to any subsequent purchaser of the Property,
(iv) not contain non-disturbance language entitling such tenant to remain at
the Property after any sale of such Property except as specifically agreed to
by the Lender in connection with specified Leases, and shall be in all other
respects acceptable to the Lender and its counsel. Approved leases may not be
modified, amended or terminated without the prior written consent of the
Lender.
28. INTEREST RATE PROTECTION: It shall be a condition of the closing of
the Credit Facility that the Borrower obtain interest rate protection in the
form of a "cap," a "collar" or a "swap" covering a significant portion of the
maximum principal amount of the Credit Facility. Such interest rate protection
must be obtained from the Lender or one of the other lenders in the bank group.
29. CORPORATE DOCUMENTS: Prior to the Facility Closing, the Borrower
shall furnish to the Lender, for review and approval, a copy of the Borrower's
and Guarantor's articles of organization or of incorporation and by-laws, a
certified copy of the Borrower's and Guarantor's corporate resolutions
authorizing the execution and delivery of the Financing Documents as applicable
and consenting to the Credit Facility and current, original good standing
certificates. The Deeds of Trust shall contain a provision whereby the entire
principal sum and all accrued and unpaid interest thereon shall become due and
payable at the option of the Lender if any interest in the Borrower shall be
either directly or indirectly sold, assigned, transferred, encumbered or
otherwise conveyed without the prior written consent of the Lender. In
addition, the Payment Guaranty shall contain a provision prohibiting the
transfer of all or a substantial portion of the assets of the Guarantor without
the Lender's prior written consent, except for customary political and
charitable contributions and transfers for which the Guarantor receives
consideration substantially equivalent to the fair market value of the
transferred asset. In connection with any subsequent Loan Closing, the Lender
reserves the right to require delivery of any and all of the foregoing
requirements in updated form.
30. OPINION OF COUNSEL: At the Facility Closing and at any subsequent
Loan Closing, the Lender shall receive a written opinion of counsel for the
Borrower and the Guarantor, satisfactory in scope and substance to the Lender,
covering such matters as the Lender may
<PAGE> 30
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 30
deem necessary, including without limitation, opinions as to the validity,
binding effect and enforceability of the Financing Documents.
31. SIGNS; PUBLICITY: At the Lender's request, but at the expense of the
Borrower, the Borrower shall place a sign at a location on each of the Premises
satisfactory to the Lender, which sign shall recite, among other things, that
the Lender is financing the construction of the Improvements. The Borrower
expressly authorizes the Lender to prepare and to furnish to the news media for
publication from time to time news releases with respect to each Property,
specifically to include but not limited to releases detailing the Lender's
involvement with the financing of the Property.
32. TERMINATION: This commitment is being made in reliance upon the
information supplied by the Borrower and the Guarantors to the Lender in
connection with the Credit Facility. If the Lender, acting in good faith,
should determine that any such information or supporting representation of a
material nature is false, inaccurate, incomplete or misleading, the Lender may
rescind and cancel this commitment and retain all fees theretofore paid to the
Lender. In addition, the Lender shall have no obligation to fund any Loan and
shall have the right to retain all fees theretofore paid to the Lender in the
event that, in the sole judgment of the Lender, prior to the Facility Closing
or any subsequent Loan Closing, there shall be a material adverse change in the
condition of any of the Premises or if any part of the Premises shall have been
taken in condemnation or other like proceedings, or if such proceedings are
pending at the time of the Facility Closing or any subsequent Loan Closing, or
if Controlled Hazardous Substances are discovered at the Premises, or if the
Borrower or the Guarantor shall be involved in any arrangement, bankruptcy,
reorganization or insolvency proceeding or shall have suffered any adverse
change in its or their financial condition or if any other event shall occur
which would constitute an event of default under the Financing Documents. The
Borrower and the Guarantor shall nevertheless remain liable for all of the
Lender's expenses in connection with the Credit Facility as hereinabove
provided.
