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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER: 0-20765
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SUNRISE ASSISTED LIVING, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 54-1746596
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
</TABLE>
9401 LEE HIGHWAY, SUITE 300
FAIRFAX, VIRGINIA 22031
(Address of principal executive offices)
(703) 273-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of November 6, 1996, there were 18,464,775 shares of the Registrant's Common
Stock outstanding.
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SUNRISE ASSISTED LIVING, INC.
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
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<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1996 and December 31, 1995..... 2
Consolidated Statements of Operations for the three and nine months ended
September 30, 1996 and 1995............................................... 3
Consolidated Statements of Cash Flows for the nine months ended September
30, 1996 and 1995......................................................... 4
Notes to Consolidated Financial Statements.................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................ 14
Signatures.................................................................. 15
</TABLE>
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PART I -- FINANCIAL INFORMATION
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 26,526,891 $ 6,252,449
Accounts receivable, less allowance of $604,000 and $235,000... 2,399,199 1,319,429
Short-term securities.......................................... 32,599,397 --
Prepaid and other current assets............................... 2,518,499 2,328,571
------------- ------------
Total current assets................................... 64,043,986 9,900,449
Property and equipment, net...................................... 155,528,578 104,317,117
Investment....................................................... 5,669,857 5,375,404
Restricted cash and cash equivalents............................. 1,355,225 1,260,470
Other assets..................................................... 4,205,163 2,467,421
------------- ------------
Total assets........................................... $ 230,802,809 $123,320,861
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................... $ 6,876,252 $ 6,547,122
Deferred revenue............................................... 950,067 903,711
Other current liabilities...................................... 11,391 130,669
Current portion of long-term debt.............................. 530,450 268,576
------------- ------------
Total current liabilities.............................. 8,368,160 7,850,078
Notes payable to affiliated entities............................. 1,620,838 1,735,138
Interests in unconsolidated partnerships......................... 821,449 620,014
Long-term debt, less current portion............................. 127,302,079 120,285,996
------------- ------------
Total liabilities...................................... 138,112,526 130,491,226
Minority interests............................................... 299,309 639,895
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 in
1995........................................................ -- 23,963,496
Stockholders' equity (deficit):
Common stock, $0.01 par value, 60,000,000 shares authorized,
14,255,753 and 6,019,475 shares issued and outstanding in
1996 and 1995............................................... 142,558 60,195
Contributed capital (deficiency)............................... 107,700,456 (19,733,287)
Accumulated deficit............................................ (15,452,040) (12,100,664)
------------- ------------
Total stockholders' equity (deficit)................... 92,390,974 (31,773,756)
------------- ------------
Total liabilities and stockholders' equity............. $ 230,802,809 $123,320,861
============= ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
2
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SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees........................... $10,855,583 $ 8,844,507 $30,314,062 $25,920,050
Management services income.............. 711,095 640,728 2,252,595 1,852,420
----------- ----------- ----------- -----------
11,566,678 9,485,235 32,566,657 27,772,470
Operating expenses:
Facility operating expenses............. 6,858,235 5,116,579 19,465,884 15,384,942
Facility development and pre-opening
expenses............................. 688,449 283,577 1,338,110 716,903
General and administrative.............. 2,548,780 1,636,872 6,961,984 4,355,801
Depreciation and amortization........... 1,063,270 746,609 2,866,751 2,225,868
----------- ----------- ----------- -----------
11,158,734 7,783,637 30,632,729 22,683,514
Income from operations.................... 407,944 1,701,598 1,933,928 5,088,956
Other income (expense):
Interest income......................... 1,189,024 342,374 1,889,282 948,309
Interest expense:
GECC mortgage........................ (2,019,407) (2,511,867) (6,826,726) (7,482,663)
Other debt........................... (95,591) (288,389) (710,331) (845,834)
----------- ----------- ----------- -----------
Total interest expense.......... (2,114,998) (2,800,256) (7,537,057) (8,328,497)
Total other expenses.................... (925,974) (2,457,882) (5,647,775) (7,380,188)
Equity in (losses) earnings on investments
in unconsolidated partnerships.......... (44,040) (9,677) (37,365) 38,458
Minority interest......................... 72,148 (17,605) 154,852 (36,192)
Unusual charge (Note 6)................... -- -- (981,300) --
----------- ----------- ----------- -----------
Net loss.................................. $ (489,922) $ (783,566) $(4,577,660) $(2,288,966)
=========== =========== =========== ===========
NET LOSS PER SHARE DATA (NOTE 7):
Net loss per common and common equivalent
shares.................................. $ (0.03) $ (0.59)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding.... 14,251,413 9,850,170
=========== ===========
PRO FORMA NET LOSS PER SHARE DATA (NOTE
7):
Net loss per common and common equivalent
shares.................................. $ (0.44)
===========
Weighted average number of common and
common equivalent shares outstanding.... 11,241,897
===========
</TABLE>
See accompanying notes.
