<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period
From _____________ to _____________
COMMISSION FILE NUMBER: 0-20765
SUNRISE ASSISTED LIVING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1746596
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
9401 LEE HIGHWAY, SUITE 300
FAIRFAX, VIRGINIA 22031
(Address of principal executive offices)
(703) 273-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
As of August 3, 1998, there were 19,355,205 shares of the
Registrant's Common Stock outstanding.
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<PAGE> 2
SUNRISE ASSISTED LIVING, INC.
FORM 10-Q
JUNE 30, 1998
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 and six months
ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 39,982 $ 82,643
Accounts receivable, net 9,208 5,849
Prepaid expenses and other current assets 13,497 6,081
--------- ---------
Total current assets 62,687 94,573
Property and equipment, net 479,856 423,615
Investment and notes receivable 24,220 22,998
Restricted cash and cash equivalents 2,243 1,573
Deferred financing costs, net 6,535 7,459
Other assets 6,332 6,042
--------- ---------
Total assets $ 581,873 $ 556,260
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 17,572 $ 16,620
Deferred revenue 1,323 1,482
Other current liabilities 47 669
Current maturities of long-term debt 5,450 5,462
--------- ---------
Total current liabilities 24,392 24,233
Long-term debt, less current maturities 348,047 335,485
Notes payable to affiliated partnerships 40 40
Interests in unconsolidated partnerships 502 445
Other long-term liabilities 547 319
--------- ---------
Total liabilities 373,528 360,522
Minority interests 529 398
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $0.01 par value, 60,000,000 shares authorized,
19,324,695 and 19,028,040 shares issued and outstanding in 1998 and 1997 193 190
Additional paid-in capital 211,048 206,784
Accumulated deficit (3,425) (11,634)
--------- ---------
Total stockholders' equity 207,816 195,340
--------- ---------
Total liabilities and stockholders' equity $ 581,873 $ 556,260
========= =========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from
the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
3
<PAGE> 4
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
------------------------ ------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees $ 36,474 $ 17,763 $ 67,785 $ 33,716
Management services income 3,980 892 7,581 1,483
-------- -------- -------- --------
Total operating revenue 40,454 18,655 75,366 35,199
-------- -------- -------- --------
Operating expenses:
Facility operating 21,624 11,147 40,283 21,089
Facility development and pre-rental 1,061 999 2,769 3,128
General and administrative 3,006 2,751 5,958 5,356
Depreciation and amortization 5,395 1,993 9,929 3,577
Facility lease 665 287 1,303 287
-------- -------- -------- --------
Total operating expenses 31,751 17,177 60,242 33,437
-------- -------- -------- --------
Income from operations 8,703 1,478 15,124 1,762
Other income (expense):
Interest income 1,211 1,502 2,944 2,921
Interest expense (5,205) (2,665) (9,901) (4,266)
-------- -------- -------- --------
Total other expense (3,994) (1,163) (6,957) (1,345)
Equity in (losses) earnings of
unconsolidated partnerships and
minority interests (123) 61 42 93
-------- -------- -------- --------
Net income $ 4,586 $ 376 $ 8,209 $ 510
======== ======== ======== ========
Net income per common share data:
- ---------------------------------
Basic net income per common share $ 0.24 $ 0.02 $ 0.43 $ 0.03
======== ======== ======== ========
Diluted net income per common share $ 0.23 $ 0.02 $ 0.40 $ 0.03
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,209 $ 510
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of unconsolidated partnerships
and minority interests (42) (93)
Provision for bad debts 111 242
Gain on sale of assets (489) -
Amortization of discount on investments (150) -
Depreciation and amortization 9,929 3,577
Amortization of financing costs and discount on long-term debt 1,131 530
Changes in assets and liabilities:
Increase:
Accounts receivable (2,318) (999)
Prepaid and other current assets (6,865) (1,166)
Other assets (934) (2,985)
Increase (decrease):
Accounts payable and accrued expenses 890 1,294
Deferred revenue (159) 326
Other liabilities 149 (26)
--------- ---------
Net cash provided by operating activities 9,462 1,210
--------- ---------
INVESTING ACTIVITIES:
Increase in restricted cash and cash equivalents (670) (1,003)
Investment in property and equipment (67,385) (83,982)
