<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, 2000
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)
<TABLE>
<S> <C>
DELAWARE 54-1746596
(State or other jurisdiction of (I.R.S.Employer
incorporation of organization) Identification No.)
</TABLE>
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.
<TABLE>
<S> <C>
Yes X No
------- ------
</TABLE>
As of August 4, 2000, there were 21,594,577 shares of the Registrant's
Common Stock outstanding.
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<PAGE> 2
SUNRISE ASSISTED LIVING, INC.
FORM 10-Q
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the three
months ended June 30, 2000 and 1999 and six months
ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 32
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
</TABLE>
<PAGE> 3
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 40,725 $ 53,540
Accounts receivable, net 18,081 15,441
Notes receivable 3,229 1,051
Deferred income taxes 2,470 8,221
Assets held for sale 34,356 33,724
Prepaid expenses and other current assets 53,191 54,568
------------ -----------
Total current assets 152,052 166,545
Property and equipment, net of accumulated depreciation
and amortization of $66,041 and $55,983, respectively 817,552 763,306
Notes receivable 63,530 59,654
Management contracts and leaseholds, net 24,713 33,994
Costs in excess of assets acquired, net 35,162 35,412
Investments in unconsolidated assisted living facilities, net 26,409 20,435
Investments 5,750 5,750
Other assets 25,908 18,355
------------ -----------
Total assets $ 1,151,076 $ 1,103,451
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,082 $ 4,114
Accrued expenses and other current liabilities 23,928 23,373
Deferred revenue 7,524 7,475
Current maturities of long-term debt 117,493 36,103
------------ -----------
Total current liabilities 153,027 71,065
Long-term debt, less current maturities 625,235 664,840
Investments in unconsolidated assisted living facilities 3,180 2,561
Deferred income taxes 22,128 22,128
Other long-term liabilities 3,698 3,985
------------ -----------
Total liabilities 807,268 764,579
Minority interests 3,841 3,748
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,
21,654,577 and 21,938,742 shares issued and outstanding
in 2000 and 1999 217 219
Additional paid-in capital 299,864 304,014
Retained earnings 39,886 30,891
------------ -----------
Total stockholders' equity 339,967 335,124
------------ -----------
Total liabilities and stockholders' equity $ 1,151,076 $ 1,103,451
============ ===========
</TABLE>
Note: The balance sheet at December 31, 1999 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 INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------- ------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees $ 69,007 $ 52,357 $ 133,552 $ 96,675
Management and contract services 6,622 7,337 12,824 13,430
Income from property sales 6,700 1,830 12,755 2,797
---------------- ---------------- ---------------- ----------------
Total operating revenue 82,329 61,524 159,131 112,902
---------------- ---------------- ---------------- ----------------
Operating expenses:
Facility operating 41,990 30,746 82,163 56,152
Management and contract services 2,136 1,108 4,384 2,136
Facility development and pre-rental 1,088 1,033 3,209 2,100
General and administrative 7,169 3,951 13,632 7,602
Depreciation and amortization 8,581 6,176 15,986 12,016
Facility lease 2,641 1,698 5,435 2,382
Non-recurring charge - 4,408 - 4,408
---------------- ---------------- ---------------- ----------------
Total operating expenses 63,605 49,120 124,809 86,796
---------------- ---------------- ---------------- ----------------
Income from operations 18,724 12,404 34,322 26,106
Interest income (expense):
Interest income 3,148 3,175 6,229 5,761
Interest expense (12,887) (7,723) (24,049) (14,429)
---------------- ---------------- ---------------- ----------------
Total interest expense (9,739) (4,548) (17,820) (8,668)
Equity in losses of unconsolidated assisted
living facilities (895) (236) (1,590) (242)
Minority interests (54) (98) (165) (289)
---------------- ---------------- ---------------- ----------------
Income before income taxes 8,036 7,522 14,747 16,907
Provision for income taxes (3,135) (2,106) (5,752) (4,265)
---------------- ---------------- ---------------- ----------------
Net income $ 4,901 $ 5,416 $ 8,995 $ 12,642
================ ================ ================ ================
Net income per common share:
Basic $ 0.23 $ 0.26 $ 0.41 $ 0.63
================ ================ ================ ================
Diluted $ 0.22 $ 0.25 $ 0.41 $ 0.60
================ ================ ================ ================
</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,
---------------------------------