3
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SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
------------ ------------
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OPERATING ACTIVITIES:
Net loss....................................................... $ (4,577,660) $ (2,288,966)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Equity in losses (earnings) on investment in unconsolidated
partnerships................................................... 37,365 (38,458)
Minority interests............................................... (154,852) 36,192
Provision for bad debts.......................................... 368,750 101,462
Depreciation and amortization.................................... 2,866,751 2,225,868
Amortization of discount on long-term debt....................... 521,600 342,750
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable.............................................. (1,448,520) (2,178,657)
Prepaid and other current assets................................. 1,556,917 150,761
Other assets..................................................... (490,739) 94,408
Increase (decrease):
Accounts payable and accrued expenses............................ 329,130 2,269,561
Deferred revenue................................................. 46,356 64,343
Other liabilities................................................ (119,278) 41,922
------------ ------------
Net cash (used in) provided by operating activities.............. (1,064,180) 821,186
INVESTING ACTIVITIES:
Increase in restricted cash and cash equivalents............... (94,755) (564,301)
Acquisition of interests in facilities......................... (18,700) --
Purchases of property and equipment............................ (52,852,904) (6,009,474)
Proceeds from disposition of property and equipment............ -- 22,889
Proceeds from maturities of investments........................ 55,482,684 --
Purchases of investments....................................... (88,376,530) (5,168,183)
Distributions from investment in unconsolidated partnerships... 182,770 188,654
------------ ------------
Net cash used in investing activities............................ (85,677,435) (11,530,415)
FINANCING ACTIVITIES:
Dividends paid................................................. (347,500) --
Net proceeds from initial public offering of common stock...... 104,295,576 --
Organization costs paid........................................ (122,542) --
Financing costs paid........................................... (1,414,923) (163,791)
Net proceeds from sale of Series A convertible preferred
stock....................................................... -- 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............................ 141,304 --
Contributions from partners.................................... -- 10,100
Distributions to partners...................................... (390,486) (9,643,850)
Additional net investments of minority interests............... (40,582) (30,294)
Additional borrowings under long-term debt..................... 23,647,473 2,415,563
Repayment of long-term debt.................................... (16,891,118) (151,727)
Advance to affiliate........................................... (1,746,845) --
Repayment of related party note payable........................ (114,300) (141,750)
------------ ------------
Net cash provided by financing activities........................ 107,016,057 12,459,844
------------ ------------
Net increase in cash and cash equivalents........................ 20,274,442 1,750,615
Cash and cash equivalents at beginning of period................. 6,252,449 8,088,655
------------ ------------
Cash and cash equivalents at end of period....................... $ 26,526,891 $ 9,839,270
============ ============
</TABLE>
See accompanying notes.
4
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SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 nine-month periods ended September 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. These consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements and the notes thereto for the year ended
December 31, 1995 included in the Company's Form S-1 (No. 333-13731). Operating
results for the three- and nine-month periods ended September 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.
2. LONG-TERM DEBT
Long-term debt was $127,832,529 at September 30, 1996, excluding notes
payable to affiliated entities, 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%.
