<PAGE> 1
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended September 30, 1999
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.)
7902 WESTPARK DRIVE
MCLEAN, VIRGINIA 22102
(Address of principal executive offices)
(703) 273-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of November 1, 1999, there were 21,938,492 shares of the Registrant's
Common Stock outstanding.
- -------------------------------------------------------------------------------
<PAGE> 2
SUNRISE ASSISTED LIVING, INC.
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three
months ended September 30, 1999 and 1998 and nine months
ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
</TABLE>
2
<PAGE> 3
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 36,739 $ 54,197
Accounts receivable, net 13,881 17,818
Notes receivable 675 754
Deferred income taxes - 3,978
Assets held for sale 49,528 -
Prepaid expenses and other current assets 44,579 15,921
---------- ----------
Total current assets 145,402 92,668
Property and equipment, net 735,021 512,708
Notes receivable 55,525 34,919
Management contracts and leaseholds 34,346 -
Costs in excess of assets acquired 28,994 -
Investments in unconsolidated assisted living facilities 16,814 -
Investments 5,750 28,329
Other assets 17,062 14,787
---------- ----------
Total assets $1,038,914 $ 683,411
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,825 $ 3,556
Accrued expenses and other current liabilities 25,506 14,049
Deferred revenue 5,466 3,722
Deferred income taxes 1,284 -
Current maturities of long-term debt 8,605 1,768
---------- ----------
Total current liabilities 42,686 23,095
Long-term debt, less current maturities 624,777 426,558
Investments in unconsolidated assisted living facilities - 1,003
Deferred income taxes 35,471 -
Other long-term liabilities 8,411 3,194
---------- ----------
Total liabilities 711,345 453,850
Minority interests 3,741 1,906
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,
21,938,424 and 19,446,427 shares issued and outstanding
in 1999 and 1998 219 194
Additional paid-in capital 296,578 216,783
Retained earnings 27,031 10,678
---------- ----------
Total stockholders' equity 323,828 227,655
---------- ----------
Total liabilities and stockholders' equity $1,038,914 $ 683,411
========== ==========
</TABLE>
Note: The balance sheet at December 31, 1998 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 amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ -------------- ------------ --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees $ 58,896 $ 40,918 $ 155,571 $ 108,703
Management services income 5,575 4,499 16,641 12,080
Facility contract services 2,306 - 4,670 -
Realized gain on assisted living facilities 1,356 735 4,153 735
--------- --------- --------- ---------
Total operating revenue 68,133 46,152 181,035 121,518
--------- --------- --------- ---------
Operating expenses:
Facility operating 36,914 24,129 93,066 64,412
Facility contract services 2,134 - 4,270 -
Facility development and pre-rental 1,774 1,301 3,874 4,070
General and administrative 5,956 3,135 13,558 9,093
Depreciation and amortization 6,621 5,742 18,637 15,671
Facility lease 2,682 825 5,064 2,128
Restructuring charge - - 4,408 -
--------- --------- --------- ---------
Total operating expenses 56,081 35,132 142,877 95,374
--------- --------- --------- ---------
Income from operations 12,052 11,020 38,158 26,144
Other income (expense):
Interest income 2,453 1,619 8,214 4,563
Interest expense (8,659) (5,683) (23,088) (15,584)
--------- --------- --------- ---------
Total other expense (6,206) (4,064) (14,874) (11,021)
Equity in (losses) earnings of unconsolidated
assisted living facilities (310) (84) (552) 88
Minority interests (79) (186) (368) (316)
--------- --------- --------- ---------
Income before income taxes 5,457 6,686 22,364 14,895
Provision for income taxes 1,746 - 6,011 -
--------- --------- --------- ---------
Net income $ 3,711 $ 6,686 $ 16,353 $ 14,895
========= ========= ========= =========
Net income per common share:
- ---------------------------
Basic $ 0.17 $ 0.35 $ 0.79 $ 0.77
========= ========= ========= =========
Diluted $ 0.17 $ 0.33 $ 0.76 $ 0.73
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,353 $ 14,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses (earnings) of unconsolidated assisted living facilities 552 (88)
Minority interests 368 316
Provision for bad debts 597 297
Provision for deferred income taxes 5,262 -
Gain on sale of interests (70) (489)
Depreciation and amortization 18,637 15,671
Amortization of discount on investments (575) (162)
Amortization of premium on investments 9 -
Amortization of financing costs and discount on long-term debt 1,717 1,533
Restructuring charge 4,408 -
Changes in assets and liabilities:
(Increase) decrease:
Accounts receivable 3,563 (3,000)
Prepaid expenses and other current assets (25,007) (7,685)
Other assets (4,017) (1,928)
Increase (decrease):
Accounts payable and accrued expenses (10,092) (1,819)
Deferred revenue (1,915) (3,642)
Other liabilities (329) 3,969
--------- ---------
Net cash provided by operating activities 9,461 17,868
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of assets 26,923 28,552
Increase in restricted cash and cash equivalents (1,315) (1,064)
Investment in property and equipment, net of cash acquired (148,100) (96,426)
Increase in investment and notes receivable (34,572) (4,887)
Proceeds from investments and notes receivable 7,488 -
Contributions to investments in unconsolidated assisted living facilities (975) (742)
Distributions from investment in unconsolidated assisted living facilities 49 62
--------- ---------
Net cash used in investing activities (150,502) (74,505)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from exercised options 3,667 4,971
Additional borrowings under long-term debt 244,864 56,000
Repayment of long-term debt (121,017) (22,974)
Financing costs paid (4,931) -
Capital contribution from minority interest 1,000 -
--------- ---------
Net cash provided by financing activities 123,583 37,997
--------- ---------
Net decrease in cash and cash equivalents (17,458) (18,640)
Cash and cash equivalents at beginning of period 54,197 82,643
--------- ---------
Cash and cash equivalents at end of period $ 36,739 $ 64,003
========= =========
</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 nine-month periods
ended September 30, 1999 and 1998 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, 1998 included
in the Company's 1998 Annual Report to Shareholders. Operating results for the
three- and nine-month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1999.
Certain 1998 balances have been reclassified to conform with the 1999
presentation.
2. LONG-TERM DEBT
Long-term debt was $633.4 million at September 30, 1999 compared to
$428.3 million at December 31, 1998.
At September 30, 1999 a subsidiary of the Company had a syndicated
revolving credit facility for $400.0 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 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 LIBOR plus 1.00% to LIBOR plus 1.50%. There were $145.9
million of advances outstanding under this credit facility as of September 30,
1999. The credit facility expires in July 2002.
Other subsidiaries have revolving credit facilities totaling $59.4
million. The repayments of the amounts outstanding under these credit
facilities are also guaranteed by the Company. The credit facilities are
secured by real property and first liens on other assets. Advances under these
facilities totaled $48.0 million as of September 30, 1999 and bear interest at
prime or rates ranging from LIBOR plus 1.75% to LIBOR plus 2.35%.
The Company has outstanding $150.0 million aggregate principal amount of
5 1/2% convertible subordinated notes due 2002. The convertible notes bear
interest at 5 1/2% per annum, payable semi-annually 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 convertible
notes are redeemable at the option of the Company commencing June 15, 2000, at
6
<PAGE> 7
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
specified premiums. The holders of the convertible notes may require the
Company to repurchase the convertible notes upon a change of control of the
Company.
In May 1999, the Company entered into a loan agreement for $88.0 million
secured by eight properties. The loan accrues interest at 7.14% and matures on
June 1, 2009. The proceeds were used to reduce the balance of one of the
Company's credit facilities and, as a result, convert a portion of the Company's
variable rate debt into debt with a fixed rate. At September 30, 1999, $87.6
million was outstanding.
