<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1996.
REGISTRATION NO. 333-13731
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
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. / /
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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 23, 1996
PROSPECTUS
, 1996
5,000,000 SHARES
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 21, 1996, the last sale price of the Common Stock on the
Nasdaq National Market was $27 1/4 per share. See "Price Range of Common Stock
and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
<S> <C> <C> <C> <C>
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Per Share....................... $ $ $ $
Total(3)........................ $ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
(2) Before deducting expenses payable by the Company estimated at $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 15 additional sites and to lease two 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
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 $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......................................... 18,259,568 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>
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(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) 1,625,657 shares of Common Stock subject to outstanding
options at October 21, 1996 at a weighted average exercise price of $11.01
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 21, 1996 of $27 1/4 per
share, outstanding options and warrants represent 987,881 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 $17,075 $ 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 10,269 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) (556) (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 2,019 1,557 1,873 2,371
Managed............... 143 549 652 772 712 712 596 712 712
------- ------- ------- ------- --------- ------- ------- ---------
Total............... 718 1,616 1,941 2,245 2,269 2,731 2,153 2,585 3,083
======= ======= ======= ======= ========= ======= ======= =========
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 $141,211
Working capital.................................................................. 66,360 31,909 134,859
Total assets..................................................................... 223,968 223,968 326,918
Total debt....................................................................... 120,712 120,712 120,712
Total stockholders' equity....................................................... 92,883 92,883 195,833
</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 $103.0 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,
7
<PAGE> 9
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) require consent for changes in
management or control of the Company, (iv) 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 (v) 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
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the judicial procedures required to foreclose on real property by foreclosing on
the pledge instead, thus accelerating the lender's acquisition of the facility.
Further, because of cross-default and cross-collateralization provisions in
certain of the Company's mortgages, a default by the Company on one of its
payment obligations could adversely affect a significant number of the Company's
other properties.
BOND FINANCING. Two facilities have been financed by bonds. In order to
continue to qualify for favorable tax treatment of the interest payable on these
bonds, the facilities must comply with certain federal income tax requirements,
principally pertaining to the maximum income level of a specified portion of the
residents. Failure to satisfy these requirements constitutes an event of default
under the bonds, thereby accelerating their maturity.
COMPETITION
The long-term care industry is highly competitive and the Company believes
that the assisted living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health care
agencies, facility-based service programs, retirement communities and
convalescent centers. In general, regulatory and other barriers to competitive
entry in the assisted living industry are not substantial. In pursuing its
growth strategy, the Company expects to face competition in its efforts to
develop and acquire assisted living facilities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its business and that could
have a material adverse effect on its business, financial condition and results
of operations. Moreover, if the development of new assisted living facilities
outpaces demand for those facilities in certain markets, such markets may become
saturated. Such an oversupply of facilities could cause the Company to
experience decreased occupancy, depressed margins and lower operating results.
See "Business -- Competition."
DIFFICULTIES OF MANAGING RAPID GROWTH
The Company expects that the number of owned and operated facilities will
increase substantially as it pursues its development and acquisition programs
for new assisted living facilities. This rapid growth will place significant
demands on the Company's management resources. The Company's ability to manage
its growth effectively will require it to continue to expand its operational,
financial and management information systems and to continue to attract, train,
motivate, manage and retain key employees. If the Company is unable to manage
its growth effectively, its business, financial condition and results of
operations could be adversely affected. See "Business -- The Sunrise Strategy"
and "-- Facility Development" and "Management."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends on the services of Paul J. Klaassen, its Chairman of
the Board, President, Chief Executive Officer and co-founder; Teresa M.
Klaassen, its Executive Vice President and co-founder; and David W. Faeder, its
Executive Vice President and Chief Financial Officer. The loss of the services
of any such officers could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
depends on its ability to continue to attract and retain management personnel
who will be responsible for the day-to-day operations of its assisted living
facilities. If the Company is unable to hire qualified management personnel to
operate its assisted living facilities, the Company's business, financial
condition and results of operations could be adversely affected. See
"Management."
STAFFING AND LABOR COSTS
The Company competes with various health care services providers, including
other elderly care providers, in attracting and retaining qualified or skilled
personnel. A shortage of nurses or other trained personnel or general
inflationary pressures may require the Company to enhance its wage and benefits
package to compete effectively for personnel. In anticipation of the Company's
growth plans, the Company's general
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and administrative expenses (which consist primarily of staffing and labor
expenses, including hiring additional staff and increasing the salary and
benefits of existing staff) have increased from 7.9% of operating revenue for
1993 to 12.3% of operating revenue for 1994 and 18.5% of operating revenue for
1995. General and administrative expenses were 21.0% 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
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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,
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 $103.0 million) to fund the development and
acquisition of additional assisted living facilities and for working capital and
general corporate purposes. The Company's management will, therefore, retain
broad discretion in allocating a significant portion of the net proceeds of the
Offering. See "Use of Proceeds."
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or toxic
substances, including, without limitation, asbestos-containing materials, that
could be located on, in or under such property. Such laws and regulations often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
an entity that arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. As a result, the presence, with or without the Company's knowledge,
of hazardous or toxic substances at any property held or operated by the
Company, or acquired or operated by the Company in the future, could have an
adverse effect on the Company's business, financial condition and results of
operations. Environmental audits performed on the Company's properties have not
revealed any significant environmental liability that management believes would
have a material adverse effect on the Company's business, financial condition or
results of operations. No assurance can be given that existing environmental
audits with respect to any of the Company's properties reveal all environmental
liabilities.
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LIABILITY AND INSURANCE
The Company's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry, including the Company, have
become subject to an increasing number of lawsuits alleging negligence or
related legal theories, many of which involve large claims and significant legal
costs. The Company is from time to time subject to such suits as a result of the
nature of its business. The Company currently maintains insurance policies in
amounts and with such coverage and deductibles as it believes are adequate,
based on the nature and risks of its business, historical experience and
industry standards. The Company currently maintains professional liability
insurance and general liability insurance. The Company's medical professional
liability coverage is limited to $1,000,000 per occurrence and $3,000,000 in the
aggregate for all claims per annual policy period. The non-medical professional
liability insurance coverage is limited to $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 18,259,568 shares
of Common Stock outstanding (19,009,568 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, approximately
11,598,149 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 1,625,657 shares were
outstanding at October 21, 1996, of which options for 684,044 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
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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."
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 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 $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 $103.0 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 21, 1996)..................... 28 3/4 26 3/4
</TABLE>
On October 21, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $27 1/4 per share. At October 21, 1996, there
were 27 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 $ 141,211
======== ========= =========
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................................. 107,703 107,703 210,613
Accumulated deficit........................................ (14,962) (14,962) (14,962)
-------- --------- ---------
Total stockholders' equity.............................. 92,883 92,883 195,833
-------- --------- ---------
Total capitalization............................... $212,346 $ 212,346 $ 315,296
======== ========= =========
</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) 1,625,657 shares of Common Stock subject to outstanding
options at October 21, 1996 at a weighted average exercise price of $11.01
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 21, 1996 of $27 1/4 per
share, outstanding options and warrants represent 987,881 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 $17,075 $ 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 10,269 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) (556) (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 2,019 1,557 1,873 2,371
Managed.............................. 143 549 652 772 712 712 596 712 712
--- ----- ----- ----- ----- ----- ----- ----- -----
Total.............................. 718 1,616 1,941 2,245 2,269 2,731 2,153 2,585 3,083
=== ===== ===== ===== ===== ===== ===== ===== =====
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 Federal 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 Federal 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, $10.7 million and
$3.2 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 15
additional sites and to lease two 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 one and one-half of one percent plus the
greater of (i) the lender's prime lending rate and (ii) the Federal funds rate
plus one-half of one percent. 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
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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.
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) require consent for
changes in management or control of the Company, (iv) limit, among other things,
the ability of the Company and certain of its subsidiaries to borrow additional
funds, dispose of assets and engage in mergers or other business combinations,
and (v) prohibit the Company from operating competing facilities within certain
distances from mortgaged facilities. 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 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 $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
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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 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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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 15
additional sites and to lease two 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
31
<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
32
<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 15 additional sites and to lease two
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.
33
<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 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
34
<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-
35
<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 235 100.0(11)(12)
Sunrise of Northshore St. Petersburg, FL 1996 Acquired 162 100.0(11)(13)
Sunrise of Augusta Augusta, GA 1996 Acquired 39 100.0(11)
Sunrise of Columbus Columbus, GA 1996 Acquired 26 100.0(11)
Sunrise of Greenville Greenville, SC 1996 Acquired 36 100.0(11)
--------
Total 2,371
========
</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.
36
<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 112 1/2% of its appraised fair market
value. If the Company has not given such notice during such two-year
period, then the Company will be deemed to have given such notice. Such
third-party owner will then give notice either that it consents to such a
sale of the facility or that it does not consent. If the third-party does
not consent to such sale, the management agreement for the facility with
the Company would be extended for an additional seven-year period. After
the expiration of such seven-year period, the third-party would have the
right to require the Company to purchase, and the Company would have the
right to purchase, the facility from the Partnership at 115% of appraised
fair market value. If any person or entity acquires ownership of more than
50% of the outstanding voting stock of the Company (other than the Company,
any subsidiary of the Company, 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 24 assisted living residents. The remainder
of the resident capacity is for independent living residents. Excludes 13
units owned by the occupants thereof. The occupants can require the Company
to repurchase the units for their original purchase prices (aggregating
approximately $2.0 million) under certain circumstances. The Company has a
right to purchase the units at fair market value upon the happening of
certain events and has a right of first refusal on sales of the units.
(13) This facility is licensed for 26 skilled nursing residents. The remainder
of the resident capacity is for assisted living residents.
37
<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 15 additional sites and to lease two 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
38
<PAGE> 40
since the first model facility was designed in 1985. Use of a standard model
allows the Company to control development costs, maintain facility consistency
and improve operational efficiency. Use of the Sunrise model also creates
"brand" awareness in the Company's markets. See "Risk Factors -- Development and
Construction Risks" and "-- Need for Additional Financing."
The primary milestones in the development process are (i) site selection
and contract signing, (ii) zoning and site plan approval and (iii) completion of
construction. Once a market has been identified, site selection and contract
signing typically take approximately one to three months. Zoning and site plan
approval generally take 10 to 12 months and are typically the most difficult
steps in the development process due to the Company's selection of sites in
established communities which usually require site rezoning. Facility
construction normally takes 12 months. The Company believes its extensive
development experience gives it an advantage relative to certain of its
competitors in obtaining necessary governmental approvals and completing
construction in a timely manner. After a facility receives a certificate of
occupancy, residents usually begin to move in immediately. Since 1993, the total
capitalized cost to develop, construct and open a Sunrise model facility,
including land acquisition and construction costs, has ranged from approximately
$5.5 million to $9.2 million. The cost of any particular facility may vary
considerably based on a variety of site-specific factors.
The Company's development activities are coordinated by its experienced
18-person development staff, which has extensive real estate acquisition,
engineering, general construction and project management experience.
Architectural design and hands-on construction functions are usually contracted
to experienced outside architects and contractors.
39
<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 7.9%. 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 15 additional sites and
leases for two additional sites in Maryland, Pennsylvania, New Jersey,
Connecticut, New York, Georgia, Colorado, California 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.
41
<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.
45
<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 of The Compucare Company, a
health care information technology company, since 1988. He served as Chief
Executive Officer of Compucare from 1988 until 1996. 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 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; EMC Squared,
a health care demand management company; and ElderHealth, Inc., an elder care
company.
The Board of Directors is divided into three classes, each consisting of
approximately one-third of the total number of directors. There are currently
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 $ 7,469,780 $ 1,653,141
Timothy S. Smick....................... 60,416 106,251 774,468 1,779,704
Thomas B. Newell....................... 57,499 97,503 779,353 1,794,434
Brian C. Swinton....................... 30,000 90,000 217,500 652,500
</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 1/4, the closing sale price of the Common Stock as of October 21, 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
Donaldson, Lufkin & Jenrette,
Inc.(16)............................. 746,030 5.3 375,000 371,036 2.0
Putnam Investments, Inc.(17)........... 1,601,199 11.2 -- 1,601,199 8.8
Executive officers and directors
as a group (11 persons)(18).......... 8,309,000 55.9 1,000,000(19) 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
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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.
(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 DLJ, Inc. is 277 Park Avenue, New York, New York
10172. Shares shown are reported on a joint Schedule 13D dated June 6, 1996
filed by DLJ, Inc., Sprout, DLJ Capital, DLJ, The Equitable Companies
Incorporated ("Equitable"), AXA, Finaxa, AXA Assurances I.A.R.D. Mutuelle,
AXA Assurances Vie Mutuelle, Uni Europe Assurance Mutuelle, Alpha
Assurances Vie Mutuelle,
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Alpha Assurances I.A.R.D. Mutuelle, Claude Bebear, AXA Voting Trustee,
Patrick Garnier, AXA Voting Trustee and Henry de Clermont-Tonnerre, AXA
Voting Trustee. According to the Schedule 13D, Sprout has sole voting and
sole dispositive power with respect to 667,161 shares, DLJ Capital has sole
voting and sole dispositive power with respect to 733,333 shares, DLJ has
sole voting and sole dispositive power with respect to 12,697 shares and
the other entities and individuals, including DLJ, Inc., have sole voting
and sole dispositive power with respect to 746,030 shares. For the
affiliation among DLJ, Inc., Sprout, DLJ Capital and DLJ, see note (13)
above. Equitable directly owns 44.1% of DLJ and The Equitable Life
Assurance Society of the United States, a wholly owned subsidiary of
Equitable, indirectly owns 36.1% of DLJ. As of April 30, 1996,
approximately 60.7% of the outstanding common stock as well as certain
convertible preferred stock of Equitable was beneficially owned by AXA. The
voting shares of Equitable beneficially owned by AXA and its subsidiaries
have been placed in the AXA Voting Trust, of which Messrs. Bebear, Garnier
and Clermont-Tonnerre are the trustees. The remaining reporting entities
control, directly or indirectly, approximately 70.0% of the issued shares
(representing approximately 85.8% of the voting power) of AXA.
(17) The business address of Putnam Investments, Inc. is One Post Office Square,
Boston, MA 02109. Shares shown are reported on a joint 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 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.
(18) 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.
(19) 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 18,259,568
shares of Common Stock (19,009,568 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 21, 1996, there were 27 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 18,259,568 shares
of Common Stock outstanding (19,009,568 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, approximately
11,598,149 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 1,625,657 shares will be
outstanding upon completion of the Offering, of which options for 684,044 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 692,321 shares of Common Stock will not be subject to the lock-up
restrictions discussed above. Of such 692,321 shares of Common
66
<PAGE> 68
Stock issuable upon the exercise of such options and warrants, 161,963 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."
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
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.
69
<PAGE> 71
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
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1996................... F-45
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1995.................................................................. F-46
Unaudited Pro Forma Consolidated Statement of Operations for the six months ended
June 30, 1996...................................................................... F-47
Notes to Unaudited Pro Forma Consolidated 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, changes in 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>
DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
(UNAUDITED- (UNAUDITED-
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 (UNAUDITED)1996
<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 one and one-half
of one percent plus the greater of (i) the lender's prime lending rate and (ii)
the Federal funds rate plus one-half of one percent.
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 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 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. 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
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)
are included to the extent they are dilutive. The Company's pro forma loss per
share reflects the conversion of 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 seven 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 498 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
-------------------------- -------------
1994 1995 (UNAUDITED)
<S> <C> <C> <C>
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,
-------------------------------------- ------------------------------
1995 1996
1993 1994 1995 ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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>
YEAR ENDED DECEMBER 31,
----------------------------------------- SIX MONTHS ENDED JUNE 30,
1993 1994 1995 --------------------------
1995 1996
(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>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------
1993 1994 1995 1995 1996
(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 (income)........................... $ (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)(c) 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) 759 (4,722)
Equity in earnings on investments in
unconsolidated partnerships............... 6 6
Minority interest........................... 83 83
Unusual charge.............................. (981) (981)
-------- -------- -------- ----------
Net loss (income)........................... $ (4,088) $ 195 $ 799 $ (3,094)
======== ======== ======== ==========
Pro forma net loss per share data(e)
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 498
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
[SUNRISE ASSISTED LIVING 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
1.3 Form of Power of Attorney
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 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.**
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**
</TABLE>
II-2
<PAGE> 123
<TABLE>
<C> <S>
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 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**
10.21 Warrant Agreement, dated as of March 19, 1996, between the Company and
Creditanstalt-Bankverein**
</TABLE>
II-3
<PAGE> 124
<TABLE>
<C> <S>
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 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>
- ---------------
* Previously filed.
** 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 Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fairfax, Commonwealth of Virginia, on
the 22nd day of October, 1996.
SUNRISE ASSISTED LIVING, INC.
By /s/ David W. Faeder
-----------------------------------
DAVID W. FAEDER
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below on October 22, 1996 by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- -------------------------------------------- --------------------------------------------------------
<C> <S>
* Chairman of the Board of Directors, President and Chief
- -------------------------------------------- Executive Officer (Principal Executive Officer)
PAUL J. 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
* Director
- --------------------------------------------
THOMAS J. DONOHUE
* Director
- --------------------------------------------
RICHARD A. DOPPELT
* Executive Vice President, Chief Operating Officer and
- -------------------------------------------- Director
TIMOTHY S. SMICK
* Director
- --------------------------------------------
SCOTT F. MEADOW
Director
- --------------------------------------------
DARCY J. MOORE
- ---------------
* David W. Faeder, by signing his name hereto, does sign this document on behalf of the persons
indicated above pursuant to powers of attorney duly executed by such persons and filed with the
Securities and Exchange Commission.
/s/ David W. Faeder
- --------------------------------------------
DAVID W. FAEDER
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 1
EXHIBIT 1.1
5,000,000 Shares
SUNRISE ASSISTED LIVING, INC.
Common Stock
UNDERWRITING AGREEMENT
October ___, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS INCORPORATED
NATWEST SECURITIES LIMITED
J.C. BRADFORD & CO.
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Sunrise Assisted Living, Inc., a Delaware corporation (the "Company"),
and the stockholders of the Company named in Schedule II hereto (collectively,
the "Selling Stockholders"), severally and not jointly propose to sell an
aggregate of 5,000,000 shares of Company Common Stock, $.01 par value per share
("Common Stock"), to the several underwriters named in Schedule I hereto (the
"Underwriters"). Such 5,000,000 shares of Common Stock are hereinafter
referred to as the "Firm Shares". In addition, the Company and certain
stockholders of the Company named in Schedule III hereto (collectively, the
"Additional Selling Stockholders"), propose to sell to the several Underwriters
not more than 750,000 additional shares of Common Stock (the "Additional
Shares") if requested by the Underwriters as provided in Section 2 hereof. The
Firm Shares consist of 4,000,000 authorized and unissued shares to be issued
and sold by the Company and 1,000,000 issued and outstanding shares to be sold
by the Selling Stockholders. The Additional Shares consist of 546,667
authorized and unissued shares to be issued and sold
<PAGE> 2
by the Company and 203,333 issued and outstanding shares to be sold by the
Additional Selling Stockholders. The Firm Shares and the Additional Shares are
herein collectively called the "Shares". The Company, the Selling Stockholders
and the Additional Selling Stockholders are hereinafter collectively called the
"Sellers".
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively called the "Act"), a registration statement on Form S-1 including
a prospectus relating to the Shares, which may be amended. The registration
statement as amended at the time when it becomes effective, including a
registration statement (if any) filed pursuant to Rule 462(b) under the Act
increasing the size of the offering registered under the Act and information
(if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to
as the "Registration Statement", and the prospectus in the form first used to
confirm sales of Shares is hereinafter referred as the "Prospectus".
2. Agreements to Sell and Purchase. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, (i) the Company agrees to issue and sell 4,000,000 Firm
Shares to the Underwriters (ii) each Selling Stockholder agrees, severally and
not jointly, to sell the number of Firm Shares set forth opposite such Selling
Stockholder's name in Schedule II hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from the Company and each Selling
Stockholder at a price per share of $________ (the "Purchase Price") the number
of Firm Shares (subject to adjustments to eliminate fractional shares as you
may determine) which bears the same proportion to the total number of Firm
Shares to be sold by such Underwriter in Schedule I hereto bears to the total
number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell up to 546,667 Additional Shares to the Underwriters, (ii) the
Additional Selling Stockholders agree to sell up to 203,333 Additional Shares
to the Underwriters and (iii) the Underwriters shall have the right to
purchase, severally and not jointly, up to 546,667 Additional Shares from the
Company at the Purchase Price and up to the number of Additional Shares set
forth opposite each Additional Selling Stockholder's name in Schedule III
hereto from such Additional Selling Stockholder at the Purchase Price.
Additional Shares may be purchased solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. The
Underwriters may exercise their right to purchase Additional Shares in whole or
in part from time to time by giving written notice thereof to the Additional
Selling Stockholders, care of the Company, within 30 days after the date of
this Agreement. You shall give any such notice on behalf of the Underwriters
and such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof. The date specified in any such notice shall be a business day (i) no
earlier than the Closing
- 2 -
<PAGE> 3
Date (as hereinafter defined), (ii) no later than ten business days after such
notice has been given and (iii) no earlier than two business days after such
notice has been given. If any Additional Shares are to be purchased, each
Underwriter, severally and not jointly, agrees to purchase from the Company
and/or the Additional Selling Stockholders, as the case may be, the number of
Additional Shares (subject to such adjustments to eliminate fractional shares
as you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number
of Firm Shares. In the event the Underwriters elect to exercise their option
to purchase the Additional Shares in part, the Company and the Additional
Selling Stockholders shall sell to the Underwriters, and the Underwriters shall
purchase (i) first, the Additional Shares to be sold by the Additional Selling
Stockholders until all such Additional Shares have been sold, and (ii) second,
the Additional Shares to be sold by the Company until all such Additional
Shares have been sold. In the event the Underwriters elect to exercise their
option to purchase Additional Shares such that the Underwriters will purchase a
portion but not all of the Additional Shares to be sold by the Additional
Selling Stockholders pursuant to clause (i) of the immediately preceding
sentence, the Underwriters shall purchase from each Additional Selling
Stockholder that number of Additional Shares equal to the total number of
Additional Shares remaining to be purchased by the several Underwriters from
the Additional Selling Stockholders multiplied by a fraction, the numerator of
which is the number of Additional Shares set forth opposite the name of such
Additional Selling Stockholder in Schedule III hereto and the denominator of
which is the aggregate number of Additional Shares offered by all of the
Additional Selling Stockholders as set forth in Schedule III hereto.
The Company agrees that the Company shall, concurrently with the
execution of this Agreement, deliver letter agreements executed by (i) each of
the directors and officers of the Company and (ii) each Selling Stockholder,
pursuant to which each such person agrees, not to offer, sell, contract to
sell, grant any option to purchase, or otherwise dispose of any Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or in any other manner transfer all or a portion of the economic consequences
associated with the ownership of any Common Stock, except to the Underwriters
pursuant to this Agreement, for a period of 90 days after the effective date of
the Registration Statement, other than (i) as a gift or gifts, provided the
donee or donees thereof agree in writing to be bound such letter agreement,
(ii) transfers to a transferor's affiliates, as such term is defined in Rule
405 promulgated under the Act, provided the transferee agrees in writing to be
bound by such letter agreement, or (iii) with the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation (except as to shares held
by affiliates of Donaldson, Lufkin & Jenrette Securities Corporation which
require the prior written consent of Alex. Brown & Sons Incorporated, NatWest
Securities Limited and J.C. Bradford & Co.). Notwithstanding the foregoing,
during such period the Company (i) may grant stock options (and may issue
shares of its Common Stock upon exercise thereof) pursuant to the Company's
existing 1995 Stock Option Plan or the Company's existing 1996 Directors' Stock
Option Plan or the Company's existing 1996 Stock Option Plan or a similar
option plan that provides for the
- 3 -
<PAGE> 4
granting of no more than 250,000 options for the benefit of employees of the
Company which plan is approved by the Board of Directors of the Company
(collectively, the "Option Plans"), (ii) may issue shares of Common Stock upon
the exercise of any of the 450,000 stock options granted to David W. Faeder
outside of the Option Plans, (iii) may issue shares of Common Stock upon the
exercise of the 50,000 warrants outstanding on the date hereof, (iv) may issue
shares of Common Stock to William Steele in satisfaction of a $200,000
non-interest bearing loan from Mr. Steele and (v) may issue shares of Common
Stock in connection with the Company's acquisition of assets of, or an
ownership interest in, another business or entity, provided, however, that,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation, the Company may not (i) register the shares of Common Stock
referred to in clauses (iv) or (v) above under the Act for a period of 90 days
after the effective date of the Registration Statement or (ii) grant any
registration rights with respect to the shares of Common Stock referred to in
clauses (iv) or (v) above that are exercisable within 90 days after the
effective date of the Registration Statement.
3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the effective time of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on
the third or fourth business day (unless otherwise permitted by the Commission
pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) following the date of this Agreement (the "Closing Date"), at
the offices of Hogan & Hartson L.L.P., 555 Thirteenth Street, NW, Washington,
D.C. 20004, or at such other place outside the State of New York as you shall
designate. The Closing Date and the location of delivery of and the form of
payment for the Firm Shares may be varied by agreement between you, the Company
and the Selling Stockholders.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the offices of Hogan &
Hartson L.L.P., 555 Thirteenth Street, NW, Washington, D.C. 20004, or at such
other place as you shall designate, at 10:00 A.M., New York City time, on the
date specified in the applicable exercise notice given by you pursuant to
Section 2 (an "Option Closing Date"). Any such Option Closing Date and the
location of delivery of and the form of payment for such Additional Shares may
be varied by agreement between you, the Company and the Additional Selling
Stockholders.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection
not later than 9:30 A.M., New York City time, on the business day next
preceding the Closing Date or an Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Shares shall be delivered to you
on the Closing Date or an Option Closing Date, as the case may
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<PAGE> 5
be, with any transfer taxes thereon duly paid by the respective Sellers, for
the respective accounts of the several Underwriters, against payment of the
Purchase Price therefor by wire transfer of immediately available funds to the
order of the applicable Sellers; provided, however, that in the case of the
Additional Selling Stockholders, the amount payable to them shall be net of (i)
the aggregate exercise price of the stock options that are being exercised by
them and (ii) applicable withholding taxes, which amounts shall be paid by wire
transfer of immediately available funds to the Company.
5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to
confirm such advice in writing, (i) when any post-effective amendment
to the Registration Statement becomes effective, (ii) of any request
by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional
information, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes,
and (iv) of the occurrence of any event during the period referred to
in paragraph (e) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which
requires the making of any additions to or changes in the Registration
Statement or the Prospectus in order to make the statements therein
not misleading. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, the
Company will make every reasonable effort to obtain the withdrawal or
lifting of such order at the earliest possible time.
(b) To furnish to you, without charge, four signed copies
of the Registration Statement as first filed with the Commission and
of each amendment to it, including all exhibits, and to furnish to you
and each Underwriter designated by you such number of conformed copies
of the Registration Statement as so filed and of each amendment to it,
without exhibits, as you may reasonably request.
(c) Not to file any amendment or supplement to the
Registration Statement, whether before or after the time when it
becomes effective, or to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to
which you shall reasonably object; and to prepare and file with the
Commission, promptly upon your reasonable request, any amendment to
the Registration Statement or supplement to the Prospectus which may
be necessary or advisable in connection with the distribution of the
Shares by you, and to use its best efforts to cause the same to become
promptly effective.
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<PAGE> 6
(d) Promptly after the Registration Statement becomes
effective, and from time to time thereafter for such period as a
prospectus is required by law to be delivered in connection with sales
by an Underwriter or a dealer, to furnish to each Underwriter and
dealer as many copies of the Prospectus (and of any amendment or
supplement to the Prospectus) as such Underwriter or dealer may
reasonably request.
(e) If during the period specified in paragraph (d) any
event shall occur as a result of which, in the judgment of the Company
or in the opinion of counsel for the Underwriters, it becomes
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if it is
necessary to amend or supplement the Prospectus to comply with any
law, forthwith to prepare and file with the Commission an appropriate
amendment or supplement to the Prospectus so that the statements in
the Prospectus, as so amended or supplemented, will not in the light
of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply with law, and to furnish to each
Underwriter and to such dealers as you shall specify, such number of
copies thereof as such Underwriter or dealers may reasonably request.