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
September 30, 1996, the Company had closed $58,000,000 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%. As of
September 30, 1996 there were $1,435,755 of advances outstanding under this
facility. 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 one and one-half of one percent
plus the greater of (i) the lender's prime leading rate and (ii) the Federal
funds rate plus one-half of one percent. There were no amounts outstanding under
the unsecured credit facility at September 30, 1996.
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 September 20, 1996, the Company closed a $7,400,000 construction loan
commitment 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.
5
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SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. SHORT-TERM SECURITIES
At September 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 Statement of Financial
Accounting Standards No. 115. The carrying amount of these investments
approximates their market value at September 30, 1996.
4. REDEEMABLE PREFERRED STOCK
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 on June 5, 1996,
redeemed all of the 1,000,000 issued and outstanding shares of Series B
Exchangeable Preferred Stock at a redemption price of $10 per share plus accrued
dividends of $165,000.
5. STOCKHOLDERS' EQUITY (DEFICIT)
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, the Company successfully completed an initial public
offering (the "Initial Offering") of its Common Stock. A total of 5,700,000
shares were sold by the Company in the Initial Offering at a price of $20 per
share, for gross proceeds of $114,000,000. The net proceeds to the Company from
the Initial Offering, after deducting underwriting discount and offering
expenses, were approximately $104,295,576.
6. UNUSUAL CHARGE
To avoid a possible change in the Company's ability to continue to manage
two facilities resulting from the reduction in the ownership interest in the
Company of Paul J. Klaassen, the Company's Chairman of the Board, President,
Chief Executive Officer and co-founder, and Teresa M. Klaassen, the Company's
Executive Vice President and co-founder (collectively, the "Founders") following
the Initial Offering, the Company made a $1,000,000 cash payment in June 1996 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.
7. NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission (SEC) staff accounting
bulletin No. 83, options to purchase Common Stock issued at prices below the
Initial Offering price during the twelve months immediately preceding the
initial filing of the registration statement relating to the Initial Offering
have been included in the computation of net loss per share as if they were
outstanding for all periods presented prior to the Initial Offering (using the
treasury method assuming repurchase of common stock at the estimated initial
public offering price). Other shares issuable upon the exercise of stock options
or conversion of redeemable convertible preferred stock have been excluded from
the computation because the effect of their inclusion would be anti-dilutive.
Subsequent to the Company's Initial Offering, options under the treasury stock
method are included to the extent they are dilutive. Weighted average shares
used to calculate the pro forma net loss per share differs from the weighted
average on a historical basis due primarily to the inclusion of the shares of
Common Stock resulting from the assumed conversion at the beginning of the
applicable period of the Series A Convertible Preferred Stock.
6
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SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
8. 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.
9. SUBSEQUENT EVENTS
On October 8, 1996, the Company completed its purchase of five facilities
located in the southeast United States for $34,000,000 in cash. The Company
intends to finance approximately $25,000,000 of the purchase price through loans
from one or more third-party lenders at a future date. The five facilities
consist of 498 total units providing primarily independent and assisted living
services.
On October 30, 1996, the Company successfully completed a second public
offering (the "Second Offering") of its Common Stock. The Company sold a total
of 4,000,000 shares, representing 28% of the Company's outstanding Common Stock
at September 30, 1996, at a price of $24 per share, for gross proceeds of
$96,000,000. The net proceeds to the Company from the Second Offering, after
deducting underwriters discount and estimated offering expense, were
approximately $90,600,000.
The pro forma unaudited results of operation for the nine months ended
September 30, 1996 and 1995, assuming consummation of the purchase as of January
1, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
------- -------
(000'S OMITTED,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net operating revenue............................................. $40,716 $35,167
Net loss.......................................................... $(2,943) $(1,131)
Net loss per common and common equivalent share................... $ (0.42)
</TABLE>
On October 3, 1996, a subsidiary of the Company received from GMAC
Commercial Mortgage Corporation a commitment for a $51,000,000 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
variable interest rates based upon LIBOR.
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 $30,800,000
in cash. The two California properties consist of a total of 258 total units
providing assisted living (109 units) and independent living (149 units).