Increase in investment and notes receivable (250) -
Proceeds from maturities of marketable securities - 8,322
Contributions to interests in unconsolidated partnerships (344) -
Distributions from interests in unconsolidated partnerships 31 -
--------- ---------
Net cash used in investing activities (68,618) (76,663)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from exercised options 4,267 1,636
Additional borrowings under long-term debt 32,937 185,213
Repayment of long-term debt (20,709) (58,147)
Financing costs paid - (3,536)
Repayment of notes payable to affiliated partnerships - (1,293)
--------- ---------
Net cash provided by financing activities 16,495 123,873
--------- ---------
Net (decrease) increase in cash and cash equivalents (42,661) 48,420
Cash and cash equivalents at beginning of period 82,643 101,811
--------- ---------
Cash and cash equivalents at end of period $ 39,982 $ 150,231
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Sunrise Assisted
Living, Inc. and subsidiaries (the "Company") are unaudited and include all
normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the three- and
six-month periods ended June 30, 1998 and 1997 pursuant to the instructions
to Form 10-Q and Article 10 of Regulation S-X. Certain information and
footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and the notes thereto for the
year ended December 31, 1997 included in the Company's 1997 Annual Report to
Stockholders. Operating results for the three- and six-month periods ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1998.
Certain 1997 balances have been reclassified to conform with the 1998
presentation.
2. LONG-TERM DEBT
Long-term debt was $353.5 million at June 30, 1998, excluding notes
payable to affiliated entities, compared to $340.9 million at December 31,
1997.
On June 6, 1997, the Company issued and sold $150.0 million aggregate
principal amount of 5 1/2% convertible subordinated notes due 2002 (the
"Notes"). The Notes bear interest at 5 1/2% per annum, payable semiannually
on June 15 and December 15 of each year. The conversion price is $37.1875
(equivalent to a conversion rate of 26.89 shares per $1,000 principal amount
of the Notes). The Notes are redeemable at the option of the Company
commencing June 15, 2000, at specified premiums. The holders of the Notes
may require the Company to repurchase the Notes upon a Change of Control (as
defined) of the Company.
The Company has an $86.5 million dollar multi-property mortgage (the
"Multi-Property Mortgage"), collateralized by a blanket first mortgage on
all assets of a subsidiary of the Company, consisting of 15 facilities. The
Multi-Property Mortgage consists of two separate debt classes: Class (A) in
the amount of $65.0 million bears a fixed interest rate of 8.56% and is
interest only until the maturity date of May 31, 2001; and Class (B) in the
amount of $21.5 million bears a variable interest rate of LIBOR plus 1.75%
and is payable in installments through May 2001.
A subsidiary of the Company has a syndicated revolving credit facility
for $250.0 million. The facility is used for general corporate purposes,
including the continued construction and development of assisted living
facilities. The Company guarantees the repayment of all amounts outstanding
under this credit facility. The credit facility expires in December 2000,
with the right to extend, and is secured by cross-collateralized first
mortgages on the real property and
6
<PAGE> 7
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. LONG-TERM DEBT (CONTINUED)
improvements and first liens on all other assets of the subsidiary. Advances
under the facility bear interest at LIBOR plus 1.00% to LIBOR plus 1.50%.
There were $64.0 million of advances outstanding under this credit facility
as of June 30, 1998.
A subsidiary of the Company has received a commitment for a $51.0
million revolving construction credit facility. The Company closed $32.1
million of the total commitment. The credit facility provides for
construction and interim loans to finance the development of up to seven
assisted living facilities. The Company has agreed to guarantee the
repayment of all amounts outstanding under this credit facility. The credit
facility is for a term of five years and is secured by cross-collateralized
first mortgages on the real property and liens on receivables. Advances
under the credit facility bear variable interest rates based upon LIBOR plus
2.00% to LIBOR plus 2.35%. There were $4.7 million of advances outstanding
under this facility as of June 30, 1998.