(f) Prior to any public offering of the Shares, to the
extent required by law, to cooperate with you and counsel for the
Underwriters in connection with the registration or qualification of
the Shares for offer and sale by the several Underwriters and by
dealers under the state securities or Blue Sky or real estate
syndication laws of such jurisdictions as you may request, to continue
such qualification in effect so long as required for distribution of
the Shares and to file such consents to service of process or other
documents as may be necessary in order to effect such registration or
qualification; provided, however, that the Company shall not be
obligated in connection therewith or as a condition thereof to (i)
file any general consent to service of process or to qualify as a
foreign corporation in any jurisdiction in which it is not otherwise
required to so file a general consent to service of process or to be
so qualified, or (ii) take any action that would subject it to income
taxation in any jurisdiction in which it is not otherwise subject to
income taxation. In addition, to the extent required by law, the
Company agrees to comply in all material respects with (i) the
undertakings set forth in numbered paragraphs 12, 13, 14 and 18 of its
"Application for Exemption Under Sections 352-g(2) and 359-f(2) of the
New York General Business Law for a Real Estate Syndication Offering
Registered with the Securities and Exchange Commission Under the
Federal Securities Act of 1933", dated March 21, 1996, as amended to
date and as may be amended hereafter, and (ii) any applicable
provisions of Section 352-e of the New York General Business Law or
the rules and regulations promulgated thereunder.
(g) To mail and make generally available to its
stockholders as soon as reasonably practicable, but in any event not
later than the 90th day following the
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<PAGE> 7
end of the fiscal quarter first occurring after the first anniversary
of the effective date of the Registration Statement, an earning
statement covering a period of at least twelve months after the
effective date of the Registration Statement which shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(h) For a period of five (5) years from the date of this
Agreement, to furnish to you as soon as available copies of all annual
reports and other documents, reports, financial statements and
information (i) furnished by the Company to its stockholders, (ii)
furnished to The Nasdaq Stock Market, Inc.'s Nasdaq National Market
(the "Nasdaq National Market") or any securities exchange upon which
the Common Stock may be listed or quoted pursuant to the requirements
of or agreements with such market or exchange or (iii) filed with the
Commission under or pursuant to the Act or the Exchange Act.
(i) To pay all costs, expenses, fees and transfer taxes
incident to (i) the preparation, printing, filing and distribution
under the Act of the Registration Statement (including financial
statements and exhibits), each preliminary prospectus and all
amendments and supplements to any of them prior to or during the
period specified in paragraph (e), (ii) the printing and delivery of
the Prospectus and all amendments or supplements to it during the
period specified in paragraph (e), (iii) the printing and delivery of
this Agreement, the Preliminary and Supplemental Blue Sky Memoranda
and all other agreements, memoranda, correspondence and other
documents printed and delivered in connection with the offering of the
Shares (including in each case any disbursements of counsel for the
Underwriters relating to such printing and delivery), (iv) the
registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of the several states (including in
each case the fees and disbursements of counsel for the Underwriters
relating to such registration or qualification and memoranda relating
thereto), (v) filings and clearance with the National Association of
Securities Dealers, Inc. ("NASD") in connection with the offering,
(vi) the listing of the Shares on the Nasdaq National Market, (vii)
furnishing such copies of the Registration Statement, the Prospectus
and all amendments and supplements thereto as may be reasonably
requested for use in connection with the offering or sale of the
Shares by the Underwriters or by dealers to whom Shares may be sold
and (viii) the performance by the Sellers of their other obligations
under this Agreement. Pursuant to a Registration Agreement dated
January 4, 1995, the Selling Stockholders and the Company have
entered into certain agreements regarding the payment of such expenses.
(j) To use its best efforts to maintain the inclusion of
the Common Stock in the Nasdaq National Market (or on a national
securities exchange) for a period of five years after the effective
date of the Registration Statement.
(k) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by
the Company prior
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<PAGE> 8
to the Closing Date or any Option Closing Date, as the case may be,
and to satisfy all conditions precedent on its part to the delivery of
the Shares.
6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective; no
stop order suspending the effectiveness of the Registration Statement
is in effect, and no proceedings for such purpose are pending before
or, to the Company's knowledge, threatened by the Commission.
(b)(i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Act and (iii) the
Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, except that the representations and warranties set
forth in this paragraph (b) do not apply to statements or omissions in
the Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by or
on behalf of such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, and each
Registration Statement filed pursuant to Rule 462(b) under the Act, if
any, complied when so filed in all material respects with the Act; and
did not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The Company has been duly organized, is validly
existing as a corporation in good standing under the laws of the State
of Delaware and has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus, and is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be
so qualified would not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries (hereafter
defined), taken as a whole.
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<PAGE> 9
(e) All of the outstanding shares of capital stock of the
Company (including all of the Firm Shares to be sold by the Selling
Stockholders and, as of any Option Closing Date, all Additional Shares
to be sold by the Additional Selling Stockholders on such Option
Closing Date) have been duly authorized and validly issued and are
fully paid and non-assessable, have been issued in compliance with all
federal and state securities laws, and were not issued in violation of
or subject to any preemptive or similar rights. The Shares to be
issued and sold by the Company hereunder have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and,
when issued and delivered to the Underwriters against payment therefor
as provided in this Agreement, will be duly and validly issued and
fully paid and non-assessable, and will be sold free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable
interest; and no preemptive right, co-sale right, tag along right,
registration right, right of first refusal or other similar right of
stockholders exists with respect to any of such Shares or the issuance
and sale thereof, other than those that have been expressly waived
prior to the date hereof. No further consent, approval or
authorization of any stockholder, the Board of Directors of the
Company, any court or governmental agency or body, or others is
required for the issuance and sale or transfer of the Shares to be
issued and sold by the Company hereunder except as may be required
under the federal securities laws or under any state or other
securities, Blue Sky or real estate syndication laws and except as may
be required to be obtained by the Underwriters. There are no
stockholders agreements or voting agreements with respect to the
Common Stock to which the Company is a party or, to the knowledge of
the Company, between or among any of the Company's stockholders.
(f) The authorized capital stock of the Company (i) is as
set forth in the Prospectus under the caption "Capitalization" and
(ii) conforms to the description thereof and the statements relating
thereto contained in the Prospectus.
(g) All of the consolidated corporations, partnerships
and limited liability companies in which the Company has a direct or
indirect ownership interest are listed in Exhibit 21 to the
Registration Statement (collectively, the "Subsidiaries"). The
Company's ownership interest in each of the facilities listed in the
Prospectus under the caption "Business-Owned Facilities" is owned by
the Company directly or indirectly through one or more Subsidiaries
and the Company's direct or indirect percentage ownership interests in
such facilities are as described under such caption.
(h) Each Subsidiary that is a corporation (a "Corporate
Subsidiary") has been duly organized, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus, and is duly qualified and is in good standing as a
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<PAGE> 10
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be
so qualified would not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries, taken as a
whole. All of the outstanding shares of capital stock of each
Corporate Subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable, were issued and sold in compliance with
all applicable federal and state securities laws, were not issued in
violation of or subject to any preemptive or similar rights, and are
owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature, except (i) for those
encumbrances disclosed in the Prospectus, (ii) for interests or liens
held by others as security for indebtedness of the Company or any
Subsidiary disclosed in the Prospectus and (iii) for transfer
restrictions under applicable federal and state securities and real
estate syndication laws.
(i) Each Subsidiary that is a limited partnership (a
"Limited Partnership Subsidiary") has been duly organized, is validly
existing as a limited partnership in good standing under the laws of
its jurisdiction of organization and has the limited partnership power
and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus, and is duly qualified and
is in good standing (where applicable) as a foreign limited
partnership authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries, taken as a
whole. All outstanding limited partnership interests in the Limited
Partnership Subsidiaries were issued and sold in compliance with the
applicable limited partnership agreements of such Limited Partnership
Subsidiaries and all applicable federal and state securities laws, and
the limited partnership interests therein held directly or indirectly
by the Company are owned free and clear of any security interest,
claim, lien, encumbrance or adverse interest of any nature, except (i)
for those encumbrances disclosed in the Prospectus, (ii) for interests
or liens held by others as security for indebtedness of the Company or
any Subsidiary disclosed in the Prospectus, (iii) to the extent
provided in the applicable limited partnership agreements of such
Limited Partnership Subsidiaries and (iv) for transfer restrictions
under applicable federal and state securities and real estate
syndication laws. To the knowledge of the Company, each limited
partnership agreement pursuant to which the Company or a Subsidiary
holds a partnership interest in a Limited Partnership Subsidiary is in
full force and effect and constitutes the legal, valid and binding
agreement of the parties thereto, enforceable against such parties in
accordance with the terms thereof, except as enforcement thereof may
be limited by bankruptcy, insolvency or other similar laws affecting
the enforcement of creditors' rights generally or by
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<PAGE> 11
general equitable principles. There has been no material breach of or
default under, and no event which with notice or lapse of time would
constitute a material breach of or default under, such limited
partnership agreements by the Company or any Subsidiary or, to the
Company's knowledge, any other party to such agreements.
(j) Each Subsidiary that is a limited liability company
(an "LLC Subsidiary") has been duly organized, is validly existing as
a limited liability company in good standing under the laws of its
jurisdiction of organization and has the limited liability company
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus, and is duly
qualified and is in good standing (where applicable) as a foreign
limited liability company authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the condition (financial or other), business, prospects, properties,
net worth or results of operations of the Company and the
Subsidiaries, taken as a whole. All outstanding membership interests
in the LLC Subsidiaries were issued and sold in compliance with the
applicable operating agreements of such LLC Subsidiaries and all
applicable federal and state securities laws, and the membership
interests therein held directly or indirectly by the Company are owned
free and clear of any security interest, claim, lien, encumbrance or
adverse interest of any nature, except (i) for those encumbrances
disclosed in the Prospectus, (ii) for interests or liens held by
others as security for indebtedness of the Company or any Subsidiary
disclosed in the Prospectus, (iii) to the extent provided in the
applicable operating agreements of such LLC Subsidiaries and (iv) for
transfer restrictions under applicable federal and state securities
and real estate syndication laws. To the knowledge of the Company,
each operating agreement pursuant to which the Company or a Subsidiary
holds a membership interest in an LLC Subsidiary is in full force and
effect and constitutes the legal, valid and binding agreement of the
parties thereto, enforceable against such parties in accordance with
the terms thereof, except as enforcement thereof may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement
of creditors' rights generally or by general equitable principles.
There has been no material breach of or default under, and no event
which with notice or lapse of time would constitute a material breach
of or default under, such operating agreements by the Company or any
Subsidiary or, to the Company's knowledge, any other party to such
agreements.
(k) Neither the Company nor any of the Subsidiaries is in
violation of its respective charter, by- laws, partnership agreement,
operating agreement or other governing document(s). Neither the
Company nor any of the Subsidiaries is in default in the performance
of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any other
agreement, indenture or instrument material to the conduct of the
business of the Company and the Subsidiaries, taken as a whole, to
which the Company or any of
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<PAGE> 12
the Subsidiaries is a party or by which it or any of the Subsidiaries
or their respective property is bound, except for any such defaults
that would not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries, taken as a
whole. Neither the Company nor any of the Subsidiaries is in material
violation of any order, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of the Subsidiaries or
over any of their respective property. Neither the Company nor any of
the Subsidiaries is in violation of any law, ordinance, rule or
regulation applicable to the Company or any of the Subsidiaries, which
violation would have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries, taken as a
whole.
(l) The Company has, and on the Closing Date and each
Option Closing Date will have, full legal right, power and authority
to enter into this Agreement and to issue, sell and deliver, in the
manner provided herein, the Shares to be issued and sold by the
Company hereunder. This Agreement has been duly authorized, executed
and delivered by the Company and this Agreement is a valid and binding
agreement of the Company enforceable in accordance with its terms,
except as rights to indemnity and contribution hereunder may be
limited by applicable law. The execution, delivery and performance of
this Agreement, compliance by the Company with all the provisions
hereof and the consummation by the Company of the transactions
contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body,
administrative agency or other governmental body (except as has been
obtained and except as may be required under the federal securities
laws or the securities, Blue Sky or real estate syndication laws of
the various states) and will not conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the charter,
by-laws, partnership agreement, operating agreement or other governing
document(s) of the Company or any of the Subsidiaries or any
agreement, indenture or other instrument to which the Company or any
of the Subsidiaries is a party or by which the Company or any of the
Subsidiaries or their respective property is bound, or violate or
conflict with any laws, administrative regulations or rulings or court
decrees applicable to the Company, any of the Subsidiaries or their
respective property, except as disclosed in the Prospectus and except
as rights to indemnity and contribution hereunder may be limited by
applicable law.
(m) Except as otherwise set forth in the Prospectus,
there are no material legal or governmental proceedings pending or, to
the Company's knowledge, threatened or contemplated to which the
Company or any of the Subsidiaries is a party or of which any of their
respective property is the subject that (i) are required to be set
forth in the Registration Statement, (ii) could reasonably be expected
to result in a material adverse change in the condition
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<PAGE> 13
(financial or other), business, prospects, properties, net worth or
results of operations of the Company and the Subsidiaries, taken as a
whole, or (iii) could reasonably be expected to adversely effect the
issuance or validity of the Shares to be issued and sold by the
Company hereunder. No contract or document of a character required to
be described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement is not so described
or filed as required.
(n) Neither the Company nor any of the Subsidiaries has
violated any foreign, federal, state or local law or regulation
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions
of the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, which in each case could
reasonably be expected to result in any material adverse change in the
condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and the Subsidiaries,
taken as a whole.
(o) Except as described in the Prospectus, the Company
and the Subsidiaries have operated and currently operate their
business in conformity with all applicable laws, rules and regulations
of each jurisdiction in which it is conducting business, except where
the failure to be so in compliance would not have a material adverse
effect on the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole. The Company and each of the
Subsidiaries has such permits, licenses, franchises and authorizations
of governmental or regulatory authorities ("permits"), including,
without limitation, under any applicable Environmental Laws, as are
necessary to own, lease and operate its respective properties and to
conduct its business; the Company and each of the Subsidiaries has
fulfilled and performed all of its material obligations with respect
to such permits and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the
holder of any such permit; and, except as described in the Prospectus,
such permits contain no restrictions that are materially burdensome to
the Company or any of the Subsidiaries. The Company and the
Subsidiaries are not aware of any existing or imminent matter which
could reasonably be expected to materially and adversely impact their
operations or business prospects other than as disclosed in the
Prospectus.
(p) Except as otherwise set forth in the Prospectus or
such as are not material to the business, prospects, financial
condition or results of operation of the Company and the Subsidiaries,
taken as a whole, the Company and each of the Subsidiaries has good
and marketable title, free and clear of all liens, claims,
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<PAGE> 14
encumbrances and restrictions except liens for taxes not yet due and
payable, to all property and assets described in the Registration
Statement as being owned by it (other than stock or other ownership
interests in Subsidiaries, which are the subject of the
representations in paragraphs (h) through (j) above). The agreements
to which the Company or any of the Subsidiaries is a party described
in the Registration Statement and Prospectus are valid agreements,
enforceable by the Company and the Subsidiaries (as applicable),
except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the Company's knowledge, the
other contracting party or parties thereto are not in material breach
or material default under any of such agreements. All leases to which
the Company or any of the Subsidiaries is a party are valid and
binding and no default has occurred or is continuing thereunder, which
could reasonably be expected to result in any material adverse change
in the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole, and the Company and the Subsidiaries
enjoy peaceful and undisturbed possession under all such leases to
which any of them is a party as lessee with such exceptions as do not
materially interfere with the use made by the Company or such
Subsidiary.
(q) The Company and the Subsidiaries maintain insurance
with insurers of recognized financial responsibility of the types and
in the amounts generally deemed adequate for their respective
businesses and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited
to, insurance covering real and personal property owned or leased by
the Company or its subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all
of which insurance is in full force and effect.
(r) Except as disclosed in the Prospectus, there are no
outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or liens related to or
entitling any person to purchase or otherwise to acquire any shares of
the capital stock of, or other ownership interest in, the Company or
any Subsidiary.
(s) There is (i) no material unfair labor practice
complaint pending against the Company or any of the Subsidiaries or,
to the knowledge of the Company, threatened against any of them,
before the National Labor Relations Board or any state or local labor
relations board, and no material grievance or arbitration proceeding
arising out of or under any collective bargaining agreement is so
pending against the Company or any of the Subsidiaries or, to the
knowledge of the Company, threatened against any of them, and (ii) no
material strike, labor dispute, slowdown or stoppage pending against
the Company or any of the Subsidiaries or, to the knowledge of the
Company, threatened against it or any of
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<PAGE> 15
the Subsidiaries. No collective bargaining agreement exists with any
of the Company's employees and, to the Company's knowledge, no such
agreement is imminent.
(t) All material tax returns required to be filed by the
Company and each of the Subsidiaries in any jurisdiction have been
filed, other than those filings being contested in good faith, and all
material taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due pursuant to such returns or
pursuant to any assessment received by the Company or any of the
Subsidiaries have been paid, other than those being contested in good
faith and for which adequate reserves have been provided.
(u) Except as described in the Prospectus, the Company
owns or possesses adequate rights to use all material trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of
its business and has no reason to believe that the conduct of its
business as described in the Prospectus will conflict with any such
rights of others.
(v) Neither the Company nor any of the Subsidiaries, nor
to the knowledge of the Company, any agent or other person acting on
behalf of the Company or any Subsidiary has, directly or indirectly,
used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or
domestic political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; failed to
disclose fully any contribution in violation of law; violated in any
material respect any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any unlawful bribe, rebate, payoff,
influence, kick-back or other unlawful payment.
(w) Each of Ernst & Young LLP, Hoffman, Morrison &
Fitzgerald P.C. and KPMG Peat Marwick LLP are independent public
accountants with respect to the Company as required by the Act.
(x) The financial statements, together with related
schedules and notes forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly
the consolidated financial position, results of operations and changes
in financial position of the Company and the Subsidiaries or the Laing
Retirement Properties, as the case may be, on the basis stated in the
Registration Statement at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, except as disclosed therein; and the other financial and
statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement
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<PAGE> 16
thereto) is, in all material respects, accurately presented and
prepared (i) on a basis consistent with such financial statements and
the books and records of the Company and (ii) as to pro forma
information, in good faith on the basis of the assumptions described
in the Registration Statement and such assumptions are reasonable and
the adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
(y) Neither the Company nor any of the Subsidiaries is,
nor will the Company or any of the Subsidiaries become upon the sale
of the Shares and the application of the proceeds therefrom as
described in the Prospectus under the caption "Use of Proceeds," an
"investment company" or a person "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
(z) Except as disclosed in the Prospectus, no holder of
any security of the Company has any right to require registration of
shares of Common Stock or any other security of the Company.
(aa) The Company has complied with all provisions of
Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(bb) The Company has filed a notification of listing the
Shares on the Nasdaq National Market.
(cc) Except as disclosed in the Prospectus, there are no
business relationships or related party transactions required to be
disclosed therein by Item 404 of Regulation S-K of the Commission.
(dd) The Company and each of the Subsidiaries maintains a
system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(ee) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (i) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and the Subsidiaries, taken as a whole, (ii)
any transaction that is material to the Company and the Subsidiaries,
taken as a whole, except transactions entered into in the ordinary
course of business, (iii) any obligation, direct or contingent, that
is material to the Company
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<PAGE> 17
and the Subsidiaries, taken as a whole, incurred by the Company or the
Subsidiaries, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock (other than as
expressly contemplated therein) or outstanding indebtedness of the
Company or any of the Subsidiaries that is material to the Company and
the Subsidiaries, taken as a whole, (v) any dividend or distribution
of any kind declared, paid or made on the capital stock of the
Company, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any of the Subsidiaries which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole.
(ff) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on
which Additional Shares are to be purchased, as the case may be, and
(ii) completion of the distribution of the Shares, any offering
material in connection with the offering and sale of the Shares other
than any preliminary prospectuses filed as part of the Registration
Statement, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.
(gg) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the
Shares.
(hh) Each Additional Selling Stockholder has vested and
presently exercisable options to purchase from the Company a number of
shares of Common Stock equal to the total number of Additional Shares
that you have the right to purchase from such Additional Selling
Stockholder pursuant to this Agreement.
7. Representations and Warranties of the Selling Stockholders and
Additional Selling Stockholders. Each Selling Stockholder (with respect to
each of the following matters that relate to a Selling Stockholder) and each
Additional Selling Stockholder (with respect to each of the following matters
that relate to an Additional Selling Stockholder) severally and not jointly
represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the
Shares to be sold by such Selling Stockholder pursuant to this
Agreement and has, and on the Closing Date will have, good and valid
title to such Shares, free of all restrictions on transfer, pledges,
liens, encumbrances, security interests and claims whatsoever. Such
Additional Selling Stockholder has beneficial ownership of the Shares
to be sold by such Additional Selling Stockholder pursuant to this
Agreement and on any Option Closing Date on which any of such Shares
are to be sold hereunder will be the lawful owner of such Shares and
will have good and valid title to such
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<PAGE> 18
Shares, free of all restrictions on transfer, pledges, liens,
encumbrances, security interests and claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant
to this Agreement, good and valid title to such Shares will pass to
the Underwriters, free and clear of all restrictions on transfer,
pledges, liens, encumbrances, security interests and claims
whatsoever; and no co-sale right, tag along right, right of first
refusal or other similar right exists with respect to any of such
Shares or the transfer and sale thereof.
(c) Such Selling Stockholder has, and on the Closing Date
will have, full legal right, power and authority to enter into this
Agreement, the Letter of Transmittal and Custody Agreement between
such Selling Stockholder and First Union National Bank of North
Carolina, as Custodian (the "Custody Agreement"), and the Selling
Stockholder's Irrevocable Power of Attorney between such Selling
Stockholder and Paul J. Klaassen and David W. Faeder (the "Power of
Attorney"), and to sell, assign, transfer and deliver such Shares in
the manner provided herein and therein, and this Agreement, the
Custody Agreement and the Power of Attorney have been duly executed
and delivered by such Selling Stockholder and each of this Agreement,
the Custody Agreement and the Power of Attorney is a valid and binding
agreement of such Seller enforceable in accordance with its terms,
except as enforcement thereof may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors' rights
generally or by general equitable principles, and except as rights to
indemnity and contribution hereunder may be limited by applicable law.
Such Additional Selling Stockholder has, and on any applicable Option
Closing Date will have, full legal right, power and authority to enter
into this Agreement and to sell, assign, transfer and deliver such
Shares in the manner provided herein, and this Agreement has been duly
executed and delivered by such Additional Selling Stockholder and this
Agreement is a valid and binding agreement of such Additional Selling
Stockholder enforceable in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally
or by general equitable principles, and except as rights to indemnity
and contribution hereunder may be limited by applicable law.
(d) Such Seller has not taken, and will not take,
directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares pursuant to the distribution
contemplated by this Agreement; and other than as permitted by the
Act, such Seller has not distributed and will not distribute any
prospectus or other offering material in connection with the offering
and sale of the Shares.
(e) The execution, delivery and performance of this
Agreement by such Seller, compliance by such Seller with all the
provisions hereof and the
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<PAGE> 19
consummation by such Seller of the transactions contemplated hereby
will not require any consent, approval, authorization or order of any
court, regulatory body, administrative agency or other governmental
body or of any other governmental or non-governmental person or entity
(except as has been obtained and except as may be required under the
federal securities laws or the state securities, Blue Sky or real
estate syndication laws) and will not conflict with or constitute a
breach of any of the terms or provisions of, or a default under, any
agreement, indenture or other instrument to which such Seller is a
party or by which such Seller or property of such Seller is bound, or
violate or conflict with any laws, administrative regulation or ruling
or court decree applicable to such Seller or property of such Seller,
except as rights to indemnity and contribution hereunder may be
limited by applicable law.
(f) Such parts of the Registration Statement under the
caption "Principal and Selling Stockholders" which specifically relate
to such Seller do not, and will not (after amendment, if necessary,
for any change in such information as provided in paragraph 7(g)
below) on the Closing Date or any Option Closing Date, as the case may
be, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein, in light of circumstances under which they
were made, not misleading.
(g) At any time during the period described in paragraph
5(e) hereof, if there is any change in the information referred to in
paragraph 7(f) above, such Seller will immediately notify you of such
change.
(h) Such Additional Selling Stockholder has vested and
presently exercisable options to purchase from the Company a number of
shares of Common Stock equal to the total number of Additional Shares
that you have the right to purchase from such Additional Selling
Stockholder pursuant to this Agreement. Such Additional Selling
Stockholder has taken all actions (including, without limitation, the
payment of the full exercise price for and the valid execution and
delivery to the Company of any required notice of exercise of such
stock options) necessary to effect the valid cashless exercise of such
stock options and the purchase by such Additional Selling Stockholder
of such Additional Shares from the Company, subject only to the
exercise and closing of your right to purchase such Additional Shares
from such Additional Selling Stockholder hereunder. Such Additional
Selling Stockholder further represents, warrants, covenants,
acknowledges and agrees with you that: (i) the actions referred to in
the immediately preceding sentence are coupled with an interest and
were taken subject to and in consideration of the interests of the
Underwriters and, until the 41st day following the date of this
Agreement, are irrevocable and not subject to termination by such
Additional Selling Stockholder or by operation of law, whether by the
death or incapacity of such Additional Selling Stockholder, the
termination of any trust or estate, the death or incapacity of one or
more trustees,
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<PAGE> 20
guardians, executors or administrators under such trust or
estate, the dissolution or liquidation of any corporation or
partnership or the occurrence of any other event; and (ii) if such
Additional Selling Stockholder should die or become incapacitated, if
any trust or estate should be terminated, if any corporation or
partnership should be dissolved or liquidated, or if any other such
event should occur before the delivery of the Additional Shares to be
sold by such Additional Selling Stockholder under this Agreement, such
Additional Shares shall be delivered to you on behalf of such
Additional Selling Stockholder in accordance with the terms and
conditions of this Agreement as if such death or incapacity,
termination, dissolution, liquidation or other event had not occurred,
regardless of whether or not you shall have received notice of such
death, incapacity, termination, dissolution, liquidation or other
event. Such Additional Selling Stockholder further represents and
warrants that he has executed and delivered to the Company's transfer
agent a stock power or other valid instrument of transfer, duly
endorsed for transfer to the Underwriters of the Additional Shares
that may be sold by such Additional Selling Stockholder hereunder,
bearing the signature of such Additional Selling Stockholder
guaranteed by a commercial bank or trust company having an office or a
correspondent in New York, New York or by a member firm of the New
York, American or Pacific Stock Exchange, subject only to the exercise
and closing of your right to purchase such Additional Shares from
such Additional Selling Stockholder hereunder.
8. Indemnification. (a) The Company, each Selling Stockholder
and each Additional Selling Stockholder, jointly, agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, liabilities and judgments
caused by or based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages, liabilities or judgments are caused by
any such untrue statement or omission or alleged untrue statement or omission
based upon information relating to any Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use
therein, and except that the indemnification obligation of each Selling
Stockholder and Additional Selling Stockholder hereunder shall be limited
solely to losses, claims, damages, liabilities and judgments caused by untrue
statements or alleged untrue statements or omissions or alleged omissions made
in reliance upon information relating to such Selling Stockholder or Additional
Selling Stockholder furnished in writing to the Company by or on behalf of such
Selling Stockholder or Additional Selling Stockholder expressly for use
therein. Notwithstanding the foregoing, the aggregate liability of any Selling
Stockholder or Additional Selling Stockholder pursuant to the provisions of
this paragraph, or for any breaches of one or more representations or
warranties contained in this Agreement, shall be limited to an amount equal to
the aggregate purchase price (net of underwriting discounts and commissions)
received by such Selling Stockholder or Additional Selling Stockholder from the
sale of
- 20 -
<PAGE> 21
such Selling Stockholder's or Additional Selling Stockholder's Shares
hereunder; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages and
liabilities and judgments purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if required
by law so to have been delivered, at or prior to the written confirmation of
the sale of the Shares to such person, and if the Prospectus (as so amended and
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or judgment.