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 late 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.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Management's discussion and analysis contains forward-looking statements
that involve risks and uncertainties. Actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, among others, development and construction risks,
acquisitions risks, licensing risks, business conditions, risks of downturns in
economic conditions generally, satisfaction of closing conditions and
availability of financing for development and acquisitions.
OVERVIEW
The Company reported a net loss of $0.5 million, or $0.03 per share, on
revenue of $11.6 million for the three months ended September 30, 1996, compared
to a net loss of $0.8 million on revenue of $9.5 million for the three months
ended September 30, 1995. During the 1996 reporting period, the Company
completed an initial public offering ("the Initial Offering") which provided net
proceeds of $104.3 million and, on October 30, 1996, completed a second public
offering ("the Second Offering") which provided net proceeds of approximately
$90.6 million. The Company had a net loss of $4.6 million, or $0.59 per share,
on revenue of $32.6 million for the nine months ended September 30, 1996,
including an unusual charge of $1.0 million, compared to a net loss of $2.3
million on revenue of $27.8 million for the nine months ended September 30,
1995. Without the one-time unusual charge, the Company's net loss for the nine
months ended September 30, 1996 would have been $3.6 million. On October 8,
1996, the Company completed the 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. Assuming consummation of the
purchase as of January 1, 1996, the Company's net loss for the nine months ended
September 30, 1996 would have been $2.9 million or $0.42 per share.
The Company is a leading provider of assisted living services to the
elderly. The Company currently operates 33 facilities in 11 states with a
capacity of approximately 2,900 residents, including 29 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. The 1996 operations include two additional facilities, a Sunrise
model facility in Raleigh, which opened in February 1996, and the Chanate Lodge,
which was acquired in February 1996. 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.
During the next three years, the Company plans to develop at least 55 (including
one facility opened on October 28, 1996) of its model facilities in major
metropolitan and suburban markets throughout the United States. To date, 17
Sunrise model facilities are under construction. The Company anticipates that it
will use a combination of net proceeds of the Initial and Second Offerings,
existing construction lines of credit, equity and debt financing and cash
generated from operations to fund this development activity. During the next
three years, the Company also plans to acquire up to 10 additional assisted
living facilities or other properties that can be repositioned as Sunrise
assisted living facilities.
UNUSUAL CHARGE TO EARNINGS
In order to avoid a possible change in the Company's ability to continue to
manage the Annapolis and Pikesville facilities resulting from the reduction in
the Founder's ownership interest in the Company following completion of the
Initial Offering, 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 an additional 1% partnership interest 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 in the quarter ended June 30,
1996.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Operating Revenues. Operating revenue for the three months ended September
30, 1996 increased 21.9% to $11.6 million from $9.5 million for the three months
ended September 30, 1995 due primarily to the growth in resident fees. Resident
fees (including community fees and fees for Basic Care (assistance with
8
<PAGE> 10
activities of daily living and other personalized support services), Extended
Care (additional specialized care and services to residents with low acuity
medical needs), Alzheimer's Care (specialized care and services to residents
with Alzheimer's disease or other forms of dementia) and other services) for the
three months ended September 30, 1996 increased 22.7% to $10.9 million from $8.8
million in the three months ended September 30, 1995. This increase was due
primarily to inclusion of the Raleigh and Chanate Lodge facilities ($1.2
million), an increase in the average daily resident fee ($0.4 million), and an
increase in average resident occupancy. Average resident occupancy increased
from 91.8% in the three months ended September 30, 1995 to 94.4% in the three
months ended September 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"). Average 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, was 93.5% in the
three months ended September 30, 1996 compared to 89.7% in the three months
ended September 30, 1995.
The average daily resident fee (excluding community fees) for Same
Facilities increased to $85 in the three months ended September 30, 1996 from
$81 in the three months ended September 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 in the three months ended September 30, 1996
increased by $0.1 million, or 11.0%, to $0.7 million due primarily to an
increase in consulting fees. In July 1996, the Company was advised by the
Maryland housing agency that owns the three Kensington facilities managed by the
Company that another bidder had been selected to take over the management of the
facilities. The Company's existing management contract expired on September 1,
1996. Management fees received by the Company for the Kensington facilities for
the nine months ended September 30, 1996 and 1995 totaled $0.1 million for each
period.