A subsidiary of the Company has received a commitment for a $15.7
million revolving construction credit facility. The credit facility provides
for construction and interim loans to finance the development of up to two
assisted living facilities. The Company guarantees the repayment of all
amounts outstanding under this credit facility. The credit facility is for a
term of three 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 credit facility bear variable interest
rates based upon LIBOR plus 1.25% to LIBOR plus 1.75%. There were no
advances outstanding under this facility as of June 30, 1998.
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 LIBOR floating rate debt bear interest at a fixed
rate based on a fixed LIBOR base rate of 7.30%. The Company has entered into
another swap transaction whereby effective during the period August 20, 1997
through April 1, 2003, outstanding advances of up to $7.0 million under
LIBOR floating rate debt bear interest at a fixed LIBOR base rate of 7.14%.
3. STOCK OPTION PLANS
The Company has stock option plans providing for the grant of incentive
and non-qualified stock options to employees, directors, consultants and
advisors for a fixed number of shares with an exercise price equal to the
fair market 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.
7
<PAGE> 8
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. STOCK OPTION PLANS (CONTINUED)
A summary of the Company's stock option activity and related information
as of June 30, 1998, is presented below:
<TABLE>
<CAPTION>
SHARES WEIGHTED- AVERAGE
FIXED OPTIONS (000) EXERCISE PRICE
------------------------------- ----------------------------
<S> <C> <C>
Outstanding - January 1, 1998 3,156 $ 22.76
Granted 1,254 41.01
Exercised (281) 15.80
Forfeited (357) 25.95
------
Outstanding - June 30, 1998 3,772 29.05
------
Exercisable - June 30, 1998 751
======
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (000) Contractual Life Price (000) Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.00 to 8.00 257 7.2 $ 5.47 170 $ 5.52
8.01 to 20.00 385 7.8 17.04 233 16.80
20.01 to 25.63 1,496 8.6 24.99 304 25.07
25.64 to 44.63 1,634 9.6 39.31 44 39.23
----- -----
3,772 751
===== =====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into contracts to purchase and lease additional
sites. Total contracted purchase price of these sites amounts to $60.6
million. The Company is pursuing additional development opportunities and
also plans to acquire additional facilities as market conditions warrant.
8
<PAGE> 9
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. NET INCOME PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income per share amounts presented in the accompanying consolidated
statements of operations (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income
per share $ 4,586 $ 376 $ 8,209 $ 510
======= ======= ======= =======
Denominator:
Denominator for basic net income per common
share-weighted average shares 19,251 18,674 19,180 18,618
Effect of dilutive securities:
Employee stock options 899 862 1,105 941
Warrants - 21 14 20
------- ------- ------- -------
Denominator for diluted net income per common
share-weighted average shares plus assumed
conversions 20,150 19,557 20,299 19,579
======= ======= ======= =======
Basic net income per common share $ 0.24 $ 0.02 $ 0.43 $ 0.03
======= ======= ======= =======
Diluted net income per common share $ 0.23 $ 0.02 $ 0.40 $ 0.03
======= ======= ======= =======
</TABLE>
Shares issuable upon the conversion of convertible subordinated notes
have been excluded from the computation because the effect of their
inclusion would be anti-dilutive.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Included in prepaid expenses and other current assets are net
receivables from unconsolidated partnerships and limited liability companies
of $10.8 million and $4.1 million as of June 30, 1998 and 1997,
respectively, which relate primarily to development activities.
7. RELATED-PARTY TRANSACTION
The Company has entered into a joint venture arrangement with a third
party that is providing up to $55.3 million of equity capital to develop
up to 22 projects. A director of the Company is a general partner in the
third party that is providing such equity capital. The joint venture has
acquired a property near London, England on which it is developing an
independent living, an assisted living and an Alzheimer's care facility.
