<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1996.
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUNRISE ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
8361
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
54-1746596
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
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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)
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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>
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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.
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If any of the securities being registered on this Form are to be 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. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF CLASS OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share..... 5,750,000 $28 1/4 $162,437,500 $49,224
===============================================================================================
</TABLE>
(1) Includes 750,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee.
------------------
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
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.
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1996
PROSPECTUS
, 1996
5,000,000 SHARES
[SUNRISE LOGO]
COMMON STOCK
Of the 5,000,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), offered hereby (the "Offering"), 4,000,000 shares are being
sold by Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") and 1,000,000
shares are being sold by certain Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by such Selling Stockholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"SNRZ." On October 7, 1996, the last sale price of the Common Stock on the
Nasdaq National Market was $27 3/4 per share. See "Price Range of Common Stock
and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total(3)........................ $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company and certain Selling Stockholders have granted 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,
Proceeds to the Company 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
J.C. BRADFORD & CO.
<PAGE> 3
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.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."
2
<PAGE> 4
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. This Prospectus contains
certain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus. 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. Unless otherwise indicated, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.
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 32 facilities in 11 states with a capacity of approximately 2,800
residents, including 21 facilities wholly owned by the Company, seven facilities
in which it has ownership interests and four facilities managed for third
parties. The Company had revenues of $37.3 million in 1995 and $21.0 million for
the six months ended June 30, 1996, and incurred net losses of $10.1 million and
$4.1 million, respectively, for these periods. Approximately 99% of these
revenues were derived from private pay sources.
The Company's three-year growth objective is to develop and own at least 55
new Sunrise assisted living facilities with a capacity of approximately 4,950
residents. To date, the Company has obtained zoning approval for 25 new
facilities with a total resident capacity of 2,215, including 16 facilities
currently under construction. The Company has also entered into contracts to
purchase 17 additional sites and is negotiating purchase terms for 11 additional
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 but one of the facilities for which it obtained zoning approval. In addition
to its construction and development plans, the Company plans to acquire up to 10
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; (vi) achieve the benefits of regional density by
clustering facilities; and (vii) develop strategic alliances with integrated
health care delivery systems.
3
<PAGE> 5
RECENT DEVELOPMENTS
ACQUISITION OF SOUTHEAST PROPERTIES
On October 8, 1996, the Company completed its acquisition from Laing
Properties & Subsidiaries, Inc. of five facilities located in the southeast
United States (the "Southeast Properties") for an aggregate purchase price of
$34.0 million in cash with no debt assumed. The Southeast Properties consist of
511 total units providing primarily independent and assisted living services.
One of the facilities also has a 26-bed skilled nursing floor. These facilities
had combined revenues of $9.9 million in 1995 and $5.4 million for the six
months ended June 30, 1996, and had combined net (losses) income of ($32,000)
and $195,000, respectively, for these periods. After giving effect to the
acquisition of the Southeast Properties at the beginning of the respective
periods, the Company had a pro forma net loss of $8.5 million and $3.1 million
for 1995 and for the first six months of 1996, respectively. See "Recent
Developments," "Selected Financial, Operating and Pro Forma Data" and "Unaudited
Pro Forma Consolidated Financial Statements."
AFFILIATION AGREEMENT WITH JEFFERSON HEALTH SYSTEM
On October 8, 1996, the Company entered into an affiliation agreement with
Jefferson Health System ("JHS"), an integrated health care system located in
Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide
residents of Sunrise facilities located in the Philadelphia metropolitan region,
on a preferred (but non-exclusive) basis, with access to certain health care
services offered by JHS. Such health care services may include hospital
services, physician services, rehabilitation services, home health services and
products and mental health services. See "Recent Developments."
CREDIT FACILITY
On October 3, 1996, a subsidiary of the Company received from GMAC
Commercial Mortgage Corporation a commitment for a $51.0 million revolving
construction credit facility. The credit facility provides for construction and
interim loans to finance the development of up to seven assisted living
facilities. The Company has agreed to guarantee the repayment of all amounts
outstanding under this credit facility. The credit facility is for a term of
five years and is secured by cross-collateralized first mortgages on the real
property and liens on receivables. Advances under the credit facility bear
interest at rates ranging from LIBOR plus 2.25% to 2.60%. See "Recent
Developments."
CONTINGENT ACQUISITION OF CALIFORNIA PROPERTIES
On October 8, 1996, the Company entered into a purchase and sale agreement
subject to certain conditions, including satisfactory completion by the Company
of financial, accounting, regulatory and property due diligence over the next 60
days, to acquire two facilities located in Southern California (the "California
Properties") for $30.8 million in cash. The two facilities consist of 258 total
units providing independent and assisted living services. Assuming the Company
elects to proceed with the transaction following the completion of its due
diligence review, the closing of the transaction would likely take place in the
first quarter of 1997. Given the contingent nature of the purchase and sale
agreement, there can be no assurance that the acquisition will be consummated.
See "Recent Developments."
INITIAL PUBLIC OFFERING
On June 5, 1996, the Company completed its initial public offering selling
5,700,000 shares of Common Stock at $20.00 per share. The net proceeds to the
Company from the offering were approximately $104.3 million. The net proceeds
have been used as follows: $16.6 million in partial payment of the Company's
long-term debt; $10.2 million to redeem the outstanding shares of Series B
Exchangeable Preferred Stock; $34.0 million to acquire the Southeast Properties;
and the balance to fund continued development of Sunrise facilities, as well as
for working capital and general corporate purposes.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 4,000,000 shares(1)
Common Stock offered by the Selling Stockholders... 1,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 18,255,753 shares(1)(2)
Use of Proceeds.................................... To finance the development and
acquisition of additional assisted
living facilities and for working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol...................... SNRZ
</TABLE>
- ---------------
(1) Excludes 750,000 shares of Common Stock (including up to 203,333 shares
subject to options held by certain officers that will be exercised and the
underlying shares sold if the Underwriters exercise their over-allotment
option) that may be issued by the Company pursuant to the Underwriters'
over-allotment option. See "Underwriting."
(2) Does not include (i) 1,631,348 shares of Common Stock subject to outstanding
options at October 7, 1996 at a weighted average exercise price of $10.99
per share, (ii) outstanding warrants for 50,000 shares of Common Stock at an
exercise price per share of $17.00, and (iii) shares having a fair market
value of $200,000 which the Company intends to issue in a private placement
in satisfaction of a $200,000 non-interest bearing loan made to one of the
Company's predecessor entities. Under the treasury stock method of
computation based on the last sale price on October 7, 1996 of $27 3/4 per
share, outstanding options and warrants represent 1,004,409 common stock
equivalents. See "Management -- 1996 Directors' Stock Option Plan," "-- 1995
Stock Option Plan," "-- 1996 Stock Option Plan" and "-- Non-Plan Stock
Option Grant" and "Description of Capital Stock -- Warrants."
5
<PAGE> 7
SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ ---------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(8) 1995 1996 1996(8)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Operating revenue:
Resident fees......... $10,358 $15,801 $23,994 $32,139 $ 34,752 $ 44,696 $17,076 $ 19,458 $ 24,839
Management services
income.............. 605 1,078 1,604 1,830 2,506 2,506 1,212 1,542 1,542
------- ------- ------- ------- --------- -------- ------- --------- --------
10,963 16,879 25,598 33,969 37,258 47,202 18,287 21,000 26,381
Operating expenses:
Facility operating
expenses............ 8,386 11,824 17,761 17,983 21,010 28,359 10,268 12,608 16,500
Facility development
and pre-opening
expenses............ 189 231 474 263 1,172 1,172 433 650 650
General and
administrative...... 993 1,655 2,034 4,183 6,875 6,875 2,719 4,413 4,413
Depreciation and
amortization........ 618 1,355 2,799 3,160 3,009 3,999 1,479 1,803 2,298
------- ------- ------- ------- --------- -------- ------- --------- --------
Income from
operations............ 777 1,814 2,530 8,380 5,192 6,797 3,387 1,526 2,520
Interest income....... 267 350 317 566 1,229 1,229 606 700 700
GECC mortgage interest
expense(2).......... -- -- -- (5,529) (15,295) (15,295) (4,971) (4,807) (4,807)
Other interest
expense............. (1,115) (2,212) (3,808) (3,060) (1,261) (1,261) (557) (615) (615)
Equity in (losses)
earnings on
investments in
unconsolidated
partnerships.......... (754) (299) (104) 33 (9) (9) 48 6 6
Minority interest...... 87 176 428 172 7 7 (19) 83 83
Unusual charge(3)...... -- -- -- -- -- -- -- (981) (981)
------- ------- ------- ------- --------- -------- ------- --------- --------
(Loss) income before
extraordinary item.... (738) (171) (637) 562 (10,137) (8,532) (1,505) (4,088) (3,094)
Extraordinary item..... -- -- -- 850 -- -- -- --
------- ------- ------- ------- --------- -------- ------- --------- --------
Net (loss) income...... $ (738) $ (171) $ (637) $ 1,412 $ (10,137) $ (8,532) $(1,505) $ (4,088) $ (3,094)
======= ======= ======= ======= ========= ======== ======= ========= ========
NET LOSS PER SHARE
DATA(4):
Net loss per common
equivalent shares..... $ (0.97) $ (0.69) $ (0.35)
======== ========= ========
Weighted average number
of common and common
equivalent shares
outstanding........... 8,826,127 7,625,366 9,720,604
========= ========= =========
OPERATING AND OTHER
DATA:
Facilities (at end of
period):
Owned(5).............. 9 14 16 19 20 25 20 23 28
Managed............... 2 5 7 9 8 8 8 7 7
------- ------- ------- ------- --------- -------- ------- --------- --------
Total............... 11 19 23 28 28 33 28 30 35
======= ======= ======= ======= ========= ======== ======= ========= ========
Resident capacity (at
end of period):
Owned(5).............. 575 1,067 1,289 1,473 1,557 2,032 1,557 1,873 2,384
Managed............... 143 549 652 772 712 712 596 712 712
------- ------- ------- ------- --------- -------- ------- --------- --------
Total............... 718 1,616 1,941 2,245 2,269 2,744 2,153 2,585 3,096
======= ======= ======= ======= ========= ======== ======= ========= ========
Occupancy rate(6)...... -- -- 94.0% 94.8% 91.7% -- 91.8% 92.5% --
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(8) AS ADJUSTED(9)
(IN THOUSANDS) --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments(7)............................................... $ 72,713 $ 38,261 $143,111
Working capital.................................................................. 66,360 31,909 136,759
Total assets..................................................................... 223,968 223,968 328,818
Total debt....................................................................... 120,712 120,712 120,712
Total stockholders' equity....................................................... 92,883 92,883 197,733
</TABLE>
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(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) See Note 8 of Notes to Consolidated and Combined Financial Statements.
(3) In June 1996, the Company made a $1.0 million cash payment to the
third-party limited partner in two facilities in exchange for the transfer
to the Company by the third-party of additional 1% partnership interests in
each facility (with a total book value of $18,700) and the elimination of
any requirement under the management contracts for these facilities for Paul
J. Klaassen, the Company's Chairman of the Board, President, Chief Executive
Officer and co-founder, and Teresa M. Klaassen, the Company's Executive Vice
President and co-founder (collectively, the "Founders"), to maintain a
specified ownership interest in the Company.
(4) See Notes 3 and 18 of Notes to Consolidated and Combined Financial
Statements.
(5) Includes all facilities wholly owned by the Company or in which the Company
owns interests. Prior to 1994, several of the owned facilities were leased
from predecessor entities.
(6) Based on monthly occupancy for owned facilities operated for at least 12
months, excluding facilities with temporary vacancies due to renovations or
resident relocation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Government
Regulation."
(7) Includes $50.0 million of short-term securities consisting of high-quality
commercial paper with maturities not greater than 180 days.
(8) Gives effect to the acquisition of the Southeast Properties as if the
transaction occurred on January 1, 1995. The Southeast Properties were
acquired in October 1996 for $34.0 million in cash. No liabilities were
assumed as part of the acquisition. Accordingly, no debt or related interest
costs have been included in the pro forma financial information.
(9) Gives effect to the acquisition of the Southeast Properties and receipt and
application of an estimated $104.9 million of net proceeds from the
Offering.
6
<PAGE> 8
RISK FACTORS
Prospective investors should carefully consider the risk factors set forth
below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Common Stock offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus.
RECENT NET LOSSES AND ANTICIPATED NET LOSS
The Company incurred a net loss of $10.1 million in 1995, compared to net
income (after a $0.9 million extraordinary gain) of $1.4 million in 1994 and a
net loss of $0.6 million in 1993. The Company incurred a net loss of $4.1
million for the six months ended June 30, 1996, compared to a net loss of $1.5
million for the six months ended June 30, 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. See "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 55 new
Sunrise assisted living facilities with a capacity of approximately 4,950
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, in addition to the five
Southeast Properties, up to 10 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. With the exception of the contingent purchase and sale agreement for
the California Properties, 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,
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the purchase price, the financial performance of the facilities after
acquisition and the ability of the Company to integrate effectively the
operations of acquired facilities. Any failure by the Company to integrate or
operate acquired facilities effectively may have a material adverse effect on
the Company's business, financial condition and results of operations. 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 55 new
Sunrise model facilities targeted for completion over the next three years is
between $410 million and $550 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 to the Company from the Offering,
together with existing working capital and financing commitments and financing
expected to be available, will be sufficient to fund its development and
acquisition programs for at least the next 18 months. 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 $119.1 million
(excluding notes payable to affiliates) at June 30, 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"), 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 June 30, 1996, approximately $41.3
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 $52,000.
CONSEQUENCES OF DEFAULT. There can be no assurance that the Company will
generate sufficient cash flow from operations to cover required interest,
principal and any operating lease payments. Any payment or other default could
cause the lender to foreclose upon the facilities securing such indebtedness or,
in the case of an operating lease, could terminate the lease, with a consequent
loss of income and asset value to the Company. In certain cases, indebtedness
secured by a facility is also secured by a pledge of the Company's interests in
the facility. In the event of a default with respect to any such indebtedness,
the lender could avoid the judicial procedures required to foreclose on real
property by foreclosing on the pledge instead, thus
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accelerating the lender's acquisition of the facility. Further, because of
cross-default and cross-collateralization provisions in certain of the Company's
mortgages, a default by the Company on one of its payment obligations could
adversely affect a significant number of the Company's other properties.
BOND FINANCING. Two facilities have been financed by bonds. In order to
continue to qualify for favorable tax treatment of the interest payable on these
bonds, the facilities must comply with certain federal income tax requirements,
principally pertaining to the maximum income level of a specified portion of the
residents. Failure to satisfy these requirements constitutes an event of default
under the bonds, thereby accelerating their maturity.
COMPETITION
The long-term care industry is highly competitive and the Company believes
that the assisted living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health care
agencies, facility-based service programs, retirement communities and
convalescent centers. In general, regulatory and other barriers to competitive
entry in the assisted living industry are not substantial. In pursuing its
growth strategy, the Company expects to face competition in its efforts to
develop and acquire assisted living facilities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its business and that could
have a material adverse effect on its business, financial condition and results
of operations. Moreover, if the development of new assisted living facilities
outpaces demand for those facilities in certain markets, such markets may become
saturated. Such an oversupply of facilities could cause the Company to
experience decreased occupancy, depressed margins and lower operating results.
See "Business -- Competition."
DIFFICULTIES OF MANAGING RAPID GROWTH
The Company expects that the number of owned and operated facilities will
increase substantially as it pursues its development and acquisition programs
for new assisted living facilities. This rapid growth will place significant
demands on the Company's management resources. The Company's ability to manage
its growth effectively will require it to continue to expand its operational,
financial and management information systems and to continue to attract, train,
motivate, manage and retain key employees. If the Company is unable to manage
its growth effectively, its business, financial condition and results of
operations could be adversely affected. See "Business -- The Sunrise Strategy"
and "-- Facility Development" and "Management."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends on the services of Paul J. Klaassen, its Chairman of
the Board, President, Chief Executive Officer and co-founder; Teresa M.
Klaassen, its Executive Vice President and co-founder; and David W. Faeder, its
Executive Vice President and Chief Financial Officer. The loss of the services
of any such officers could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
depends on its ability to continue to attract and retain management personnel
who will be responsible for the day-to-day operations of its assisted living
facilities. If the Company is unable to hire qualified management personnel to
operate its assisted living facilities, the Company's business, financial
condition and results of operations could be adversely affected. See
"Management."
STAFFING AND LABOR COSTS
The Company competes with various health care services providers, including
other elderly care providers, in attracting and retaining qualified or skilled
personnel. A shortage of nurses or other trained personnel or general
inflationary pressures may require the Company to enhance its wage and benefits
package to compete effectively for personnel. In anticipation of the Company's
growth plans, the Company's general and administrative expenses (which consist
primarily of staffing and labor expenses, including hiring
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additional staff and increasing the salary and benefits of existing staff) have
increased from 7.9% of operating revenue for 1993 to 12.3% of operating revenue
for 1994 and 18.5% of operating revenue for 1995. General and administrative
expenses were 21.0% of operating revenue for the six months ended June 30, 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 facilities are subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities,
although requirements vary from state to state. In general, these requirements
address, among other things: personnel education, training, and records;
facility services, including administration of medication, assistance with
self-administration of medication, and limited nursing services; monitoring of
resident wellness; physical plant specifications; furnishing of resident units;
food and housekeeping services; emergency evacuation plans; and resident rights
and responsibilities, including in some states the right to receive certain
health care services from providers of a resident's choice. Certain of the
Company's facilities are also licensed to provide independent living services
which generally involve lower levels of resident assistance. In several states
in which the Company operates or intends to operate, assisted living facilities
also require a certificate of need before the facility can be opened. In most
states, assisted living facilities also are subject to state or local building
code, fire code and food service licensure or certification requirements. Like
other health care facilities, assisted living facilities are subject to periodic
survey or inspection by governmental authorities. From time to time in the
ordinary course of business, the Company receives deficiency reports. The
Company reviews such reports and seeks to take appropriate corrective action.
Although most inspection deficiencies are resolved through a plan of correction,
the reviewing agency typically is authorized to take action against a licensed
facility where deficiencies are noted in the inspection process. Such action may
include imposition of fines, imposition of a provisional or conditional license
or suspension or revocation of a license or other sanctions. In March 1996,
Maryland state officials imposed a $3,000 civil money fine against the Company
for survey deficiencies at three Kensington, Maryland facilities formerly
managed by the Company. The Company appealed such fine and in August 1996 paid
$2,000 in settlement of such fine. In May 1996, one of the Pennsylvania nursing
home facilities managed by the Company received notice from the Pennsylvania
Department of Health of a survey report stating that the facility was not in
compliance with the requirements of participation for the Medicare and Medicaid
programs. Therefore, the
Pennsylvania agency survey report stated that a civil monetary penalty of $50 to
$3,000 per day would be imposed for the period beginning March 12, 1996, the
date the facility was first alleged to be out of compliance, until the date the
alleged deficiencies were corrected. The owner of the facility appealed such
fine and in October 1996, paid the Health Care Financing Administration
approximately $18,000 in settlement of such fine. 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. In 1995, a local
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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 intended to put the management
contract for the Kensington facilities out for bid when the existing management
contract with the Company expired. The management contract has been awarded to a
third party effective September 1, 1996.
The Company also is subject to Federal and state anti-remuneration laws,
such as the Medicare/ Medicaid anti-kickback law, which govern certain financial
arrangements among health care providers and others who may be in a position to
refer or recommend patients to such providers. These laws prohibit, among other
things, certain direct and indirect payments that are intended to induce the
referral of patients to, the arranging for services by, or the recommending of,
a particular provider of health care items or services. The Medicare/Medicaid
anti-kickback law has been broadly interpreted to apply to certain contractual
relationships between health care providers and sources of patient referral,
including agreements like the Company's agreement with Jefferson Health System.
Similar state laws vary from state to state, are sometimes vague and seldom have
been interpreted by courts or regulatory agencies. Violation of these laws can
result in loss of licensure, civil and criminal penalties, and exclusion of
health care providers or suppliers from participation in (i.e., furnishing
covered items or services to beneficiaries of) the Medicare and Medicaid
programs. There can be no assurance that such laws will be interpreted in a
manner consistent with the practices of the Company. See "Business -- Government
Regulation."
DISCRETIONARY USE OF PROCEEDS
The Company expects to use the net proceeds to the Company from the
Offering (estimated to be $104.9 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.
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
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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 $5,000,000
per wrongful act and $7,000,000 in the aggregate. The general liability
insurance is limited to $1,000,000 per facility/per event, with additional
specific limitations of $100,000 per event (premises damage), $5,000 per event
(medical expenses) and $1,000 per event (resident's property damage). The
Company also has an umbrella excess liability protection policy in the total
amount of $25,000,000. There can be no assurance that claims will not arise
which are in excess of the Company's insurance coverage or are not covered by
the Company's insurance coverage. A successful claim against the Company not
covered by, or in excess of, the Company's insurance could have a material
adverse effect on the Company's financial condition and results of operations.
Claims against the Company, regardless of their merit or eventual outcome, may
also have a material adverse effect on the Company's ability to attract
residents or expand its business and would require management to devote time to
matters unrelated to the operation of the Company's business. In addition, the
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
After completion of the Offering, the Company will have 18,255,753 shares
of Common Stock outstanding (19,005,753 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, approximately
11,594,334 shares, including the 5,000,000 shares offered hereby (5,750,000
shares 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 6,661,419 shares are "restricted
securities" within the meaning of Rule 144. Subject to certain exceptions, the
Company, its directors and executive officers and certain stockholders of the
Company, who upon completion of the Offering, will beneficially own in the
aggregate approximately 7,309,000 shares of Common Stock (including up to
203,333 shares that will be sold if the Underwriters' over-allotment option is
exercised), have agreed 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 90 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. Thereafter, up to
6,661,419 shares may be sold, subject to the limitations of Rule 144. After
expiration of the lock-up period, the holders of 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. In addition to the outstanding shares of Common Stock, the Company has
reserved for issuance 3,248,065 shares of Common Stock pursuant to the Company's
stock option programs, under which options to purchase 1,631,348 shares were
outstanding at October 8, 1996, of which options for 687,984 shares (of which up
to 203,333 shares will be sold in the Offering if the Underwriters'
over-allotment option is exercised) are exercisable within 60 days of the date
of this Prospectus. 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,"
"-- 1996 Stock Option Plan" and "-- Non-Plan Stock Option Grant" and
"Underwriting."
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POSSIBLE VOLATILITY OF STOCK PRICE
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 or the
Company's ability to meet those estimates, 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 28.3% of
the outstanding Common Stock after completion of the Offering (27.2%, if the
Underwriters' over-allotment option is exercised in full). Executive officers
and directors as a group (including the Founders) will beneficially own
approximately 38.8% of the outstanding Common Stock after the Offering (36.6%,
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."
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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 for which the Company received net proceeds
of $20.2 million. These shares were converted automatically into an equal number
of shares of Common Stock upon completion of the Company's initial public
offering on June 5, 1996. 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 $87.0 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 $22.0 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 3.75% 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. 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 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."
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In May 1996, the Company entered into a Loan Modification Agreement
regarding the GECC Mortgage whereby, upon consummation of the Company's initial
public offering on June 5, 1996, the Company paid GECC $8.6 million as payment
in full of a 25% participating interest in cash flow and appreciation in the
value of the SALLP Properties. In addition, the Company prepaid $8.0 million of
the Floating Rate Portion. The interest rate applicable to the remaining balance
of the Floating Rate Portion was reduced 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 $15.3 million.
The Company's executive offices are located at 9401 Lee Highway, Suite 300,
Fairfax, Virginia 22031, and its telephone number is (703) 273-7500.
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RECENT DEVELOPMENTS
ACQUISITION OF SOUTHEAST PROPERTIES
On October 8, 1996, the Company completed its acquisition from Laing
Properties & Subsidiaries, Inc. of five facilities located in the southeast
United States (the "Southeast Properties") for an aggregate purchase price of
$34.0 million in cash with no debt assumed. The five facilities consist of 511
total units providing primarily independent and assisted living services. One of
the facilities also has a 26-bed skilled nursing floor. These facilities had
combined revenues of $9.9 million in 1995 and $5.4 million for the six months
ended June 30, 1996, and had combined net (losses) income of $(32,000) and
$195,000, respectively, for these periods. After giving effect to the
acquisition of the Southeast Properties at the beginning of the respective
periods, the Company had a pro forma net loss of $8.5 million and $3.1 million
for 1995 and for the first six months of 1996, respectively. See "Selected
Financial, Operating and Pro Forma Data" and "Unaudited Pro Forma Consolidated
Financial Statements."
AFFILIATION AGREEMENT WITH JEFFERSON HEALTH SYSTEM
On October 8, 1996, the Company entered into an affiliation agreement with
Jefferson Health System ("JHS"), an integrated health care system located in
Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide
residents of Sunrise facilities located in the Philadelphia metropolitan region,
on a preferred (but non-exclusive) basis, with access to certain health care
services offered by JHS. Such health care services may include hospital
services, physician services, rehabilitation services, home health services and
products and mental health services. The initial term of the affiliation
agreement is five years, after which either party may extend the agreement for
an additional five-year period. After the expiration of the first year of the
term of the affiliation agreement, it is contemplated that the parties would
enter into a more detailed agreement in place of the existing agreement for the
remainder of the term. Either party has the right to terminate the existing
agreement after expiration of the first year of the term and before a
replacement agreement is executed.
CREDIT FACILITY
On October 3, 1996, a subsidiary of the Company received from GMAC
Commercial Mortgage Corporation a commitment for a $51.0 million revolving
construction credit facility. The credit facility provides for construction and
interim loans to finance the development of up to seven assisted living
facilities. The Company has agreed to guarantee the repayment of all amounts
outstanding under this credit facility. The credit facility is for a term of
five years and is secured by cross-collateralized first mortgages on the real
property and liens on receivables. Advances under the credit facility bear
interest at rates ranging from LIBOR plus 2.25% to 2.60%.
CONTINGENT ACQUISITION OF CALIFORNIA PROPERTIES
On October 8, 1996, the Company entered into a purchase and sale agreement
subject to certain conditions, including satisfactory completion by the Company
of financial, accounting, regulatory and property due diligence over the next 60
days, to acquire two facilities located in Southern California for $30.8 million
in cash. The California Properties consist of 258 total units providing
independent and assisted living services. Assuming the Company elects to proceed
with the transaction following the completion of its due diligence review, the
closing of the transaction would likely take place in the first quarter of 1997.
Given the contingent nature of the purchase and sale agreement, there can be no
assurance that the acquisition will be consummated.
INITIAL PUBLIC OFFERING
On June 5, 1996, the Company completed its initial public offering selling
5,700,000 shares of Common Stock at $20.00 per share. The net proceeds to the
Company from the offering were approximately $104.3 million. The net proceeds
were used as follows: $16.6 million in partial payment of the Company's
long-term debt; $10.2 million to redeem the outstanding shares of Series B
Exchangeable Preferred Stock; $34.0 million to acquire the Southeast Properties;
and the balance to fund continued development of Sunrise facilities, as well as
for working capital and general corporate purposes.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby are estimated to be approximately $104.9 million,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. The Company expects to use such net
proceeds to finance development and acquisition of additional assisted living
facilities and for working capital and general corporate purposes. Pending such
uses, the Company intends to invest its 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 the 1,000,000 shares of
Common Stock by the Selling Stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- The Sunrise Strategy."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company completed its initial public offering of Common Stock on June
5, 1996 at a price of $20.00 per share. Since May 31, 1996, the Common Stock has
traded on the Nasdaq National Market under the symbol "SNRZ." The following
table sets forth for the periods indicated the high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1996 HIGH LOW
<S> <C> <C>
Second Quarter (from May 31, 1996)............................ $25 3/4 $23
Third Quarter................................................. 30 21 1/2
Fourth Quarter (through October 7, 1996)...................... 28 3/4 27 3/4
</TABLE>
On October 7, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $27 3/4 per share. At October 7, 1996, there were 26
holders of record of the Common Stock.
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."
17
<PAGE> 19
CAPITALIZATION
The following table sets forth at June 30, 1996 (i) the actual
capitalization of the Company, (ii) pro forma capitalization of the Company
giving effect to the acquisition of the Southeast Properties, and (iii) pro
forma capitalization giving effect to the acquisition of the Southeast
Properties as adjusted to reflect the receipt and application of the estimated
net proceeds to the Company from the Offering (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 JUNE 30, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and short-term investments(1)........................... $ 72,713 $ 38,261 $ 143,111
======== ======== ========
Long-term debt (including current portion)(2)................ 119,091 119,091 119,091
Minority interests........................................... 372 372 372
Stockholders' equity:
Preferred Stock, par value $.01 per share, 10,000,000
shares
authorized; none issued and outstanding................. -- -- --
Common Stock, $.01 par value, 60,000,000 shares authorized;
14,244,562 shares issued and outstanding, actual and pro
forma; 18,244,562 shares issued and outstanding, pro
forma as adjusted(3).................................... 142 142 182
Additional paid-in capital................................. 107,703 107,703 212,513
Accumulated deficit........................................ (14,962) (14,962) (14,962)
-------- -------- --------
Total stockholders' equity.............................. 92,883 92,883 197,733
-------- -------- --------
Total capitalization............................... $212,346 $ 212,346 $ 317,196
======== ======== ========
</TABLE>
- ---------------
(1) Includes $50.0 million of short-term securities consisting of high-quality
commercial paper with maturities not greater than 180 days.
(2) Excludes notes payable to affiliates.
(3) Does not include (i) 1,631,348 shares of Common Stock subject to outstanding
options at October 7, 1996 at a weighted average exercise price of $10.99
per share, (ii) outstanding warrants for 50,000 shares of Common Stock at an
exercise price per share of $17.00, and (iii) shares having a fair market
value of $200,000 which the Company intends to issue in a pro rata placement
in satisfaction of a $200,000 non-interest bearing loan made to one of the
Company's predecessor entities. Under the treasury stock method of
computation based on the last sale price on October 7, 1996 of $27 3/4 per
share, outstanding options and warrants represent 1,004,409 common stock
equivalents. See "Management -- 1996 Directors' Stock Option Plan," "-- 1995
Stock Option Plan," "-- 1996 Stock Option Plan," and "-- Non-Plan Stock
Option Grant" and "Description of Capital Stock -- Warrants."
18
<PAGE> 20
SELECTED FINANCIAL, OPERATING AND PRO FORMA DATA
The following table sets forth selected financial, operating and pro forma
data of the Company. The selected financial and operating data for the six-month
periods ended June 30, 1995 and 1996 and for the year ended December 31, 1995
are derived from consolidated financial statements of the Company. The selected
financial and operating data for the four years ended December 31, 1994 are
derived from the combined financial statements of Sunrise Entities. The
consolidated 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 and operating data for the years
ended December 31, 1991 and 1992 are derived from unaudited combined financial
statements of Sunrise Entities. 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 pro forma data for the year ended December 31, 1995 and as of and for
the six months ended June 30, 1996 assume the conversion of the Series A
Preferred Stock and the acquisition of the Southeast Properties as if each had
occurred at January 1, 1995. Pro forma adjustments are based upon available
information and certain assumptions that management believes to be reasonable.
The unaudited pro forma financial data set forth below is not necessarily
indicative of the Company's financial position or the results of operations that
actually would have occurred if the transactions had been consummated on such
dates. In addition, the pro forma data are not intended to be a projection of
results of operations that may be obtained in the future. The data should be
read in conjunction with the Consolidated and Combined Financial Statements and
Unaudited Pro Forma Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(11) 1995 1996 1996(11)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Operating revenue:
Resident fees......... $10,358 $15,801 $23,994 $32,139 $ 34,752 $ 44,696 $17,076 $ 19,458 $ 24,839
Management services
income.............. 605 1,078 1,604 1,830 2,506 2,506 1,212 1,542 1,542
------- ------- ------- ------- --------- ------- ------- --------- -------
10,963 16,879 25,598 33,969 37,258 47,202 18,287 21,000 26,381
Operating expenses:
Facility operating
expenses............ 8,386 11,824 17,761 17,983 21,010 28,359 10,268 12,608 16,500
Facility development
and pre-opening
expenses............ 189 231 474 263 1,172 1,172 433 650 650
General and
administrative...... 993 1,655 2,034 4,183 6,875 6,875 2,719 4,413 4,413
Depreciation and
amortization........ 618 1,355 2,799 3,160 3,009 3,999 1,479 1,803 2,298
------- ------- ------- ------- --------- ------- ------- --------- -------
Income from
operations............ 777 1,814 2,530 8,380 5,192 6,797 3,387 1,526 2,520
Interest income....... 267 350 317 566 1,229 1,229 606 700 700
GECC mortgage interest
expense(2).......... -- -- -- (5,529) (15,295) (15,295) (4,971) (4,807) (4,807)
Other interest
expense............. (1,115) (2,212) (3,808) (3,060) (1,261) (1,261) (557) (615) (615)
Equity in (losses)
earnings on
investments in
unconsolidated
partnerships.......... (754) (299) (104) 33 (9) (9) 48 6 6
Minority interest....... 87 176 428 172 7 7 (19) 83 83
Unusual charge(3)....... -- -- -- -- -- -- -- (981) (981)
------- ------- ------- ------- --------- ------- ------- --------- -------
(Loss) income before
extraordinary item.... (738) (171) (637) 562 (10,137) (8,532) (1,505) (4,088) (3,094)
Extraordinary item...... -- -- -- 850 -- -- -- -- --
------- ------- ------- ------- --------- ------- ------- --------- -------
Net (loss) income(4).... $ (738) $ (171) $ (637) $ 1,412 $(10,137) $ (8,532) $(1,505) $ (4,088) $ (3,094)
======= ======= ======= ======= ========= ======= ======= ========= =======
NET LOSS PER SHARE
DATA(5):
Net loss per common
equivalent shares..... $ (0.97) $ (0.69) $ (0.35)
======= ========= =======
Weighted average number
of common and common
equivalent shares
outstanding........... 8,826,127 7,625,366 9,720,604
======= ========= =======
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(11) 1995 1996 1996(11)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND OTHER DATA(6):
Facilities (at end of period):
Owned(7)............................. 9 14 16 19 20 25 20 23 28
Managed.............................. 2 5 7 9 8 8 8 7 7
--- ----- ----- ----- ----- ===== ----- ----- =====
Total.............................. 11 19 23 28 28 33 28 30 35
=== ===== ===== ===== ===== ===== ===== ===== =====
Resident capacity (at end of period):
Owned(7)............................. 575 1,067 1,289 1,473 1,557 2,032 1,557 1,873 2,384
Managed.............................. 143 549 652 772 712 712 596 712 712
--- ----- ----- ----- ----- ----- ----- ----- -----
Total.............................. 718 1,616 1,941 2,245 2,269 2,744 2,153 2,585 3,096
=== ===== ===== ===== ===== ===== ===== ===== =====
Occupancy rate(8)...................... -- -- 94.0% 94.8% 91.7% -- 91.8% 92.5% --
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
----------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(11)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and short-term investments(9)....... $ 640 $ 2,499 $ 3,268 $ 8,089 $ 6,252 $ 72,713 $ 38,261
Working capital (deficit)(10)............ (468) 741 1,288 (7,305) 2,050 66,360 31,909
Total assets............................. 18,146 50,866 61,159 109,003 123,321 223,968 223,968
Total debt............................... 13,997 45,405 55,207 110,029 122,290 120,712 120,712
Series A convertible preferred stock..... -- -- -- -- 23,963 -- --
Total common stockholders' equity
(deficit).............................. (513) (1,716) (2,925) (16,391) (31,774) 92,883 92,883
</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) The 1995 GECC Mortgage interest expense includes $0.5 million of debt
discount amortization, $5.4 million of expense related to the 25% GECC
participating interest in cash flow and appreciation in the value of the
SALLP Properties and $9.4 million of additional interest expense related to
the GECC Mortgage. In June 1996, the Company paid GECC approximately $8.6
million to prepay GECC's 25% participating interest. Also in June 1996, the
Company paid $8.0 million of the floating rate portion of the GECC Mortgage
and the interest rate was reduced on the floating rate portion from LIBOR
plus 5.75% to 3.75%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Six Months Ended June 30, 1996
Compared to the Six Months Ended June 30, 1995."
(3) In June 1996, the Company made a $1.0 million cash payment to the
third-party limited partner in two facilities in exchange for the transfer
to the Company by the third-party of additional 1% partnership interests in
each facility (with a total book value of $18,700) and the elimination of
any requirement for the Founders to maintain a specified ownership interest
in the Company.
(4) 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.
(5) See Notes 3 and 18 of Notes to Consolidated and Combined Financial
Statements.
(6) 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.
(7) Includes all facilities wholly owned by the Company or in which the Company
owns interests. Prior to 1994, several of the owned facilities were leased
from Sunrise Entities.
(8) 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."
(9) Includes $50.0 million of short-term securities consisting of high-quality
commercial paper with maturities not greater than 180 days.
(10) Working capital (deficit) at December 31, 1994 included a liability for
distributions made in connection with the formation of the Company. See
"Certain Transactions."
(11) The Southeast Properties were acquired in October 1996 for $34.0 million in
cash. No liabilities were assumed as part of the acquisition. Accordingly,
no debt or related interest costs have been included in the pro forma
financial information.
20
<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 is a leading provider of assisted living services to the
elderly. The Company currently operates 32 facilities in 11 states with a
capacity of approximately 2,800 residents, including 28 facilities owned by the
Company or in which it has ownership interests and four 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). Of such shares of Preferred Stock, all of the
outstanding Series A Convertible Preferred Stock was converted automatically
into an equal number of shares of Common Stock upon completion of the Company's
initial public offering in June 1996 and all of the outstanding shares of Series
B Exchangeable Preferred Stock were redeemed using a portion of the net proceeds
of the initial public offering. See "The Company and its Predecessors" and
"Certain Transactions."
During the next three years, the Company plans to develop at least 55 of
its model facilities in major metropolitan and suburban markets throughout the
United States. The estimated cost to complete and lease up the 55 new Sunrise
model facilities is between $410 million and $550 million. The Company
anticipates that it will use a combination of net proceeds to the Company from
the Offering, existing working capital and 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
10 additional assisted living facilities or other properties that can be
repositioned as Sunrise assisted living facilities, which are in addition to the
five Southeast Properties. 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 working capital, financing commitments and financing
expected to be available, will be sufficient to fund its development and
acquisition programs for at least the next 18 months. See "-- Liquidity and
Capital Resources" 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 six months ended June 30, 1996 comprised 93.3% and 92.7%,
respectively, of total operating revenues. Resident fees typically are paid
monthly by residents, their families or other responsible parties. In 1995 and
for the six months ended June 30, 1996, approximately 99% of the Company's
revenue was derived from private pay sources. Resident fees include revenue
derived from Basic Care, community fees, Extended Care,
21
<PAGE> 23
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 six months ended June 30, 1996 accounted for the remaining 6.7% and
7.3%, 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
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 six months ended June 30, 1996
through the addition of headquarters and regional staff.
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>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses..................... 69.4(1) 52.9 56.4 56.2 60.0
Facility development and pre-opening expenses... 1.9 0.8 3.1 2.4 3.1
General and administrative...................... 7.9 12.3 18.5 14.9 21.0
Depreciation and amortization................... 10.9 9.3 8.1 8.1 8.6
----- ----- ----- ----- -----
Income from operations............................ 9.9 24.7 13.9 18.5 7.3
Other income (expense):
Interest income................................. 1.2 1.7 3.3 3.3 3.3
Interest expense:
GECC mortgage interest expense............... -- (16.3) (41.1) (27.2) (22.9)
Other interest expense....................... (14.9) (9.0) (3.4) (3.0) (2.9)
----- ----- ----- ----- -----
Total interest expense.......................... (14.9) (25.3) (44.5) (30.2) (25.8)
Equity in (losses) earnings on investments in
unconsolidated partnerships.................. (0.4) 0.1 -- 0.3 0.0
Minority interest............................... 1.7 0.5 -- (0.1) 0.4
Unusual charge.................................. -- -- -- -- (4.7)
----- ----- ----- ----- -----
(Loss) income before extraordinary item........... (2.5) 1.7 (27.2) (8.2) (19.5)
Extraordinary item.............................. -- 2.5 -- -- --
----- ----- ----- ----- -----
Net (loss) income................................. (2.5)% 4.2% (27.2)% (8.2)% (19.5)%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes $2.7 million of rent expense related to six facilities leased in
1993 that were acquired in 1994. Excluding such rent expense, facility
operating expenses as a percentage of operating revenue would have been
58.9%.
22
<PAGE> 24
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Operating Revenue. Operating revenue for the six months ended June 30,
1996 increased 14.8% to $21.0 million from $18.3 million in the six months ended
June 30, 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 six months ended June 30, 1996 increased 14.0%
to $19.5 million from $17.1 million in the six months ended June 30, 1995. This
increase was due primarily to the inclusion of the Raleigh and Chanate Lodge
facilities ($1.5 million) and an increase in the average daily resident fee
($0.8 million). Resident occupancy was 92.5% for the six months ended June 30,
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"), compared to 91.8% for the six months ended June
30, 1995. Resident occupancy, including vacancies attributable to renovations at
two facilities in order to meet requirements for accepting non-ambulatory
residents and the relocation of non-ambulatory residents at a third facility,
remained virtually unchanged at 90.0% for the six months ended June 30, 1996
compared to 90.1% for the six months ended June 30, 1995.