The Company has an $85.7 million, excluding a $0.7 million discount,
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
$20.7 million bears a variable interest rate of LIBOR plus 1.75% and is payable
in installments through May 2001.
As of September 30, 1999, the Company had various other debt outstanding
totaling approximately $116.9 million with interest rates ranging from 6.5% to
10.0%.
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.
A summary of the Company's stock option activity and related information
as of September 30, 1999, is presented below:
7
<PAGE> 8
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
Shares Weighted - Average
Fixed Options (000) Exercise Price
- -------------- ------------------------------------
<S> <C> <C>
Outstanding - January 1, 1999 4,170 $24.93
Granted 983 30.08
Exercised (212) 17.25
Canceled (322) 31.02
----------
Outstanding - September 30, 1999 4,619 26.10
==========
Exercisable - September 30, 1999 1,440
==========
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 1999:
<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 8.00 157 6.0 $ 4.94 157 $ 4.94
8.01 to 20.00 314 6.6 17.09 280 16.74
20.01 to 25.63 2,870 7.9 24.96 912 24.98
25.64 to 44.56 1,278 9.3 33.49 91 35.84
---------- ---------
4,619 1,440
========== =========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
On November 12, 1999, Sunrise elected not to proceed with its planned
acquisition of certain properties of Constellation Senior Services, Inc. from
Constellation Energy, Inc. and has agreed with Constellation Energy, Inc. to
terminate the previously announced purchase agreement. Sunrise and
Constellation Energy, Inc. were unable to reach agreement regarding valuation
and related financing issues that arose during due diligence. Sunrise will
receive back its deposits in the amount of $1.6 million and expects to
write-off approximately $0.8 million of legal, due diligence, and pre-closing
expenses relating to the transaction in the fourth quarter of 1999.
8
<PAGE> 9
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The Company has entered into contracts to purchase and lease properties
for development of additional assisted living facilities. Total contracted
purchase prices of these sites amount to $76.9 million. The Company is pursuing
additional development opportunities and also plans to acquire additional
facilities as market conditions warrant.
The Company previously completed the sale of four assisted living
facilities for an aggregate sales price of $57.2 million in cash. The
transactions resulted in the realization of $17.5 million gain which the
Company will recognize over a maximum of 15 quarters. To date, the Company has
recognized $5.7 million of the gain. The remaining gain is deferred, the
recognition of which is contingent upon future events. The Company will
continue operating the facilities under long-term operating agreements.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income
per share $ 3,711 $ 6,686 $ 16,353 $ 14,895
========= ========= ========= ========
Denominator:
Denominator for basic net income per
common share-weighted average shares 21,935 19,340 20,744 19,228
Effect of dilutive securities:
Employee stock options 343 757 785 1,055
Warrants - - - 9
--------- --------- ---------- --------
Denominator for diluted net income per common
share-weighted average shares plus assumed
conversions 22,278 20,097 21,529 20,292
--------- --------- ---------- --------
Basic net income per common share $ 0.17 $ 0.35 $ 0.79 $ 0.77
========= ========= ========== ========
Diluted net income per common share $ 0.17 $ 0.33 $ 0.76 $ 0.73
========= ========= ========== ========
</TABLE>
9
<PAGE> 10
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 or limited liability companies of
$29.3 million and $11.8 million as of September 30, 1999 and December 31, 1998,
respectively, which relate primarily to development activities.
7. RELATED-PARTY TRANSACTIONS
The Company 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 in the United Kingdom and Canada. A former director
of the Company is a general partner in the third-party that is providing such
equity capital. A current director of the Company is a managing director of the
entity that owns controlling interests in the third-party. Currently, the joint
venture has two properties under development in the United Kingdom and eight
properties under development in Canada. The Company provides 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. As of September 30, 1999, the
third-party has provided approximately $12.5 million and the Company has
provided $1.0 million of equity capital to the joint venture.
The Company has committed to provide a revolving credit arrangement of
up to approximately $3.4 million in principal to a subsidiary of the joint
venture. Interest on advances made under the credit arrangement accrues at
12.0%. The outstanding principal and unpaid accrued interest are due on November
4, 2001. At September 30, 1999, the outstanding principal balance and unpaid
accrued interest under the credit arrangement totaled approximately $3.7
million.
8. INFORMATION ABOUT THE COMPANY'S SEGMENTS
The Company primarily derives income from two types of services: (1)
resident services and (2) management services. Resident services are further
segmented into two stages of operations consisting of stabilized facilities and
lease-up facilities. Stabilized facilities represent owned facilities opened or
operated by the Company for at least 12 months, or that have achieved occupancy
percentages of 95% or above. Lease-up facilities represent those facilities
owned by the Company that are operating in their early stages but are not
considered stabilized. Management services include fees from long-term
management contracts or development contracts for facilities owned by
unconsolidated joint ventures and other third-party owners.
10
<PAGE> 11
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Operating Revenue:
Resident Services:
Stabilized $ 42,386 $ 27,609 $ 104,234 $ 61,754
Lease-up 16,510 13,309 51,337 46,949
Management services:
Unconsolidated assisted living facilities 7,881 4,499 21,311 12,080
Consolidated assisted living facilities 4,779 2,104 10,058 5,584
Other 1,356 735 4,153 735
Elimination of intersegment revenue (4,779) (2,104) (10,058) (5,584)
---------------------------------- ----------------------------------
Total operating revenue 68,133 46,152 181,035 121,518
Operating expenses:
Resident Services:
Stabilized 27,011 17,445 64,414 40,200
Lease-up 13,098 8,788 37,126 29,796
Management services 7,573 3,219 17,486 9,108
Elimination of intersegment expenses (3,195) (2,104) (8,474) (5,584)
---------------------------------- ----------------------------------
Total operating expenses 44,487 27,348 110,552 73,520
---------------------------------- ----------------------------------
Segment operating income 23,646 18,804 70,483 47,998
Reconciliation to income before income taxes:
Facility pre-rental 1,193 600 1,987 2,601
General and administrative 1,098 617 2,229 1,454
Depreciation and amortization 6,621 5,742 18,637 15,671
Facility lease 2,682 825 5,064 2,128
Restructuring charge - - 4,408 -
---------------------------------- ----------------------------------
Income from operations 12,052 11,020 38,158 26,144
Interest expense, net (6,206) (4,064) (14,874) (11,021)
Equity in (losses) earnings of unconsolidated
Assisted living facilities (310) (84) (552) 88
Minority interests (79) (186) (368) (316)
---------------------------------- ----------------------------------
Income before income Taxes $ 5,457 $ 6,686 $ 22,364 $ 14,895
================================== ==================================
</TABLE>
11
<PAGE> 12
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other revenues for the three and nine months ended September 30, 1999
and 1998 consist of realized gains on the sale of assisted living facilities.
<TABLE>
<CAPTION>
Assets: SEPTEMBER 30, DECEMBER 31,
- ------- 1999 1998
---------------------------------------
<S> <C> <C>
Stabilized operations $ 440,605 $ 219,794
Lease-up operations 100,819 89,552
Assets held for sale 49,528 -
Other segment assets 180,426 8,511
Corporate 267,536 365,554
---------------------------------------
Total assets $1,038,914 $ 683,411
=======================================
</TABLE>
9. ACQUISITIONS AND DISPOSITIONS
On May 14, 1999, the Company completed its acquisition of Karrington
Health, Inc. through a tax-free, stock-for-stock transaction in which it issued
2.2 million common shares in exchange for all the outstanding shares of
Karrington and Karrington became a wholly owned subsidiary of the Company. The
total transaction was valued at $85.5 million, including merger and stock
issuance costs of $8.4 million and the fair value of assumed employee stock
options of $1.9 million. Karrington operates assisted living facilities
providing services to the elderly.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of Karrington for the
period from May 14, 1999 (exclusive of assets held for sale) are included in
the accompanying consolidated financial statements. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values, which are subject to adjustment when additional
information concerning asset and liability valuations is finalized. Management
contracts and leaseholds represent the estimated fair values assigned to eight
management contracts and twelve leaseholds acquired as part of the acquisition
and will be amortized over the average useful lives of the underlying asset or
agreements ranging between 18 to 20 years. Investments in unconsolidated
assisted living facilities represents the estimated fair values assigned to the
Company's 20% - 50% joint venture interests of assisted living facilities
acquired as part of the acquisition. The costs in excess of assets acquired
will be amortized on a straight-line basis over 38 years. The purchase of
Karrington was presented in the statement of cash flows as a non-cash
transaction, net of cash acquired.