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,995 $ 12,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of properties (6,055) (70)
Equity in losses of unconsolidated assisted living facilities 1,590 242
Minority interests 165 289
Provision for bad debts 589 320
Provision for deferred income taxes 5,751 3,516
Depreciation and amortization 15,929 12,016
Amortization of discount on investments - (575)
Amortization of premium on investments - 9
Amortization of financing costs and discount on long-term debt 1,870 1,078
Non-recurring charge - 4,408
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable (3,345) 8,366
Prepaid expenses and other current assets 1,329 (4,074)
Other assets (305) (1,640)
Assets held for sale (34) -
Increase (decrease):
Accounts payable and accrued expenses (565) (9,837)
Deferred revenue (725) (1,432)
Other liabilities 685 330
-------------- --------------
Net cash provided by operating activities 25,874 25,588
-------------- --------------
INVESTING ACTIVITIES
Proceeds from sale of assets 33,428 26,923
Acquisition of interests in facility (1,098) -
Investment in property and equipment (92,967) (88,118)
Increase in investment and notes receivable (72,249) (47,861)
Proceeds from investments and notes receivable 66,228 7,488
Increase in restricted cash and cash equivalents (5,534) (746)
Contributions to investments in unconsolidated
assisted living facilities (1,250) (541)
Distributions from investments in unconsolidated
assisted living facilities 32 39
---------------- --------------
Net cash used in investing activities (73,410) (102,816)
-------------- --------------
FINANCING ACTIVITIES
Net proceeds from exercised options 101 3,408
Additional borrowings under long-term debt 126,179 200,116
Repayment of long-term debt (84,658) (107,788)
Financing costs paid (2,648) (2,266)
Capital contribution from minority interest - 1,000
Repurchase of stock (4,253) -
-------------- --------------
Net cash provided by financing activities 34,721 94,470
-------------- --------------
Net (decrease) increase in cash and cash equivalents (12,815) 17,242
Cash and cash equivalents at beginning of period 53,540 54,197
-------------- --------------
Cash and cash equivalents at end of period $ 40,725 $ 71,439
============== ==============
</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 ("Sunrise") 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, 2000 and 1999 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 Sunrise's
consolidated financial statements and the notes thereto for the year ended
December 31, 1999 included in Sunrise's 1999 Annual Report to Shareholders.
Operating results for the three- and six-month periods ended June 30, 2000
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2000.
Certain 1999 balances have been reclassified to conform with the 2000
presentation.
2. DEBT
Total debt was $742.7 million at June 30, 2000 compared to $700.9 million at
December 31, 1999.
A subsidiary of Sunrise has 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. 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 1.75%. The credit facility expires in July 2002. There were $194.5
million of advances outstanding under this credit facility as of June 30,
2000.
Two other subsidiaries have revolving credit facilities totaling $38.7
million. The repayment of the amounts outstanding under these credit
facilities is also guaranteed by Sunrise. The credit facilities are secured
by real property and first liens on other assets. Advances under these
facilities totaled $20.3 million as of June 30, 2000 and bear interest at
LIBOR plus 1.95% to 2.00%.
On June 6, 1997, Sunrise issued and sold $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
(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 convertible notes
upon a change of control of Sunrise.
6
<PAGE> 7
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Sunrise has an $85.4 million, excluding a $0.4 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
$20.4 million bears a variable interest rate of LIBOR plus 1.75% and is
payable in installments through May 2001.
In May 1999, Sunrise entered into a multi-property first mortgage 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 a fixed rate debt. At June 30, 2000, $86.6
million was outstanding.
On March 22, 2000, Sunrise closed a $75.0 million loan secured by eight
properties. The loan bears interest at a fixed rate of 8.66% and matures in
April 2007. The proceeds of the loan were used to repay $59.0 million of
floating rate construction debt and to help fund Sunrise's development and
$30.0 million stock repurchase programs. There was $74.8 million outstanding
as of June 30, 2000.
As of June 30, 2000, Sunrise has various other debt outstanding
totaling approximately $131.5 million with interest rates ranging from 4.6%
to 10.0%.
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%.