Operating Expenses. Operating expenses for the three months ended
September 30, 1996 increased by 43.4% to $11.2 million from $7.8 million for the
three months ended September 30, 1995. The increase in operating expenses for
the quarter ended September 30, 1996 was attributable primarily to the growth in
facility operating and general and administrative expenses, including the
addition of the two new facilities.
Facility operating expenses for the three months ended September 30, 1996
increased 34.0% to $6.9 million from $5.1 million in the three months ended
September 30, 1995. As a percentage of operating revenue, facility operating
expenses in the three months ended September 30, 1996 increased to 59.3% from
53.9% in the three months ended September 30, 1995. The new Raleigh and Chanate
Lodge facilities contributed $0.4 million and $0.4 million of the increase,
respectively. Salary and benefit 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 constituted $0.4 million of the increase. The balance of $0.6 million
was comprised of increases in food, repairs, taxes, advertising and other
general expenses.
Facility development and pre-opening expenses for the quarter ended
September 30, 1996 increased $0.4 million to $0.7 million from $0.3 million for
the quarter ended September 30, 1995. This increase was primarily due to
increased labor costs of $0.2 million and $0.2 million increase in other
development expenses resulting from increased development activity.
General and administrative expenses in the three months ended September 30,
1996 increased 55.7% to $2.5 million from $1.6 million in the three months ended
September 30, 1995. As a percentage of operating revenue, general and
administrative expenses in the three months ended September 30, 1996 increased
to 22.0% from 17.3% in the three months ended September 30, 1995. Of the $0.9
million increase in general and administrative expenses in the three months
ended September 30, 1996, $0.3 million was related to labor costs attributable
to hiring additional staff. The remaining $0.6 million was attributable to a
combination of increases in marketing, consulting, taxes, telephone, travel and
other corporate expenses.
Depreciation and amortization in the three months ended September 30, 1996
compared to the three months ended in September 30, 1995 increased $0.3 million,
or 42.4%, to $1.0 million primarily due to a
9
<PAGE> 11
$0.1 million increase at the corporate level for capital expenditure purchases
and increased depreciation related to the new Raleigh and Chanate Lodge
facilities.
Other income (expense). Interest income increased to $1.2 million for
September 30, 1996 compared to $0.3 million for the three months ended September
30, 1995. This increase was due primarily to the investment of funds received
from the Initial Offering. Interest expense decreased for the three months ended
September 30, 1996 to $2.1 million from $2.8 million for the three months ended
September 30, 1995. This decrease was due to $0.1 million reduction caused by
the elimination of the 25% GECC Mortgage participation, $0.4 million from the
reduction of the interest rate on the floating rate portion of the GECC Mortgage
and prepayment of a portion of the variable rate debt in June 1996, and an
increase in capitalized interest of $0.4 million for facilities under
development offset, in part, by an increase of $0.2 million of interest from
additional borrowings.
Net loss. The Company incurred a net loss of $0.5 million for the three
months ended September 30, 1996, compared to a net loss of $0.8 million for the
three months ended September 30, 1995. The $0.3 million loss reduction was
primarily attributable to a $2.1 million increase in operating revenue and a
$1.6 million decrease in other expenses partially offset by a $3.4 million
increase in operating expenses. The Company did not recognize any income tax
expense in the three months ended September 30, 1996 because of such net loss.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1995
Operating Revenue. Operating revenue for the nine months ended September
30, 1996 increased 17.3% to $32.6 million from $27.8 million in the nine months
ended September 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 nine months ended September 30,
1996 increased 17.0% to $30.3 million from $25.9 million in the nine months
ended September 30, 1995. This increase was due primarily to the inclusion of
the Raleigh and Chanate Lodge facilities ($2.7 million) and an increase in the
average daily resident fee ($1.1 million). Average resident occupancy was 93.3%
for the nine months ended September 30, 1996 for Same Facilities compared to
91.7% for the nine months ended September 30, 1995. Average resident occupancy,
including vacancies attributable to renovations at two facilities and relocating
residents at a third facility increased to 91.3% for the nine months ended
September 30, 1996 compared to 89.9% for the nine months ended September 30,
1995.