The average daily resident fee (excluding community fees) for Same
Facilities increased to $83 in the six months ended June 30, 1996 from $79 in
the six months ended June 30, 1995 primarily due to an increase in the Basic
Care rate and an increase in the number of residents receiving Extended Care and
Alzheimer's Care services.
Management services income for the six months ended June 30, 1996 increased
by $0.3 million, or 27.2%, to $1.5 million from $1.2 million in the six months
ended June 30, 1995 due to an increase in management fees and one-time
consulting fees.
Operating Expenses. Operating expenses for the six months ended June 30,
1996 increased 30.7% to $19.5 million from $14.9 million in the six months ended
June 30, 1995. The increase in operating expenses in the six months ended June
30, 1996 is attributable primarily to growth in facility operating and general
and administrative expenses.
Facility operating expenses for the six months ended June 30, 1996
increased 22.8% to $12.6 million from $10.3 million in the six months ended June
30, 1995. As a percentage of operating revenue, facility operating expenses in
the six months ended June 30, 1996 increased to 60.0% from 56.2% in the six
months ended June 30, 1995. Of the $2.3 million increase in facility operating
expenses in the six months ended June 30, 1996, $1.2 million is attributable to
the opening of the Raleigh facility and the acquisition of the Chanate Lodge.
Increased staffing, benefits, salaries and training at existing facilities
accounted for $0.7 million. The balance of the increase, $0.4 million, was
comprised of an increase in other general expenses.
Facility development and pre-opening expenses for the six months ended June
30, 1996 increased $0.2 million to $0.6 million from $0.4 million in the six
months ended June 30, 1995. This increase was primarily due to increased labor
costs resulting from increased development efforts.
General and administrative expenses in the six months ended June 30, 1996
increased 62.3% to $4.4 million from $2.7 million in the six months ended June
30, 1995. As a percentage of operating revenue, general and administrative
expenses in the six months ended June 30, 1996 increased to 21.0% from 14.9% in
the six months ended June 30, 1995. Of the $1.7 million increase in general and
administrative expenses in the six months ended June 30, 1996, approximately
55.7% was related to labor costs, including a $0.7 million increase in salary
and benefits expenses relating to the hiring of additional headquarters and
regional office management staff in anticipation of the Company's growth plans,
and $0.2 million related to salary increases and benefits for existing staff.
The remaining $0.8 million increase is attributable to accounting, marketing,
consulting, public relations, telephone, and other general expenses.
Depreciation and amortization in the six months ended June 30, 1996
increased 21.9% to $1.8 million from $1.5 million in the six months ended June
30, 1995 primarily due to the opening of the Raleigh facility and acquisition of
the Chanate Lodge facility and amortization of capitalized pre-opening costs
over twelve months.
23
<PAGE> 25
Other income (expense). Interest income for the six months ended June 30,
1996 increased 15.6% to $0.7 million from $0.6 million in the six months ended
June 30, 1995 primarily due to interest earned on $5.0 million of revenue bonds
purchased in March 1995 (the Company has an option to purchase the facility
subject to the revenue bonds, at any time, for fair market value). Interest
expense for the six months ended June 30, 1996 decreased 1.9% to $5.4 million
from $5.5 in the six months ended June 30, 1995 as a result of a decrease in
GECC Mortgage interest. In June 1996, the Company paid approximately $8.6
million to GECC as payment in full of all participation interest due and payable
pursuant to the GECC Mortgage. In addition, the Company paid GECC $8.0 million
to be applied to prepay a portion of the variable rate indebtedness. GECC
reduced the interest rate applicable to the outstanding portion of variable rate
indebtedness from LIBOR plus 5.75% to LIBOR plus 3.75%.
Unusual Charge. 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 Company's initial public offering in June 1996, the Company
made a $1.0 million cash payment to the third-party limited partner in these two
facilities in exchange for the transfer to the Company by the third party of
additional 1% partnership interests in each facility (with a total book value of
$18,700) and the elimination of any requirement for the Founders to maintain a
specified ownership interest in the Company. This was reflected as an unusual
charge during the six months ended June 30, 1996.
Net loss. The Company incurred a net loss of $4.1 million for the six
months ended June 30, 1996, including the $1.0 million unusual charge, compared
to a net loss of $1.5 million in the six months ended June 30, 1995. The net
loss for the six months ended June 30, 1996 resulted primarily from a $4.6
million increase in operating expenses and the $1.0 million unusual charge
described above offset, in part, by a $2.7 million increase in operating
revenue. The Company did not recognize any income tax expense in the six months
ended June 30, 1996 because of such net loss.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Operating Revenue. Operating revenue for 1995 increased 9.7% to $37.3
million from $34.0 million in 1994 due primarily to the growth in resident fees.
Resident fees (including community fees and fees for Basic Care, Extended Care,
Alzheimer's Care and other services) for 1995 increased 8.1% to $34.8 million
from $32.1 million in 1994. This increase was due primarily to $1.9 million of
additional revenue generated by an increase in the Basic Care rate and the
inclusion of a full year of resident fees of $1.4 million for the Gardner Park
facility (opened in September 1994), and was offset partially by $0.8 million
due to a decline in average resident occupancy. Resident occupancy fell from
94.8% to 91.7% in 1995 for Same Facilities. Resident occupancy was 89.6% in 1995
including vacancies attributable to renovating two facilities in order to meet
requirements for accepting non-ambulatory residents and relocating
non-ambulatory residents at a third facility. Same Facility resident occupancy
declined in 1995 largely as a result of a decline in resident occupancy at two
facilities. At these two facilities, the Company has made management changes and
instituted new marketing programs. In addition, the Company strengthened its
senior management team by hiring a new chief operating officer. See
"Management."
The average daily resident fee (excluding community fees) for Same
Facilities increased 6.7% to $80 in 1995 from $75 in 1994 primarily due to a
4.4% increase in the average Basic Care rate from $68 in 1994 to $71 in 1995 and
an increase in the number of residents receiving Extended Care and Alzheimer's
Care services.
Management services income for 1995 increased by $0.7 million, or 37.0%, to
$2.5 million from $1.8 million in 1994 due to a $0.4 million, or 26.8%, increase
in management fees related to a full year of income from four management
contracts entered into in 1994, and from ancillary services totaling $0.3
million.
Operating Expenses. Operating expenses for 1995 increased 25.3% to $32.0
million from $25.6 million in 1994. The increase in operating expenses in 1995
is attributable primarily to growth in facility operating expenses, facility
development and pre-opening expenses and general and administrative expenditures
related to building the Company's infrastructure in connection with its growth
plans.
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Facility operating expenses for 1995 increased 16.8% to $21.0 million from
$18.0 million in 1994. As a percentage of operating revenue, facility operating
expenses in 1995 increased to 56.4% from 52.9% in 1994. Of the $3.0 million
increase in facility operating expenses in 1995, $1.2 million was attributable
to combination of salary increases for existing staff, increased facility-based
staffing required to handle the increased number of residents receiving Extended
Care or Alzheimer's Care and training of facility-based personnel. The balance
of the increase, $1.8 million, was due to the inclusion of a full year of
operations at the Gardner Park facility, other facility expenses such as food,
marketing, and legal, the renovation and opening of a portion of the Village
House facility providing assisted living services.
Facility development and pre-opening expenses for 1995 increased $0.9
million to $1.2 million from $0.3 million in 1994. The increase was due to an
increase in development activities. Labor costs increased $0.4 million,
unrecoverable direct costs increased $0.6 million, and pre-opening expenses
increased $0.1 million. These increases were offset by an increase in
capitalized development expenses of $0.4 million.
General and administrative expenses in 1995 increased 64.4% to $6.9 million
from $4.2 million in 1994. As a percentage of operating revenue, general and
administrative expenses in 1995 increased to 18.5% from 12.3% in 1994. Of the
$2.7 million increase in general and administrative expenses in 1995,
approximately 70.8% was related to labor costs including a $1.0 million increase
in salary and benefits expenses relating to the hiring in 1995 of 33 additional
headquarters and regional office management staff in anticipation of the
Company's growth plans, and $0.9 million related to salary increases and
benefits for existing staff. The remaining $0.8 million increase is attributable
to marketing, consulting, and public relations and other general expenses.
The provision for bad debts was $0.2 million and $0.1 million in 1995 and
1994, respectively. Receivable balances are reviewed on a monthly basis and a
provision for bad debts is established as needed for those balances that in the
judgment of management are uncollectible. During 1994, the Company also accrued
$0.3 million to recognize anticipated losses on one of its management contracts.
Also in 1994, the Company accrued $0.1 million in anticipation of actions taken
by Virginia state and local authorities regarding licensure and state building
code violations. No loss accruals were recorded in 1995. See "Risk
Factors -- Government Regulation."
Depreciation and amortization in 1995 decreased 4.8% to $3.0 million from
$3.2 million in 1994. In 1994, certain predecessor limited partnerships wrote
off $0.2 million of deferred financing costs. These costs were expensed prior to
June 8, 1994 when the Company acquired all minority ownership interests in the
SALLP Properties utilizing a new debt facility.
Other income (expense). Interest income for 1995 increased 117.3% to $1.2
million from $0.6 million in 1994 primarily due to a $0.4 million increase
related to the purchase in 1995, for $5.0 million, of revenue bonds secured by a
Company-managed facility and a $0.2 million increase due to higher cash balances
related to the January 1995 private placement of Series A Convertible Preferred
Stock. Interest expense for 1995 increased 92.8% to $16.6 million from $8.6
million in 1994. The increase in interest expense primarily was attributable to
the GECC Mortgage. The GECC Mortgage interest expense increased by $4.2 million,
or 79.4%, in 1995 reflecting the inclusion of an additional five months of
interest compared to 1994. Interest expense for 1994 and 1995 includes $0.3
million and $0.5 million, respectively, of amortization expense, which relates
to a $3.2 million loan discount recorded on the GECC Mortgage. Such discount is
being amortized over the term of the GECC Mortgage. GECC Mortgage interest
expense for 1995, totaling $5.4 million, represents accrual of interest expense
relating to the 25% participation interest and is based upon an increase during
1995 in the estimated market value of facilities securing the GECC Mortgage.
A Loan Modification Agreement with GECC was entered into in May 1996.
Pursuant to the agreement, upon consummation of the Company's initial public
offering on June 5, 1996, the Company paid 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 paid GECC $8.0 million to be applied to
prepay a portion of the variable rate indebtedness. GECC reduced 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
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loan documents effective January 1, 1995, GECC Mortgage interest expense for
1995 would have been approximately $7.8 million as compared to $15.6 million.
Interest expense related to other debt for 1995 decreased 58.8% to $1.3
million from $3.1 million in 1994, due to the repayment of $71.5 million of debt
with a portion of the proceeds from the GECC Mortgage.
Net (loss) income. The Company incurred a net loss of $10.1 million in
1995, compared to net income of $1.4 million (after a $0.9 million extraordinary
item) in 1994. The net loss in 1995 resulted primarily from the $6.1 million of
expense recorded in 1995 relating to the GECC Mortgage loan discount and
participation interest and the $6.5 million increase in operating expenses,
which were offset, in part, by the $3.3 million increase in operating revenue.
The Company did not recognize any income tax expense in 1995 because of such net
loss. At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $3.9 million which expire in 2010. See Note
9 of Notes to Consolidated and Combined Financial Statements.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Operating Revenue. Operating revenue for 1994 increased 32.7% to $34.0
million from $25.6 million in 1993 due primarily to the growth in resident fees.
Resident fees for 1994 increased 33.9% to $32.1 million from $24.0 million in
1993. This increase was primarily due to the inclusion of a full year of
resident fees from the Falls Church and Village House facilities, and the
acquisition of the majority ownership interest in the Mercer Island facility
which contributed $2.5 million and $1.9 million, respectively, to this increase.
The remaining increase was a result of higher average resident occupancy. The
average daily resident fee (excluding community fees) and the average Basic Care
rate for Same Facilities of $75 and $68, respectively, was unchanged from 1993.
Management services income for 1994 increased 14.0% to $1.8 million from
$1.6 million in 1993 due to an increase in the number of facilities managed by
the Company to 11 in 1994 from seven in 1993.
Operating Expenses. Operating expenses for 1994 increased 10.9% to $25.6
million from $23.1 million in 1993. The increase in operating expenses in 1994
was primarily attributable to growth in general and administrative expenses and
depreciation and amortization. Facility-based expenses were essentially flat in
1994 compared to 1993.
Facility operating expenses for 1994 were $18.0 million compared to $17.8
million in 1993. Facility operating expenses for 1993 included $2.7 million of
rental expense related to six facilities leased by the Company in 1993 that were
acquired in 1994. Excluding such rent expense, facility operating expenses would
have been $15.0 million in 1993, or 58.9% of operating revenue for that year
compared to 52.9% for 1994. Before such rent expense in 1993, the facility
operating expenses increased 19.4% to $18.0 million from $15.0 million in 1993.
Of such increase, approximately $1.1 million was attributable to the inclusion
of a full year of operations of the Falls Church and Village House facilities,
$1.1 million was attributable to the acquisition of the Mercer Island facility
that was managed by the Company in 1993 and $0.3 million was attributable to the
opening of the Gardner Park facility in 1994. The remaining balance consists of
a $0.9 million increase in labor costs offset, in part, by a $0.4 million
decline in other operating expenses such as professional fees, advertising,
taxes and utilities.
Facility development and pre-opening expenses for 1994 decreased to $0.3
million from $0.5 million. This decrease was attributable to a $0.5 million
increase in development labor costs offset by an increase of $0.7 million in
capitalized costs. There were no capitalized costs in 1993 because there was
limited internal development activity.
General and administrative expenses in 1994 increased 105.6% to $4.2
million from $2.0 million in 1993 primarily due to an increase in salary and
benefits expenses. As a percentage of operating revenue, general and
administrative expenses in 1994 increased to 12.3% from 7.9% in 1993. Of the
increase in general and administrative expenses in 1994, approximately 40.1% was
related to salary and benefits expenses relating to salary increases and hiring
of additional headquarters and regional office management staff. The additional
increase was related to $0.4 million of bad debt and legal expense accruals, a
$0.1 million increase in training
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and consulting fees, and increases in other general and corporate expenses such
as marketing, telephone and rent.
Depreciation and amortization for 1994 increased by 12.9% to $3.2 million
from $2.8 million in 1993. The majority of this increase was related to $1.0
million of depreciation expense on the six facilities leased by the Company in
1993 that were acquired in 1994. In 1994, the Sunrise Entities increased the
estimated useful life of property and equipment, which had the effect of
reducing depreciation expense by $0.4 million.
Other income (expense). Interest income for 1994 increased by $0.3 million
to $0.6 million from $0.3 million in 1993. The increase in interest income is
primarily attributable to higher cash balances from funds received as a result
of the creation of a new debt facility in June 1994. Interest expense for 1994
increased by 125.5% to $8.6 million from $3.8 million in 1993, and is primarily
attributable to seven months of interest expense on the GECC Mortgage. Interest
expense on other debt declined 19.7% to $3.1 million from $3.8 million in 1993,
primarily due to the repayment of $71.5 million of debt with a portion of the
proceeds from the GECC Mortgage.
Extraordinary item. In 1994, $3.4 million of second-trust mortgages
related to two predecessor limited partnerships were pre-paid in full for $2.5
million. The prepayment at a discount was reflected as a $0.9 million
extraordinary gain.
Net (loss) income. The Company had net income (after the $0.9 million
extraordinary item) of $1.4 million in 1994 compared to a net loss of $0.6
million in 1993. The improvement in operating results for 1994 resulted
primarily from the $0.9 million gain recorded on the prepayment at a discount of
the two second-trust mortgages and an $8.4 million increase in operating
revenue, which were offset, in part, by $4.8 million of additional interest
expense. For 1994 and prior periods, Sunrise Entities consisted of partnerships,
limited liability companies or corporations that elected to be treated as S
Corporations under the Internal Revenue Code of 1986, as amended. Accordingly,
no provision or benefit for income taxes was made because taxable income or loss
passed through to the owners of those entities.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations from long-term borrowings,
equity placements and offerings 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 June 30, 1996, the Company had
$119.1 million of outstanding debt (excluding notes payable to affiliates) at a
weighted average interest rate of 8.4%. Of such amount, the Company had $79.9
million of fixed-rate debt (excluding a $2.1 million loan discount on the GECC
Mortgage) at a weighted average interest rate of 8.3%, $41.3 million of
variable-rate debt at a weighted average interest rate of 8.7%. 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 Convertible Preferred Stock in a
private placement for which the Company received gross proceeds of $22.0
million. In January 1996, the Company issued and sold 1,000,000 shares of Series
B Exchangeable Preferred Stock, receiving $10.0 million in net proceeds. On June
5, 1996, the Company completed its initial public offering. Upon completion of
the initial public offering, the outstanding shares of Series A Convertible
Preferred Stock converted automatically into an equal number of shares of Common
Stock. The net proceeds to the Company from the initial public offering were
approximately $104.3 million. As of June 30, 1996, uses of the net proceeds
included $16.6 million in partial payment of the Company's long-term debt, the
redemption of all of the outstanding shares of Series B Exchangeable Preferred
Stock for $10.2 million and the development of additional Sunrise assisted
living facilities. Working capital increased to $66.4 million at June 30, 1996,
compared to $2.1 million as of December 31, 1995, primarily from the net
proceeds received from the initial public offering. After giving effect to the
acquisition of the Southeast Properties, working capital, on a pro forma basis,
at June 30, 1996 totaled $31.9 million.
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Cash provided by operating activities was $0.9 million for 1995, as
compared to $2.7 million for 1994 and $3.1 million for 1993. Cash used for
operating activities was $0.2 million for the six months ended June 30, 1996,
including a $1.0 million payment to a third-party limited partner which was
charged to earnings. Without the $1.0 million payment, operating activities
would have provided $0.8 million for the six months ended June 30, 1996.
Unrestricted cash balances were $6.3 million, $8.1 million and $3.3 million at
December 31, 1995, 1994 and 1993, respectively. At June 30, 1996, the
unrestricted cash balance was $22.7 million.
Net cash used in investing activities totaled $17.9 million, $17.0 million
and $4.2 million in 1995, 1994 and 1993, respectively. Net cash used in
investing activities was $84.2 million for the six months ended June 30, 1996.
The Company's investing activities included $12.8 million, $10.6 million and
$4.3 million in 1995, 1994 and 1993, respectively, and $33.9 million for the six
months ended June 30, 1996, related to the Company's development activities.
Investing activities in 1995 included the purchase of $5.4 million carrying
value of tax exempt mortgage revenue bonds. Investing activities in 1994
included the purchase of minority interests in 15 facilities using net proceeds
of $5.5 million from the GECC Mortgage. See Note 4 of Notes to Consolidated and
Combined Financial Statements.
During 1995, the Company's financing activities provided net cash of $15.1
million compared to $19.1 million and $1.9 million provided in 1994 and 1993,
respectively. Financing activities provided net cash of $100.8 million for the
six months ended June 30, 1996. Cash was provided by the Company's initial
public offering, described above, as well as $14.9 million provided by
additional borrowings. In June 1996, the Company paid GECC $8.6 million as
payment in full of GECC's 25% participating interest in cash flow and
appreciation in the value of certain properties. In addition, the Company
prepaid $8.0 million of its variable rate debt, paid $0.3 million in dividends
to holders of Series B Exchangeable Preferred Stock, and $0.8 million in various
financing costs. All shares of Series B Exchangeable Preferred Stock have been
redeemed. In 1995, $16.8 million was provided by additional borrowings relating
primarily to the construction of facilities, and $20.2 million in net proceeds
was provided by the issuance of Series A Convertible Preferred Stock. In
addition, $9.6 million in cash distributions were made in 1995. During 1994, the
Company consolidated its permanent financing on 15 facilities. Net cash provided
by additional borrowings amounted to $25.1 million. The Company received cash
contributions of $3.6 million and paid out dividends and distributions during
1994 totaling $10.5 million. 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 55 of its model facilities with a capacity of
approximately 4,950 residents. To date, the Company has obtained zoning approval
for 25 new facilities with a resident capacity of 2,215 residents, including 16
facilities under construction, and has entered into contracts to purchase 17
additional sites and is negotiating purchase terms for 11 additional sites.
During the next three years the Company also plans to acquire up to 10 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. The Company has issued the lender a warrant
for 50,000 shares at an exercise price of $17.00 per share.
The Company also has obtained a commitment (subject to certain conditions
including syndication) from a financial institution for an $80.0 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. To date,
of this total line of credit, the Company has closed $58.0 million. The Company
guaranteed the repayment of all amounts outstanding under this line of credit.
The line of credit is for a term of five years and is secured by
cross-collateralized first mortgages on the real property and improvements and
first liens on all other assets of the subsidiary. Advances under the facility
bear interest at rates from LIBOR plus 1.7% to 2.9%. As part of this line, the
Company has entered into a swap transaction whereby effective during the period
June 18, 1998 through June 18, 2001, outstanding advances of up to $19.0 million
under this line of credit, or other LIBOR floating rate debt, bear interest at a
fixed rate based on a fixed LIBOR base rate of 7.3%. Construction of all 10
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facilities to be financed by the lines of credit must be commenced within 18
months of the closing of the line of credit. There were no borrowings on these
lines of credit at June 30, 1996.
The Company's financing documents contain financial covenants and other
restrictions that (i) require the Company to meet certain financial tests and
maintain certain escrows of funds, (ii) require that the 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 55 new Sunrise model
facilities targeted for completion over the next three years is between $410
million and $550 million, which substantially exceeds the net proceeds of the
Offering and existing working capital and financing arrangements. The Company
currently estimates that the net proceeds of the Offering, together with
existing working capital and financing commitments and financing expected to be
available, will be sufficient to fund its development and acquisition programs
for at least the next 18 months. Substantial additional financing will be
required to complete the Company's growth plans and to refinance existing
indebtedness if cash flows from operations do not increase as a result of
planned growth. There can be no assurance that such financing will be available
on acceptable terms. See "Risk Factors -- Need for Additional Financing."
At June 30, 1996, the Company had stockholders' equity of $92.9 million
compared to a stockholders' deficit of $31.8 million at December 31, 1995. The
change resulted primarily from (i) adding the receipt of net proceeds from the
Company's initial public offering of $104.3 million, conversion of Series A
Convertible Preferred Stock to an equal number of common shares for $24.0
million, $1.1 million from other common shares issued including the exercise of
stock options granted, and $0.1 million from the issuance of common stock
warrants, and (ii) subtracting $0.7 million relating to dividends and other
distributions paid and a net loss for the six months ended June 30, 1996 of $4.1
million.
SUBSEQUENT EVENTS
ACQUISITION OF SOUTHEAST PROPERTIES. On October 8, 1996, the Company
completed its acquisition from Laing Properties & Subsidiaries, Inc. of five
facilities located in the southeast United States (the "Southeast Properties")
for an aggregate purchase price of $34.0 million in cash with no debt assumed.
The five facilities consist of 511 total units providing primarily independent
and assisted living services. One of the facilities also has a 26-bed skilled
nursing floor. These facilities had combined revenues of $9.9 million in 1995
and $5.4 million for the six months ended June 30, 1996, and had combined net
income (losses) of $(32,000) and $195,000, respectively, for these periods.
After giving effect to the acquisition of the Southeast Properties at the
beginning of the respective periods, the Company had a pro forma net loss of
$8.5 million and $3.1 million for 1995 and for the first six months of 1996,
respectively. See "Recent Developments," "Selected Financial, Operating and Pro
Forma Data" and "Unaudited Pro Forma Consolidated Financial Statements."
AFFILIATION AGREEMENT WITH JEFFERSON HEALTH SYSTEM. On October 8, 1996,
the Company entered into an affiliation agreement with Jefferson Health System
("JHS"), an integrated health care system located in Philadelphia, Pennsylvania,
pursuant to which JHS has agreed to provide residents of Sunrise facilities
located in the Philadelphia metropolitan region, on a preferred (but
non-exclusive) basis, with access to certain health care services offered by
JHS. Such health care services may include hospital services, physician
services, rehabilitation services, home health services and products and mental
health services. See "Recent Developments."
CREDIT FACILITY. On October 3, 1996, a subsidiary of the Company received
from GMAC Commercial Mortgage Corporation a commitment for a $51.0 million
revolving construction credit facility. The credit facility provides for
construction and interim loans to finance the development of up to seven
assisted living facilities. The Company has agreed to guarantee the repayment of
all amounts outstanding under this credit facility. The credit facility is for a
term of five years and is secured by cross-collateralized first mortgages on
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the real property and liens on receivables. Advances under the credit facility
bear interest at rates ranging from LIBOR plus 2.25% to 2.60%. See "Recent
Developments."
CONTINGENT ACQUISITION OF CALIFORNIA PROPERTIES. On October 8, 1996, the
Company entered into a purchase and sale agreement subject to certain
conditions, including satisfactory completion by the Company of financial,
accounting, regulatory and property due diligence over the next 60 days, to
acquire two facilities located in Southern California for $30.8 million in cash.
The California Properties consist of 258 total units providing independent and
assisted living services. Assuming the Company elects to proceed with the
transaction following the completion of its due diligence review, the closing of
the transaction would likely take place in the first quarter of 1997. Given the
contingent nature of the purchase and sale agreement, there can be no assurance
that the acquisition will be consummated. See "Recent Developments."
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 June 30,
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. At June 30, 1996, the Company also had $50.0 million of
short-term investments classified as available for sale. As a result of such
classifications, unrealized holding gains or losses, net of the related tax
effect, is recorded as a separate component of stockholders' (deficit) equity.
At June 30, 1996, the net carrying cost of the bonds and short-term investments
approximated market value and, accordingly, there were no unrealized holding
gains or losses, net of the related tax effect, on these bonds and investments
at that date. See Note 5 of Notes to Consolidated and Combined Financial
Statements.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. The Statement allows for a
fair value based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for
stock-based compensation arrangements under Opinion No. 25, Statement No. 123
requires disclosure of the pro forma effect on net income and earnings per share
of its fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of the statement, if earlier. The Company adopted
Statement No. 123 in the first quarter of 1996 and elected to continue to
account for stock-based compensation arrangements under APB Opinion No. 25.
IMPACT OF INFLATION
Resident fees from Company-owned assisted living facilities and management
services income from facilities operated by the Company for third parties are
the primary sources of revenue for the Company. These revenues are affected by
daily resident fee rates and facility occupancy rates. The rates charged for the
delivery of assisted living services are highly dependent upon local market
conditions and the competitive environment in which the facilities operate. In
addition, employee compensation expense is the principal cost element of
property operations. Employee compensation, including salary increases and the
hiring of additional staff to support the Company's growth plans, has recently
had a negative impact on operating margins and may continue to do so in the
foreseeable future.
Substantially all of the Company's resident agreements are for terms of one
year and allow, at the time of renewal, for adjustments in the daily fees
payable thereunder, and thus may enable the Company to seek increases in daily
fees due to inflation or other factors. Any such increase would be subject to
market and competitive conditions and could result in a decrease in occupancy of
the Company's facilities. The Company believes, however, that the short-term
nature of its resident agreements generally serves to reduce the risk to the
Company of the adverse effect of inflation. There can be no assurance that
resident fees will increase or that costs will not continue to increase due to
inflation or other causes.
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<PAGE> 32
BUSINESS
OVERVIEW
Sunrise is a leading provider of assisted living services to the elderly.
The Company currently operates 32 facilities in 11 states with a capacity of
approximately 2,800 residents, including 28 facilities owned by the Company or
in which it has ownership interests and four facilities managed for third
parties. The Company had revenues of $37.3 million in 1995 and $21.0 million for
the six months ended June 30, 1996, and incurred net losses of $10.1 million and
$4.1 million, respectively, for these periods. Approximately 99% of these
revenues were derived from private pay sources.
The Company's three-year growth objective is to develop at least 55 new
Sunrise assisted living facilities with a capacity of approximately 4,950
residents. To date, the Company has obtained zoning approval for 25 new
facilities with a resident capacity of 2,215, including 16 facilities currently
under construction. The Company has also entered into contracts to purchase 17
additional sites and is negotiating purchase terms for 11 additional 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
but one of the facilities for which it obtained zoning approval. In addition to
its construction and development plans, the Company plans to acquire up to 10
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, (vi) achieve the benefits of regional density by clustering
facilities, and (vii) develop strategic alliances with integrated health care
delivery systems.
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
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<PAGE> 33
believes results in a higher quality of life than that experienced in more
institutional or clinical settings, such as skilled nursing facilities.
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 35% of
the population of seniors over age 85 need assistance with ADLs and more than
one-half of such seniors develop Alzheimer's disease or other forms of dementia.
In addition, the growing affluence of the elderly has made assisted living more
affordable.
<TABLE>
<CAPTION>
85 YEARS AND OVER
FASTEST GROWING POPULATION IN U.S.
1990 2000
---- ----
<S> <C> <C>
85 YEARS AND OVER 0% 42%
TOTAL POPULATION 0% 11%
</TABLE>
Source: U.S. Bureau of Census
SUPPLY/DEMAND IMBALANCE. As illustrated below, the supply of skilled
nursing home beds per 1,000 persons 85 years of age and older is declining. This
decline may be attributed to several factors, including the aging of the
population and the implementation of moratoriums on the granting of certificates
of need for new skilled nursing facilities. In addition, many skilled nursing
facilities are focusing on higher acuity patients with higher reimbursement
profiles. As a result, fewer skilled nursing beds are available for the
increasing number of elderly who need assistance with ADLs but do not require
significant medical attention. The Company believes that the supply of assisted
living beds has increased substantially since 1980 to satisfy a portion of this
demand.
DECLINE IN NURSING BEDS PER THOUSAND
FOR INDIVIDUALS 85 YEARS OR OLDER
<TABLE>
<CAPTION>
1967 1976 1980 1986 1990 2000E
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
BEDS PER THOUSAND 540 690 650 540 500 350
</TABLE>
Source: U.S. Bureau of Census
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<PAGE> 34
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 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 55 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 25 new facilities, including 16 facilities currently under construction, and
has entered into contracts to purchase 17 additional sites and is negotiating
purchase terms for 11 additional 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 but one of the 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.
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<PAGE> 35
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 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.
PURSUE ACQUISITIONS AND MANAGEMENT CONTRACT OPPORTUNITIES. During the next
three years, the Company plans to acquire up to 10 additional assisted living
facilities or other properties (excluding the five Southeast 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. Except for the purchase and sale agreement for the California
Properties, the Company has not entered into any agreements with respect to any
additional 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.
DEVELOP STRATEGIC ALLIANCES WITH INTEGRATED HEALTH CARE DELIVERY
SYSTEMS. The Company is developing alliances with hospital systems located to
strategically position itself within evolving integrated health care delivery
systems in its markets. Such alliances will facilitate residents' access to an
expanded range of health care services. The Company believes its assisted living
programs can serve these evolving health care systems by offering the frail
elderly high quality care in a cost effective setting.
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 six months ended June 30, 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 six months ended June 30, 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
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<PAGE> 36
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 program for
residents who might otherwise have to move to a more medically intensive
facility. At June 30, 1996, approximately 51% of the Company's assisted living
residents participated in the Extended Care program.
MEDICATION MANAGEMENT
Many of the Company's residents also require assistance with medications.
To the extent permitted by state law, the Medication Management program includes
the storage of medications, the distribution of medications as directed by the
resident's physician and compliance monitoring. The Company charges an
additional fixed daily fee for this service. At June 30, 1996, approximately 54%
of the Company's assisted living residents participated in the 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 June 30, 1996, approximately 23%
of the Company's assisted living 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-
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<PAGE> 37
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.
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
Sunrise of Mercer Island Seattle, WA 1990 Developed 'X' 59 100.0
Sunrise of Fairfax Fairfax, VA 1990 Developed 'X' 59 100.0(3)
Sunrise of Queen Anne Seattle, WA 1991 Acquired 136 33.3(4)
Sunrise of Frederick Frederick, MD 1992 Developed 'X' 86 100.0
Sunrise of Countryside Sterling, VA 1992 100.0
East Building Developed(5) 'X' 66
West Building Developed(5) 'X' 64
Sunrise of Gunston Lorton, VA 1992 Developed(5) 'X' 67 100.0
Sunrise of Atrium Boca Raton, FL 1992 Acquired 210 100.0
Sunrise of Falls Church Falls Church, VA 1993 Developed 'X' 66 100.0
Sunrise of Village House Gaithersburg, MD 1993 Acquired 155(6) 80.0
Sunrise of Towson Towson, MD 1994 Developed 'X' 66 13.9(7)
Sunrise of Gardner Park Peabody, MA 1994 Developed 'X' 59 50.0(7)(8)
Sunrise of Annapolis Annapolis, MD 1995 Developed 'X' 88 51.0(8)(9)
Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0
Sunrise of Raleigh Raleigh, NC 1996 Developed 'X' 93 50.0(8)(10)
Sunrise of Pikesville Pikesville, MD 1996 Developed 'X' 103 51.0(8)(9)
Huntcliff Summitt Atlanta, GA 1996 Acquired 248 100.0(11)(12)
Sunrise Northshore St. Petersburg, FL 1996 Acquired 162 100.0(11)(13)
Sunrise Augusta Augusta, GA 1996 Acquired 39 100.0(11)
Sunrise Columbus Columbus, GA 1996 Acquired 26 100.0(11)
Sunrise Greenville Greenville, NC 1996 Acquired 36 100.0(11)
--------
Total 2,384
========
</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. Eight other owned facilities are
subject to one or more mortgages or deeds of trust that mature between 1998
and 2033 and bear interest at rates ranging from 6.875% to 8.75% annually
as of June 30, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
Note 8 of Notes to Consolidated and Combined Financial Statements. All
facilities that are wholly owned by the Company are consolidated in the
Consolidated and Combined Financial Statements. The Village House, Gardner
Park and Raleigh facilities are held by limited liability companies or
limited partnerships in which the Company holds the ownership interests
indicated in the table. The Company is the general partner or managing
member of such entities and through the partnership or operating agreements
and the management agreements for the facilities the Company controls their
ordinary course business operations.
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<PAGE> 38
Therefore, the Village House, Gardner Park and Raleigh facilities are also
consolidated in the Consolidated and Combined Financial Statements. The
ordinary course business operations of the Queen Anne, Towson, Annapolis
and Pikesville facilities are not currently controlled by the Company and,
therefore, are accounted for under the equity method of accounting.
(2) Each of these facilities has been redeveloped in a manner consistent with
the Sunrise model.
(3) Subject to long-term ground lease. See "Certain Transactions."
(4) This property is held as a tenancy-in-common. The remaining ownership
interests are owned by unaffiliated third parties. The Company manages this
facility pursuant to a management contract that is subject to annual
renewal at the option of the owners.
(5) These facilities were initially developed by the Company for third parties
and were subsequently acquired by the Company in 1992.
(6) This facility is licensed for 40 assisted living residents. The remainder
of the resident capacity is for independent living residents.
(7) The remaining ownership interests are owned by third parties. Sunrise
manages each of these facilities.
(8) A current officer and a former employee of the Company each have a 25%
ownership interest in this facility. Sunrise has the right to acquire these
minority ownership interests for fair market value, as determined by an
appraiser mutually agreeable to the parties.
(9) Commencing on June 1, 1998, the third-party owner of the remaining
interests in the limited partnership that owns this facility ("the
Partnership") has the right to require the Company to buy the facility from
the Partnership for 112 1/2% of its "appraised fair market value" as
mutually agreed upon by the parties or, if they cannot agree, as determined
by an appraiser mutually selected by the parties. Commencing three years
after the date that the certificate of occupancy is received for the
facility (November 1998 for Annapolis and April 1999 for Pikesville) and
continuing for two years thereafter, the Company has the right to give
written notice to such third-party owner that it desires to buy the
facility from the Partnership for 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.
(10) On the earlier of the date that this facility has maintained an occupancy
of 84 residents for 30 consecutive days or August 22, 1998, the Company has
the option to purchase all or any part of the third-party interests in the
limited liability company that owns this facility. If the Company's
purchase option is exercised prior to July 28, 1999, the price will be the
greater of (i) $0.8 million, if purchased before July 28, 1997, $1.2
million, if purchased between July 28, 1997 and July 28, 1998, and $1.5
million, if purchased between July 28, 1998 and July 27, 1999; or (ii) the
third party's 50% interest multiplied by the net value of the limited
liability company's business as determined by applying a 12.5%
capitalization rate to the net operating income of the limited liability
company, and subtracting limited liability company liabilities, all as
determined by the accountant regularly employed by the limited liability
company. If Sunrise elects to exercise its option on or after July 28,
1999, the purchase price of the third-party interest shall be determined by
an appraiser mutually agreeable to the parties.
(11) The Company intends to use these facilities as collateral for financing.
(12) This facility is licensed for 224 independent living residents. The
remainder of the resident capacity is for assisted living residents.
(13) This facility is licensed for 26 skilled nursing residents. The remainder
of the resident capacity is for assisted living residents.
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<PAGE> 39
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 2001(1)
Mill Run(2) Bristol, PA 186 April 1992 April 1997
Lincolnia(3) Fairfax, VA 84 June 1989 June 1997
John Bertram House Salem, MA 32 June 1994 Oct. 1998
Mount Laurel Mount Laurel, NJ 'X' 90 May 1994(4) July 2021
Boston Boston, MA 139 July 1995(5) Jan. 2002
---
Total 618
===
</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) 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.
(3) The Company does not provide financial or accounting services for this
facility.
(4) This facility is currently under construction. The Company has entered into
a development contract for this facility which provides that the Company
will begin managing Mt. Laurel for a 25-year period following completion of
construction.
(5) This facility is currently under construction. The Company anticipates this
facility will begin operations on or about December 1997. The Company has
entered into a development contract for this facility which provides that
the Company will begin managing the facility for a three-year period
following completion of construction. This facility is licensed for 139
continuing care retirement community residents.
The Company also manages two skilled nursing facilities, Pembrook and
Prospect Park, located in West Chester and Prospect Park, Pennsylvania. The
Pembrook facility has 240 beds and the Prospect Park facility has 180 beds. Both
of these facilities are owned by a single unaffiliated nonprofit corporation.
The management contracts for these facilities were initially entered into in May
1994 and expire in April 1999. The owner of these facilities has the option to
terminate the management agreements in May 1997. The Company does not provide
financial or accounting services for these facilities.
FACILITY DEVELOPMENT
The Company targets sites for development located in major metropolitan
areas and their surrounding suburban communities. In evaluating a prospective
market, the Company considers a number of factors, including population, income
and age demographics, target site visibility, probability of obtaining zoning
approvals, estimated level of market demand and the ability to maximize
management resources in a specific market by clustering its development and
operating activities.
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 55 additional Victorian model facilities with an aggregate capacity of
over 4,950 residents. To date, the Company has obtained zoning approval for 25
new facilities, including 16 facilities currently under construction, and has
contracts to purchase 17 additional sites and is currently negotiating purchase
terms for 11 additional identified sites. Historically, the Company has
completed all but one of the facilities for which it has obtained zoning
approval. The Company bases its development upon its "Victorian" model facility
that it has developed and refined since the first model facility
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<PAGE> 40
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.
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<PAGE> 41
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 4th Q 1996 96 100.0
Sunrise of Hunter Mill Hunter Mill, VA Construction 1st Q 1997 96 100.0
Sunrise of Petaluma Petaluma, CA Construction 1st Q 1997 84 100.0(3)(5)
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 97 100.0
Building I metro region
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 71 100.0
Building II metro region
Sunrise of Granite Run Philadelphia, PA Construction 2nd Q 1997 95 100.0
metro region
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 99 50.0(4)(5)
Building I
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 74 50.0(4)(5)
Building II
Sunrise of Franconia Franconia, VA Construction 2nd Q 1997 98 100.0
Sunrise of Rockville Rockville, MD Construction 3rd Q 1997 86 100.0
Sunrise of Alexandria Alexandria, VA Construction 3rd Q 1997 92 100.0(6)
Sunrise of Old Tappan Old Tappan, NJ Construction 3rd Q 1997 95 100.0
Sunrise of Morris Plains Morris Plains, NJ Construction 3rd Q 1997 95 100.0
Sunrise of Wayne Wayne, NJ Construction 4th Q 1997 90 100.0
Sunrise of Westfield Westfield, NJ Construction 4th Q 1997 95 100.0
Sunrise of Norwood Boston, MA Zoned 2nd half 1997 90 100.0
metro region
Sunrise of North Fulton Atlanta, GA Zoned 2nd half 1997 97 100.0
metro region
Sunrise of Fresno Fresno, CA Zoned 2nd half 1997 84 100.0(3)(5)
Sunrise of Wayland Boston, MA Zoned 2nd half 1997 68 100.0
metro region
Sunrise of East Cobb Atlanta, GA Zoned 2nd half 1997 96 100.0
metro region
Sunrise of Decatur Decatur, GA Zoned 2nd half 1997 96 100.0
Sunrise of Haverford Haverford, PA Zoned 1st half 1998 73 100.0
Sunrise of Glen Cove Glen Cove, NY Zoned 1st half 1998 80 100.0
Sunrise of Cohasset Cohasset, MA Zoned 1st half 1998 71 100.0
-----
Total 2,215
=====
</TABLE>
- ---------------
(1) The Columbia, Blue Bell, Hunter Mill, Alexandria and Rockville facilities
under construction are subject to one or more mortgages or deeds of trust
that mature between April 2001 and April 2003 and bear interest at rates
currently averaging approximately 7.8%. The Abington, Granite Run,
Franconia, Old Tappan, Morris Plains, and Wayne facilities are financed
under one of the Company's credit facilities and are subject to one or more
mortgages or deeds of trust that mature June 2001 and currently bear
interest at a rate of approximately 8.3%.