3. STOCK OPTION PLANS
Sunrise 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. Sunrise 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)
A summary of Sunrise's stock option activity and related information as
of June 30, 2000, is presented below:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Options (000) Exercise Price
------------------------------- ------------------------------------
<S> <C> <C>
Outstanding - January 1, 2000 5,250 $23.28
Granted 1,218 13.49
Exercised (16) 6.41
Canceled (440) 25.90
-------
Outstanding - June 30, 2000 6,012 22.00
=======
Exercisable - June 30, 2000 2,192
=======
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------
Weighted- Weighed- 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 - 8.00 145 4.9 $ 4.95 145 $ 4.95
8.01 - 20.00 2,187 9.0 13.77 380 16.33
20.01 - 25.63 2,669 7.0 24.96 1,432 24.99
25.64 - 44.56 1,011 8.5 34.05 235 37.22
-------- --------
6,012 2,192
======== ========
</TABLE>
4. COMMITMENTS
Sunrise has entered into contracts to purchase and lease properties for
development of additional assisted living facilities. Total contracted
purchase price of these sites amounts to $70.6 million. Sunrise 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,
-----------------------------------------------------------
2000 1999 2000 1999
------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income
per share $ 4,901 $ 5,416 $ 8,995 $12,642
======== ======== ========== ========
Denominator:
Denominator for basic net income per
common share-weighted average shares 21,700 20,779 21,819 20,135
Effect of dilutive securities:
Employee stock options 314 800 207 932
-------- -------- ---------- ---------
Denominator for diluted net income per common
share-weighted average shares plus assumed
conversion 22,014 21,579 22,026 21,067
-------- -------- ---------- --------
Basic net income per common share $ 0.23 $ 0.26 $ 0.41 $ 0.63
======== ======== ========== ========
Diluted net income per common share $ 0.22 $ 0.25 $ 0.41 $ 0.60
======== ======== ========== ========
</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 or limited liability companies
of $38.2 million and $38.6 million as of June 30, 2000 and December 31, 1999,
respectively, which relate primarily to development activities.
9
<PAGE> 10
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. ACQUISITIONS
On May 14, 1999, Sunrise completed its acquisition of Karrington Health,
Inc. through a tax-free, stock-for-stock transaction in which it issued 2.3
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 $85.1 million, including merger and stock
issuance costs of $8.4 million and the fair value of assumed employee stock
options of $1.5 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 (excluding 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. Based on
the preliminary allocation of the purchase price, the excess purchase price
over the estimated fair value of the net assets acquired was $35.5 million.
Sunrise acquired cash of $2.4 million in the Karrington acquisition, which is
included in the statement of cash flows. The remainder of the Karrington
transaction was a non-cash transaction for the statement of cash flows.
The following unaudited pro forma information presents the results of
operations of Sunrise for the six-month period ended June 30, 1999 as if the
acquisition of Karrington had taken place as of January 1, 1999. This pro
forma information excludes the results of operations of the assets held for
sale. See Note 9. Assets Held For Sale (in thousands, except per share).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
----------------------
<S> <C>
Revenue $125,291
Net income 2,009
Basic earnings per share 0.09
Diluted earnings per share 0.08
</TABLE>
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
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SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. INFORMATION ABOUT SUNRISE'S SEGMENTS
In the first quarter of 2000, Sunrise reorganized and began reporting
the results of its three operating divisions - Sunrise Management Services,
Sunrise Properties and Sunrise Ventures. Sunrise Assisted Living, Inc.
continues as the parent company of each division and develops Sunrise's
strategy and overall business plan and coordinates the activities of all
business divisions. The Sunrise Management Services division provides
full-service assisted living management services, in the U.S. and
internationally, for all homes owned by Sunrise or managed by Sunrise for
third-parties. The Sunrise Management Services division also provides
consulting services on market and site selection and pre-opening sales and
marketing. The Sunrise Properties division is responsible for all Sunrise
real estate operations, including development, construction, property
management, project and permanent financing, real estate and property sales.
Sunrise Ventures is a new division that is responsible for the development of
new business opportunities in senior care and services.
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Operating Revenue:
Sunrise Management Services $ 54,407 $ 40,125 $105,593 $ 73,501
Sunrise Properties 76,883 56,792 148,695 104,245
Elimination of intersegment revenue (48,961) (35,393) (95,157) (64,844)
------------- ------------ ------------- --------------
Total consolidated operating revenue 82,329 61,524 159,131 112,902
------------- ------------ ------------- --------------
Operating Expenses:
Sunrise Management Services 49,264 34,635 96,155 63,686
Sunrise Properties 61,035 49,172 119,530 86,500
Sunrise Ventures 128 5 280 32
Elimination of intersegment expenses (48,961) (35,393) (95,157) (64,844)
------------- ------------ ------------- --------------
Total consolidated operating expenses 61,466 48,419 120,808 85,374
------------- ------------ ------------- --------------
Segment operating income 20,863 13,105 38,323 27,528
Reconciliation to net income:
Corporate operating expenses 2,139 701 4,001 1,422
------------- ------------ ------------- --------------
Income from operations 18,724 12,404 34,322 26,106
Interest expense, net (9,739) (4,548) (17,820) (8,668)
Equity in losses of unconsolidated assisted
living facilities (895) (236) (1,590) (242)
Minority interests (54) (98) (165) (289)
Provision for income taxes (3,135) (2,106) (5,752) (4,265)
------------- ------------ ------------- --------------
Total consolidated net income $ 4,901 $ 5,416 $ 8,995 $ 12,642
============= ============ ============= ==============
</TABLE>
Management and contract services revenue from operations in England was
$0.02 million and $0.3 million for the three months ended June 30, 2000 and
1999, respectively, and $0.1 million and $0.7 million for the six months
ended June 30, 2000 and 1999, respectively. The remaining revenues and all
long-lived assets are domestic.