The following unaudited pro forma information presents the results of
operations of the Company (exclusive of assets held for sale) for the nine
months ended September 30, 1999 and 1998, respectively, as if the acquisition
of Karrington had taken place as of January 1, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
--------------------- ----------------------
<S> <C> <C>
Revenue $193,424 $ 138,349
Net income 8,446 5,634
Basic earnings per share 0.37 0.26
Diluted earnings per share 0.36 0.25
</TABLE>
12
<PAGE> 13
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future.
10. ASSETS HELD FOR SALE
The Company intends to sell 15 operating properties, six zoned
development sites and one non-operating property acquired from Karrington
within 12 months following the merger. The Company believes that these
properties do not fit with its strategy. Specifically, the Company believes
such properties are not located within its target markets, cannot be
repositioned easily as Sunrise facilities and would not be able to achieve
benefits of regional clustering. Consequently, these assets are presented on
the balance sheet as assets held for sale at their estimated fair values less
estimated costs to sell. The operating results of these assets are not
reflected in the Company's consolidated operating results.
The operating results of the properties since completion of the merger
on May 14, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenue $ 5,074
Operating expenses 4,781
Interest expense 1,458
--------------
Net loss $ (1,165)
==============
</TABLE>
13
<PAGE> 14
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 financial statements, including the related
notes, and other financial information appearing elsewhere in this Form 10-Q.
This management's discussion and analysis contains certain forward-looking
statements that involve risks and uncertainties. Sunrise's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including development and construction risks,
acquisition risks, licensing risks, business conditions, competition, Sunrise's
ability to operate the Karrington properties profitably, risks of downturns in
economic conditions generally, satisfaction of closing conditions and
availability of financing for development and acquisitions. Some of these
factors are discussed elsewhere in this Form 10-Q and in Sunrise's 1998 Annual
Report on Form 10-K. Unless the context suggests otherwise, references herein
to "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries.
OVERVIEW
Sunrise is a provider of assisted living services for seniors. Sunrise
currently operates 130 facilities in 23 states with a capacity of more than
10,000 residents, including 101 facilities owned by Sunrise or in which it has
ownership interests, 15 facilities owned by Sunrise and held for sale following
the acquisition of Karrington Health, Inc. and 14 facilities managed for third
parties. Sunrise also operates two skilled nursing facilities owned by a
third-party.
On May 14, 1999, Sunrise completed its acquisition of Karrington Health,
Inc. through a tax-free, stock-for-stock transaction in which it issued 2.2
million common shares in exchange for all the outstanding shares of Karrington
and Karrington became a wholly owned subsidiary of Sunrise. The total
transaction was valued at $85.5 million, including merger and stock issuance
costs of $8.4 million and the fair value of assumed employee stock options of
$1.9 million. Karrington operates assisted living facilities providing services
to the elderly.
The acquisition was accounted for using the purchase method of accounting
and accordingly, the results of operations of Karrington for the period from
May 14, 1999 are included in the accompanying consolidated financial
statements. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values, which are subject to
adjustment when additional information concerning asset and liability
valuations is finalized. The $29.0 million of costs in excess of assets
acquired are being amortized on a straight-line basis over 38 years. The
purchase of Karrington was presented in the Statement of Cash Flows as a
non-cash transaction, net of cash acquired.
Sunrise intends to sell 15 Karrington operating properties, six zoned
development sites and one non-operating property within 12 months following the
merger. Most of the facilities are Karrington Cottage prototype models, which
consist of 20 units or less. These properties are classified as assets held for
sale on the accompanying balance sheet.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On November 12, 1999, Sunrise elected not to proceed with its planned
acquisition of certain properties of Constellation Senior Services, Inc. from
Constellation Energy, Inc. and has agreed with Constellation Energy, Inc. to
terminate the previously announced purchase agreement. Sunrise and
Constellation Energy, Inc. were unable to reach agreement regarding valuation
and related financing issues that arose during due diligence. Sunrise will
receive back its deposits in the amount of $1.6 million and expects to
write-off approximately $0.8 million of legal, due diligence, and pre-closing
expenses relating to the transaction in the fourth quarter of 1999.
Sunrise has continued to experience growth in operations over the 12
months ended September 30, 1999. During this period, Sunrise began operating an
additional seven facilities owned by it or in which it has ownership interests
(excluding facilities held for sale following the acquisition of Karrington)
and managing an additional five facilities for third parties. Since September
30, 1999, Sunrise opened two additional facilities. Sunrise also entered into
several new development contracts during the 12 months ended September 30,
1999. As a result, operating revenue increased to $68.1 million for the three
months ended September 30, 1999 from $46.2 million for the three months ended
September 30, 1998. Net income, however, decreased by $3.0 million to $3.7
million for the three months ended September 30, 1999, or $0.17 per share
(diluted), from $6.7 million for the three months ended September 30, 1998, or
$0.33 per share (diluted). The decrease in net income was due in part to the
under-performance of certain properties, including those acquired through the
acquisition of Karrington in May 1999. Also contributing to the decrease in net
income was an increase in general and administrative expenses, and the
recognition of income taxes in 1999. In prior years, income tax expense was
offset by recognizing tax benefits of certain net operating loss carryforwards.
See "Results of Operations" for further discussion.
Operating revenue increased to $181.0 million for the nine months ended
September 30, 1999 from $121.5 million for the nine months ended September 30,
1998. Net income increased by $1.5 million to $16.4 million for the nine months
ended September 30, 1999, or $0.76 per share (diluted), including a one-time
restructuring charge of $4.4 million ($3.2 million net of taxes), or $0.15 per
share (diluted), from $14.9 million for the nine months ended September 30,
1998, or $0.73 per share (diluted). Excluding the one-time restructuring
charge, net income for the nine months ended September 30, 1999 would have been
$19.6 million, or $0.91 per share (diluted).
The increase in net income between the periods was attributable to the
additional facilities operated in the nine months ended September 30, 1999 and
increases in development and management contracts with third parties. The
increase was partially offset by the under-performance of certain properties,
the increase in general and administrative expenses, the recognition of income
taxes in 1999 for the first time and the restructuring charge. See "Results of
Operations" for further discussion.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sunrise's growth objectives include developing new Sunrise model assisted
living facilities and selectively acquiring existing facilities. Sunrise
currently has 37 facilities under construction with a resident capacity of
approximately 3,300, of which 14 facilities are scheduled to open in the next
two months. Sunrise also has entered into contracts to purchase 53 additional
development sites, 29 of which are zoned, and to lease 2 additional sites under
long-term ground leases. Sunrise is pursuing additional development
opportunities and also plans to acquire additional facilities as market
conditions warrant.
In connection with the implementation of its growth plans, in prior years
Sunrise made significant investments in its infrastructure through the addition
of information technology, as well as additions to headquarters and regional
staff. During 1999, Sunrise expects to continue to invest in these areas to
support both the growth of Sunrise and to provide enhancement to some of its
existing computer systems to make them year 2000 compliant. See "Results of
Operations" and "Year 2000 Issues" for further discussion.