(b) In case any action shall be brought against any
Underwriter or any person controlling such Underwriter, based upon any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement thereto and with respect to which indemnity may be
sought against the Company or any Selling Stockholder or Additional Selling
Stockholder, such Underwriter shall promptly notify the Company or such
Selling Stockholder or Additional Selling Stockholder, as the case may be, in
writing and the Company or such Selling Stockholder or Additional Selling
Stockholder, as the case may be, shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such indemnified party and
payment of all reasonable fees and expenses. Any Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the reasonable fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the employment of such counsel has been
specifically authorized in writing by the Company, or such Selling Stockholder
or Additional Selling Stockholder, as the case may be, (ii) the Company or such
Selling Stockholder or Additional Selling Stockholder, as the case may be,
shall have failed to assume the defense and employ counsel or (iii) the named
parties to any such action (including any impleaded parties) include both such
Underwriter or such controlling person and the Company or such Selling
Stockholder or Additional Selling Stockholder, as the case may be, and such
Underwriter or such controlling person shall have been advised by such counsel
that there may be one or more legal defenses available to it which are
different from or additional to those available to the Company or such Selling
Stockholder, as the case may be, (in which case the Company or such Selling
Stockholder or Additional Selling Stockholder, as the case may be, shall not
have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however, that the
Company or such Selling Stockholder shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all such Underwriters and
controlling persons, which firm shall be designated in writing by Donaldson,
Lufkin & Jenrette Securities Corporation and that all such fees and expenses
shall be reimbursed as they are incurred). A Seller shall not be liable for
any settlement of any such action effected without the written consent of such
Seller but if settled with the written consent of such Seller, such Seller
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<PAGE> 22
agrees to indemnify and hold harmless any Underwriter and any such controlling
person from and against any loss or liability by reason of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(c) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, any person controlling the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Selling Stockholder, each Additional Selling Stockholder and each person, if
any, controlling such Selling Stockholder or Additional Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
to the same extent as the foregoing indemnity from the Sellers to each
Underwriter but only with reference to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter through you expressly
for use in the Registration Statement, the Prospectus or any preliminary
prospectus. In case any action shall be brought against the Company, any of
its directors, any such officer or any person controlling the Company, or any
Selling Stockholder or Additional Selling Stockholder or any person controlling
such Selling Stockholder or Additional Selling Stockholder, based on the
Registration Statement, the Prospectus or any preliminary prospectus and in
respect of which indemnity may be sought against any Underwriter, the
Underwriter shall have the rights and duties given to the Sellers (except that
if any Seller shall have assumed the defense thereof such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate
in the defense thereof but the fees and expenses of such counsel shall be at
the expense of such Underwriter), and the Company, its directors, any such
officers and any person controlling the Company, and the Selling Stockholders,
the Additional Selling Stockholders and any person controlling such Selling
Stockholders or Additional Selling Stockholders, shall have the rights and
duties given to the Underwriters, by Section 8(b) hereof.
(d) If the indemnification provided for in this Section 8
is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Sellers and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The
relative benefits received by the Sellers
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<PAGE> 23
and the Underwriters shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by the
Sellers, and the total underwriting discounts and commissions received by the
Underwriters, bear to the total price to the public of the Shares, in each case
as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the Company, the Selling Stockholders, the Additional Selling
Stockholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Sellers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission and no
Selling Stockholder or Additional Selling Stockholder shall be required to
contribute any amount in excess of the aggregate purchase price (net of
underwriting discounts and commissions) received by such Selling Stockholder or
Additional Selling Stockholder from the sale of Shares hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
(e) You, on behalf of the Underwriters, represent and
warrant that the information set forth (i) in the last paragraph on the front
cover page, (ii) on the inside front cover page concerning United Kingdom
purchasers, stabilization and over-allotment, and passive market making, and
(iii) under the caption "Underwriting" in the Registration Statement, any
preliminary prospectus and the Prospectus relating to the Shares (insofar as
such information relates to the Underwriters) constitutes the only information
furnished by the Underwriters for inclusion in the Registration Statement, any
preliminary prospectus and the Prospectus.
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<PAGE> 24
(f) The Company and the Selling Stockholders have entered
into a Registration Agreement dated January 4, 1995, pursuant to which the
Company has agreed to indemnify the Selling Stockholders against certain
liabilities (and vice versa). The Additional Selling Stockholders agree to
indemnify the Company on the same basis as the indemnification of the Company
by the Selling Stockholders under such registration Agreement, subject to the
same limitation on the aggregate liability of each Additional Selling
Stockholder contained in Section 8(a).
(g) NatWest Securities Limited hereby agrees that, as
part of the distribution of the Common Stock offered by the Prospectus 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. NatWest Securities Limited further represents
and agrees that: (i) 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"); (ii) it has complied and will comply with all applicable
provisions of the Act with respect to anything done by it in relation to the
shares of Common Stock in, from, or otherwise involving the United Kingdom; and
(iii) 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.
9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
and the Subsidiaries contained in this Agreement shall be true and
correct on the Closing Date with the same force and effect as if made
on and as of the Closing Date.
(b) The Registration Statement shall have become
effective not later than 5:00 P.M.(and in the case of a Registration
Statement filed under Rule 462(b) of the Act, not later than 10:00
p.m.), New York City time, on the date of this Agreement or at such
later date and time as you may approve in writing, and at the Closing
Date no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose
shall have been commenced or shall be pending before or, to the
knowledge of the Company or any Underwriter, contemplated by the
Commission.
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<PAGE> 25
(c)(i) Since the date of the latest balance sheet included
in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
other), business, prospects, properties, net worth or results of
operations, whether or not arising in the ordinary course of business,
of the Company, (ii) since the date of the latest balance sheet
included in the Registration Statement and the Prospectus there shall
not have been any material adverse change, or any development
involving a prospective material adverse change, in the capital stock
or in the long-term debt of the Company from that set forth in or
contemplated by the Registration Statement and Prospectus, (iii) the
Company and the Subsidiaries shall have no liability or obligation
(other than long-term debt, which is the subject of the immediately
preceding clause (ii) of this paragraph 9(c)), direct or contingent,
which is material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration Statement and
the Prospectus and (iv) on the Closing Date you shall have received a
certificate dated the Closing Date, signed by Paul J. Klaassen and
David W. Faeder, in their capacities as the Chief Executive Officer
and Chief Financial Officer of the Company, respectively, confirming
the matters set forth in paragraphs (a), (b), and (c) of this Section
9 and addressing such other matters as may be reasonably requested by
you or your counsel.
(d) All the representations and warranties of the Selling
Stockholders and Additional Selling Stockholders contained in this
Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date and you
shall have received a certificate to such effect, dated the Closing
Date, from the Selling Stockholders and Additional Selling
Stockholders.
(e) You shall have received on the Closing Date an
opinion (reasonably satisfactory to you and counsel for the
Underwriters), dated the Closing Date, of Hogan & Hartson L.L.P.,
counsel for the Company, to the effect that:
(i) The Company was duly incorporated, and is
validly existing and in good standing under the laws of the
State of Delaware as of the date specified in such opinion
letter, and has the corporate power and corporate authority to
own, lease and operate its properties and to conduct its
business as described in the Prospectus. The Company is
authorized to transact business as a foreign corporation in
each jurisdiction identified on a Schedule to such opinion
letter, as of the respective dates of the certificates
specified therein.
(ii) The authorized, issued and outstanding
capital stock of the Company, as of June 30, 1996, was set
forth under the caption "Capitalization" in the Prospectus.
All shares of Common Stock shown as issued and outstanding
under said caption (including the Shares to be sold by the
Selling Stockholders and, as of any Option Closing Date, all
- 25 -
<PAGE> 26
Additional Shares to be sold by the Additional Selling
Stockholders on such Option Closing Date pursuant to Section 2
of this Agreement) have been duly authorized and are validly
issued, fully paid and non-assessable, and were not issued in
violation of (A) any preemptive rights under the Company's
Restated Certificate of Incorporation or Delaware corporate
law or (B) to such counsel's knowledge, similar contractual
rights.
(iii) The Company has the corporate power and
corporate authority to enter into this Agreement and to
consummate the transactions contemplated hereby and this
Agreement has been duly authorized, executed and delivered by
the Company. The Shares to be issued and sold by the Company
pursuant to this Agreement, when issued and delivered to the
Underwriters against payment therefor as provided in this
Agreement, will be duly authorized, validly issued, fully paid
and non-assessable, and will not have been issued in violation
of (A) any preemptive rights under the Company's Restated
Certificate of Incorporation or Delaware corporate law or (B)
to such counsel's knowledge, similar contractual rights.
(iv) Each of the Corporate Subsidiaries
incorporated in Virginia was incorporated, and is validly
existing and in good standing under the laws of its
jurisdiction of incorporation as of the respective dates
specified in such opinion letter and has the corporate power
and corporate authority to own, lease and operate its
properties and to conduct its business as described in the
Prospectus. Each such Corporate Subsidiary is authorized to
transact business as a foreign corporation in each
jurisdiction identified on a Schedule to such opinion letter,
as of the respective dates of the certificates specified
therein.
(v) All of the outstanding shares of capital
stock of each such Corporate Subsidiary (a) have been duly
authorized and are validly issued, fully paid and
nonassessable, and (b) to such counsel's knowledge, were not
issued in violation of any preemptive rights under such
Corporate Subsidiary's charter or under the laws of the
jurisdiction of its incorporation or in violation of any
similar contractual rights.
(vi) Each Limited Partnership Subsidiary formed in
Virginia or Maryland was formed, and is validly existing and
in good standing under the laws of its jurisdiction of
organization as of the respective dates specified in such
opinion letter, and has the limited partnership power and
limited partnership authority to own, lease and operate its
properties and to conduct its business as described in the
Prospectus. Each Limited Partnership Subsidiary is authorized
to transact business as a foreign limited partnership in each
jurisdiction identified on a Schedule to such opinion letter,
as of the respective dates of the certificates specified
therein.
- 26 -
<PAGE> 27
(vii) Each LLC Subsidiary formed in Maryland was
formed, and is validly existing and in good standing under the
laws of its jurisdiction of organization as of the respective
dates specified in such opinion letter, and has the limited
liability company power and limited liability company
authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus.
(viii) The authorized capital stock of the Company
conforms in all material respects to the description thereof
contained in the Prospectus under the caption "Description of
Capital Stock". The form of certificate evidencing the Firm
Shares has been duly authorized and complies with the
requirements of the Delaware General Corporation Law and the
Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Company.
(ix) The Registration Statement has become
effective under the Act and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or threatened by the Commission.
(x) The execution, delivery and performance as of
the Closing Date by the Company of this Agreement do not (i)
violate the Restated Certificate of Incorporation or Amended
and Restated Bylaws of the Company, the charter, bylaws,
partnership agreements or operating agreements of any of the
Subsidiaries or the General Corporation Law of the State of
Delaware or (ii) breach or constitute a default under any
contract or agreement listed on a Schedule to such opinion
letter. No approval or consent of any Delaware, Virginia or
Maryland governmental agency is required to be obtained by the
Company in connection with the execution, delivery and
performance as of the Closing Date by the Company of this
Agreement.
(xi) Each of the Company's owned assisted living
facilities in Maryland and Virginia currently holds (or has
pending a renewal application for) a license authorizing such
facility to furnish assisted living services as described
under the heading "Services" on pages 34-35 of the Prospectus.
(xii) To such counsel's knowledge, except as set
forth in the Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with
respect to securities of the Company and, except as set forth
in the Prospectus, all holders of securities of the Company
having rights to registration of shares of Common Stock or
other securities because of the filing of the Registration
Statement by the
- 27 -
<PAGE> 28
Company have, solely with respect to the offering contemplated
thereby, either waived such rights or included in the
Registration Statement the shares of Common Stock they wish to
have registered.
(xiii) Neither the Company nor any of the
Subsidiaries is required to be registered as an "investment
company" under the 1940 Act.
(xiv) The Registration Statement (including any
Registration Statement filed under 462(b) of the Act, if any)
and the Prospectus and any supplement or amendment thereto
(except for financial statements and supporting schedules and
other financial and statistical information and data included
therein, as to which no opinion need be expressed) comply as
to form in all material respects with the Act.
(xv) To such counsel's knowledge, the Company owns
directly or indirectly the ownership interests in the
Subsidiaries set forth on Exhibit 21 to the Registration
Statement.
In addition to the matters set forth above, such opinion
letter shall also include a statement to the effect that no facts have
come to the attention of such counsel which cause them to believe that
(i) the Registration Statement, at the time it became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as of its
date and as of the Closing Date, contained or contains an untrue
statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, (ii)
there are any legal or governmental proceedings pending or threatened
against the Company that are required to be disclosed in the
Registration Statement or the Prospectus, other that those disclosed
therein, or (iii) there are any contracts or documents of a character
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or referred to therein or so filed; provided
that in making the foregoing statements (which shall not constitute
an opinion), such counsel need not express any views as to
the financial statements and supporting schedules and other financial
and statistical information and data included in or omitted from the
Registration Statement or the Prospectus.
In giving its opinion required by this paragraph (e) above,
such counsel may rely, (A) as to all matters of fact, upon
certificates and written statements of officers and employees of the
Company and its Subsidiaries, and (B) as to the qualification and good
standing of the Company and its Subsidiaries to do business in any
jurisdiction, upon certificates of appropriate government officials in
such jurisdictions. Further, such counsel may state that their
opinion is based as to matters of law solely upon (i) the federal
securities laws, (ii) the General
- 28 -
<PAGE> 29
Corporation Law, as amended, of each of the States of Delaware and
Virginia, (iii) the limited partnership acts of Virginia and Maryland,
(iv) the limited liability company act of Maryland, (v) Hospitals and
Related Institutions, Md. Health-Gen. Code Ann. Section Section
19-301 to 19-374, (vi) Domiciliary Care Homes, Md. Regs. Code Section
Section 10.07.03.01 to 10.07.03.27, (vii) Licensing of Homes for
Aged, Infirm or Disabled Adults, Va. Code Ann. Section Section
63.1-172 to 182.1, and (viii) Standards and Regulations for Licensed
Adult Care Residences, 22 Va. Admin. Code Section Section 40-70-10 to
40-745-110; and that such counsel expresses no opinion as to any other
laws, statutes, ordinances, rules or regulations.
The opinion of Hogan & Hartson L.L.P. described in this
paragraph (e) shall be rendered to you at the request of the Company
and shall so state therein.
(f) You shall have received on the Closing Date an
opinion (reasonably satisfactory to you and counsel for the
Underwriters), dated the Closing Date, from each of (i) the
Vice President and Associate General Counsel of Allstate Insurance
Company, as counsel to each of Allstate Insurance Company, Allstate
Life Insurance Company, Allstate Retirement Plan and Agents
Pension Plan, (ii) Hopkins & Sutter, counsel to Frontenac VI Limited
Partnership, (iii) the Office of the General Counsel of Donaldson,
Lufkin & Jenrette, Inc., as counsel to each of DLJ Capital Corporation
and Sprout Growth II, L.P. and (iv) Watt, Tieder & Hoffar, counsel to
each of the Additional Selling Stockholders, to the effect that:
(i) Each Selling Stockholder and each Additional
Selling Stockholder has full right, power and authority to
enter into and to perform his, her or its obligations under
this Agreement and to sell, transfer, assign and deliver the
Shares to be sold by such Selling Stockholder or Additional
Selling Stockholder hereunder.
(ii) This Agreement has been duly executed and
delivered by or on behalf of each Selling Stockholder and each
Additional Selling Stockholder.
(iii) The execution, delivery and performance of
this Agreement by each Selling Stockholder and each Additional
Selling Stockholder, compliance by each Selling Stockholder
and each Additional Selling Stockholder with all the
provisions hereof and the consummation of the transactions of
each Selling Stockholder and each Additional Selling
Stockholder contemplated hereby do not (a) require any
consent, approval, authorization, order or other action of any
court, regulatory body, administrative agency or other
governmental agency or body (except as may be required under
state securities or Blue Sky laws, as to which such counsel
need express no opinion), (b) constitute a breach of, or a
default under, any agreement, promissory note, mortgage or
other instrument to which such Selling Stockholder or
Additional Selling Stockholder is a party
- 29 -
<PAGE> 30
or by which such Selling Stockholder or Additional Selling
Stockholder is bound and of which such counsel has knowledge,
or (c) violate or conflict with any applicable law, rule or
regulation (except state securities or Blue Sky laws, as to
which such counsel need express no opinion) or any order, writ
or decree of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or Additional
Selling Stockholder.
(iv) Each Selling Stockholder has full right,
power and authority to enter into and perform his, her or its
obligations under the Custody Agreement and the Power of
Attorney to be executed and delivered by such Selling
Stockholder in connection with the transactions contemplated
by this Agreement; each of such Custody Agreement and such
Power of Attorney has been duly executed and delivered by such
Selling Stockholder; and each of such Custody Agreement and
such Power of Attorney constitutes a valid and binding
agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as enforcement thereof may
be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally or by
general equitable principles.
The opinions of counsel to the Selling Stockholders described
in this paragraph (f) shall be rendered to you at the request of the
Selling Stockholders and Additional Selling Stockholders (and shall so
state therein) and shall be limited to matters of federal law and the
laws of the respective states of residence of each Selling Stockholder
and Additional Selling Stockholder (other than the securities or Blue
Sky laws of such states, as to which such counsel need express no
opinion).
(g) You shall have received on the Closing Date an
opinion, dated the Closing Date, of Alston & Bird, counsel for the
Underwriters, in form and substance reasonably satisfactory to you,
with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions
contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(h) You shall have received a letter on and as of the
Closing Date, in form and substance satisfactory to you, from Ernst &
Young LLP, independent public accountants, with respect to the
financial statements and certain financial information contained in
the Registration Statement and the Prospectus and substantially in the
form and substance of the letter delivered to you by Ernst & Young LLP
on the date of this Agreement. You shall have also received a letter
on and as of the Closing Date, in form and substance satisfactory to
you, from
- 30 -
<PAGE> 31
KPMG Peat Marwick LLP, independent public accountants, with respect to
their review of the unaudited financial statements of the Laing
Retirement Properties as of and for the six-month period ended June
30, 1996 contained in the Registration Statement and the Prospectus
and substantially in the form and substance of the letter delivered to
you by KPMG Peat Marwick LLP on the date of this Agreement.
(i) The Company, the Selling Stockholders and the
Additional Selling Stockholders shall not have failed at or prior to
the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the
Company, the Selling Stockholders or the Additional Selling
Stockholders at or prior to the Closing Date.
(j) The Company, the Selling Stockholders and the
Additional Selling Stockholders shall have furnished to you such
further certificates and documents as you or your counsel shall
reasonably request, including, without limitation, certificates of
officers of the Company and certificates of the Selling Stockholders
and the Additional Selling Stockholders as to the accuracy of the
respective representations and warranties of the Company, the Selling
Stockholders and the Additional Selling Stockholders herein, as to the
performance by the Company, the Selling Stockholders and the
Additional Selling Stockholders of their respective obligations
hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to counsel to the Underwriters. The Company, the Selling Stockholders and the
Additional Selling Stockholders will furnish you with such number of conformed
copies of such opinions, certificates, letters and documents as you shall
reasonably request.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to
the good standing of the Company, title to the Additional Shares, the
Registration Statement and Prospectus and other matters related to the Company
or the purchase of such Additional Shares, including, without limitation, (i)
an opinion dated the Option Closing Date of Watt, Tieder & Hoffar, counsel for
the Additional Selling Stockholders, with respect to the matters set forth in
paragraph 9(f) above and to the effect that, upon the delivery of and payment
for the Additional Shares to be sold by the Additional Selling Stockholders as
contemplated in this Agreement, each of the Underwriters (assuming they are
bona fide purchasers within the meaning of the Uniform Commercial Code) will
have acquired title to such Additional Shares purchased by it, free and clear
of any adverse claims, (ii) an opinion dated the Option Closing Date of Hogan &
Hartson L.L.P., counsel for the Company, with respect to the matters set forth
in paragraph 9(e) above (other than opinions relating solely to the Firm
Shares), (iii) an opinion dated the Option Closing Date of Alston & Bird,
counsel for
- 31 -
<PAGE> 32
the Underwriters, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, (iv) a letter
dated the Option Closing Date from Ernst & Young LLP with respect to the
matters set forth in the first sentence of paragraph 9(h) above and a letter
dated the Option Closing Date from KPMG Peat Marwick LLP with respect to the
matters set forth in the second sentence of paragraph 9(h) above, and (v)
certificates dated the Option Closing Date as to the matters referred to in
paragraph 9(j) above.
10. Effective Date of Agreement and Termination. This Agreement
shall become effective upon the later of (i) execution of this Agreement and
(ii) the effectiveness of the Registration Statement.
This Agreement may be terminated at any time prior to the
Closing Date by you by written notice to the Sellers if any of the following
has occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse change
or development involving a prospective material adverse change in the condition
(financial or other) of the Company and the Subsidiaries, taken as a whole, or
the business, prospects, properties, net worth or results of operations of the
Company and the Subsidiaries, taken as a whole, whether or not arising in the
ordinary course of business, which would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus, (ii) any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic conditions
or in the financial markets of the United States or elsewhere that, in your
judgment, is material and adverse and would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus, (iii) the suspension or material limitation of trading in
securities on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market or limitation on prices for securities on any such
exchange or Nasdaq National Market, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of any court or other governmental authority which in your opinion materially
and adversely affects, or will materially and adversely affect, the business or
operations of the Company and the Subsidiaries, taken as a whole, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase the Firm Shares or Additional Shares, as the case may be, which it or
they have agreed to purchase hereunder on such date and the aggregate number of
Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall
- 32 -
<PAGE> 33
be obligated severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I bears to the total number of Firm Shares
which all the non-defaulting Underwriters, as the case may be, have agreed to
purchase, or in such other proportion as you may specify, to purchase the Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase on such date; provided that in no event shall the number of Firm
Shares or Additional Shares, as the case may be, which any Underwriter has
agreed to purchase pursuant to Section 2 hereof be increased pursuant to this
Section 10 by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date or on an Option Closing Date, as the case
may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm
Shares, or Additional Shares, as the case may be, and the aggregate number of
Firm Shares or Additional Shares, as the case may be, with respect to which
such default occurs is more than one-tenth of the aggregate number of Shares to
be purchased on such date by all Underwriters and arrangements satisfactory to
you and the applicable Sellers for purchase of such Shares are not made within
48 hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter and the applicable Sellers. In any
such case which does not result in termination of this Agreement, either you or
the Sellers shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of any such Underwriter under this
Agreement.
11. Agreements of the Selling Stockholders and Additional Selling
Stockholders. Each Selling Stockholder and Additional Selling Stockholder
severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer
taxes with respect to the Shares to be sold by such Selling
Stockholder or Additional Selling Stockholder; and
(b) To take all reasonable actions in cooperation
with the Company and the Underwriters to cause the
Registration Statement to become effective at the earliest
possible time, to do and perform all things to be done and
performed by such Selling Stockholder or Additional Selling
Stockholder under this Agreement prior to the Closing Date or
the Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery by such Selling
Stockholder or Additional Selling Stockholder of the Shares to
be sold by such Selling Stockholder or Additional Selling
Stockholder pursuant to this Agreement.
- 33 -
<PAGE> 34
12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (a) if to the Company, to Paul
J. Klaassen, Chief Executive Officer, Sunrise Assisted Living, Inc., 9401 Lee
Highway, Suite 300, Fairfax, Virginia 22031, (b) if to any Selling Stockholder
or Additional Selling Stockholder, to such Selling Stockholder or Additional
Selling Stockholder c/o Sunrise Assisted Living, Inc., 9401 Lee Highway, Suite
300, Fairfax, Virginia 22031 and (c) if to any Underwriter or to you, to you
c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New
York, New York 10172, Attention: Syndicate Department, or in any case to such
other address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements,
representations, warranties and other statements of the Selling Stockholders,
the Additional Selling Stockholders, the Company, its officers and directors
and of the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any Underwriter or
by or on behalf of the Sellers, the officers or directors of the Company or any
controlling person of the Sellers, (ii) acceptance of the Shares and payment
for them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters
because of any failure or refusal on the part of the Company or the Selling
Stockholders or Additional Selling Stockholder to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company, the Selling
Stockholders or the Additional Selling Stockholders, as the case may be, agree
to reimburse the several Underwriters for all out-of-pocket expenses (including
the reasonable fees and disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is
made solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance
with the laws of the State of New York.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
- 34 -
<PAGE> 35
Please confirm that the foregoing correctly sets forth the
agreement by and among the Company, the Selling Stockholders, the Additional
Selling Stockholders and the several Underwriters.
Very truly yours,
SUNRISE ASSISTED LIVING, INC.
By:
-----------------------------------
David W. Faeder, Executive Vice President
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE II HERETO
By:
-----------------------------------
Attorney-in-Fact
--------------------------------------
DAVID W. FAEDER
--------------------------------------
TIMOTHY S. SMICK
--------------------------------------
THOMAS B. NEWELL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS INCORPORATED
NATWEST SECURITIES LIMITED
J.C. BRADFORD & CO.
Acting severally on behalf of themselves and the
several Underwriters named in Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
--------------------------------------------
John W. Patterson, Senior Vice President
- 35 -
<PAGE> 36
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
------------ -------------------------
<S> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation
Alex. Brown & Sons Incorporated
NatWest Securities Limited
J.C. Bradford & Co.
_________
Total 4,000,000
</TABLE>
<PAGE> 37
SCHEDULE II
Selling Stockholders
<TABLE>
<CAPTION>
Number of Additional
Name Shares Being Sold
---- -----------------
<S> <C>
Allstate Insurance Company 140,000
Allstate Life Insurance Company 87,500
CTC Illinois Trust Company, as trustee for 12,500
the benefit of Allstate Retirement Plan
CTC Illinois Trust Company, as trustee for 10,000
the benefit of Agents Pension Plan
Frontenac VI Limited Partnership 375,000
DLJ Capital Corporation 33,838
Sprout Growth II, L.P. 341,162
---------
Total 1,000,000
</TABLE>
<PAGE> 38
SCHEDULE III
Additional Selling Stockholders
<TABLE>
<CAPTION>
Number of Additional
Name Shares Being Sold*
---- ------------------
<S> <C>
David W. Faeder 150,000
Timothy S. Smick 33,333
Thomas B. Newell 20,000
-------
Total 203,333
</TABLE>
_______________
* Represents shares subject to presently exercisable stock options that
will be exercised immediately prior to the Option Closing, if the
Underwriters' over-allotment option is exercised.
<PAGE> 1
EXHIBIT 1.2
SUNRISE ASSISTED LIVING, INC.
LETTER OF TRANSMITTAL AND CUSTODY AGREEMENT
First Union National Bank
of North Carolina
230 South Tryon Street, 11th Floor
Charlotte, North Carolina 28202
Ladies and Gentlemen:
There are delivered to you herewith certificates representing shares
of Common Stock, par value $0.01 per share ("Common Stock"), of Sunrise
Assisted Living, Inc., a Delaware corporation (the "Company"), as set forth at
the end of this letter on the page entitled "CERTIFICATES DEPOSITED". Each of
the certificates so delivered is accompanied by a duly executed assignment form
duly endorsed for transfer and are in negotiable form bearing the signature of
the undersigned guaranteed by a commercial bank or trust company having an
office or a correspondent in New York City, New York or by a member firm of the
New York, American or Pacific Stock Exchange. The stock certificates are to be
held by you as Custodian for the account of the undersigned and are to be
disposed of by you in accordance with this Letter of Transmittal and Custody
Agreement (the "Custody Agreement").
The undersigned agrees to deliver to the Attorneys (as herein defined)
or to you such additional documentation as the Attorneys, or any of them, or
the Company or the Representatives (as herein defined) or you or any of their
respective counsel may request to effectuate or confirm compliance with any of
the provisions hereof or of the Underwriting Agreement (as herein defined), all
of the foregoing to be in form and substance satisfactory in all material
respects to the Attorneys and you and such counsel.
Concurrently with the execution and delivery of this Custody
Agreement, the undersigned has executed a power of attorney (the "Power of
Attorney") to Paul J. Klaassen and David W. Faeder (individually, an "Attorney"
and collectively, the "Attorneys"), authorizing the Attorneys, each with full
power and authority to act alone, including full power of substitution, to sell
from the number of securities represented by the certificates deposited with
you hereunder that number of securities indicated at the end of this Custody
Agreement on the page entitled "CERTIFICATES DEPOSITED" (the "Securities"), and
for that purpose to enter into and perform an underwriting agreement
<PAGE> 2
(the "Underwriting Agreement") among the Company, the Selling Stockholders (as
defined in the Underwriting Agreement), the Additional Selling Stockholders (as
defined in the Underwriting Agreement), and Donaldson, Lufkin & Jenrette
Securities Corporation, Alex. Brown & Sons Incorporated, NatWest Securities
Limited and J.C. Bradford & Co., as the representatives (the "Representatives")
of and on behalf of each of the several underwriters named in the Underwriting
Agreement (the "Underwriters"). All items not otherwise defined herein shall
have the same meaning as in the Underwriting Agreement.
You are authorized and directed to hold the Securities deposited with
you hereunder in your custody, and on the Closing Date or such other date
specified in the Underwriting Agreement you shall (i) take all necessary action
to cause the Securities to be sold and transferred on the books of the Company
into such names as the Representatives, on behalf of the several Underwriters,
shall have instructed you and to surrender the certificates representing the
shares of Common Stock to you, as transfer agent for the Common Stock, in
exchange for new certificates for shares of Common Stock registered in such
names and in such denominations as the Representatives shall have instructed
you; (ii) deliver such new certificates to the Representatives, for the
accounts of the several Underwriters, against payment for such Securities at
the purchase price per share as determined in accordance with the Underwriting
Agreement, and give receipt for such payment; (iii) deposit the same to your
account as Custodian, and draw upon such account to pay such expenses, if any
(the "Expenses"), as you may be instructed to pay by the undersigned; (iv) when
instructed by the undersigned to do so, you are to transmit to the undersigned,
within 24 hours of such instruction to you, the balance, if any, of the amount
received by you as payment for the Securities after deducting the Expenses.