11
<PAGE> 12
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. ASSETS HELD FOR SALE
Sunrise intends to sell 16 operating properties and four zoned
development sites acquired from Karrington Health, Inc. Sunrise believes that
these properties do not fit with its strategy because these 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 Sunrise's
consolidated operating results. Sunrise anticipates completing the sale of
substantially all of the assets held for sale by the third quarter of 2000.
The operating results of these properties for the six months ended June
30, 2000 are as follows (in thousands):
<TABLE>
<S> <C>
Revenue $7,604
Operating expenses 6,157
Interest expense 1,834
-----------------
Net loss $ (387)
=================
</TABLE>
12
<PAGE> 13
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 1999 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 156 facilities in 23 states with a capacity of over 12,000
residents, including 122 facilities owned by Sunrise or in which it has
ownership interests, 16 facilities owned by Sunrise and held for sale
following the acquisition of Karrington Health, Inc. and 18 facilities
managed for third parties.
In the first quarter of 2000, Sunrise reorganized and began reporting
the results of its three operating divisions--Sunrise Management Services,
Sunrise Properties and Sunrise Ventures. Sunrise Assisted Living, Inc.
continues as the parent company of each division. It develops Sunrise's
strategy and overall business plan and coordinates the activities of all
business divisions. The Sunrise Management Services division provides
full-service assisted living management services, in the U.S. and
internationally, for all homes owned by Sunrise or managed by Sunrise for
third parties. The Sunrise Management Services division also provides
consulting services on market and site selection and pre-opening sales and
marketing. The Sunrise Properties division is responsible for all Sunrise
real estate operations, including development, construction, property
management, project and permanent financing, real estate and property sales.
Sunrise Ventures division is responsible for the development of new business
opportunities in senior care and services. Sunrise's management believes that
Sunrise's divisional reorganization will help Sunrise to manage growth more
efficiently and pursue new business opportunities, while allowing Sunrise to
better serve its residents and its growing number of third-party property
owners.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1999
CONSOLIDATED
Sunrise has continued to experience growth in operations over the 12
months ended June 30, 2000. During this period, Sunrise began operating an
additional 26 facilities in which it has an ownership interest and managing
an additional four facilities for independent third parties. As a result,
operating revenue increased to $82.3 million for the three months ended June
30, 2000 from $61.5 million for the three months ended June 30, 1999. Net
income decreased by $0.5 million to $4.9 million for the three months ended
June 30, 2000, or $0.22 per share (diluted), from $5.4 million for the three
months ended June 30, 1999, or $0.25 per share (diluted). The decrease in net
income between the two periods was primarily due to $4.7 million in pre-tax
start-up losses recognized in the second quarter 2000 for the 26 communities
opened by Sunrise in the preceding 12 months in which Sunrise has an
ownership interest, almost double the number of homes Sunrise opened during
the same period last year. The decrease was also driven by an increase in the
effective tax rate to 39% in the second quarter of 2000 compared to 28% in
the second quarter of 1999. Sunrise recognized $6.7 million in income from
the sale of three properties in June 2000. In the prior year quarter, Sunrise
recorded a non-recurring charge of $4.4 million related to the Karrington
acquisition. See below for a further discussion of these items.
SUNRISE MANAGEMENT SERVICES
The following table sets forth the components of Sunrise Management Services
net income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------- ---------------------------------------------
2000 1999
--------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Operating revenue:
Management and contract services $54,407 $40,125
Operating expenses:
Management and contract services 44,127 31,855
General and administrative 4,810 2,539
Depreciation and amortization 327 241
--------------------------------------------------------------- ---------------------- ----------------------
Total operating expenses 49,264 34,635
--------------------------------------------------------------- ---------------------- ----------------------
Operating income 5,143 5,490
Provision for income taxes (2,007) (1,481)
--------------------------------------------------------------- ---------------------- ----------------------
Sunrise Management Services net income $ 3,136 $ 4,009
--------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
Note: Management and contract services revenues include revenue from Sunrise
Properties in the amounts of $48,961 and $35,393 for the second quarter of
2000 and 1999, respectively.