Sunrise plans to expand its previously-announced plan of selling selected
real estate assets, subject to market conditions, 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 Sunrise to reduce debt, redeploy its capital into new
development projects and recognize gains on appreciated real estate. Sunrise is
exploring uses of the additional cash expected to be generated by the expansion
of the asset sales program, including a possible common stock buy-back program.
In June 1999, Sunrise completed the sale of two assisted living facilities
located in Columbia, Maryland and Norwood, Massachusetts for an aggregate sales
price of $27.9 million in cash. The transaction will result in the realization
of up to an $11.1 million gain over the 12 quarters following the sale. To
date, Sunrise has recognized $1.7 million of the gain. Previously, in September
1998, Sunrise completed the sale of two assisted living facilities located in
Maryland for an aggregate purchase price of $29.3 million in cash that will
result in the realization of up to a $6.4 million gain over a maximum of 15
quarters following the sale. To date, Sunrise has recognized $4.0 million of
the gain. The remaining gain is deferred, the recognition of which is
contingent upon future events. For tax purposes, the transactions were set up
as tax-free exchanges. Sunrise will continue operating the facilities under
long-term operating agreements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Operating Revenue. Operating revenue for the three months ended September
30, 1999 increased 48% to $68.1 million from $46.2 million for the three months
ended September 30, 1998 due primarily to the growth in resident fees. Resident
fees, including community fees, for the three months ended September 30, 1999
increased $18.0 million, or 44%, to $58.9 million
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
from $40.9 million for the three months ended September 30, 1998. This increase
was due primarily to the inclusion for the three months ended September 30,
1999 of approximately $10.3 million from the Karrington properties acquired in
May 1999 and $4.1 million of resident fees generated from the operations of
Sunrise developed assisted living facilities open during the three months ended
September 30, 1999 that were not open during the three months ended September
30, 1998. Another $3.3 million of the increase in resident fees was from
facilities operating for a full three months in 1999 versus a partial period in
1998. The remaining increase in resident fees was due primarily to an increase
in the average daily resident rate, excluding community fees.
Average resident occupancy for owned facilities operated by the Company
for at least 12 months or that have achieved occupancy percentages of 95% or
above at the beginning of the quarter, decreased to 94.4% for the three months
ended September 30, 1999 compared to 95.6% for the three months ended September
30, 1998. The occupancy rate excludes temporary vacancies and resident
relocations generally of between three to six months due to renovations.
Sunrise increased its owned and operated stabilized communities by 49 percent
over the three months ended September 30, 1998 to 58 stabilized communities,
including three Karrington properties, for the three months ended September 30,
1999 from 39 stabilized communities for the three months ended September 30,
1998. The average daily resident fee, excluding community fees, for these
stabilized facilities increased to $99 for the three months ended September 30,
1999 from $90 for the three months ended September 30, 1998. The increase is
due to the inclusion of additional stabilized prototype facilities which have
higher basic care rates, a general increase in the basic care rate at other
facilities, and an increase in the number of residents receiving plus care and
reminiscence(TM) care services. For the 36 communities currently owned which
were stabilized in both the third quarter of 1998 and the third quarter of
1999, occupancy remained constant at 95.5%.
Resident fees for owned facilities in initial resident lease-up,
including the Karrington properties, increased by $3.2 million between the
three months ended September 30, 1999 and 1998 due to an increase in the number
of facilities in lease-up and the facilities in lease-up being in different
stages of lease-up in the respective three month periods.
Management services income represents fees from long-term contracts for
facilities owned by unconsolidated joint ventures and other third-party owners
and includes management fees, which are generally in the range of 5% to 7% of a
managed facility's total operating revenue, for homes in operation and
development fees for site acquisition, development services, facility design
and construction management services. Facility contract services revenue is
comprised of fees plus reimbursable expenses of facilities operated with
Sunrise employees under long-term operating contracts. Management services
income for the three months ended September 30, 1999 increased to $5.6 million
from $4.5 million for the three months ended September 30, 1998. This $1.1
million increase resulted primarily from additional development and management
contracts entered into after the third quarter of 1998 with unconsolidated
joint ventures and third-party owners. Sunrise had expected to derive
additional increases in management service income from third-party joint
ventures. However, difficulties have been experienced by the third-party
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
joint ventures in obtaining debt financing for construction. Sunrise expects
these difficulties to continue for several quarters.
During the three months ended September 30, 1999, Sunrise recognized $1.4
million of gain previously deferred. This gain relates to the prior sale of
assisted living communities and was recognized upon the resolution of
contractual contingencies.
Operating Expenses. Operating expenses for the three months ended
September 30, 1999 increased by 60% to $56.1 million from $35.1 million for the
three months ended September 30, 1998. The increase in operating expenses for
the three months ended September 30, 1999 was attributable to increases in all
of the following expenses: facility operating, facility contract services
(which is comprised of operating expenses reimbursable to Sunrise under
long-term operating contracts), facility development and pre-rental, general
and administrative, depreciation and amortization and facility lease.
Facility operating expenses for the three months ended September 30,
1999, increased 53% to $36.9 million from $24.1 million for the three months
ended September 30, 1998. As a percentage of resident fees, facility operating
expenses for the three months ended September 30, 1999, increased to 63% from
59% for the three months ended September 30, 1998. Of the $12.8 million
increase, $8.7 million was attributable to expenses from operations at the
Karrington properties and $2.3 million from operations at new Sunrise developed
assisted living facilities open during the three months ended September 30,
1999 that were not open during the same period in 1998. Another $1.7 million of
the increase in facility operating expenses was from facilities operating for a
full three months in 1999 versus a partial period in 1998. The remaining
balance of the increase was primarily due to an increase in labor and general
and administrative expenses at facilities that were operational for a full
quarter in both periods.
Facility development and pre-rental expenses for the three months
September 30, 1999, increased 36% to $1.8 million from $1.3 million for the
three months ended September 30, 1998. The $0.5 million increase in facility
development and pre-rental expenses for the three months ended September 30,
1999 was primarily related to an increase in start-up costs due to an increase
in the number of facilities in later stages of development during the three
months ended September 30, 1999 as compared to the three months ended September
30, 1998. Sunrise is scheduled to open approximately 14 facilities during the
next two months.
General and administrative expenses for the three months ended September
30, 1999 increased 90% to $6.0 million from $3.1 million for the three months
ended September 30, 1998. As a percentage of operating revenue, general and
administrative expenses for the three months ended September 30, 1999 increased
to 8.7% from 6.8% for the three months ended September 30, 1998. The $2.8
million increase in general and administrative expenses for the three months
ended September 30, 1999 was primarily related to labor costs, consisting of
hiring and training additional staff at the headquarters and regional offices.
The additional staffing was due, in part, to the 14 home openings scheduled
during the next two months, as well as the acquisition and integration of
Karrington in 1999.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Depreciation and amortization expenses for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998
increased $0.9 million, or 15%, to $6.6 million from $5.7 million for the three
months ended September 30, 1998 primarily due to a $1.1 million increase in
depreciation expense partially offset by a $0.2 million decrease in
amortization. Of the increase in depreciation expense, $0.4 million related to
the acquisition of the Karrington properties and $0.5 million related to new
Sunrise developed facilities which were not open during the three months ended
September 30, 1998. Another $0.1 million of the increase in depreciation
expense was from facilities operating for a full three months in 1999 versus a
partial period in 1998.
Facility lease expenses increased $1.9 million to $2.7 million for the
three months ended September 30, 1999 from $0.8 million for the three months
ended September 30, 1998. The increase was primarily due to the operation of 12
Karrington leased properties.