The Company will provide management and development services to the joint
venture on a contract-fee basis with rights to acquire the assets in the
future and has agreed to invest up to $2.8 million of equity capital in
the joint venture.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis 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, among
others, development and construction risks, acquisition risks, licensing
risks, business conditions, risks of downturns in economic conditions
generally, satisfaction of closing conditions and availability of financing
for development and acquisitions. Certain of these factors are discussed
elsewhere herein. Unless the context suggests otherwise, references herein
to the "Company" or "Sunrise" means Sunrise Assisted Living, Inc. and its
subsidiaries.
OVERVIEW
The Company is a leading provider of assisted living services to the
elderly. The Company currently operates 70 facilities in 13 states with a
capacity of approximately 6,000 residents, including 62 facilities owned by
the Company or in which it has ownership interests and eight facilities
managed for third parties. The Company also operates two skilled nursing
facilities owned by a third party. The current number of facilities operated
by the Company represents a significant growth in operations. Over the past
12 months, the Company began operating an additional 28 facilities in which
it has an ownership interest and managing an additional three facilities for
third parties.
The Company reported net income of $4.6 million, or $0.23 per share
(diluted), on operating revenue of $40.5 million for the three months ended
June 30, 1998, compared to a net income of $0.4 million, or $0.02 per share
(diluted), on operating revenue of $18.7 million for the three months ended
June 30, 1997. The Company reported net income of $8.2 million, or $0.40 per
share (diluted), on operating revenue of $75.4 million for the six months
ended June 30, 1998, compared to a net income of $0.5 million, or $0.03 per
share (diluted), on operating revenue of $35.2 million for the six months
ended June 30, 1997. The increase in net income between the three and six
months ended June 30, 1998 and 1997 was attributable to the additional
facilities in 1998 and the Company's ability to control general and
administrative expenses during the expansion. General and administrative
expenses decreased as a percentage of operating revenue by 7.3% between both
the three- and six-month periods (see results of operations for further
discussion).
The Company's previously announced growth objectives include developing
at least 55 new Sunrise model assisted living facilities with an additional
resident capacity of more than 4,500 by the end of 1999. The Company has
completed development of 31 such facilities with a resident capacity of
2,714 and has 15 facilities currently under construction with a resident
capacity of 1,431. The Company has also entered into contracts to purchase
40 additional sites, 19 of which are zoned, and to lease two additional
sites. The Company is pursuing additional development opportunities and also
plans to acquire additional facilities as market conditions warrant.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In mid 1997, the Company again began seeking to capitalize on its brand
awareness by accepting third-party management and development contracts.
The Company has renewed efforts to seek additional third-party management
and development opportunities after a two year period during which the
Company focused on building its infrastructure. During the first quarter of
1998 the Company entered an agreement expanding its relationship with
Resource Housing of America, an Atlanta-based nonprofit organization for
which the Company currently manages two nursing homes and an assisted living
community. Under this agreement, the Company will initially develop and
manage three new assisted living communities in the southeastern United
States.
The Company has continued its efforts to explore international
development and acquisition possibilities in the United Kingdom and Canada
and has entered into a joint venture arrangement with a third party that is
providing up to $55.3 million of the equity capital to develop up to 22
projects. Scott Meadow, a director of the Company, is a general partner in
the third party that is providing such equity capital. The joint venture
has acquired a property near London, England on which it is developing an
independent living, an assisted living and an Alzheimer's care facility.
The Company will provide management and development services to the joint
venture on a contract-fee basis with rights to acquire the assets in the
future and has agreed to invest up to $2.8 million of equity capital in the
joint venture. To date, the third party has provided approximately $5.1
million and the Company has provided $0.4 million of equity capital to the
joint venture.
The Company anticipates, subject to market conditions, selling selected
real estate assets as a normal part of its operations while retaining
long-term management through operating agreements. This strategy of selling
selected real estate assets as a normal part of operations should enable the
Company to reduce debt, redeploy its capital into new development projects
and recognize gains on appreciated real estate.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997
Operating Revenue. Operating revenue for the three months ended June 30,
1998 increased 116.9% to $40.5 million from $18.7 million for the three
months ended June 30, 1997 due primarily to the growth in resident fees.