(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.
40
<PAGE> 42
The Company has entered into purchase contracts for 17 additional sites in
Maryland, Pennsylvania, New Jersey, Connecticut, New York, Georgia, Colorado,
Massachusetts and Washington. The Company has completed preliminary feasibility
studies and submitted rezoning requests on 14 of such sites and is conducting
preliminary feasibility studies on the remaining sites. The Company's
development team is negotiating purchase terms on 11 additional sites identified
for development.
FACILITY ACQUISITIONS
The Company and its predecessors have completed 12 acquisitions, including
the five Southeast Properties, 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 10 additional
assisted living facilities or other properties that can be 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 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.
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<PAGE> 43
Care Managers, who work on full-time, part-time and flex-time schedules,
provide most of the hands-on resident care, such as bathing, dressing and other
personalized care services (including housekeeping, meal service and resident
activities). To the extent permitted by state law, nurses, or Care Managers who
complete a special training program, supervise the storage and distribution of
medications. The use of Care Managers to provide substantially all services to
residents has the benefits of consistency and continuity in resident care. In
most cases, the same Care Manager assists the resident in dressing, dining and
coordinating daily activities. The number of Care Managers working in a facility
varies according to the level of care required by the residents of the facility
and the numbers of residents receiving Alzheimer's Care and Extended Care
services. The number of Care Managers ranges from three (Leesburg facility) to
20 (Atrium facility) on the day shifts and from two Care Managers (Leesburg) to
seven Care Managers (Atrium) on the night shift.
The Company believes that its facilities can be most efficiently managed by
maximizing direct resident and staff contact. Employees involved in resident
care, including the administrative staff, are trained in the Care Manager duties
and participate in supporting the care needs of the residents. Accounting
functions are centralized so that administrative staff may devote substantially
all of their time to care giving.
STAFF EDUCATION AND TRAINING
The Company has attracted, and continues to seek, highly dedicated,
experienced personnel. The Company has adopted formal training procedures and
review and evaluation procedures to help ensure quality care for its residents.
The Company believes that education, training and development enhance the
effectiveness of its employees. All employees are required to complete the
Company's training program, which centers around its proprietary "Five-Star
Educational Program." This program includes a core curriculum consisting of care
basics, Alzheimer's care, resident care 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
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
42
<PAGE> 44
Company's performance from the perspective of a customer, without the inherent
biases of a Company employee. Each facility is "shopped" at least three times
per year in person, as well as one or more times per month by telephone. To
evaluate medication management, third-party pharmacists conduct periodic reviews
of on-site handling and storage of medications, record-keeping and coordination
of medications.
MARKETING AND SALES
The Company's marketing strategy is intended to create awareness of the
Company and its services among potential residents and their family members and
referral sources, such as hospital discharge planners, physicians, clergy, area
agencies for the elderly, skilled nursing facilities, home health agencies and
social workers. A central marketing staff develops overall strategies for
promoting the Company throughout its markets and monitors the success of the
Company's marketing efforts. Each regional office generally has at least one
Marketing Specialist and each facility typically has a Director of Community
Relations who oversees marketing and outreach programs. In addition to direct
contacts with prospective referral sources, the Company also relies on print
advertising, yellow pages advertising, direct mail, signage and special events,
such as grand openings for new facilities, health fairs and community
receptions.
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% preleased
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. On October 8,
1996, the Company entered into an affiliation agreement with Jefferson Health
System ("JHS"), an integrated health care system located in Philadelphia,
Pennsylvania, pursuant to which JHS has agreed to provide residents of Sunrise
facilities located in the Philadelphia metropolitan region, on a preferred (but
non-exclusive) basis, with access to certain health care services offered by
JHS. Such health care services may include hospital services, physician
services, rehabilitation services, home health services and products and mental
health services. See "Recent Developments."
COMPETITION
Providers of assisted living and related services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the facilities, services offered, family and physician preferences
and location. As assisted living receives increased attention, the Company
believes that competition will grow from new local and regional companies that
operate, manage and develop assisted living facilities within the same
geographic areas as the Company. 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 facilities are subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities,
although requirements vary from state to state. In general, these requirements
address, among other things: personnel education, training, and records;
facility services, including administration of medication, assistance with
self-administration of medication, and limited nursing services; monitoring of
resident wellness; physical plant specifications; furnishing of resident units;
food and housekeeping services; emergency evacuation plans; and resident rights
and responsibilities, including in some states the right to receive certain
health care services from providers of a resident's choice. Certain of the
Company's facilities are also licensed to provide independent living services
which generally involve lower
43
<PAGE> 45
levels of resident assistance. In several states in which the Company operates
or intends to operate, assisted living facilities also require a certificate of
need before the facility can be opened. In most states, assisted living
facilities also are subject to state or local building code, fire code and food
service licensure or certification requirements. Like other health care
facilities, assisted living facilities are subject to periodic survey or
inspection by governmental authorities. From time to time in the ordinary course
of business, the Company receives deficiency reports. The Company reviews such
reports and seeks to take appropriate corrective action. Although most
inspection deficiencies are resolved through a plan of correction, the reviewing
agency typically is authorized to take action against a licensed facility where
deficiencies are noted in the inspection process. Such action may include
imposition of fines, imposition of a provisional or conditional license or
suspension or revocation of a license or other sanctions. In March 1996,
Maryland state officials imposed a $3,000 civil money fine against the Company
for survey deficiencies at three Kensington, Maryland facilities formerly
managed by the Company. The Company appealed such fine and in August 1996 paid
$2,000 in settlement of such fine. In May 1996, one of the Pennsylvania nursing
home facilities managed by the Company received notice from the Pennsylvania
Department of Health of a survey report stating that the facility was not in
compliance with the requirements of participation for the Medicare and Medicaid
programs. Therefore, the Pennsylvania agency survey report stated that a civil
monetary penalty of $50 to $3,000 per day would be imposed for the period
beginning March 12, 1996, the date the facility was first alleged to be out of
compliance, until the date the alleged deficiencies were corrected. The owner of
the facility appealed such fine and in October 1996, paid the Health Care
Financing Administration approximately $18,000 in settlement of such fine. 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. 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 intended
to put the management contract for the Kensington facilities out for bid when
the existing management contract with the Company expired. The management
contract has been awarded to a third party effective September 1, 1996.
The Company also is subject to Federal and state anti-remuneration laws,
such as the Medicare/ Medicaid anti-kickback law which govern certain financial
arrangements among health care providers and others who may be in a position to
refer or recommend patients to such providers. These laws prohibit, among other
things, certain direct and indirect payments that are intended to induce the
referral of patients to, the arranging for services by, or the recommending of,
a particular provider of health care items or services. The Medicare/Medicaid
anti-kickback law has been broadly interpreted to apply to certain contractual
relationships between health care providers and sources of patient referral.
Similar state laws vary from state to state, are sometimes vague and seldom have
been interpreted by courts or regulatory agencies. Violation of these laws can
result in loss of licensure, civil and criminal penalties, and exclusion of
health care providers or suppliers from participation in (i.e., furnishing
covered items or services to beneficiaries of) the Medicare and Medicaid
programs. There can be no assurance that such laws will be interpreted in a
manner consistent with the practices of the Company. See "Risk
Factors -- Government Regulation."
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<PAGE> 46
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 June 30, 1996, the Company had 1,877 employees, including 1,208
full-time employees, of which 86 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.
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<PAGE> 47
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)......................... 39 Chairman of the Board of Directors, President
and Chief Executive Officer
Teresa M. Klaassen(1)....................... 41 Executive Vice President, Secretary and
Director
David W. Faeder(1).......................... 40 Executive Vice President, Chief Financial
Officer and Director
Timothy S. Smick............................ 45 Executive Vice President, Chief Operating
Officer and Director
Thomas B. Newell............................ 39 Executive Vice President and General Counsel
of the Company and President of Sunrise
Development, Inc.
Brian C. Swinton............................ 51 Executive Vice President, Sales and Marketing
Ronald V. Aprahamian(2)(3)(4)............... 50 Director
Thomas J. Donohue(2)(3)(4).................. 57 Director
Richard A. Doppelt(4)....................... 41 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
terminated upon completion of the Company's initial public 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 and was appointed as a director of
the Company in October 1996. From 1994 to 1996, Mr. Smick was a senior housing
consultant to LaSalle Advisory, Ltd., a pension fund advisory company. From
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<PAGE> 48
1984 to 1994, Mr. Smick was the Chairman and Chief Executive Officer of
PersonaCare, Inc., a company which he co-founded and which provided subacute,
skilled 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 joined the Company as Executive Vice President, Sales and
Marketing, on May 31, 1996. From January 1994 to April 1996, Mr. Swinton was a
Senior Vice President of Forum Group, Inc., a developer and operator of
retirement communities and assisted living facilities, where his
responsibilities included marketing, sales and product development. From 1986 to
1994, Mr. Swinton served as Vice President, Sales, Marketing and Product
Development at Marriott International, where he was responsible for designing,
developing, marketing and the initial operations of the Brighton Gardens
assisted living concept.
Ronald V. Aprahamian has been a director of the Company since February
1995. Mr. Aprahamian has been Chairman of the Board and Chief Executive Officer
of The Compucare Company, a health care information technology company, since
1988. Mr. Aprahamian also is a director of Metrocall, Inc., a paging company.
Thomas J. Donohue has been a director of the Company since February 1995.
Mr. Donohue has been the President and Chief Executive Officer of the American
Trucking Association, the national trade organization of the trucking industry
since 1984. Mr. Donohue is a director of: the National Football League Alumni
Association; IPAC, an international consulting firm; Newmyer Associates, a
Washington, D.C. firm that tracks and analyzes public policy; and the Hudson
Institute. In addition, Mr. Donohue served on the President's Commission on
Intermodal Transportation.
Richard A. Doppelt has been a director of the Company since January 1995.
Mr. Doppelt is Venture Group Manager of Allstate Venture Capital, a division of
Allstate Insurance Company. He has been a member of Allstate Venture Capital
since 1987. Prior to joining Allstate, he practiced as a corporate attorney with
the law firm of Morrison & Foerster. Mr. Doppelt is a director of several
privately held companies.
Scott F. Meadow has been a director of the Company since February 1996. Mr.
Meadow also served as a director of the Company from December 1994 to August
1995. Mr. Meadow has been a Vice President of The Sprout Group, the venture
capital division of DLJ Capital Corporation, since February 1996. From 1992 to
1995, Mr. Meadow was a General Partner of Frontenac Company, a venture capital
firm. From 1982 to 1992, he was a general partner of William Blair Venture
Partners, a venture capital firm. Mr. Meadow is a director of
Medpartners/Mullikin Inc., a physician practice management company, as well as
several privately held companies.
Darcy J. Moore has been a director of the Company since February 1996. Ms.
Moore has been a General Partner of Frontenac Company, a venture capital firm,
since 1992. From 1990 to 1992, Ms. Moore served as an Associate of the venture
capital firm of William Blair Venture Partners. Ms. Moore is a director of:
Healthcare Resource Management, Inc., a radiology services company; 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
nine directors. Class I directors, consisting of Messrs. Klaassen, Doppelt and
Smick, 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> 49
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. Aprahamian, Meadow and Donohue, all of whom are non-employee directors.
The Stock Option Committee has the power and authority to take all actions and
make all determinations under the Company's 1995 and 1996 Stock Option Plans,
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 of $20.00 per share. Options
for 10,000 shares vested upon completion of the Company's initial public
offering. Options for the remaining 15,000 shares vest one-third on each
anniversary date thereof.
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> 50
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. At that time, the Company owned a 50% membership
interest in, and was the managing member of, the LLC, and managed the facility
pursuant to a management contract that expires in 2003. Distributions made by
the LLC to the Donohues in 1993, 1994 and 1995 aggregated $18,700, $35,616 and
$40,295, respectively. On May 28, 1996, the Company purchased the Donohues' 30%
interest in the LLC in exchange for 52,500 shares of Common Stock. The purchase
price was determined based on a valuation of the facility prepared by the
Company based primarily upon a capitalization of net operating income from the
facility. The Donohues 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 Convertible Preferred Stock at $9.00 per
share and an aggregate of 300,000 shares of Series B Exchangeable Preferred
Stock at $10.00 per share, respectively. The Series A Convertible Preferred
Stock converted into an equal number of shares of Common Stock upon completion
of the Company's initial public offering and the Series B Preferred Stock was
redeemed by the Company for $10.00 per share (plus any accrued but unpaid
dividends) with a portion of the net proceeds of the initial public 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, a Selling Stockholder in the Offering, is an affiliate of
DLJ, the lead managing underwriter of the Offering. See "Underwriting."
49
<PAGE> 51
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 three 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/
AWARD
------------
SHARES OF
ANNUAL COMPENSATION 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............................ 175,000 491,667 2,310
Executive Vice President and Chief
Financial Officer
Timothy S. Smick(3)........................ 175,000 166,667 --
Executive Vice President and Chief
Operating Officer
Thomas B. Newell(4)........................ 175,000 155,002 --
Executive Vice President and General
Counsel of the Company and President of
Sunrise Development, Inc.
Brian C. Swinton(5)........................ 165,000 120,000 --
Executive Vice President, Sales and
Marketing
</TABLE>
- ---------------
(1) Includes options granted through May 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.
(5) Mr. Swinton joined the Company in May 1996. Salary information shown for Mr.
Swinton is for 1996.
50
<PAGE> 52
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) 26.3% $ 8.00 01/04/05 $2,264,021 $5,737,473
Executive Vice President and 16,666(3) 1.0 10.50 02/15/06 110,052 278,898
Chief Financial Officer 25,000(4) 1.5 20.00 05/30/06 314,445 796,870
Timothy S. Smick................ 141,666(3) 8.3 10.50 02/15/06 935,476 2,370,681
Executive Vice President and 25,000(4) 1.5 20.00 05/30/06 314,445 796,870
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 3.7 7.50 11/19/05 298,723 757,024
General Counsel of the 63,333(3) 3.7 10.50 02/15/06 418,212 1,059,833
Company and President of 25,000(4) 1.5 20.00 05/30/06 314,445 796,870
Sunrise Development, Inc.
Brian C. Swinton................ 120,000(5) 7.0 20.00 05/30/06 1,509,338 3,824,976
Executive Vice President,
Sales
and Marketing
</TABLE>
- ---------------
(1) All options included in this table vested 25% on June 5, 1996 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.
(4) Granted in May 1996, 100% of which are vested.
(5) Granted in May 1996.
51
<PAGE> 53
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 OPTIONS(1) VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS(2)
-------------------------------- -----------------------------
NAME EXERCISABLE(3) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
David W. Faeder........................ 404,166 87,501 $ 7,671,864 $ 1,696,892
Timothy S. Smick....................... 60,416 106,251 804,676 1,832,830
Thomas B. Newell....................... 57,499 97,503 808,104 1,843,187
Brian C. Swinton....................... 30,000 90,000 232,500 697,500
</TABLE>
- ---------------
(1) Includes options granted in February and May 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
$27 3/4, the closing sale price of the Common Stock as of October 7, 1996,
less the applicable exercise price, multiplied by the number of shares
underlying such options.
(3) If the Underwriters' over-allotment option is exercised, Messrs. Faeder,
Smick and Newell will sell up to 150,000 shares, 33,333 shares, and 20,000
shares, respectively, in the Offering. See "Principal and Selling
Stockholders."
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 Company's initial public 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 Company's initial public 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 Company's initial public 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 continued until completion of the Company's initial
public offering; (iii) illiquidity of the Common Stock subject to the options;
(iv) option vesting and exercise conditions; (v) risk associated with completion
of the Company's initial public offering; and (vi) market pricing uncertainties.
52
<PAGE> 54
1995 STOCK OPTION PLAN
The Sunrise Assisted Living, Inc. 1995 Stock Option Plan, as amended (the
"1995 Stock Option Plan"), provides for the granting of options to acquire
Common Stock, which may be either incentive stock options (an "ISO") or
nonqualified stock options (an "NSO"). The 1995 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 1995 Stock Option Plan is determined by the 1995
Stock Option Committee to be in the best interests of the Company are eligible
to receive option grants thereunder. The 1995 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 1995 Stock Option Plan. Receipt of option grants under the
1995 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 1995 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 1995 Stock Option Plan and 50,000 shares per
year thereafter. The terms of options granted under the 1995 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 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 1995 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 1995 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.
53
<PAGE> 55
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 1995 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 1995 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.
1996 STOCK OPTION PLAN
In October 1996, the Board of Directors adopted The Sunrise Assisted
Living, Inc. 1996 Stock Option Plan, as amended (the "1996 Stock Option Plan"),
subject to stockholder approval at the 1997 annual meeting of stockholders. The
1996 Stock Option Plan provides for the grant of options to purchase up to
1,500,000 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 1996 Stock Option Plan and 50,000 shares per year
thereafter. Other terms and provisions of the 1996 Stock Option Plan are
substantially the same as the 1995 Stock Option Plan.
NON-PLAN STOCK OPTION GRANT
The Company has granted 450,000 non-qualified stock options outside of the
1995 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: 375,000 shares are currently
exercisable and options for 75,000 shares become exercisable when the Common
Stock price reaches $30.00 per share or 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"). 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 five 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.
54
<PAGE> 56
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.
55
<PAGE> 57
CERTAIN TRANSACTIONS
The Company leases certain real property on which the Fairfax facility is
located from Teresa M. Klaassen and Paul J. Klaassen pursuant to a 99-year
ground lease dated June 5, 1986 (the "Ground Lease"). The Ground Lease provides
for monthly rent of $21,272, as adjusted annually based on the Consumer Price
Index. Annual rent expense under the ground lease for 1993, 1994 and 1995 was
$241,896, $248,496 and $255,258, respectively. The Company has subleased
approximately 50% of the property subject to the Ground Lease to Sunrise
Foundation, Inc., a not-for-profit organization operated by the Founders
("Sunrise Foundation"), which operates a school and day care center on the
property. The sublease terminates upon expiration of the Ground Lease and
provides for monthly rent equal to 50% of all of the rent payable under the
Ground Lease. Sunrise Foundation also reimburses the Company for use of office
facilities and support services. Reimbursements for the years ended December 31,
1993, 1994 and 1995 were $60,000 for each year. The Company believes that, at
the time entered into, the terms of the lease and sublease were no less
favorable to the Company than those which it could have obtained from an
unaffiliated third party.
The Founders lease certain real property located in Fairfax County,
Virginia for use as a residence pursuant to a 99-year ground lease with the
Company entered into in June 1994. The rent is $1.00 per month. This property is
part of a parcel, which includes the Oakton facility, that was transferred by
the Founders to the Company in connection with obtaining the GECC Mortgage.
Rather than attempting to subdivide the parcel, which would have caused a
significant delay in consummation of that transaction, the Company agreed to
lease the Founders' residence back to them as a condition to the transfer of the
property.
In connection with the Contribution Transaction, in 1995 the Sunrise
Entities made distributions aggregating $9.6 million to, and the Company assumed
$1.4 million of indebtedness (representing the discounted value of $2.1 million
of interest-free indebtedness) of, the Founders. A portion of the cash
distributions is expected to be used to pay tax liabilities incurred by the
Founders in the Contribution Transaction. See Note 1 of Notes to Consolidated
and Combined Financial Statements. In 1996, one of the Sunrise Entities made an
additional $390,000 distribution to the Founders relating to prior period net
income. Immediately prior to the Contribution Transaction in 1994, Sunrise
Entities made distributions totaling $5.9 million to the Founders. See "The
Company and its Predecessors."
Sunrise Terrace, Inc., a wholly owned subsidiary of the Company, made
various advances to the Founders in 1993 and 1994. The largest amount
outstanding in 1993 was $954,000 and in 1994 was $1.2 million. The Founders
repaid such advances in full in 1994.
Prior to June 1994, 15 assisted living facilities now owned by the Company
were held in separate limited partnerships and other entities partially owned by
other parties. In June 1994, proceeds from the GECC Mortgage were used to
refinance $71.5 million of existing mortgages and $5.5 million to finance the
acquisition of all minority ownership interests in these 15 facilities. The
minority ownership interests in such facilities were acquired by the Founders
and those facilities were transferred to a newly formed limited partnership,
SALLP, in exchange for limited partnership interests in that entity. The
Founders' interests in SALLP were contributed to the Company in the Contribution
Transaction.
In 1993, Thomas J. Donohue, a director of the Company, jointly with his
wife, made a capital contribution of $500,000 in exchange for a 30% membership
interest in Sunrise Village House LLC, a limited liability company (the "LLC")
that owns the Village House facility. Distributions made by the LLC to the
Donohues in 1993, 1994 and 1995 aggregated $18,700, $35,616 and $40,295,
respectively. In May 1996, the Company purchased the Donohues' 30% interest in
the LLC in exchange for 52,500 shares of Common Stock. The purchase price was
determined based on a valuation of the facility prepared by the Company based
primarily upon a capitalization of net operating income from the facility. The
Donohues have incidental registration rights with respect to their shares.
The table below sets forth (i) the number of shares of Series A Convertible
Preferred Stock issued by the Company for $9.00 per share on January 4, 1995 and
(ii) the number of shares of Series B Exchangeable 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 Investors"). In June 1996 upon
completion of the Company's
56
<PAGE> 58
initial public offering, the Series A Convertible Preferred Stock converted
automatically into an equal number of shares of Common Stock and the Series B
Exchangeable Preferred Stock was redeemed by the Company for $10.00 per share
(plus accrued but unpaid dividends).
<TABLE>
<CAPTION>
PRIOR TO CONVERSION OF
SERIES A PREFERRED STOCK AND
REDEMPTION OF SERIES B
PREFERRED STOCK
----------------------------
NUMBER OF NUMBER OF REDEMPTION
SHARES OF SHARES OF PRICE PAID TO
SERIES A SERIES B HOLDERS OF
PREFERRED PREFERRED SERIES B
ENTITY/DIRECTOR STOCK(1) STOCK PREFERRED STOCK
<S> <C> <C> <C>
Allstate Insurance Company and affiliated entities/
Richard A. Doppelt................................... 977,778 400,000 $ 4,066,000
DLJ Capital Corporation and Sprout Growth II, L.P./
Scott F. Meadow...................................... 733,333 300,000 3,049,500
Frontenac VI Limited Partnership/
Darcy J. Moore....................................... 733,333 300,000 3,049,500
</TABLE>
- ---------------
(1) See "Principal and Selling Stockholders" for a description of the beneficial
ownership of the shares of Common Stock issued on June 5, 1996 upon
conversion of the Series A Convertible Preferred Stock and the number of
shares being sold by the Series A Investors in the Offering.
The Company has entered into a Registration Agreement with the Series A
Investors and the Founders. 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.
57
<PAGE> 59
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 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:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(1)
-------------------- NUMBER OF SHARES --------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Paul J. Klaassen(2).................... 5,164,475 36.2% -- 5,164,475 28.3%
Teresa M. Klaassen(2).................. 5,164,475 36.2 -- 5,164,475 28.3
David W. Faeder(2)(3).................. 404,166 2.8 -- 404,166 2.2
Timothy S. Smick(2)(4)................. 65,916 * -- 65,916 *
Thomas B. Newell(2)(5)................. 57,499 * -- 57,499 *
Brian C. Swinton(2)(6)................. 30,000 * -- 30,000 *
Ronald V. Aprahamian(7)................ 65,000 * -- 65,000 *
Thomas J. Donohue(8)................... 77,500 * -- 77,500 *
Richard A. Doppelt(9).................. 977,778 6.9 250,000 727,778 4.0
Scott F. Meadow(10).................... 733,333 5.1 375,000 358,333 2.0
Darcy J. Moore(11)..................... 733,333 5.1 375,000 358,333 2.0
Allstate Insurance Company(12)......... 977,778 6.9 250,000 727,778 4.0
DLJ Capital Corporation(13)............ 733,333 5.1 375,000 358,333 2.0
Frontenac VI Limited Partnership(14)... 733,333 5.1 375,000 358,333 2.0
Sprout Growth II, L.P.(15)............. 667,161 4.7 341,162 325,999 1.8
Putnam Investments, Inc.(16)........... 1,601,199 11.2 -- 1,601,199 8.8
Executive officers and directors
as a group (11 persons)(17).......... 8,309,000 55.9 1,000,000(18) 7,309,000 38.8
</TABLE>
- ---------------
* Less than one percent.
(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial
ownership of any securities as to which such person, directly or
indirectly, through any contract, arrangement, undertaking, relationship or
otherwise has or shares voting power and/or investment power and as to
which such person has the right to acquire such voting and/or investment
power within 60 days. Percentage of beneficial ownership as to any person
as of a particular date is calculated by dividing the number of shares
beneficially owned by such person by the sum of the number of shares
outstanding as of such date and the number of shares as to which such
person has the right to acquire voting and/or investment power within 60
days.
(2) The business address of the named person is c/o the Company, 9401 Lee
Highway, Suite 300, Fairfax, VA 22031.
(3) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 30, 1996. If the Underwriters
exercise their over-allotment option, Mr. Faeder will sell up to 150,000
shares of Common Stock that are subject to currently exercisable stock
options and will beneficially own 254,166 shares (1.3%) of the Common Stock
outstanding after the Offering.
(4) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 30, 1996 and 5,500 shares held in a
trust for which Mr. Smick serves as trustee. If the Underwriters exercise
their over-allotment option, Mr. Smick will sell up to 33,333 shares of
Common Stock that are subject to currently exercisable stock options and
would beneficially own 32,583 shares (less than 1%) of the Common Stock
outstanding after the Offering.
(5) Represents shares issuable upon the exercise of stock options that are
exercisable within 60 days of September 30, 1996. If the Underwriters
exercise their over-allotment option, Mr. Newell will sell up to 20,000
shares of Common Stock that are subject to currently exercisable stock
options and would beneficially own 37,499 shares (less than 1%) of the
Common Stock outstanding after the Offering.
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(6) Represents 30,000 shares issuable upon the exercise of options that are
exercisable within 60 days of September 30, 1996.
(7) The business address of the named person is c/o The Compucare Company,
12110 Sunset Hills Drive, Reston, VA 22090. Represents 25,000 shares
issuable upon the exercise of stock options that are exercisable within 60
days of September 30, 1996 and 40,000 shares of Common Stock held directly.
(8) The business address of the named person is c/o American Trucking
Association, 2200 Mill Road, Alexandria, VA 22314. Represents 25,000 shares
issuable upon the exercise of stock options that are exercisable within 60
days of September 30, 1996 and 52,500 shares of Common Stock issued in May
1996 in exchange for a 30% 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 CTC Illinois Trust Company, as trustee. Mr. Doppelt is Venture
Group Manager of Allstate Insurance Company, and in such capacity may be
deemed to share beneficial ownership with respect to such shares; however,
he disclaims any beneficial ownership except to the extent of his pecuniary
interest therein.
(10) The business address of the named person is c/o The Sprout Group, 277 Park
Avenue, New York, NY 10172. Represents 667,161 shares beneficially owned by
Sprout Growth II, L.P. ("Sprout") and 66,172 shares beneficially owned by
DLJ Capital Corporation ("DLJ Capital"). Mr. Meadow is a general partner of
DLJ Growth Associates II, L.P., which is a general partner of Sprout, and a
Vice President of The Sprout Group, a division of DLJ Capital. Mr. Meadow
may be deemed to share beneficial ownership with respect to such shares;
however, he disclaims any beneficial ownership, except to the extent of his
pecuniary interest therein.
(11) The business address of the named person is c/o Frontenac Company, 135 S.
LaSalle Street, 38th Floor, Chicago, IL 60603. Represents 733,333 shares
beneficially owned by Frontenac VI Limited Partnership ("Frontenac VI").
Frontenac Company is the general partner of Frontenac VI. Ms. Moore is a
general partner of Frontenac Company. In such capacity, Ms. Moore may be
deemed to share beneficial ownership with respect to such shares; however,
she disclaims beneficial ownership thereof except to the extent of her
pecuniary interest therein.
(12) The business address of Allstate Insurance Company is Northbrook, IL 60062.
Includes shares owned by Allstate Insurance Company (547,555 shares) and
Allstate Life Insurance Company (342,222 shares). These Allstate entities
are affiliates through interrelated ownership and/or control. Also includes
shares held in trust for the benefit of Allstate Retirement Plan (48,889
shares) and Agents Pension Plan (39,112 shares) by CTC Illinois 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 66,172 shares owned directly by DLJ Capital and 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) The business address of Putnam Investments, Inc. is One Post Office Square,
Boston, MA 02109. Shares shown are reported on a Schedule 13G dated
September 9, 1996 filed with the Securities and Exchange Commission by
Marsh & McLennan Companies, Inc. ("M&MC"), Putnam Investments, Inc. ("PI"),
Putnam Investment Management Inc. ("PIM"), The Putnam Advisory Company,
Inc. ("PAC") and Putnam New Opportunities Fund ("Fund"). PI and PAC share
voting power with
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respect to 41,786 shares and the Fund shares voting power with respect to
1,092,431 shares. PI, PIM, PAC and the Fund share power to dispose of all
1,601,199 shares that they are deemed to beneficially own. M&MC and PI
disclaim any beneficial ownership of the above-listed shares.
(17) See notes (3), (4), (5), (6), (7), (8), (9), (10) and (11) above. Includes
the 5,164,475 shares jointly owned by Paul J. and Teresa M. Klaassen.
(18) Includes the following shares of Common Stock being sold by the Selling
Stockholders: Allstate Insurance Company (140,000 shares); Allstate Life
Insurance Company (87,500 shares); Agents Pension Plan (10,000 shares);
Allstate Retirement Plan (12,500); DLJ Capital (33,838 shares); Sprout
(341,162 shares); and Frontenac VI (375,000 shares).
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DESCRIPTION OF CAPITAL STOCK
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") and by the provisions of applicable law. A
copy of the Certificate is included as an exhibit to the Registration Statement
of which this Prospectus is a part.
The Company's authorized capital stock consists 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").
Upon completion of the Offering, the Company will have outstanding 18,255,753
shares of Common Stock (19,005,753 shares if the Underwriters' over-allotment
option is exercised in full) and no shares of Preferred Stock. All of the
currently outstanding shares of Common Stock are validly issued, fully paid and
nonassessable under the Delaware General Corporation Law (the "DGCL"). As of
October 7, 1996, there are approximately 26 record holders of Common Stock.
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. The
Company has no present plan to issue shares of its Preferred Stock.
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 $17.00, subject to various anti-dilution adjustments.
The warrants may be exercised at any time through March 19, 2006. The Company
has 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.
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REGISTRATION RIGHTS
The Founders, as holders of 5,164,475 shares of outstanding Common Stock
(the "Founders' Shares"), the holders of 2,444,444 shares of Common Stock issued
upon conversion of the Series A Convertible 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,
holders of Registrable Securities may request that the Company offer some or all
of such Registrable Securities to the public pursuant to an effective
registration statement under the Securities Act. Registration on Form S-1 may be
demanded by either of the Founders or by the holders of not less than a majority
of the Investors' Shares (defined below), provided that the holders requesting
registration on Form S-1 must be requesting registration of not less than 25% of
the Registrable Securities held by such holders. Registration on Form S-3 may be
demanded by either 25% of the holders of Investors' Shares or by holders of 25%
of the then outstanding Founders' Shares, provided that the aggregate offering
value of the Registrable Securities requested to be included in such
registration must be reasonably expected to equal at least $1 million. The
holders have the right to require the Company to file a registration statement
on Form S-1 two times and on Form S-3 an unlimited number of times. However, the
Company is obligated to pay registration expenses only for the first two
registrations on Form S-3. The Company is also required to give notice of such
requested registration to all holders of all Registrable Securities of the
Company. If a demand registration is an underwritten public offering and the
managing underwriter advises the Company that the number of Registrable
Securities and other securities being registered exceeds the number of
securities which can be sold in such offering without having a material adverse
effect on the offering, the Company may cut back pro rata the number of
Registrable Securities and other securities being registered. "Investors'
Shares" means any shares of Common Stock held of record by stockholders other
than the Founders, including shares issued or issuable upon the conversion of
the Series A Convertible 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.
In addition to the foregoing registration rights, the Company has granted
incidental registration rights to Thomas J. Donohue (52,500 shares) and the
holder of the Company's outstanding warrants (50,000 shares) and intends to
grant incidental registration rights with respect to shares of Common Stock
having an aggregate fair market value of $200,000 which the Company intends to
issue in satisfaction of a $200,000 non-interest bearing loan made to a Company
predecessor.
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 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:
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(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.
The Company has entered 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
The Certificate and the Bylaws 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
Company's subsidiaries and on the communities in which the Company and its
subsidiaries operate or are located.
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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 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
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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
After completion of the Offering, the Company will have 18,255,573 shares
of Common Stock outstanding (19,005,753 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, approximately
11,594,334 shares, including the 5,000,000 shares offered hereby (5,750,000
shares 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 6,661,419 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. Subject to
certain exceptions, the Company, its directors and executive officers and
certain stockholders of the Company who, upon completion of the Offering, will
beneficially own in the aggregate approximately 7,309,000 shares of Common Stock
(including up to 203,333 shares subject to options held by certain officers that
will be exercised and the underlying shares sold if the underwriter's
over-allotment option is exercised), have agreed 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 prior to the expiration of 90 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 3,248,065 shares of Common Stock pursuant to the Company's
stock option programs, under which options to purchase 1,631,348 shares will be
outstanding upon completion of the Offering, of which options for 687,984 shares
are exercisable within 60 days of the date of this Prospectus. In addition,
warrants to purchase 50,000 shares of Common Stock are outstanding.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least two years is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the two-year holding period, to sell shares of Common Stock. A person
who is deemed not to have been an "affiliate" of the Company at any time during
the 90 days preceding a sale by such person, and who has beneficially owned such
shares for at least three years, would be entitled to sell such shares without
regard to the volume limitations described above.
The Commission has proposed to amend the holding period required by Rule
144 to permit sales of "restricted securities" after one year rather than two
years (and two years rather than three years for "non-affiliates" under Rule
144(k)). If such proposed amendment is adopted, restricted securities would
become freely tradable (subject to any applicable contractual restrictions) at
correspondingly earlier dates.
Subject to certain exceptions, the Company, its directors and executive
officers and certain stockholders of the Company who, upon completion of the
Offering, will beneficially own in the aggregate approximately 7,309,000 shares
of Common Stock,, have agreed 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 90 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.
Currently, options and warrants which could be exercised for the purchase
of 698,012 shares of Common Stock will not be subject to the lock-up
restrictions discussed above. Of such 698,012 shares of Common
66
<PAGE> 68
Stock issuable upon the exercise of such options and warrants, 165,903 options
and warrants are exercisable within 60 days after the date of this Prospectus.
After the Offering, the holders of 6,711,419 shares of Common Stock or
their transferees, as well as the holder of shares of Common Stock having a fair
market value of $200,000 which the Company intends to issue in satisfaction of a
$200,000 non-interest bearing loan made to a Company predecessor, 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."
67
<PAGE> 69
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, NatWest Securities Limited and J.C. Bradford & Co. are acting as
representatives (collectively, the "Representatives"), have severally agreed to
purchase from the Company and the Selling Stockholders 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
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..............
Alex. Brown & Sons Incorporated..................................
NatWest Securities Limited.......................................
J.C. Bradford & Co. .............................................
---------
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.
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 Company and certain Selling Stockholders 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 public offering price less underwriting discounts and
commissions, solely to cover over-allotments. Of such shares subject to the
over-allotment option, the first 203,333 shares exercised will be sold by
certain Selling Stockholders and the remaining 546,667 shares covered by the
over-allotment option, to the extent exercised, will be issued and sold by the
Company. To the extent that the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such Underwriter's name in the preceding table bears
to the total number of shares offered.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer any Common Stock within the United States, its
territories or possessions, or to persons who are citizens thereof or residents
therein. The Underwriting Agreement does not limit sale of the Common Stock
offered hereby outside of the United States.
NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments
(whether as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of
68
<PAGE> 70
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.
Pursuant to the Stockholders' Agreement entered into in connection with the
issuance of the Series A Convertible Preferred Stock, Sprout and DLJ Capital,
both affiliates of DLJ, had 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 terminated upon completion of the Company's initial public offering.
Sprout and DLJ Capital beneficially own an aggregate of 733,333 shares of Common
Stock, of which 375,000 shares will be sold in the Offering.
The Underwriters do not intend to confirm sales of shares of Common Stock
to any accounts over which they exercise discretionary authority.
In connection with the Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934, as amended, during the two business day period
before commencement of offers of the Common Stock. Any passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for such security. However,
if all independent bids are lowered before the passive market maker's bid, then
such bid must then be lowered when certain purchase limits are exceeded.
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 90 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."
This Prospectus may also be used by DLJ in connection with offers and sales
of shares of Common Stock in market making transactions at negotiated prices
related to prevailing market prices at the time of sale. DLJ may not act as
principal or agent in such transactions.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Hogan & Hartson L.L.P., Washington, D.C. Alston & Bird, Atlanta,
Georgia, is acting as counsel for the Underwriters in connection with certain
legal matters relating to the sale of Common Stock offered hereby.
EXPERTS
The consolidated financial statements of Sunrise Assisted Living, Inc. as
of December 31, 1995, and for the year then ended, and the combined financial
statements of Sunrise Entities as of December 31, 1994 and for the year then
ended, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such 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
69
<PAGE> 71
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.
The combined financial statements of Laing Retirement Properties as of
December 31, 1995 and for the three years then ended appearing in this
Prospectus and Registration Statement have been audited by KPMG Peat Marwick
LLP, independent auditors, as indicated in their report with respect thereto,
and are included herein in reliance upon the authority of such firm as experts
in accounting and auditing.
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.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files 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 Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, registrations statements,
proxy statements, and other information regarding registrants that file
electronically with the Commission.
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.
70
<PAGE> 72
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 June 30, 1996 (unaudited) and as of December 31,
1995 of the Company and Combined Balance Sheets as of December 31, 1994 of Sunrise
Entities........................................................................... F-4
Consolidated Statements of Operations of the Company for the six months ended June
30, 1996 and 1995 (unaudited) and for the year ended December 31, 1995 and Combined
Statements of Operations of Sunrise Entities for each of the two years ended
December 31, 1994.................................................................. F-5
Consolidated Statement of Changes in Stockholders' (Deficit) Equity of the Company
and Combined Statement of Owners' Deficit of Sunrise Entities...................... F-6
Consolidated Statements of Cash Flows of the Company for the six months ended June
30, 1996 and 1995 (unaudited) and for the year ended December 31, 1995 and Combined
Statements of Cash Flows of 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-28
Combined Balance Sheet as of December 31, 1993....................................... F-29
Combined Statement of Operations and Partners' Deficit for the year ended December
31, 1993........................................................................... F-30
Combined Statement of Cash Flows for the year ended December 31, 1993................ F-31
Notes to Combined Financial Statements............................................... F-32
LAING RETIREMENT PROPERTIES (SOUTHEAST PROPERTIES)
Report of Independent Auditors....................................................... F-36
Combined Balance Sheets as of June 30, 1996 (unaudited) and as of December 31, 1995
and 1994 of Laing Retirement Properties............................................ F-37
Combined Statements of Operations of Laing Retirement Properties for the six months
ended June 30 1996 and 1995 (unaudited) and for each of the three years ended
December 31, 1995.................................................................. F-38
Combined Statements of Changes in Stockholders' Equity of Laing Retirement
Properties......................................................................... F-39
Combined Statements of Cash Flows of Laing Retirement Properties for the six months
ended June 30 1996 and 1995 (unaudited) and for each of the three years ended
December 31, 1995.................................................................. F-40
Notes to Combined Financial Statements............................................... F-41
SUNRISE ASSISTED LIVING, INC.
Unaudited Pro Forma Consolidated Financial Statements................................ F-44
Pro Forma Consolidated Balance Sheet as of June 30, 1996............................. F-45
Pro Forma Consolidated Statement of Operations for the year ended December 31,
1995............................................................................... F-46
Pro Forma Consolidated Statement of Operations for the six months ended June 30
1996............................................................................... F-47
Notes to Pro Forma Financial Statements.............................................. F-48
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Sunrise Assisted Living, Inc.
We have audited the accompanying consolidated balance sheet of Sunrise
Assisted Living, Inc. (the "Company") as of December 31, 1995, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. We also have audited the combined balance sheet of Sunrise
Entities (the predecessor to the Company, see Note 1) as of December 31, 1994,
and the related combined statements of operations, owners' deficit, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sunrise
Assisted Living, Inc. as of December 31, 1995, and the consolidated results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. Further, in our opinion, the financial
statements referred to above present fairly, in all material respects, the
combined financial position of Sunrise Entities as of December 31, 1994, and the
combined results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Washington, D.C.