Such balance is to be paid in the manner requested by the undersigned at the
end of this Custody Agreement or in such manner as you, in accordance with the
terms hereof, shall deem appropriate. With such remittance you shall also
return to the undersigned new certificates representing the number of shares of
Common Stock, if any, deposited with you hereunder which are in excess of the
number of Securities sold by the undersigned to the Underwriters.
If the Underwriting Agreement shall not have been entered into prior
to November 30, 1996, then, upon the written request of the undersigned to you
(accompanied by written notice of termination of the Power of Attorney
addressed to each of the Attorneys, in your care) on or after that date, you
are to return to the undersigned the certificates deposited with you hereunder,
together with any stock powers delivered herewith.
Under the terms of the Power of Attorney, the power conferred
thereby is granted, made and conferred subject to and in consideration of the
interests of the Underwriters and the Company and, prior to November 30, 1996,
is irrevocable and not subject to termination by the undersigned or by
operation of law, whether by the death, incapacity, termination, dissolution or
liquidation of the undersigned or otherwise, and the obligations of the
undersigned pursuant to the Underwriting Agreement are similarly not subject to
termination and shall remain in full force and effect until such date and, to
the
- 2 -
<PAGE> 3
extent provided therein, after such date. Accordingly, the certificates
deposited with you hereunder and this Custody Agreement and your authority
hereunder are subject to the interests of the several Underwriters and the
Company, and this Custody Agreement and your authority hereunder are
irrevocable and are not subject to termination by the undersigned or by
operation of law, whether by the death or incapacity of the undersigned, the
termination of any trust or estate, the death or incapacity of one or more
trustees, guardians, executors or administrators under such trust or estate,
the dissolution or liquidation of any corporation or partnership or the
occurrence of any other event. If the undersigned should die or become
incapacitated, if any trust or estate should be terminated, if any corporation
or partnership should be dissolved or liquidated, or if any other such event
should occur before the delivery of the Securities to be sold by the
undersigned under the Underwriting Agreement, certificates for such Securities
shall be delivered by you on behalf of the undersigned in accordance with the
terms and conditions of the Underwriting Agreement and this Custody Agreement,
and action taken by you pursuant to this Custody Agreement shall be as valid as
if such death or incapacity, termination, dissolution, liquidation or other
event had not occurred, regardless of whether or not you shall have received
notice of such death, incapacity, termination, dissolution, liquidation or
other event. [_____________] has authority to instruct you on irregularities
or discrepancies in letters of transmittal, discrepancies in the form of
certificates representing the Securities and accompanying documents.
Until payment of the purchase price for the Securities has been made
to you by or for the account of the several Underwriters, the undersigned shall
remain the owner of the Securities and shall have the right to vote the
Securities and all other securities, if any, represented by the certificates
deposited with you hereunder and to receive all dividends and distributions
thereon.
You shall be entitled to act and rely upon any statement, request,
notice or instructions respecting this Custody Agreement given to you on behalf
of the undersigned, if the same shall have been made or given to you by the
undersigned, or by the Attorneys, or any of them; provided, however, that you
shall not be entitled to act on any statement or notice to you with respect to
the Closing Date under the Underwriting Agreement, or with respect to the
non-effectiveness or termination of the Underwriting Agreement, or advising
that the Underwriting Agreement has not been executed and delivered, unless
such statement or notice shall have been confirmed in writing to you by the
Representatives.
In taking any action requested or directed by the Representatives
under the terms of this Custody Agreement, you will be entitled to rely upon a
writing signed by an authorized employee of Donaldson, Lufkin & Jenrette
Securities Corporation.
It is understood that you assume no responsibility or liability to any
person other than to deal with the certificate(s) deposited with you hereunder
and the proceeds from the sale of all or a portion of the securities
represented thereby in accordance with the provisions of this Custody
Agreement, and the undersigned agrees to indemnify and hold
- 3 -
<PAGE> 4
you harmless with respect to anything done by you in good faith in accordance
with the foregoing instructions.
The undersigned represents and warrants on behalf of itself severally,
and not jointly with any other Selling Stockholder, that:
(i) Such Selling Stockholder is the lawful owner of the
Securities to be sold by such Selling Stockholder pursuant to the
Underwriting Agreement.
(ii) Upon delivery of and payment for such Securities
pursuant to the Underwriting Agreement, good and clear title to such
Securities will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests and claims
whatsoever.
(iii) Such Selling Stockholder has, and on the Closing Date
will have, full legal right, power and authority to enter into the
Underwriting Agreement and this Custody Agreement and to sell, assign,
transfer and deliver the Securities in the manner provided herein and
therein, and the Underwriting Agreement and this Custody Agreement
have been duly authorized, executed and delivered by or on behalf of
such Selling Stockholder.
(iv) The Power of Attorney signed by such Selling
Stockholder appointing Paul J. Klaassen and David W. Faeder, or any
one of them, as such Selling Stockholder's attorney-in-fact to the
extent set forth therein with regard to the transactions contemplated
by the Underwriting Agreement and by the Registration Statement and by
this Custody Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder, and such
Selling Stockholder has, and on the Closing Date will have, full legal
right, power and authority to enter into the Power of Attorney and to
grant to the Attorneys, or either of them, the power, authority and
rights granted thereby.
The foregoing representations, warranties and agreements are made for
the benefit of, and may be relied upon by, (i) the Company, (ii) Hogan &
Hartson L.L.P., (iii) the Underwriters and their representatives, agents and
counsel, Alston & Bird, (iv) the Custodian, and (v) counsel to the undersigned.
The Custody Agreement shall be governed by the laws of the state of
residence of the undersigned indicated in the address appearing below the
undersigned's signature on this Custody Agreement.
- 4 -
<PAGE> 5
Please acknowledge your acceptance hereof as Custodian, and receipt of
the certificate(s) deposited with you hereunder, by executing and returning the
enclosed copy hereof to the undersigned in care of _______________________.
Dated: October __, 1996 Very truly yours,
*
------------------------------
Printed Name and Address:
- -----------------------
- -----------------------
- -----------------------
- -----------------------
Taxpayer I.D. #:
- -----------------------
Telephone Number:
---------------------
- -----------------------
*To be signed in exactly the same manner as the securities are registered.
- 5 -
<PAGE> 6
Instruction: Complete each column as to certificates to be deposited with the
Custodian.
CERTIFICATES DEPOSITED
<TABLE>
<CAPTION>
Number of Shares Maximum Number of
of Common Stock Shares of Common
Stock Represented by Stock To Be Sold
Cert. No. Each Certificate from Certificate*
--------- ---------------- ----------------------
<S> <C> <C>
TOTAL: ---------------- --------------------
</TABLE>
* If no indication is made to the certificates from which securities
to be sold shall be allocated, then selection will be made at the
Custodian's discretion. The Attorneys do not have the power to sell a
greater number of securities than is listed in this column, although
they may sell a lesser number.
- 6 -
<PAGE> 7
Instruction: Indicate how you wish to receive payment for the securities
sold to the Underwriters. A wire transfer can be made only to an account
standing in exactly the same name as the person holding the securities being
sold.
MANNER OF PAYMENT
I request that payment of the net proceeds from the sale of the shares
of Common Stock of the Company to be sold by me pursuant to the Underwriting
Agreement be made in the following manner (CHECK ONE):
<TABLE>
<S> <C> <C>
( ) CHECK made payable to:
------
--------------------------------------
to be sent to the following address:
--------------------------------------
--------------------------------------
phone ( )
-- ---------------------------
Please send by (check one):
( ) Via First Class Mail
-------
( ) Via Federal Express
------- Federal Express Account Number:
-------------
( ) WIRE TRANSFER to the following account:
-------
Account No.
---------------------------
Bank
----------------------------------
(Name)
--------------------------------------
(Address)
ABA No.
-------------------------------
phone ( )
------ -----------------------
( ) OTHER (please specify):
--------
--------------------------------------
--------------------------------------
--------------------------------------
</TABLE>
- 7 -
<PAGE> 8
CUSTODIAN'S ACKNOWLEDGMENT AND RECEIPT
First Union National Bank of North Carolina, as Custodian,
acknowledges acceptance of the duties of the Custodian under the foregoing
Custody Agreement and receipt of the certificates referred to therein.
Dated: October ___, 1996
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By:
---------------------------------
Name:
Title:
DO NOT DETACH FROM CUSTODY AGREEMENT
- 8 -
<PAGE> 1
EXHIBIT 1.3
SUNRISE ASSISTED LIVING, INC.
SELLING STOCKHOLDER'S IRREVOCABLE POWER OF ATTORNEY
Paul J. Klaassen
David W. Faeder
Sunrise Assisted Living, Inc.
9401 Lee Highway, Suite 300
Fairfax, Virginia 22031
Ladies and Gentlemen:
The undersigned, Sunrise Assisted Living, Inc. (the "Company"),
certain other holders of outstanding shares of the Company's common stock (such
holders and the undersigned being hereinafter sometimes collectively referred
to as the "Selling Stockholders") and certain holders of options to purchase
shares of the Company's comon stock (such holders of options and the Selling
Stockholders being hereinafter sometimes collectively referred to as the
"Sellers") propose to enter into an Underwriting Agreement (the "Underwriting
Agreement") with Donaldson, Lufkin & Jenrette Securities Corporation, Alex.
Brown & Sons Incorporated, NatWest Securities Limited and J.C. Bradford & Co.,
as representatives (the "Representatives") of a group of underwriters to be
named in the Underwriting Agreement (the "Underwriters"). The Selling
Stockholders propose to sell certain authorized and issued shares of the common
stock, par value $0.01 per share, of the Company (the "Common Stock") owned by
them to the Underwriters pursuant to the Underwriting Agreement. All items not
otherwise defined herein shall have the same meaning as in the Underwriting
Agreement. The undersigned hereby irrevocably constitutes and appoints Paul J.
Klaassen and David W. Faeder, each with full power and authority to act alone
in any matter hereunder and with full power of substitution, the true and
lawful attorneys-in-fact (the "Attorneys") of the undersigned with full power
in the name of, for and on behalf of the undersigned with respect to all
matters arising in connection with the sale of Common Stock by the undersigned
including, but not limited to, the power and authority to take any and all of
the following actions:
(1) To sell and deliver to the several Underwriters up to
the number of shares of Common Stock as set forth in Attachment A
hereto (such total number of shares as is finally determined by the
Attorneys and set forth opposite the name of the undersigned in
Schedule II to the Underwriting Agreement are hereinafter
<PAGE> 2
referred to as the "Securities"), such Securities to be represented by
certificates deposited by the undersigned pursuant to the Letter of
Transmittal and Custody Agreement (the "Custody Agreement") between
the undersigned and First Union National Bank of North Carolina, as
Custodian (the "Custodian"), at a purchase price per share to be paid
by the Underwriters as the Attorneys, or any one of them, in their
sole discretion shall determine, but at the same price per share at
which the Company sells Common Stock to the Underwriters and on such
other terms as are determined by the Attorneys;
(2) For the purpose of effecting such sale, to execute,
deliver and perform the Underwriting Agreement and in conjunction with
the Representatives and a committee of the Board of Directors of the
Company to determine the public offering price and the purchase price
per share of Common Stock to be paid by the Underwriters as determined
by the Attorneys (subject to paragraph (1) above) and the other terms
of sale in accordance with the Underwriting Agreement (including the
provisions for exercise of the Underwriters' over-allotment option);
(3) To give such orders and instructions to the Custodian
as the Attorneys may determine with respect to (i) the transfer on the
books of the Company of any shares of Common Stock to be sold by the
undersigned to the Underwriters in order to effect such sale
(including the names in which new certificates for shares of Common
Stock are to be issued and the denominations thereof), (ii) the
delivery to or for the account of the Underwriters of the certificates
for the Securities against receipt by the Custodian or its agent of
the purchase price to be paid therefor, (iii) the payment, out of the
proceeds (net of underwriting discounts) from the sale of the
Securities by the undersigned to the Underwriters, of any expense
incurred in accordance with paragraph (5) which is not payable by the
Company, and (iv) the return to the undersigned of new certificates
representing the number of shares of Common Stock, if any, represented
by certificates deposited with the Custodian which are in excess of
the number of shares of Common Stock sold by the undersigned to the
Underwriters;
(4) On behalf of the undersigned, to make the
representations and warranties of the undersigned and enter into the
agreements of the undersigned contained in the Underwriting
Agreement (including, without limitation, the restriction on sales or
other dispositions of shares of Common Stock and securities
convertible into or exercisable or exchangeable for shares of Common
Stock by the undersigned);
(5) To incur any necessary or appropriate expense in
connection with the sale of the Securities consistent with the terms
of the Registration Agreement between the Company and the Selling
Stockholders dated January 4, 1995;
- 2 -
<PAGE> 3
(6) To approve on behalf of the undersigned any
amendments to the Registration Statement or the Prospectus other than
information relating to the undersigned furnished to the Company by or
on behalf of the undersigned expressly for use therein;
(7) With the consent of the undersigned, to retain legal
counsel to represent the undersigned in connection with any and all
matters referred to herein (which counsel may, but need not be,
counsel for the Company);
(8) To make, execute, acknowledge and deliver all such
other contracts, stock powers, orders, receipts, notices,
instructions, certificates, letters and other writings, including,
without limitation, requests for the acceleration of the effectiveness
of the Registration Statement, and other communications to the
Securities and Exchange Commission (the "Commission"), and amendments
to the Underwriting Agreement, and in general to do all things and to
take all actions which the Attorneys, in their sole discretion, may
consider necessary or proper in connection with or to carry out the
aforesaid sale of shares to the Underwriters and the public offering
thereof, as fully as could the undersigned if personally present and
acting;
(9) To make, acknowledge, verify and file on behalf of
the undersigned applications, consents to service of process and such
other undertakings or reports as may be required by law with state
commissioners or officers administering state securities or real
estate syndication laws;
(10) If necessary, to endorse (in blank or otherwise) on
behalf of the undersigned the certificate or certificates representing
the Securities, or a stock power or powers attached to such
certificate or certificates;
(11) To sell a number of shares of Common Stock fewer than
that set forth in the Custody Agreement pursuant to the Underwriting
Agreement; and
(12) To sign such other underwriting documents and
agreements as necessary to consummate this transaction.
Notwithstanding any of the foregoing provisions, in no event shall the
Attorneys, or either of them, have the power or authority to modify any
representations, warranties or indemnities of the undersigned contained in the
preliminary draft of the Underwriting Agreement dated October 22, 1996.
Each of the Attorneys is hereby empowered to determine in his or her
sole discretion the time or times when, purpose for and manner in which any
power herein conferred upon him or her shall be exercised, and the conditions,
provisions or covenants of any instrument or document which may be executed by
him or her pursuant hereto. The undersigned acknowledges that each of Paul J.
Klaassen and David W. Faeder is an officer and a director of the Company.
The undersigned has reviewed the preliminary draft of the Underwriting
Agreement dated October 22, 1996 and understands the obligations and agreements
of the undersigned set forth therein. All representations and warranties of
the Selling Stockholders in the Underwriting Agreement are, with respect to the
undersigned, and will
- 3 -
<PAGE> 4
be at the Closing Date as determined in accordance with the Underwriting
Agreement, true and correct and will, as provided in the Underwriting
Agreement, survive the termination of the Underwriting Agreement and the
delivery of and payment for the Securities.
Upon the execution and delivery of the Underwriting Agreement by the
Attorneys on behalf of the Selling Stockholders, the undersigned agrees to be
bound by and to perform each and every covenant and agreement therein of the
undersigned as a Selling Stockholder (including, without limitation, the
indemnification and contribution arrangements set forth in the Underwriting
Agreement).
This Power of Attorney and all authority conferred hereby are granted
and conferred subject to and in consideration of the interests of the several
Underwriters and the Company and for the purposes of completing the
transactions contemplated by the Underwriting Agreement and this Power of
Attorney.
This Power of Attorney is an agency coupled with an interest and all
authority conferred hereby shall be irrevocable, and shall not be terminated by
any act of the undersigned or by operation of law, whether by the death or
incapacity of the undersigned (or either or any of them) or by the occurrence
of any other event or events (including, without limiting the foregoing, the
termination of any trust or estate for which the undersigned is acting as a
fiduciary or fiduciaries or the dissolution or liquidation of any corporation
or partnership). If after the execution hereof the undersigned (or either or
any of them) should die or become incapacitated, or if any trust or estate
should be terminated, or if any corporation or partnership should be dissolved
or liquidated, or if any other such event or events shall occur, before the
completion of the transactions contemplated by the Underwriting Agreement and
this Power of Attorney, certificates representing the Securities shall be
delivered by or on behalf of the undersigned in accordance with the terms and
conditions of the Underwriting Agreement and of the Custody Agreement executed
by the undersigned, and actions taken by the Attorneys or any one of them,
hereunder shall be as valid as if such death, incapacity, termination,
dissolution, liquidation or other event or events had not occurred, regardless
of whether or not the Custodian, Attorneys, Underwriters or any one of them,
shall have received notice of such death, incapacity, termination, dissolution,
liquidation or other event.
Notwithstanding any of the foregoing provisions, if all of the
transactions contemplated by the Underwriting Agreement and this Power of
Attorney are not completed prior to December 31, 1996, then from and after such
date, the undersigned shall have the power, upon written notice to the
Attorneys, to terminate this Power of Attorney subject, however, to all lawful
action done or performed pursuant hereto prior to the receipt of actual notice.
The undersigned hereby represents, warrants and agrees that
- 4 -
<PAGE> 5
(i) The undersigned is the lawful owner of the Securities
to be sold by the undersigned pursuant to the Underwriting Agreement.
(ii) Upon delivery of and payment for such Securities
pursuant to the Underwriting Agreement, good and clear title to such
Securities will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests and claims
whatsoever.
(iii) The undersigned has, and on the Closing Date will
have, full legal right, power and authority to enter into the
Underwriting Agreement and the Custody Agreement and to sell, assign,
transfer and deliver the Securities in the manner provided therein,
and the Underwriting Agreement and the Custody Agreement have been
duly authorized, executed and delivered by or on behalf of the
undersigned.
(iv) This Power of Attorney appointing Paul J. Klaassen
and David W. Faeder, or any one of them, as the undersigned's
attorney-in fact to the extent set forth herein with regard to the
transactions contemplated by the Underwriting Agreement and by the
Registration Statement and by the Custody Agreement has been duly
authorized, executed and delivered by or on behalf of the undersigned,
and the undersigned has, and on the Closing Date will have, full legal
right, power and authority to enter into this Power of Attorney and to
grant to the Attorneys, or either of them, the power, authority and
rights granted hereby.
The Attorneys, and any of them, shall be entitled to act and rely upon
any representation, warranty, agreement, statement, request, notice or
instruction respecting this Power of Attorney given by the undersigned, not
only as to the authorization, validity and effectiveness hereof, but also as to
the truth and acceptability of any information herein contained; provided,
however, that any statement or notice to the Attorneys with respect to the date
of delivery under the Underwriting Agreement or with respect to the
non-effectiveness or termination of the Underwriting Agreement, or advice that
the Underwriting Agreement has not been executed and delivered, shall have been
confirmed in writing to the Attorneys by the Representatives. In acting
hereunder, the Attorneys may also rely on the representations, warranties and
agreements of the undersigned made in the Underwriting Agreement executed by
the Attorneys on behalf of the undersigned and in the Custody Agreement
executed by the undersigned.
The foregoing representations, warranties and agreements, as well as
those contained in the Underwriting Agreement, are made for the benefit of, and
may be relied upon by, the Attorneys, the Company, the Underwriters, the
Sellers other than the undersigned, the Custodian, and the respective
representatives, agents and counsel for each of the foregoing.
It is understood that the Attorneys assume no responsibility or
liability to any person other than to deal with the certificates for shares of
Common Stock deposited with
- 5 -
<PAGE> 6
the Custodian pursuant to the Custody Agreement and the proceeds from the sale
of shares of Common Stock represented thereby in accordance with the provisions
hereof. The Attorneys (in such a capacity) make no representations with
respect to and shall have no responsibility for the Registration Statement or
the Prospectus nor, except as herein expressly provided, for any aspect of the
offering of Common Stock, and the Attorneys shall not be liable for any error
of judgment or for any act done or omitted or for any mistake of fact or law
except for the Attorneys' own gross negligence or bad faith. The undersigned
agrees to indemnify the Attorneys for and to hold the Attorneys, jointly and
severally, free from and harmless against any and all loss, claim, damage,
liability or expense incurred by or on behalf of the Attorneys, or any of them,
arising out of or in connection with acting as Attorneys under this Power of
Attorney, as well as the cost and expense of defending against any claim of
liability hereunder, and not due to the Attorneys' own gross negligence or bad
faith. The undersigned agrees that the Attorneys may consult with counsel of
their choice (which may but need not be counsel for the Company) and the
Attorneys shall have full and complete authorization and protection for any
action taken or suffered by the Attorneys, or any of them hereunder, in good
faith and in accordance with the opinion of such counsel.
It is understood that the Attorneys shall serve entirely without
compensation.
This Power of Attorney shall be governed by the laws of the state of
residence of the undersigned indicated in the address appearing below the
undersigned's signature on this Power of Attorney.
[Remainder of Page Intentionally Left Blank]
- 6 -
<PAGE> 7
Witness the due execution of the foregoing Power of Attorney as of the
date written below.
Dated: October , 1996 Very truly yours,
---
*
-----------------------------------
Printed Name and Address:
- ----------------------------
- ----------------------------
- ----------------------------
Taxpayer I.D. #:
- ----------------------------
Telephone Number:
-----------------
- -----------------------
*To be signed in exactly the same manner as the securities are registered.
- 7 -
<PAGE> 8
ATTACHMENT A
MAXIMUM NUMBER OF SHARES TO BE SOLD
<TABLE>
<CAPTION>
Number of Shares Maximum Number of
of Common Stock Shares of Common
Stock Represented by Stock To Be Sold
Cert. No.: Each Certificate From Certificate*
--------- ---------------- ----------------------
<S> <C> <C>
TOTAL: ------------ -------------------
</TABLE>
* If no indication is made as to the certificates from which
securities to be sold shall be allocated, then selection will be made
at the Custodian's discretion. The Attorneys do not have the power to
sell a greater number of securities than is listed in this column,
although they may sell a lesser number.
DO NOT DETACH FROM POWER OF ATTORNEY
- 8 -
<PAGE> 9
TRUSTEE ACKNOWLEDGMENT
State of )
---------------------
) SS.
- -----------------------------
County of: )
-------------------
On this the ___ day of October, 1996, before me,
_________________________, the undersigned Notary Public, personally appeared
.
/ / personally known to me
/ / proved to me on the basis of satisfactory evidence to be the person(s)
who executed the within instrument as Trustee on behalf of the Trust
therein named, and acknowledged that he or she subscribed his or her
name thereto as Trustee.
WITNESS my hand and official seal.
----------------------------
Notary's Signature
- 9 -
<PAGE> 1
Exhibit 4.2
SUNRISE ASSISTED LIVING, INC.
AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
AS RIGHTS AGENT
RIGHTS AGREEMENT
DATED AS OF APRIL 25, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3. Issue of Rights Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4. Form of Rights Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5. Countersignature and Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. . . . . . . . . . . . . . . . . 10
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. . . . . . . . . . . . . . . . . . 11
Section 8. Cancellation and Destruction of Rights Certificates. . . . . . . . . . . . . . . . . . . . . . . 13
Section 9. Reservation and Availability of Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 10. Preferred Stock Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. . . . . . . . . . . 16
Section 12. Certificate of Adjusted Purchase Price or Number of Shares. . . . . . . . . . . . . . . . . . . 25
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. . . . . . . . . . . . . . 25
Section 14. Fractional Rights and Fractional Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 16. Agreement of Rights Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 17. Rights Certificate Holder Not Deemed a Stockholder. . . . . . . . . . . . . . . . . . . . . . . 31
Section 18. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 19. Compensation and Indemnification of the Rights Agent. . . . . . . . . . . . . . . . . . . . . . 33
Section 20. Merger or Consolidation or Change of Name of Rights Agent. . . . . . . . . . . . . . . . . . . . 34
Section 21. Change of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 22. Issuance of New Rights Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 23. Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 25. Notice of Certain Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 26. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 27. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 28. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 29. Determinations and Actions by the Board, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 30. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 31. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 32. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 33. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 34. Descriptive Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
- ii -
<PAGE> 4
RIGHTS AGREEMENT
Rights Agreement, dated as of April 25, 1996 (the
"Agreement"), between Sunrise Assisted Living, Inc., a Delaware corporation
(the "Company"), and First Union National Bank of North Carolina, a national
banking institution (the "Rights Agent").
WHEREAS, on April 25, 1996 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared a
dividend of one Right for each share of Common Stock (as hereinafter defined)
of the Company outstanding at the Close of Business (as defined herein) on the
Record Date (as defined herein), and has authorized the issuance of one Right
with respect to each share of Common Stock of the Company issued between the
Record Date (whether originally issued or delivered from the Company's
treasury) and the Distribution Date (as hereinafter defined), each Right
initially representing the right to purchase one one-thousandth of a share of
Series C Junior Participating Preferred Stock of the Company having the rights,
powers and preferences set forth in the form of Certificate of Designation,
Preferences and Rights attached hereto as Exhibit A, upon the terms and subject
to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS.
For purposes of this Agreement, the following terms have the
meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term
is hereinafter defined) who or which, together with all
Affiliates and Associates (as such terms are hereinafter
defined) of such Person, shall be the Beneficial Owner (as such
term is hereinafter defined) of 20% or more of the shares of
Common Stock then outstanding, but shall not include (i) the
Company, (ii) any Subsidiary of the Company, or (iii) any
employee benefit plan of the Company or any Subsidiary of the
Company, or any Person or entity holding shares of Common Stock
for or pursuant to the terms of any such plan to the extent, and
only to the extent, of such shares so held. Notwithstanding the
foregoing, neither Paul J. Klaassens nor Teresa M. Klaassens
(each, together with their Affiliates, Associates and Estates,
an "Exempt Person") each of whom, was, as of April 25, 1996, the
Beneficial Owner of the Company's Common Stock in excess of 20%
of the Company's outstanding Common, shall be deemed as
"Acquiring Person"; provided however, that if after
<PAGE> 5
the date hereof, any Exempt Person shall become at any time the
Beneficial Owner of an additional 2% of the shares of Common
Stock of the Company then outstanding in excess of the amount
beneficially owned as of the date hereof (or if the Company
successfully completes an initial public offering of its shares
of Common Stock pursuant to the registration provisions of the
Securities Act of 1933, as amended, (an "IPO"), an amount in
excess of the amount beneficially owned by an Exempt Person at
the closing of such initial public offering) then such Exempt
Person shall be deemed an "Acquiring Person". Notwithstanding
the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of shares of Common Stock by the
Company which, by reducing the number of shares of Common Stock
outstanding, increases the proportionate number of shares of
Common Stock beneficially owned by such Person to 20% or more of
the shares of Common Stock of the Company then outstanding (or
in the case of an Exempt Person, increases the proportionate
number of shares of Common Stock beneficially owned as of the
date hereof (or the date the Company's closes an IPO); provided,
however, that if a Person shall become the Beneficial Owner of
20% or more of the Common Stock of the Company then outstanding
or in the case of an Exempt Person, increases the proportionate
number of shares of Common Stock beneficially owned as of the
date hereof (or the date the Company closes an IPO) by an
additional 2%) by reason of share purchases by the Company and
shall, after such share purchases by the Company, become the
Beneficial Owner of any additional shares of Common Stock of the
Company, then such Person shall be deemed to be an "Acquiring
Person" if such Person is then the Beneficial Owner of 20% or
more of the Common Stock then outstanding (or in the case of an
Exempt Person, the Beneficial Owner of an additional 2% of the
shares of Common Stock of the Company then outstanding in excess
of the amount beneficially owned by such Exempt Person as of the
date hereof (or the date the Company closes an IPO)).
Notwithstanding the foregoing, if the Board of Directors of the
Company determines in good faith that a Person who would
otherwise be an "Acquiring Person", as defined pursuant to the
foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as
practicable a sufficient number of shares of Common Stock so
that such Person would no longer be an "Acquiring Person", then
such Person shall not be deemed an "Acquiring Person" for any
purposes of this Agreement unless and until such Person shall
again become an "Acquiring Person".