Sunrise Management Services provides full-service assisted living
management services, in the U.S. and internationally, for all communities
owned or managed by Sunrise.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In addition, the Sunrise Management Services division provides management and
consulting services to third parties on market and site selection,
pre-opening sales and marketing, start-up training, and management services
for properties under development and construction. During the second quarter
2000, Sunrise Management Services began managing five new communities and
provided pre-opening services for 23 new communities under construction,
seven of which began in the second quarter. Sunrise Management Services had
net income of $3.1 million, or $.14 per share (diluted), for the second
quarter 2000 compared to $4.0 million, or $0.18 per share (diluted), in the
prior year quarter. The reduction in net income was due primarily to an
increase in divisional general and administrative expenses and an increase in
the income tax rate between the second quarter 2000 and the second quarter
1999.
Operating Revenue. The Management Services division revenues include
management and contract services revenues from third-party owners and
internal management services revenues for services provided to the Sunrise
Properties division. Internal fees reflect market-based fees for the
management services. Total revenues for Sunrise Management Services increased
36% to $54.4 million for the three months ended June 30, 2000 from $40.1
million for the three months ended June 30, 1999. This increase was primarily
due to the growth in the number of communities operated by the Management
Services division. The total number of communities operated increased 22% to
155 for second quarter 2000, up from 127 communities in the second quarter of
1999. This growth resulted from the completion and opening of 26 additional
facilities and the addition of 4 managed facilities, net of the sale of 2
facilities.
Operating Expenses. The Management Services division operating expenses
include all operating expenses of facilities managed for third-party owners
and the Sunrise Properties division. Total operating expenses for the three
months ended June 30, 2000 increased 42% to $49.3 million from $34.6 million
for the three months ended June 30, 1999. Management and contract services
expenses for the three months ended June 30, 2000 increased $12.2 million, or
38%, to $44.1 million from $31.9 million for the three months ended June 30,
1999. This increase was directly related to the increase in the number of
communities operated by Management Services to 155 in the second quarter of
2000 compared to 127 in the second quarter of 1999. General and
administrative expenses increased $2.3 million to $4.8 million for the three
months ended June 30, 2000 from $2.5 million for the three months ended June
30, 1999. The general and administrative expenses for the Management Services
division have increased due to the substantial growth in the number of
facilities operated, through acquisition and new home openings, during the
last twelve months.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SUNRISE PROPERTIES
The following table sets forth the components of Sunrise Properties net
income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------- ---------------------------------------------
2000 1999
--------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Operating revenue:
Resident fees $69,007 $52,357
Management and contract services 1,176 2,605
Income from property sales 6,700 1,830
--------------------------------------------------------------- ---------------------- ----------------------
Total operating revenue 76,883 56,792
Operating expenses:
Facility operating 41,990 30,746
Management and contract services 6,970 4,646
Facility development and pre-rental 1,088 1,033
General and administrative 722 762
Depreciation and amortization 7,624 5,879
Facility lease 2,641 1,698
Non-recurring charges - 4,408
--------------------------------------------------------------- ---------------------- ----------------------
Total operating expenses 61,035 49,172
--------------------------------------------------------------- ---------------------- ----------------------
Operating income 15,848 7,620
Interest expense, net (9,739) (4,548)
Equity in losses of unconsolidated assisted
living facilities (895) (236)
Minority interest (54) (98)
Provision for income taxes (2,012) (820)
--------------------------------------------------------------- ---------------------- ----------------------
Sunrise Properties net income $ 3,148 $ 1,918
--------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
Note: Operating expenses include costs with Sunrise Management Services in
the amounts of $48,961 and $35,393 for the second quarter of 2000 and 1999,
respectively.
Sunrise Properties is responsible for all Sunrise real estate
operations, including development, construction, project and permanent
financing, and real estate sales. As of June 30, 2000, the Sunrise Properties
division wholly-owned 107 communities, a 10% increase over the 97 communities
wholly-owned as of June 30, 1999. In addition, Sunrise Properties has
majority ownership interests in four communities and minority ownership
interests in another 26 communities.