Other Income (Expense). Interest income increased to $2.5 million for the
three months ended September 30, 1999 compared to $1.6 million for the three
months ended September 30, 1998. This increase was primarily due to an increase
in interest income from notes receivable. Interest expense increased for the
three months ended September 30, 1999 to $8.7 million from $5.7 million for the
three months ended September 30, 1998. Of the $3.0 million increase, $1.3
million was due to interest on additional borrowings under one of Sunrise's
credit facilities and $1.6 million was due to interest expense on the $88.0
million loan agreement entered into in May, 1999. Another $0.5 million was due
to the debt assumed through the acquisition of Karrington. The increase in
interest expense was partially offset by an increase in capitalized interest.
Provision for Income Taxes. The provision for income taxes was $1.7
million and zero for the three months ended September 30, 1999 and 1998,
respectively. As of September 30, 1999, Sunrise had total net operating loss
carryforwards of approximately $27.7 million available to offset future federal
taxable income, which expire from 2010 through 2014. This amount includes
approximately $11.2 million of net operating loss carryforwards acquired from
Karrington, which are subject to certain limitations on utilization. The
remaining net operating loss carryforwards will result in a tax benefit derived
from non-qualified stock options, and when recognized for tax purposes, will be
credited directly to equity.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Operating Revenue. Operating revenue for the nine months ended September
30, 1999 increased 49% to $181.0 million from $121.5 million for the nine
months ended September 30, 1998 due primarily to the growth in resident fees.
Resident fees, including community fees, for the nine months ended September
30, 1999 increased $46.9 million, or 43%, to $155.6 million from $108.7 million
for the nine months ended September 30, 1998. This increase was due primarily
to the inclusion for the nine months ended September 30, 1999 of approximately
$15.2 million from the Karrington properties acquired in May 1999 and $6.5
million of resident fees
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
generated from the operations of new Sunrise developed assisted living
facilities open during the nine months ended September 30, 1999 that were not
open during the nine months ended September 30, 1998. Another $21.2 million of
the increase in resident fees was from facilities operating for a full nine
months in 1999 versus a partial period in 1998. The remaining increase in
resident fees was due primarily to an increase in the average daily resident
rate, excluding community fees, and the average resident occupancy for
facilities that were owned and operated by Sunrise during both periods.
Average resident occupancy for owned facilities operated by the Company
for at least 12 months or that have achieved occupancy percentages of 95% or
above at the beginning of the year, increased to 95.5% for the nine months
ended September 30, 1999 compared to 94.7% for the nine months ended September
30, 1998. The occupancy rate excludes temporary vacancies and resident
relocations generally of between three to six months due to renovations.
Sunrise increased its owned and operated stabilized communities by 58 percent
over the nine months ended September 30, 1998 to 49 stabilized communities for
the nine months ended September 30, 1999 from 31 stabilized communities for the
nine months ended September 30, 1998. The average daily resident fee, excluding
community fees, for these stabilized facilities increased to $97 for the nine
months ended September 30, 1999 from $86 for the nine months ended September
30, 1998. The increase is due to the inclusion of additional stabilized
prototype facilities which have higher basic care rates, a general increase in
the basic care rate at other facilities, and an increase in the number of
residents receiving plus care and reminiscence(TM) care services. For the 29
communities currently owned which were stabilized in both periods, occupancy
increased to 95.2% for the nine months ended September 30, 1999 from 94.4% for
the nine months ended September 30, 1998.
Resident fees for owned facilities in initial resident lease-up,
including the Karrington properties, increased by $4.4 million between the nine
months ended September 30, 1999 and 1998 due to the increase in the number of
facilities in lease-up and the facilities in lease-up being in different stages
of lease-up in the respective periods.
Management services income for the nine months ended September 30, 1999
increased to $16.6 million from $12.1 million for the nine months ended
September 30, 1998. This $4.6 million increase resulted primarily from
additional development and management contracts entered into after the third
quarter of 1998 with unconsolidated joint ventures and third-party owners.
Sunrise had expected to derive additional increases in management service
income from third-party joint ventures. However, difficulties have been
experienced by the joint ventures in obtaining financing for construction.
Sunrise expects these difficulties to continue for several quarters.
During the nine months ended September 30, 1999, Sunrise recognized $4.2
million of gain, some of which was previously deferred. This gain relates to
the prior sale of assisted living communities, some of which was recognized
upon the resolution of contractual contingencies.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating Expenses. Operating expenses for the nine months ended
September 30, 1999 increased by 50% to $142.9 million from $95.4 million for
the nine months ended September 30, 1998. The increase in operating expenses
for the nine months ended September 30, 1999 was attributable to increases in
all of the following expenses: facility operating, facility contract services,
general and administrative, depreciation and amortization and facility lease.
Sunrise also recorded a restructuring charge in 1999.
Facility operating expenses for the nine months ended September 30, 1999,
increased 44% to $93.1 million from $64.4 million for the nine months ended
September 30, 1998. As a percentage of resident fees, facility operating
expenses for the nine months ended September 30, 1999, increased to 60% from
59% for the nine months ended September 30, 1998. Of the $28.7 million
increase, $12.3 million was attributable to expenses from operations at the
Karrington properties and $3.6 million from operations at new Sunrise developed
assisted living facilities open during the nine months ended September 30, 1999
that were not open during the same period in 1998. Another $12.1 million of the
increase in facility operating expenses was from facilities operating for a
full nine months in 1999 versus a partial period in 1998. The remaining balance
of the increase was primarily due to an increase in labor and general and
administrative expense at facilities that were operational for a full nine
months in both periods.
Facility development and pre-rental expenses for the nine months
September 30, 1999, decreased 4.8% to $3.9 million from $4.1 million for the
nine months ended September 30, 1998. The $0.2 million decrease in facility
development and pre-rental expenses for the nine months ended September 30,
1999 was primarily related to a decrease in start-up costs due to facilities
being in earlier stages of development during the nine months ended September
30, 1999 as compared to facilities under development during the nine months
ended September 30, 1998. As previously discussed, Sunrise noted an increase in
the third quarter of 1999 and expects similar levels in the fourth quarter of
1999 due to the 14 home openings scheduled during the next two months.
General and administrative expenses for the nine months ended September
30, 1999 increased 49% to $13.6 million from $9.1 million for the nine months
ended September 30, 1998. As a percentage of operating revenue, general and
administrative expenses for the nine months ended September 30, 1999 remained
constant at 7% compared to the nine months ended September 30, 1998. The $4.5
million increase in general and administrative expenses for the nine months
ended September 30, 1999 was primarily related to labor costs, consisting of
hiring and training additional staff at the headquarters and regional offices.
The additional staffing is due, in part, in anticipation of the 14 home
openings scheduled for the fourth quarter of 1999, as well as the acquisition
and integration of Karrington in 1999.
Depreciation and amortization expenses for the nine months ended
September 30, 1999 compared to the nine months ended in September 30, 1998
increased $3.0 million, or 19%, to $18.6 million from $15.7 million for the
nine months ended September 30, 1998 primarily due to a $3.6 million increase
in depreciation expense, partially offset by a $0.6 million decrease in
amortization expense. Of the increase in depreciation expense, $0.8 million
related to the
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
acquisition of the Karrington properties and $0.7 million related to new
Sunrise developed facilities that were not open during the nine months ended
September 30, 1998. Another $1.8 million of the increase in depreciation
expense was from facilities operating for a full nine months in 1999 versus a
partial period in 1998.
Facility lease expenses increased $2.9 million to $5.1 million for the
nine months ended September 30, 1999 from $2.1 million for the nine months
ended September 30, 1998. Of the increase, $2.8 million was related to the
operation of 12 Karrington leased properties.
Sunrise recorded a $4.4 million restructuring charge in the second
quarter of 1999 related to the consolidation and integration of the acquired
operations and development pipeline of Karrington.