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and
- 2 -
<PAGE> 6
Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(c) A Person shall be deemed the "Beneficial Owner" of and
shall be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has
the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant
to any agreement, arrangement or understanding (whether
or not in writing), or upon the exercise of conversion
rights, exchange rights, other rights (other than these
Rights), warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own", (A)
securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or
exchange; or (B) securities issuable upon exercise of
Rights at any time prior to the occurrence of a
Triggering Event, or (C) securities issuable upon
exercise of Rights from and after the occurrence of a
Triggering Event which Rights were acquired by such
Person or any of such Person's Affiliates or Associates
prior to the Distribution Date or pursuant to Section
3(a) or Section 22 hereof (the "Original Rights") or
pursuant to Section 11(i) hereof in connection with an
adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has
the right to vote or dispose of or has "beneficial
ownership" of (as determined pursuant to Rule 13d-3 of
the General Rules and Regulations under the Exchange
Act), including pursuant to any agreement, arrangement
or understanding, whether or not in writing; provided,
however, that a Person shall not be deemed the
"Beneficial Owner" of, or to beneficially own, any
security under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such
security if such agreement, arrangement or
understanding: (A) arises solely from a revocable
proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with,
the applicable provisions of the General Rules and
Regulations under the Exchange Act, and (B) is not also
then reportable by such Person on Schedule 13D under
the Exchange Act (or any comparable or successor
report); or
- 3 -
<PAGE> 7
(iii) which are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate or
Associate thereof) with which such Person or any of
such Person's Affiliates or Associates has any
agreement, arrangement or understanding (whether or not
in writing), for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy as
described in the proviso to subparagraph (ii) of this
paragraph (c)) or disposing of any voting securities of
the Company; provided, however, that nothing in this
paragraph (c) shall cause a person engaged in business
as an underwriter of securities to be the "Beneficial
Owner" of, or to "beneficially own," any securities
acquired through such person's participation in good
faith in a firm commitment underwriting until the
expiration of forty days after the date of such
acquisition.
(d) "Board" shall mean the Board of Directors of the
Company.
(e) "Business Day" shall mean any day other than a
Saturday, Sunday, or a day on which banking institutions in the
State of New York are authorized or obligated by law or
executive order to close.
(f) "Close of Business" on any given date shall mean 5:00
P.M., New York City time, on such date; provided, however, that
if such date is not a Business Day it shall mean 5:00 P.M., New
York City time, on the next succeeding Business Day.
(g) "Common Stock" when used with reference to the Company
shall mean the shares of common stock, par value $.01 per share,
of the Company. "Common Stock" when used with reference to any
Person other than the Company shall mean the class of capital
stock with the greatest aggregate voting power, or the class of
equity securities or other equity interests having power to
control or direct the management, of such Person.
(h) "Company" shall mean Sunrise Assisted Living, Inc., a
Delaware Corporation.
(i) "Continuing Director" shall mean (i) any member of the
Board, while such Person is a member of the Board, who is not an
Acquiring Person, or an Affiliate or Associate of an Acquiring
Person, or a representative of any Acquiring Person or of any
such Affiliate or Associate, and was a member of the Board as of
the date of this Agreement, or (ii) any Person who subsequently
becomes a member of the Board, while such Person is a member of
the Board, who is not an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, or
- 4 -
<PAGE> 8
a representative of an Acquiring Person or of any such Affiliate
or Associate, if such Person's nomination for election or
election to the Board is recommended or approved by a majority
of the Continuing Directors.
(j) "Distribution Date" shall mean the earlier of (i) the
Close of Business on the tenth day after the Stock Acquisition
Date (or, if the tenth day after the Stock Acquisition Date
occurs before the Record Date, the close of business on the
Record Date), or (ii) the Close of Business on the tenth
Business Day (or, if such tenth Business Day occurs before the
Record Date, the Close of Business on the Record Date), or such
specified or unspecified later date on or after the Record Date
as may be determined by action of a majority of the Continuing
Directors, after the date that a tender or exchange offer by any
Person (other than the Company, any Subsidiary of the Company or
any employee benefit plan of the Company or of any Subsidiary of
the Company or any Person or entity holding shares of Common
Stock for or pursuant to the terms of any such plan) is first
published or sent or given within the meaning of Rule 14d-2(a)
of the General Rules and Regulations under the Exchange Act, if
upon consummation thereof, such Person would be the beneficial
owner of 20% or more of the outstanding shares of Common Stock.
(k) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, as in effect on the date of this Agreement.
(l) "Exchange Date" shall have the meaning set forth in
Section 7(a) hereof.
(m) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(n) "Final Expiration Date" shall have the meaning set
forth in Section 7(a) hereof.
(o) "Outside Directors" shall mean the Continuing Directors
who are not officers of the Company.
(p) "Person" shall mean any individual, firm, corporation,
partnership or other entity, and shall include any successor (by
merger or otherwise) of such entity.
(q) "Preferred Stock" shall mean shares of Series C Junior
Participating Preferred Stock, par value $.01 per share, of the
Company.
- 5 -
<PAGE> 9
(r) "Principal Party" shall have the meaning set forth in
Section 13(b) hereof.
(s) "Purchase Price" shall have the meaning set forth in
Section 4(a) and 11(a)(ii) hereof.
(t) "Record Date" shall mean the close of business on May
15, 1996.
(u) "Redemption Period" shall have the meaning set forth in
Section 23(a) hereof.
(v) "Rights Agent" shall mean First Union National Bank of
North Carolina.
(w) "Rights Certificate" shall have the meaning set forth
in Section 3 hereof.
(x) "Rights Dividend Declaration Date" shall mean the close
of business on April 25, 1996.
(y) "Section 11(a)(ii) Event" shall mean any event
described in Section 11(a)(ii) hereof.
(z) "Section 13 Event" shall mean any event described in
clauses (x), (y) or (z) of Section 13(a) hereof.
(aa) "Securities Act" shall mean the Securities Act of 1933,
as amended, as in effect on the date of this Agreement.
(bb) "Stock Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition,
shall include, without limitation, a report filed pursuant to
Section 13(d) of the Exchange Act) by the Company or an
Acquiring Person that an Acquiring Person has become such.
(cc) "Subsidiary" of any Person shall mean any corporation
or other entity of which a majority of the voting power of the
voting equity securities or equity interests is owned, directly
or indirectly, by such Person, or is otherwise controlled by
such Person.
(dd) "Triggering Event" shall mean any Section 11(a)(ii)
Event or any Section 13 Event.
- 6 -
<PAGE> 10
SECTION 2. APPOINTMENT OF RIGHTS AGENT.
The Company hereby appoints the Rights Agent to act as agent
for the Company and the holders of the Rights (who, in accordance with Section
3 hereof, shall prior to the Distribution Date also be the holders of the
Common Stock) in accordance with the terms and conditions hereof, and the
Rights Agent hereby accepts such appointment. The Company may from time to
time appoint such Co-Rights Agents as it may deem necessary or desirable.
SECTION 3. ISSUE OF RIGHTS CERTIFICATES.
(a) As promptly as practicable following the Record Date,
the Company will send a copy of a Summary of Rights to Purchase Preferred
Stock, in substantially the form attached hereto as Exhibit B (the "Summary of
Rights"), by first-class, postage prepaid mail, to each record holder of Common
Stock as of the Close of Business on the Record Date at the address of such
holder shown on the records of the Company. With respect to certificates for
shares of Common Stock outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by such certificates for the
Common Stock and the registered holders of the Common Stock shall also be the
registered holders of the associated Rights. Until the Distribution Date (or
the earlier Expiration Date or Final Expiration Date), the transfer of any
certificate representing shares of Common Stock in respect of which Rights have
been issued shall also constitute the transfer of the Rights associated with
the shares of Common Stock represented thereby.
(b) Rights shall be issued in respect of all shares of
Common Stock issued (whether originally issued or from the Company's treasury)
after the Record Date but prior to the earlier of the Distribution Date or the
Expiration Date or the Final Expiration Date. Rights shall also be issued to
the extent provided in Section 22 in respect of all shares of Common Stock
which are issued (whether originally issued or from the Company's treasury)
after the Distribution Date and prior to the Expiration Date. Certificates
representing such shares of Common Stock shall also be deemed to be
certificates for Rights, and shall bear the following legend (in addition to
any other legends that may be required):
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in a Rights Agreement between
Sunrise Assisted Living, Inc. (the "Company") and First Union
National Bank of North Carolina (the "Rights Agent") dated as of
April 25, 1996 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is
on file at the principal executive offices of the Company.
Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this
certificate. The Company will mail
- 7 -
<PAGE> 11
to the holder of this certificate a copy of the Rights Agreement
as in effect on the date of mailing without charge after receipt
of a written request therefor.
Under certain circumstances set forth in the Rights Agreement,
Rights issued to, or held by, any Person who is, was or becomes
an Acquiring Person or any Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any
subsequent holder, may become null and void. The Rights shall
not be exercisable, and shall be void so long as held, by a
holder in any jurisdiction where the requisite qualification of
the issuance to such holder, or the exercise by such holder, of
the Rights in such jurisdiction shall not have been obtained or
be obtainable.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any such certificate shall also constitute the transfer of the Rights
associated with the Common Stock represented thereby.
(c) Until the Distribution Date (i) the Rights will be
evidenced (subject to the provisions of paragraph (a) of this Section 3) by the
certificates for Common Stock registered in the names of the holders thereof
(which certificates for Common Stock shall also be deemed to be Rights
Certificates) and not by separate Rights Certificates, and (ii) the Rights will
be transferable only in connection with the transfer of the underlying shares
of Common Stock (including a transfer to the Company).
(d) As soon as practicable after the Distribution Date, the
Rights Agent will send by first-class, insured, postage prepaid mail, to each
record holder of Common Stock as of the Close of Business on the Distribution
Date, at the address of such holder shown on the records of the Company, a
Rights Certificate, in substantially the form of Exhibit C hereto, evidencing
one Right for each share of Common Stock so held, subject to adjustment as
provided herein. In the event that an adjustment in the number of Rights per
share of Common Stock has been made pursuant to Section 11(p) hereof, at the
time of distribution of the Rights Certificates, the Company shall make
necessary and appropriate rounding adjustments (in accordance with Section
14(a) hereof) so that Rights Certificates representing only whole numbers of
Rights are distributed and cash is paid in lieu of any fractional Rights. As
of and after the Distribution Date, the Rights will be evidenced solely by such
Right Certificates.
- 8 -
<PAGE> 12
SECTION 4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall be
substantially the same as Exhibit C hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section
11 and Section 22 hereof, the Rights Certificates, whenever issued, shall be
dated as of the Record Date, and on their face shall entitle the holders
thereof to purchase such number of one one-thousandths of a share of Preferred
Stock as shall be set forth therein at the price set forth therein (such
exercise price per one one-thousandth of a share, the "Purchase Price"), but
the amount and type of securities purchasable upon exercise of each Right and
the Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(d)
or Section 22 hereof that represents Rights beneficially owned by: (i) an
Acquiring Person or any Associate or Affiliate of an Acquiring Person; (ii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such; or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person
becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which a majority of the
Continuing Directors has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect avoidance of Section
7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or Section
11 hereof upon transfer, exchange, replacement or adjustment of any other
Rights Certificate referred to in this sentence, shall contain (to the extent
feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement). Accordingly,
this Rights Certificate and the Rights represented hereby may
become null and void in the circumstances specified in Section
7(e) of such Rights Agreement.
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<PAGE> 13
SECTION 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf of
the Company by its President or a Vice-President either manually or by
facsimile signature, and have affixed thereto the Company's seal or a facsimile
thereof which shall be attested by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer of the Company, either manually or by
facsimile signature. The Rights Certificates shall be manually countersigned
by the Rights Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any of
the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights
Agent, and issued and delivered by the Company with the same force and effect
as though the person who signed such Rights Certificates had not ceased to be
such officer of the Company; and any Rights Certificate may be signed on behalf
of the Company by any person who, at the actual date of the execution of such
Rights Certificate, shall be a proper officer of the Company to sign such
Rights Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN
RIGHTS CERTIFICATES.
(a) Subject to the provisions of Section 4(b), Section 7(e)
and Section 14 hereof, at any time after the close of business on the
Distribution Date, and at or prior to the close of business on the earlier of
the Expiration Date or Final Expiration Date, any Rights Certificate or
Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or Certificates, entitling the registered holder to purchase
a like number of one one-thousandths of a share of Preferred Stock (or
following a Triggering Event, Common Stock, other securities, cash, or other
assets, as the case may be) as the Rights Certificate or Certificates
surrendered then entitled such holder (or former holder in the case of a
transfer) to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Rights Certificate shall make such request in writing
delivered to the Rights Agent, and shall surrender the Rights Certificate or
Certificates to be transferred,
- 10 -
<PAGE> 14
split up, combined or exchanged at the principal office of the Rights Agent.
Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to Section 4(b), Section 7(e) and Section 14
hereof, countersign and deliver to the person entitled thereto a Rights
Certificate or Certificates, as the case may be, as so requested. The Company
may require payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to them, and, at the Company's
request, reimbursement to the Company and the Rights Agent of all reasonable
expenses incidental thereto, and upon surrender to the Rights Agent and
cancellation of the Rights Certificate if mutilated, the Company will execute
and deliver a new Rights Certificate of like tenor to the Rights Agent for
countersignature and delivery to the registered owner in lieu of the Rights
Certificate so lost, stolen, destroyed, or mutilated.
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE
OF RIGHTS.
(a) Subject to Section 7(e) hereof, the registered holder
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office of the Rights Agent, together with payment of the
Purchase Price for each one one-thousandth of a share of Preferred Stock (or
other securities, cash or other assets, as the case may be) as to which the
Rights are exercised, at or prior to the earlier of (i) the close of business
on April 24, 2006 (the "Final Expiration Date"), (ii) the time at which the
Rights are redeemed as provided in Section 23 hereof, (iii) the time at which
such Rights are exchanged (the "Exchange Date") as provided in Section 24
hereof, or (iv) the time at which the Rights expire pursuant to Section 13(d)
hereof (the earliest of (i), (ii), (iii) and (iv) being herein referred to as
the "Expiration Date").
- 11 -
<PAGE> 15
(b) Each Right shall entitle the registered holder thereof
to purchase one one-thousandth of a share of Preferred Stock, and the Purchase
Price for each one one-thousandth of a share of Preferred Stock pursuant to the
exercise of a Right shall initially be $85.00, and shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in lawful money of the United States of America in accordance with
paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one one-thousandth of a share of Preferred Stock (or
Common Stock, other securities, cash or other assets, as the case may be) to be
purchased and an amount equal to any applicable transfer tax in cash, or by
certified check, cashier's check or bank draft payable to the order of the
Company, the Rights Agent shall, subject to Section 18(j) hereof, thereupon
promptly (i) (A) requisition from any transfer agent of the shares of Preferred
Stock (or make available, if the Rights Agent is the transfer agent)
certificates for the total number of one one-thousandths of a share of
Preferred Stock to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests, or (B) if the Company
shall have elected to deposit the total number of shares of Preferred Stock
issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one one-thousandths of a share of Preferred Stock as are to be
purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company will direct the depositary to comply with
such request, (ii) requisition from the Company the amount of cash, if any, to
be paid in lieu of issuance of fractional shares in accordance with Section 14,
(iii) promptly after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder and (iv) after receipt thereof, promptly deliver such cash, if any,
to or upon the order of the registered holder of such Rights Certificate. In
the event that the Company is obligated to issue other securities (including
Common Stock) of the Company, pay cash and/or distribute other property
pursuant to Section 11(a) hereof, the Company will make all arrangements
necessary so that such securities, cash and/or other property are available for
distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of Section 14
hereof.
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<PAGE> 16
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, which a majority of the Continuing Directors,
in their sole discretion, determines is or was involved in or caused or
facilitated, directly or indirectly (including through any change in the
Board), such Section 11(a)(ii) Event, (ii) a transferee of an Acquiring Person
(or of any such Associate or Affiliate) who becomes a transferee after the
Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom such Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which a majority of the Continuing Directors has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(e), shall become null and void without any further
action, and no holder of such Rights shall have any rights whatsoever with
respect to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to ensure that the
provisions of this Section 7(e) and Section 4(b) hereof are complied with, but
shall have no liability to any holder of Rights Certificates or other Person as
a result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the
form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner)
or Affiliates or Associates thereof as the Company shall reasonably request.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES.
All Rights Certificates surrendered for the purpose of
exercise, transfer, split up, combination or exchange shall, if surrendered to
the Company or to any of its agents, be delivered to the Rights Agent for
cancellation or in cancelled form, or, if surrendered to the Rights Agent,
shall be cancelled by it, and no Rights Certificates shall be issued in lieu
thereof except as expressly permitted by any provisions of this Rights
Agreement. The Company shall deliver to the Rights Agent for cancellation and
retirement, and the Rights Agent shall so cancel and
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<PAGE> 17
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Rights Certificates to the Company, or shall, at the written request
of the Company, destroy such cancelled Rights Certificates, and in such case
shall deliver a certificate of destruction thereof to the Company.
SECTION 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK.
(a) The Company covenants and agrees that it will cause to
be reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and following the occurrence of a Triggering Event, out of its
authorized and unissued shares of Common Stock and/or other securities or out
of its authorized and issued shares held in its treasury), the number of shares
of Preferred Stock (and, following the occurrence of a Triggering Event, shares
of Common Stock and/or other securities) that, as provided in this Agreement,
including Section 11(a)(iii) hereof, will be sufficient to permit the exercise
in full of all outstanding Rights.
(b) In the event the shares of Preferred Stock (and,
following the occurrence of a Triggering Event, Common Stock and/or other
securities) issuable upon the exercise of Rights become listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with this
Agreement, a registration statement under the Securities Act with respect to
the Common Stock or other securities purchasable upon exercise of the Rights on
an appropriate form, (ii) cause such registration statement to become effective
as soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the
Expiration Date. The Company will also take such action as may be appropriate
under, or to ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the Rights. The
Company may temporarily suspend, for a period of time not to exceed ninety (90)
days after the date set forth in clause (i) of the first sentence of this
Section 9(c), the exercisability of the Rights in order to prepare and file
such registration statement and permit it to become effective. In addition, if
the Company shall determine that a registration statement is required following
the Distribution Date, the Company may temporarily suspend the exercisability
of the Rights until such time as a
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<PAGE> 18
registration statement has been declared effective. Upon any suspension of
exercisability of Rights referred to in this Section 9(c), the Company shall
issue a public announcement stating that the exercisability of the Rights has
been temporarily suspended, as well as a public announcement at such time as
the suspension is no longer in effect. Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable and shall be
void so long as held, by a holder in any jurisdiction where the requisite
qualification to the issuance to such holder, or the exercise by such holder,
of the Rights in such jurisdiction shall not have been obtained or be
obtainable, or the exercise thereof shall not be permitted under applicable law
or a registration statement shall not have been declared effective.
(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all one one-thousandths of a
share of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such shares (subject to payment
of the Purchase Price), be duly and validly authorized and issued and fully
paid and non-assessable.
(e) The Company further covenants and agrees that it will
pay when due and payable any and all federal and state transfer taxes and
charges which may be payable in respect of the issuance or delivery of the
Rights Certificates or of any certificates for a number of one one-thousandths
of a share of Preferred Stock (or Common Stock and/or other securities, as the
case may be) upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Rights Certificates to a Person other than, or the
issuance or delivery of certificates for a number of one one-thousandths of a
share of Preferred Stock (or Common Stock and/or other securities, as the case
may be) in a name other than that of, the registered holder of the Rights
Certificate evidencing Rights surrendered for exercise or to issue or deliver
any certificates for a number of one one-thousandths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) in a name
other than that of the registered holder upon the exercise of any Rights until
any such tax shall have been paid (any such tax being payable by the holder of
such Rights Certificate at the time of surrender) or until it has been
established to the Company's satisfaction that no such tax is due.
SECTION 10. PREFERRED STOCK RECORD DATE.
Each person in whose name any certificate for a number of one
one-thousandths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of such fractional
shares of Preferred Stock (or Common Stock and/or other securities, as the case
may be) represented
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<PAGE> 19
thereby on, and such certificate shall be dated, the date upon which the Rights
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and any applicable transfer taxes) was made; provided, however,
that if the date of such surrender and payment is a date upon which the
Preferred Stock (or Common Stock and/or other securities as the case may be)
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares (fractional or otherwise) on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Stock (or Common Stock and/or other securities as the case may be)
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate shall not be entitled to
any rights of a stockholder of the Company with respect to shares for which the
Rights shall be exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES
OR NUMBER OF RIGHTS.
The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C)
combine the outstanding Preferred Stock into a smaller number of shares or (D)
issue any shares of its capital stock in a reclassification of the Preferred
Stock (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and
the number and kind of shares of Preferred Stock or the number and kind of
shares of capital stock issuable on such date, as the case may be, shall be
proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive, upon payment of the aggregate adjusted
Purchase Price then in effect necessary to exercise a Right in full, the
aggregate number and kind of shares of Preferred Stock or the number and kind
of shares of capital stock, as the case may be, which, if such Right had been
exercised immediately prior to such date and at a time when the Preferred Stock
(or other capital stock, as the case may be) transfer books of the Company were
open, he would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination, or reclassification. If an
event occurs which would require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii)
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<PAGE> 20
hereof, the adjustment provided for in this Section 11(a)(i) shall be in
addition to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii) hereof.
(ii) Subject to Sections 23 and 24 of this
Agreement, in the event that any Person (other than the Company, any Subsidiary
of the Company, any employee benefit plan of the Company or of any Subsidiary
of the Company, or any Person or entity organized, appointed or established by
the Company for or pursuant to the terms of any such plan), alone or together
with its Affiliates and Associates, shall, at any time after the Rights
Dividend Declaration Date, become an Acquiring Person, unless the event causing
such Person to become an Acquiring Person is a transaction set forth in Section
13(a) hereof, or is an acquisition of shares of Common Stock pursuant to a cash
tender offer made pursuant to Section 14(d) of the Exchange Act for all
outstanding shares of Common Stock (other than shares of Common Stock
beneficially owned by the person making the offer or by its Affiliates or
Associates) at a price and on terms determined by at least a majority of the
Outside Directors, after receiving advice from one or more investment banking
firms, to be (a) at a price which is fair to stockholders (taking into account
all factors which such members of the Board deem relevant including, without
limitation, prices which could reasonably be achieved if the Company or its
assets were sold on an orderly basis designed to realize maximum value) and (b)
otherwise in the best interests of the Company and its stockholders, proper
provision shall be made so that promptly following the Redemption Period (as
defined in Section 23(a)), each holder of a Right (except as provided below and
in Section 7(e) hereof) shall thereafter have the right to receive, upon
exercise thereof and payment of an amount equal to the then current Purchase
Price in accordance with the terms of this Agreement, in lieu of a number of
one one-thousandths of a share of Preferred Stock, such number of shares of
Common Stock of the Company as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the then number of one
one-thousandths of a share of Preferred Stock for which a Right was or would
have been exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event, whether or not such Right was then exercisable, and (y)
dividing that product (which, following such first occurrence, shall thereafter
be referred to as the "Purchase Price" for each Right and for all purposes of
this Agreement except to the extent set forth in Section 13 thereof) by 50% of
the current market price per share of Common Stock (determined pursuant to
Section 11(d) hereof) on the date of such first occurrence (such number of
shares, the "Adjustment Shares").
(iii) The Company may at its option substitute for a
share of Common Stock issuable upon the exercise of Rights in accordance with
the foregoing subparagraph (ii) such number or fractions of shares of Preferred
Stock having an aggregate market value equal to the current per share market
price of a share of Common Stock. In the event that the number of shares of
Common Stock which is authorized by the Company's Amended and Restated
Certificate of
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<PAGE> 21
Incorporation but not outstanding, or reserved for issuance for purposes other
than upon exercise of the Rights, is not sufficient to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii), the
Board shall (acting by at least a majority of the Continuing Directors), to the
extent permitted by applicable law and by material agreements then in effect to
which the Company is a party, (A) determine the excess of (1) the value of the
Adjustment Shares issuable upon the exercise of a Right (the "Current Value")
over (2) the Purchase Price (such excess, the "Spread"), and (B) with respect
to each Right (subject to Section 7(e) hereof), make adequate provision to
substitute for some or all of the Adjustment Shares, upon exercise of a Right
and payment of the applicable Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) Common Stock or other equity securities of the Company
(including, without limitation, shares, or units of shares, of Preferred Stock
which the Board has deemed to have the same value as shares of Common Stock)
(such shares of equity securities being herein called "common stock
equivalents"), (4) debt securities of the Company, (5) other assets, or (6) any
combination of the foregoing, having an aggregate value equal to the Current
Value, where such aggregate value has been determined by the Board based upon
the advice of an investment banking firm selected by the Board; provided,
however, if the Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within thirty (30) days following the later of (x)
the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later of
(x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"),
then the Company shall be obligated to deliver, upon the surrender for exercise
of a Right and without requiring payment of the Purchase Price, shares of
Common Stock (to the extent available) and then, if necessary, cash, which
shares and/or cash have an aggregate value equal to the Spread. If, upon the
occurrence of a Section 11(a)(ii) Event, the Board shall determine in good
faith that it is likely that sufficient additional shares of Common Stock could
be authorized for issuance upon exercise in full of the Rights, then if the
Board so elects, the thirty (30) day period set forth above may be extended to
the extent necessary, but not more than ninety (90) days after the Section
11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval
for the authorization of such additional shares (such period, as it may be
extended, the "Substitution Period"). To the extent that action is to be taken
pursuant to the preceding provisions of this Section 11(a)(iii), the Company
(x) shall provide, subject to Section 7(e) hereof, that such action shall apply
uniformly to all outstanding Rights, and (y) may suspend the exercisability of
the Rights until the expiration of the Substitution Period in order to seek any
authorization of additional shares and/or to decide the appropriate form of
distribution to be made pursuant to the first sentence of this Section
11(a)(iii) and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is no longer in effect. For
purposes of this Section 11(a)(iii), the value of the Common Stock shall be the
current market price (as determined pursuant to Section 11(d)
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<PAGE> 22
hereof) per share of the Common Stock on the Section 11(a)(ii) Trigger Date and
the value of any "common stock equivalent" shall be deemed to have the same
value as the Common Stock on such date. The Board may, but shall not be
required to, establish procedures to allocate the right to receive shares of
Common Stock upon the exercise of the Rights among holders of Rights pursuant
to this Section 11(a)(iii).