The average daily resident fee (excluding community fees) for Same
Facilities increased to $84 in the nine months ended September 30, 1996 from $80
in the nine months ended September 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 nine months ended September 30, 1996
increased by $0.4 million, or 21.6%, to $2.3 million from $1.9 million in the
nine months ended September 30, 1995 due to an increase in consulting fees.
Operating Expenses. Operating expenses for the nine months ended September
30, 1996 increased 35.0% to $30.7 million from $22.7 million in the nine months
ended September 30, 1995. The increase in operating expenses in the nine months
ended September 30, 1996 was attributable primarily to growth in facility
operating and general and administrative expenses.
Facility operating expenses for the nine months ended September 30, 1996
increased 26.5% to $19.5 million from $15.4 million in the nine months ended
September 30, 1995. As a percentage of operating revenue, facility operating
expenses in the nine months ended September 30, 1996 increased to 59.8% from
55.4% in the nine months ended September 30, 1995. Of the $4.1 million increase
in facility operating expenses in the nine months ended September 30, 1996, $2.0
million is attributable to Raleigh and the Chanate Lodge. Increased staffing,
benefits, salaries and training at existing facilities accounted for $1.1
million. The balance of the increase, $1.0 million, was comprised of an increase
in food, bad debt, repairs, training, advertising and other general expenses.
10
<PAGE> 12
Facility development and pre-opening expenses for the nine months ended
September 30, 1996 increased $0.6 million to $1.3 million from $0.7 million in
the nine months ended September 30, 1995. This increase was primarily due to
increased labor costs resulting from increased development efforts.
General and administrative expenses in the nine months ended September 30,
1996 increased 59.8% to $7.0 million from $4.4 million in the nine months ended
September 30, 1995. As a percentage of operating revenue, general and
administrative expenses in the nine months ended September 30, 1996 increased to
21.4% from 15.7% in the nine months ended September 30, 1995. Of the $2.6
million increase in general and administrative expenses in the nine months ended
September 30, 1996, approximately 41.6% was related to labor costs, including a
$1.0 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 $1.4 million increase was
attributable to increases in accounting, marketing, consulting, public
relations, telephone, taxes, and other general expenses.
Depreciation and amortization for the nine months ended September 30, 1996
increased 28.8% to $2.9 million from $2.2 million for the nine months ended
September 30, 1995 primarily due to a $0.1 million increase at the corporate
level for additional capital expenditures and a $0.4 million increase from
depreciation on assets related to the new Raleigh facility and acquisition of
the Chanate Lodge facility.
Other income (expense). Interest income for the nine months ended
September 30, 1996 increased to $1.9 million from $0.9 million in the nine
months ended September 30, 1995 primarily due to a $0.3 million increase from
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) and a $0.6 million increase due to the
investment of funds received from the Initial Offering. Interest expense for the
nine months ended September 30, 1996 decreased 9.5% to $7.5 million from $8.3
million in the nine months ended September 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 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%.
Net loss. The Company incurred a net loss of $4.6 million for the nine
months ended September 30, 1996, compared to a net loss of $2.3 million in the
nine months ended September 30, 1995. The net loss for the nine months ended
September 30, 1996 resulted primarily from a $7.9 million increase in operating
expenses and a $1.0 million unusual charge offset by a $4.8 million increase in
operating revenue and a $1.7 million reduction of other expenses. The Company
did not recognize any income tax expense in the nine months ended September 30,
1996 because of such net loss.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had approximately $26.5 million in cash
and cash equivalents, $55.7 million in net working capital, including $32.6
million in high quality short-term investments (A1/P1 rated) with maturities no
more than 180 days, and $69.2 million of unused lines of credit.