February 15, 1996
except for Notes 10 and
Note 16, as to which the date is June 5, 1996
F-2
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
To the Partners and Stockholders
Sunrise Entities
We have audited the accompanying combined statements of operations and
partners'/stockholders' deficits and cash flows of Sunrise Entities
(collectively, the "Company") for the year ended December 31, 1993. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Sunrise Entities for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
Hoffman, Morrison & Fitzgerald P.C.
Vienna, Virginia
March 13, 1996
F-3
<PAGE> 75
CONSOLIDATED BALANCE SHEET OF SUNRISE ASSISTED LIVING, INC.
AS OF JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
AND THE COMBINED BALANCE SHEET OF SUNRISE ENTITIES
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
---------------------------- -------------------
1994 1995 (UNAUDITED-NOTE 18)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 8,088,655 $ 6,252,449 $ 22,712,621
Accounts receivable, less allowance of
$50,000, $235,000 and $502,000..................... 1,097,886 1,319,429 1,572,441
Short-term securities................................ -- -- 50,000,000
Prepaid and other current assets..................... 2,090,644 2,328,571 1,726,548
------------ ------------ -------------------
Total current assets.......................... 11,277,185 9,900,449 76,011,610
Property and equipment, net............................ 94,296,103 104,317,117 137,470,595
Investment............................................. -- 5,375,404 5,645,785
Restricted cash and cash equivalents................... 1,175,410 1,260,470 1,333,542
Other assets........................................... 2,254,629 2,467,421 3,505,966
------------ ------------ -------------------
Total assets.................................. $109,003,327 $123,320,861 $ 223,967,498
============= ============= ===================
LIABILITIES AND OWNERS'/STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 3,008,239 $ 6,547,122 $ 7,207,813
Distribution payable................................. 9,646,167 -- --
Deferred revenue..................................... 950,789 903,711 971,245
Other current liabilities............................ 760,740 130,669 1,077,430
Current portion of long-term debt.................... 4,216,667 268,576 394,935
------------ ------------ -------------------
Total current liabilities..................... 18,582,602 7,850,078 9,651,423
Notes payable to affiliated entities................... 1,610,231 1,735,138 1,620,838
Interests in unconsolidated partnerships............... 322,221 620,014 744,863
Long-term debt, less current maturities................ 104,202,457 120,285,996 118,695,915
------------ ------------ -------------------
Total liabilities............................. 124,717,511 130,491,226 130,713,039
Minority interests..................................... 676,944 639,895 371,457
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 --
Owners'/Stockholders' (deficit) equity:
Common stock of predecessor.......................... 10,501 -- --
Additional paid-in capital of predecessor............ 852,020 -- --
Accumulated deficit of predecessor................... (17,253,649) -- --
Common stock, $0.01 par value, 60,000,000 shares
authorized, 6,019,475 and 14,244,562 shares issued
and outstanding 1995 and 1996...................... -- 60,195 142,446
Contributed capital (deficiency)..................... -- (19,733,287) 107,702,674
Accumulated deficit.................................. -- (12,100,664) (14,962,118)
------------ ------------ -------------------
Total owners'/stockholders' (deficit)
equity...................................... (16,391,128) (31,773,756) 92,883,002
------------ ------------ -------------------
Total liabilities and owners'/stockholders'
(deficit) equity............................ $109,003,327 $123,320,861 $ 223,967,498
============= ============= ===================
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
CONSOLIDATED STATEMENTS OF OPERATIONS OF SUNRISE ASSISTED LIVING, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE COMBINED STATEMENTS OF OPERATIONS OF SUNRISE ENTITIES
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
DECEMBER 31, 1995 1996
------------------------------------------ (UNAUDITED- (UNAUDITED-
1993 1994 1995 NOTE 18) NOTE 18)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Resident fees...................... $23,993,737 $32,138,979 $ 34,752,023 $17,075,543 $19,458,479
Management services income......... 1,604,367 1,829,707 2,505,903 1,211,692 1,541,500
----------- ----------- ------------ ----------- -----------
25,598,104 33,968,686 37,257,926 18,287,235 20,999,979
Operating expenses:
Facility operating expenses........ 17,760,450 17,983,070 21,010,486 10,268,363 12,607,649
Facility development and
pre-opening expenses............. 474,206 262,825 1,171,843 433,326 649,661
General and administrative......... 2,034,340 4,182,777 6,875,006 2,718,929 4,413,204
Depreciation and amortization...... 2,798,581 3,159,764 3,008,639 1,479,259 1,803,481
----------- ----------- ------------ ----------- -----------
23,067,577 25,588,436 32,065,974 14,899,877 19,473,995
----------- ----------- ------------ ----------- -----------
Income from operations............... 2,530,527 8,380,250 5,191,952 3,387,358 1,525,984
Other income (expense):
Interest income.................... 317,144 565,449 1,228,789 605,935 700,258
Interest expense:
GECC mortgage interest........... -- (5,528,789) (15,295,287) (4,970,796) (4,807,319)
Other debt....................... (3,808,093) (3,059,777) (1,260,292) (557,445) (614,740)
----------- ----------- ------------ ----------- -----------
Total interest expense............. (3,808,093) (8,588,566) (16,555,579) (5,528,241) (5,422,059)
Equity in (losses) earnings on
investments in
unconsolidated/non-combined
partnerships....................... (104,382) 33,024 (9,081) 48,135 6,675
Minority interest.................... 427,798 171,870 6,755 (18,587) 82,704
Unusual charge....................... -- -- -- -- (981,300)
----------- ----------- ------------ ----------- -----------
(Loss) income before extraordinary
item............................... (637,006) 562,027 (10,137,164) (1,505,400) (4,087,738)
Extraordinary item................... -- 850,000 -- -- --
----------- ----------- ------------ ----------- -----------
Net (loss) income.................... $ (637,006) $ 1,412,027 $(10,137,164) $(1,505,400) $(4,087,738)
=========== =========== ============ =========== ===========
Net loss per share data (Unaudited --
Note 18):
Net loss per common equivalent
shares........................... $ (0.69)
===========
Weighted average number of common
and common equivalent shares
outstanding...................... 7,625,366
===========
Pro forma net loss per share data:
(Unaudited -- Notes 3 and 18):
Net loss per common and common
equivalent shares................ $ (0.97) $ (0.35)
============ ===========
Weighted average number of common
and common equivalent shares
outstanding...................... 8,826,127 9,720,604
============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY OF THE
COMPANY AND
COMBINED STATEMENT OF OWNERS' DEFICIT OF THE SUNRISE ENTITIES
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID-IN- OWNERS'
STOCK OF CAPITAL OF DEFICIT OF SHARES OF COMMON CONTRIBUTED
SUNRISE SUNRISE SUNRISE COMMON STOCK CAPITAL ACCUMULATED
ENTITIES ENTITIES ENTITIES STOCK AMOUNT (DEFICIENCY) DEFICIT TOTAL
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1992.......... $ 10,500 $ 822,568 $ (4,370,189) $ 1,600,729 $ (1,936,392)
Contribution of
partnership
capital....... 33,022 33,022
Distributions... (457,814) (29,354) (487,168)
Net loss........ (1,707,434) 1,070,428 (637,006)
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Balance at
December 31,
1993.......... 10,500 822,568 (6,502,415) 2,641,803 (3,027,544)
Acquisition of
interests not
previously
owned by
principal
shareholders... 3,846,815 3,846,815
Contribution of
partnership
capital....... 3,550,336 3,550,336
Other capital
contributions... 29,353 29,353
Dividends....... (3,750,000) (3,750,000)
Cash
distributions... (16,432,652) (16,432,652)
Other
distributions... (2,019,563) (2,019,563)
Net income...... 494,801 917,226 1,412,027
Initial
capitalization
of Sunrise
Assisted
Living,
Inc. ......... 100 $ 1 $ 99 $ 100
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Combined balance
at December
31, 1994...... 10,500 851,921 (17,062,678) 100 1 99 (190,971) (16,391,128)
Issuance of
common stock
for net assets
of Sunrise
Entities...... (10,500) (851,921) 17,062,678 6,019,375 60,194 (16,451,422) 190,971 --
Liability of
Stockholder
assumed at
formation..... (1,447,561) (1,447,561)
Cost of issuance
of Series A
convertible
preferred
stock......... (1,834,403) (1,834,403)
Net loss........ (10,137,164) (10,137,164)
Preferred return
on Series A
convertible
preferred
stock......... (1,963,500) (1,963,500)
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Balance at
December 31,
1995.......... -- -- -- 6,019,475 60,195 (19,733,287) (12,100,664) (31,773,756)
Issuance of
common stock
warrants...... 135,000 135,000
Preferred return
on Series A
convertible
preferred
stock......... (858,000) (858,000)
Issuance of
common
stock......... 5,700,000 57,000 104,282,950 104,339,950
Conversion of
Series A
convertible
preferred
stock to
common
stock......... 2,444,444 24,444 24,797,052 24,821,496
Forfeiture of
preferred
return on
Series A
convertible
preferred
stock......... (2,821,500) 2,821,500
Dividends
payable on
Series B
exchangeable
preferred
stock......... (347,500) (347,500)
Issuance of
common stock
to acquire
interest in
facility...... 52,500 525 944,475 945,000
Exercise of
employee stock
options for
common
stock......... 28,143 282 97,984 98,266
Distributions to
stockholders... (389,716) (389,716)
Net loss........ (4,087,738) (4,087,738)
-------- ---------- ------------ ---------- -------- ------------ ------------ ------------
Balance June 30,
1996
(Unaudited --
Note 18)...... $ -- $ -- $ -- 14,244,562 $142,446 $107,702,674 $(14,962,118) $ 92,883,002
======== ========= ============ ========== ======== ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 78
CONSOLIDATED STATEMENT OF CASH FLOWS OF SUNRISE ASSISTED LIVING, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 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>
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................. $ (637,006) $ 1,412,027 $(10,137,164) $(1,505,400) $ (4,087,738)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Equity in losses (earnings) on investment in
unconsolidated/non-combined partnerships..... 104,382 (33,024) 9,081 (48,134) (6,675)
Minority interest.............................. (427,798) (171,870) (6,755) 18,587 (82,704)
Provision for bad debts........................ -- 123,368 185,257 64,043 266,802
Provision for loss accrual..................... -- 350,000 -- -- --
Extraordinary gain on extinguishment of debt... -- (850,000) -- -- --
Depreciation and amortization.................. 2,798,581 3,159,764 3,008,639 1,479,259 1,803,481
Amortization of discount on long-term debt..... -- 267,000 457,000 228,500 416,900
Accrual of participation mortgage interest..... -- -- 5,400,000 -- --
Interest included in convertible obligations... 105,658 -- -- -- --
Conversion of accrued interest into note
payable...................................... 222,098 -- -- -- --
Changes in assets and liabilities:
(Increase) decrease:
Accounts receivable........................ (256,350) (299,820) (406,799) (1,410,616) (519,814)
Prepaid and other current assets........... (89,766) (595,799) (237,927) 217,886 602,023
Other assets............................... -- 36,309 (854,429) 95,533 (225,776)
Increase (decrease):
Accounts payable and accrued expenses...... 1,341,388 (362,950) 3,538,883 1,541,425 660,690
Deferred revenue........................... 6,242 (298,909) (47,078) 204,547 67,534
Other liabilities.......................... (97,069) -- 35,726 42,748 946,762
----------- ------------ ------------ ----------- ------------
Net cash provided by (used in) operating
activities....................................... 3,070,360 2,736,096 944,434 928,378 (158,515)
INVESTING ACTIVITIES
Increase in restricted cash and cash equivalents... 118,700 (552,631) (85,060) (471,997) (73,072)
Acquisition of interests in facilities............. (1,055,412) (5,458,707) 195,936 -- (18,700)
Purchases of property and equipment................ (3,218,190) (10,652,172) (12,765,570) (2,655,832) (33,941,627)
Disposition of property and equipment.............. -- -- 24,586 22,889 --
Purchase of investment and short term
investments...................................... -- -- (5,375,404) (5,214,093) (50,270,381)
Distribution from investment in unconsolidated
partnership...................................... -- (374,419) 97,876 83,983 150,224
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities.............. (4,154,902) (17,037,929) (17,907,636) (8,235,050) (84,153,556)
FINANCING ACTIVITIES
Organization costs paid............................ -- (61,475) (264) -- (112,993)
Net proceeds from sale of Series A convertible
preferred stock.................................. -- 100 20,165,593 20,165,593 --
Net proceeds from sale of Series B exchangeable
preferred stock.................................. -- -- -- -- 10,000,000
Redemption of series B exchangeable preferred
stock............................................ -- -- -- (10,000,000)
Net proceeds from exercised options................ -- -- -- -- 99,036
Dividends paid on Series B exchangeable preferred
stock............................................ -- -- -- -- (347,500)
Net proceeds from initial public offering of common
stock............................................ -- -- -- -- 104,339,950
Contributions from partners........................ 28,022 3,550,336 -- 5,100 --
Distributions to partners.......................... (2,397) (6,786,485) (9,646,167) (9,645,461) (390,486)
Additional net investment of minority interests.... 2,581,497 1,024,090 (35,394) (10,294) (40,582)
Additional borrowings under long-term debt......... 923,538 101,976,095 9,326,357 1,333,483 14,916,267
Additional borrowings from related parties......... -- 10,100 -- -- --
Financing costs paid............................... (54,674) -- (312,564) (162,750) (780,258)
Repayment of long-term debt........................ (1,622,028) (76,840,388) (4,295,472) (102,764) (16,796,891)
Dividends.......................................... -- (3,750,000) -- -- --
Repayment of related party note payable............ -- -- (75,093) (141,750) (114,300)
----------- ------------ ------------ ----------- ------------
Net cash provided by financing activities.......... 1,853,958 19,122,373 15,126,996 11,441,157 100,772,243
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 769,416 4,820,540 (1,836,206) 4,134,485 16,460,172
Cash and cash equivalents at beginning of year..... 2,498,699 3,268,115 8,088,655 8,088,655 6,252,449
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of year........... $ 3,268,115 $ 8,088,655 $ 6,252,449 $12,223,140 $ 22,712,621
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 79
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRESENTATION
Sunrise Assisted Living, Inc. (the "Company") does business in the assisted
living segment of providing elder care services. The Company operates, manages
and develops assisted living facilities. The facilities provide a residence,
meals and non-medical assistance to elderly residents for a monthly fee.
Agreements with residents are for a term of one year and are cancelable by
residents with thirty days notice. The Company's services are generally not
covered by health insurance and so the monthly fees are generally payable by the
residents, their family, or another responsible party.
The consolidated financial statements include the Company's wholly owned
subsidiaries that manage (Sunrise Terrace, Inc.), own (Sunrise Assisted Living
Limited Partnership), and develop (Sunrise Development, Inc.) assisted living
facilities, and also include one limited partnership which owns a facility
(Gardner Park) in which the Company owns a 50% partnership interest and controls
the limited partnership through its status as the manager of the facility and as
the sole general partner with the unilateral ability under the partnership
agreement to conduct the ordinary course of business of the partnership, and two
limited liability companies which own facilities (Village House and Raleigh).
For the limited liability company which owns the Village House facility, the
Company owns a 50% membership interest and has entered into an agreement to
acquire an additional 30% membership interest, acts as the sole manager of the
limited liability company and the manager of the facility, and has the ability
under the operating agreement to unilaterally conduct the ordinary course of
business of the limited liability company. For the limited liability company
which owns the Raleigh facility, the Company owns a 50% membership interest, has
the right on 45 days notice to acquire the remaining interests for a price
specified in the operating agreement, acts as the sole manager of the limited
liability company and the manager of the facility, and under the terms of the
operating agreement has the unilateral right to conduct the ordinary course of
business of the limited liability company. All significant intercompany
transactions and accounts have been eliminated. The Company accounts for other
significant partnership investments in which it is the general partner and/or
manager on the equity method, including Sunrise Homes of Towson, L.P. (13.9%
ownership interest) and Sunrise of Queen Anne (33% tenancy-in-common ownership
interest) because the Company is able to significantly influence both the
operating and financial decisions of these facilities. The Company also has
accounted under the equity method for its partnership investment in the limited
partnerships which own the Annapolis and Pikesville facilities. In those
partnerships, the Company is the sole general partner, has a 50% ownership
interest and has entered into an agreement to acquire an additional 1% ownership
interest. The Company's ability to conduct the ordinary course of business of
the partnership is currently limited by certain limited partner approval
requirements.
The Company was incorporated in Delaware on December 14, 1994. On January
4, 1995, the Company issued 6,019,375 shares of Common Stock to the majority
stockholders in exchange for all of the equity interests in Sunrise Entities.
The equity interests were recorded at the historical cost of the majority
stockholders (i.e., a reorganization of entities under common control).
Simultaneously, the Company sold 2,444,444 shares of Series A Convertible
Preferred Stock at $9.00 per share net of issuance costs of $1,834,403 to seven
institutional investors. In addition, the Company assumed notes payable of
$2,090,000 at January 4, 1995 (see Note 8). Concurrent with the January 4, 1995
transaction, Sunrise Entities distributed an aggregate $9,606,000 in cash to the
majority stockholders, which was recognized as a distribution payable in Sunrise
Entities' December 31, 1994 combined financial statements.
The historical financial statements for the years ended December 31, 1994
and 1993 represent the combined historical results of operations and financial
condition of Sunrise Entities. Sunrise Entities recorded their interests in the
Acquired Entities of Sunrise under the equity method prior to June 8, 1994.
Sunrise Entities, which prior to January 4, 1995 developed, managed and owned
assisted living facilities, consist of a
F-8
<PAGE> 80
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND PRESENTATION (CONTINUED)
management company, a development company, interests in limited partnerships and
limited liability companies that owned assisted living facilities and other
limited partnerships used to hold equity in operating assisted living facilities
or development projects. All of the operations and equity interests of Sunrise
Entities were held by the majority stockholder of the Company and were
transferred to the Company on January 4, 1995, in exchange for Common Stock of
the Company. All significant intercompany transactions and accounts have been
eliminated in the combined financial statements.
Prior to June 8, 1994, 15 of the assisted living facilities now owned by
the Company were held in separate limited partnerships partially owned by other
parties. Four of the facilities were not previously controlled by the Sunrise
Entities. The Sunrise Entities owned 47%, 48%, 29% and 25%, respectively of
these facilities. The combined net assets of the 15 facilities consisted of
$75,492,931 of total assets, including $263,008 of cash and $77,645,513 of
liabilities. On June 8, 1994, a new debt facility (see Note 8) was used to
finance the acquisition of all outside interests and refinance approximately
$71,500,000 of existing long-term debt of the facilities. The aggregate purchase
price of the outside interests was $48,319,245. At the acquisition date the
carrying value of the net operating assets of the facilities was stepped up by
$12,094,910 to reflect the excess of the purchase price over the book basis of
the interests acquired (i.e., the acquisition of an interest not previously
earned) that was not previously owned by the Company's principal stockholders.
Disclosures made herein with respect to the years ended December 31, 1993
and 1994 are to be read as disclosures of Sunrise Entities. All disclosures made
in reference to periods subsequent to December 31, 1994, except those
specifically identified as relating to transactions prior to the formation of
the Company, are disclosures of the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Resident fee revenue is recognized when services are rendered and consists
of daily resident fees, resident community fees and other ancillary services.
Generally, resident community fees approximating sixty times the daily residence
fee are received from potential residents upon occupancy. Resident community
fees are ratably refundable if the prospective resident does not move into the
facility or moves out of the facility within ninety days. Community fees
received are recognized as income over the first ninety days of the resident's
stay. Revenue from management contracts is recognized in the month in which it
is earned in accordance with the terms of the management contract.
F-9
<PAGE> 81
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCES FOR DOUBTFUL ACCOUNTS
Details of the allowance for doubtful accounts receivable are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Beginning balance.................................... $ -- $ -- $ 50,000
Bad debt expense..................................... -- 123,000 185,000
Accounts written off................................. -- (73,000) --
--------- -------- --------
Ending balance....................................... $ -- $ 50,000 $235,000
========= ======== ========
</TABLE>
PROVISION FOR LOSS ACCRUALS
During 1994, the Company recorded a loss accrual amounting to $250,000 to
recognize anticipated losses on one of its management contracts. Also in 1994,
the Company accrued $100,000 in anticipation of actions taken by Virginia state
and local authorities regarding licensure and state building code violations. No
loss accruals were recorded in 1995.
PRE-RENTAL COSTS
Costs incurred to initially rent facilities are capitalized and amortized
over 12 months. All other pre-rental costs are expensed as incurred.
Pre-rental costs and accumulated amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
<S> <C> <C>
Pre-rental costs................................................. $42,725 $253,557
Accumulated amortization......................................... (1,965) (11,393)
------- --------
$40,760 $242,164
======= ========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at the lower of cost or net realizable
value and include interest and property taxes capitalized on long-term
construction projects during the construction period as well as other costs
directly related to the development and construction of facilities. Maintenance
and repairs are charged to expense as incurred. Depreciation is computed using
the straight-line method at rates intended to amortize the cost of the related
assets over their estimated useful lives.
During 1994, Sunrise Entities changed the estimated useful life of
furniture and equipment from seven to ten years and of buildings from 31.5 to 40
years. The changes had the effect of reducing depreciation expense by $402,069
in 1994.
DEFERRED FINANCING COSTS
Costs incurred in connection with obtaining permanent financing for
Company-owned facilities have been deferred and are amortized over the term of
the financing using the effective interest method.
F-10
<PAGE> 82
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred financing fees and accumulated amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
<S> <C> <C>
Deferred financing........................................... $2,233,750 $2,546,319
Accumulated amortization..................................... (162,393) (438,385)
---------- ----------
$2,071,357 $2,107,934
========== ==========
</TABLE>
ORGANIZATION COSTS
Costs incurred in connection with the organization of the Company have been
capitalized and are being amortized ratably over five years.
INCOME TAXES
Income taxes are provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis (temporary differences).
All of Sunrise Entities were partnerships, limited liability corporations
or were corporations that elected to be treated as an S Corporation under
Section 1362 of the Internal Revenue Code. Therefore, no provision or benefit
for income taxes was included in the Predecessor's financial statements because
taxable income or loss passed through pro rata to the owners of the Predecessor.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include currency on
hand, demand deposits, and all highly liquid investments with a maturity of
three months or less at the date of purchase.
NON-CASH TRANSACTION
In 1993 the Company assumed a note payable of $8,550,000 as the primary
consideration for the acquisition of the Village House facility.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and accordingly
recognizes no compensation expense for the stock option grants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows
F-11
<PAGE> 83
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company adopted Statement 121 in the first
quarter of 1996 and the effect is not material to the Company's operations or
financial position taken as a whole. Under SFAS No. 121, property and equipment
of the Company are reviewed for impairment whenever events or circumstances
indicate that the asset's undiscounted expected cash flows are not sufficient to
recover its carrying amount. The Company measures an impairment loss by
comparing the fair value of the asset to its carrying amount. Fair value of an
asset is calculated as the present value of expected future cash flows.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value-based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value-based
accounting for those arrangements. These disclosure requirements are effective
for fiscal years beginning after 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.
OTHER
The Company's interest in accumulated losses of unconsolidated
partnership's distributions are recorded below the Company's cost basis, which
reflects the Company's obligations as the general partner. The Company has no
liability for any other material commitments or contingencies of partnerships in
which it is a general partner.
RECLASSIFICATIONS
Certain 1993 and 1994 balances have been reclassified to conform with the
1995 presentation.
3. PRO FORMA NET LOSS PER COMMON SHARE
The 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
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. The Company's pro forma loss per share reflects the conversion of
Series A Convertible Preferred Stock and the acquisition of the Southeast
Properties as if they occurred on January 1, 1995.
F-12
<PAGE> 84
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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 (CONTINUED)
The following table summarizes the computations of share amounts used and
the computation of pro forma net loss per common share presented in the
accompanying statements of operations:
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1995
(UNAUDITED)
<S> <C>
Common and common equivalent shares:
Weighted average number of shares of common stock outstanding
during the period................................................ 6,019,475
Assumed conversion of Series A Convertible Preferred Stock......... 2,444,444
Options to purchase common stock issued within one year of
registration statement using the treasury stock method........... 362,208
------------
Total common and common equivalent shares of stock considered
outstanding during the year...................................... 8,826,127
============
Net loss........................................................... $ 10,137,164
Net loss per common and common equivalent shares................... (1.15)
Pro forma adjustment to reflect acquisition of Southeast Properties
(Note 18)........................................................ 1,605,000
------------
Pro forma net loss................................................. $ (8,532,164)
============
Net loss per common and common equivalent shares................... $ (0.97)
</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 $ 13,071,971
Building and building improvements............. 40 yrs. 82,033,939 83,012,889
Furniture and equipment........................ 10 yrs. 8,960,081 10,403,810
------------ ------------
102,632,809 106,488,670
Less accumulated depreciation and
amortization................................. (12,539,785) (15,184,945)
------------ ------------
90,093,024 91,303,725
Construction in progress....................... 4,203,079 13,013,392
------------ ------------
$ 94,296,103 $104,317,117
============ ============
</TABLE>
Interest capitalized during 1994 and 1995 was $137,896 and $166,960,
respectively.
Construction in progress includes pre-acquisition costs and other direct
costs related to acquisition, development and construction of facilities
including certain direct costs of the Company's development subsidiary, Sunrise
Development, Inc. If a project is abandoned, any costs previously capitalized
are expensed.
5. INVESTMENT
On March 1, 1995, the Company purchased all of the outstanding mortgage
revenue bonds used to finance a facility managed by the Company. The 10% Bucks
County Industrial Development Authority, First
F-13
<PAGE> 85
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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 (CONTINUED)
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.
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
F-14
<PAGE> 86
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
per month. This property is part of a parcel, which includes a facility, that
was transferred to the Company on June 8, 1994.
A director of the Company made a capital contribution of $500,000 in
exchange for a 30% membership interest in a limited liability company which
operates one of the Company's facilities. The Company owns a 50% membership
interest, is the managing member and manages the facility pursuant to a
management contract that expires in 2003. Distributions made by the Company to
the director in 1993, 1994 and 1995 aggregated $18,700, $35,616 and $40,295,
respectively. The operating agreement of the facility requires the facility to
repurchase the minority interests at the lessor of (i) the facility's fair
market value or (ii) return of the investor's contributed capital assuming on 8%
return net of distributions. The repurchase right is exercisable beginning in
2000.
7. RECEIVABLES AND PAYABLES FROM AFFILIATES
Included in prepaid and other current assets are net receivables from
unconsolidated partnership investments of $1,073,242 and $1,359,164, as of
December 31, 1994 and 1995, respectively. Included in other assets are notes
receivable from officers of the Company amounting to $43,401 and $109,348 as of
December 31, 1994 and 1995, respectively.
Included in other current liabilities is $714,295 and $102,601 payable to
affiliates as of December 31, 1994 and 1995, respectively. Also included in
other liabilities in 1994 is $671,000 payable to minority owners, which pertains
to advances for construction activities prior to obtaining a construction loan.
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> 87
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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.............. 3,200,000 8,600,000
Outstanding draws on construction notes payable.................. 358,874 9,685,336
Mortgage notes payable to Housing Opportunities Commission of
Montgomery County, Maryland (HOC).............................. 8,600,308 8,530,059
Notes payable dated June 6, 1994 to three individual parties..... -- 1,170,544
Other notes and capital leases................................... 92,942 44,633
Line of credit................................................... 4,100,000 --
Discount on the GECC Mortgage long-term debt less amortization of
$724,000....................................................... (2,933,000) (2,476,000)
------------ ------------
108,419,124 120,554,572
Less current portion........................................ (4,216,667) (268,576)
------------ ------------
$104,202,457 $120,285,996
============ ============
</TABLE>
The GECC Mortgage is collateralized by a blanket first mortgage on all
assets of a subsidiary of the Company. Such assets had a book value of
approximately $80 million at December 31, 1995. The GECC Mortgage consists of
two separate debt classes. Class (A) in the amount of $65,000,000 bears a fixed
interest rate of 8.56% and is interest only until the maturity date of May 31,
2001. Class (B) in the amount of $30,000,000 bears a variable interest rate of
one month LIBOR rate plus 5.75% (11.75% at December 31, 1995). Class (B) is
interest only until July 1, 1997 at which time principal and interest payments
are due using a twenty-year amortization schedule. Effective September 30, 1996,
Sunrise Assisted Living Limited Partnership is required to meet a minimum debt
service coverage ratio or principal payments accelerate to the lesser of monthly
net cash flow or amortization of the loan over a twenty-year period. Each month,
the lender can receive additional interest based on 25% of net cash flows as
specified in the loan documents, which amounted to $347,000 in 1995 and $370,000
in 1994 and has a 25% participation interest payable at maturity computed at
either the date of maturity, initial public offering of securities by Sunrise
Assisted Living Limited Partnership or one of its affiliates, or sale of the
operating assets. The terms of the loan contain certain covenants and prepayment
restrictions. Additionally, the current majority stockholders must maintain a
25% interest in the Company.
The GECC Mortgage requires Sunrise Assisted Living Limited Partnership to
maintain certain restricted cash balances. These restricted cash and cash
equivalent balances consist of escrows for an operating reserve of fifteen days
of total Sunrise Assisted Living Limited Partnership expenses, a capital reserve
of 3% of monthly revenues of Sunrise Assisted Living Limited Partnership and a
real estate tax escrow.
A participation interest of $3,200,000 payable in connection with the GECC
Mortgage was recorded at the loan date. A corresponding amount was recorded as
loan discount that will be amortized over the life of the loan. Amortization of
the discount of $267,000 and $457,000 has been included as interest expense in
1994 and 1995, respectively. During 1995, the Company revised its estimate of
the market value of the properties financed by the GECC Mortgage. Additional
participation interest on the GECC Mortgage of $5.4 million
F-16
<PAGE> 88
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
was accrued and expensed through December 31, 1995 based on the increase in the
properties' estimated market value during 1995.
The construction notes have total available borrowings of $14,934,000. The
notes bear interest based on various published interest rate indices. At
December 31, 1995, interest rates on the notes ranged from 7.8% to 11%,
remaining maturities ranged from four to seven years, and the notes were secured
by four facilities under construction.
The mortgage notes payable to HOC have monthly payments of $56,714,
including interest at 7.25%, due monthly through June 2033. Additional payments
of approximately $21,070 are also made monthly for taxes, insurance and
replacement reserves. The notes are insured by the Maryland Housing Fund for
which the Company pays an annual fee of .5% of the outstanding note balance and
are collateralized by a deed of trust on the applicable facility and an
assignment of rents from that facility. One of the notes, totaling $200,000, is
also guaranteed by certain stockholders. The notes payable to individuals were
part of the $2,090,000 and liabilities assumed upon the formation of the Company
(see Note 1). The Notes are interest free and are recorded net of imputed
interest at 8.56% (fixed rate of the GECC Mortgage). The principal amount is
payable in 132 equal consecutive monthly installments beginning July 1, 1994.
The notes are due in full on June 1, 2005.
The HOC mortgage notes also place certain restrictions on operations
including maintenance of escrow accounts for real estate taxes and property
replacement reserves.
The line of credit was due May 31, 1995. Interest accrued at a rate equal
to two hundred basis points over the thirty-day LIBOR rate. Borrowing on the
line was used to purchase an assisted living facility.
Principal maturities of long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.................................................................. $ 268,576
1997.................................................................. 605,250
1998.................................................................. 4,959,563
1999.................................................................. 5,087,653
2000.................................................................. 912,351
Thereafter............................................................ 108,721,179
------------
$120,554,572
============
</TABLE>
Interest expense paid totaled $3,241,778, $6,220,886 and $10,231,941, in
1993, 1994 and 1995, respectively, of which $0, $17,288 and $18,000 in 1993,
1994 and 1995, respectively, is related to notes payable to related parties.
Substantially all of the Company's property and equipment is subject to
mortgages or other pledges.
Restricted cash and cash equivalents at December 31 consists of the
following:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Under the GECC Mortgage, real estate tax escrows, operating
and capital reserves....................................... $ 991,382 $1,104,665
Under HOC mortgage, real estate tax escrows and resident
security deposits.......................................... 184,028 155,805
---------- ----------
$1,175,410 $1,260,470
========== ==========
</TABLE>
F-17
<PAGE> 89
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Prior to formation of the
Company on January 4, 1995 (see Note 1) Sunrise Entities were held in
partnerships, limited liability companies, and subchapter S corporations, all of
which passed through tax liabilities and benefits to the owners. The transfer of
assets at the formation of the Company was taxable, in part to the owners.
Accordingly, the tax basis of a majority of the property and equipment of the
Company exceeds its respective book basis for financial reporting purposes. The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities recognized as of the date
of formation of the Company and at December 31, 1995 are presented below:
<TABLE>
<CAPTION>
JANUARY 4, DECEMBER 31,
1995 1995
<S> <C> <C>
Deferred tax assets:
Property and equipment.................................. $ 6,598,370 $ 6,664,396
Participating interest.................................. -- 2,480,220
Operating loss carryforward............................. -- 1,562,860
Deferred revenue........................................ 349,269 363,442
Bad debt allowance...................................... 20,250 95,175
----------- ------------
Total gross deferred tax assets........................... 6,967,889 11,166,093
Less valuation allowance.................................. (6,967,889) (11,166,093)
Deferred tax liabilities.................................. -- --
----------- ------------
Net deferred tax amount................................... $ -- $ --
=========== ============
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $3,860,000 which expire in 2010. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company is
in a cumulative pretax loss for the latest three years for financial reporting
purposes. Recognition of deferred tax assets will require generation of future
taxable income. There can be no assurance that the Company will generate any
earnings or any specific level of earnings in future years. Therefore, the
Company established a valuation allowance on deferred tax assets of
approximately $11.2 million as of December 31, 1995.
Significant components of the provision for income taxes are as follows for
the year ended:
<TABLE>
<CAPTION>
DECEMBER
31, 1995
<S> <C>
Current:
Federal........................................................... $ --
State............................................................. --
-----------
Total current........................................................ --
Deferred:
Federal........................................................... (3,524,418)
State............................................................. (673,786)
Increase in valuation allowance................................... 4,198,204
-----------
Total deferred....................................................... $ --
===========
</TABLE>
F-18
<PAGE> 90
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
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) EQUITY AND STOCK OPTION PLAN
The Company effected a three-for-one stock split of the Company's Common
Stock and increased the number of authorized shares of Common Stock from
20,000,000 to 60,000,000, effective July 11, 1995. Pursuant to the authorization
of the Board of Directors and stockholders, the Company has effected on March
20, 1996 a one-for-three stock split. All share amounts reflected herein reflect
the one-for-three stock split. Authorized shares of Common Stock remain
60,000,000. The Company has a stock option plan providing for the grant of
incentive and nonqualified stock options to employees, directors, consultants
and advisors. Pursuant to the Plan, 998,065 shares of Common Stock have been
reserved for issuance. At December 31, 1995 the following options have been
granted:
<TABLE>
<CAPTION>
DATE OF GRANT NO. OF SHARES GRANTED EXERCISE PRICE
<S> <C> <C>
May 16, 1995.................................. 257,100 $ 3.00
November 17 ,1995............................. 63,333 $ 7.50
December 15, 1995............................. 181,167 $ 7.50
December 15, 1995............................. 6,666 $ 3.75
</TABLE>
No shares have been forfeited. Options expire ten years from date of grant
and will vest 25% each year beginning on the earlier of December 31, 1999 or the
effectiveness of a Registration Statement on Form S-8 following the completion
of the proposed initial public offering by the Company.
The Company also has a stock option agreement with one of its senior
executives who currently is not a stockholder of the Company. The agreement, as
amended, is effective as of January 4, 1995 and covers 450,000 shares of Common
Stock that have been reserved for issuance at an exercise price of $8.00. No
compensation has been attributed to the options. These options expire in ten
years and are exercisable in 2001 or when the "trigger price" or per share
market value of outstanding Common Shares reaches a certain value as follows:
<TABLE>
<CAPTION>
SHARES EXERCISABLE TRIGGER PRICE
<S> <C>
300,000......................................................... $ 15.75
75,000......................................................... $ 25.00
75,000......................................................... $ 30.00
</TABLE>
A total of 3,892,509 shares of Common Stock have been reserved for stock
option plans and conversion of preferred stock (see Note 11).
F-19
<PAGE> 91
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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) EQUITY AND STOCK OPTION PLAN (CONTINUED)
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. See
Note 18.
The holders of Series A Preferred Stock shares are entitled to vote on all
matters submitted to a vote of the stockholders of the Company and to have the
number of votes equal to the number of whole shares of Common Stock into which
each share of Series A Preferred Stock is then convertible. Each Series A
stockholder is obligated to purchase, upon call by the Company, its pro rata
portion of 1,000,000 shares of Series B exchangeable preferred stock for $10 per
share, or $10,000,000. On January 19, 1996 the Company exercised the call.
The Series B Exchangeable Preferred Stock (Series B Preferred Stock) has a
9% cumulative dividend payable quarterly and has no conversion rights. Each
share of Series B may be redeemed at the option of the holder beginning in 2002
or earlier under specified circumstances. If the gross proceeds provided in an
initial public offering are greater than $35,000,000, all shares of Series B
Preferred Stock are required to be redeemed at a redemption price of $10.00 per
share plus an amount in cash equal to any accrued but unpaid dividends on the
Series B shares.
Shares of Series B are exchangeable, at the option of the Company, for
subordinated debt bearing interest of 9% per annum. In general, Series B
stockholders are not entitled to vote on any matters submitted to a vote of the
stockholders of the Company.
12. EXTRAORDINARY ITEM
In June 1994, $3,350,000 of second-trust mortgages related to two of the
predecessor limited partnerships, were prepaid for $2,500,000. The gain on
prepayment has been reflected as an $850,000 extraordinary gain in the combined
statements of operations.
F-20
<PAGE> 92
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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
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.
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.
F-21
<PAGE> 93
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. PROFIT-SHARING PLAN
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 $74,745,000 has an
estimated aggregate fair value of $75,000,000 at December 31, 1995. Estimated
fair value of fixed rate debt is based on interest rates currently available to
the Company for issuance of debt with similar terms and remaining maturities.
The estimated fair value of the Company's variable rate debt is estimated to be
approximately equal to its carrying value of $45,810,000 at December 31, 1995.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1995. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since December 31, 1995 and current estimates of
fair value may differ from the amounts presented herein.
16. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
On May 28, 1996, the Company purchased an additional 30% interest held by a
director in one of the Company's facilities in exchange for 52,500 shares of
Common Stock. The purchase price of $945,000 was determined based on a valuation
of the facility prepared by the Company based primarily upon a capitalization of
net operating income from the facility.
On June 5, 1996, all of the 2,444,444 outstanding shares of Series A
Convertible Preferred Stock of the Company were converted into an equal number
of shares of Common Stock. Preferred return of $2,821,500 through the conversion
date was forfeited upon conversion. In addition, the Company redeemed all of its
1,000,000 shares of Series B Exchangeable Preferred Stock on June 5, 1996 at a
redemption price of $10 per share plus accrued dividends of $165,000.
F-22
<PAGE> 94
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1995 AND 1996 (UNAUDITED) AND AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND SUNRISE ENTITIES AS OF AND FOR
EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994 AND 1993
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
On June 5, 1996, the Company successfully completed an initial public
offering (the "IPO") of its Common Stock. A total of 5,700,000 shares,
representing 40% of the Company's outstanding Common Stock at June 30, 1996,
were sold by the Company in the IPO at a price of $20 per share, for gross
proceeds of $114,000,000. The net proceeds to the Company from the IPO, after
deducting underwriting discount and offering expenses, were approximately
$104,340,000.
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.
PENNSYLVANIA SURVEY REPORT
On May 23, 1996, one of the Pennsylvania nursing home facilities managed by
the Company received notice from the Pennsylvania Department of Health of a
survey report stating that the facility was not in compliance with the
requirements of participation for the Medicare and Medicaid programs. Therefore,
the Pennsylvania survey agency report stated that a civil monetary penalty of
$50 to $3,000 per day will be imposed for the period beginning March 12, 1996,
the date the facility was first alleged to be out of compliance, until the date
the alleged deficiencies are corrected. The report also stated that the agency
will recommend a ban on payment for new Medicare/Medicaid admissions if
substantial compliance is not achieved within three months after the last day of
the survey identifying the alleged noncompliance. The facility has not received
confirmation or verification from the Health Care Financing Administration of
whether such remedies will be imposed, or what the amount of any such penalty
would be. The Company has engaged counsel and intends to vigorously contest the
survey report and the imposition of a civil monetary penalty (see Note 18).
F-23
<PAGE> 95
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
On February 15, 1996 and February 29, 1996, the Company granted stock
options for a total of 327,000 shares of Common Stock at an exercise price of
$10.50 per share. The Company believes that these options were granted at no
less than fair market value. Accordingly, no compensation expense was recorded
for these options. The Company believes that events subsequent to February 29,
1996 substantially increased the value of its Common Stock. The market price for
publicly traded assisted living companies increased significantly. In addition,
as discussed in Note 16, subsequent to the date of the grants, the Company
commenced and completed negotiations for a loan modification with GECC. The loan
modification eliminated the uncertainty and financial impact of GECC's 25%
participation in cash flow and property appreciation.
The Company believes if the stock option grants had been made after the
events described above at that same exercise price, these option grants would be
deemed compensatory in an amount reflecting the difference 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 IPO 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 IPO; (iii)
illiquidity of the Common Stock subject to the options; (iv) option vesting and
exercise conditions; (v) risk associated with completion of the IPO; 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.
18. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company and include all normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for the three- and six-month periods ended June 30, 1996 and 1995 pursuant to
the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Operating results
for the six-month period ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1996.
Unless the context indicates otherwise, the Company means Sunrise Assisted
Living, Inc. and its consolidated subsidiaries.
LONG-TERM DEBT
Long-term debt was $119,090,850 at June 30, 1996 compared to $120,554,572
at December 31, 1995. In June 1996, pursuant to a Loan Modification Agreement
relating to a $95.0 million principal amount term loan (the "GECC Mortgage") in
place with General Electric Capital Corporation ("GECC"), the Company paid GECC
$8,633,000 as payment in full of GECC's 25% participating interest in cash flow
and appreciation in the value of certain properties. In addition, the Company
prepaid $8,000,000 of its variable rate debt. The interest rate applicable to
the remaining $22,000,000 balance of the floating rate debt was reduced from
LIBOR plus 5.75% to LIBOR plus 3.75%.
F-24
<PAGE> 96
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
18. INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The Company has obtained a commitment (subject to certain conditions
including syndication) from a financial institution for an $80,000,000 line of
credit for construction and interim loans to finance the development of up to 10
assisted living facilities of a wholly-owned subsidiary of the Company. As of
June 30, 1996, the Company had closed $38,000,000 of the total commitment. The
Company guaranteed the repayment of all amounts outstanding under this line of
credit. The line of credit is for a term of five years and is secured by
cross-collateralized first mortgages on the real property and improvements and
first liens on all other assets of the subsidiary. Advances under the facility
bear interest at rates from LIBOR plus 1.7% to LIBOR plus 2.9%. As part of this
line, the Company has entered into a swap transaction whereby effective during
the period June 18, 1998 through June 18, 2001, outstanding advances of up to
$19,000,000 under this line of credit, or other LIBOR floating rate debt, bear
interest at a fixed rate based on a fixed LIBOR base rate of 7.3%. The Company
also has a $13,000,000 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 leading rate
and (ii) the Federal funds rate plus one-half of one percent. In connection with
obtaining this credit facility, the Company issued warrants for 50,000 shares of
Common Stock at an exercise price per share of $17.00. There were no amounts
outstanding under either credit facility at June 30, 1996.
SHORT-TERM SECURITIES
At June 30, 1996, short-term securities consisted of high-quality
commercial paper with maturities not greater than 180 days. These securities are
classified as available-for-sale in accordance with SFAS 115. The carrying
amount of these investments approximates their market value at June 30, 1996.
UNUSUAL CHARGE
To avoid a possible change in the Company's ability to continue to manage
two facilities resulting from the reduction in the ownership interest in the
Company of Paul J. Klaassen, the Company's Chairman of the Board, President,
Chief Executive Officer and co-founder, and Teresa M. Klaassen, the Company's
Executive Vice President and co-founder (collectively, the "Founders") following
the Offering, the Company made a $1,000,000 cash payment to the third-party
limited partner in these two facilities. The payment was made in exchange for
the transfer to the Company by the third party of additional 1% partnership
interests in each facility with a total book value of $18,700 and the
elimination of any requirement for the Founders to maintain a specified
ownership interest in the Company.
NET LOSS PER SHARE
The Company's net loss per share for the six months ended June 30, 1996 is
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 IPO price during the twelve months immediately preceding the
initial filing of the registration statement relating to the Offering have been
included in the computation of net loss per share as if they were outstanding
for all periods presented prior to the IPO (using the treasury method assuming
repurchase of common stock at the 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 are included to the extent they are dilutive. The
Company's pro forma loss per share reflects the conversion of
F-25
<PAGE> 97
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
18. INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
the Series A Convertible Preferred Stock and the acquisition of the Southeast
Properties as if they occurred on January 1, 1995.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- -----------
<S> <C> <C>
Net loss per share data:
Common and common equivalent shares:
Weighted average number of shares of common stock
outstanding during the period.................... 7,191,736 7,191,736
Options to purchase common stock issued within one
year of IPO using treasury stock method.......... 433,630 433,630
----------- -----------
Adjustment to reflect conversion of Series A
Convertible Preferred Stock as of January 1,
1995............................................. -- 2,095,238
Total common and common equivalent shares of stock
considered outstanding during the period......... 7,625,366 9,720,604
=========== ===========
Net loss........................................... $(4,087,738) $(4,087,738)
Dividend preference attributable to Series A
Convertible Preferred Stock...................... (858,000) --
Dividends attributable to Series B Exchangeable
Preferred Stock.................................. (347,500) (347,500)
----------- -----------
Net loss attributable to common shares............. $(5,293,238) $(4,434,738)
=========== ===========
Net loss per common equivalent shares.............. $ (0.69)
===========
Pro forma adjustment to reflect acquisition of
Southeast Properties............................. $ 994,000
-----------
Pro forma net loss attributable to common shares... $(3,440,738)
===========
Pro forma net loss per common equivalent shares.... $ (0.35)
===========
</TABLE>
OFFICE LEASE COMMITMENT
On July 8, 1996, the Company entered into an agreement to renew its
corporate office lease. The lease has a term of five years with an option to
terminate after twelve months from October 1, 1996, the lease commencement date.
The initial annual lease payments amount to $252,412. The base rent is subject
to annual increases based on the Consumer Price Index from a minimum of 2% to a
maximum cap of 3% per year. The Company is also responsible for its
proportionate share of annual increases in operating expenses and property
taxes.
PENNSYLVANIA SURVEY REPORT
In May 1996, one of the Pennsylvania nursing home facilities managed by the
Company received notice from the Pennsylvania Department of Health of a survey
report stating that the facility was not in compliance with the requirements of
participation for the Medicare and Medicaid programs. Therefore, the
Pennsylvania agency survey report stated that a civil monetary penalty of $50 to
$3,000 per day would be imposed for the period beginning March 12, 1996, the
date the facility was first alleged to be out of compliance, until the date
F-26
<PAGE> 98
SUNRISE ASSISTED LIVING, INC. AS OF AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 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)
18. INTERIM FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
the alleged deficiencies were corrected. The owner of the facility appealed such
fine and in October 1996, paid approximately $18,000 in settlement of such fine.
OTHER MATTERS
The Company received commitments to close two additional $10,000,000
portions, one on July 11, 1996 and one on July 24, 1996, of the $80,000,000 line
of credit commitment from a financial institution (see Note 2 above). The credit
facility is for construction and interim loans to finance the development of up
to 10 assisted living facilities. The Company guaranteed the repayment of all
amounts outstanding under this line of credit. The line of credit is for a term
of five years and is secured by cross-collateralized first mortgages on the real
property and improvements and first liens on all other assets of the borrower.
Advances under the facility bear interest at rates ranging from LIBOR plus 1.7%
to LIBOR plus 2.9%.
On September 20, 1996, the Company closed a $7,400,000 construction loan to
finance the construction of an assisted living facility. The loan will be for a
term of five years at interest rates ranging from 2.25% to 2.75% in excess of
the 30-day LIBOR.
On October 3, 1996 the Company received a commitment for a $51,000,000
revolving construction credit facility. The facility provides for construction
and interim loans to finance the development of up to assisted living
facilities. The Company guaranteed the repayment of all amounts outstanding
under this credit facility. The facility is for a term of five years and is
secured by cross-collateralized first mortgages on the real property and liens
on receivables. Advances under the facility bear interest at rates ranging from
LIBOR plus 2.60% to 2.25%.
On September 5, 1996, the Company obtained a $7,556,800 construction loan
to finance the development of an assisted living facility. The loan will be for
a term of five years at interest rates ranging from 2.95% in excess of 30-day
LIBOR or 0.25% above the prime rate during construction and from 2.75% in excess
of LIBOR or the prime rate following completion of construction.
On October 8, 1996, the Company completed its purchase of five facilities
located in the southeast United States for $34.0 million in cash. The Company
intends to finance approximately $25.0 million of the purchase price through
loans from one or more third-party lenders at a future date. The five facilities
consist of 511 total units providing primarily independent and assisted living
services. These facilities provided a combined net resident revenue of $9.9
million for the year ended December 31, 1995 and $5.4 million for the six months
ended June 30, 1996.
F-27
<PAGE> 99
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-28
<PAGE> 100
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-29
<PAGE> 101
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-30
<PAGE> 102
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-31
<PAGE> 103
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-32
<PAGE> 104
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-33
<PAGE> 105
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-34
<PAGE> 106
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-35
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laing Properties, Inc. and subsidiaries:
We have audited the accompanying combined balance sheets of Laing Retirement
Properties, a wholly owned business segment of Laing Properties, Inc. and
subsidiaries (the "Company") as of December 31, 1994 and 1995, and the related
combined statements of operations, equity, and cash flows for the years ended
December 31, 1993, 1994, and 1995. 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 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Laing Retirement
Properties as of December 31, 1994 and 1995, and the results of their operations
and their cash flows for the years ended December 31, 1993, 1994, and 1995 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
August 9, 1996
F-36
<PAGE> 108
LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30, 1996
-------------------------- -------------
<S> <C> <C> <C>
1994 1995 (UNAUDITED)
ASSETS
Current assets:
Cash................................................ $ 204,963 $ 225,864 $ 221,277
Accounts receivable................................. 38,049 37,257 89,299
Inventories......................................... 51,793 59,107 54,022
Prepaid expenses and other current assets........... 105,124 100,068 39,586
Due from Laing Properties, Inc. (note 5)............ 14,209,326 14,309,644 15,220,071
----------- ----------- ------------
Total current assets........................ 14,609,255 14,731,940 15,624,255
----------- ----------- ------------
Property and equipment, at cost:
Land................................................ 3,856,242 3,856,242 3,856,242
Buildings........................................... 25,407,705 27,167,565 27,572,978
Furniture, fixtures, and equipment.................. 2,287,615 2,456,106 2,456,106
----------- ----------- ------------
31,551,562 33,479,913 33,885,326
Less accumulated depreciation....................... 4,436,196 5,494,349 6,029,355
----------- ----------- ------------
27,115,366 27,985,564 27,855,971
----------- ----------- ------------
Other assets.......................................... -- 10,918 --
----------- ----------- ------------
$41,724,621 $42,728,422 $ 43,480,226
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $ 1,719,923 $ 2,867,873 $ 3,483,462
Current installments of long-term debt (note 2)..... 122,520 122,520 122,520
Resident security deposits.......................... 552,831 557,066 565,425
Deferred revenue.................................... 5,155 10,848 5,165
Notes payable to related party (note 3)............. 10,000,347 10,000,347 10,000,347
----------- ----------- ------------
Total current liabilities................... 12,400,776 13,558,654 14,176,919
Long-term debt, excluding current installments (note
2).................................................. 7,277,480 7,154,960 7,093,701
----------- ----------- ------------
Total liabilities..................................... 19,678,256 20,713,614 21,270,620
----------- ----------- ------------
Stockholders' equity:
Common stock -- Laing Northshore, Inc. authorized
and issued 500 shares $1 par value............... 500 500 500
Common stock -- Laing Greenville, Inc. authorized
and issued 500 shares of $1 par value............ 500 500 500
Additional paid-in capital.......................... 3,317,508 3,317,508 3,317,508
Accumulated deficit................................. (1,138,602) (1,599,128) (1,754,138)
----------- ----------- ------------
Total stockholders' equity.................. 2,179,906 1,719,380 1,564,370
Partners' capital..................................... 19,866,459 20,295,428 20,645,236
----------- ----------- ------------
Total equity................................ 22,046,365 22,014,808 22,209,606
Commitments and contingencies (note 6)................
----------- ----------- ------------
$41,724,621 $42,728,422 $ 43,480,226
=========== =========== ============
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE> 109
LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996
1993 1994 1995 ------------- -------------
(UNAUDITED) (UNAUDITED)
Revenues:
Rental.......................... $7,555,872 $8,507,473 $8,879,107 $ 4,365,268 $ 4,817,599
Resident services............... 926,814 1,010,078 1,002,528 494,557 529,436
Other........................... 61,880 63,935 62,390 26,449 33,501
---------- ---------- ---------- ----------- -----------
Total revenue........... 8,544,566 9,581,486 9,944,025 4,886,274 5,380,536
---------- ---------- ---------- ----------- -----------
Expenses:
Utilities....................... 551,223 567,218 600,803 285,749 321,902
Repairs and maintenance......... 368,113 637,977 738,074 445,454 324,707
Property taxes.................. 381,808 374,505 398,525 209,038 220,334
Insurance....................... 116,369 138,960 133,577 67,545 69,958
Payroll and benefits (note 1)... 3,362,317 3,540,102 3,648,565 1,796,868 2,059,623
Food............................ 604,155 630,243 615,084 296,451 288,744
General and administrative...... 469,071 424,052 524,571 200,662 231,522
Sales and marketing............. 320,296 210,285 187,699 126,690 105,417
Management fees (note 3)........ 426,854 488,248 501,730 247,615 269,310
Depreciation.................... 975,887 991,807 1,058,153 499,852 535,006
---------- ---------- ---------- ----------- -----------
Total expenses.......... 7,576,093 8,003,397 8,406,781 4,175,924 4,426,523
---------- ---------- ---------- ----------- -----------
Income from
operations............ 968,473 1,578,089 1,537,244 710,350 954,013
Interest expense.................. 918,134 886,038 1,568,801 790,998 759,215
---------- ---------- ---------- ----------- -----------
Net income (loss)....... $ 50,339 $ 692,051 $ (31,557) $ (80,648) $ 194,798
========== ========== ========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-38
<PAGE> 110
LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, --------------------------
----------------------------------------- 1995 1996
1993 1994 1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Common stock:
Balance at beginning of
period................... $ 500 $ 500 $ 1,000 $ 1,000 $ 1,000
Issuance of 500 shares...... -- 500 -- -- --
----------- ----------- ----------- ----------- -----------
Balance at end of period.... 500 1,000 1,000 1,000 1,000
----------- ----------- ----------- ----------- -----------
Additional paid-in capital.... 3,317,508 3,317,508 3,317,508 3,317,508 3,317,508
----------- ----------- ----------- ----------- -----------
Accumulated stockholder's
deficit:
Balance at beginning of
period................... (131,957) (739,046) (1,138,602) (1,138,602) (1,599,128)
Net loss.................... (607,089) (399,556) (460,526) (177,602) (155,010)
----------- ----------- ----------- ----------- -----------
Balance at end of period...... (739,046) (1,138,602) (1,599,128) (1,316,204) (1,754,138)
----------- ----------- ----------- ----------- -----------
Partners' capital:
Balance at beginning of
period................... 18,117,424 18,774,852 19,866,459 19,866,459 20,295,428
Net income.................. 657,428 1,091,607 428,969 96,954 349,808
----------- ----------- ----------- ----------- -----------
Balance at end of period...... 18,774,852 19,866,459 20,295,428 19,963,413 20,645,236
----------- ----------- ----------- ----------- -----------
Total equity.................. $21,353,814 $22,046,365 $22,014,808 $21,965,717 $22,209,606
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-39
<PAGE> 111
LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, ---------------------------
-------------------------------------- 1995 1996
1993 1994 1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 50,339 $ 692,051 $ (31,557) $ (80,648) $ 194,798
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 975,887 991,807 1,058,153 499,852 535,006
Decrease (increase) in accounts
receivable....................... (20,284) 54,875 792 23,526 (52,042)
Decrease (increase in prepaids and
current other assets............. 210,034 (103,466) 5,056 68,727 19,521
Decrease (increase) in inventory.... (16,978) 1,400 (7,314) (7,962) 46,046
Decrease (increase) in other
assets........................... -- -- (10,918) -- 10,918
Increase in accounts payable and
accrued expenses................. 173,177 516,391 1,147,950 749,953 615,589
Decrease (increase) in escrow
deposits......................... (25,070) 25,070 -- -- --
Increase (decrease) in security
deposits......................... 360,557 26,948 4,235 (7,970) 8,359
Increase (decrease) in deferred
revenue.......................... (9,094) 1,308 5,693 (695) (5,683)
---------- ---------- ---------- ---------- -----------
Net cash provided by operating
activities..................... 1,698,568 2,206,384 2,172,090 1,244,783 1,372,512
---------- ---------- ---------- ---------- -----------
Cash flows from investing activities:
Additions to property and equipment,
net................................... (1,179,468) (370,407) (1,928,351) (603,221) (405,413)
Proceeds from sale of condominium
units................................. 929,000 -- -- -- --
---------- ---------- ---------- ---------- -----------
Net cash used in investing
activities..................... (250,468) (370,407) (1,928,351) (603,221) (405,413)
---------- ---------- ---------- ---------- -----------
Cash flows from financing activities:
Net advances to parent.................. (1,243,810) (9,311,176) (100,318) (603,705) (910,427)
Proceeds of long-term debt.............. -- 7,400,000 -- -- --
Proceeds of note payable to related
party................................. -- 6,659,373 -- -- --
Repayments of long-term debt............ (38,663) (6,657,987) (122,520) -- --
Equity contributions.................... -- 500 -- (61,260) (61,259)
---------- ---------- ---------- ---------- -----------
Net cash used in financing
activities..................... (1,282,473) (1,909,290) (222,838) (664,965) (971,686)
---------- ---------- ---------- ---------- -----------
Net increase (decrease) in
cash........................... 165,627 (73,313) 20,901 (23,403) (4,587)
Cash at beginning of period............... 112,649 278,276 204,963 204,963 225,864
---------- ---------- ---------- ---------- -----------
Cash at end of period..................... $ 278,276 $ 204,963 $ 225,864 $ 181,560 $ 221,277
========== ========== ========== ========== ===========
Supplemental disclosure of cash
payments -- for interest................ $ 718,022 $ 442,747 $ 514,365 $ 250,474 $ 244,826
========== ========== ========== ========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-40
<PAGE> 112
LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
The accompanying combined financial statements of Laing Retirement
Properties (the "Properties") are a combination of five retirement homes and a
parcel of land wholly owned by Laing Properties, Inc. and its subsidiaries ("the
Company"). The Properties include The Glens of Greenville in Greenville, South
Carolina; Northshore in St. Petersburg, Florida; Huntcliff Summit in Atlanta,
Georgia; Augusta Glen in Augusta, Georgia; and Brookside Glen in Columbus,
Georgia and a parcel of land in Atlanta, Georgia.
(b) Principles of Combination
The combined financial statements of the Properties include Laing
Greenville, Inc. (The Glens of Greenville); Laing Northshore, Inc. (Northshore);
Laing Huntcliff, LLC (Huntcliff Summit); AmCare I Joint Venture (Brookside
Glen); AmCare II Joint Venture (Augusta Glen) and a parcel of land wholly owned
by Laing Properties, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
(c) Inventories
Inventories, which consist of food items and supplies, are stated at the
lower of cost (first-in, first-out) or market.
(d) Property and Equipment
Buildings, furniture, fixtures, and equipment are carried at cost less any
declines in value deemed to be other than temporary. Property and equipment is
depreciated using the straight-line method over the estimated useful lives of
the assets.
(e) Income Taxes
The entities subject to taxation use the asset and liability approach in
accounting for income taxes. Under the asset and liability method, 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 bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income or expense.
(f) Payroll and Benefits
The Properties are managed by a subsidiary of Laing Properties, Inc. and
certain direct payroll related costs are reimbursed for services rendered on
behalf of the management company. Personnel are employed by the management
company and not the related property.
(g) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments. The carrying values of cash,
accounts receivable, advances from parent, accounts payable and accrued expenses
are reasonable estimates of their fair values due to the short-term nature of
the instruments. Based on borrowings currently available to the Properties, the
carrying values of all debt are a reasonable estimation of their fair values.
F-41
<PAGE> 113
LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(i) Unaudited Interim Financial Statements
In the opinion of the Company's management, the accompanying unaudited
combined financial statements include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the combined results of
operations of the Properties for the six-month periods ended June 30, 1996 and
1995. The combined results and operations for this period are not necessarily
indicative of the results to be expected for the full year.
(2) LONG-TERM DEBT
On December 28, 1994, Laing Huntcliff, LLC ("Huntcliff") executed a
mortgage note payable to a financial institution totaling $39,863,000. The note
was allocated to Huntcliff and four other affiliated properties. These four
other affiliated properties are not included in the Laing Retirement Properties.
Each property is jointly liable for the entire balance of the note. Huntcliff's
pro rata share of the balance is $7,400,000 and $7,277,480 as of December 31,
1994 and 1995, respectively. The note bears interest at the rate of LIBOR plus
1.2% and is secured by the land and building of each of the properties. The note
is guaranteed by Laing Properties, Inc. and another affiliated company and
matures on December 28, 1999.
Huntcliff and Laing Properties, Inc. guarantee a $20,137,000 mortgage note
with the same financial institution for an affiliated company. This note payable
and the note payable discussed in the previous paragraph total $60,000,000 and
require combined quarterly principal payments of $250,000 with the remaining
balance due at maturity. The combined balance of the two notes is $60,000,000
and $59,000,000 as of December 31, 1994 and 1995, respectively.
Huntcliff's pro rata share of the maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1996.................................................. $ 122,520
1997.................................................. 122,520
1998.................................................. 122,520
1999.................................................. 6,909,920
----------
$7,277,480
=========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
On March 9, 1990, AmCare I Joint Venture and AmCare II Joint Venture
executed mortgage notes with an affiliated company for $1,759,175 and
$1,581,799, respectively. The notes bear interest at prime (8.5% at December 31,
1995), are secured by property and equipment, and had a maturity date of
December 31, 1994. The notes were not repaid at the maturity date and,
therefore, fell under the provisions in the agreement whereby, interest accrues
at the default rate of prime plus 5% (13.5% as of December 31, 1995) until all
F-42
<PAGE> 114
LAING RETIREMENT PROPERTIES
(A WHOLLY OWNED BUSINESS SEGMENT OF LAING PROPERTIES, INC. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(3) RELATED PARTY TRANSACTIONS (CONTINUED)
principal and interest are repaid. Accrued interest on these notes totaled
$1,185,462 and $1,619,788 at December 31, 1994 and 1995, respectively. Interest
expense relating to these notes was $200,459, $220,505, and $434,327 for the
years ended December 31, 1993, 1994, and 1995, respectively.
On July 12, 1994, Laing Northshore, Inc. executed an unsecured $6,659,373
note with an affiliated company. The proceeds were used to repay a mortgage note
with a lending institution. The note bears interest at 9% and is payable on
demand. Accrued interest on the note was $282,430 and $881,774 as of December
31, 1994 and 1995, respectively. Interest expense relating to this note was
$282,430 and $599,344 for the years ended December 31, 1994 and 1995,
respectively.
Each property pays management fees to Laing Properties, Inc. ("LPI") equal
to 5% of gross receipts. Management fees paid accrued to LPI were $426,854,
$488,248, and $501,730 for the years ended December 31, 1993, 1994 and 1995,
respectively.
(4) INCOME TAXES
The entities file consolidated federal tax returns with Laing Properties,
Inc. A sharing agreement exists, whereby net operating losses may be shared
among the entire consolidated group. The group has sufficient net operating
losses to offset future taxable income which may arise. The types of temporary
differences that give rise to significant portions of the deferred tax assets
consist primarily of net operating loss carryforwards, differences in
depreciation, and accrued interest. The deferred tax assets arising from these
temporary differences and the net operating loss carryforwards are entirely
offset by a valuation allowance.
(5) DUE FROM LAING PROPERTIES, INC.
Due from Laing Properties, Inc. consists of advances by the Properties to
LPI in order for LPI to refinance its own debt. Advances are reported net of any
borrowings from LPI.
(6) COMMITMENTS
In previous years, Huntcliff sold 15 condominium units to residents of the
property. Under the terms of an agreement associated with the sales of the
units, the purchasers can require Huntcliff to repurchase the units for the
amount of the original sales price. Additionally, Huntcliff has a first right of
refusal to repurchase the units should the purchasers desire to sell to third
parties. Three such units have been repurchased through December 31, 1995. The
repurchase price for the remaining units totals $1,953,500 under the terms of
the agreements. No gain or loss was recognized on the original sales by
Huntcliff.
F-43
<PAGE> 115
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The "Sunrise Consolidated Pro Forma" column set forth in the unaudited pro forma
consolidated balance sheet of the Company as of June 30, 1996 assumes that the
acquisition of the Southeast Properties has occurred on June 30, 1996. The
"Sunrise Consolidated Pro Forma" column set forth in the unaudited pro forma
consolidated statement of operations for the year ended December 31, 1995 and
the six months ended June 30, 1996 assumes the acquisition of the Southeast
Properties had occurred on January 1, 1995. The pro forma adjustments are based
upon available information and certain assumptions that management believes to
be reasonable. Final purchase adjustments may differ from the pro forma
adjustments herein.
The unaudited pro forma consolidated financial information set forth below is
not necessarily indicative of the Company's consolidated financial position or
the results of operations that actually would have occurred if the transactions
had been consummated on such dates. In addition, they are not intended to be a
projection of results of operations that may be obtained in the Company's
future. The unaudited pro forma consolidated financial information should be
read in conjunction with the financial statements and related notes thereto
included elsewhere in this Prospectus.
F-44
<PAGE> 116
SUNRISE ASSISTED LIVING, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUNRISE
HISTORICAL PRO FORMA CONSOLIDATED
SUNRISE(a) ADJUSTMENTS PRO FORMA
---------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 22,713 $ (34,452)(b) $(11,739)
Accounts receivable................................... 1,572 1,572
Short-term securities................................. 50,000 50,000
Prepaid and other current assets...................... 1,727 1,727
--------- --------- --------
Total current assets.......................... 76,012 (34,452) 41,560
Property and equipment, net............................. 137,471 34,452(b) 171,923
Investments............................................. 5,646 5,646
Restricted cash and cash equivalents.................... 1,333 1,333
Other assets............................................ 3,506 3,506
--------- --------- --------
Total assets.................................. $ 223,968 $ -- $223,968
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 7,208 $ $ 7,208
Deferred revenue...................................... 971 971
Other current liabilities............................. 1,077 1,077
Current portion of long-term debt..................... 395 395
--------- --------- --------
Total current liabilities..................... 9,651 9,651
Notes payable to affiliated entities.................... 1,621 1,621
Interests in unconsolidated
partnerships.......................................... 745 745
Long-term debt, less current
maturities............................................ 118,696 118,696
--------- --------- --------
Total liabilities............................. 130,713 130,713
Minority interests...................................... 372 372
Stockholders' equity:
Preferred stock....................................... --
Common stock.......................................... 142 142
Additional paid-in capital............................ 107,703 107,703
Owners' capital....................................... --
Accumulated deficit................................... (14,962) (14,962)
--------- --------- --------
Total stockholders' equity.................... 92,883 -- 92,883
--------- --------- --------
Total liabilities and stockholders' equity.... $ 223,968 $ $223,968
========= ========= ========
</TABLE>
F-45
<PAGE> 117
SUNRISE ASSISTED LIVING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL SUNRISE
HISTORICAL SOUTHEAST PRO FORMA CONSOLIDATED
SUNRISE(a) PROPERTIES(a) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees............................. $ 34,752 $ 9,944 $ 44,696
Management services income................ 2,506 2,506
--------- ------- ------- ---------
37,258 9,944 -- 47,202
Operating expenses:
Facility operating expenses............... 21,010 7,349 28,359
Facility development and pre-opening
expenses............................... 1,172 1,172
General and administrative................ 6,875 6,875
Depreciation and amortization............. 3,009 1,058 (68)(c) 3,999
--------- ------- ------- ---------
32,066 8,407 (68) 40,405
Income from operations...................... 5,192 1,537 68 6,797
Other income (expense):
Interest income........................... 1,229 1,229
Interest expense:
GECC mortgage interest................. (15,295) (15,295)
Other debt............................. (1,261) (1,569) 1,569(d) (1,261)
--------- ------- ------- ---------
Total interest expense............ (16,556) (1,569) 1,569 (16,556)
Total other expenses................... (15,327) (1,569) 1,569 (15,327)
Equity in (losses) earnings on investments
in unconsolidated partnerships............ (9) (9)
Minority interest........................... 7 7
--------- -------- ------- ---------
Net loss.................................... $ (10,137) $ (32) $ 1,637 $ (8,532)
========= ======== ======= =========
Pro forma net loss per share data(e)
Net loss per common and common equivalent
shares................................. $ (0.97)
=========
Weighted average number of common and
common equivalent shares outstanding... 8,826,127
=========
</TABLE>
F-46
<PAGE> 118
SUNRISE ASSISTED LIVING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL SUNRISE
HISTORICAL SOUTHEAST PRO FORMA CONSOLIDATED
SUNRISE(a) PROPERTIES(a) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees............................. $ 19,458 $ 5,381 $ 24,839
Management services income................ 1,542 1,542
--------- ------- ----- ---------
21,000 5,381 26,381
Operating expenses:
Facility operating expenses............... 12,608 3,892 16,500
Facility development and pre-opening
expenses............................... 650 650
General and administrative................ 4,413 4,413
Depreciation and amortization............. 1,803 535 $ (40)(e) 2,298
--------- ------- ----- ---------
19,474 4,427 (40) 23,861
Income from operations.................... 1,526 954 40 2,520
Other income (expense):
Interest income........................ 700 700
Interest expense:
GECC mortgage interest............... (4,807) (4,807)
Other debt........................... (615) (759) 759(d) (615)
--------- ------- ----- ---------
Total interest expense.................... (5,422) (759) 759 (5,422)
Total other expenses........................ (4,722) 759 (4,722)
Equity in earnings on investments in
unconsolidated partnerships............... 6 6
Minority interest........................... 83 83
Unusual charge.............................. (981) (981)
--------- ------- ----- ---------
Net loss.................................... $ (4,088) $ 195 $ 799 $ (3,094)
======== ======= ===== =========
Pro forma net loss per share data
Net loss per common and common equivalent
shares................................. $ (0.35)
=========
Weighted average number of common and
common equivalent shares outstanding... 9,720,604
=========
</TABLE>
F-47
<PAGE> 119
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
On October 8, 1996, the Company completed its acquisition of the real and
personal property and related leases of five facilities with a capacity of 511
residents located in the Southeastern United States (the "Southeast Properties")
for $34.0 million in cash. No liabilities were assumed as part of the
acquisition. Accordingly, no debt or related interest costs have been included
in the unaudited pro forma financial information. The Company intends to include
this property as security for approximately $25.0 million of loans from one or
more third-party lenders. However, commitments for such loans have not been
finalized.
PRO FORMA ADJUSTMENTS
(a) Derived from the financial statements of the Company and Laing
Retirement Properties.
(b) For purposes of these pro forma consolidated financial statements the
allocation of the purchase price of $34.0 million plus related acquisition costs
to acquired assets was based upon the Company's historical experience with
similar properties. The Company is in the process of engaging an independent
appraiser to assist in the allocation of the purchase price.
(c) To record depreciation and amortization for the acquisition as if the
transaction had occurred at January 1, 1995 using estimated useful lives of 40
years for acquired buildings and 5 years for acquired furniture and equipment.
The allocation of the purchase price between land, building, and furniture and
equipment was based upon management's knowledge and experience with similar
projects. The Company intends to engage an independent party to perform the
allocation of the purchase price between the five properties based upon market
values of the respective assets. Differences between the final allocation and
management's current estimated allocation are not expected to be material.
(d) To eliminate interest expense for the acquisition of the Southeast
Properties as if the transaction was consummated at January 1, 1995.
(e) Outstanding shares are based upon the weighted average number of shares
of Common Stock outstanding for the periods presented. Options to purchase
Common Stock issued at prices below the Company's initial public offering
("IPO") price of $20.00 per share during the twelve months immediately prior to
the Company's IPO have been included in the calculation as if they were
outstanding for all periods prior to the IPO, regardless of whether they are
dilutive. The outstanding shares also reflect the conversion of the Series A
Convertible Preferred Stock as if converted on January 1, 1995. In computing net
loss attributable to common shares, dividends attributable to Series B
Exchangeable Preferred Stock are deducted. Such amounts were $347,500 and $0 for
the six months ended June 30, 1996 and the year ended December 31, 1995,
respectively.
F-48
<PAGE> 120
- ------------------------------------------------------
- ------------------------------------------------------
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.............................. 7
The Company and its Predecessors.......... 14
Recent Developments....................... 16
Use of Proceeds........................... 17
Price Range of Common Stock and Dividend
Policy.................................. 17
Capitalization............................ 18
Selected Financial, Operating and Pro
Forma Data.............................. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
Business.................................. 31
Management................................ 46
Certain Transactions...................... 56
Principal and Selling Stockholders........ 58
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 66
Underwriting.............................. 68
Legal Matters............................. 69
Experts................................... 69
Additional Information.................... 70
Index to Financial Statements............. F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,000,000 SHARES
LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
NATWEST SECURITIES LIMITED
J.C. BRADFORD & CO.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 121
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 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.............................................. $ 49,224
NASD filing fee................................................... 16,744
Nasdaq National Market fee........................................ 17,500
Blue Sky fees and expenses........................................ 40,000
Accounting fees and expenses...................................... 100,000
Legal fees and expenses........................................... 125,000
Printing and engraving expenses................................... 75,000
Registrar and transfer agent's fees............................... 5,000
Miscellaneous fees and expenses................................... 171,532
----------
Total........................................................ $ 600,000
========
</TABLE>
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 nonderivative 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.
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.
II-1
<PAGE> 122
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") 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.
On May 28, 1996, the Company issued 52,500 shares of Common Stock to a
director of the Company in exchange for a 30% limited partnership interest held
by the director in one of the Company's facilities. These securities were issued
without registration under the Securities Act, in reliance upon the exemption in
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
1.2 Form of Custody Agreement*
2.1 Purchase and Sale Agreement dated July 31, 1996 between the Company and Laing
Properties & Subsidiaries, Inc.
3.1 Restated Certificate of Incorporation of the Company
3.2 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**
10.1.1 Assignment and Contribution Agreement, effective as of January 4, 1995, by and
between Paul and Teresa Klaassen and the Company**
10.1.2 Assignment and Contribution Agreement, dated as of January 4, 1995, by and between
Paul J. Klaassen and Teresa M. Klaassen and Sunrise Partners, L.P. and Sunrise
Assisted Living Investments, Inc.**
</TABLE>
II-2
<PAGE> 123
<TABLE>
<C> <S>
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 1995 Stock Option Plan, as amended**
10.13.1 1996 Directors' Stock Option Plan**
10.14 Stock Option Agreement, entered into, effective as of January 4, 1995, by and
between the Company and David W. Faeder**
10.14.1 Form of Amendment No. 1 to Stock Option Agreement 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**
</TABLE>
II-3
<PAGE> 124
<TABLE>
<C> <S>
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.**
10.23 Form of Membership Interest Purchase Agreement among the Company and Thomas and
Elizabeth Donohue**
10.24 Form of Indemnification Agreement**
10.25 1996 Stock Option Plan
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 KPMG Peat Marwick
23.4 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>
- ---------------
* To be filed by amendment.
** Incorporated by reference from the registrant's Registration Statement on
Form S-1 (File No. 333-2582).
(b) Financial Statement Schedules.
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> 125
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 8th day of October, 1996.
SUNRISE ASSISTED LIVING, INC.
By /s/ Paul J. Klaassen
--------------------------------------
PAUL J. KLAASSEN
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each person whose signature appears below hereby constitutes and appoints
Paul J. Klaassen, David W. Faeder and Thomas B. Newell, or any of them, their
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for them and in their name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement or a Registration Statement filed pursuant to
Rule 462 of the Securities Act of 1933, and to file the same with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on October 8, 1996 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- -------------------------------------------- --------------------------------------------------------
<C> <S>
/s/ Paul J. Klaassen Chairman of the Board of Directors, President and Chief
- -------------------------------------------- Executive Officer (Principal Executive Officer)
PAUL J. KLAASSEN
/s/ Teresa M. Klaassen Executive Vice President and Director
- --------------------------------------------
TERESA M. KLAASSEN
/s/ David W. Faeder Executive Vice President, Chief Financial Officer, and
- -------------------------------------------- Director (Principal Financial Officer)
DAVID W. FAEDER
/s/ Larry E. Hulse Controller (Principal Accounting Officer)
- --------------------------------------------
LARRY E. HULSE
Director
- --------------------------------------------
RONALD V. APRAHAMIAN
/s/ Thomas J. Donohue Director
- --------------------------------------------
THOMAS J. DONOHUE
/s/ Richard A. Doppelt Director
- --------------------------------------------
RICHARD A. DOPPELT
/s/ Timothy S. Smick Executive Vice President,
- --------------------------------------------
TIMOTHY S. SMICK
/s/ Scott F. Meadow Director
- --------------------------------------------
SCOTT F. MEADOW
Director
- --------------------------------------------
DARCY J. MOORE
</TABLE>
II-5
<PAGE> 1
EXHIBIT 2.1
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of this 31st day of July, 1996 by and between Sunrise Development,
Inc., a Virginia corporation ("Purchaser") and the other companies (other than
the Escrow Agent) executing this Agreement (hereinafter referred to
collectively as "Sellers" and individually as "Seller").
R E C I T A L S:
I. Laing Huntcliff, L.L.C., a Georgia limited liability company
("Huntcliff Seller") is the owner of the property described on Exhibit A
hereto, less and except the condominium units (the "Third-Party Huntcliff
Units") listed on Exhibit A-1 hereto ("Huntcliff Summit") and including certain
land appurtenant to Huntcliff Summit which is owned by Laing Land, Inc.
("Huntcliff Land").
II. Laing Northshore, Inc., a Georgia corporation ("Northshore
Seller") is the owner of the property described on Exhibit B attached hereto
("Northshore").
III. Laing Amcare Augusta, Inc. ("Augusta Seller"), a Georgia
corporation, is the owner of the property described on Exhibit C attached
hereto ("Augusta Glen").
IV. Laing Amcare Columbus, Inc. , a Georgia corporation,
("Columbus Seller") is the owner of the property described on Exhibit D
attached hereto ("Brookside Glen").
V. Laing Greenville, Inc., a Georgia corporation ("Greenville
Seller") is the owner of the property described on Exhibit E attached hereto
("Glens of Greenville").
VI. Huntcliff Summit, Northshore, Augusta Glen, Brookside Glen and
Glens of Greenville (including the respective land described on the foregoing
exhibits and any appurtenant easements and rights of way) are sometimes
hereinafter collectively referred to as the "Facilities" and severally as a
"Facility". The buildings that are part of the Facilities are hereinafter
collectively referred to as the "Building". The Facilities and the Building
are hereinafter collectively referred to as the "Real Properties".
VII. Huntcliff Seller is party to the contracts (the "Third-Party
Huntcliff Contracts") described on Exhibit F attached hereto pursuant to which
Huntcliff Seller has, among other rights and obligations, rights and
obligations with respect to the purchase of the Third-Party Huntcliff Units.
VIII. Purchaser desires to purchase and Seller desires to sell the
Real Properties on the terms and conditions set forth below.
-1-
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Sale of Real Property and Personal Property.
Subject to the terms and conditions of this Agreement, each of the
Sellers agrees to sell, convey, transfer and assign to Purchaser, and Purchaser
agrees to purchase and acquire from such Seller all right, title and interest
of Seller in, under and to the following assets:
A. Conveyance of Facilities, Leases and Personal Property.
(1) Huntcliff Seller agrees to sell Huntcliff Summit and
the Leases (as hereinafter defined and herein so called) and the Personal
Property (as hereinafter defined and herein so called) appurtenant thereto. In
addition, Laing Land, Inc. agrees to sell Huntcliff Land. In the event that
Huntcliff Seller desires to acquire any of the Third-Party Huntcliff Units
prior to Closing other than substantially in accordance with the terms of the
Guaranteed Buy Back Agreements (the " Guaranteed Buy Back Agreement"), which
are listed on Exhibit F attached hereto, such acquisition shall require the
prior written consent of Purchaser, which shall not be unreasonably withheld or
delayed. An acquisition by Huntcliff Seller of any Third-Party Huntcliff Unit
substantially in accordance with the Guaranteed Buy Back Agreements shall not
require the consent of Purchaser. Any Third-Party Huntcliff Units purchased by
Huntcliff Seller prior to Closing substantially in accordance with the
Guaranteed Buy Back Agreements or with the prior consent of Purchaser shall
become a part of Huntcliff Summit for purposes of this Agreement.
(2) Northshore Seller agrees to sell Northshore and the
Leases and the Personal Property appurtenant thereto.
(3) Augusta Seller agrees to sell Augusta Glen and the
Leases and the Personal Property appurtenant thereto.
(4) Columbus Seller agrees to sell Brookside Glen and the
Leases and Personal Property appurtenant thereto.
(5) Greenville Seller agrees to sell Glens of Greenville
and the Leases and Personal Property appurtenant thereto.
B. Leases Defined. "Leases" (severally a "Lease") means, with
respect to any Facility, the respective Seller's right, title and interest as
landlord (whether named as such therein, or by assignment or otherwise) in any
leases and subleases, if any, regarding the respective Facility now existing or
at any time hereafter made, and all amendments, modifications, supplements,
renewals and extensions thereof, together with any refundable security deposits
made by tenants of the respective Facility which are at Closing (as hereinafter
-2-
<PAGE> 3
defined and herein so called) in the possession of the Seller. A schedule
identifying each and every party leasing, at the date hereof, a portion of the
Building, together with a description of the unit leased by each, the
applicable lease term and the current rental amount, is attached hereto as
Exhibit G.