33. INDEMNIFICATION: Neither the approval by the Lender of any of the
Plans, nor any subsequent inspections or approvals of any of the Improvements
during construction shall constitute a warranty or representation by the Lender
or any of its agents, representatives or designees, as to the technical
sufficiency, or adequacy or safety of the structure or any of its component
parts, including without limitation, its fixtures, equipment or furnishings,
nor shall such approvals or inspections constitute such a warranty or
representation as to the subsoil conditions involved
<PAGE> 31
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 31
in the project or any other physical condition or feature pertaining to any of
the Improvements. All acts, including any failure to act, relating to any of
the Property by any agent, representative or designee of the Lender are
performed solely for the benefit of the Lender to assure repayment of the
Credit Facility and are not for the benefit of the Borrower or for the benefit
of any other person, including without limitation, residents, purchasers,
tenants or other occupants. Acceptance by the Borrower of this commitment
shall evidence its agreement to indemnify the Lender and to hold the Lender
harmless against any loss or expense (including reasonable attorneys' fees)
resulting from any and all claims, actions, settlements, or liability for acts
or failure to act in connection with any of the Improvements.
34. ESCROW FOR TAXES AND INSURANCE: The Lender reserves the right to
require after the occurrence of an Event of Default the Borrower to pay to the
Lender, together with the monthly installments of principal and/or interest due
under each Note, an amount which shall be estimated by the Lender from time to
time to be sufficient to enable the Lender to pay, at least thirty (30) days
before due, all taxes and assessments levied against all the Property and all
premiums for insurance policies required by the Lender in connection with the
Loans.
35. LATE CHARGES AND PENALTIES: Each Note shall require the Borrower to
pay to the holder thereof a late charge of four percent (4%) of any installment
or other payment not received by the holder of the Note within fifteen (15)
days after the date such payment is due. Upon the occurrence of an event of
default under any of the Financing Documents, the outstanding principal
balances of the Loans shall bear interest thereafter, until the default is
cured, at a rate which is at all times equal to three percent (3%) per annum in
excess of the then applicable Loan interest rate under such Note.
36. CLOSING DATE; SURVIVAL: The Facility Closing must occur within
forty-five (45) days after the date hereof or this commitment shall be deemed
null and void. Unless otherwise agreed to by the Lender, the Facility Closing
and each Loan Closing shall take place in the main office of the Lender, at one
of the Lender's other branch offices, or at the office of the Lender's counsel,
as the Lender may designate. The terms and conditions of this commitment shall
survive the Facility Closing and each Loan Closing; provided, however, that if
any of the terms and conditions of this commitment shall conflict with any of
the terms and conditions of the Financing Documents, the terms and conditions
of the Financing Documents shall prevail.
37. ACCEPTANCE OF COMMITMENT: A signed acceptance of this commitment,
upon the terms and conditions herein set forth, must be
<PAGE> 32
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 32
delivered to the Lender on or before the date which is three (3) business days
after the date hereof (unless otherwise extended by the Lender in writing), or
this commitment shall automatically lapse and expire.
38. TIME OF ESSENCE: Time shall be of the essence for all purposes in
construing, interpreting and enforcing this commitment.
39. WAIVERS: No waiver by the Lender of any provision in this commitment
shall be deemed a continuing waiver. No waiver of any of the Lender's rights
shall be binding upon the Lender unless such waiver is approved in writing by
the Lender.
40. HEADINGS; GENDER; BANK GROUP: The headings in this commitment are for
convenience only and shall not limit or otherwise affect any of the terms
hereof. As used herein, the pronouns of any gender shall include the other
genders, and either the singular or plural shall include the latter. Any
indemnity provision for the benefit of the Lender set forth herein shall apply
to any other lender who joins the bank group to make available the Credit
Facility.
41. ASSIGNMENT BY BORROWER PROHIBITED: This commitment may not be
assigned or in any way transferred by the Borrower without the prior written
approval of the Lender.
42. ASSIGNMENT BY LENDER. The Lender may, without consent of the
Borrower, sell, assign or transfer to or participate with any person or persons
all or any part of the Credit Facility obligations.
43. ENTIRE AGREEMENT: No statements, agreements or representations, oral
or written, which may have been made to the Borrower or to any employee or
agent of the Borrower, either by the Lender or by any employee, agent or broker
acting on the Lender's behalf, with respect to the Credit Facility, shall be of
any force or effect, except to the extent stated in this commitment, and all
prior agreements and representations with respect to the Loan are merged
herein. This commitment may not be changed except by written agreement signed
by the Borrower, the Lender and the Guarantor. The terms of this commitment
shall supersede in full any prior proposal letter issued by the Lender in
connection with the transaction contemplated hereby.