Resident fees (including community fees) for the three months ended June 30,
1998 increased $18.7 million compared to the three months ended June 30,
1997. This increase was due primarily to the inclusion, for the three months
ended June 30, 1998, of $11.3 million of resident fees generated from the
additional assisted living facilities. The remaining increase in resident
fees was due primarily to an increase in the average daily resident fee
(excluding community fees) and the average resident occupancy for facilities
that were operational in both periods.
Average resident occupancy for owned facilities operated by the Company
for at least 12 months or that have achieved stabilization of 95%
("Stabilized Facilities") increased to 94.5% for the three months ended June
30, 1998 compared to 93.6% for the three months ended June 30, 1997. The
average daily resident fee (excluding community fees) for Stabilized
Facilities increased to $86 in the three months ended June 30, 1998 from $78
in the three months ended June 30, 1997. The increase is due to the
increase in the Basic Care rate and an increase in the number of residents
receiving Plus Care and Alzheimer's Care services.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Management services income represents fees from long-term contracts for
facilities owned by joint ventures and other third party owners. Management
services income for the three months ended June 30, 1998 increased to $4.0
million from $0.9 million for the three months ended June 30, 1997. This
increase resulted primarily from a $2.9 million increase in fees from
additional management activities. Currently, the Company has contracts for
17 domestic facilities, one international facility, and two skilled nursing
facilities for third parties compared to five facilities and two skilled
nursing facilities for the same period last year.
Operating Expenses. Operating expenses for the three months ended June
30, 1998 increased by 84.8% to $31.8 million from $17.2 million for the
three months ended June 30, 1997. The increase in operating expenses for the
quarter ended June 30, 1998 was attributable primarily to an increase in
facility operating and depreciation and amortization expenses.
Facility operating expenses for the three months ended June 30, 1998,
increased 94.0% to $21.6 million from $11.1 million for the three months
ended June 30, 1997. As a percentage of resident fees, facility operating
expenses for the three months ended June 30, 1998, decreased to 59.3% from
62.8% for the three months ended June 30, 1997. The increase in facility
operating expenses for the quarter ended June 30, 1998 was attributable
primarily to the additional assisted living facilities operated in the 1998
period.
General and administrative expenses for the three months ended June 30,
1998 increased 9.3% to $3.0 million from $2.8 million for the three months
ended June 30, 1997. As a percentage of operating revenue, general and
administrative expenses for the three months ended June 30, 1998 decreased
to 7.4% from 14.7% for the three months ended June 30, 1997, reflecting
higher operating revenue in the 1998 period. The $0.2 million increase in
general and administrative expenses for the three months ended June 30, 1998
was primarily related to labor costs, consisting of hiring and training
additional staff at the headquarters and regional offices.
Depreciation and amortization for the three months ended June 30, 1998
compared to the three months ended in June 30, 1997 increased $3.4 million,
or 170.7%, to $5.4 million primarily due to the openings of additional
assisted living facilities and the inclusion of operations of acquired
facilities.
Facility lease expense increased $0.4 million primarily due to the
opening of three facilities developed and leased by the Company in 1998 and
another facility included for a full three months in 1998 versus a partial
quarter in 1997.
Other income (expense). Interest income decreased to $1.2 million for
the three months ended June 30, 1998 compared to $1.5 million for the three
months ended June 30, 1997. This decrease was primarily due to decreased
funds available for investment. Interest expense increased for the three
months ended June 30, 1998 to $5.2 million from $2.7 million for the three
months ended June 30, 1997. Of this increase, $1.5 million was due to
interest on the Company's $150.0 million aggregate principal amount of the
Notes issued in June 1997. The remaining increase was primarily due to
interest on additional borrowings under one of the Company's credit
facilities.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1997
Operating Revenue. Operating revenue for the six months ended June 30,
1998 increased 114.1% to $75.4 million from $35.2 million for the six months
ended June 30, 1997 due primarily to the growth in resident fees. Resident
fees for the six months ended June 30, 1998 increased 101.0% to $67.8
million from $33.7 million in the six months ended June 30, 1997. This
increase was due primarily to the inclusion, for the six months ended June
30, 1998, of additional resident fees of $20.4 million generated from the
operations of additional facilities opened or acquired subsequent to June
30, 1997. The remaining increase in resident fees was primarily due to an
increase in the average daily rate for owned facilities operated by the
Company for at least twelve months.