C. Personal Property Defined. "Personal Property" means, with
respect to any Facility,
(1) Any furniture, fixtures, furnishings, machinery,
equipment, Inventory (as hereinafter defined and
herein so called), assignable contracts, including
without limitation the Third-Party Huntcliff
Contracts (except for those with respect to
Third-Party Huntcliff Units that shall have been
acquired by Huntcliff Seller prior to Closing and
therefore become part of the definition of Huntcliff
Summit), which have been entered into by the
respective Seller in connection with the respective
Facility, and all other personal property owned by
the Seller of the respective Facility, used in
connection with the respective Facility and now
located upon the respective Facility, if any. A
preliminary list of such tangible personal property
(which shall include an approximate listing of
furniture and fixtures owned by any of the Sellers
and located in each Facility and the equipment owned
by any of the Sellers and located in each Facility,
the cost of which was approximately $5,000.00 or
more) for each Facility shall be prepared by Seller
during the Study Period and finalized prior to
Closing and will be delivered by Seller to Purchaser.
The respective Seller's interest in all such
assignable contracts shall be assigned to Purchaser
at Closing except for such contracts (other than the
Third-Party Huntcliff Contracts) as to which
Purchaser has given notice to Seller, not later than
the end of the Study Period, of Purchaser's election
not to take such an assignment. There shall be
excluded from the Personal Property the matters
described as the Excluded Personal Property on
Exhibit H attached hereto.
(2) All other intangible rights and interests of Seller
of the respective Facility relating to such Facility,
including but not limited to licenses and permits of
such Facility to the extent that they are
transferable, and the name of such Facility to the
extent Seller has a transferable right to said name.
Seller agrees to cooperate, at the sole cost and
expense of Purchaser, in the transferring of such
licenses and permits to Purchaser.
D. The Real Properties and all Personal Property may be referred
to herein collectively as the "Property" or the "Properties".
-3-
<PAGE> 4
2. No Liabilities.
Except as provided for in this Agreement, Purchaser is assuming no
liabilities attributable to Seller's operation or ownership of the Real
Properties or any Personal Property therein, including liabilities to Seller's
employees. Seller represents to Purchaser that all employees (the "Facility
employees") employed at the Facilities are "at-will" employees, subject only to
the terms of employment letters copies of which are attached hereto as Exhibit
S. Seller shall cause Laing Management Company ("Management"), the manager of
the Facilities, to retain on its payroll all Facility employees other than
those who resign or are terminated for "cause", and at Closing Purchaser shall
offer employment to all identified by Seller as Facility employees during the
Study Period or thereafter. All Facility employees rehired by Purchaser shall
be immediately eligible under Purchaser's health care benefits plan.
Purchaser, however, may notify Seller prior to the expiration of the Study
Period of any specific employee which Purchaser believes in its reasonable
determination should be terminated for "cause", and Purchaser shall not be
required to rehire such employee(s). For the purposes of this Section 2,
"cause" shall be defined as dishonesty, willful and repeated violation of
employment policies or Facility rules and regulations, resident neglect or
abuse or felony criminal conviction. Seller shall indemnify and hold Purchaser
and its officers, directors, stockholders, partners, employees and agents,
harmless from and against any and all damages, liabilities, lawsuits, claims,
causes of action, costs or expenses, including reasonable attorney's fees,
asserted against them by employees or creditors of Seller, by third parties or
by tenants of the Facilities, as a result of direct actions or failures of
Seller. In the event of any such suit, claim, cause of action or other
proceeding, Seller shall undertake and have responsibility for the full and
complete defense thereof at Seller's sole cost and expense. It is expressly
understood that Purchaser is not assuming any liabilities of Seller to Facility
employees for any action or inaction of Seller prior to Closing. Purchaser
shall indemnify and hold Seller and its officers, directors, stockholders,
partners, employees and agents, harmless from and against any and all damages,
liabilities, lawsuits, claims, causes of action, costs or expenses, including
reasonable attorneys' fees asserted against them by employees or creditors of
Purchaser, by third parties or by tenants of the Facilities, as a result of
direct actions or failures of Purchaser subsequent to Closing. In the event of
any such suit, claim, cause of action or other proceeding, Purchaser shall
undertake and have responsibility for the full and complete defense thereof at
Purchaser's sole cost and expense. Management is agreed to be an express third
party beneficiary of the covenants of Purchaser set forth in this Paragraph 2.
This Paragraph 2 shall survive closing as to all matters of which the
respective obligee of any covenant set forth in this Paragraph 2 shall give
notice to the obligor thereof not later than two and one half years (2.5 years)
after the Closing Date, as hereinafter defined.
3. Purchase Price and Deposit.
A. The purchase price for the Property shall be Thirty Four
Million and no/100 Dollars ($34,000,000.00) plus the Inventory Price (as
hereinafter defined) and the Third-Party Huntcliff Unit Prices (as hereinafter
defined) ("Purchase Price"). "Inventory Price" means Seller's book value, of
all food or foodstuffs (collectively, the "Inventory") conveyed to Purchaser
pursuant to this Agreement. "Third-Party Huntcliff Unit Prices" means, with
respect to all Third-Party Huntcliff Units acquired by Huntcliff Seller under
the terms of this Agreement
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prior to Closing, the sum of the gross purchase prices for the acquisition of
all such Units plus all reasonable costs and expenses paid or incurred by
Huntcliff Seller in connection therewith.
B. Purchaser shall deposit with Commonwealth Land Title Insurance
Company, Washington D.C., (hereinafter referred to as "Escrow Agent") a deposit
of One Hundred Thousand and no/100 Dollars ($100,000.00), with any accrued
interest thereon, (the "Initial Deposit") within five (5) days of execution of
this Agreement. The Initial Deposit will be refundable to Purchaser in the
event that Purchaser terminates this Agreement during the Study Period (as
hereinafter defined and hereinafter so called) or as provided for in Section
8.C herein below. Purchaser will also deposit with the Escrow Agent an
additional deposit of Nine Hundred Thousand and no/100 Dollars ($900,000.00) on
the last day of the Study Period, unless the Agreement has been duly
terminated, which additional deposit shall be non-refundable except as set
forth elsewhere in this Agreement. In the event that Purchaser shall be
obligated to make said $900,000.00 deposit and fails to do so, the Initial
Deposit shall be paid by Escrow Agent to Laing Properties, Inc., as full
liquidated damages on behalf of the Sellers, whereupon this Agreement shall
terminate and be of no further force and effect, except for those provisions
that by their terms shall survive such termination. Escrow Agent will deposit
said funds in an interest-bearing account at a federally-insured commercial
bank, with interest to accrue to Purchaser. The Initial Deposit, the
$900,000.00 deposit and any additional deposits contemplated by this Agreement,
together with any and all accrued interest, may be referred to herein
collectively as the "Deposit".
C. At Closing, the Deposit shall be applied to the Purchase
Price. Should Closing not occur, the Escrow Agent shall distribute the Deposit
in accordance with the applicable provisions of this Agreement.
4. Plans, Engineering, Title Examination and
Operational Records and Other Documents to Purchaser.
In consideration of the execution of this Agreement, the Seller agrees
to cause to be provided to the Purchaser, at no cost, all items requested per
Exhibit I, within the period of time specified therein; provided, however, that
the failure to provide any such item or any other matter contemplated by this
Agreement shall not have the effect of extending the date of expiration of the
Study Period or any other date provided for in this Agreement. It is also
understood by the parties hereto that during the Study Period, Purchaser may
request that other items be provided by Seller in addition to those
specifically listed in Exhibit I, which items shall be provided if mutually
agreed upon by the parties.
5. Title.
A. Purchaser shall obtain a Commitment for Title Insurance (the
"Title Commitment"), committing to insure, upon the payment of a requisite
premium at standard rates prevailing in the respective jurisdiction, that
Purchaser shall acquire good and indefeasible fee simple title (except for the
portions of Huntcliff Summit consisting of leasehold or other interests that do
not constitute fee simple title) to the Real Properties, subject only to the
Permitted
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<PAGE> 6
Exceptions, as defined herein. Prior to the expiration of the Study Period,
Purchaser shall deliver a complete copy of the Title Commitment to Seller.
Purchaser shall have until the expiration of the Study Period, as defined
hereinbelow, within which to object, by written notice to Seller, to any
exceptions to title (other than the Permitted Exceptions) set forth in the
Title Commitment. Such objections shall be within Purchaser's sole discretion.
If Purchaser fails to object to any such item by written notice to Seller prior
to the expiration of the Study Period, Purchaser shall be deemed to have
approved such item. If Purchaser objects to any such item by timely written
notice to Seller, Seller shall have the right (without any obligation to do so,
except as to monetary liens ("Seller Monetary Liens") created by any Seller to
cure or attempt to cure Purchaser's objections to such item prior to the date
of Closing. In the event Seller is unable to or elects not to cure any one or
more of Purchaser's objections, Seller may notify Purchaser in writing of such
election and request that Purchaser waive Purchaser's right to terminate this
Agreement due to such objection(s). If Purchaser does not terminate this
Agreement within ten (10) days of receiving such notice from Seller, Purchaser
shall be deemed to have waived its right to terminate this Agreement due to
such objections.
B. The term "Permitted Exceptions", as used herein, shall mean
(i) the lien of real estate taxes not yet due and payable, (ii) all matters
revealed in the Title Commitment obtained by Purchaser other than Seller
Monetary Liens and approved or deemed approved as provided hereinabove, (iii)
all existing building, zoning and other city, state, county or federal laws,
codes and regulations affecting the Properties, (iv) any existing utility
easements serving any of the Properties or not materially interfering with the
operation of any of the Properties, (v) any title exception created directly by
any act or omission of Purchaser or its representatives, agents, employees or
invitees, (vi) the matters set forth on Exhibit J attached hereto and (vii)
rights of tenants.
C. Title to the Real Properties shall be conveyed to Purchaser at
Closing by Limited or Special Warranty Deed free and clear of any and all
liens, mortgages, deeds of trust and security interests, and free and clear of
any and all covenants, conditions, restrictions, easements, rights-of-way,
licenses, unrecorded agreements and claims of any persons, encroachments,
judgments or encumbrances of any kind whatsoever, except the Permitted
Exceptions and all matters of record. Purchaser may, after the expiration of
the Study Period, object to any exceptions to title (other than the Permitted
Exceptions and those matters of record that were accepted by Purchaser prior to
the end of the Study Period), whereupon Seller shall have the right (without
any obligation to do so, except as to any Seller Monetary Liens) to cure or
attempt to cure such objections on or prior to the date of Closing.
D. If the Purchaser elects to have made a survey of the Real
Properties, then any objections to title based upon such survey shall be
governed by the above Paragraph 5.A. Any such objections shall be due to the
Seller on the same date as the title objections are due, and the failure to
deliver objections shall constitute a waiver thereof. Purchaser shall bear the
cost of the entire premium and expenses for the Commitment, the Owner's policy
of title insurance and any survey.
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<PAGE> 7
6. Study Period.
A. During the period beginning on the date of full execution of
this Agreement and expiring on the earlier to occur of 60 days thereafter or
September 26, 1996 (the "Study Period"), Purchaser shall have the right to
review and evaluate the Real Properties, the Personal Property, the nature and
extent of the Properties and operations and all rights and liabilities related
thereto. Seller agrees to provide or make available to Purchaser and its
authorized representatives for inspection upon request all books, records and
other information concerning the Real Properties and the Personal Property in
the possession of Seller. Without limiting the generality of the foregoing and
the provisions of Section 4 hereinabove, Seller shall furnish or make available
to Purchaser or its representatives as soon as possible the following which are
in Seller's possession:
(1) Any contracts, leases and equipment agreements
affecting the Real Properties or the Personal
Properties, including contracts of employees of
Seller currently working at the Real Properties;
(2) Any licenses and permits currently held by Seller;
and
(3) Any current Certificates of Use and Occupancy for the
Real Properties.
B. In addition, during the Study Period and thereafter until
Closing, Seller and its representatives shall reasonably cooperate with
Purchaser at no cost to the Seller in conducting its evaluation of the Real
Properties and introduce Purchaser to such persons other than tenants and
occupants with knowledge of the Facilities as Purchaser shall reasonably
request, including Facility employees. However, Purchaser shall not contact or
otherwise communicate with any of the tenants or occupants of any of the
Facilities whatsoever and shall contact or otherwise communicate with any of
the staff members or other employees or others providing goods or services to
any of the Facilities without the prior written consent of Seller's Senior
Executives, as defined hereinbelow, which shall not be unreasonably withheld or
delayed. The parties will prepare as soon as possible after the execution of
this Agreement a joint communication to be delivered by Seller to the Facility
employees.
C. At any time during the Study Period, Purchaser shall have the
right, in its sole discretion and for any reason or no reason, to terminate
this Agreement and receive the return of the Initial Deposit (net of the sum of
$100.00, which Escrow Agent shall pay over to Laing Properties, Inc. on behalf
of Sellers as consideration for entering into this Agreement) and all accrued
interest by providing written notice to Seller and Escrow Agent. Upon such
notice, this Agreement shall terminate and be of no further force and effect,
and the net Initial Deposit shall be promptly returned to Purchaser by Escrow
Agent.
D. Purchaser agrees to indemnify and hold harmless each of the
Sellers from and against any and all liability, loss, cost, damage, lien or
expense (including but not limited to attorney fees and costs of litigation)
that any of the Sellers or Laing Land, Inc. shall suffer or incur as a result
of the acts or omissions of Purchaser and those acting on its
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<PAGE> 8
behalf or at its request with respect to any of the Properties. This subsection
shall survive Closing as to all matters of which any of the Sellers or Laing
Land, Inc. shall give notice to Purchaser not later than two and one half (2.5)
years after the Closing Date, as hereinafter defined.
7. Actions Pending Closing.
A. During the Study Period and prior to Closing, Seller
undertakes and hereby covenants and agrees as follows:
(1) Subject to the provisions of Paragraph 12, Seller
will maintain the Real Properties and the Personal
Property in substantially their present condition,
except for ordinary wear and tear and the use and
consumption of Inventory and other items of Personal
Property in the ordinary course of business.
(2) Except for the use and consumption of Inventory,
Seller will not sell or dispose of, or cause to be
sold or disposed of, all or any portion of the Real
Properties or the Personal Property, during the Study
Period, except as provided in (1) of this
subparagraph and except in the ordinary course of
business and for items having an aggregate value not
in excess of $50,000.00, an aggregate per facility
value not in excess of $10,000 or replaced with
similar items, as needed.
(3) Seller shall cooperate with Purchaser to obtain
consents of governmental officials regarding
acquisition by Purchaser of necessary licenses and
permits.
(4) Seller shall not enter into or materially modify any
lease with respect to the Properties, make any
material commitment, take any material action or
incur any material obligation that burdens the title
to any of the Properties, materially affects any
contract that is to be assumed by Purchaser or
materially alters the operations and/or the business
conducted at the Properties, as operated and
conducted by the respective Sellers without the prior
written consent of Purchaser, other than in the
ordinary course of business and, with respect to any
agreement or lease, other than for a duration of one
(1) year or less. Nothing in this subsection shall
preclude Seller from exercising its rights under the
Guaranteed Buy Back Agreements with the owners of the
Third-Party Huntcliff Units or their executors,
administrators and personal representatives.
(5) Prior to the expiration of the Study Period, Seller
shall provide to Purchaser copies of all licenses
which are currently in force and effect at the
Facilities and will provide notice to Purchaser upon
any notice or receipt of any notice or revocation or
suspension of said licenses.
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<PAGE> 9
B. If any agreements, undertakings or covenants in Paragraph 7.A
above shall be breached by Seller in any material respect prior to Closing,
then Purchaser shall have the right, in its sole discretion (i) to waive the
breach or (ii) to terminate this Agreement and receive a return of the Deposit.
8. Conditions Precedent to Closing.
A. The obligation of Seller to consummate the transactions
contemplated herein shall be subject to the representations and warranties made
by Purchaser hereunder being true and correct in all material respects and
confirmed in writing on the date of Closing and the performance by Purchaser of
all of its obligations under this Agreement.
B. The obligation of Purchaser to consummate the transactions
contemplated herein shall be subject to the occurrence, satisfaction or waiver
of the following conditions:
(1) Seller's Senior Executives (which term shall mean
collectively Ned S. Holmes, James A. Gillespie,
Joanna K. M. Bright and Robert R. Stubbs) shall have
no actual (without investigation) knowledge of any
suit, action, investigation, inquiry or other
proceeding by any governmental authority or any other
person, pending or threatened, which would have a
material adverse effect on the Properties if
adversely determined;
(2) If requested by Purchaser, the respective Seller
shall deliver to Purchaser on the Closing Date
originals or true copies of properly executed letters
(or a form letter) (the "Tenant Letter") from Seller
to all tenants under the Leases to be dated as of
Closing, advising of the change of ownership and the
transfer of deposits of such tenants;
(3) All other documents required hereunder for Closing
shall have been executed and delivered by Seller and
Purchaser.
(4) All representations and warranties made by Seller
under this Agreement shall have remained true and
correct in all material respects.
C. In the event any condition precedent set forth in Paragraph
8.B., is not satisfied in full as of the date scheduled for Closing, as may be
extended in accordance with such Section 9, the party in favor of whom such
condition precedent is made may, in its sole discretion, (i) waive the
condition in writing or (ii) declare this Agreement to be terminated, upon
which the Deposit and all accrued interest shall be paid to the party entitled
thereto and no party shall have any further obligation hereunder. In the event
that, during the Study Period, any Certificate of Occupancy or assisted living
or nursing care facility license applicable to any of the Facilities shall be
revoked, suspended, or canceled, or if any certificate of licensure related to
the operation of the Glens of Greenville shall be revoked, suspended or
canceled, then Purchaser, by notice to Sellers given on or before the end of
the Study Period, may terminate this Agreement, whereupon the Deposit shall be
refunded to Purchaser; provided, however, that if any such
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<PAGE> 10
revocation, suspension or cancellation (collectively the "Revocation") shall
occur during the last five (5) calendar days of the Study Period, then
Purchaser shall have until 5:00pm., Atlanta time, on the fifth (5th) calendar
day after the date the Revocation occurs, to exercise the termination right set
forth in this sentence but only on account of the Revocation. In the event
that Revocation occurs after the Study Period, then Purchaser, by notice to the
Sellers given within five (5) calendar days (the "Response Period") after
notice from any Seller to Purchaser of the Revocation, may terminate this
Agreement, whereupon the Deposit shall be refunded to Purchaser; if, in such
event, Purchaser does not so terminate this Agreement, then Sellers, by notice
to Purchaser given on or before the third (3rd) day after the Response Period,
may terminate this Agreement, whereupon the Deposit shall be refunded to
Purchaser. The provisions of Paragraph 25.K of this Agreement shall not apply
to the time periods set forth in this Paragraph.
9. Closing.
A. Closing of the transactions contemplated hereby shall take
place on a date (the "Closing Date") which is the earlier to occur of (a) 30
days after the expiration of the Study Period or (b) October 31, 1996, or at an
earlier date at the option of Purchaser exercised by not fewer than ten days'
prior written notice to Seller, at the offices of Commonwealth Land Title
Insurance Company, 1828 L Street, N.W., Suite 725, Washington D.C., 20036, or
such other location as the parties may agree upon prior to Closing. Purchaser
may extend the Closing Date to and including December 3, 1996 by depositing
with Escrow Agent on or before October 29, 1996 an additional non-refundable
deposit in the amount of Two Hundred and Fifty Thousand and no/100 Dollars
($250,000), which shall be deemed to be a part of the Deposit.
B. At Closing, each Seller shall execute (or cause to be
executed), where appropriate, and deliver the following documents to Purchaser
with respect to such Seller's respective Facility:
(1) The confirmation of the representations and
warranties of Seller in substantially the form(s)
attached hereto as Exhibit K;
(2) Bill of Sale in substantially the form(s) attached
hereto as Exhibit L (the "Bill of Sale");
(3) Limited or Special Warranty Deed in substantially the
form(s) attached hereto as Exhibit M (the "Deed");
(4) Assignment and Assumption Agreement in substantially
the form(s) attached hereto as Exhibit N (the
"Assignment and Assumption Agreement");
(5) The Tenant Letter (see subparagraph 8.B(2));
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<PAGE> 11
(6) All plans, specifications and blueprints relating to
the Real Properties that are in the respective
Seller's possession and have not previously been
forwarded to Purchaser (to be delivered at the place
of Closing or at the respective Facility);
(7) Affidavit regarding mechanics' liens and possessory
rights in substantially the form attached hereto as
Exhibit O;
(8) To the extent in the respective Seller's possession,
keys to all improvements and to any lock which exists
for the Building (to be delivered at the respective
Facility);
(9) Any modifications of any existing leases or any
agreements entered into by Seller which are permitted
under Section 7.A(4) regarding the operation of the
Buildings which have not previously been supplied to
Purchaser and which are in the possession of Seller;
(10) A subordination agreement, under which the current
holder of that certain Deed to Secure Debt dated May
31, 1993 by George L. Aulbach and Gertrude Frisby
Aulbach in favor of Huntcliff, a Georgia general
partnership, agrees to subordinate its lien on the
Third-Party Unit owned by the Aulbachs to any
assessment lien placed on such Unit by the
Association (as hereinafer defined);
(11) An affidavit of non-foreign status and a corporate
resolution and incumbency certificate for each Seller
with regard to the transfer of the Property; and
(12) A closing statement.
C. At Closing, Purchaser shall execute (where appropriate), cause
to be executed and/or deliver the following:
(1) The Purchase Price in cash;
(2) The confirmation of the representations and
warranties of Purchaser and possessory rights in
substantially the form attached hereto as Exhibit P;
(3) The Assignment and Assumption Agreement (in five
counterparts);
(4) An indemnification agreement executed by Purchaser
and Sunrise Assisted Living, Inc. with respect to any
Third-Party Huntcliff Units required to be
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<PAGE> 12
acquired by any of the Sellers or any parent company
or affiliate thereof in substantially the form
attached here to as Exhibit T;
(5) A consent by Purchaser to any future leasing of any
Third-Party units acquired by any of the Sellers or
any parent company or affiliate thereof in
substantially the form attached hereto as Exhibit U;
and
(6) A closing statement.
D. At Closing, Huntcliff Seller shall cause all of the officers
and all but one of the directors of Huntcliff Summit Condominium Associates,
Inc. (the "Association"), to resign and shall cause the remaining director to
execute a consent appointing three individuals to be named by Purchaser as new
directors of the Association, whereupon said remaining director shall submit
his or her resignation as a director of the Association. In the event that
Purchaser shall fail to name the three aforesaid individuals, the said
remaining director may nevertheless submit the aforesaid resignation. Also at
Closing, Purchaser shall cause the Association to execute, for the benefit of
the Sellers, any affiliated or parent company thereof and all directors,
officers, members, employees and agents thereof, an agreement whereby the
Association agrees to indemnify and hold harmless said benefitted parties
against any and all liability, loss, damages, cost or expense, including but
not limited to attorney fees and litigation costs, that any of them may incur
or be threatened with in respect of the Association and its activities.
10. Certain Credits, Charges and Prorations.
A. All general real estate taxes and personal property taxes for
the current year with respect to the Real Properties and the appurtenant
Personal Property shall be prorated through the date of Closing and all general
real estate taxes and personal property taxes for all prior years shall be paid
in full by Seller at or prior to Closing. Any Seller or Laing Land, Inc. may
contest or continue to contest any such taxes, and upon the conclusion thereof
appropriate prorations thereof, if any, shall be made by Purchaser and such
Seller. Seller shall pay, or credit to the Purchase Price at the option of
Purchaser, all special assessments, if any, constituting a lien against any of
the Properties, prorated over the useful life of the respective improvement as
of Closing Date, that pertain in any way to the Real Properties or the Personal
Property. Seller represents and warrants, to the actual knowledge of Seller's
Senior Executives, that it has no knowledge or notice of any pending
assessments, or any threatened public improvements which could result in
additional assessments being levied against the Real Properties or the Personal
Property nor, except as set forth on Exhibit V attached hereto, has Seller
received any notice of reassessment of the Property. Seller shall pay all
accrued and unpaid water, sewer and other utility charges, prorated through the
date of Closing, such payment to be made after Closing when bills are
available. Seller shall also be responsible for paying all accrued vacation,
sick leave, salary and other payments, including the employer portion of
payroll tax and other withholdings, earned by Facility employees to be rehired
by Purchaser, which shall be prorated through the date of Closing and shall
either be paid by Seller directly to the Facility employees or will be credited
to the Purchase Price; provided that no vacation accruals of over eighty (80)
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hours will be accepted by Purchaser. This subparagraph 10.A shall survive
Closing as to all matters of which Purchaser shall notify Sellers not later
than two and one half (2.5) years after the closing date.
B. Purchaser shall pay the cost of recording the Deeds, all costs
of the title company selected by Purchaser to insure title and Purchaser's
attorneys' fees and costs. The cost of all County and State transfer,
recording or similar taxes (including without limitation documentary stamp
taxes), as well as the cost of any releases of Seller Monetary Liens
encumbrances or other title exceptions to be removed prior to Closing, shall be
shared equally by the parties.
11. Income and Expenses.
A. All income and expenses of the Properties shall be prorated on
a daily basis between the Seller and the Purchaser as of midnight of the date
of Closing or such other date as the parties agree in writing (the "Proration
Date"). Such items to be prorated shall include, without limitation:
(1) Rents and income, if any;
(2) Utility charges, if any;
(3) Payments under service agreements, if any;
(4) Periodic charges or fees assessed by any governmental
authority, if any; and
B. Any escrow accounts held by any utility companies shall be
either paid to the Seller or, if assigned to the Purchaser, Seller shall
receive a credit at Closing for any such deposit.
C. The Purchaser shall receive income from the Properties
attributable to the period after the Proration Date and shall be responsible
for all expenses of the Properties attributable to the period after the
Proration Date. The Purchaser shall use its best efforts to assist the Seller
in collecting all accounts receivable, including accounts receivable for rent,
which are attributable to the period up to and including the Proration Date and
which remain outstanding on the date of Closing; however, Purchaser shall not
be obligated to assist in instituting any lawsuit or to terminate any lease or
resident agreement. This subparagraph shall survive Closing. In the event
Seller receives any payment from a resident for rent due for any period after
12:01 am on the date of Closing, Seller shall forward such payment to Sunrise.
In addition, in the event Seller has received any pre-paid rent or any security
deposits from a resident for any period after midnight on the date of Closing,
Seller shall forward such pre-paid rent and or security deposits to Purchaser.
D. The parties agree that a final list of all food inventory
located at Huntcliff and Northshore shall be prepared by Seller as of the date
of Closing.
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<PAGE> 14
E. The parties agree that any amounts which may become due under
this Section 11 shall be paid at Closing as can best be determined. A
post-Closing reconciliation of such pro-rated income and expenses shall be made
by the parties thirty (30) days after Closing, and any additional amounts
determined to be owing shall be promptly forwarded to the respective party in a
lump sum payment. A second determination of any amounts due under this Section
11 shall be made sixty (60) days after Closing and any amounts due at that time
shall be forwarded to the respective party in a lump sum payment. Any
additional amounts which may become due after the second determination shall be
forwarded at the time they are received.
12. Risk of Loss.
A. Risk of loss shall remain with Seller until delivery of the
Deed and Bill of Sale at Closing. Seller shall notify Purchaser, within a
reasonable time after the occurrence thereof, of any substantial damage to or
destruction of all or any substantial portion of any of the Real Properties or
any condemnation or taking by eminent domain of any substantial portion of any
of the Real Properties. In the event of any damage to any of the Real
Properties or any condemnation or taking by eminent domain of any of the Real
Properties, Purchaser, provided it proceeds to Closing and there is no
reduction in the Purchase Price agreed to by Seller and Purchaser, shall be
entitled to all condemnation awards or insurance proceeds (less costs of
restoration paid or incurred by Seller) received by Seller on account of such
condemnation, damage or destruction if proceeds are payable after Closing. If
proceeds are paid before Closing, said proceeds (less costs of restoration paid
or incurred by Seller) shall be deducted from the Purchase Price at Closing and
Purchaser shall purchase the Properties subject to said damage or destruction.
Purchaser shall have no right to participate in any proceedings with respect to
condemnation or insurance matters pending prior to Closing; provided, however,
in the event Purchaser shall be entitled to condemnation or insurance proceeds,
the pending condemnation or insurance proceedings shall become the
responsibility of Purchaser from and after Closing. Any proceedings with
respect to condemnation or insurance matters pending at Closing will be
assigned to Purchaser, with liabilities therefor assumed by Purchaser at
Closing. Any such proceedings commenced after Closing will be Purchaser's
responsibility. Purchaser shall have the further right to insure its equitable
interest prior to Closing in the amounts and to the extent it deems necessary.
B. For the purposes of the above Paragraph 12.A, a "substantial
portion" of any of the Real Properties shall be deemed to include any taking or
damage by casualty equal to or greater than twenty percent (20%) of the gross
number of square feet contained in the Building and shall not include any
taking of less than twenty percent (20%) of the Building. If less than a
substantial portion of any of the Real Properties shall be damaged or destroyed
by a casualty or taken in condemnation or under the right of eminent domain
before the Closing Date, then the parties shall proceed to close the
transaction contemplated herein, and any proceeds actually received by the
Seller attributable to any of the Real Properties from such casualty,
condemnation or eminent domain (less costs of restoration paid or incurred by
Seller) and any right the Seller may have to receive proceeds attributable to
any of the Real Properties from such casualty, condemnation or eminent domain
(less costs of restoration paid or incurred by Seller
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<PAGE> 15
with Purchaser's prior approval) shall be delivered or assigned to the
Purchaser at Closing or as soon as available, and there shall be no reduction
in the Purchase Price.
C. The Purchaser shall have the right to terminate this Agreement
within ten (10) days after notice of such damage, destruction or condemnation
of all or any substantial portion of any of the Real Properties as described in
the above Paragraph 12.A. If the Purchaser does not elect to terminate this
Agreement, the Purchaser shall be obligated to consummate this transaction.
13. Representations and Warranties of Seller.
A. Seller hereby represents and warrants to Purchaser as follows:
(1) Seller has full power and authority to execute this
Agreement, to transfer the Real Properties and the
Personal Properties, and to perform the other
obligations of the Seller hereunder.
(2) To the actual knowledge, without investigation, of
Seller's Senior Executives, the execution and
performance of this Agreement does not violate the
terms or conditions of any other agreement to which
Seller is a party that will affect any of the
Properties upon Closing;
(3) All material contracts for services relating to the
Real Properties, the Personal Property, or the
operation of the Buildings, to which Seller is a
party or is bound, which materially impacts the
operations and/or business conducted at the
Properties, have been or will have been furnished to
Purchaser within ten (10) days of the date of this
Agreement and are terminable by Purchaser with not
more than thirty (30) days written notice and are
currently in full force and effect and are assignable
to Purchaser, except as identified in a notice to
Purchaser given by any of Seller's Senior Executives
on Exhibit Q, which will be attached hereto within
ten (10) days of the date of this Agreement;
(4) To the actual knowledge, without investigation, of
Seller's Senior Executives, there are no suits,
actions or proceedings threatened or likely to result
in any material suit, action or proceeding that
burdens the title to any of the Properties,
materially affects any contract that is to be assumed
by Purchaser or materially alters the operations
and/or the business conducted at the Properties to
the Real Properties.
(5) To the actual knowledge, without investigation, of
Seller's Senior Executives, there will be as of
Closing no contingent or other liabilities of the
Seller, whether as maker, obligor, guarantor, surety
or otherwise, which could materially affect the value
of or Purchaser's title to the Real Properties or the
Personal Properties following Closing.
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<PAGE> 16
(6) To the actual knowledge, without investigation, of
Seller's Senior Executives, the Properties are zoned
such that it will permit the operation of an
independent and/or assisted living facility as is
appropriate to the specific Properties.
(7) To the actual knowledge, without investigation, of
Seller's Senior Executives, the Properties are
presently served with County utilities, and Seller
has no knowledge of any proposed or threatened
discontinuation of such service.
(8) To the actual knowledge, without investigation, of
Seller's Senior Executives, and except for substances
used in the operation of the Facilities, during
Sellers' ownership of their respective Properties, no
person or entity has engaged in, nor will Seller
knowingly permit on the Properties, any activity on
the Properties that could lead to the imposition of
liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980
("CERCLA") or in any other federal, state or local
law governing hazardous substances, as such laws may
be amended from time to time, on any such person or
entity, or on Seller or Purchaser; provided, however,
that no representation or warranty is made with
respect to the underground storage tank formally
located at Northshore or any matter mentioned in any
environmental assessment report delivered or to be
delivered to Purchaser pursuant to this Agreement
B. Any material breach of any representation or warranty
contained herein which is not cured prior to Closing shall constitute a breach
of this Agreement, entitling Purchaser to exercise the rights and remedies
contained in Paragraph 21 hereof.
14. Representations and Warranties of Purchaser.
A. Purchaser represents and warrants as follows:
(1) To the best of Purchaser's knowledge and belief, the
execution and performance of this Agreement do not
violate the terms or conditions of any other
agreement to which Purchaser is a party.
(2) Purchaser has full power and authority to execute
this Agreement and to purchase the Properties;
B. Any material breach of any representation or warranty
contained herein which is not cured prior to Closing shall constitute a breach
of this Agreement, entitling Seller to exercise the rights and remedies
contained in Paragraph 21 hereof.
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<PAGE> 17
15. Intentionally Left Blank.
16. Costs.
Each party shall pay the costs and expenses of its legal counsel,
accountants and other agents and personnel in respect to all aspects of the
transaction contemplated hereby; provided, however, that Purchaser shall pay
all fees and other charges (KPMG Peat Marwick) relating to audited financial
statements prepared in accordance with U.S. Generally Accepted Accounting
Principles ("U.S. GAAP"). Purchaser does hereby waive and relinquish any right
Purchaser may have to rely upon any warranties or representations or statements
made by anyone to said accountants, or any other person, firm, company or
corporation, in connection with financial statements, both audited and
unaudited. Purchaser and Sunrise Assisted Living, Inc. ("Parent"), being the
parent company of Purchaser, jointly and severally agree, for the benefit of
Sellers, any affiliated or parent company thereof and all directors, officers,
members, employees, and agents thereof, to indemnify and hold harmless said
benefited parties against any and all liability, loss, damage, cost or expense,
including but not limited to attorney fees and litigation costs, that any of
them may incur or be threatened with on account of or in any manner relating to
any such warranty, representation or statement relating to presentation of
financial statements in accordance with U.S. GAAP methodology, and the
provisions of this sentence shall survive Closing and the conveyances
contemplated herein.
17. Brokers.
Seller and Purchaser warrant to each other that there is no real
estate broker or agent acting on behalf of the respective warranting party in
connection with this transaction. Each party warrants and represents to the
other that no such real estate broker or agent has been involved in
negotiations leading to the execution of this Agreement and that no commission
is owed to any such broker or agent as a result of the action of such party.
Each party agrees to hold the other harmless from any loss, cost or charge
(including reasonable attorneys' fees), arising from the assertion by any such
broker or agent that any fee or commission is owed because of the acts or
agreement of such party. This paragraph shall survive Closing or the
termination of this Agreement.
18. Notices.
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given only if
delivered by hand or sent by recognized overnight or next business day courier
service:
If to Seller:
c/o Laing Properties, Inc.
Suite 555
5901-B Peachtree-Dunwoody Road
Atlanta, Georgia 30328
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<PAGE> 18
Attn: Mr. Robert R. Stubbs, House Counsel
Telephone: 770/551-3478
Telecopier: 770/551-3462
and
Attn: Ms. Joanna K. M. Bright, Chief Financial Officer
Telephone: 770/551-3421
Telecopier: 770/551-3459
with a copy to:
Sutherland, Asbill & Brennan
Suite 2300 First Union Plaza
999 Peachtree Street
Atlanta, Georgia 30309-3996
Attn: Mr. J. Patton Hyman, III
Telephone: 404/853-8095
Telecopier: 404/853-8806
If to Purchaser:
Sunrise Development, Inc.
9401 Lee Highway, Suite 300
Fairfax, Virginia 22031
Attn: Mr. Dan Gorham
Telephone: 703/352-6657
Telecopier: 703/273-7501
With a copy to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attn: Mark C. Rusche
Telephone: 404/881-7000
Telecopier:404/881-7777
or to such other person or place as notice of the name and address of which
shall have been furnished in writing to each of the other parties hereto. All
notices shall be deemed to have been timely given when hand-delivered to the
addressee prior to the close of business, or deposited with a recognized
overnight or next business day courier service, on or before the date on which
such notice is required or permitted to be given.
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<PAGE> 19
19. Further Assurance.
Each of the parties hereto will, after Closing, without any cost or
expense to the performing party, execute and deliver, or cause to be executed
and delivered, to such other party such further instruments of transfer and
conveyance as may reasonably be requested to more effectively consummate the
transfers and conveyances contemplated by this Agreement.
20. Assignment.
This Agreement may not be assigned, in whole or in part, by any of
the parties hereto without the written consent of all other parties, provided
that Purchaser may assign its rights and obligations to any entity owned or
controlled by Sunrise Assisted Living, Inc., and such entity, upon assuming all
obligations of Purchaser under this Agreement, shall be a permitted assignee
hereunder. In the event of an assignment, the assignee shall then become a
party to and be bound by this Agreement, with all rights, privileges and
protections afforded hereunder. No such assignment shall relieve Purchaser of
its obligations under this Agreement. There shall be no third party
beneficiary of this Agreement, except as expressly set forth in this Agreement.
21. Remedies Upon Default.
A. If Seller materially defaults on any of its obligations
hereunder, or if the conditions precedent to the Purchaser's obligations as
provided in this Agreement have not been met or have not occurred, the
Purchaser may, as its sole remedy hereunder, by serving notice in writing upon
the Seller in the manner provided in this Agreement, either:
(1) Terminate this Agreement and declare it null and void
and receive a refund of the Deposit, together with
all interest earned thereon; or
(2) Seek specific performance against the Seller; or
(3) Bring suit for all damages, but only with respect to
Seller's obligation indemnify Purchaser for breach of
the Representations and Warranties of Seller set
forth in Paragraph 13.A (1), (2), (4), and (5) and
obligations to indemnify Purchaser as set forth in
Paragraphs 2 and 10.A provided that Purchaser has
acquired properties, suffered by Purchaser due to any
material misrepresentation of Seller under the terms
of this Agreement, and recover all of Purchaser's
costs and expenses, including reasonable attorneys'
fees incurred as a direct result of such
misrepresentation; or
(4) Waive any such conditions or defaults and consummate
the transaction contemplated by this Agreement in the
same manner as if there had been no conditions or
defaults and without any reduction in the Purchase
Price and without any further claim against the
Seller therefor; or
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<PAGE> 20
(5) If the default is the failure of Seller to pay off a
Seller Monetary Lien on the Property, Purchaser may
pay off such lien at Closing and deduct the pay off
amount from the Purchase Price.
Except as set forth above, Purchaser dose hereby waive any and
all rights that Purchaser may have to sue Sellers or any of them for damages
for any reason whatsoever under or by virtue of this Agreement.
B. If the Purchaser shall default (except with respect to any
obligation of Purchaser to indemnify and hold harmless Seller and others ) in
the performance of any of its obligations hereunder, the Seller may, as its
sole remedy hereunder, by serving notice in writing upon the Purchaser in the
manner provided in this Agreement, receive the Deposit and all interest thereon
as its complete liquidated damages and sole remedy and not as a penalty or
forfeiture (actual damages being difficult or impossible to measure) and
neither party shall have any further claim against the other. Said liquidated
damages are the parties' best estimate of such damages. Seller's receipt of
the Deposit is intended not as a penalty but as full liquidated damages
pursuant to Official Code of Ga. Ann. Section 13-6-7.
C. In no event shall Escrow Agent disburse all or any part of the
Deposit or any interest thereon except upon the joint written instructions of
Seller and Purchaser.
22. Confidentiality.
No press release or public dissemination of the transaction
contemplated herein shall be made before the Closing has occurred, unless upon
the prior written agreement of the parties hereto; provided, however that
Purchaser or Seller may disclose this transaction if and to the extent
necessary to comply with securities laws. Purchaser shall provide Seller with
a copy of any press release to be issued by Purchaser as required under the
securities laws, as soon as reasonably possible prior to such release. Either
party may issue press releases or public dissemination of the transaction upon
the completion of the Closing, without the consent of the other. Until
Closing, Purchaser shall maintain the confidentiality of all information (the
"Information") obtained from the Sellers, their managing agents, past or
present employees and representatives with respect to the Properties and the
ownership, operation and management thereof, shall not directly or indirectly
disclose any of the Information or permit the disclosure of any of the
Information to any person or entity except professional advisers who have
agreed to maintain such confidentiality, and shall not use the Information for
any purpose other than evaluating the purchase and sale contemplated by this
Agreement. Nothing contained herein shall prevent Purchaser's producing the
Information pursuant to any court order or subpoena that Purchaser, on advice
of counsel, believes to be bona fide, and in such event Purchaser shall give
the Sellers immediate written notice of receipt of such order or subpoena,
detailing the specific Information sought and for whom it is to be produced, so
that Sellers (or any of them) and/or Laing Properties, Inc. (which is agreed to
be an express third party beneficiary of this Paragraph) may seek a protective
order or other appropriate remedy. Purchaser shall produce only that portion
of the Information that Purchaser is advised by counsel that it is required to
disclose and will exercise its best efforts to obtain reliable assurances that
confidential treatment will be
-20-
<PAGE> 21
accorded to any Information so released. All of the Information is proprietary
to Sellers and Laing Properties, Inc.