On June 5, 1996, the Company completed its Initial Offering. The net
proceeds to the Company from the Initial Offering, after deducting underwriting
discount and offering expenses, were approximately $104.3 million. On October
30, 1996, the Company completed a second public offering (the "Second
Offering"). The net proceeds to the Company from the Second Offering, after
deducting underwriting discount and estimated offering expenses were
approximately $90.6 million. Uses of the net proceeds from the Initial Offering
included $16.6 million in partial payment of the Company's long-term debt, $10.2
million to redeem shares of Series B Exchangeable Preferred Stock and $34.0
million to acquire five facilities in southeast United States. The Company
expects to use the balance of the net proceeds from the Initial and Second
Offerings to fund continued development of up to 55 (including one facility
opened October 28, 1996) new Sunrise model facilities and up to 10 planned
acquisitions over the next three years, as well as for working capital and
general corporate purposes.
11
<PAGE> 13
The estimated cost to complete and lease up 55 new Sunrise model facilities
(including one facility opened October 28, 1996) targeted for completion over
the next three years is between $400 million and $540 million, which
substantially exceeds the net proceeds of the Initial Offering and the Second
Offering and existing working capital and financing arrangements. The Company
currently estimates that the net proceeds of the Initial Offering and the Second
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 operation do not increase as
a result of planned growth. There can be no assurance that the such financing
will be available on acceptable terms. To date, the Company has obtained zoning
approval for 24 new sites, including 17 facilities currently under construction.
The Company has also entered into contracts to purchase 13 additional sites, and
to lease two additional sites and is currently negotiating purchase terms for
the additional identified sites.
Working capital increased to $55.7 million at September 30, 1996, compared
to $2.1 million as of December 31, 1995, primarily from the net proceeds
received from the Initial Offering.
Net cash used in operating activities for the nine months ended September
30, 1996 was approximately $1.1 million, 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 used $0.2 million. Net cash
provided by operations was $0.8 million for the nine months ended September 30,
1995. The Company's unrestricted cash balances were $26.5 million and $6.3
million at September 30, 1996 and December 31, 1995, respectively.
For the nine months ended September 30, 1996 and 1995, the Company used
cash in investing activities of $85.7 million and $11.5 million, respectively.
Investing activities during 1996 included net purchases of $32.9 million in
investments and approximately $52.9 million for construction of assisted living
facilities.
Net cash provided by financing activities was $107.0 million and $12.5
million for the nine months ended September 30, 1996 and 1995, respectively.
Cash was provided by the Initial Offering, described above, as well as $23.6
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 $1.4 million
in various financing costs. All shares of Series B Exchangeable Preferred Stock
have been redeemed.
The Company 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 variable interest at rates based upon LIBOR. 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%. Construction of all 10
facilities to be financed by the lines of credit must be commenced within 18
months of the closing of the line of credit. At September 30, 1996, there were
$1,435,755 of advances outstanding under this credit facility.
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 September 20, 1996, the Company closed a $7,400,000 construction loan
commitment 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.
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
12
<PAGE> 14
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) require
consent for changes in management or control of the Company, (iv) limit, among
other things, the ability of the Company and certain subsidiaries of the Company
to borrow additional funds, dispose of assets and engage in mergers or other
business combinations, and (v) prohibit the Company from operating competing
facilities within certain distances from mortgaged facilities.
At September 30, 1996 the Company had stockholders' equity of $92.4 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
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 nine months ended September 30, 1996 of $4.6 million. At September 30, 1996,
the Company had net operating loss carryforwards for income tax purposes of
approximately $11.0 million which expire through 2011.
SUBSEQUENT EVENTS
Acquisition of Southeast Properties. On October 8, 1996, the Company
completed its acquisition of five properties located in the southeast United
States for an aggregate purchase price of $34.0 million in cash with no debt
assumed. The five facilities consist of 498 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 $8.2
million for the nine months ended September 30, 1996 and $7.4 million for the
nine months ended September 30, 1995. After giving effect to the acquisition of
these properties at the beginning of the respective periods, the Company had a
pro forma net loss of $2.9 million and $1.1 million for the nine months ended
September 30, 1996 and 1995, respectively.