Average resident occupancy for Stabilized Facilities increased to 94.3%
for the six months ended June 30, 1998 compared to 94.2% for the six months
ended June 30, 1997. The average daily resident fee (excluding community
fees) for Stabilized Facilities increased to $85 in the six months ended
June 30, 1998 from $79 in the six months ended June 30, 1997. The increase
is due to the increase in the Basic Care rate and an increase in the number
of residents receiving Plus Care and Alzheimer's Care services.
Management services income for the six months ended June 30, 1998
increased to $7.6 million from $1.5 million for the six months ended June
30, 1997. The increase resulted primarily from a $4.8 million increase in
fees from additional management activities. Also included are management
services income from three additional facilities managed by the Company
during the six months ended June 30, 1998 and a $0.5 million gain to the
Company from the sale of its minority interest in a tenancy-in-common that
owned one facility.
Operating Expenses. Operating expenses for the six months ended June 30,
1998 increased by 80.2% to $60.2 million from $33.4 million for the six
months ended June 30, 1997. The increase in operating expenses was
attributable primarily to the increase in facility operating and
depreciation and amortization expenses.
Facility operating expenses for the six months ended June 30, 1998
increased 91.0% to $40.3 million from $21.1 million for the six months ended
June 30, 1997. As a percentage of resident fees, facility operating expenses
for the six months ended June 30, 1998 decreased to 59.4% from 62.5% for the
six months ended June 30, 1997. Of the $19.2 million increase, $13.6 million
was attributable to expenses from the operations of additional assisted
living facilities operated by the Company for the six months ended June 30,
1998 as compared to the six months ended June 30, 1997. The remaining
balance was primarily due to an increase in labor and general and
administrative expenses at facilities that were operational in both periods.
General and administrative expenses for the six months ended June 30,
1998 increased 11.2% to $6.0 million from $5.4 million for the six months
ended June 30, 1997. As a percentage of operating revenue, general and
administrative expenses for the six months ended June 30, 1998 decreased to
7.9 % from 15.2% for the six months ended June 30, 1997, reflecting higher
operating
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
revenue in the 1998 period. The $0.6 million increase in general and
administrative expense for the six months ended June 30, 1998, was primarily
related to labor costs, consisting of hiring and training additional staff
at the headquarters and regional offices.
Depreciation and amortization for the six months ended June 30, 1998
compared to the six months ended in June 30, 1997 increased $6.4 million, or
177.6%, to $9.9 million from $3.6 million primarily due to the increase in
the number of facilities operated by the Company.
Facility lease expense increased $1.0 million primarily due to the
opening of three facilities developed and leased by the Company in 1998 and
another facility included for a full six months in 1998 versus a partial
period in 1997.
Other income (expense). Interest income for the six months ended June
30, 1998 and 1997 was $2.9 million. Interest expense increased for the six
months ended June 30, 1998 to $9.9 million from $4.3 million for the six
months ended June 30, 1997. Of this increase, $3.6 million was due to
interest on the Notes. The remaining increase was primarily due to interest
on additional borrowings under one of the Company's credit facilities.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations from long-term
borrowings, equity offerings and cash generated from operations. At June 30,
1998, the Company had $353.5 million of outstanding debt (excluding notes
payable to affiliates) at a weighted average interest rate of 6.7%. Of such
amount, the Company had $259.4 million of fixed-rate debt (excluding a $1.2
million loan discount) at a weighted average interest rate of 6.5%, and
$94.1 million of variable rate debt at a weighted average interest rate of
7.3%. Increases in prevailing interest rates could increase the Company's
interest payment obligations relating to variable-rate debt.