23. Indemnification of Escrow Agent.
Seller and Purchaser each hereby indemnify and hold harmless Escrow
Agent from and against one half of any and all cost or expense arising in its
connection with their acting in its capacity as Escrow Agent. A copy of the
Escrow Agreement is attached hereto as Exhibit R.
24. Advice of Counsel and Construction.
All parties to this Agreement have been represented by counsel or have
had the opportunity to be so represented. Accordingly, the rule of
construction of contract language against the drafting party is hereby waived
by both parties.
25. Miscellaneous.
A. Entire Agreement. This Agreement constitutes the entire
agreement between the parties, and all prior oral discussions or agreements are
merged herein.
B. Survival. Except as specifically provided in this Agreement,
the provisions of this Agreement shall not survive Closing or conveyance of the
Real Properties and the Personal Property and any other instruments of
conveyance.
C. Singular and Plural Genders. The singular shall be
substituted for the plural, and vice versa, and any gender or the neuter for
any other gender, as appropriate.
D. Headings. The headings of the paragraphs of this Agreement
are inserted for convenience only, and shall not constitute a part of or limit
the content of any paragraph.
E. Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, and their respective estates,
heirs, executors, representatives, successors and assigns, subject to the
provisions of Paragraph 20.
F. Governing Law. This Agreement shall be construed and
interpreted in accordance with the laws of the State of Georgia.
G. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
H. Exhibits. The exhibits attached to this Agreement are
incorporated in this Agreement as though fully set forth herein.
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<PAGE> 22
I. Waivers and Amendments. No purported waiver or amendment of
any provision of this Agreement shall be valid unless in writing signed by the
person against whom such waiver is sought to be enforced. No delay or omission
in the exercise of any right or remedy accruing to Seller or Purchaser upon any
breach under this Agreement shall impair such right or remedy or be construed
as a waiver of any such breach theretofore or thereafter occurring. The waiver
by Seller or Purchaser of any breach of any term, covenant or condition herein
stated shall not be deemed to be a waiver of any other breach or of a
subsequent breach of the same or any other term, covenant or condition herein
contained. Each party hereto reserves the right to waive, in whole or in part,
any provision hereof that is for the benefit of such party.
J. Time of Essence. Time is of the essence of each and every
provision of this Agreement.
K. Calculation of Time. If any time period under this Agreement
ends on a day other than a Business Day, then such time period shall be
extended until the next Business Day. The term "Business Day" (or, in the
plural, "Business Days") shall mean Monday through Friday excluding holidays
recognized by the State of Georgia or the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date and year first above written for the uses and
purposes herein contained.
SELLER:
Laing Huntcliff, L.L.C.
By: /s/ JAMES A. GILLESPIE
------------------------------------
Name: James A. Gillespie
----------------------------------
Title: Executive Vice President
---------------------------------
Laing Northshore, Inc.
By: /s/ JAMES A. GILLESPIE
------------------------------------
Name: James A. Gillespie
----------------------------------
Title: Executive Vice President
---------------------------------
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<PAGE> 23
Laing Amcare Augusta, Inc.
By: /s/ JAMES A. GILLESPIE
------------------------------------
Name: James A. Gillespie
----------------------------------
Title: Executive Vice President
---------------------------------
Laing Amcare Columbus, Inc.
By: /s/ JAMES A. GILLESPIE
------------------------------------
Name: James A. Gillespie
----------------------------------
Title: Executive Vice President
---------------------------------
Laing Greenville, Inc.
By: /s/ JAMES A. GILLESPIE
------------------------------------
Name: James A. Gillespie
----------------------------------
Title: Executive Vice President
---------------------------------
Laing Land, Inc.
By: /s/ JAMES A. GILLESPIE
------------------------------------
Name: James A. Gillespie
----------------------------------
Title: Executive Vice President
---------------------------------
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<PAGE> 24
PURCHASER:
Sunrise Development, Inc.,
a Virginia corporation
By: /s/ THOMAS B. NEWELL
---------------------------------
Name: Thomas B. Newell
------------------------------
Title: President
-----------------------------
Sunrise Assisted Living, Inc.
a Delaware corporation
By: /s/ DAVID F. FAEDER
---------------------------------
Name: David F. Faeder
------------------------------
Title: Executive Vice President
-----------------------------
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<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
SUNRISE ASSISTED LIVING, INC.
Sunrise Assisted Living, Inc., a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Sunrise Assisted Living,
Inc., and the name under which the corporation was originally incorporated was
Sunrise Assisted Living Holdings, Inc. The date of filing its original
Certificate of Incorporation with the Secretary of State of the State of
Delaware was December 14, 1994.
2. Pursuant to Section 245 of the General Corporation Law of
the State of Delaware, this Restated Certificate of Incorporation restates and
integrates but does not further amend the provisions of this corporation's
Certificate of Incorporation as heretofore amended or supplemented, and there
is no discrepancy between those provisions and the provisions of this Restated
Certificate of Incorporation (except for the omission, as permitted by Section
245(c) of the General Corporation Law of the State of Delaware, of such
provisions contained in previous amendments to this corporation's Certificate
of Incorporation as were necessary to effect changes, exchanges,
reclassifications or cancellations of stock, which changes, exchanges,
reclassifications or cancellations have become effective).
3. The text of the Restated Certificate of Incorporation is
as follows:
RESTATED CERTIFICATE OF INCORPORATION
OF
SUNRISE ASSISTED LIVING, INC.
ARTICLE 1. NAME
The name of this corporation is Sunrise Assisted Living, Inc.
(the "Corporation").
ARTICLE 2. REGISTERED OFFICE AND AGENT
The registered office of the Corporation shall be located at
1013 Centre Road, Wilmington, New Castle County, Delaware 19805. The
registered agent of the Corporation at such address shall be Corporation
Service Company.
<PAGE> 2
ARTICLE 3. PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "Delaware General Corporation
Law"). The Corporation shall have all power necessary or convenient to the
conduct, promotion or attainment of such acts and activities.
ARTICLE 4. CAPITAL STOCK
4.1. AUTHORIZED SHARES
The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 70,000,000 of which 60,000,000
shall be Common Stock, having a par value of $.01 per share ("Common Stock"),
and 10,000,000 shall be Preferred Stock, having a par value of $.01 per share
("Preferred Stock"). Attached as Exhibit A is the Certificate of Designation,
Preferences and Rights of Series C Junior Participating Preferred Stock.
4.2. COMMON STOCK
4.2.1. RELATIVE RIGHTS
The Common Stock shall be subject to all of the rights,
privileges, preferences and priorities of the Preferred Stock as set forth in
the certificate(s) of designations filed to establish the respective series of
Preferred Stock. Each share of Common Stock shall have the same relative
rights as and be identical in all respects to all the other shares of Common
Stock.
4.2.2. DIVIDENDS
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of 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 payments, if any, to which such
holders are respectively entitled in preference to the Common Stock, then
dividends may be paid on the Common Stock and on any class or series of stock
entitled to participate therewith as to dividends, out of any assets legally
available for the payment of dividends thereon, but only when and as declared
by the Board of Directors of the Corporation.
4.2.3. DISSOLUTION, LIQUIDATION, OR WINDING UP
In the event of any dissolution, liquidation, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Common
Stock, and holders of any class or series of stock entitled to participate
therewith, in whole or in part, as to the distribution of assets in such event,
shall become entitled to participate in the distribution of any assets of the
Corporation remaining after the Corporation shall have paid, or provided for
payment of, all debts and liabilities of the Corporation and after the
Corporation shall have paid, or set aside for payment, to the holders of any
class of stock having preference over the Common Stock in the event of
dissolution, liquidation or winding up the full preferential amounts (if any)
to which they are entitled.
4.2.4. VOTING RIGHTS
Each holder of shares of Common Stock shall be entitled to
attend all special and annual meetings of the stockholders of the Corporation
and, share for share and without regard to class, together with the holders of
all other classes of stock entitled to attend such meetings and to vote (except
any class or series of
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<PAGE> 3
stock having special voting rights), to cast one vote for each outstanding
share of Common Stock so held upon any matter or thing (including, without
limitation, the election of one or more directors) properly considered and
acted upon by the stockholders.
4.3. PREFERRED STOCK
The Board of Directors is authorized, subject to limitations
prescribed by the Delaware General Corporation Law and the provisions of this
Certificate of Incorporation, to provide, by resolution or resolutions from
time to time and by filing a certificate(s) pursuant to the Delaware General
Corporation Law, for the issuance of the shares of Preferred Stock in series,
to establish from time to time the number of shares to be included in each such
series, to fix the powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and to fix the qualifications, limitations or restrictions thereof.
ARTICLE 5. INCORPORATOR
The name and mailing address of the incorporator (the
"Incorporator") are Corporation Service Company, 1013 Centre Road, Wilmington,
Delaware 19805. The powers of the Incorporator shall terminate upon the filing
of this Certificate of Incorporation.
ARTICLE 6. BOARD OF DIRECTORS
ARTICLE 6.1. NUMBER; ELECTION; AND CLASSIFICATION
The number of directors of the Corporation shall be not less
than two nor more than eleven directors, the exact number of directors
to be fixed from time to time by or in the manner provided in the bylaws of the
Corporation. The directors of the Corporation shall be divided into three
classes, each consisting of approximately one-third of the total number of
directors. The term of office of each class shall be three years and shall
expire in successive years at the time of the annual meeting of stockholders.
Upon the filing in the Office of the Secretary of State of Delaware of the
Certificate of Amendment of Certificate of Incorporation of the Corporation,
whereby this Article 6.1 is amended to read as set forth herein, the classes of
directors are as follows:
Class I (terms of office expiring at the 1998 annual meeting of
stockholders) -- Paul J. Klaassen and Richard Doppelt;
Class II (terms of office expiring at the 1999 annual meeting
of stockholders) -- Teresa M. Klaassen, Ronald V. Aprahamian and Darcy Moore;
and
Class III (terms of office expiring at the 1997 annual meeting
of stockholders) -- David W. Faeder, Thomas Donohue and Scott Meadow.
At each annual meeting of stockholders, the successors to the class of
directors whose term shall then expire shall be elected to hold office for a
term expiring at the third succeeding annual meeting and until their successors
shall be elected and qualified. Unless and except to the extent that the
bylaws of the Corporation shall otherwise require, the election of directors of
the Corporation need not be by written ballot.
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 vote of a majority of the directors then in office,
whether or not a quorum, or by a sole remaining director, 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
- 3 -
<PAGE> 4
and until such director's successor shall have been elected and qualified. No
director may be removed except for cause and then only by an affirmative vote
of the holders of at least a majority of the outstanding shares of stock of the
Corporation entitled to vote thereon at a duly constituted meeting of
stockholders called for such purpose. At least 30 days prior to such meeting
of stockholders, written notice shall be sent to the director or directors
whose removal shall be considered at such meeting.
6.1. MANAGEMENT OF BUSINESS AND AFFAIRS OF THE CORPORATION
The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors.
6.2. LIMITATION OF LIABILITY
No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this provision shall not eliminate or limit
the liability of a director (a) for any breach of the director's duty of
loyalty to the Corporation or its stockholders; (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (c) under Section 174 of the Delaware General Corporation Law; or (d) for
any transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article 6.3 shall be prospective only and
shall not adversely affect any right or protection of, or any limitation on the
liability of, a director of the Corporation existing at, or arising out of
facts or incidents occurring prior to, the effective date of such repeal or
modification.
ARTICLE 7. COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders of any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of Section 279 of Title 8 of
the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
ARTICLE 8. AMENDMENT OF BYLAWS
The Board of Directors or the stockholders may from time to
time adopt, amend or repeal the by-laws of the Corporation. Such action by the
Board of Directors shall require the affirmative vote of at least two-thirds of
the directors then in office at a duly constituted meeting of the Board of
Directors called for such purpose. Such action by the stockholders shall
require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of stock of the Corporation entitled to vote thereon at a
duly constituted meeting of stockholders called for such purpose.
- 4 -
<PAGE> 5
ARTICLE 9. RESERVATION OF RIGHT TO AMEND CERTIFICATE OF INCORPORATION
The Corporation reserves the right at any time, and from time
to time, to amend, alter, change, or repeal any provision contained in this
Certificate of Incorporation, and other provisions authorized by the laws of
the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by law; and all rights, preferences, and
privileges of any nature conferred upon stockholders, directors, or any other
persons by and pursuant to this Certificate of Incorporation in its present
form or as hereafter amended are granted subject to the rights reserved in this
Article 9.
ARTICLE 10. STOCKHOLDER MATTERS
10.1. CONSENT IN LIEU OF MEETING
Any action required or permitted to be taken by the
stockholders of the Corporation 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.
10.2. CALL OF SPECIAL MEETINGS
Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the Board of
Directors, the Chairman of the Board or the President of the Corporation, and
shall be called by the President or the Secretary of the Corporation at the
request in writing of stockholders possessing at least 25 percent of the voting
power of the issued and outstanding voting stock of the Corporation entitled to
vote generally for the election of directors. Such request shall include a
statement of the purpose or purposes of the proposed meeting.
- 5 -
<PAGE> 6
ARTICLE 11. OTHER CONSTITUENCIES
The Board of Directors of the Corporation, when evaluating any
offer, bid, proposal, or similar communication of another party to (a) make a
tender or exchange offer for any equity security of the Corporation, (b) merge
or consolidate the Corporation with or into another corporation or
corporations, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the Corporation, shall, in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its stockholders, give due consideration to all relevant
factors, including, without limitation, the social, economic and regulatory
effects on the Corporation, on employees, providers and payors of the
Corporation and its subsidiaries, on residents and families served by the
Corporation and its subsidiaries, on operations of the Corporation's
subsidiaries and on the communities in which the Corporation and its
subsidiaries operate or are located.
ARTICLE 12. AMENDMENT OF CERTIFICATE OF INCORPORATION
Except as set forth in this Article 12 or as otherwise
specifically required by law, no amendment of any provision of this Certificate
of Incorporation shall be made unless such amendment has been first proposed by
the Board of Directors of the Corporation upon the affirmative vote of at least
two-thirds of the directors then in office at a duly constituted meeting of the
Board of Directors called for such purpose and thereafter approved by
stockholders of the Corporation by the affirmative vote of the holders of at
least a majority of the outstanding shares of stock of the Corporation entitled
to vote thereon; provided, however, if such amendment is to the provisions set
forth in this clause of Article 12 or in Articles 4.1 (insofar as relating to
the authorized number of shares of Preferred Stock), 4.3, 6, 8, 10 or 11
hereof, such amendment must be approved by the affirmative vote of the holders
of at least two-thirds of the outstanding shares of stock of the Corporation
entitled to vote thereon rather than a majority of such shares.
4. This Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the corporation in accordance with the
applicable provisions of Section 245 of the General Corporation Law of the
State of Delaware.
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IN WITNESS WHEREOF, Sunrise Assisted Living, Inc. has caused
this Restated Certificate of Incorporation to be signed by its duly authorized
officer, as of the 5th day of June, 1996.
SUNRISE ASSISTED LIVING, INC.
By: /s/ PAUL J. KLAASSEN
-----------------------------------
Paul J. Klaassen
Chairman of the Board, President
and Chief Executive Officer
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<PAGE> 8
Exhibit A
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
of
SUNRISE ASSISTED LIVING, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Sunrise Assisted Living, Inc., a corporation organized under
the laws of the State of Delaware (the "Corporation"), hereby certifies that,
pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation, as amended, of the said Corporation, the said
Board of Directors on April 25, 1996, adopted the following resolution creating
a series of 30,000 shares of Preferred Stock designated as Series C Junior
Participating Preferred Stock:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (the "Board") in accordance with
the provisions of its Certificate of Incorporation, as amended, a series of
Preferred Stock of the Corporation be and it hereby is created, and that the
designation and amount thereof and the voting rights or powers, preferences and
relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations or restrictions thereof are as
follows:
Section 1. Designation and Amount. The shares of such
series, par value $0.01 per share, shall be designated as "Series C Junior
Participating Preferred Stock" and the number of shares constituting such
series shall be 30,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series C Junior Participating Preferred Stock to a
number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights
or warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series C Junior Participating Preferred Stock.
<PAGE> 9
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders
of any shares of any series of Preferred Stock ranking prior and superior to
the shares of Series C Junior Participating Preferred Stock with respect to
dividends, the holders of shares of Series C Junior Participating Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the 15th day of April, July, October and January, in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after first
issuance of a share or fraction of a share of Series C Junior Participating
Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $10.00 or (b) subject to the provision for adjustment
hereinafter set forth, 1,000 times the aggregate per share amount of all cash
dividends, and 1,000 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions, other than a dividend payable in
shares of common stock, par value $.01 per share, of the Corporation (the
"Common Stock"), or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series C Junior Participating Preferred Stock. In the
event the Corporation shall at any time after April 25, 1996 (the "Rights
Declaration Date") (i) declare or pay any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series C Junior
Participating Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or
distribution on the Series C Junior Participating Preferred Stock as provided
in paragraph (A) above immediately after it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $10.00 per share on the Series C Junior Participating Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series C Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series C Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date set for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Series C Junior Participating Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which event such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series C
Junior Participating Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series C Junior Participating Preferred
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<PAGE> 10
stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 60 days prior to the date
fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series
C Junior Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter
set forth, each share of Series C Junior Participating Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a vote of
the stockholders of the Corporation. In the event the Corporation shall at any
time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series C Junior Participating Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided by law, the holders of
shares of Series C Junior Participating Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation.
(C) Except as set forth herein, holders of Series C Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever dividends or distributions payable on the
Series C Junior Participating Preferred Stock as provided in Section 2 are not
paid, thereafter and until such dividends and distributions, whether or not
declared, on shares of Series C Junior Participating Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, or make any
other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series C Junior
Participating Preferred Stock; or
(ii) declare or pay dividends on, or make any
other distributions on, any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series C
Junior Participating Preferred Stock, except dividends paid ratably on the
Series C Junior Participating Preferred Stock and all such parity stock on
which dividends are payable in proportion to the total amounts to which the
holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series C Junior
Participating Preferred Stock, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior (either as
to dividends or upon dissolution, liquidation or winding up) to the Series C
Junior Participating Preferred Stock; or
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<PAGE> 11
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series C Junior Participating Preferred Stock, or
any shares of stock ranking on a parity with the Series C Junior Participating
Preferred Stock, except in accordance with a purchase offer made in writing or
by publication (as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series C
Junior Participating Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued as
part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Series C Junior
Participating Preferred Stock shall have received $85,000 per share, plus any
unpaid dividends and distributions payable thereon, whether or not declared, to
the date of such payment (the "Series C Liquidation Preference"). Following
the payment of the full amount of the Series C Liquidation Preference, no
additional distributions shall be made to the holders of Series C Junior
Participating Preferred Stock unless, prior thereto, the holders of shares of
Common Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series C Liquidation
Preference by (ii) 1,000 (as appropriately adjusted as set forth in
subparagraph (C) below to reflect such events as stock splits, stock dividends
and recapitalizations with respect to the Common Stock) (such number in clause
(ii) immediately above being referred to as the "Adjustment Number").
Following the payment of the full amount of the Series C Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series C
Junior Participating Preferred Stock and Common Stock, respectively, holders of
Series C Junior Participating Preferred Stock and holders of shares of Common
Stock shall receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment Number to one (1) with
respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series C Liquidation
Preference and the liquidation preferences of all other series of preferred
stock, if any, which rank on a parity with the Series C Junior Participating
Preferred Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are sufficient assets available
to permit
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<PAGE> 12
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any
such case the shares of Series C Junior Participating Preferred Stock shall at
the same time be similarly exchanged or changed in an amount per share (subject
to the provision for adjustment hereinafter set forth) equal to 1,000 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series C Junior Participating
Preferred Stock shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 8. Redemption. The outstanding shares of Series C
Junior Participating Preferred Stock may be redeemed as a whole, but not in
part, at any time, or from time to time, at the option of the Board, at a cash
price per share equal to 105 percent of (i) the product of the Adjustment
Number times the Average Market Value (as such term is hereinafter defined) of
the Common Stock, plus (ii) all dividends which on the redemption date are
payable on the shares to be redeemed and have not been paid or declared, and a
sum sufficient for the payment thereof set apart, without interest. The
"Average Market Value" is the average of the closing sale prices of the Common
Stock during the 30 day period immediately preceding the date before the
redemption date on the Composite Tape for New York Stock Exchange Listed
Stocks, or, if such stock is not quoted on the Composite Tape, on the New York
Stock Exchange, or, if such stock is not listed on such Exchange, on the
principal United States securities exchange registered under the Securities
Exchange Act of 1934, as amended, on which such stock is listed, or, if such
stock is not listed on any such exchange, the average of the closing sale
prices with respect to a share of Common Stock during such 30 day period, as
quoted on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such quotations are
available, the fair market value of the Common Stock as determined by the Board
in good faith.
Section 9. Ranking. Notwithstanding anything contained
herein to the contrary, the Series C Junior Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to
voting rights, the payment of dividends and the distribution of assets in
liquidation, unless the terms of any such series shall provide otherwise.
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<PAGE> 13
Section 10. Amendment. The Certificate of Incorporation,
as amended, of the Corporation shall not be further amended in any manner which
would materially alter or change the powers, preferences or special rights of
the Series C Junior Participating Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least a majority of
the outstanding shares of Series C Junior Participating Preferred Stock, voting
separately as a class.
Section 11. Fractional Shares. Series C Junior
Participating Preferred Stock may be issued in fractions of a share which shall
entitle the holders, in proportion to such holders fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series C Junior
Participating Preferred Stock.
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<PAGE> 14
IN WITNESS WHEREOF, Sunrise Assisted Living, Inc. has caused
this Certificate of Designation to be executed as of May 15, 1996.
SUNRISE ASSISTED LIVING, INC.
By: /s/ THOMAS B. NEWELL
------------------------------
Thomas B. Newell
Executive Vice President
and General Counsel
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<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
SUNRISE ASSISTED LIVING, INC.
1. OFFICES
1.1. REGISTERED OFFICE
The initial registered office of the Corporation shall be in
Wilmington, Delaware, and the initial registered agent in charge thereof shall
be Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805.
1.2. OTHER OFFICES
The Corporation may also have offices at such other places,
both within and without the State of Delaware, as the Board of Directors may
from time to time determine or as may be necessary or useful in connection with
the business of the Corporation.
2. MEETINGS OF STOCKHOLDERS
2.1. PLACE OF MEETINGS
All meetings of the stockholders shall be held at such place
as may be fixed from time to time by the Board of Directors, the Chairman of
the Board or the President.
2.2. ANNUAL MEETINGS
The Corporation shall hold annual meetings of stockholders,
commencing with the year 1995, on such date and at such time as shall be
designated from time to time by the Board of Directors, the Chairman of the
Board or the President, at which stockholders shall elect successors to that
class of directors whose terms shall have expired and transact such other
business as may properly be brought before the meeting.
2.3. SPECIAL MEETINGS
Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the Board of
Directors, the Chairman of the Board or the President of the Corporation, and
shall be called by the President or the Secretary of the Corporation at the
request in writing of stockholders possessing at least 25 percent of the voting
power of the issued and outstanding voting stock of the Corporation entitled to
vote generally for the election of directors. Such request shall include a
statement of the purpose or purposes of the proposed meeting.
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<PAGE> 2
2.4. NOTICE OF MEETINGS
Notice of any meeting of stockholders, stating the place, date
and hour of the meeting, and (if it is a special meeting) the purpose or
purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than ten nor more than sixty days
before the date of the meeting (except to the extent that such notice is waived
or is not required as provided in the General Corporation Law of the State of
Delaware (the "Delaware General Corporation Law") or these Bylaws). Such
notice shall be given in accordance with, and shall be deemed effective as set
forth in, Section 222 (or any successor section) of the Delaware General
Corporation Law.
2.5. WAIVERS OF NOTICE
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation of the Corporation (which shall include any
amendments thereto and shall be hereinafter referred to as so amended as the
"Certificate of Incorporation") or these Bylaws, a waiver thereof, in writing
and delivered to the Corporation, signed by the person or persons entitled to
said notice, whether before or after the event as to which such notice is
required, shall be deemed equivalent to notice. Attendance of a stockholder at
a meeting shall constitute a waiver of notice (1) of such meeting, except when
the stockholder at the beginning of the meeting objects to holding the meeting
or transacting business at the meeting, and (2) (if it is a special meeting) of
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the stockholder
objects to considering the matter at the beginning of the meeting.
2.6. BUSINESS AT SPECIAL MEETINGS
Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice (except to the extent
that such notice is waived or is not required as provided in the Delaware
General Corporation Law or these Bylaws).
2.7. LIST OF STOCKHOLDERS
After the record date for a meeting of stockholders has been
fixed, at least ten days before such meeting, the officer who has charge of the
stock ledger of the Corporation shall make a list of all stockholders entitled
to vote at the meeting, arranged in alphabetical order and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder for
any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place in the city
where the meeting is to be held, which place is to be specified in the notice
of the meeting, or at the place where the meeting is to be held. Such list
shall also, for the duration of the meeting, be produced and kept open to the
examination of any stockholder who is present at the time and place of the
meeting.
2.8. QUORUM AT MEETINGS
Stockholders may take action on a matter at a meeting only if
a quorum exists with respect to that matter. Except as otherwise provided by
statute or by the Certificate of Incorporation, the holders of a majority of
the shares entitled to vote at the meeting, and who are present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. Where a separate vote by a class
or classes is required, the holders of a majority of the outstanding shares of
such class or classes, who are present in person or represented by proxy, shall
constitute a quorum entitled to take action on that matter. Once a share is
represented for any purpose at a meeting (other than solely to object (1) to
holding the meeting or transacting business at the meeting, or (2) (if it is a
special meeting) to consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the meeting notice), it is
deemed present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record
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<PAGE> 3
date is or must be set for the adjourned meeting. The holders of a majority of
the voting shares represented at a meeting, whether or not a quorum is present,
may adjourn such meeting from time to time.
3
<PAGE> 4
2.9. VOTING AND PROXIES
Unless otherwise provided in the Delaware General
Corporation Law or in the Corporation's Certificate of Incorporation, and
subject to the other provisions of these Bylaws, each stockholder shall be
entitled to one vote on each matter, in person or by proxy, for each share of
the Corporation's capital stock that has voting power and that is held by such
stockholder. No proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed
appointment of proxy shall be irrevocable if the appointment form states that
it is irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power.
2.10. REQUIRED VOTE
When a quorum is present at any meeting of stockholders, all
matters shall be determined, adopted and approved by the affirmative vote
(which need not be by ballot) of the holders of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote
with respect to the matter, unless the proposed action is one upon which, by
express provision of statutes or of the Certificate of Incorporation, a
different vote is specified and required, in which case such express provision
shall govern and control the decision of such question. Where a separate vote
by a class or classes is required, the affirmative vote of the holders of a
majority of the shares of such class or classes present in person or
represented by proxy at the meeting shall be the act of such class, unless the
proposed action is one upon which, by express provision of statutes or of the
Certificate of Incorporation, a different vote is specified and required, in
which case such express provision shall govern and control the decision of
such question. Notwithstanding the foregoing, directors shall be elected by a
plurality of the votes of the shares present in person or represented by proxy
at the meeting and entitled to vote on the election of directors.
2.11. ACTION WITHOUT A MEETING
Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of such stockholders and may not be effected by any consent in
writing by such stockholders, unless such consent is unanimous.
2.12. BUSINESS AT ANNUAL MEETING
At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, a stockholder must
have given timely notice thereof in writing to the Secretary of the
Corporation.
To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 60 days prior to the meeting; provided, however, that in the event
that less than 75 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the
15th day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. A stockholder's notice
to the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting (a) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (c) the class
and
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<PAGE> 5
number of shares of the Corporation's stock which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
No later than the tenth day following the date of receipt of a stockholder
notice pursuant to this Section 2.12, the Chairman of the Board of Directors of
the Corporation shall, if the facts warrant, determine and notify in writing
the stockholder submitting such notice that such notice was not made in
accordance with the time limits and/or other procedures prescribed by the
Bylaws. If no such notification is mailed to such stockholder within such
ten-day period, such stockholder notice containing a matter of business shall
be deemed to have been made in accordance with the provisions of this Section
2.12. Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the
procedures set forth in this Section 2.12.
3. DIRECTORS
3.1. POWERS
The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors, which may exercise
all such powers of the Corporation and do all such lawful acts and things,
subject to any limitation set forth in the Certificate of Incorporation or as
otherwise may be provided in the Delaware General Corporation Law. The Board
of Directors shall annually elect a Chairman of the Board from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings. If neither the Chairman of the Board
nor the President is present, the Board of Directors may designate another
officer to preside at such meeting. The Chairman of the Board and the
President may be the same person. The Board of Directors may also annually
elect one or more Vice Chairmen from among its members, with such duties as the
Board of Directors shall from time to time prescribe.
3.2. NUMBER, CLASSES, ELECTION AND TERM OF OFFICE
As of the closing of the Corporation's initial public
offering of equity securities under the Securities Act of 1933, as amended, the
total number of directors which shall constitute the entire Board of Directors
shall be eight. The term "entire Board of Directors" as used herein shall mean
the total number of directors constituting the entire Board of Directors
irrespective of the number of directors then in office or vacancies.
Thereafter, the total number of directors constituting the entire Board of
Directors shall be determined by resolution of the Board of Directors passed by
the affirmative vote of at least two-thirds of the directors then in office,
provided, that such number shall be consistent with the minimum and maximum
number of directors set forth in the Certificate of Incorporation. Directors
shall be divided into three classes, each consisting of approximately one-third
of the total number of directors, as provided in the Certificate of
Incorporation. At the 1995 annual meeting of stockholders and at each
subsequent annual meeting of stockholders, directors elected to succeed those
whose terms are expiring shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders and when their respective
successors are duly elected and qualified. Directors shall be elected at
annual meetings of the stockholders, except as provided in Section 3.3 hereof,
and each director elected shall hold office until his successor is elected and
qualified or until his earlier death, resignation or removal. Directors need
not be stockholders.
3.3. VACANCIES
Vacancies and newly created directorships resulting from any increase
in the authorized number of directors elected by all of the stockholders having
the right to vote as a single class may be filled by a majority of the
directors then in office, although fewer than a quorum, or by a sole remaining
director. Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
Certificate of Incorporation, vacancies and newly created directorships of such
class or classes
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or series may be filled by a majority of the directors elected by such class or
classes or series thereof then in office, or by the sole remaining director so
elected. Each director so chosen shall hold office until the next election of
the class for which such director shall have been chosen, and until such
director's successor is elected and qualified, or until the director's earlier
resignation or removal. In the event that one or more directors resigns from
the Board, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office until the next election of the class for which such director shall have
been chosen, and until such director's successor is elected and qualified, or
until the director's earlier resignation or removal.
3.4. MEETINGS
3.4.1. REGULAR MEETINGS
Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board of Directors.
3.4.2. SPECIAL MEETINGS
Special meetings of the Board may be called by the
Chairman of the Board or President on one day's notice to each director, either
personally or by telephone, express delivery service (so that the scheduled
delivery date of the notice is at least one day in advance of the meeting),
telegram or facsimile transmission, and on five days' notice by mail (effective
upon deposit of such notice in the mail). The notice need not describe the
purpose of a special meeting.
3.4.3. TELEPHONE MEETINGS
Members of the Board of Directors may participate in a
meeting of the Board by any communication by means of which all participating
directors can simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
3.4.4. ACTION WITHOUT MEETING
Any action required or permitted to be taken at any
meeting of the Board of Directors may be taken without a meeting if the action
is taken by all members of the Board. The action must be evidenced by one or
more written consents describing the action taken, signed by each director, and
delivered to the Corporation for inclusion in the minute book.
3.4.5 WAIVER OF NOTICE OF MEETING
A director may waive any notice required by statute, the
Certificate of Incorporation or these Bylaws before or after the date and time
stated in the notice. Except as set forth below, the waiver must be in writing,
signed by the director entitled to the notice, and delivered to the Corporation
for inclusion in the minute book. Notwithstanding the foregoing, a director's
attendance at or participation in a meeting waives any required notice to the
director of the meeting unless the director at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting and does
not thereafter vote for or assent to action taken at the meeting.
3.5. QUORUM AND VOTE AT MEETINGS
At all meetings of the Board, a quorum of the Board of
Directors consists of the presence of a majority of the total number of
directors constituting the entire Board of Directors. The affirmative vote of
a
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majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, the Certificate of Incorporation or these
Bylaws.
3.6. COMMITTEES OF DIRECTORS
The Board of Directors may by resolution designate one or
more committees, each committee to consist of one or more of the directors of
the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. If a member of a committee shall be absent from
any meeting, or disqualified from voting thereat, the remaining member or
members present and not disqualified from voting, whether or not such member or
members constitute a quorum, may, by unanimous vote, appoint another member of
the Board of Directors to act at the meeting in the place of such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of
shares of stock adopted by the Board of Directors pursuant to Section 151(a) of
the Delaware General Corporation Law, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of any shares of any series), adopting an agreement of
merger or consolidation pursuant to Sections 251, 252, 257, 258, 263 or 264 of
the Delaware General Corporation Law, recommending to the stockholders the
sale, lease or exchange of all or substantially all of the Corporation's
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the Bylaws; and
unless the resolutions, these Bylaws or the Certificate of Incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to Section 253 of the Delaware
General Corporation Law. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the Board
of Directors. Unless otherwise specified in the resolution of the Board of
Directors designating the committee, at all meetings of each such committee of
directors, a majority of the members of the committee shall constitute a quorum
for the transaction of business, and the affirmative vote of a majority of the
members of the committee present at any meeting at which there is a quorum
shall be the act of the committee. Each committee shall keep regular minutes
of its meetings and report the same to the Board of Directors, when required.
3.7. COMPENSATION OF DIRECTORS
The Board of Directors shall have the authority to fix
the compensation of directors. No such payment shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
3.8. NOMINEES
Only persons who are nominated in accordance with the
procedures set forth in this Section 3.8 shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the Corporation entitled to
vote for the election of directors at the meeting who complies with notice
procedures set forth in this Section 3.8. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant
to timely notice in writing to the Secretary of the Corporation.
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To be timely, a stockholder notice shall be delivered to or mailed and received
at the principal executive office of the Corporation not less than 60 days
prior to the meeting; provided, however, that in the event that less than 75
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 15th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation's stock which are beneficially
owned by such person, and (iv) any other information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including without
limitation such person's written consent to be named in the proxy statement as
a nominee and to serving as a director if elected); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such stockholder and (ii) the class and number of
shares of the Corporation's stock which are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the
Secretary of the Corporation that information required to be set forth in the
stockholder's notice of nomination which pertains to the nominee. No later
than the tenth day following the date of receipt of a stockholder nomination
submitted pursuant to this Section 3.8, the Chairman of the Board of Directors
of the Corporation shall, if the facts warrant, determine and notify in writing
the stockholder making such nomination that such nomination was not made in
accordance with the time limits and/or other procedures prescribed by the
bylaws. If no such notification is mailed to such stockholder within such
ten-day period, such nomination shall be deemed to have been made in accordance
with the provisions of this Section 3.8. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 3.8.
4. OFFICERS
4.1. POSITIONS
The officers of the Corporation shall be a Chairman of
the Board, a President and Chief Executive Officer, a Chief Financial Officer,
a Secretary and a Treasurer, and such other officers as the Board of Directors
from time to time may appoint, including one or more Vice Chairpersons, a Chief
Operating Officer, Executive Vice Presidents, a General Counsel, Senior Vice
Presidents, Vice Presidents, Assistant Secretaries and Assistant Treasurers.
Each such officer shall exercise such powers and perform such duties as shall
be set forth below and such other powers and duties as from time to time may be
specified by the Board of Directors or by any officer(s) authorized by the
Board of Directors to prescribe the duties of such other officers. Any number
of offices may be held by the same person, except that in no event shall the
President and the Secretary be the same person. Each of the Chairman of the
Board, the President and Chief Executive Officer, the Chief Operating Officer,
the Chief Financial Officer, and/or any Executive Vice President or Senior Vice
President may execute bonds, mortgages and other documents under the seal of
the Corporation, except where required or permitted by law to be otherwise
executed and except where the authorization therefor shall be expressly
delegated by the Board of Directors to some other officer or agent of the
Corporation.
4.2. CHAIRMAN OF THE BOARD
The Chairman of the Board shall (when present) preside at all meetings
of the Board of Directors and stockholders and shall ensure that all orders and
resolutions of the Board of Directors are carried into effect. Unless the
Board shall designate a person other than the Chairman as the President and
Chief Executive Officer, the Chairman of the Board shall also be the President
and Chief Executive Officer of the Corporation, and as
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such shall have overall executive responsibility and authority for management
of the business, affairs and operations of the Corporation (subject to the
authority of the Board of Directors). As President and Chief Executive
Officer, the Chairman of the Board shall, in general, perform all duties
incident to the office of a president and chief executive officer of a
corporation, including those duties customarily performed by persons holding
such offices, and shall perform such other duties as, from time to time, may be
assigned to him or her by the Board of Directors.
4.3. PRESIDENT AND CHIEF EXECUTIVE OFFICER
The President shall be the Chief Executive Officer of the Corporation
and as such shall have overall executive responsibility and authority for
management of the business, affairs and operations of the Corporation (subject
to the authority of the Board of Directors), and, in general, shall perform all
duties incident to the office of a president and chief executive officer of a
corporation, including those duties customarily performed by persons holding
such offices, and shall perform such other duties as, from time to time, may be
assigned to him or her by the Board of Directors.
4.4. CHIEF FINANCIAL OFFICER
The Chief Financial Officer of the Corporation shall have
general charge and supervision of the financial affairs of the Corporation,
including budgetary, accounting and statistical methods, and shall approve
payment, or designate others serving under him to approve for payment, all
vouchers and warrants for disbursements of funds, and, in general, shall
perform such other duties as are incident to the office of a chief financial
officer of a corporation, including those duties customarily performed by
persons occupying such office, and shall perform such other duties as, from
time to time, may be assigned to him or her by the Board of Directors or the
President and Chief Executive Officer.
4.5. CHIEF OPERATING OFFICER
The Chief Operating Officer of the Corporation shall have
general charge and supervision of the day to day operations of the Corporation
(subject to the direction of the President and Chief Executive Officer and the
authority of the Board of Directors), and, in general, shall perform such other
duties as are incident to the office of a chief operating officer of a
corporation, including those duties customarily performed by persons occupying
such office, and shall perform such other duties as, from time to time, may be
assigned to him or her by the Board of Directors or the President and Chief
Executive Officer.
4.6. GENERAL COUNSEL
The General Counsel of the Corporation shall be
responsible for supervising the legal affairs of the Corporation, and, in
general, shall perform such other duties as are incident to the office of a
general counsel of a corporation, including those duties customarily performed
by persons occupying such office, and shall perform such other duties as, from
time to time, may be assigned to him or her by the Board of Directors or the
President and Chief Executive Officer.
4.7. VICE PRESIDENT
In the absence of the President and Chief Executive
Officer or in the event of the President and Chief Executive Officer's failure
or refusal to act, the Vice President (or in the event there be more than one
Vice President, the Vice Presidents in the order designated, or in the absence
of any designation, then in the order of their election) shall perform the
duties of the President and Chief Executive Officer, and when so acting
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shall have all the powers of, and be subject to all the restrictions upon, the
President and Chief Executive Officer. The Vice President or Vice Presidents,
in general, shall perform such other duties as are incident to the office of a
vice president of a corporation, including those duties customarily performed
by persons occupying such office, and shall perform such other duties as, from
time to time, may be assigned to him or her or them by the Board of Directors
or the President and Chief Executive Officer. The Board of Directors may
designate one or more Vice Presidents as Executive Vice Presidents or Senior
Vice Presidents.
4.8. SECRETARY
The Secretary, or an Assistant Secretary, shall attend
all meetings of the Board of Directors and all meetings of the stockholders,
and shall record all the proceedings of the meetings of the stockholders and of
the Board of Directors in a book to be kept for that purpose, and shall perform
like duties for the standing committees, when required. The Secretary shall
have custody of the corporate seal of the Corporation, and the Secretary, or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it, and when so affixed it may be attested by the signature of the
Secretary or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by such officer's signature. The
Secretary or an Assistant Secretary may also attest all instruments signed by
the President and Chief Executive Officer, the Chief Operating Officer, the
Chief Financial Officer or any Vice President. The Secretary, or an Assistant
Secretary, shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and, in general,
shall perform all duties as are incident to the office of a secretary of a
corporation, including those duties customarily performed by persons occupying
such office, and shall perform such other duties as, from time to time, may be
assigned to him or her by the Board of Directors, the President and Chief
Executive Officer, the Chief Operating Officer, the Chief Financial Officer or
any Executive Vice President.