Other Income (Expense). Interest income increased to $8.2 million for the
nine months ended September 30, 1999 compared to $4.6 million for the nine
months ended September 30, 1998. This increase was primarily due to an increase
in interest income from long-term investments and notes receivable, offset, in
part, by a decrease in funds available for short-term investment. Interest
expense increased for the nine months ended September 30, 1999 to $23.1 million
from $15.6 million for the nine months ended September 30, 1998. Of the $7.5
million increase, $4.2 million was due to interest on additional borrowings
under one of Sunrise's credit facilities and $2.1 million was due to interest
expense on the $88.0 million loan agreement entered into in May, 1999. Another
$1.0 million was due to the debt assumed through the acquisition of Karrington.
Provision for Income Taxes. The provision for income taxes was $6.0
million and zero for the nine months ended September 30, 1999 and 1998,
respectively. The difference between the tax provision calculated at the
statutory federal income tax rate and the actual tax provision recorded for
each year are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Statutory rate 35% 35%
State taxes, net 7 6
Valuation allowance and other (15) (41)
------------------ ------------------
27% 0%
================== ==================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
To date, Sunrise has financed its operations from long-term borrowings,
equity offerings and cash generated from operations. At September 30, 1999,
Sunrise had $633.4 million of outstanding debt at a weighted average interest
rate of 7.00%. Of the amount of outstanding debt, Sunrise had $360.7 million of
fixed-rate debt, excluding a $0.7 million loan discount, at a weighted average
interest rate of 6.87%, and $273.4 million of variable rate debt at a weighted
average interest rate of 7.17%.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At September 30, 1999, Sunrise had approximately $36.7 million in
unrestricted cash and cash equivalents, including $8.4 million in high-quality
short-term investments (A1/P1 rated) and $102.7 million in net working capital
and currently has $265.5 million of unused lines of credit.
At September 30, 1999, a subsidiary of Sunrise had a syndicated revolving
credit facility for $400.0 million. Sunrise guarantees the repayment of all
amounts outstanding under this credit facility. The credit facility 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 LIBOR plus 1.00% to LIBOR plus 1.50%. There were
$145.9 million of advances outstanding under this credit facility as of
September 30, 1999. The credit facility expires on July 2002.
Other subsidiaries have revolving credit facilities totaling $59.4
million. The repayments of the amounts outstanding under these credit
facilities are also guaranteed by Sunrise. The credit facilities are secured by
real property and first liens on other assets. Advances under these facilities
totaled $48.0 million as of September 30, 1999 and bear interest at Prime or
rates ranging from LIBOR plus 1.75% to LIBOR plus 2.35%.
Sunrise has outstanding $150.0 million aggregate principal amount of 5
1/2% convertible subordinated notes due 2002. The convertible 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, which is equivalent to a
conversion rate of 26.89 shares per $1,000 principal amount of the notes. The
convertible notes are redeemable at the option of Sunrise commencing June 15,
2000, at specified premiums. The holders of the convertible notes may require
Sunrise to repurchase the notes upon a change of control of Sunrise, as defined
in the convertible notes.
In May 1999, Sunrise entered into a loan agreement for $88.0 million
secured by eight properties. The loan accrues interest at 7.14% and matures on
June 1, 2009. The proceeds were used to reduce the balance of one of Sunrise's
credit facilities and, as a result, convert a portion of Sunrise's variable
rate debt into debt with a fixed rate. At September 30, 1999, $87.6 million was
outstanding.
Sunrise has an $85.7 million, excluding a $0.7 million discount,
multi-property mortgage, collateralized by a blanket first mortgage on all
assets of a subsidiary of Sunrise, 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
$20.7 million bears a variable interest rate of LIBOR plus 1.75% and is payable
in installments through May 2001.
As of September 30, 1999, Sunrise had various other debt outstanding
totaling approximately $116.9 million, including $64.4 million of debt acquired
through the acquisition of Karrington, with interest rates ranging from 6.5% to
10.0%.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sunrise 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%. Sunrise 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%. Sunrise recorded net interest
expense for the nine months ended September 30, 1999 and 1998 in the amounts of
$410,000 and $38,000, respectively, for swap transactions.
There are various financial covenants and other restrictions in Sunrise's
debt instruments, including provisions which:
- require it to meet specified financial tests. For example, Sunrise's
$85.7 million multi-property mortgage, which is secured by 15 of its
facilities, requires that these facilities maintain a cash flow to
interest expense coverage ratio of at least 1.25 to 1. Sunrise's
$400.0 million credit facility requires Sunrise to have a
consolidated tangible net worth of at least $255.0 million, to
maintain a consolidated minimum cash liquidity balance of at least
$25.0 million and to meet other financial ratios. These tests are
administered on a monthly or quarterly basis, depending on the
covenant;
- require consent for changes in management or control of Sunrise. For
example, Sunrise's $400.0 million revolving credit facility requires
the lender's consent for any merger where Paul Klaassen or Teresa
Klaassen does not remain chairman of the board and chief executive
officer of Sunrise;
- restrict the ability of Sunrise subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business
combinations without lender consent; and
- require that Sunrise maintain minimum occupancy levels at its
facilities to maintain designated levels of borrowings. For example,
Sunrise's $400.0 million credit facility requires that 85% occupancy
be achieved after 12 months for a newly opened facility and,
following this 12-month period, be maintained at or above that
level.
Working capital increased to $102.7 million at September 30, 1999 from
$69.6 million at December 31, 1998, primarily due to a net increase in working
capital resulting from the purchase of Karrington and an increase in
receivables from joint ventures.
Sunrise has committed to provide a revolving credit arrangement of up to
approximately $3.4 million in principal to a subsidiary of a joint venture in
the United Kingdom. Interest on the outstanding principal amount accrues at
12%. The arrangement expires on November 4, 2001. At September 30, 1999, the
outstanding principal balance and unpaid accrued interest under this credit
arrangement totaled approximately $3.7 million.
Net cash provided by operating activities for the nine months ended
September 30, 1999 and 1998 was approximately $9.5 million and $17.9 million,
respectively. Net cash provided by
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
operating activities for the nine months ended September 30, 1999 reflects an
increase in Sunrise's activities related to the development of unconsolidated
joint venture properties.
During the nine months ended September 30, 1999 and 1998, Sunrise used
$150.5 million and $74.5 million, respectively, for investing activities.
Investing activities included investment in property and equipment in the
amounts of $148.1 million, which includes the purchase of one assisted living
facility, and $96.4 million for the nine months ended September 30, 1999 and
1998, respectively, related to the construction of assisted living facilities.
For the nine months ended September 30, 1999, Sunrise also invested $34.6
million in notes receivable to facilitate the development of assisted living
facilities with third parties, offset, in part, by the proceeds from the sale
of two assisted living communities in June 1999 amounting to $26.9 million plus
$7.5 million of proceeds from investments and notes receivable.
Net cash provided by financing activities was $123.6 million and $38.0
million, respectively, for the nine months ended September 30, 1999 and 1998.
Financing activities for the nine months ended September 30, 1999 included
additional borrowings of $244.9 million, offset, in part, by debt repayments of
$121.0 million. Additional borrowings during the nine months ended September
30, 1999 were primarily from the $88.0 million loan entered into in May 1999
and one of Sunrise's credit facilities. The additional borrowings under
Sunrise's credit facility were used to fund Sunrise's continued development of
assisted living facilities. Debt repayments during the nine months ended
September 30, 1999 included the use of the proceeds from the $88.0 million loan
to reduce the outstanding balance on one of Sunrise's credit facilities. During
the nine months ended September 30, 1998, additional borrowings were $56.0
million and debt repayments were $23.0 million.