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Stock
entitling them (for a period expiring within forty-five (45) calendar days
after such record date) to subscribe for or purchase Preferred Stock (or shares
having the same rights, privileges and preferences as the shares of Preferred
Stock ("equivalent preferred stock") or securities convertible into Preferred
Stock at a price per share of Preferred Stock or per share of "equivalent
preferred stock" (or having a conversion price per share of Preferred Stock, if
a security convertible into Preferred Stock) less than the current per share
market price of the Preferred Stock (as defined in Section 11(d)) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the number of
shares of Preferred Stock outstanding on such record date, plus the number of
shares of Preferred Stock which the aggregate offering price of the total
number of shares of Preferred Stock and/or equivalent preferred stock so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and
the denominator of which shall be the number of shares of Preferred Stock
outstanding on such record date, plus the number of additional shares of
Preferred Stock and/or equivalent preferred stock to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be
paid in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be as determined in good faith by
the Board, whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes. Shares of Preferred
Stock owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed; and in the event that
such rights or warrants are not so issued, the Purchase Price shall be adjusted
to be the Purchase Price which would then be in effect if such record date had
not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation) of evidences of indebtedness, cash (other
than a regular quarterly cash dividend out of the earnings or retained earnings
of the Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock), or
subscription rights or warrants (excluding
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<PAGE> 23
those referred to in Section 11(b)), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the current per share market price of the Preferred Stock (as
defined in Section 11(d)) on such record date, less the fair market value (as
determined in good faith by the Board, whose determination shall be described
in a statement filed with the Rights Agent and shall be conclusive for all
purposes) of the portion of the cash, assets or evidences of indebtedness so to
be distributed or of such subscription rights or warrants applicable to a share
of Preferred Stock and the denominator of which shall be such current per share
market price of the Preferred Stock. Such adjustment shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current market price" of the Common Stock on any date shall be deemed to be
the average of the daily closing prices per share of such Common Stock for the
30 consecutive Trading Days (as such term is hereinafter defined) immediately
prior to such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "current market price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices per share of
Common Stock for the ten (10) consecutive Trading Days immediately following
such date; provided, however, that in the event that the current market price
of the Common Stock is determined during a period following the announcement by
the issuer of such Common Stock of (i) a dividend or distribution on such
Common Stock payable in shares of such Common Stock or securities convertible
into such Common Stock (other than the Rights), or (ii) any subdivision,
combination or reclassification of such Common Stock, and prior to the
expiration of the requisite thirty (30) Trading Day or ten (10) Trading Day
period, as set forth above, after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "current market price" shall
be appropriately adjusted to take into account ex-dividend trading. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the shares of Common
Stock are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading or, if the
shares of Common Stock are not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported
by the National Association of Securities Dealers, Inc. Automated Quotations
System
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<PAGE> 24
("NASDAQ") or such other system then in use, or, if on any such date the shares
of Common Stock are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the shares of Common Stock selected by the Board. If on any such
date no market maker is making a market in the Common Stock, the fair value of
such shares on such date as determined in good faith by the Board shall be
used. The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the shares of Common Stock are listed or admitted
to trading is open for the transaction of business, or, if the shares of Common
Stock are not listed or admitted to trading on any national securities
exchange, the term "Trading Day" shall mean a Monday, Tuesday, Wednesday,
Thursday or Friday on which banking institutions in the State of New York are
not authorized or obligated by law or executive order to close. If the Common
Stock is not publicly held or not listed or traded, "current market price"
shall mean the fair value per share as determined in good faith by the Board,
whose determination shall be described in a statement filed with the Rights
Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder,
the "current market price" per share of Preferred Stock shall be determined in
the same manner as set forth above for the Common Stock in clause (i) of this
Section 11(d) (other than the last sentence thereof). If the current market
price per share of Preferred Stock cannot be determined in the manner provided
above or if the Preferred Stock is not publicly held or listed or traded in a
manner described in clause (i) of this Section 11(d), the "current market
price" per share of Preferred Stock shall be conclusively deemed to be an
amount equal to 1,000 (as such number may be appropriately adjusted for such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Stock occurring after the date of this Agreement) multiplied by the
current market price per share of the Common Stock. If neither the Common
Stock nor the Preferred Stock is publicly held or so listed or traded, "current
market price" per share of the Preferred Stock shall mean the fair value per
share as determined in good faith by the Board, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive
for all purposes. For all purposes of this Agreement, the "current market
price" of one one-thousandth of a share of Preferred Stock shall be equal to
the "current market price" of one share of Preferred Stock divided by 1,000.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in such price;
provided, however, that any adjustments which by reason of this Section 11(e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be
made to the nearest cent or to the nearest ten-thousandth of a share of Common
Stock or other share or one-millionth of a share of Preferred Stock, as the
case may be. Notwithstanding the first sentence of this Section 11(e), an
adjustment required by this Section 11
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<PAGE> 25
shall be made no later than the earlier of (i) three years from the date of the
transaction which requires such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter
exercised shall become entitled to receive any shares of capital stock of the
Company other than Preferred Stock, thereafter the number of such other shares
so receivable upon exercise of any Right and the Purchase Price thereof shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Preferred Stock
contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m),
and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the
Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent
to any adjustment made to the Purchase Price hereunder shall evidence the right
to purchase, at the adjusted Purchase Price, the number of one one-thousandths
of a share of Preferred Stock purchasable from time to time hereunder upon
exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a share of Preferred Stock (calculated to the nearest
one-millionth) obtained by (i) multiplying (x) the number of one
one-thousandths of a share covered by a Right immediately prior to this
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of one one-thousandths of a share of Preferred Stock
issuable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted
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<PAGE> 26
or any day thereafter, but, if the Rights Certificates have been issued, shall
be at least ten (10) days later than the date of the public announcement. If
Rights Certificates have been issued, upon each adjustment of the number of
Rights pursuant to this Section 11(i), the Company shall, as promptly as
practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Rights Certificates so to be distributed shall
be issued, executed and countersigned in the manner provided for herein (and
may bear, at the option of the Company, the adjusted Purchase Price) and shall
be registered in the names of the holders of record of Rights Certificates on
the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of one one-thousandths of a share of Preferred
Stock issuable upon the exercise of the Rights, the Rights Certificates
theretofore and thereafter issued may continue to express the Purchase Price
per one one-thousandth of a share and the number of one one-thousandths of a
share which were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then-par value, if any, of the number of
one one-thousandths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Company may validly and legally
issue fully paid and non-assessable such number of one one-thousandths of a
share of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that
an adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-thousandths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of one one-thousandths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon
such exercise on the basis of the Purchase Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event requiring such
adjustment.
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<PAGE> 27
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it in its sole discretion shall determine
to be advisable in order that any (i) consolidation or subdivision of the
Preferred Stock, (ii) issuance wholly for cash of any shares of Preferred Stock
at less than the current market price, (iii) issuance wholly for cash of shares
of Preferred Stock or securities which by their terms are convertible into or
exchangeable for Preferred Stock, (iv) stock dividends or (v) issuance of
rights, options or warrants referred to hereinabove in this Section 11,
hereafter made by the Company to holders of its Preferred Stock shall not be
taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at
any time after the Distribution Date, (i) consolidate with any other Person
(other than a Subsidiary of the Company in a transaction which complies with
Section 11(o) hereof), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements
in effect which would substantially diminish or otherwise eliminate the
benefits intended to be afforded by the Rights or (y) prior to, simultaneously
with or immediately after such consolidation, merger or sale, the stockholders
of the Person who constitutes, or would constitute, the "Principal Party" for
purposes of Section 13(a) hereof shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 27
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by
the Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after the
Rights Dividend Declaration Date and prior to the Distribution Date (i) declare
a dividend on the outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
the number of Rights associated with each share of Common Stock then
outstanding, or issued or delivered thereafter but prior to the Distribution
Date, shall be proportionately adjusted so
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<PAGE> 28
that the number of Rights thereafter associated with each share of Common Stock
following any such event shall equal the result obtained by multiplying the
number of Rights associated with each share of Common Stock immediately prior
to such event by a fraction the numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior to the occurrence of the
event and the denominator of which shall be the total number of shares of
Common Stock outstanding immediately following the occurrence of such event.
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES.
Whenever an adjustment is made as provided in Sections 11 and
13 hereof, the Company shall (a) promptly prepare a certificate setting forth
such adjustment, and a brief statement of the facts accounting for such
adjustment, (b) promptly file with the Rights Agent and with each transfer
agent for the Preferred Stock and the Common Stock a copy of such certificate
and (c) mail a brief summary thereof to each holder of a Rights Certificate
(or, if prior to the Distribution Date, to each holder of a certificate
representing shares of Common Stock) in accordance with Section 25 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained and shall not be deemed to have knowledge of
any adjustment unless and until it shall have received such certificate.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) Subject to Section 23 of this Agreement, in the event
that, following the Stock Acquisition Date, directly or indirectly, (x) the
Company shall consolidate with, or merge with and into, any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), and the Company shall not be the continuing or surviving
corporation of such consolidation or merger, (y) any Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof) shall consolidate with, or merge with or into, the Company, and the
Company shall be the continuing or surviving corporation of such consolidation
or merger and, in connection with such consolidation or merger, all or part of
the outstanding shares of Common Stock shall be changed into or exchanged for
stock or other securities of any other Person or cash or any other property, or
(z) the Company shall sell or otherwise transfer (or one or more of its
Subsidiaries shall sell or otherwise transfer), in one transaction or a series
of related transactions, assets or earning power aggregating more than 50% of
the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any Person or Persons (other than the Company or any Subsidiary of
the Company in one or more transactions each of which complies with Section
11(o) hereof), then, and in each such case (except as may be contemplated by
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<PAGE> 29
Section 13(d) hereof), proper provision shall be made so that: (i) each holder
of a Right, except as provided in Section 7(e) hereof, shall, upon the
expiration of the Redemption Period (as defined in Section 23(a)), thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price in accordance with the terms of this Agreement, such number of
validly authorized and issued, fully paid, non-assessable and freely tradable
shares of Common Stock of the Principal Party (as such term is hereinafter
defined), not subject to any liens, encumbrances, rights of first refusal or
other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one
one-thousandths of a share of Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 13 Event (or, if a
Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section
13 Event, multiplying the number of one one-thousandths of a share of Preferred
Stock for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect
immediately prior to such first occurrence), and (2) dividing that product
(which product, following the first occurrence of a Section 13 Event, shall be
referred to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by 50% of the current market price per share of the shares of Common
Stock of such Principal Party on the date of consummation of such Section 13
Event (or the fair market value on such date or other securities or property of
the Principal Party, as provided for herein); (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of Section 11 hereof (other
than Sections 11(a)(ii) and 11(a)(iii)) shall apply only to such Principal
Party following the first occurrence of a Section 13 Event; (iv) such Principal
Party shall take such steps (including, but not limited to, the reservation of
a sufficient number of shares of its Common Stock) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its shares of Common Stock thereafter deliverable upon the
exercise of the Rights; and (v) the provisions of Section 11(a)(ii) and Section
11(a)(iii) hereof shall be of no effect following the first occurrence of any
Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause
(x) or (y) of the first sentence of Section 13(a), the Person
that is the issuer of any securities into which shares of Common
Stock of the Company are converted in such merger or
consolidation, and if no securities are so issued, the Person
that is the other party to such merger or consolidation; and
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<PAGE> 30
(ii) in the case of any transaction described in
clause (z) of the first sentence of Section 13(a), the Person
that is the party receiving the greatest portion of the assets
or earning power transferred pursuant to such transaction or
transactions; provided, however, that in any such case, (1) if
the Common Stock of such Person is not at such time and has not
been continuously over the preceding twelve (12) month period
registered under Section 12 of the Exchange Act, and such Person
is a direct or indirect Subsidiary of another Person the Common
Stock of which is and has been so registered, "Principal Party"
shall refer to such other Person; and (2) in case such Person is
a Subsidiary, directly or indirectly, of more than one Person,
the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such
Persons is the issuer of the Common Stock having the greatest
aggregate market value.
(c) The Company shall not consummate any Section 13 Event
unless the Principal Party shall have a sufficient number of authorized shares
of its Common Stock which have not been issued or reserved for issuance to
permit the exercise in full of the Rights in accordance with this Section 13
and unless prior thereto the Company and such Principal Party shall have
executed and delivered to the Rights Agent a supplemental agreement providing
for the terms set forth in paragraphs (a) and (b) of this Section 13 and
further providing that, as soon as practicable after the date of any such
Section 13 Event, the Principal Party will:
(i) prepare and file a registration statement under
the Securities Act, with respect to the Rights and the
securities purchasable upon exercise of the Rights on an
appropriate form, and will use its best efforts to cause such
registration statement to (A) become effective as soon as
practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Act)
until the Expiration Date; and
(ii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its
Affiliates which comply in all respects with the requirements
for registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers
or consolidations or sales or other transfers. In the event that a Section 13
Event shall occur at any time after the occurrence of a Section 11(a)(ii)
Event, the Rights which have not theretofore been exercised shall thereafter
become exercisable in the manner described in Section 13(a) hereof.
(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 shall not be applicable to a transaction described in
subparagraphs (x)
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<PAGE> 31
and (y) of Section 13(a) if (i) such transaction is consummated with a Person
or Persons (or a wholly owned subsidiary of any such Person or Persons) who
acquired shares of Common Stock pursuant to a cash tender offer for all
outstanding shares of Common Stock which complies with the provisions of
Section 11(a)(ii) hereof, (ii) the price per share of Common Stock offered in
such transaction is not less than the price per share of Common Stock paid to
all holders of Common Stock whose shares were purchased pursuant to such cash
tender offer and (iii) the form of consideration being offered to the remaining
holders of shares of Common Stock pursuant to such transaction is the same as
the form of consideration paid pursuant to such cash tender offer. Upon
consummation of any such transaction contemplated by this Section 13(d), all
Rights hereunder shall expire.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of
Rights except prior to the Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional Rights
would otherwise be issuable, an amount in cash equal to the same fraction of
the current market value of the whole Right. For the purposes of this Section
14(a), the current market value of a whole Right shall be the closing price of
the Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for
any day shall be the last sale price, or, in case no such sale takes place on
such day, the average of the high bid and low asked prices, in either case as
reported by NASDAQ or such other system then in use or, if on any such date the
Rights are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Rights selected by the Board. If on any such date no such market maker is
making a market in the Rights the fair value of the Rights on such date as
determined in good faith by the Board shall be used. In the event the Rights
are listed or admitted to trading on a national securities exchange, the
closing price for any day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the high bid and low
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to the national
securities exchange on which the Rights are listed or admitted to trading.
(b) The Company shall not be required to issue fractions of
shares of Preferred Stock (other than fractions which are integral multiples of
one one-thousandth of a share of Preferred Stock) upon exercise of the Rights
or to distribute certificates which evidence fractional shares of Preferred
Stock (other than fractions which are integral multiples of one one-thousandth
of a share of Preferred Stock). In lieu of fractional shares of Preferred
Stock that are not integral
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<PAGE> 32
multiples of one one-thousandth of a share of Preferred Stock, the Company may
pay to the registered holders of Rights Certificates at the time such Rights
are exercised as herein provided an amount in cash equal to the same fraction
of the current market value of one one-thousandth of a share of Preferred
Stock. For purposes of this Section 14(b), the current market value of one
one-thousandth of a share of Preferred Stock shall be one one-thousandth of the
closing price of a share of Preferred Stock (as determined pursuant to Section
11(d)(ii) hereof) for the Trading Day immediately prior to the date of such
exercise.
(c) Following the occurrence of one of the events specified
in Section 11 giving rise to the right to receive Common Stock, common stock
equivalents or other securities upon the exercise of a Right, the Company shall
not be required to issue fractions of shares of Common Stock, common stock
equivalents or other securities upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Common Stock, common stock
equivalents or other securities. In lieu of fractional shares of Common Stock,
common stock equivalents or other securities the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one (1) share of Common Stock, common stock equivalents or
other securities. For purposes of this Section 14(c), the current market value
of one share of Common Stock shall be the closing price of one share of Common
Stock (as determined pursuant to Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
SECTION 15. RIGHTS OF ACTION.
All rights of action in respect of this Agreement, except the
rights of action vested in the Rights Agent pursuant to Section 18 and Section
20 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of
the Common Stock); and any registered holder of any Rights Certificate (or,
prior to the Distribution Date, of the Common Stock), without the consent of
the Rights Agent or of the holder of any other Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), may, in his own behalf and for his
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Rights Certificate in the manner
provided in such Rights Certificate and in this Agreement. Without limiting
the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have
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<PAGE> 33
an adequate remedy at law for any breach of this Agreement and will be entitled
to specific performance of the obligations under, and injunctive relief against
actual or threatened violations of, the obligations hereunder of any Person
subject to this Agreement.
SECTION 16. AGREEMENT OF RIGHTS HOLDERS.
Every holder of a Right by accepting the same consents and
agrees with the Company and the Rights Agent and with every other holder of a
Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Stock;
(b) after the Distribution Date, the Rights Certificates
are transferable only on the registry books of the Rights Agent if surrendered
at the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer and with the appropriate form of assignment and
the certificate contained therein duly completed and executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the
Company and the Rights Agent may deem and treat the person in whose name the
Rights Certificate (or, prior to the Distribution Date, the associated Common
Stock certificate) is registered as the absolute owner thereof and of the
Rights evidenced thereby (notwithstanding any notations of ownership or writing
on the Rights Certificates or the associated Common Stock certificate made by
anyone other than the Company or the Rights Agent) for all purposes whatsoever,
and neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be affected by any notice to the contrary; and
(d) Notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative
agency or commission, or any statute, rule, regulation or executive order
promulgated or enacted by any government authority, prohibiting or otherwise
restraining performance of such obligation; provided, however, the Company must
use its best efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.
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<PAGE> 34
SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER.
No holder, as such, of any Rights Certificate shall be
entitled to vote, receive dividends or be deemed for any purpose the holder of
the Preferred Stock or any other securities of the Company which may at any
time be issuable on the exercise of the Rights represented thereby, nor shall
anything contained herein or in any Rights Certificate be construed to confer
upon the holder of any Rights Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings
or other actions affecting stockholders (except as provided in Section 25
hereof), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by such Rights Certificate shall have been
exercised in accordance with the provisions hereof.
SECTION 18. DUTIES OF RIGHTS AGENT.
The Rights Agent undertakes the duties and obligations imposed
by this Agreement upon the following terms and conditions, by all of which the
Company and the holders of Rights Certificates, by their acceptance thereof,
shall be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the advice or opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in accordance
with such advice or opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter (including, without limitation, the identity of any Acquiring Person
and the determination of "current market price") be proved or established by
the Company prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any person believed by the Rights Agent to be any one of
the Chairman of the Board, President, a Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own gross negligence, bad faith, or willful misconduct.
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<PAGE> 35
(d) The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this Agreement or in
the Rights Certificates (except as to its countersignature thereof) or be
required to verify the same, but all such statements and recitals are and shall
be deemed to have been made by the Company only.
(e) The Rights Agent is serving as an administrative agent
and shall not be under any responsibility in respect of the validity of any
provision of this Agreement or the execution and delivery of this Agreement
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 7(e) hereof) or any
adjustment required under any of the provisions hereof or responsible for the
manner, method, or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment (except with respect
to the exercise of Rights evidenced by Rights Certificates after actual notice
of any such adjustment); nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation of any
shares of Common Stock or shares of Preferred Stock to be issued pursuant to
this Agreement or any Rights Certificate or as to whether any shares of Common
Stock or shares of Preferred Stock will, when so issued, be validly authorized
and issued, fully paid and non-assessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing
by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder
from any person believed by the Rights Agent to be any one of the Chairman of
the Board, the President, a Vice President, the Secretary or the Treasurer of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with instructions of any
such officer. Any application by the Rights Agent for written instructions
from the Company may, at the option of the Rights Agent, set forth in writing
any action proposed to be taken or omitted by the Rights Agent under this
Rights Agreement and the date on or after which such action shall be taken or
such omission shall be effective. The Rights Agent shall not be liable for any
action taken by, or omission of, the Rights Agent in accordance with a proposal
included in any such application on or after the date specified in such
application (which date shall not be less than five Business Days after the
date any
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<PAGE> 36
officer of the Company actually receives such application, unless any such
officer shall have consented in writing to an earlier date) unless, prior to
taking any such action (or the effective date in the case of an omission), the
Rights Agent shall have received written instruction in response to such
application specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer
or employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys or agents, and the Rights Agent shall not
be answerable or accountable for any act, default, neglect, or misconduct of
any such attorneys or agents or for any loss to the Company resulting from any
such act, default, neglect, or misconduct; provided, however, the Rights Agent
was not grossly negligent in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the exercise
of its rights if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered
to the Rights Agent for exercise or transfer, the certificate attached to the
form of assignment or form of election to purchase, as the case may be, has
either not been completed or indicates an affirmative response to clause 1
and/or 2 thereof, the Rights Agent shall not take any further action with
respect to such requested exercise of transfer without first consulting with
the Company.
(l) The Rights Agent undertakes only the express duties and
obligations imposed on it by this Agreement and no implied duties or
obligations shall be read into this Agreement against the Rights Agent.
SECTION 19. COMPENSATION AND INDEMNIFICATION OF THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder and, from
time to time, on demand of the Rights Agent, its reasonable expenses and
counsel fees and other
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<PAGE> 37
disbursements incurred in the administration and execution of this Agreement
and the exercise and performance of its duties hereunder. The Company also
agrees to indemnify the Rights Agent, its officers, employees, agents and
directors for, and to hold each of them harmless against, any loss, liability,
or expense, incurred without gross negligence, bad faith or willful misconduct
on the part of the Rights Agent, for anything done or omitted by the Rights
Agent or such other indemnified party in connection with the acceptance and
administration of this Agreement and the exercise of its duties hereunder,
including the costs and expenses of defending against any claim of liability in
the premises. The indemnity provided for hereunder shall survive the
expiration of the Rights and the termination of this Agreement.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement or the exercise of its
duties hereunder in reliance upon any Rights Certificate or certificate for
Common Stock or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified
or acknowledged, by the proper person or persons.
(c) Anything in this Agreement to the contrary
notwithstanding, in no event shall the Rights Agent be liable for special,
indirect or consequential loss or damage of any kind whatsoever (including but
not limited to lost profits), even if the Rights Agent has been advised of the
likelihood of such loss or damage and regardless of the form of the action
unless such loss or damage results from the gross negligence, bad faith or
willful misconduct of the Rights Agent.
SECTION 20. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS
AGENT.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; provided, however, that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall
succeed to the agency created by this Agreement, any of the Rights Certificates
shall have been countersigned but not delivered, any such successor Rights
Agent may adopt the countersignature of the predecessor Rights Agent and
deliver such Rights Certificates so countersigned; and
- 34 -
<PAGE> 38
in case at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Rights Certificates
shall have the full force provided in the Rights Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent shall
be changed and at any such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
SECTION 21. CHANGE OF RIGHTS AGENT.
The Rights Agent or any successor Rights Agent may resign and
be discharged from its duties under this Agreement upon thirty (30) days'
notice in writing mailed to the Company and to each transfer agent of the
Common Stock and the Preferred Stock by registered or certified mail, and to
the holders of the Rights Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon thirty (30) days'
notice in writing, mailed to the Rights Agent or successor Rights Agent, as the
case may be, and to each transfer agent of the Common Stock and Preferred Stock
by registered or certified mail, and to the holders of the Rights Certificates
by first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after giving notice of such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then the registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the
United States or of the State of North Carolina, Virginia or New York (or of
any other state of the United States so long as such corporation is authorized
to do business as a banking institution in the State of Virginia or New York),
in good standing, having a principal office in the State of Virginia or New
York which is authorized under such laws to exercise corporate trust power and
is subject to supervision or examination by federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50 million. After appointment, the successor Rights Agent
shall be vested with the
- 35 -
<PAGE> 39
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the
effective date of any such appointment the Company shall file notice thereof in
writing with the predecessor Rights Agent and each transfer agent of the Common
Stock and the Preferred Stock, and mail a notice thereof in writing to the
registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES.
Notwithstanding any of the provisions of this Agreement or of
the Rights to the contrary, the Company may, at its option, issue new Rights
Certificates evidencing Rights in such form as may be approved by the Board to
reflect any adjustment or change in the Purchase Price per share and the number
or kind of class of shares or other securities or property purchasable under
the Rights Certificates made in accordance with the provisions of this
Agreement. In addition, in connection with the issuance or sale of shares of
Common Stock following the Distribution Date (other than upon exercise of a
Right) and prior to the redemption or expiration of the Rights, the Company (a)
shall, with respect to shares of Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, or upon
the exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board, issue Rights Certificates representing the appropriate number of
Rights in connection with such issuance or sale; provided, however, that (i) no
such Rights Certificate shall be issued if, and to the extent that, the Company
shall be advised by counsel that such issuance would create a significant risk
of material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued, and (ii) no such Rights Certificate shall
be issued if, and to the extent that, appropriate adjustment shall otherwise
have been made in lieu of the issuance thereof.
SECTION 23. REDEMPTION.
(a) The Board may, at its option, at any time during the
period commencing on the Rights Dividend Declaration Date and ending on the
earlier of (i) the Close of Business on the tenth day following the Stock
Acquisition Date (or, if the Stock Acquisition Date shall have occurred prior
to the Record Date, the Close of Business on the tenth day following the Record
Date), as such period may be extended or shortened in the discretion of the
Board of Directors (the "Redemption
- 36 -
<PAGE> 40
Period") or (ii) the Final Expiration Date, cause the Company to redeem all but
not less than all the then outstanding Rights at a redemption price of $.005
per Right, as such amount may be appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption
Price"); provided, however, that, if the Board authorizes redemption of the
Rights or a change in the Redemption Period in either of the circumstances set
forth in clauses (i) and (ii) below, then there must be Continuing Directors
then in office and such authorization shall require the concurrence of a
majority of such Continuing Directors: (i) such authorization occurs on or
after the time a Person becomes an Acquiring Person, or (ii) such authorization
occurs during the 120-day period from the date of a change (resulting from a
proxy or consent solicitation effected in compliance with applicable law and
regulations) in a majority of the directors in office at the commencement of
such solicitation if any Person who is a participant in such solicitation has
stated (or, if a majority of the directors in office at the commencement of
such solicitation has determined in good faith) that such Person (or any of its
Affiliates or Associates) intends to take, or may consider taking, any action
which would result in such Person becoming an Acquiring Person or which would
cause the occurrence of a Triggering Event unless, concurrently with such
solicitation, such Person (or one or more of its Affiliates or Associates) is
making a cash tender offer pursuant to a Schedule 14D-1 (or any successor form)
filed with the Securities and Exchange Commission for all outstanding shares of
Common Stock not beneficially owned by such Person (or by its Affiliates or
Associates). If, following the occurrence of a Stock Acquisition Date and
following the expiration of the Company's right of redemption hereunder (i) a
Person who is an Acquiring Person shall have transferred or otherwise disposed
of a number of shares of Common Stock in one transaction or series of
transactions, not directly or indirectly involving the Company or any of its
Subsidiaries, which did not result in the occurrence of a Triggering Event such
that such Person is thereafter a Beneficial Owner of 10% or less of the
outstanding shares of Common Stock, (ii) there are no other Persons,
immediately following the occurrence of the event described in clause (i), who
are Acquiring Persons, and (iii) the Board (with the concurrence of a majority
of the Continuing Directors) shall so approve, then the Company's right of
redemption shall be reinstated and thereafter be subject to the provisions of
this Section 23. Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable after the first occurrence of a
Section 11(a)(ii) Event or a Section 13 Event until such time as the Company's
right of redemption hereunder has expired. The Company may, at its option, pay
the Redemption Price in cash, shares of Common Stock (based on the current
market price of the Common Stock at the time of redemption) or any other form
of consideration deemed appropriate by the Board.
(b) Immediately upon the action of the Board ordering the
redemption of the Rights, evidence of which shall have been filed with the
Rights Agent and without any further action and without any notice, the right
to exercise
- 37 -
<PAGE> 41
the Rights will terminate and the only right thereafter of the holders of
Rights shall be to receive the Redemption Price. Promptly after the action of
the Board ordering the redemption of the Rights, the Company shall give notice
of such redemption to the Rights Agent and the holders of the then outstanding
Rights by mailing such notice to all such holders at their last addresses as
they appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the Transfer Agent for the Common
Stock. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice
of redemption will state the method by which the payment of the Redemption
Price will be made.
SECTION 24. EXCHANGE.
(a) The Board may, at its option, at any time after any
Person becomes an Acquiring Person, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 11(a)(ii) or Section 7(l)
hereof) for shares of Common Stock at an exchange ratio of one share of Common
Stock per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio").
(b) Immediately upon the action of the Board ordering the
exchange of any Rights pursuant to subsection (a) of this Section 24 and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of shares of Common Stock equal to the number
of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange
will state the method by which the exchange of Common Stock for Rights will be
effected and, in the event of any partial exchange, the number of Rights which
will be exchanged. Any partial exchange shall be effected pro rata based on
the number of Rights (other than Rights which have become void pursuant to the
provisions of Section 11(a)(ii) or Section 7(l) hereof) held by each holder of
Rights.
(c) In the event that there shall not be sufficient Common
Stock issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take
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<PAGE> 42
all such action as may be necessary to authorize additional shares of Common
Stock for issuance upon exchange of the Rights.
(d) The Company shall not be required to issue fractions of
shares of Common Stock or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of such fractional shares, the Company shall
pay to the registered holders of the Right Certificates with regard to which
such fractional shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole share of Common Stock.
For the purposes of this paragraph (d), the current market value of a whole
share of Common Stock shall be the closing price of a share of Common Stock (as
determined pursuant to the second sentence of Section 11(d) hereof) for the
Trading Day immediately prior to the date of exchange pursuant to this Section
24.
SECTION 25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall propose, at any time after
the Distribution Date (i) to pay any dividend payable in stock of any class to
the holders of Preferred Stock or to make any other distribution to the holders
of Preferred Stock (other than a regular quarterly cash dividend out of
earnings or retained earnings) or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Stock (other than a reclassification involving only the subdivision of
outstanding Preferred Stock), or (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its subsidiaries to effect any sale or other transfer), in one or more
transactions, of more than 50% of the assets or earning power of the Company
and its subsidiaries (taken as a whole) to, any other Person, or (v) to effect
the liquidation, dissolution or winding up of the Company, then, in each such
case, the Company shall give to each holder of a Rights Certificate, to the
extent feasible and in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the shares of Preferred Stock, if any such date is to
be fixed, and such notice shall be so given in the case of any action covered
by clause (i) or (ii) above at least twenty (20) days prior to the record date
for determining holders of the shares of Preferred Stock for purposes of such
action and in the case of any such other action, at least twenty (20) days
prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the shares of Preferred Stock whichever
shall be the earlier.
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<PAGE> 43
(b) In case any Section 11(a)(ii) Event shall occur, then,
in any such case, (i) the Company shall as soon as practicable thereafter give
to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of the occurrence of such event
which shall specify the event and the consequences of the event to holders of
Rights under Section 11(a)(ii) hereof, and (ii) all references in the preceding
paragraph to Preferred Stock shall be deemed thereafter to refer to Common
Stock and/or, if appropriate other securities.
SECTION 26. NOTICES.
Notices or demands authorized by this Agreement to be given or
made by the Rights Agent or by the holder of any Rights Certificate to or on
the Company shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed (until another address is filed in writing with the
Rights Agent) as follows:
Sunrise Assisted Living, Inc.