4.9. ASSISTANT SECRETARY
The Assistant Secretary, or if there be more than one,
the Assistant Secretaries in the order determined by the Board of Directors (or
if there shall have been no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act or when requested by the Chairman of
the Board, the President and Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer or any Executive Vice President, perform
the duties and exercise the powers of the Secretary, and, in general, shall
perform all duties as are incident to the office of an assistant secretary of a
corporation, including those duties customarily performed by persons holding
such office, and shall perform such other duties as, from time to time, may be
assigned to him or her or them by the Board of Directors, the President and
Chief Executive Officer, the Chief Operating Officer, the Chief Financial
Officer, any Executive Vice President or the Secretary. An Assistant Secretary
may or may not be an officer, as determined by the Board of Directors.
4.10. TREASURER
The Treasurer shall have responsibility for the custody
of the corporate funds and securities and shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation, and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall also render to the President and Chief
Executive Officer and the Chief Operating Officer, upon request, and to the
Board of Directors at its regular meetings, or when the Board of Directors so
requires, an account of all financial transactions and of the financial
condition of the Corporation and, in general, shall perform such duties as are
incident to the office of a treasurer of a corporation, including those
customarily performed by persons occupying such office, and shall perform all
other duties as, from time to time, may be assigned to him or her by the Board
of Directors, the President and Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer or any Executive Vice President.
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4.11. ASSISTANT TREASURER
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer, and, in general, shall perform all duties as are
incident to the office of an assistant treasurer of a corporation, including
those duties customarily performed by persons occupying such office, and shall
perform such other duties as, from time to time, may be assigned to him or them
by the Board of Directors, the President and Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer, any Executive Vice President or
by the Treasurer. An Assistant Treasurer may or may not be an officer, as
determined by the Board of Directors.
4.12. TERM OF OFFICE
The officers of the Corporation shall hold office until
their successors are chosen and qualify or until their earlier resignation or
removal. Any officer may resign at any time upon written notice to the
Corporation. Any officer elected or appointed by the Board of Directors may be
removed at any time, with or without cause, by the affirmative vote of a
majority of the directors constituting the entire Board of Directors.
4.13. COMPENSATION
The compensation of officers of the Corporation shall be
fixed by the Board of Directors or by any officer(s) authorized by the Board of
Directors to prescribe the compensation of such other officers.
4.14. FIDELITY BONDS
The Corporation may secure the fidelity of any or all of
its officers or agents by bond or otherwise.
5. CAPITAL STOCK
5.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES
The shares of the Corporation shall be represented by
certificates, provided that the Board of Directors may provide by resolution
that some or all of any or all classes or series of the Corporation's stock
shall be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates, and upon request
every holder of uncertificated shares, shall be entitled to have a certificate
(representing the number of shares registered in certificate form) signed in
the name of the Corporation by the Chairman of the Board, President or any Vice
President, and by the Treasurer, Secretary or any Assistant Treasurer or
Assistant Secretary of the Corporation. Any or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
whose signature or facsimile signature appears on a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
5.2. LOST CERTIFICATES
The Board of Directors, Chairman of the Board, President
and Chief Executive Officer, Chief Financial Officer or Secretary may direct a
new certificate of stock to be issued in place of any certificate theretofore
issued by the Corporation and alleged to have been lost, stolen or destroyed,
upon the making of an
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affidavit of that fact by the person claiming that the certificate of stock has
been lost, stolen or destroyed. When authorizing such issuance of a new
certificate, the Board or any such officer may, as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or such owner's legal representative, to advertise
the same in such manner as the Board or such officer shall require and/or to
give the Corporation a bond or indemnity, in such sum or on such terms and
conditions as the Board or such officer may direct, as indemnity against any
claim that may be made against the Corporation on account of the certificate
alleged to have been lost, stolen or destroyed or on account of the issuance of
such new certificate or uncertificated shares.
5.3. RECORD DATE
5.3.1. ACTIONS BY STOCKHOLDERS
In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which record date shall not be more than sixty days
nor less than ten days before the date of such meeting. If no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting, unless the Board of Directors fixes a new
record date for the adjourned meeting.
In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which record date shall not be more than
ten days after the date upon which the resolution fixing the record date is
adopted by the Board of Directors. If no record date has been fixed by the
Board of Directors, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by the Delaware General Corporation Law,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation in the
manner prescribed by Section 213(b) of the Delaware General Corporation Law. If
no record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by the Delaware General Corporation Law, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting shall be at the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action.
5.3.2. PAYMENTS
In order that the Corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
5.4. STOCKHOLDERS OF RECORD
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The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive
dividends, to receive notifications, to vote as such owner, and to exercise all
the rights and powers of an owner. The Corporation shall not be bound to
recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise may be provided by the Delaware General
Corporation Law.
6. INDEMNIFICATION
6.1. AUTHORIZATION OF INDEMNIFICATION
Each person who was or is a party or is threatened to be made a
party to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and
whether by or in the right of the Corporation or otherwise (a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee,
partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan, shall
be (and shall be deemed to have a contractual right to be) indemnified and held
harmless by the Corporation (and any successor to the Corporation by merger or
otherwise) to the fullest extent authorized by, and subject to the conditions
and (except as provided herein) procedures set forth in the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but any such
amendment shall not be deemed to limit or prohibit the rights of
indemnification hereunder for past acts or omissions of any such person insofar
as such amendment limits or prohibits the indemnification rights that said law
permitted the Corporation to provide prior to such amendment), against all
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
ERISA taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith;
provided, however, that the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person (except for a suit or action pursuant to Section 6.2 hereof) only
if such proceeding (or part thereof) was authorized by the Board of Directors
of the Corporation. Persons who are not directors or officers of the
Corporation may be similarly indemnified in respect of such service to the
extent authorized at any time by the Board of Directors of the Corporation. The
indemnification conferred in this Section 6.1 also shall include the right to
be paid by the Corporation (and such successor) the expenses (including
attorneys' fees) incurred in the defense of or other involvement in any such
proceeding in advance of its final disposition; provided, however, that, if and
to the extent the Delaware General Corporation Law requires, the payment of
such expenses (including attorneys' fees) incurred by a director or officer in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking by or on behalf of such director
or officer to repay all amounts so paid in advance if it shall ultimately be
determined that such director or officer is not entitled to be indemnified
under this Section 6.1 or otherwise; and provided further, that, such expenses
incurred by other employees and agents may be so paid in advance upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
6.2. RIGHT OF CLAIMANT TO BRING ACTION AGAINST THE CORPORATION
If a claim under Section 6.1 is not paid in full by the
Corporation within sixty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring an action against
the Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such action. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in connection with
any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been
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tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law
for the Corporation to indemnify the claimant for the amount claimed or is
otherwise not entitled to indemnification under Section 6.1 but the burden of
proving such defense shall be on the Corporation. The failure of the
Corporation (in the manner provided under the Delaware General Corporation Law)
to have made a determination prior to or after the commencement of such action
that indemnification of the claimant is proper in the circumstances because he
or she has met the applicable standard of conduct set forth in the Delaware
General Corporation Law shall not be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
Unless otherwise specified in an agreement with the claimant, an actual
determination by the Corporation (in the manner provided under the Delaware
General Corporation Law) after the commencement of such action that the
claimant has not met such applicable standard of conduct shall not be a defense
to the action, but shall create a presumption that the claimant has not met the
applicable standard of conduct.
6.3. NON-EXCLUSIVITY
The rights to indemnification and advance payment of
expenses provided by Section 6.1 hereof shall not be deemed exclusive of any
other rights to which those seeking indemnification and advance payment of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
6.4. SURVIVAL OF INDEMNIFICATION
The indemnification and advance payment of expenses and rights
thereto provided by, or granted pursuant to, Section 6.1 hereof shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee, partner or agent and shall inure to
the benefit of the personal representatives, heirs, executors and
administrators of such person.
6.5. INSURANCE
The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, partner (limited or general) or
agent of another corporation or of a partnership, joint venture, limited
liability company, trust or other enterprise, against any liability asserted
against such person or incurred by such person in any such capacity, or arising
out of such person's status as such, and related expenses, whether or not the
Corporation would have the power to indemnify such person against such
liability under the provisions of the Delaware General Corporation Law.
7. GENERAL PROVISIONS
7.1. INSPECTION OF BOOKS AND RECORDS
Any stockholder, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records, and to make copies or extracts therefrom. A proper purpose shall mean
a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which
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authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation at its registered
office or at its principal place of business.
7.2. DIVIDENDS
The Board of Directors may declare dividends upon the
capital stock of the Corporation, subject to the provisions of the Certificate
of Incorporation and the laws of the State of Delaware.
7.3. RESERVES
The directors of the Corporation may set apart, out
of the funds of the Corporation available for dividends, a reserve or reserves
for any proper purpose and may abolish any such reserve.
7.4. EXECUTION OF INSTRUMENTS
All checks, drafts or other orders for the payment of
money, and promissory notes of the Corporation shall be signed by such officer
or officers or such other person or persons as the Board of Directors may from
time to time designate.
7.5. FISCAL YEAR
The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
7.6. SEAL
The corporate seal shall be in such form as the Board
of Directors shall approve. The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
7.7. PRONOUNS
All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine, neuter, singular or plural, as the
identity of the person or entity may require.
7.8. AMENDMENTS
The Board of Directors or the stockholders may from
time to time adopt, amend or repeal the Bylaws of the Corporation. Such action
by the Board of Directors shall require the affirmative vote of at least
two-thirds of the directors then in office at a duly constituted meeting of the
Board of Directors called for such purpose. Such action by the stockholders
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of stock of the Corporation entitled to vote thereon at a
duly constituted meeting of stockholders called for such purpose.
* * * * *
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<PAGE> 1
EXHIBIT 10.25
SUNRISE ASSISTED LIVING, INC.
1996 STOCK OPTION PLAN
SUNRISE ASSISTED LIVING, INC., a Delaware corporation (the
"Corporation"), sets forth herein the terms of this 1996 Stock Option Plan (the
"Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation
and any subsidiary thereof within the meaning of Rule 405 of Regulation C under
the Securities Act of 1933, as amended (with the term "person" as used in such
Rule 405 being defined as in Section 2(2) of such Act) (a "Subsidiary"), by
providing eligible individuals (as designated pursuant to Section 4 below) with
incentives to improve business results, by providing an opportunity to acquire
or increase a proprietary interest in the Corporation, which thereby will
create a stronger incentive to expend maximum effort for the growth and success
of the Corporation and its Subsidiaries, and will encourage such eligible
individuals to continue to serve the Corporation and its Subsidiaries, whether
as an employee, as a director, as a consultant or advisor or in some other
capacity. To this end, the Plan provides for the grant of stock options, as
set out herein.
This Plan provides for the grant of stock options (each of which
is an "Option") in accordance with the terms of the Plan. An Option may be an
incentive stock option (an "ISO") intended to satisfy the applicable
requirements under Section 422 of the Internal Revenue Code of 1986, as amended
from time to time, or the corresponding provision of any subsequently-enacted
tax statute (the "Code"), or a nonqualified stock option (an "NSO"). An Option
is an NSO to the extent that the Option would exceed the limitations set forth
in Section 7 below. An Option is also an NSO if either (i) the Option is
specifically designated at the time of grant as an NSO or not being an ISO or
(ii) the Option does not otherwise satisfy the requirements of Code Section 422
at the time of grant. Each Option shall be evidenced by a written agreement
between the Corporation and the recipient individual that sets out the terms
and conditions of the grant as further described in Section 8.
2. ADMINISTRATION
(a) BOARD
The Plan shall be administered by the Board of Directors of the
Corporation (the "Board"), which shall have the full power and authority to
take all actions and to make all determinations required or provided for under
the Plan or any Option granted or Option Agreement (as defined in Section 8
below) entered into hereunder and all such other actions and determinations not
inconsistent with the specific terms and provisions of the Plan deemed by the
Board to be necessary or appropriate to the administration of the Plan or any
Option granted or Option Agreement entered into hereunder. The interpretation
and construction by the Board of any provision of the Plan or of any Option
granted or Option Agreement entered into hereunder shall be final, binding and
conclusive.
<PAGE> 2
(b) ACTION BY COMMITTEE
The Board from time to time may appoint a Stock Option Committee
consisting of two or more members of the Board of Directors who, in the sole
discretion of the Board, may be the same Directors who serve on the
Compensation Committee, or may appoint the Compensation Committee to serve as
the Stock Option Committee (the "Committee"). The Board, in its sole
discretion, may provide that the role of the Committee shall be limited to
making recommendations to the Board concerning any determinations to be made
and actions to be taken by the Board pursuant to or with respect to the Plan,
or the Board may delegate to the Committee such powers and authorities related
to the administration of the Plan, as set forth in Section 2(a) above, as the
Board shall determine, consistent with the Restated Certificate of
Incorporation and By-Laws of the Corporation and applicable law. In the event
that the Plan or any Option granted or Option Agreement entered into hereunder
provides for any action to be taken by or determination to be made by the
Board, such action may be taken by or such determination may be made by the
Committee if the power and authority to do so has been delegated to the
Committee by the Board as provided for in this Section. Unless otherwise
expressly determined by the Board, any such action or determination by the
Committee shall be final and conclusive.
(c) NO LIABILITY
No member of the Board or of the Committee shall be liable for
any action or determination made in good faith with respect to the Plan or any
Option granted or Option Agreement entered into hereunder.
3. STOCK
The stock that may be issued pursuant to Options under the Plan
shall be shares of common stock, par value $.01 per share, of the Corporation
(the "Stock"), which shares may be treasury shares or authorized but unissued
shares. The number of shares of Stock that may be issued pursuant to Options
under the Plan shall not exceed, in the aggregate, one million five hundred
thousand (1,500,000) shares. If any Option expires, terminates, or is
terminated or canceled for any reason prior to exercise, the shares of Stock
that were subject to the unexercised, forfeited, terminated or canceled portion
of such Option shall be available immediately for future grants of Options
under the Plan.
4. ELIGIBILITY
(a) DESIGNATED RECIPIENTS
Subject to the next sentence, Options may be granted under the
Plan to (i) any employee of the Corporation or any Subsidiary (including any
such individual who is an officer or director of the Corporation or any
Subsidiary) as the Board shall determine and designate from time to time or
(ii) any consultant or advisor providing bona fide services to the Corporation
or any Subsidiary (provided that such services must not be in connection with
the offer or sale of securities in a capital-raising transaction) whose
participation in the Plan is determined by the Board to be in the best
interests of the Corporation and is so designated by the Board. Options
granted to a full-time employee of the Corporation or a "subsidiary
corporation" thereof within the meaning of Section 424(f) of the Code shall be
either ISOs or NSOs, as determined in the sole discretion of the Board, and
Options granted to any other eligible individual shall be NSOs.
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<PAGE> 3
(b) SUCCESSIVE GRANTS
An individual may hold more than one Option, subject to such
restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) EFFECTIVE DATE
The Plan shall be effective as of the date of adoption by the
Board, subject to approval of the Plan within one year of such effective date
by the affirmative vote of stockholders who hold more than fifty percent (50%)
of the combined voting power of the outstanding shares of voting stock of the
Corporation present or represented, and entitled to vote thereon at a duly
constituted stockholders' meeting, or by consent as permitted by law. Upon
approval of the Plan by the stockholders of the Corporation as set forth above,
however, all Options granted under the Plan on or after the effective date
shall be fully effective as if the stockholders of the Corporation had approved
the Plan on the Plan's effective date. If the stockholders fail to approve the
Plan within one year of such effective date, any Options granted hereunder
shall be null and void and of no effect.
(b) TERM
The Plan shall have no termination date, but no grant of an ISO
may occur after the date that is ten years after the effective date.
6. GRANT OF OPTIONS
(a) GENERAL
Subject to the terms and conditions of the Plan, the Board may,
at any time and from time to time, grant to such eligible individuals as the
Board may determine (each of the whom is an "Optionee"), Options to purchase
such number of shares of Stock on such terms and conditions as the Board may
determine, including any terms or conditions that may be necessary to qualify
such Options as ISOs under Section 422 of the Code. Such authority
specifically includes the authority, in order to effectuate the purposes of the
Plan but without amending the Plan, to modify grants to eligible individuals
who are foreign nationals or are individuals who are employed outside the
United States to recognize differences in local law, tax policy, or custom.
(b) LIMITATION ON GRANTS OF OPTIONS
The maximum number of shares subject to Options that can be
granted under the Plan to any executive officer of the Company or a Subsidiary,
or to any other person eligible for a grant of an Option under Section 4, is
250,000 shares during the first ten years after the effective date of the Plan
and 50,000 shares per year thereafter (in each case, subject to adjustment as
provided in Section 16(a) hereof).
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<PAGE> 4
7. LIMITATIONS ON INCENTIVE STOCK OPTIONS
(a) PRICE AND DOLLAR LIMITATIONS
An Option that is designated as being one that is intended to
qualify as an ISO shall qualify for treatment as an ISO only to the extent that
the aggregate fair market value (determined at the time the Option is granted)
of the Stock with respect to which all options that are intended to constitute
"incentive stock options," within the meaning of Code Section 422, are
exercisable for the first time by any Optionee during any calendar year (under
the Plan and all other plans of the Optionee's employer corporation and its
parent and subsidiary corporations within the meaning of Section 422(d) of the
Code) does not exceed $100,000.
(b) PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other
agreement, contract, or understanding heretofore or hereafter entered into by
the Optionee with the Corporation, except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this paragraph (an "Other Agreement"), and notwithstanding any
formal or informal plan or other arrangement for the direct or indirect
provision of compensation to the Optionee (including groups or classes of
participants or beneficiaries of which the Optionee is a member), whether or
not such compensation is deferred, is in cash, or is in the form of a benefit
to or for the Optionee (a "Benefit Arrangement"), if the Optionee is a
"disqualified individual," as defined in Section 280G(c) of the Code, any
Option held by that Optionee and any right to receive any payment or other
benefit under this Plan shall not become exercisable or vested (i) to the
extent that such right to exercise, vesting, payment, or benefit, taking into
account all other rights, payments, or benefits to or for the Optionee under
this Plan, all Other Agreements, and all Benefit Arrangements, would cause any
payment or benefit to the Optionee under this Plan to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the Code as
then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a
Parachute Payment, the aggregate after-tax amounts received by the Optionee
from the Corporation under this Plan, all Other Agreements, and all Benefit
Arrangements would be less than the maximum after-tax amount that could be
received by him without causing any such payment or benefit to be considered a
Parachute Payment. In the event that the receipt of any such right to
exercise, vesting, payment, or benefit under this Plan, in conjunction with all
other rights, payments, or benefits to or for the Optionee under any Other
Agreement or any Benefit Arrangement would cause the Optionee to be considered
to have received a Parachute Payment under this Plan that would have the effect
of decreasing the after-tax amount received by the Optionee as described in
clause (ii) of the preceding sentence, then the Optionee shall have the right,
in the Optionee's sole discretion, to designate those rights, payments, or
benefits under this Plan, any Other Agreements, and any Benefit Arrangements
that should be reduced or eliminated so as to avoid having the payment or
benefit to the Optionee under this Plan be deemed to be a Parachute Payment.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
agreements ("Option Agreements"), to be executed by the Corporation and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same
time need not contain similar provisions; provided, however, that all such
Option Agreements shall comply with all terms of the Plan.
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<PAGE> 5
9. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option (the "Option Price") shall be fixed by the Board and stated in each
Option Agreement. In the case of an Option intended to constitute an ISO, the
Option Price shall be not less than the greater of par value or 100 percent of
the fair market value of a share of Stock on the date on which the Option is
granted (as determined in good faith by the Board); provided, however, that in
the event the Optionee would otherwise be ineligible to receive an ISO by
reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating
to stock ownership of more than ten percent), the Option Price of an Option
that is intended to be an ISO shall not be less than the greater of par value
or 110 percent of the fair market value of a share of Stock at the time such
Option is granted. In the event that the Stock is listed on an established
national or regional stock exchange or The Nasdaq Stock Market, is admitted to
quotation on the National Association of Securities Dealers Automated Quotation
System, or is publicly traded in an established securities market, in
determining the fair market value of the Stock, the Board shall use the closing
price of the Stock on such exchange or system or in such market (the highest
such closing price if there is more than one such exchange or market) on the
trading date immediately before the Option is granted (or, if there is no such
closing price, then the Board shall use the mean between the highest bid and
lowest asked prices or between the high and low prices on such date), or, if no
sale of the Stock has been made on such day, on the next preceding day on which
any such sale shall have been made. In the case of an Option that is an NSO,
the Option Price shall not be less than par value.
10. TERM AND EXERCISE OF OPTIONS
(a) TERM
Upon the expiration of ten years from the date on which an ISO
is granted or on such date prior thereto as may be fixed by the Board and
stated in the Option Agreement relating to such Option, that ISO shall be
ineligible for treatment as an "incentive stock option," as defined in Section
422 of the Code, and shall be exercisable only as an NSO. In the event the
Optionee otherwise would be ineligible to receive an "incentive stock option"
by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code
(relating to stock ownership of more than 10 percent), such ten year
restriction on exercisability as an ISO shall be read to impose a five year
restriction on such exercisability. If an Optionee shall terminate employment
prior to the ten-year or five-year limitation described in the immediately
preceding sentences, any outstanding ISO shall be ineligible for treatment as
an "incentive stock option," as defined in Section 422 of the Code, and shall
be exercisable only as an NSO, unless exercised within three months after such
termination or, in the case of termination on account of "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code), within one
year after such termination.
(b) OPTION PERIOD AND LIMITATIONS ON EXERCISE
Each Option granted under the Plan shall be exercisable, in
whole or in part, at any time and from time to time, over a period commencing
on or after the date of grant and, to the extent that the Board determines and
sets forth a termination date for such Option in the Option Agreement
(including any amendment thereto), ending upon the stated expiration or
termination date. The Board in its sole discretion may specify events or
circumstances, including the giving of notice, which will cause an Option to
terminate as set forth in the Option Agreement or in this Plan. No Option
granted to a person who is required to file reports under Section 16(a) of the
Securities Exchange Act of 1934 (as now in effect or as hereafter amended)
shall be exercisable during the first six months after the date of grant.
Without limiting the foregoing but subject to the terms and conditions of the
Plan, the Board may in its sole discretion
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<PAGE> 6
provide that an Option may not be exercised in whole or in part for any period
or periods of time during which such Option is outstanding and may condition
exercisability (or vesting) of an Option upon the attainment of performance
objectives, upon continued service, upon certain events or transactions, or a
combination of one or more of such factors, or otherwise, as set forth in the
Option Agreement. Subject to the parachute payment restrictions under Section
7(b), however, the Board, in its sole discretion, may rescind, modify, or waive
any such limitation or condition on the exercise of an Option contained in any
Option Agreement, so as to accelerate the time at which the Option may be
exercised or extend the period during which the Option may be exercised.
Notwithstanding any other provisions of the Plan, no Option granted to an
Optionee under the Plan shall be exercisable in whole or in part prior to the
date on which the stockholders of the Corporation approve the Plan, as provided
in Section 5 above.
(c) METHOD OF EXERCISE
An Option that is exercisable hereunder may be exercised by
delivery to the Corporation on any business day, at the Corporation's principal
office, addressed to the attention of the President, of written notice of
exercise, which notice shall specify the number of shares with respect to which
the Option is being exercised and shall be accompanied by payment in full of
the Option Price of the shares for which the Option is being exercised. The
minimum number of shares of Stock with respect to which an Option may be
exercised, in whole or in part, at any time shall be the lesser of (i) 100
shares or such lesser number set forth in the applicable Option Agreement and
(ii) the maximum number of shares available for purchase under the Option at
the time of exercise. Payment of the Option Price for the shares of Stock
purchased pursuant to the exercise of an Option shall be made (i) in cash or in
cash equivalents; (ii) to the extent permitted by applicable law and under the
terms of the Option Agreement with respect to such Option, through the tender
to the Corporation of shares of Stock, which shares shall be valued, for
purposes of determining the extent to which the Option Price has been paid
thereby, at their fair market value (determined in accordance with Section 9)
on the date of exercise; (iii) to the extent permitted by applicable law and
under the terms of the Option Agreement with respect to such Option, by the
delivery of a promissory note of the person exercising the Option to the
Corporation on such terms as shall be set out in such Option Agreement; (iv) to
the extent permitted by applicable law and under the terms of the Option
Agreement with respect to such Option, by causing the Corporation to withhold
shares of Stock otherwise issuable pursuant to the exercise of an Option equal
in value to the Option Price or portion thereof to be satisfied pursuant to
this clause (iv); or (v) by a combination of the methods described in (i),
(ii), (iii), and (iv). An attempt to exercise any Option granted hereunder
other than as set forth above shall be invalid and of no force and effect.
Payment in full of the Option Price need not accompany the written notice of
exercise provided the notice directs that the Stock certificate or certificates
for the shares for which the Option is exercised be delivered to a licensed
broker acceptable to the Corporation as the agent for the individual exercising
the Option and, at the time such Stock certificate or certificates are
delivered, the broker tenders to the Corporation cash (or cash equivalents
acceptable to the Corporation) equal to the Option Price. Promptly after the
exercise of an Option and the payment in full of the Option Price of the shares
of Stock covered thereby, the individual exercising the Option shall be
entitled to the issuance of a Stock certificate or Stock certificates
evidencing his ownership of such shares. A separate Stock certificate or
separate Stock certificates shall be issued for any shares purchased pursuant
to the exercise of an Option that is an ISO, which certificate or certificates
shall not include any shares that were purchased pursuant to the exercise of an
Option that is an NSO. Unless otherwise stated in the applicable Option
Agreement, an individual holding or exercising an Option shall have none of the
rights of a stockholder (for example, the right to receive cash or stock
dividend payments attributable to the subject shares or to direct the voting of
the subject shares) until the shares of Stock covered thereby are fully paid
and issued to him. Except as provided in Section 16 below, no adjustment shall
be made for dividends or other rights for which the record date is prior to the
date of such issuance.
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<PAGE> 7
(d) DATE OF GRANT
The date of grant of an Option under this Plan shall be the date
as of which the Board approves the grant.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee, only such Optionee (or, in
the event of legal incapacity or incompetency, the guardian or legal
representative of the Optionee) may exercise the Option, except as otherwise
specifically permitted by this Section 11. No Option shall be assignable or
transferable other than by will or in accordance with the laws of descent and
distribution; provided, however, subject to the terms of the applicable Option
Agreement, and to the extent the transfer is in compliance with any applicable
restrictions on transfers, an Optionee may transfer an NSO to a family member
of the Optionee (defined as an individual who is related to the Optionee by
blood or adoption) or to a trust established and maintained for the benefit of
the Optionee or a family member of the Optionee (as determined under applicable
state law and the Code).
12. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP OF OPTIONEE
In the Board's sole discretion, the Board may include language
in an Option Agreement providing for the termination of any unexercised Option
in whole or in part upon or at any time after the termination of employment or
other relationship of the Optionee with the Corporation or a Subsidiary
(whether as an employee, a director, a consultant or advisor providing bona
fide services to the Corporation or a Subsidiary, or otherwise). Whether a
leave of absence or leave on military or government service shall constitute a
termination of employment or other relationship of the Optionee with the
Corporation or a Subsidiary for purposes of the Plan shall be determined by the
Board, which determination shall be final and conclusive.
13. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock
pursuant to the exercise of Options granted under the Plan shall constitute
general funds of the Corporation.
14. REQUIREMENTS OF LAW
The Corporation shall not be required to sell or issue any
shares of Stock under any Option if the sale or issuance of such shares would
constitute a violation by the Optionee, the individual exercising the Option,
or the Corporation of any provisions of any law or regulation of any
governmental authority, including without limitation any federal or state
securities laws or regulations. If at any time the Corporation shall
determine, in its discretion, that the listing, registration, or qualification
of any shares subject to the Option upon any securities exchange or under any
state or federal law, or the consent or approval of any government regulatory
or self-regulatory body is necessary or desirable as a condition of, or in
connection with, the issuance or purchase of shares, the Option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent, or approval shall have been effected or obtained free of any
conditions not acceptable to the Corporation, and any delay caused thereby
shall in no way affect the date of termination of the Option. Specifically in
connection with the Securities Act of 1933 (as now in effect or as hereafter
amended), upon the exercise of any Option, unless a registration statement
under such Act is in effect with respect to the shares of Stock covered
thereby, the Corporation shall not be required to
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<PAGE> 8
sell or issue such shares unless the Board has received evidence satisfactory
to it that the holder of such Option may acquire such shares pursuant to an
exemption from registration under such Act. Any determination in this
connection by the Board shall be final, binding, and conclusive. The
Corporation may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended). The Corporation shall not be obligated to take any
affirmative action in order to cause the exercisability or vesting of an Option
or to cause the exercise of an Option or the issuance of shares pursuant
thereto to comply with any law or regulation of any governmental authority. As
to any jurisdiction that expressly imposes the requirement that an Option shall
not be exercisable unless and until the shares of Stock covered by such Option
are registered or are subject to an available exemption from registration, the
exercise of such Option (under circumstances in which the laws of such
jurisdiction apply) shall be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption.
15. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend, or terminate the Plan as to any shares of Stock as to which Options
have not been granted; provided, however, that any amendment by the Board
which, if not approved by the Corporation's stockholders, would cause the Plan
to not comply with Sections 162(m) or 422 of the Code shall not be effective
unless approved by the affirmative vote of stockholders who hold more than
fifty percent (50%) of the combined voting power of the outstanding shares of
voting stock of the Corporation present or represented, and entitled to vote
thereon at a duly constituted stockholders' meeting, or by consent as permitted
by law. The Corporation, however, may retain the right in an Option Agreement
to convert an ISO into an NSO. The Corporation may also retain the right in an
Option Agreement to cause a forfeiture of the shares of Stock or gain realized
by a holder of an Option (a) if the holder violates any agreement covering
non-competition with the Corporation or any Subsidiary or nondisclosure of
confidential information of the Corporation or any Subsidiary, (b) if the
holder's employment is terminated for cause or (c) if the Board determines that
the holder committed acts or omissions which would have been the basis for a
termination of holder's employment for cause had such acts or omissions been
discovered prior to termination of holder's employment. Furthermore, the
Corporation may, in the Option Agreement, retain the right to annul the grant
of an Option, if the holder of such grant was an employee of the Corporation or
a Subsidiary and the holder's employment is terminated for cause, as defined in
the applicable Option Agreement. Except as permitted under this Section 15 or
Section 16 hereof, no amendment, suspension, or termination of the Plan shall,
without the consent of the holder of the Option, alter or impair rights or
obligations under any Option theretofore granted under the Plan.
16. EFFECT OF CHANGES IN CAPITALIZATION
(a) CHANGES IN STOCK
If the number of outstanding shares of Stock is increased or
decreased or the shares of Stock are changed into or exchanged for a different
number or kind of shares or other securities of the Corporation on account of
any recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of
consideration by the Corporation, occurring after the effective date of the
Plan, the number and kind of shares for the acquisition of which Options may be
granted under the Plan, and the limitations on the maximum number of shares
subject to Options that can be granted to any individual under the Plan as set
forth in Section 6(b) hereof, shall be adjusted
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<PAGE> 9
proportionately and accordingly by the Corporation. In addition, the number
and kind of shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the
holder of the Option immediately following such event shall, to the extent
practicable, be the same as immediately before such event. Any such adjustment
in outstanding Options shall not change the aggregate Option Price payable with
respect to shares that are subject to the unexercised portion of the Option
outstanding but shall include a corresponding proportionate adjustment in the
Option Price per share.
(b) REORGANIZATION IN WHICH THE CORPORATION IS THE
SURVIVING CORPORATION
Subject to Subsection (c)(iv) hereof, if the Corporation shall
be the surviving corporation in any reorganization, merger, or consolidation of
the Corporation with one or more other corporations, any Option theretofore
granted pursuant to the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to such Option would
have been entitled immediately following such reorganization, merger, or
consolidation, with a corresponding proportionate adjustment of the Option
Price per share so that the aggregate Option Price thereafter shall be the same
as the aggregate Option Price of the shares remaining subject to the Option
immediately prior to such reorganization, merger, or consolidation.
(c) DISSOLUTION, LIQUIDATION, SALE OF ASSETS,
REORGANIZATION IN WHICH THE CORPORATION IS NOT THE SURVIVING
CORPORATION, ETC.
The Plan and all Options outstanding hereunder shall terminate
(i) upon the dissolution or liquidation of the Corporation, or (ii) upon a
merger, consolidation, or reorganization of the Corporation with one or more
other corporations in which the Corporation is not the surviving corporation,
or (iii) upon a sale of substantially all of the assets of the Corporation to
another person or entity, or (iv) upon a merger, consolidation or
reorganization (or other transaction if so determined by the Board in its sole
discretion) in which the Corporation is the surviving corporation, that is
approved by the Board and that results in any person or entity (other than
persons who are holders of Stock of the Corporation at the time the Plan is
approved by the stockholders and other than an Affiliate) owning 80 percent or
more of the combined voting power of all classes of stock of the Corporation,
except to the extent provision is made in writing in connection with any such
transaction covered by clauses (i) through (iv) for the continuation of the
Plan or the assumption of such Options theretofore granted, 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 adjustments as
to the number and kind of shares and exercise prices, in which event the Plan
and Options theretofore granted shall continue in the manner and under the
terms so provided. In the event of any such termination of the Plan, each
individual holding an Option shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), during such period
occurring before such termination as the Board in its sole discretion shall
determine and designate, and in any event immediately before the occurrence of
such termination, to exercise such Option in whole or in part, to the extent
that such Option was otherwise exercisable at the time such termination occurs,
except that, by inclusion of appropriate language in an Option Agreement, the
Board may provide that the Option may be exercised before termination without
regard to any installment limitation or other condition on exercise imposed
pursuant to Section 10(b) above. The Corporation shall send written notice of
a transaction or event that will result in such a termination to all
individuals who hold Options not later than the time at which the Corporation
gives notice thereof to its stockholders.
(d) ADJUSTMENTS
Adjustments under this Section 16 related to stock or securities
of the Corporation shall be made by the Board, whose determination in that
respect shall be final, binding, and conclusive. No
- 9 -
<PAGE> 10
fractional shares of Stock or units of other securities shall be issued
pursuant to any such adjustment, and any fractions resulting from any such
adjustment shall be eliminated in each case by rounding downward to the nearest
whole share or unit.
(e) NO LIMITATIONS ON CORPORATION
The grant of an Option pursuant to the Plan shall not affect or
limit in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations, or changes of its capital or business
structure or to merge, consolidate, dissolve, or liquidate, or to sell or
transfer all or any part of its business or assets.
17. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ or service of or to maintain a
relationship with the Corporation or any Subsidiary, or to interfere in any way
with any contractual or other right or authority of the Corporation or any
Subsidiary either to increase or decrease the compensation or other payments to
any individual at any time, or to terminate any employment or other
relationship between any individual and the Corporation or any Subsidiary. The
obligation of the Corporation to pay any benefits pursuant to this Plan shall
be interpreted as a contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed herein. The Plan
shall in no way be interpreted to require the Corporation to transfer any
amounts to a third party trustee or otherwise hold any amounts in trust or
escrow for payment to any participant or beneficiary under the terms of the
Plan.
18. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan
to the stockholders of the Corporation for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt
such other incentive compensation arrangements (which arrangements may be
applicable either generally to a class or classes of individuals or
specifically to a particular individual or particular individuals) as the Board
in its discretion determines desirable, including, without limitation, the
granting of stock options otherwise than under the Plan.
19. CAPTIONS
The use of captions in this Plan or any Option Agreement is for
the convenience of reference only and shall not affect the meaning of any
provision of the Plan or such Option Agreement.
20. DISQUALIFYING DISPOSITIONS
If Stock acquired by exercise of an ISO granted under this Plan
is disposed of within two years following the date of grant of the ISO or one
year following the transfer of the subject Stock to the Optionee (a
"disqualifying disposition"), the holder of the Stock shall, immediately prior
to such disqualifying disposition, notify the Corporation in writing of the
date and terms of such disposition and provide such other information regarding
the disposition as the Corporation may reasonably require.
- 10 -
<PAGE> 11
21. WITHHOLDING TAXES
The Corporation shall have the right to deduct from payments
of any kind otherwise due to an Optionee any Federal, state, or local taxes of
any kind required by law to be withheld with respect to any shares issued upon
the exercise of an Option under the Plan or in connection with the purchase of
an Option by the Corporation. At the time of exercise, the Optionee shall pay
to the Corporation any amount that the Corporation may reasonably determine to
be necessary to satisfy such withholding obligation. The Board in its sole
discretion may provide in the Option Agreement that, subject to the prior
approval of the Corporation, which may be withheld by the Corporation in its
sole discretion, the Optionee may elect to satisfy such obligations, in whole
or in part, (i) by causing the Corporation to withhold shares of Stock
otherwise issuable pursuant to the exercise of an Option or (ii) by delivering
to the Corporation shares of Stock already owned by the Optionee. The shares
so delivered or withheld shall have a fair market value equal to such
withholding obligations. The fair market value of the shares used to satisfy
such withholding obligation shall be determined by the Corporation as of the
date that the amount of tax to be withheld is to be determined. An Optionee
who has made an election pursuant to this Section 21 may only satisfy his or
her withholding obligation with shares of Stock that are not subject to any
repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
22. OTHER PROVISIONS
Each Option granted under the Plan may be subject to, and the
Option Agreement relating to such Option may contain, such other terms and
conditions not inconsistent with the Plan as may be determined by the Board, in
its sole discretion. Notwithstanding the foregoing, each ISO granted under the
Plan shall include those terms and conditions that are necessary to qualify the
ISO as an "incentive stock option" within the meaning of Section 422 of the
Code or the regulations thereunder and shall not include any terms or
conditions that are inconsistent therewith.
23. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall
include the plural form, the masculine gender shall include the feminine
gender, etc., as the context requires.
24. SEVERABILITY
If any provision of the Plan or any Option Agreement shall be
determined to be illegal or unenforceable by any court of law in any
jurisdiction, the remaining provisions hereof and thereof shall be severable
and enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.
25. GOVERNING LAW
The validity and construction of this Plan and the instruments
evidencing the Options granted hereunder shall be governed by the laws of the
State of Delaware (excluding its choice of law rules).
* * *
- 11 -
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Sunrise Assisted Living, Inc.
Sunrise Assisted Living Limited Partnership
Sunrise Assisted Living Limited Partnership II
Sunrise Assisted Living Limited Partnership III
Sunrise Assisted Living Limited Partnership IV
Sunrise Assisted Living Limited Partnership V
Sunrise Assisted Living Limited Partnership VI
Sunrise Assisted Living Limited Partnership VII
Sunrise Assisted Living Limited Partnership VIII
Sunrise Terrace, Inc.
Sunrise Development, Inc.
Sunrise Village House, LLC
Independence Home Care Agency, Inc.
Sunrise Homes of Towson LLC
Sunrise at Gardner Park Limited Partnership
Sunrise of Raleigh, LLC
Sunrise East Assisted Living Limited Partnership
Sunrise of Alexandria Assisted Living, L.P.
Sunrise of Rockville Assisted Living Limited Partnership
Sunrise Huntcliff Assisted Living Limited Partnership
Sunrise Augusta Assisted Living Limited Partnership
Sunrise Columbus Assisted Living Limited Partnership
Sunrise Greenville Assisted Living Limited Partnership
Sunrise Northshore Assisted Living Limited Partnership
Sunrise of Westfield Assisted Living, LP
Sunrise Assisted Living Investments, Inc.
Sunrise Partners Limited Partnership
NAH/Sunrise Severna Park, LLC
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial,
Operating and Pro Forma Data" and "Experts" and to the use of our report dated
February 15, 1996 (except for notes 10 and 16 as to which the date is June 5,
1996) in the Registration Statement (Form S-1 No. 333-00000) 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.
October 8, 1996
<PAGE> 1
EXHIBIT 23.2
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
October 8, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated August 9, 1996 with respect to
the combined balance sheets of Laing Retirement Properties as of December 31,
1995 and 1994, and the related combined statements of operations, equity, and
cash flows for each of the years in the three-year period ended December 31,
1995 which report appears in the Registration Statement of Sunrise Assisted
Living Inc. dated October 8, 1996.
We also consent to the reference to our firm under the heading "Experts" in the
Prospectus.
KPMG Peat Marwick LLP
Atlanta, Georgia /s/ KPMG Peat Marwick LLP
October 8, 1996
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 22,712,621
<SECURITIES> 50,000,000
<RECEIVABLES> 2,074,243
<ALLOWANCES> 501,802
<INVENTORY> 0
<CURRENT-ASSETS> 76,011,610
<PP&E> 154,243,537
<DEPRECIATION> 16,772,942
<TOTAL-ASSETS> 223,967,498
<CURRENT-LIABILITIES> 9,651,423
<BONDS> 118,695,915
0
0
<COMMON> 142,446
<OTHER-SE> 92,740,556
<TOTAL-LIABILITY-AND-EQUITY> 223,967,498
<SALES> 0
<TOTAL-REVENUES> 20,999,979
<CGS> 0
<TOTAL-COSTS> 19,473,995
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 266,802
<INTEREST-EXPENSE> 5,422,059
<INCOME-PRETAX> (4,087,738)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,087,738)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (4,087,738)
<EPS-PRIMARY> .69
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