44. BROKERAGE: The Borrower warrants and represents to the Lender that it
has not used the services of any finder, mortgage broker or similar person in
connection with the Credit Facility. All finder's fees, brokerage fees or
similar fees or charges payable
<PAGE> 33
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 33
in connection with the Credit Facility shall be the responsibility and
obligation of the Borrower and/or the Guarantor. The Borrower and the
Guarantor agree to indemnify and hold harmless the Lender from all claims,
losses, damages, costs and expenses, including legal expenses, suffered or
incurred by the Lender resulting directly or indirectly from any claim by a
third party for brokerage or other similar fees relating to the Credit
Facility.
45. COMMERCIAL LOAN: The Borrower shall covenant and agree in the
Financing Documents that the Credit Facility is being transacted solely for the
purpose of carrying on or acquiring a business or commercial enterprise and not
for personal or household use.
46. GOVERNING LAW: The Borrower and the Guarantor agree that this
commitment and the Loan Documents shall be governed by and construed under the
laws of the Commonwealth of Virginia or such other State as the Lender may
designate and shall consent to be sued in any court in the Commonwealth of
Virginia having jurisdiction in any action to enforce the provisions of this
commitment and/or the Financing Documents. If the Borrower and/or the
Guarantor are not residents or entities formed under the laws of the
Commonwealth of Virginia, the Borrower and/or the Guarantors, as required,
shall irrevocably appoint a resident of the Commonwealth of Virginia
satisfactory to the Lender as their true and lawful attorney-in-fact to accept
service of process for them and on their behalf in any proceeding to enforce
the provisions of the Financing Documents.
Very truly yours,
NATIONSBANK, N.A.
By: /s/ ROBERT J. MONTANARI
-----------------------
Robert J. Montanari
Vice President
<PAGE> 34
Sunrise Entity to be Formed
c/o Sunrise Assisted Living, Inc.
March 26, 1996
Page 34
THE FOREGOING TERMS AND CONDITIONS ARE HEREBY ACCEPTED AND AGREED TO
THIS _____ DAY OF ______, 1996.
SUNRISE ASSISTED LIVING, INC., on
behalf of the Borrower to be Formed
and on its own Behalf as Guarantor
By:
-----------------------------
Paul J. Klaassen
President
<PAGE> 1
EXHIBIT 16
May 3, 1996
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Gentlemen:
We have read the change in the independent accountant section on page 62
of Sunrise Assisted Living, Inc.'s Form S-1 File No. 333-2582 and are in
agreement with the statements contained in the first three sentences therein.
We have no basis to agree or disagree with the last sentence of that section.
/s/ Hoffman, Morrison & Fitzgerald, P.C.
HOFFMAN, MORRISON & FITZGERALD, P.C.
Vienna, Virginia
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data", and "Experts" and to the use of our report dated February 15, 1996
(except notes 10 and 16, as to which the date is May 1, 1996) in Amendment
No. 1 to the Registration Statement (Form S-1 No. 333-2582) and related
Prospectus of Sunrise Assisted Living, Inc. for the registration of 5,750,000
shares of its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Washington, D.C.
May 7, 1996
<PAGE> 1
EXHIBIT 23.2
[HOFFMAN, MORRISON & FITZGERALD, P.C. LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement of our report dated
March 13, 1996, relating to the combined financial statements of Acquired
Entities of Sunrise for the year ended December 31, 1993 and our report dated
March 13, 1996, relating to the combined financial statements of Sunrise
Entities for the year ended December 31, 1993 (not presented separately in the
Registration Statement), and to the reference to our Firm under the caption
"Experts" in the Prospectus.
/s/ Hoffman, Morrison & Fitzgerald, P.C.
HOFFMAN, MORRISON & FITZGERALD, P.C.
Vienna, Virginia
May 3, 1996
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<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
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<RECEIVABLES> 1,813,523 1,548,987
<ALLOWANCES> 393,551 235,000
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<CURRENT-ASSETS> 10,156,845 8,882,948
<PP&E> 149,792,828 132,272,727
<DEPRECIATION> 15,983,409 15,202,158
<TOTAL-ASSETS> 155,424,439 136,165,312
<CURRENT-LIABILITIES> 9,140,441 8,253,678
<BONDS> 144,391,779 133,782,912
34,463,995 23,963,496
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<COMMON> 60,195 60,195
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<TOTAL-REVENUES> 10,447,171 37,390,792
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<INTEREST-EXPENSE> 2,817,610 16,881,899
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<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,708,326) (10,404,164)
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<NET-INCOME> (1,708,326) (10,404,164)
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