Sunrise currently estimates that the existing credit facilities, existing
working capital, proceeds from sales of selected real estate assets as a normal
part of its operations, financing commitments and financing expected to be
available, will be sufficient to fund facilities currently under construction.
Additional financing may be required to complete additional development and to
refinance existing indebtedness. Sunrise estimates that it will cost between
$280 million and $415 million to complete the 35 facilities Sunrise currently
has under construction. Sunrise expects that the cash flow from the combined
companies' operations, together with borrowings under existing credit
facilities, will be sufficient to fund Sunrise's needs for at least the next six
months. Sunrise expects from time to time to seek additional funding through
public or private financing sources, including equity or debt financing. There
can be no assurance that required financing and refinancing will be available to
Sunrise on acceptable terms.
In addition, Sunrise plans to expand its previously-announced plan of
selling selected real estate assets as a normal part of its operations while
retaining long-term management through operating agreements. This strategy
should enable Sunrise to redeploy capital for such purposes as new development
projects, debt reduction and other uses including a possible common stock
buy-back program. There can be no assurance that Sunrise can continue or expand
its plan to sell selected assets. The ability of Sunrise to sell selected real
estate assets will be determined by various factors, including Sunrise's ability
to identify suitable purchasers, the
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
financial performance of the selected assets prior to sale, and the ability of
Sunrise and the purchaser to agree upon an acceptable sales price.
The ability of Sunrise to achieve its development plans will depend upon
a variety of factors, many of which will be outside the control of Sunrise.
These factors include:
- obtaining zoning, land use, building, occupancy, licensing and other
required governmental permits for the construction of new facilities
without experiencing significant delays;
- completing construction of new facilities on budget and on schedule;
- the ability to work with third-party contractors and subcontractors who
construct the facilities;
- shortages of labor or materials that could delay projects or make them
more expensive;
- adverse weather conditions that could delay projects;
- finding suitable sites for future development activities at acceptable
prices; and
- addressing changes in laws and regulations or how existing laws and
regulations are applied.
Sunrise cannot assure that it will not experience delays in completing
facilities under construction or in development or that it will be able to
identify suitable sites at acceptable prices for future development activities.
If it fails to achieve its development plans, its growth could slow, which
would adversely impact its revenues and results of operations.
Sunrise's growth plan includes the acquisition of assisted living
facilities or the companies operating assisted living facilities, such as
Karrington. The success of Sunrise's acquisitions will be determined by
numerous factors, including Sunrise'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
Sunrise to integrate or operate acquired facilities effectively. Any failure to
do so may have a material adverse effect on Sunrise's business, financial
condition, revenues and earnings.
The long-term care industry is highly competitive and the assisted living
segment is becoming increasingly competitive. Sunrise competes with numerous
other companies that provide similar long-term care alternatives, such as home
health care agencies, facility-based service programs, retirement communities,
convalescent centers and other assisted living providers. In general, regulatory
and other barriers to competitive entry in the assisted living industry are not
substantial. In pursuing its growth strategies, Sunrise has experienced and
expects to continue to experience increased competition in its efforts to
develop and acquire assisted living facilities. Some of the present and
potential competitors of Sunrise are significantly larger and have, or may
obtain, greater financial resources than Sunrise. Consequently, Sunrise cannot
assure that it will not encounter increased competition that could
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
limit its ability to attract residents or expand its business, which could have
a material adverse effect on its revenues and earnings.
Sunrise expects that the number of owned and operated facilities will
continue to increase substantially as it pursues its development and
acquisition programs for new assisted living facilities. This rapid growth will
place significant demands on Sunrise's management resources. Sunrise'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 Sunrise is unable
to manage its growth effectively, its business, financial condition and results
of operations could be adversely affected.
Sunrise believes that some assisted living markets have become or are on
the verge of becoming overbuilt. As described above, regulation and other
barriers to entry into the assisted living industry are not substantial.
Consequently, the development of new assisted living facilities could outpace
demand. Overbuilding in Sunrise market areas could, therefore, cause Sunrise to
experience decreased occupancy, depressed margins or lower operating results.
Sunrise believes that each local market is different and Sunrise 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.
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,
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. It is Sunrise's policy to capitalize certain costs
incurred to rent its facilities such as costs of model units, their furnishings
and "grand openings" in accordance with Statement of Financial Accounting
Standards No. 67, Accounting for Costs and Initial Rental Operation of Real
Estate Projects. Additionally, initial direct costs associated with originating
lease transactions are capitalized in accordance with Statement of Financial
Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases. Direct costs include employees' compensation and payroll-related fringe
benefits directly related to acquiring leases. All costs of Sunrise's
development and leasing activities which are not considered to be within the
scope of Statement 67 or Statement 91 are expensed as incurred. SOP 98-5 states
that the guidance provided by Statement 67 and Statement 91 is not affected by
the provisions of SOP 98-5. The adoption of SOP 98-5 in January 1999 did not
materially affect results of operations or the financial position of Sunrise.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
was to be effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the Financial Accounting Standards Board issued
Statement No. 137, Accounting for Derivative Instruments
27
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133. Statement 137 defers for one year the effective day of Statement 133,
which will apply to all fiscal quarters of all fiscal years beginning after
June 15, 2000. Statement 133 standardizes the accounting for derivative
instruments. Sunrise participates in interest rate swap transactions, which
would be considered derivatives under Statement 133. Sunrise has not entered
into any other derivative transactions. To date, the net effect of the interest
rate swaps to Sunrise's results of operations has not been material. Therefore,
Statement 133 is not anticipated to affect results of operations or the
financial position of Sunrise.
IMPACT OF INFLATION
Resident fees from Company-owned assisted living facilities and
management services income from facilities operated by Sunrise for third
parties are the primary sources of revenue for Sunrise. 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 Sunrise's growth
initiatives, have previously had a negative impact on operating margins and may
again do so in the foreseeable future.
Substantially all of Sunrise'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, and
thus may enable Sunrise to seek increases in daily fees due to inflation or
other factors. Any increase would be subject to market and competitive
conditions and could result in a decrease in occupancy of Sunrise's facilities.
Sunrise believes, however, that the short-term nature of its resident
agreements generally serves to reduce the risk to Sunrise 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.
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUES
Impact of Year 2000. Some of the older computer programs utilized by
Sunrise 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. This
could cause a system failure or miscalculations causing disruptions of
operations, including a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
State of Readiness. Sunrise's plan for mission critical information
technology systems consists of four phases:
- inventory - identifying all mission critical information technology
systems and risk rating each according to its potential business
impact;
- assessment - identifying mission critical information technology
systems that use date functions and assessing them for year 2000
functionality;
- remediation - reprogramming, or replacing where necessary,
inventoried items to ensure they are year 2000 ready; and
- testing - including date testing and performing quality assurance
testing to ensure successful operation in the post-1999 environment.
Sunrise completed the inventory and assessment phases for substantially
all of its mission critical information technology systems. Sunrise's mission
critical information technology systems are currently in the remediation and
testing phases. Mission critical information technology 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;
- payroll and human resource system; and
- substantially all software residing on Sunrise's home office and
facility desk-top and lap-top computers.
Sunrise plans to complete the remediation and testing of substantially
all of its mission critical systems by November 1999.
Sunrise is complete in its assessment of embedded systems, which includes
the additional Karrington communities. Sunrise's remaining steps include
remediating and testing systems that exhibit year 2000 issues. Sunrise intends
to focus its testing and remediation efforts on select embedded systems at
Sunrise's facilities, such as telephone, elevator, security, HVAC and similar
29
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
systems. Sunrise plans to complete the remediation and testing of these systems
by year-end 1999.