At June 30, 1998, the Company had approximately $40.0 million in
unrestricted cash and cash equivalents, including $20.7 million in high
quality short-term investments (A1/P1 rated) and $38.3 million in net
working capital and currently has $248.0 million of unused lines of credit.
Working capital decreased to $38.3 million from $70.3 million at
December 31, 1997, primarily due to the Company's continued investment in
the development and ownership of assisted living facilities.
Net cash provided by operating activities for the six months ended June
30, 1998 and 1997 was approximately $9.5 million and $1.2 million,
respectively, corresponding to the increased number of facilities operated
by the Company at June 30, 1998, compared to June 30, 1997.
For the six months ended June 30, 1998 and 1997, the Company used $68.6
million and $76.7 million, respectively, for investing activities. Investing
activities included investment in property and equipment in the amounts of
$67.4 million and $84.0 million, respectively, related to the construction
of assisted living facilities.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net cash provided by financing activities was $16.5 million and $123.9
million for the six months ended June 30, 1998 and 1997, respectively.
Financing activities included additional borrowings of $32.9 million and
$185.2 million, respectively, offset, in part, by debt repayments of $20.7
million and $58.1 million, respectively. Additional borrowings during the six
months ended June 30, 1998 were primarily from the Company's credit
facilities (see note 2, long-term debt) and were used to fund the Company's
continued development of assisted living facilities.
The Company's previously announced three-year growth objectives include
developing at least 55 new Sunrise model assisted living facilities with an
additional resident capacity of more than 4,500 by the end of 1999. As of
July 31, 1998, the Company has completed development of 31 such facilities
with an additional resident capacity of 2,714 (Danville, CA, Whitemarsh, PA,
Pinehurst, CO, Huntcliff, GA, East Cobb, GA, Fresno, CA, Haverford, PA,
Decatur, GA, Walnut Creek, CA, Glen Cove, NY, Ivey Ridge, GA, Cohasset, MA,
Denver, CO, Alexandria, VA, Norwood, MA, Wayne, NJ, Wayland, MA, Westfield,
NJ, Rockville, MD, Philadelphia, PA (3), Old Tappan, NJ, Morris Plains, NJ,
Severna Park, MD (2), Springfield, VA, Oakton, VA, Petaluma, CA, Blue Bell,
PA, and Columbia, MD) and has 15 facilities currently under construction
with a resident capacity of 1,431. The Company has also entered into
contracts to purchase 40 additional sites, 19 of which are zoned, and to
lease two additional sites. The Company is pursuing additional development
opportunities and also plans to acquire additional facilities as market
conditions warrant.
The Company currently estimates that the existing credit facility,
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. The estimated cost to
complete and lease up the 24 remaining new Sunrise model facilities targeted
for completion by the end of 1999 is between $204 million and $288 million.
Additional financing will be required to complete the Company's growth plans
and to refinance existing indebtedness. There can be no assurance that such
financing will be available on acceptable terms.
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
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the general contractor or subcontractor 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.
The Company's previously announced growth plan included the acquisition
of up to 15 facilities by the end of 1999, of which nine have been acquired.
There can be no assurance that the Company will be able to complete the
acquisition of additional assisted living facilities. The success of the
Company's acquisitions will be determined by numerous factors, including the
Company's ability to identify suitable acquisition candidates, competition
for such acquisitions, the purchase price, the financial performance of the
facilities after acquisition and the ability of the Company to integrate or
operate acquired facilities effectively may have a material adverse effect
on the Company's business, financial condition and results of operations.
The long-term care industry is highly competitive and the Company
believes that the assisted living segment, in particular, will become more
competitive in the future. The Company competes with numerous other
companies providing assisted living and other 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
faces competition in its efforts to develop and acquire assisted living
facilities and is experiencing competition in many of its opened facilities.
Some of the Company's present and potential competitors are significantly
larger and have, or may obtain, greater financial resources than the
Company. 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 affect 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. Providers of
assisted living and related services compete for residents primarily on the
basis of quality of care, price, reputation, physical appearance and
location of the facilities, services offered, and family and physician
preferences. As assisted living receives increased attention, the Company
believes that competition will grow from new and existing local, regional,
and national companies that operate, manage and develop assisted living
facilities within the same geographic areas as the Company. The Company
believes that each local market is different and the Company is and will
continue to react in a variety of ways, including selective price
discounting, to the specific competitive environment that exists in each
market.