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 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.
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 receivable. Advances under the credit facility will
bear variable interest at rates based upon LIBOR.
Contingent Acquisition of California Properties. On October 8, 1996, the
Company entered into a purchase agreement subject to certain conditions,
including satisfactory completion by the Company of financial, accounting,
regulatory and property due diligence over the next 60 days (the "Study
Period"), to acquire two facilities located in the Southern California for $30.8
million in cash. The two facilities consist of a total of 258 total units
providing assisted living (109 units) and independent living (149 units)
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 late 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.
13
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. EXHIBIT NAME
- ----------- ------------
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
14
<PAGE> 16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SUNRISE ASSISTED LIVING, INC.
--------------------------------------
(Registrant)
<TABLE>
<S> <C>
Date: November 12, 1996 /s/ DAVID W. FAEDER
---------------------------------------------
DAVID W. FAEDER
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: November 12, 1996 /s/ LARRY E. HULSE
---------------------------------------------
LARRY E. HULSE
CHIEF ACCOUNTING OFFICER
</TABLE>
15
<PAGE> 17
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT NAME PAGE
- ----------- ------------ ----
<C> <S> <C>
11.1 Computation of Net Loss Per Share.......................................... 17
</TABLE>
16
<PAGE> 1
EXHIBIT 11.1 COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------ -------------
<S> <C> <C>
Weighted average common shares outstanding......................... 14,251,413 9,562,138
Net effect of stock options--based on the treasury stock method.... 288,032
------------ ------------
Totals............................................................. 14,251,413 9,850,170
============ ============
Net loss........................................................... $ (489,922) $ (4,577,660)
Dividend preference attributable to Series A Convertible Preferred
Stock (Note 1)................................................... (858,000)
Dividends attributable to Series B Exchangeable Preferred Stock
(Note 2)......................................................... (347,500)
------------ ------------
Net loss attributable to common shares............................. $ (489,922) $ (5,783,160)
============ ============
Net loss per common and common equivalent shares................... $ (0.03) $ (0.59)
============ ============
PRO FORMA NET LOSS PER SHARE DATA:
Weighted average common shares outstanding......................... 9,562,138
Net effect of stock options--based on the treasury stock method.... 288,032
Adjustment to reflect conversion of Series A Convertible Preferred
Stock as of January 1, 1996...................................... 1,391,727
------------
Total.............................................................. 11,241,897
============
Net loss........................................................... $ (4,577,660)
Dividends attributable to Series B Exchangeable Preferred Stock.... (347,500)
------------
Net loss attributable to common shares............................. $ (4,925,160)
============
Pro forma net loss per common and common equivalent shares......... $ (0.44)
============
</TABLE>
- ---------------
Note 1 -- The dividend preference was eliminated upon conversion of Series A
Convertible Preferred Stock into Common Stock upon completion of the
Company's initial public offering on June 5, 1996.
Note 2 -- The Series B Exchangeable Stock was redeemed in full on June 5, 1996
using a portion of the net proceeds from the initial public offering.
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,526,891
<SECURITIES> 32,599,397
<RECEIVABLES> 3,003,199
<ALLOWANCES> 604,000
<INVENTORY> 0
<CURRENT-ASSETS> 64,043,986
<PP&E> 173,154,815
<DEPRECIATION> 17,626,237
<TOTAL-ASSETS> 230,802,809
<CURRENT-LIABILITIES> 8,368,160
<BONDS> 127,302,079
0
0
<COMMON> 142,558
<OTHER-SE> 92,248,416
<TOTAL-LIABILITY-AND-EQUITY> 230,802,809
<SALES> 0
<TOTAL-REVENUES> 32,566,657
<CGS> 0
<TOTAL-COSTS> 30,732,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 368,750
<INTEREST-EXPENSE> 7,537,057
<INCOME-PRETAX> (4,577,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,577,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,577,660)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