External Relationships. Sunrise also faces the risk that one or more of
its critical vendors will not be able to interact with Sunrise due to the
third-party's inability to resolve its own year 2000 issues, including those
associated with its own external relationships. Sunrise has completed its
inventory of external relationships and is continuing its attempt to determine
the overall year 2000 readiness of its external relationships. In the case of
mission critical suppliers, such as banks, financial intermediaries, including
stock exchanges, telecommunications providers and other utilities, Sunrise
engaged in discussions with the third parties and obtained detailed information
as to those parties' year 2000 plans and state of readiness. Sunrise has not
been made aware of any critical vendors that will not be year 2000 ready,
however, Sunrise cannot ultimately predict whether its mission critical
suppliers will be year 2000 ready.
Year 2000 Costs. Sunrise estimates the cost of assessment, remediation,
testing and certification of its internal systems will be approximately $2.0
million. The major components of these costs are: consultants, new software and
hardware, software upgrades and travel expenses. Sunrise expects that these
costs will be funded through operating cash flows. This estimate is based on
currently available information. Sunrise's year 2000 costs may increase once it
has determined the year 2000 readiness of its vendors, customers and other
third parties. In addition, the availability and cost of consultants and other
personnel trained in this area and any future acquisitions may materially
affect the estimated costs.
No Assurance that Sunrise Can Fully Implement Its Year 2000 Plan.
Sunrise's year 2000 issue involves significant risks. There can be no assurance
that Sunrise will succeed in fully implementing its year 2000 plan. The
following describes Sunrise's most reasonably likely worst-case scenario, given
current uncertainties. If Sunrise's remediated internal mission critical
information technology systems fail upon testing, or any software application
or embedded microprocessors central to Sunrise's operations are overlooked in
the assessment or implementation phases, Sunrise may incur significant
problems, including delays in billing its residents. If Sunrise's vendors or
suppliers fail to provide its facilities with necessary power,
telecommunications, transportation and financial services, equipment and
services, Sunrise will be unable to provide services to its residents. If any
of these uncertainties were to occur, Sunrise's business, revenues and results
of operations would be adversely affected. Sunrise is unable at this time to
assess the likelihood of these events occurring or the extent of the effect on
Sunrise.
Year 2000 Forward-Looking Statements. The foregoing year 2000 discussion
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements, including
anticipated costs and the dates by which Sunrise expects to complete actions,
are based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of resources, representations received from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause material differences include the ability to identify
30
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
and remediate all relevant mission critical information technology and
non-mission critical information technology systems, results of year 2000
testing, adequate resolution of year 2000 issues by businesses and other third
parties who are service providers and suppliers of Sunrise, unanticipated
system costs, the adequacy of and ability to develop and implement contingency
plans and similar uncertainties. The "forward-looking statements" made in the
previous year 2000 discussion speak only as of the date on which the statements
are made. Sunrise undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Sunrise is exposed to market risks related to fluctuations in interest
rates on its notes receivable, investments and debt. The purpose of the
following analyses is to provide a framework to understand the Company's
sensitivity to hypothetical changes in interest rates as of September 30, 1999.
Sunrise has investments in notes receivable, bonds and mortgages loans.
Investments in notes receivable are primarily with joint venture arrangements
in which Sunrise has equity ownership percentages ranging from 9% to 15%.
Investments in bonds and mortgage loans are secured by the operating properties
subject to the debt and are with properties that are managed by Sunrise. The
majority of the investments have fixed rates. One of the notes has an
adjustable rate. Sunrise utilizes a combination of debt and equity financing to
fund its development, construction and acquisition activities. Sunrise seeks
the financing at the most favorable terms available at the time. When seeking
debt financing, Sunrise uses a combination of variable and fixed rate debt,
whichever is more favorable in management's judgment at the time of financing.
Sunrise has used interest rate swaps to manage the interest rates on some
of its long-term borrowings. As of September 30, 1999, Sunrise had two interest
rate swap agreements which effectively establishes fixed rates of 7.3% on up to
$19.0 million of long-term debt until June 2001 and 7.1% on up to $7.0 million
of long-term debt until April 2003. Sunrise does not utilize forward or option
contracts on foreign currencies or commodities, or other types of derivative
financial instruments.
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt, but not earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact fair
market value of the debt, but do affect the future earnings and cash flows.
Sunrise generally cannot prepay fixed rate debt prior to maturity without
penalty. Therefore, interest rate risk and changes in fair market value should
not have a significant impact on the fixed rate debt until Sunrise would be
required to refinance such debt. Holding the variable rate debt balance of
$273.4 million at September 30, 1999 constant, each one percentage point
increase in interest rates would result in an increase in interest expense for
the coming year of approximately $2.7 million.
31
<PAGE> 32
The table below details by category the principal amount, the average
interest rates and the estimated fair market value. Some of the mortgage loans
receivable and some items in the various categories of debt, excluding the
convertible debentures, require periodic principal payments prior to the final
maturity date. The fair value estimates for the mortgage loans receivable are
based on the estimates of management and on rates currently prevailing for
comparable loans. The fair market value estimates for debt securities are based
on discounting future cash flows utilizing current rates offered to Sunrise for
debt of the same type and remaining maturity. The fair market value estimate of
the convertible notes is based on the market value at September 30, 1999.
32
<PAGE> 33
<TABLE>
<CAPTION>
Estimated
Maturity Date Fair Market
2000 2001 2002 2003 2004 Thereafter Value
---- ---- ---- ---- ---- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Notes receivable
Fixed rate -- $ 3,730 $ 16,412 -- -- $ 11,118 $ 31,260
Average interest rate -- 12.0% 10.0% -- -- 10.0% --
Variable rate -- -- -- $24,182 -- -- $ 24,182
Average interest rate -- -- -- 10.0% -- -- --
Investments
Bonds -- -- -- -- -- $ 5,750 $ 5,750
Average interest rate -- -- -- -- -- 11.0% --
LIABILITIES
Debt
Fixed rate $ 4,024 $69,395 $ 25,460 $ 4,619 $ 5,047 $101,045 $211,036
Average interest rate 8.5% 8.6% 7.3% 8.8% 8.8% 7.4% --
Variable rate $30,484 $33,327 $170,597 $ 12,246 $13,597 $ 8,592 $268,843
Average interest rate 7.0% 7.2% 7.0% 8.5% 7.6% 7.5% --
Convertible notes -- -- $150,000 -- -- -- $161,250
Average interest rate -- -- 5.5% -- -- -- --
</TABLE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
----------- ------------
<S> <C>
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and is not filed.
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
33
<PAGE> 34
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.
<TABLE>
<CAPTION>
SUNRISE ASSISTED LIVING, INC.
(Registrant)
<S> <C>
Date: November 15, 1999 /s/ Christian B. A. Slavin
- ----------------------------------------- ---------------------------------------------------------
Christian B. A. Slavin
Chief Financial Officer
Date: November 15, 1999 /s/ Larry E. Hulse
- ----------------------------------------- ---------------------------------------------------------
Larry E. Hulse
Chief Accounting Officer
</TABLE>
34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 36,739
<SECURITIES> 0
<RECEIVABLES> 17,090
<ALLOWANCES> 3,209
<INVENTORY> 0
<CURRENT-ASSETS> 145,402
<PP&E> 784,348
<DEPRECIATION> 49,327
<TOTAL-ASSETS> 1,038,914
<CURRENT-LIABILITIES> 42,686
<BONDS> 624,777
0
0
<COMMON> 219
<OTHER-SE> 323,609
<TOTAL-LIABILITY-AND-EQUITY> 1,038,914
<SALES> 0
<TOTAL-REVENUES> 181,035
<CGS> 0
<TOTAL-COSTS> 142,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 597
<INTEREST-EXPENSE> 23,088
<INCOME-PRETAX> 22,364
<INCOME-TAX> 6,011
<INCOME-CONTINUING> 16,353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,353
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.76
</TABLE>