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) one of the Company's Founders
(Paul and Teresa Klaassen) serve as Chairman of the Board and Chief
Executive Officer 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
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
At June 30, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $17.0 million which expire from 2010
through 2012.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities
("SOP 98-5"), which is effective for fiscal years beginning after December
15, 1998. SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of SOP 98-5 is
not anticipated to affect results of operations or the financial position of
the Company.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"), which is effective for
fiscal years beginning after December 15, 1997. Statement 131 establishes
standards for the way that a public company reports information about
operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Company will adopt the new requirements in 1998. Management has not
completed its review of Statement 131; however, the adoption of Statement
131 is not anticipated to affect results of operations or financial
position, but could add to the Company's operating disclosures in future
periods.
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 initiatives, have previously had a negative impact on
operating margins and may again do so in the foreseeable future.
Substantially all of the Company's resident agreements are for terms of
one year (but are terminable by the resident at any time upon 30 days'
notice) 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
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 increase
due to inflation or other causes.
IMPACT OF YEAR 2000
Some of the older computer programs utilized by the Company were written
using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognize
a date using "00" as the year 1900 rather than the year 2000 ("Year 2000
Issue"). This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
During the past year, the Company has continued to invest resources
developing the needed infrastructure to support current and anticipated
growth. In most cases, the Company has implemented financial and accounting
systems that will support its development plans, which includes year 2000
compliant software. To date, financial and accounting systems implemented or
updated that are year 2000 compliant include the accounting general ledger
system, the resident billing system, the cash disbursement or accounts
payable system, the development or project cost system, the fixed asset
system, the employee stock option system and substantially all software
residing on the Company's home office and facility desk-top and lap-top
computers.
The Company recently selected for implementation during 1998 a payroll
system with expanded functionality. Included among the requirements for
selection is that the payroll system be year 2000 compliant. The project is
estimated to be completed not later than December 31, 1998, which is prior
to any anticipated impact of the Year 2000 Issue on its operations. The
Company will continue to assess its software to determine whether additional
portions will have to be modified or replaced so that its computer systems
will function properly with respect to dates in the year 2000 and
thereafter. The Company believes that with modifications to existing
software and conversions to new software, planned and completed, the Year
2000 Issue will not pose significant operational problems or costs. However,
there can be no assurance that management's expectations will be achieved
and actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. If such modifications and conversions are not made or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Exhibit Name
----------- ------------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and is not
filed.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE ASSISTED LIVING, INC.
(Registrant)
Date: August 12, 1998 /s/ David W. Faeder
-------------------------------- -----------------------------
David W. Faeder
Executive Vice President and Chief
Financial Officer
Date: August 12, 1998 /s/ Larry E. Hulse
-------------------------------- -----------------------------
Larry E. Hulse
Chief Accounting Officer
19
<PAGE> 20
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name Page
----------- ------------ ----
<S> <C>
27 Financial Data Schedule, which is
submitted electronically to the Securities
and Exchange Commission for
information only and is not filed.
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,982
<SECURITIES> 0
<RECEIVABLES> 10,942
<ALLOWANCES> 1,734
<INVENTORY> 0
<CURRENT-ASSETS> 62,687
<PP&E> 513,400
<DEPRECIATION> 33,544
<TOTAL-ASSETS> 581,873
<CURRENT-LIABILITIES> 24,392
<BONDS> 348,047
0
0
<COMMON> 193
<OTHER-SE> 207,623
<TOTAL-LIABILITY-AND-EQUITY> 581,873
<SALES> 0
<TOTAL-REVENUES> 75,366
<CGS> 0
<TOTAL-COSTS> 60,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 111
<INTEREST-EXPENSE> 9,901
<INCOME-PRETAX> 8,209
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,209
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
</TABLE>