9401 Lee Highway
Suite 300
Fairfax, Virginia 22031
Attention: Chief Financial Officer
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or
made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
First Union National Bank of North Carolina
230 South Tryon Street
Charlotte, North Carolina 28288
Attention: Corporate Trust Department
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to any such holder at the address of such holder as shown on the
registry books of the Company.
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<PAGE> 44
SECTION 27. SUPPLEMENTS AND AMENDMENTS.
Prior to the Distribution Date and subject to the penultimate
sentence of this Section 27, the Company may, and the Rights Agent shall, if
the Company so directs, supplement or amend any provision of this Agreement
without the approval of any holders of certificates representing shares of
Common Stock. From and after the Distribution Date and subject to the
penultimate sentence of this Section 27, the Company may, and the Rights Agent
shall at any time and from time to time, if the Company so directs, supplement
or amend this Agreement without the approval of any holders of Rights
Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provisions herein, (iii) to shorten or lengthen any time period hereunder
or (iv) to change or supplement the provisions hereunder in any manner which
the Company may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Rights Certificates (other than an
Acquiring Person or an Affiliate or Associate of any such Person); provided,
however, that this Agreement may not be supplemented or amended (A) to lengthen
a time period relating to when the Rights may be redeemed at such time as the
Rights are not then redeemable, or (B) to lengthen any other time period unless
such lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights (other than an
Acquiring Person or an Affiliate or Associate of any such Person). Upon the
delivery of a certificate from an appropriate officer of the Company which
states that the proposed supplement or amendment is in compliance with the
terms of this Section 27, the Rights Agent shall execute such supplement or
amendment. Notwithstanding anything contained in this Agreement to the
contrary, no supplement or amendment shall be made which changes the Redemption
Price, the Final Expiration Date, the Purchase Price or the number of one
one-thousandths of a share of Preferred Stock for which a Right is exercisable.
In addition, no supplement or amendment that changes the rights and duties of
the Rights Agent under this Agreement shall be effective without the consent of
the Rights Agent. Prior to the Distribution Date, the interests of the holders
of Rights shall be deemed coincident with the interests of the holders of
shares of Common Stock.
SECTION 28. SUCCESSORS.
All the covenants and provisions of this Agreement by or for
the benefit of the Company or the Rights Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
SECTION 29. DETERMINATIONS AND ACTIONS BY THE BOARD, ETC.
For all purposes of this Agreement, any calculation of the
number of shares of Common Stock outstanding at any particular time, including
for purposes
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<PAGE> 45
of determining the particular percentage of such outstanding shares of Common
Stock of which any Person is the Beneficial Owner, shall be made in accordance
with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and
Regulations under the Exchange Act. The Board (with, where specifically
provided for herein, the concurrence of the Continuing Directors or Outside
Directors) shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the
Board (with, where specifically provided for herein, the concurrence of the
Continuing Directors or Outside Directors) or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including without limitation a
determination to redeem or not redeem the Rights or to amend the Agreement).
All such actions, calculations, interpretations and determinations (including,
for purposes of clause (y) below, all omissions with respect to the foregoing)
which are done or made by the Board (with, where specifically provided for
herein, the concurrence of the Continuing Directors or Outside Directors) in
good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (y) not
subject any director to any liability to the holders of the Rights.
SECTION 30. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any
Person other than the Company, the Rights Agent and the registered holders of
the Rights Certificates (and, prior to the Distribution Date, the registered
holders of the Common Stock) any legal or equitable right, remedy or claim
under this Agreement; but this Agreement shall be for the sole and exclusive
benefit of the Company, the Rights Agent and the registered holders of the
Rights Certificates (and, prior to the Distribution Date, registered holders of
Common Stock).
SECTION 31. SEVERABILITY.
If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated; provided,
however, that notwithstanding anything in this Agreement to the contrary, if
any such term, provision, covenant or restriction is held by such court or
authority to be invalid, void or unenforceable and the Board of Directors
determines in its good faith judgment that severing the invalid language from
this Agreement would materially and adversely affect the purpose or effect of
this Agreement, the right of redemption set forth in Section 23 hereof shall be
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<PAGE> 46
reinstated and shall not expire until the Close of Business on the tenth day
following the date of such determination by the Board.
SECTION 32. GOVERNING LAW.
This Agreement, each Right and each Rights Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Delaware and for all purposes shall be governed by and construed in accordance
with laws of such State.
SECTION 33. COUNTERPARTS.
This Agreement may be executed in any number of counterparts.
It shall not be necessary that the signature of or on behalf of each party
appears on each counterpart, but it shall be sufficient that the signature of
or on behalf of each party appears on one or more of the counterparts. All
counterparts shall collectively constitute a single agreement. It shall not be
necessary in any proof of this Agreement to produce or account for more than a
number of counterparts containing the respective signatures of or on behalf of
all of the parties.
SECTION 34. DESCRIPTIVE HEADINGS.
Descriptive headings of the several Sections of this Agreement
are inserted for convenience only and shall not control or affect the meaning
or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
<TABLE>
<S> <C>
SUNRISE ASSISTED LIVING, INC.
Attest:
By /s/ Susan Timoner By /s/ Thomas B. Newell
----------------------------------------- ------------------------------------------
Executive Vice President and
----------------------------------------- General Counsel
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By /s/ Eleanor G. Autry
------------------------------------------
Vice President
</TABLE>
- 43 -
<PAGE> 47
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
I, ________________, __________________________, of Sunrise
Assisted Living, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 103, thereof, DO HEREBY CERTIFY:
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> 48
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.
- 2 -
<PAGE> 49
(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
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.
- 3 -
<PAGE> 50
(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
(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.
- 4 -
<PAGE> 51
(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
- 5 -
<PAGE> 52
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
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
- 6 -
<PAGE> 53
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.
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.
- 7 -
<PAGE> 54
IN WITNESS WHEREOF, I have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties of perjury
this ______ day of __________, 1996.
------------------------------
------------------------------
------------------------------
------------------------------
Attest:
- ------------------------------
- ------------------------------
- ------------------------------
- ------------------------------
- 8 -
<PAGE> 55
Exhibit B
SUMMARY OF RIGHTS TO PURCHASE
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
On April 25, 1996, the Board of Directors of Sunrise Assisted
Living, Inc. (the "Company") declared a dividend distribution of one Right for
each outstanding share of common stock, par value $.01 per share (the "Common
Stock"), of the Company. The distribution is payable to stockholders of record
on May 15, 1996. Each Right, when exercisable, entitles the registered holder
to purchase from the Company one one-thousandth of a share of Series C Junior
Participating Preferred Stock ("Preferred Stock") at a price of $85.00 per one
one-thousandth share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and First Union National Bank of North
Carolina as Rights Agent (the "Rights Agent").
Initially, the Rights will be attached to all certificates
representing shares of Common Stock then outstanding, and no separate
certificates evidencing the Rights will be distributed. The Rights will
separate from the Common Stock and a distribution of Rights Certificates will
occur 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
(the earlier of such dates being called the "Distribution Date").
Notwithstanding the foregoing, the term "Acquiring Person" shall not include
either Paul J. Klaassens or Teresa M. Klaassens (each together with their
Affiliates, Associates and Estates, an "Exempt Person") each of whom, as of the
date of adoption of the Rights Agreement, beneficially owned shares of the
Company's Common Stock in excess of 20% of the outstanding shares of Common
Stock, unless such Exempt Person acquires beneficial ownership of an additional
2% of the shares of Common Stock of the Company in excess of the amount
beneficially owned by the Exempt Person on April 25, 1996 (or if the Company
completes an initial public offering of its shares of Common Stock pursuant to
the registration provisions of the Securities Act of 1933, as amended, in
excess of the amount beneficially owned by an Exempt Person at the closing of
the initial public offering) (other than as a result of acquisitions of shares
of Common Stock by the Company which increases the proportionate number of
shares beneficially owned by such Exempt Person).
<PAGE> 56
Until the Distribution Date, (i) the Rights will be evidenced
by the Common Stock certificates, and will be transferred with and only with
the Common Stock certificates, (ii) new Common Stock certificates issued after
May 15, 1996 upon transfer or new issuance of the Common Stock will contain a
notation incorporating the Rights Agreement by reference, and (iii) the
surrender for transfer of any certificates for Common Stock outstanding will
also constitute the transfer of the Rights associated with the Common Stock
represented by such certificate.
The Rights are not exercisable until the Distribution Date and
will expire at the close of business on April 24, 2006, unless earlier redeemed
or exchanged by the Company as described below. The Rights will not be
exercisable by a holder in any jurisdiction where the requisite qualification
to the issuance to such holder, or the exercise by such holder, of the Rights
has not been obtained or is not obtainable.
As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights ("Rights Certificates") will be
mailed to holders of record of the Common Stock as of the close of business on
the Distribution Date and, thereafter, the separate Rights Certificates alone
will evidence the Rights. Except as otherwise determined by the Board of
Directors, only shares of Common Stock issued prior to the Distribution Date
will be issued with Rights.
In the event that 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 referred to below, have the right to exercise the Right by purchasing,
for an amount equal to the Purchase Price, Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a
value equal to two times such amount. Notwithstanding any of the foregoing,
following the occurrence of the events set forth in this paragraph, all Rights
that are, or (under certain circumstances specified in the Rights Agreement)
were, beneficially owned by any Acquiring Person will be null and void.
However, Rights are not exercisable following the occurrence of the events set
forth above until such time as the Rights are no longer redeemable by the
Company as set forth below.
For example, at a Purchase Price of $85.00 per Right, each
Right not owned by an Acquiring Person (or by certain related parties)
following an event set forth in the preceding paragraph would entitle its
holder to purchase $170.00 worth of Common Stock (or other consideration, as
noted above) for $85.00. Assuming that the Common Stock had a per share value
of $20.00 at such time, the holder of each valid Right would be entitled to
purchase four shares of Common Stock for $85.00.
- 2 -
<PAGE> 57
In the event that, at any time following the Stock Acquisition
Date, (i) the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation (other than a
merger which follows an offer described in the second preceding paragraph), or
(ii) 50% or more of the Company's assets or earning power is sold or
transferred, each holder of a Right (except Rights which previously have been
voided as set forth above) shall, after the expiration of the redemption period
referred to below, 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 (e.g., common stock of the acquiring company having a value of
$170.00 for the $85.00 Purchase Price).
At any time after a person or group of affiliated or
associated persons becomes an Acquiring Person, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by such person or
group which have become void), in whole or in part, at an exchange ratio of one
share of Common Stock per Right (subject to adjustment).
The Purchase Price payable, and the number of one
one-thousandths of a share of Preferred Stock or other securities or property
issuable, upon exercise of the Rights are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of the Preferred Stock (ii) upon
the grant to holders of the Preferred Stock of certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the
current market price of the Preferred Stock or (iii) upon the distribution to
holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at least
1% in such Purchase Price. No fractional shares will be issued and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Preferred Stock on the last trading date prior to the date of exercise.
In general, the Board of Directors of the Company, may cause
the Company to redeem the Rights in whole, but not in part, at any time during
the period commencing on April 25, 1996, and ending on the tenth day following
the Stock Acquisition Date, as such period may be extended or shortened by the
Board of Directors (the "Redemption Period") at a price of $.005 per Right
(payable in cash, Common Stock or other consideration deemed appropriate by the
Board of Directors). Under certain circumstances set forth in the Rights
Agreement, the decision to redeem the Rights will require the concurrence of a
majority of the Continuing Directors. After the redemption period has expired,
the Company's right of redemption may be reinstated (with the concurrence of
the Continuing
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<PAGE> 58
Directors) if an Acquiring Person reduces his beneficial ownership to 10% or
less of the outstanding shares of Common Stock in a transaction or series of
transactions not involving the Company and there are no other Acquiring
Persons. Immediately upon the action of the Board of Directors of the Company
ordering redemption of the Rights, with, where required, the concurrence of the
Continuing Directors, the Rights will terminate and the only right of the
holders of Rights will be to receive the $.005 redemption price.
The term "Continuing Director" means any member of the Board
of Directors of the Company 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, but shall not include an Acquiring Person or an affiliate
or associate of an Acquiring Person, or any representative of the foregoing
entities. The term "Outside Directors" means "Continuing Directors" who are
not officers of the Company.
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. While the distribution of the
Rights will not be subject to federal taxation to stockholders or to the
Company, stockholders may, depending upon the circumstances, recognize taxable
income in the event that the Rights become exercisable for Common Stock (or
other consideration) of the Company or for common stock of the acquiring
company as set forth above.
Other than those provisions relating to the principal economic
terms of the Rights, any of the provisions of the Rights Agreement may be
amended by the Board of Directors of the Company prior to the Distribution
Date. After the Distribution Date, the provisions of the Rights Agreement may
be amended by the Board in order to cure any ambiguity, defect or inconsistency
or to make changes which do not adversely affect the interests of holders of
Rights (excluding the interests of any Acquiring Person), or to shorten or
lengthen any time period under the Rights Agreement; provided however, no
amendment to adjust the time period governing redemption may be made at such
time as the Rights are not redeemable.
* * *
- 4 -
<PAGE> 59
Exhibit C
[Form of Rights Certificate]
Certificate No. R-__________ __________ Rights
NOT EXERCISABLE AFTER April 24, 2006 OR EARLIER IF REDEEMED OR
EXCHANGED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT
THE OPTION OF THE COMPANY, AT $.005 PER RIGHT ON THE TERMS SET FORTH
IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS
BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE
OF ANY SUCH PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT)
AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
THE RIGHTS SHALL NOT BE EXERCISABLE, AND SHALL BE VOID SO LONG AS
HELD, BY A HOLDER IN ANY JURISDICTION WHERE THE REQUISITE
QUALIFICATION TO THE ISSUANCE TO SUCH HOLDER, OR THE EXERCISE BY SUCH
HOLDER, OF THE RIGHTS IN SUCH JURISDICTION SHALL NOT HAVE BEEN
OBTAINED OR BE OBTAINABLE. [THE RIGHTS REPRESENTED BY THIS RIGHTS
CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR
BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY
MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION
7(e) OF SUCH AGREEMENT.] *
- ------------------
* The portion of the legend in brackets shall be inserted only if
applicable and shall replace the preceding sentence.
<PAGE> 60
Rights Certificate
SUNRISE ASSISTED LIVING, INC.
This certifies that ______________________________ , or its
registered assigns, is the registered owner of the number of Rights set forth
above, each of which entitles the owner thereof, subject to the terms,
provisions and conditions of the Rights Agreement, dated as of April 25, 1996
(the "Rights Agreement"), between Sunrise Assisted Living, Inc., a Delaware
corporation (the "Company"), and First Union National Bank of North Carolina
(the "Rights Agent"), to purchase from the Company at any time prior to April
24, 2006 at the office or offices of the Rights Agent designated for such
purpose, or its successors as Rights Agent, one one-thousandth of a fully paid,
non-assessable share of Series C Junior Participating Preferred Stock, par
value $.01 per share (the "Preferred Stock") of the Company, at a purchase
price of $85.00 per one one-thousandth share (the "Purchase Price"), upon
presentation and surrender of this Rights Certificate with the Form of Election
to Purchase and related Certificate duly executed. The number of Rights
evidenced by this Rights Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Purchase Price per
share set forth above, are the number and Purchase Price as of [________ __,
199_], based on the Preferred Stock as constituted at such date, and are
subject to adjustment upon the happening of certain events as provided in the
Rights Agreement.
From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, the Rights evidenced by this Rights
Certificate beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Person (as such terms are defined in the Rights
Agreement), which the Continuing Directors (as defined in the Rights
Agreement), in their sole discretion, determines is or was involved in or
caused or facilitated, directly or indirectly (including through any change in
the Board), such Section 11(a)(ii) Event, (ii) a transferee of any such
Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances
specified in the Rights Agreement, a transferee of a person who, concurrently
with or after such transfer, became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person shall become null and void and no holder
hereof shall have any right with respect to such Rights from and after the
occurrence of such Section 11(a)(ii) Event.
The Rights evidenced by this Rights Certificate shall not be
exercisable, and shall be void so long as held, by a holder in any jurisdiction
where the requisite qualification to the issuance to such holder, or the
exercise by such holder, of the Rights in such jurisdiction shall not have been
obtained or be obtainable.
As provided in the Rights Agreement, the Purchase Price and
the number and kind of shares of Preferred Stock or other securities, which may
be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are
- 2 -
<PAGE> 61
subject to modification and adjustment upon the happening of certain events,
including Triggering Events (as such term is defined in the Rights Agreement).
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description
of the rights, limitations of rights, obligations, duties and immunities
hereunder of the Rights Agent, the Company and the holders of the Rights
Certificates, which limitations of rights include the temporary suspension of
the exercisability of such Rights under the specific circumstances set forth in
the Rights Agreement. Copies of the Rights Agreement are on file at the
above-mentioned office of the Rights Agent and are also available upon written
request to the Rights Agent.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the office or offices of the Rights Agent
designated for such purpose, may be exchanged for another Rights Certificate or
Right Certificates of like tenor and date evidencing Rights entitling the
holder to purchase a like aggregate number of one one-thousandths of a share of
Preferred Stock as the Rights evidenced by the Rights Certificate or Rights
Certificates surrendered shall have entitled such holder to purchase. If this
Rights Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.005 per Right at any time prior to the earlier of the
close of business on (i) the tenth day following the Stock Acquisition Date (as
such time period may be changed in the discretion of the Board of Directors
pursuant to the Rights Agreement), and (ii) the Final Expiration Date (as
defined in the Rights Agreement). Under certain circumstances set forth in the
Rights Agreement, the decision to redeem shall require the concurrence of a
majority of the Continuing Directors. After the expiration of the redemption
period, the Company's right of redemption may be reinstated if an Acquiring
Person reduces his beneficial ownership to 10% or less of the outstanding
shares of Common Stock in a transaction or series of transactions not involving
the Company, and such reinstatement is approved by the Company's Board of
Directors (with the concurrence of a majority of the Continuing Directors).
At any time after a person becomes an Acquiring Person, the
Board of Directors of the Company may exchange the Rights (other than Rights
owned by such Acquiring Person which have become void), in whole or in part, at
an exchange ratio of one share of Common Stock per Right (subject to
adjustment).
- 3 -
<PAGE> 62
No fractional shares of Preferred Stock will be issued upon
the exercise of any Right or Rights evidenced hereby, (other than fractions
which are integral multiples of one one-thousandth of a share of Preferred
Stock, which may, at the election of the Company, be evidenced by depositary
receipts), but in lieu thereof a cash payment will be made, as provided in the
Rights Agreement.
No holder of this Rights Certificate, as such, shall be
entitled to vote or receive dividends or be deemed for any purpose the holder
of shares of Preferred Stock or of any other securities of the Company which
may at any time be issuable on the exercise hereof, nor shall anything
contained in the Rights Agreement or herein be construed to confer upon the
holder hereof, as such, any of the rights of a stockholder of the Company or
any right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in the Rights Agreement), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Rights Certificate shall have been exercised as provided in
the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
- 4 -
<PAGE> 63
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal.
<TABLE>
<S> <C>
Dated as of ,
------------------ --- -------
ATTEST: SUNRISE ASSISTED LIVING, INC.
By:
- ------------------------------------------- ------------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
Countersigned:
- -----------------------------------------
- -----------------------------------------
By:
-------------------------------------
Authorized Signature
</TABLE>
- 5 -
<PAGE> 64
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if
such holder desires to transfer the
Rights Certificate.)
FOR VALUE RECEIVED
-------------------------------------------------------------
hereby sells, assigns and transfers unto
--------------------------------------
- -------------------------------------------------------------------------------
(Please print name and address of transferee)
- -------------------------------------------------------------------------------
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: ,
-------------------- ----
---------------------------------
Signature
Signature Guaranteed:
<PAGE> 65
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of any such Person.
Dated: ,
----------------------- ------ -------------------------------
Signature
Signature Guaranteed:
<PAGE> 66
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE> 67
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder
desires to exercise Rights represented
by the Rights Certificate.)
To:
------------------------------
The undersigned hereby irrevocably elects to exercise
____________ Rights represented by this Rights Certificate to purchase the
shares of Preferred Stock issuable upon the exercise of the Rights (or such
other securities of the Company or of any other person which may be issuable
upon the exercise of the Rights) and requests that certificates for such shares
be issued in the name of and delivered to:
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
Please insert social security
or other identifying number:
---------------------------------------
If such number of Rights shall not be all the Rights evidenced
by this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Please insert social security
or other identifying number:
---------------------------------------
- --------------------------------------------------------------------
Dated: ,
-------------------- ----
---------------------------------
Signature
Signature Guaranteed:
- 2 -
<PAGE> 68
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Rights Certificate [ ]
are [ ] are not being exercised by or on behalf of a Person who is or was an
Acquiring Person or an Affiliate or Associate of any such Person (as such terms
are defined in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or became an Acquiring Person or
an Affiliate or Associate of any such Person.
Dated: ,
-------------------- ----
---------------------------------
Signature
Signature Guaranteed:
- 3 -
<PAGE> 69
NOTICE
The signature to the foregoing Election to Purchase and
Certificate must correspond to the name as written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or any
change whatsoever.
- 4 -
<PAGE> 1
EXHIBIT 5
[Hogan & Hartson Letterhead]
October 22, 1996
Board of Directors
Sunrise Assisted Living, Inc.
9401 Lee Highway, Suite 300
Fairfax, Virginia 22031
Ladies and Gentlemen:
We are acting as counsel to Sunrise Assisted Living Inc., a
Delaware corporation (the "Company"), in connection with its registration
statement on Form S-1, as amended, File No. 333-13731 (the "Registration
Statement"), filed with the Securities and Exchange Commission relating to the
proposed public offering of up to 5,750,000 shares of the Company's common
stock, par value $.01 per share, 4,547,000 of which shares (the "Company
Shares") are to be sold by the Company, 1,000,000 of which shares (the "Firm
Selling Shareholder Shares") are to be sold by certain Selling Stockholders
identified in the Registration Statement and up to 203,000 of which shares (the
"Option Selling Stockholder Shares") are to be sold by certain other Selling
Stockholders identified in the Registration Statement to the extent that the
Underwriters exercise their over-allotment option. (The Firm Selling
Stockholder Shares and Option Selling Stockholder Shares are referred to herein
collectively as the "Selling Stockholder Shares.") This opinion letter is
furnished to you at your request to enable you to fulfill the requirements of
Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section 229.601(b)(5), in
connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies
of the following documents:
1. An executed copy of the Registration Statement.
2. The Restated Certificate of Incorporation of the
Company, as certified by the Assistant Secretary of
the Company on the date hereof as then being
complete, accurate and in effect.
3. The Amended and Restated Bylaws of the Company, as
certified by the Assistant Secretary of the Company
on the date hereof as then being complete, accurate
and in effect.
<PAGE> 2
Board of Directors
Sunrise Assisted Living, Inc.
October 22, 1996
Page 2
4. The proposed form of Underwriting Agreement among the
Company, the Selling Stockholders and the several
Underwriters to be named therein, for whom Donaldson,
Lufkin & Jenrette Securities Corporation, Alex. Brown
& Sons Incorporated, Natwest Securities Limited and
J.C. Bradford & Co. will act as representatives,
filed as Exhibit 1 to the Registration Statement (the
"Underwriting Agreement").
5. Resolutions of the Board of Directors of the Company
adopted on October 6, 1996, as certified by the
Secretary of the Company on the date hereof as then
being complete, accurate and in effect, relating to
the issuance and sale of the Company Shares and
arrangements in connection therewith.
6. Resolutions of the Board of Directors of the Company
and the Stock Option Committee thereof, as certified
by the Assistant Secretary of the Company on the date
hereof as then being complete, accurate and in
effect, relating to the issuance by the Company to
certain of the Selling Stockholders of (i) the Series
A Convertible Preferred Stock which was converted
into the Firm Selling Stockholder Shares at the time
of the Company's initial public offering and (ii) the
stock options which will be exercised by certain of
the Selling Stockholders for the Option Selling
Stockholder Shares to the extent that the
Underwriters exercise their over-allotment option,
and arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed
the genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, the
authenticity of all original documents and the conformity to authentic original
documents of all documents submitted to us as copies (including telecopies).
This opinion letter is given, and all statements herein are made, in the
context of the foregoing.
This opinion letter is based as to matters of law solely on
the General Corporation Law of the State of Delaware. We express no opinion
herein as to any other laws, statutes, regulations, or ordinances.
<PAGE> 3
Board of Directors
Sunrise Assisted Living, Inc.
October 22, 1996
Page 3
Based upon, subject to and limited by the foregoing, we are of
the opinion that (a) following (i) final action of the Pricing Committee of the
Board of Directors of the Company approving the price of the Company Shares,
(ii) execution and delivery by the Company of the Underwriting Agreement, (iii)
effectiveness of the Registration Statement, (iv) issuance of the Company
Shares pursuant to the terms of the Underwriting Agreement and (v) receipt by
the Company of the consideration for the Company Shares specified in the
resolutions of the Board of Directors and the Pricing Committee referred to in
paragraph 5 above, the Company Shares will be validly issued, fully paid and
nonassessable under the General Corporation Law of the State of Delaware; (b)
assuming that at the time the Selling Stockholder Shares were issued the
Company received the consideration therefor specified in the resolutions of the
Board of Directors referred to in paragraph 6 above, the Selling Stockholder
Shares are validly issued, fully paid and nonassessable under the General
Corporation Law of the State of Delaware; and (c) upon issuance of the Option
Selling Stockholder Shares in accordance with the terms of the related stock
options, such Option Selling Stockholder Shares will be validly issued, fully
paid and nonassesable under the General Corporation Law of the State of
Delaware.
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion
letter has been prepared solely for your use in connection with the filing of
the Registration Statement on the date of this opinion letter and should not be
quoted in whole or in part or otherwise be referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion letter as
Exhibit 5 to the Registration Statement and to the reference to this firm under
the caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that
we are an "expert" within the meaning of the Securities Act of 1933, as
amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE> 1
Exhibit 10.14.1
AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT
This Amendment No. 1 to Stock Option Agreement (this
"Amendment") is made as of May 30,1996 by and between Sunrise Assisted Living,
Inc. (the "Corporation"), a Delaware corporation, and David W. Faeder (the
"Optionee").
WHEREAS, the Optionee holds an unexercised option to
purchase 450,000 shares of the Common Stock, par value $.01 per share, of the
Company (the "Stock"), at a price of $8.00 per share (the "Option") evidenced
by that certain Stock Option Agreement entered into, effective as of January 4,
1995, by and between the Corporation and the Optionee (the "Agreement"); and
WHEREAS, the Board of Directors of the Company and
the Optionee believe it desirable to amend the Agreement to provide for the
cashless exercise of the Option through a broker; and
WHEREAS, such amendment has been approved by the
Corporation's Board of Directors and stockholders;
NOW, THEREFORE, for and in consideration of the
foregoing and of the mutual covenants and agreements set forth in this
Amendment, the parties AGREE as follows:
1. The following new sentence is added following
the second sentence of Section 4(c) of the Agreement:
Payment in full of the Aggregate Exercise Price need
not accompany the written notice of exercise provided
the notice of exercise 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 Optionee 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 Aggregate Exericse
Price for the shares of Stock purchased pursuant to
the exercise of the Option.
2. Except as expressly provided herein, the
terms and conditions of the Agreement shall remain in full force and effect and
shall be binding on the parties hereto.
<PAGE> 2
IN WITNESS WHEREOF, the parties have duly executed
and delivered this Amendment, or have caused this Amendment to be duly executed
and delivered in their name and on their behalf, as of the day and year first
above written.
SUNRISE ASSISTED LIVING, INC.
By: /s/ Thomas B. Newell
-------------------------------
Its: Executive Vice President and
General Counsel
OPTIONEE
/s/ David W. Faeder
-----------------------------------
David W. Faeder
- 2 -
<PAGE> 1
Exhibit 10.23
MEMBERSHIP INTEREST PURCHASE AGREEMENT
THIS MEMBERSHIP INTEREST PURCHASE AGREEMENT is entered into as
of this 29th day of May, 1996 among Sunrise Assisted Living, Inc. ("Buyer"),
and Thomas Donohue and Elizabeth Donohue (collectively, "Sellers").
WHEREAS, Sellers are parties to that certain Sunrise Village
House LLC Operating Agreement (the "Operating Agreement") dated as of April 15,
1993, as amended by Amendment No. 1 dated as of June 6, 1994, and as further
amended by a Consent and Second Amendment dated as of January 4, 1995, pursuant
to which, among other things, Sellers jointly own as tenants by the entireties
a thirty (30%) membership interest in Sunrise Village House LLC (the
"Membership Interest").
WHEREAS, Sellers desire to sell to Buyer and Buyer desires to
purchase from Sellers the Membership Interest upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements hereinafter set forth, the parties hereto
hereby agree as follows:
1. DEFINITIONS
For all purposes of this Purchase Agreement, certain
capitalized terms specified in Exhibit A shall have the meanings set forth in
that Exhibit A, except as otherwise expressly provided.
2. SALE AND PURCHASE OF MEMBERSHIP INTEREST
2.1. SALE AND PURCHASE OF MEMBERSHIP INTEREST
On the basis of the representations, warranties and agreements
contained herein, and subject to the terms and conditions hereof, Sellers agree
to sell to Buyer, and Buyer agrees to acquire from Sellers, the Membership
Interest, in consideration for which Buyer agrees to issue to the Sellers
52,500 shares of common stock of Buyer (the "Common Stock").
2.2. ADDITIONAL UNDERTAKINGS
Buyer and Sellers acknowledge and agree that transfer of the
Membership Interest is subject to the terms and condition of the Operating
Agreement. Therefore, as a condition concurrent to the consummation of the
purchase and sale set forth in Section 2.1 above, all members of the Sunrise
Village House LLC, simultaneously with the execution of this Purchase
Agreement, shall enter into an Amendment to the Operating Agreement in the form
attached hereto as Exhibit B (the "Amendment") pursuant to which, among other
things, Buyer shall be admitted as a member of the Sunrise Village House LLC.
Sellers further acknowledge and agree that, effective as of the execution of
this Purchase Agreement, Sellers shall be deemed, without
<PAGE> 2
any further action on their part, to have withdrawn from Sunrise Village House
LLC.
3. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers hereby represent and warrant to Buyer as follows:
3.1. TITLE TO MEMBERSHIP INTEREST
Since the date of the acquisition of the Membership Interest
by Sellers, there has been no event, or action taken (or failure to take
action) by or against Sellers, which has resulted or might result in the
creation of any Encumbrance on the Membership Interest. Sellers have good,
valid and marketable title to the Membership Interest, free and clear of all
Encumbrances, with full right and lawful authority to sell and transfer the
Membership Interest to Buyer pursuant to this Purchase Agreement.
3.2. AUTHORITY AND CAPACITY; BINDING OBLIGATION
Sellers have full legal right, capacity, power and authority
to execute this Purchase Agreement and to consummate the transactions
contemplated hereby. This Purchase Agreement constitutes a valid and binding
obligation of each Seller, enforceable in accordance with its terms.
3.3. ABSENCE OF VIOLATION
The execution, delivery and performance by Sellers of this
Purchase Agreement, the fulfillment of and the compliance with the respective
terms and provisions hereof, and the consummation of the transactions
contemplated hereby, do not and will not (a) conflict with, or violate any
provision of, any Law having applicability to Sellers, or (b) conflict with, or
result in any breach of, or constitute a default under, any Agreement to which
either Seller is a party.
3.4. NO LITIGATION
There are no actions, suits, claims, arbitrations, proceedings
or investigations pending, threatened or reasonably anticipated against,
affecting or involving Sellers, or the transactions contemplated by this
Purchase Agreement, at law or in equity or admiralty, or before or by any
court, arbitrator or governmental authority, domestic or foreign.
3.5. RESTRICTIONS AND CONSENTS
There are no Agreements, Laws or other restrictions of any
kind to which either Seller is party or subject that would prevent or restrict
the execution, delivery or performance of this Purchase Agreement or result in
any penalty, forfeiture, Agreement termination, or restriction on business
operations of Buyer or Sellers as a result of the execution, delivery or
performance of this Agreement.
2
<PAGE> 3
3.6. TRANSFER OF TITLE
Upon payment for the Membership Interest pursuant to the terms
of this Purchase Agreement, Buyer will acquire good, valid and marketable title
thereto, free and clear of all Encumbrances.
3.7. RESIDENCE OF SELLERS
Sellers represent that they are residents of the State of
Maryland.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Sellers as follows:
4.1. ORGANIZATION AND STANDING
Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the full and
unrestricted corporate power and authority to carry on its business as
currently conducted, to enter into this Purchase Agreement and to carry out the
transactions contemplated hereby.
4.2. AUTHORIZATION
The execution, delivery and performance by Buyer of this
Purchase Agreement, the fulfillment of and the compliance with the respective
terms and provisions hereof, and the consummation by Buyer of the transactions
contemplated hereby have been duly authorized by its Board of Directors (which
authorization has not been modified or rescinded and is in full force and
effect), and will not: (a) conflict with, or violate any provision of, any
term or provision of the certificate or articles of organization of Buyer or
(b) conflict with, or result in any breach of, or constitute a default under,
any Agreement to which Buyer is a party or by which Buyer is bound. No other
action is necessary for Buyer to enter into this Purchase Agreement and to
consummate the transactions contemplated hereby and thereby.
4.3. ISSUANCE OF COMMON STOCK
The Common Stock to be issued to the Sellers pursuant to this
Purchase Agreement shall, upon issuance in accordance with this Purchase
Agreement, be validly issued, fully paid and nonassessable.
4.4. BINDING OBLIGATION
This Purchase Agreement constitutes a valid and binding
obligation of Buyer, enforceable in accordance with its terms.
3
<PAGE> 4
5. RESTRICTED SECURITIES
Sellers hereby represent, warrant and covenant as follows:
5.1. NO REGISTRATION UNDER THE SECURITIES ACT
Sellers understand that the Common Stock to be received by
them pursuant to this Purchase Agreement has not been registered under the
Securities Act in reliance upon exemptions contained in the Securities Act or
interpretations thereof, and cannot be offered for sale, sold or otherwise
transferred unless such Common Stock being acquired hereunder subsequently is
so registered or qualifies for exemption from registration under the Securities
Act.
5.2. ACQUISITION FOR INVESTMENT
The Common Stock is being acquired under this Purchase
Agreement by Sellers in good faith solely for their own account, for investment
and not with a view toward resale or other distribution within the meaning of
the Securities Act. The Common Stock will not be offered for sale, sold or
otherwise transferred by Sellers without either registration or exemption from
registration under the Securities Act.
5.3. RESTRICTIVE LEGENDS
The Sellers acknowledge that in connection with the delivery
of the Common Stock, Buyer shall cause the following legend to be placed on the
Common Stock issued to Sellers pursuant to this Purchase Agreement:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE, AND THUS MAY NOT BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SO
REGISTERED OR UNLESS AN EXEMPTION FROM REGISTRATION
IS AVAILABLE UNDER SUCH ACT AND UNDER ANY SUCH
APPLICABLE STATE SECURITIES LAWS."
5.4. EVALUATION OF MERITS AND RISKS OF INVESTMENT
Sellers have such knowledge and experience in financial and
business matters that Sellers are capable of evaluating the merits and risks of
Seller's acquisition of such Common Stock being acquired hereunder. Sellers
understand and are able to bear any economic risks associated with such
acquisition (including, without limitation, the necessity of holding such
Common Stock for an indefinite period of time, inasmuch as such Common Stock
has not been registered under the Securities Act).
4
<PAGE> 5
6. CLOSING
6.1. CLOSING OF SALE AND PURCHASE
Subject to the terms and conditions of this Purchase
Agreement, the Closing shall take place simultaneously with the execution of
this Purchase Agreement.
6.2. DELIVERIES BY SELLERS
At the Closing, Sellers shall deliver to Buyer the following:
(i) a counterpart copy of the Amendment duly executed by
all members (other than Buyer) of the Sunrise Village House
LLC;
(ii) a counterpart copy of the registration rights letter
agreement in the form attached hereto as Exhibit C duly
executed by Sellers; and
(iii) such other Documents as Buyer may reasonably request.
6.3. DELIVERIES BY BUYER
At the Closing, Buyer shall deliver to Sellers the following:
(i) certificates representing the Common Stock;
(ii) a counterpart copy of the Amendment duly executed by
Buyer;
(iii) a counterpart copy of the registration rights letter
agreement in the form attached hereto as Exhibit C
duly executed on behalf of Buyer; and
(iv) such other Documents as Sellers may reasonably
request.
7. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION; REMEDIES
7.1. SURVIVAL OF REPRESENTATIONS
All representations, warranties, covenants, indemnities and other
Agreements made by any party to this Purchase Agreement herein or pursuant
hereto shall survive the Closing and any investigation, audit or inspection at
any time made by or on behalf of any party hereto.
7.2. AGREEMENT OF SELLERS TO INDEMNIFY
Subject to the conditions and provisions of this Article 7,
each Seller hereby agrees to indemnify, defend and hold harmless Buyer from and
against and in respect of all Claims asserted against, resulting to, imposed
upon or incurred by Buyer, directly or indirectly,
5
<PAGE> 6
by reason of or resulting from any misrepresentation or breach of any
representation or warranty, or noncompliance with conditions or other
Agreements, given or made by Sellers in this Purchase Agreement.
7.3. AGREEMENT OF BUYER TO INDEMNIFY
Subject to the conditions and provisions of this Article 7.,
Buyer hereby agrees to indemnify, defend and hold harmless Sellers from and
against and in respect of all Claims asserted against, resulting to, imposed
upon or incurred by Sellers, directly or indirectly, by reason of or resulting
from any misrepresentation or breach of any representation or warranty, or
noncompliance with any conditions or other Agreements, given or made by Buyer
in this Purchase Agreement.
7.4. REMEDIES CUMULATIVE
The remedies provided herein shall be cumulative and shall not
preclude the assertion by Sellers or Buyer of any other rights or the seeking
of any other remedies against the other, or their respective successors or
assigns.
8. MISCELLANEOUS
8.1. ADDITIONAL ACTIONS AND DOCUMENTS
Each of the parties hereto hereby agrees to take or cause to
be taken such further actions, to execute, deliver and file or cause to be
executed, delivered and filed such further documents, and to obtain such
consents, as may be necessary or as may be reasonably requested in order to
effectuate fully the purposes, terms and conditions of this Purchase Agreement.
8.2. ASSIGNMENT
No party shall assign its rights and obligations under this
Purchase Agreement, in whole or in part, whether by operation of law or
otherwise, without the prior written consent of the other parties hereto, and
any such assignment contrary to the terms hereof shall be null and void and of
no force and effect.
8.3. ENTIRE AGREEMENT; AMENDMENT
This Purchase Agreement and the Exhibits attached hereto
constitute the entire Agreement among the parties hereto with respect to the
transactions contemplated herein, and it supersedes all prior oral or written
Agreements, commitments or understandings with respect to the matters provided
for herein. No amendment, modification or discharge of this Purchase Agreement
shall be valid or binding unless set forth in writing and duly executed and
delivered by the party against whom enforcement of the amendment, modification,
or discharge is sought.
6
<PAGE> 7
8.4. WAIVER
No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Purchase Agreement or under
any other documents furnished in connection with or pursuant to this Purchase
Agreement shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial
exercise of any such right, power or privilege shall preclude the further
exercise of such right, power or privilege, or the exercise of any other right,
power or privilege. No waiver shall be valid against any party hereto unless
made in writing and signed by the party against whom enforcement of such waiver
is sought and then only to the extent expressly specified therein.
8.5. SEVERABILITY
If any part of any provision of this Purchase Agreement shall
be invalid or unenforceable in any respect, such part shall be ineffective to
the extent of such invalidity or unenforceability only, without in any way
affecting the remaining parts of such provision or the remaining provisions of
this Purchase Agreement.
8.6. GOVERNING LAW
This Purchase Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed in accordance with the laws of the Commonwealth of Virginia
(excluding the choice of law rules thereof).
8.7. NOTICES
All notices, demands, requests, or other communications which
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Purchase Agreement shall be in writing and shall be hand
delivered, sent by overnight courier or mailed by first-class, registered or
certified mail, return receipt requested, postage prepaid, or transmitted by
telegram, telecopy or telex, addressed as follows:
(i) If to Buyer:
Sunrise Assisted Living, Inc.
9401 Lee Highway, Suite 300
Fairfax, Virginia 22031
Attn.: Thomas B. Newell, Esq.
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attn.: Robert J. Waldman, Esq.
7
<PAGE> 8
(ii) If to Sellers:
Thomas and Elizabeth Donohue
8008 Coach Street
Potomac, Maryland 20854
with a copy (which shall not constitute notice) to:
Anne L. Stone, Esq.
8133 Leesburg Pike, Suite 605
Vienna, VA 22182
Each party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be so given, served or
sent. Each notice, demand, request, or communication which shall be hand
delivered, sent, mailed, telecopied or telexed in the manner described above,
or which shall be delivered to a telegraph company, shall be deemed
sufficiently given, served, sent, received or delivered for all purposes at
such time as it is delivered to the addressee (with the return receipt, the
delivery receipt, or (with respect to a telecopy or telex) the answerback being
deemed conclusive, but not exclusive, evidence of such delivery) or at such
time as delivery is refused by the addressee upon presentation.
8.8. HEADINGS
Article and Section headings contained in this Purchase
Agreement are inserted for convenience of reference only, shall not be deemed
to be a part of this Purchase Agreement for any purpose, and shall not in any
way define or affect the meaning, construction or scope of any of the
provisions hereof.
8.9. EXECUTION IN COUNTERPARTS
To facilitate execution, this Purchase Agreement may be
executed in as many counterparts as may be required. It shall not be necessary
that the signatures of, or on behalf of, each party, or that the signatures of
all persons required to bind any party, appear on each counterpart; but it
shall be sufficient that the signature of, or on behalf of, each party, or that
the signatures of the persons required to bind any party, appear on one or more
of the counterparts. All counterparts shall collectively constitute a single
Agreement. It shall not be necessary in making proof of this Purchase
Agreement to produce or account for more than a number of counterparts
containing the respective signatures of, or on behalf of, all of the parties
hereto.
8.10. LIMITATION ON BENEFITS
The covenants, undertakings and agreements set forth in this
Purchase Agreement shall be solely for the benefit of, and shall be enforceable
only by, the parties hereto and their respective successors, heirs, executors,
administrators, legal representatives and permitted assigns.
8
<PAGE> 9
8.11. BINDING EFFECT
Subject to any provisions hereof restricting assignment, this
Purchase Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors, heirs, executors,
administrators, legal representatives and assigns.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have duly executed this
Purchase Agreement, or have caused this Purchase Agreement to be duly executed
on their behalf, as of the day and year first above written.
BUYER:
SUNRISE ASSISTED LIVING, INC.
By: /s/ Paul J. Klaassen
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SELLERS:
/s/ Thomas Donohue
--------------------------------------------
Thomas Donohue
/s/ Elizabeth Donohue
--------------------------------------------
Elizabeth Donohue
10
<PAGE> 11
Exhibit A
Definitions
"AGREEMENT" means any concurrence of understanding and
intention between two or more persons (or entities) with respect to their
relative rights and/or obligations or with respect to a thing done or to be
done (whether or not conditional, executory, express, implied, in writing or
meeting the requirements of contract), including, without limitation,
contracts, leases, promissory notes, covenants, easements, rights of way,
covenants, commitments, arrangements and understandings.
"CLAIMS" means all demands, claims, actions or causes of
action, assessments, losses, damages (including, without limitation, diminution
in value), liabilities, costs and expenses, including, without limitation,
interest, penalties and attorneys' fees and disbursements.
"CLOSING" means the closing of the sale and purchase of the
Membership Interest pursuant to the Purchase Agreement.
"ENCUMBRANCE" means any mortgage, lien, pledge, encumbrance,
security interest, deed of trust, option, encroachment, reservation, order,
decree, judgment, condition, restriction, charge, Agreement, claim or equity of
any kind.
"LAWS" means all foreign, federal, state and local statutes,
laws, ordinances, regulations, rules, resolutions, orders, determinations,
writs, injunctions, awards (including, without limitation, awards of any
arbitrator), judgments and decrees applicable to the specified persons or
entities and to the businesses and assets thereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and all laws promulgated pursuant thereto or in connection therewith.
<PAGE> 12
Exhibit B
Amendment to Operating Agreement
<PAGE> 13
AMENDMENT NO. 3 TO
SUNRISE VILLAGE HOUSE LLC
OPERATING AGREEMENT
This Amendment No. 3 to the Sunrise Village House LLC
Operating Agreement (this "Amendment") is made as of this 29th day of May, 1996
by and among Thomas Donohue and Elizabeth Donohue, husband and wife (the
"Donohues"), the Manor at Gunston Limited Partnership ("Gunston"), Countryside
Properties Company LP ("Countryside"), Sunrise Atrium Limited Partnership
("Atrium"), Sunrise Partners, L.P. ("SPLP"), Sunrise Assisted Living
Investments, Inc. ("SALII") and Sunrise Assisted Living, Inc. ("Sunrise").
W I T N E S S E T H:
WHEREAS, Sunrise Village House LLC, a Maryland limited
liability company (the "Company"), was formed pursuant to the Articles of
Organization dated December 11, 1992 and filed with the Maryland State
Department of Assessments and Taxation as of December 14, 1992 and the
Operating Agreement dated April 15, 1993, as amended by Amendment No. 1 dated
as of June 6, 1994 and as further amended by a Consent and Second Amendment
dated as of January 4, 1995 (the "Operating Agreement");
WHEREAS, pursuant to a Membership Interest Purchase Agreement
dated as of the date hereof (the "Membership Interest Purchase Agreement"), the
Donohues are assigning their thirty percent (30%) interest in the Company to
Sunrise and withdrawing from the Company.
WHEREAS, execution of this Amendment is a condition concurrent
to the consummation of the transactions contemplated by the Membership Interest
Purchase Agreement.
WHEREAS, the undersigned desire to amend the Operating
Agreement in order to reflect the withdrawal of the Donohues, include the
membership interest of Sunrise, and admit Sunrise as a Member of the Company,
all as set forth below.
WHEREAS, capitalized terms used herein but not defined herein
shall have the meanings ascribed to them in the Operating Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged by the parties, it is hereby agreed as follows:
1. The Operating Agreement is hereby amended to reflect
the withdrawal of the Donohues as Members and to admit Sunrise as a Member.
1
<PAGE> 14
2. Paragraph 2.2 of the Operating Agreement is amended
to include the following membership interests:
<TABLE>
<CAPTION>
Member Membership Interest
<S> <C>
Sunrise Partners, L.P. 49%
Sunrise Assisted Living, Inc. 30%
Sunrise Atrium Limited Partnership 10%
The Manor at Gunston Limited Partnership 5%
CountrySide Properties Company LP 5%
Sunrise Assisted Living Investments, Inc. 1%
--
100%
</TABLE>
4. In accordance with Section 9.1 of the Operating
Agreement, this Amendment shall constitute written consent by all the members
of the assignment of the Donohues' interest to Sunrise.
5. In accordance with Section 9.1 of the Operating
Agreement, Sunrise hereby agrees to be bound by the terms and conditions of the
Operating Agreement and agrees to be personally obligated to the same extent as
any other Member with respect to obligations of the Company.
6. Sunrise shall assume the Donohues' obligations as a
Member in the Company. From and after the date hereof, the net profit, net
losses, net gains, credits, cash flow or transaction proceeds (including those
which have not been distributed) of the Company allocable to the Donohues'
membership interest shall be credited or charged to Sunrise.
7. This Amendment and assignment of the Donohues'
membership interest shall not dissolve the Company and the business of the
Company shall be deemed to have continued notwithstanding such assignment.
8. The Operating Agreement, as amended by this
Amendment, is hereby ratified and confirmed.
9. This Amendment may be executed in separate
counterparts, none of which need contain the signatures of all parties, and all
which taken together shall constitute one and the same instrument.
2
<PAGE> 15
IN WITNESS WHEREOF, the undersigned have executed this
Amendment No. 3 to Sunrise Village House LLC Operating Agreement as of the day
and year first above written.
THE MANOR AT GUNSTON, L.P.,
By: Sunrise Northern Virginia Limited
Partnership, General Partner
By: Sunrise Retirement
Investments, Inc., General
Partner
WITNESS:
By: /s/ Paul J. Klaassen
-----------------------------------------
Paul J. Klaassen, President
- ----------------------------
COUNTRYSIDE PROPERTIES COMPANY, L.P.,
By: Sunrise Northern Virginia Limited
Partnership, General Partner
By: Sunrise Retirement
Investments, Inc., General
Partner
WITNESS:
By: /s/ Paul J. Klaassen
-----------------------------------------
Paul J. Klaassen, President
- ----------------------------
SUNRISE ATRIUM LIMITED PARTNERSHIP
By: Sunrise Atrium, Inc.
General Partner
WITNESS:
By: /s/ Paul J. Klaassen
-----------------------------------------
Paul J. Klaassen, President
- ----------------------------
3
<PAGE> 16
SUNRISE PARTNERS, L.P.
By: Sunrise Development, Inc.
General Partner
WITNESS:
By: /s/ Paul J. Klaassen
-----------------------------------------
Paul J. Klaassen, President
- ----------------------------
SUNRISE ASSISTED LIVING, INC.
WITNESS:
By: /s/ Paul J. Klaassen
-----------------------------------------
Paul J. Klaassen, President
- ----------------------------
SUNRISE ASSISTED LIVING
INVESTMENTS, INC.
WITNESS:
By: /s/ Paul J. Klaassen
-----------------------------------------
Paul J. Klaassen, President
- ----------------------------
4
<PAGE> 17
Acknowledged by:
WITNESS: DONOHUES:
/s/ Karen S. Coleman /s/ Thomas Donohue
- ---------------------------- --------------------------------------------
Thomas Donohue
WITNESS:
/s/ Karen S. Coleman /s/ Elizabeth Donohue
- ---------------------------- --------------------------------------------
Elizabeth Donohue
5
<PAGE> 18
Exhibit C
Registration Rights Letter Agreement
1
<PAGE> 19
SUNRISE ASSISTED LIVING, INC.
9401 Lee Highway
Suite 300
Fairfax, Virginia 22031
May 29, 1996
Thomas and Elizabeth Donohue
8008 Coach Street
Potomac, Maryland 20854
RE: REGISTRATION RIGHTS FOR DONOHUE STOCK
Dear Mr. & Mrs. Donohue:
Reference is made to that certain (i) Membership Interest
Purchase Agreement (the "Purchase Agreement") dated as of May 29, 1996 by and
among Sunrise Assisted Living, Inc. (the "Issuer") and Thomas Donohue and
Elizabeth Donohue, (ii) Registration Agreement (the "Registration Agreement")
dated as of January 4, 1995 by and among the Issuer, the Investors and the
Founders, and (iii) Warrant Agreement (the "Warrant Agreement") dated as of
March 19, 1996 by and between Issuer and Creditanstalt-Bankberein.
Pursuant to and in accordance with the Purchase Agreement, as
of the date hereof, the Issuer is issuing to Thomas and Elizabeth Donohue
52,500 shares of the common stock of the Issuer ("Donohue Stock"). This Letter
Agreement ("Letter Agreement") sets forth the terms and conditions on which the
Issuer shall grant certain registration rights to the holders of Donohue Stock.
Capitalized terms used herein but not otherwise defined herein shall have the
meanings ascribed to them by the Registration Agreement.
The Issuer hereby grants to the holders of outstanding Donohue
Stock the same "piggyback registration rights" granted to Holders of
Registrable Shares as are set forth in Section 3 of the Registration Agreement
as if the holders of Donohue Stock had become parties to the Registration
Agreement for purposes of Section 3 and other provisions of the Registration
Agreement applicable thereto; provided, however, (a) such registration rights
granted hereunder shall be subordinated to (and not inconsistent with) (i) the
registration rights of the holders of the Convertible Preferred Stock (and
other persons) pursuant to the Registration Agreement and (ii) the registration
rights of holders of the Warrants (as defined in
<PAGE> 20
the Warrant Agreement) and the Warrant Shares (as defined in the Warrant
Agreement) issuable on exercise of the Warrants pursuant to the Warrant
Agreement and (b) such subordination (and consistency) shall be effected by
considering the Donohue Stock to be included, after inclusion pursuant to the
Warrant Agreement of the Warrants and Warrant Shares issuable on exercise of
the Warrants, in clause (D) of Sections 3(b) and 3(c) of the Registration
Agreement as ". . . other securities requested to be included in such
registration which in the opinion of such underwriter(s) can be sold (after
taking into account the securities to be sold pursuant to clauses (A), (B) and
(C)) without having a material adverse effect on the offering. . . ." and in
clause (C) of Section 2(d) of the Registration Agreement as "...other
securities requested to be included in such registration which in the opinion
of the underwriter(s) can be sold (after taking into account the Registrable
Shares to be sold pursuant to clauses (A) and (B)) without having a material
adverse effect on the offering"; and provided further that notwithstanding any
provision of the Registration Agreement to the contrary, in any registration
thereunder which includes any Donohue Stock the Issuer shall be obligated to
pay all Registration Expenses of the Issuer and the holders of such Donohue
Stock shall be obligated to pay the costs and expenses incurred by the holders
of such Donohue Stock in connection with such registration.
Each holder of Donohue Stock shall be deemed to have agreed by
acquisition of such Donohue Stock to the same obligations as Holders of
Registrable Shares and Persons and shall be entitled to the same benefits as
Holders of Registrable Shares and Persons as are set forth in Sections 4, 5, 6,
7, 8, 9, 10, 11, the second sentence of Section 12, and Sections 13, 15, 16,
17, 19 and 20 of the Registration Agreement, as if the holders of Donohue Stock
had become parties to the Registration Agreement for purposes of such Sections
(or portions thereof) and their Donohue Stock were Registrable Shares
thereunder.
The registration rights granted to holders of Donohue Stock
pursuant to this Letter Agreement shall terminate with regard to each holder of
Donohue Stock, at such time as such holder shall have an unlimited right to
sell its Donohue Stock shares in the public market without restriction on
volume or otherwise.
The registration rights granted under this Letter Agreement
shall not apply to an Initial Public Offering (as defined in the Warrant
Agreement).
- 2 -
<PAGE> 21
If the foregoing is in accordance with our mutual
understanding, please so indicate by executing this Letter Agreement below and
returning an original hereof to the undersigned officer of the Issuer at the
address first listed above.
SUNRISE ASSISTED LIVING, INC.
By: /s/ Paul J. Klaassen
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Acknowledged and Agreed:
/s/ Thomas Donohue
- ----------------------------------
Thomas Donohue
/s/ Elizabeth Donohue
- ----------------------------------
Elizabeth Donohue
- 3 -
<PAGE> 1
EXHIBIT 21
Sunrise Assisted Living, Inc.
List of Subsidiaries
<TABLE>
<CAPTION>
Direct or Indirect Jurisdiction
Subsidiaries Ownership of Incorporation
- ------------ --------------------------- ----------------
<S> <C> <C>
Sunrise Terrace, Inc. 100% Virginia
Sunrise Development, Inc. 100% Virginia
Sunrise Assisted Living
Investments, Inc. 100% Virginia
Sunrise Assisted Living
Limited Partnership 100% Virginia
Sunrise Assisted Limited Partnership 100% Virginia
Sunrise at Gardner Park
Limited Partnership 50% Massachusetts
Sunrise of Raleigh, LLC 50% North Carolina
Sunrise Village House, LLC 80% Maryland
Sunrise Assisted Living
Limited Partnership II 100% Virginia
Sunrise Assisted Living
Limited Partnership III 100% Pennsylvania
Sunrise Assisted Living
Limited Partnership IV 100% New Jersey
Sunrise Assisted Living
Limited Partnership V 100% New Jersey
Sunrise Assisted Living
Limited Partnership VI 100% New Jersey
Sunrise Assisted Living
Limited Partnership VII 100% Maryland
Sunrise Assisted Living
Limited Partnership VIII 100% California
Sunrise Assisted Living of Abington, L.P. 100% Pennsylvania
Sunrise Assisted Living of Granite Run, L.P. 100% Pennsylvania
Sunrise Assisted Living of Franconia, L.P. 100% Virginia
Independence Home Care
Agency, Inc. 100% Washington
Sunrise Homes of Towson LLC 100% Maryland
Sunrise East Assisted Living
Limited Partnership 100% Virginia
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Sunrise of Alexandria
Assisted Living, L.P. 100% Virginia
Sunrise of Rockville Assisted
Living Limited Partnership 100% Maryland
Sunrise Huntcliff Assisted
Living Limited Partnership 100% Georgia
Sunrise Augusta Assisted
Living Limited Partnership 100% Georgia
Sunrise Columbus Assisted
Living Limited Partnership 100% Georgia
Sunrise Greenville Assisted
Living Limited Partnership 100% South Carolina
Sunrise Northshore Assisted
Living Limited Partnership 100% Florida
Sunrise of Westfield Assisted
Living, L.P. 100% Maryland
NAH/Sunrise Severna Park, LLC 50% Maryland
Sunrise Wayland Assisted
Living Limited Partnership 100% Massachusetts
Sunrise Norwood Assisted
Living Limited Partnership 100% Massachusetts
</TABLE>
<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 first amendment to the Registration Statement (Form S-1 No.
333-13731) and related Prospectus of Sunrise Assisted Living, Inc. for the
registration of 5,000,000 shares of its common stock.
/s/ Ernst & Young LLP
Ernst & Young LLP
Washington, D.C.
October 22, 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 22, 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 22, 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 22, 1996