Sunrise Properties' growth objectives include developing new Sunrise
model assisted living facilities and selectively acquiring existing
facilities. Sunrise Properties currently has 23 facilities under construction
with a resident capacity of over 1,850. Sunrise Properties has also entered
into contracts to purchase or lease 45 additional development sites, 23 of
which are zoned. Sunrise Properties is pursuing additional development
opportunities and also plans to acquire additional facilities as market
conditions warrant.
Sunrise Properties' operating objectives include its
previously-announced plan of
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
selling selected real estate properties, 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
properties as a normal part of operations is expected to enable Sunrise to
reduce debt, redeploy its capital into new development projects and realize
gains on appreciated real estate. On June 29, 2000, Sunrise entered into a
definitive agreement for the sale of 11 assisted living communities to a real
estate venture company in which Sunrise owns a 25 percent interest. The
venture company has closed on three of the 11 properties, located in Wayland,
Massachusetts, West Essex, New Jersey and Oakton, Virginia, for an aggregate
sales price of $44 million. The transaction resulted in the realization of
$13.3 million in gain over the four quarters following the sale, subject to
certain contingencies being met, of which $6.7 million was recognized in the
current quarter. The Sunrise Management Services division will continue to
provide day-to-day management of the communities under long-term operating
agreements. We expect to close on the remaining eight properties during the
third quarter and recognize the gain over the four quarters following the
sale, subject to certain contingencies being met.
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 resulted in
the realization of $11.3 million in gain over the 3 quarters following the
sale, subject to certain contingencies being met or waived by the buyers, of
which the final $6.1 million was recognized during the three months ended
March 31, 2000. Previously, in September 1998, Sunrise completed the sale of
two assisted living facilities located in Maryland for an aggregate sales
price of $29.3 million in cash that will result in the realization of up to a
$6.4 million gain. As of June 30, 2000, Sunrise has recognized $3.4 million
of the gain. The remaining gain is deferred, the recognition of which is
contingent upon future events. For tax purposes, the transactions are
tax-free exchanges. Sunrise continues to operate the facilities under
long-term operating agreements.
Sunrise Properties continues 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. Currently,
the joint venture has one property operating in the United Kingdom, eight
properties under development in Canada, and purchase commitments for two
properties to be developed in the United Kingdom. Sunrise Properties and
Sunrise Management Services provide management and contract services to the
joint venture on a contract-fee basis with rights to acquire the assets in
the future and have agreed to invest up to $2.8 million of equity capital in
the joint venture. As of June 30, 2000, the third party has provided
approximately $20.8 million and Sunrise Properties has provided $1.7 million
of equity capital to the joint venture.
Sunrise Properties had net income of $3.1 million, or $0.14 per share
(diluted), for the second quarter 2000 compared to $1.9 million, or $0.09 per
share (diluted), in the prior year period. This increase in net income was
due primarily to the gain on property sales, offset by start-up losses from
the record number of new communities that were opened during the previous
twelve months, and an increase in the effective tax rate for the second
quarter of
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2000. In the second quarter of 1999, Sunrise Properties recorded a
non-recurring charge totalling $4.4 million related to the Karrington
acquisition.
Operating Revenue. Sunrise Properties revenues include resident fees
from Sunrise owned properties, management service revenues from consulting
and pre-opening services contracts with third parties, and income from the
sales of owned communities. Sunrise Properties revenues increased 35% to
$76.9 million for the three months ended June 30, 2000 from $56.8 million for
the three months ended June 30, 1999. Resident fees, including community
fees, for the three months ended June 30, 2000 increased $16.6 million, or
32%, to $69.0 million from $52.4 million for the three months ended June 30,
1999. This increase was due primarily to the inclusion for the three months
ended June 30, 2000 of approximately $7.1 million of resident fees generated
from the operations of assisted living facilities open during the three
months ended June 30, 2000 that were not open during the three months ended
June 30, 1999 and an increase of approximately $5.9 million in resident fees
for Karrington properties that were owned a full three months in 2000
compared to one and one-half months in 1999. The remaining increase in
resident fees was due primarily to an increase in the average daily resident
rate for facilities that were owned and operated by Sunrise during both
periods.
Average resident occupancy for owned facilities operated by Sunrise for
at least 12 months or that have achieved stabilization of 95% or above at the
beginning of the period, decreased to 93.3% for the three months ended June
30, 2000 compared to 94.5% for the three months ended June 30, 1999. The
average daily resident fee, excluding community fees, for these stabilized
facilities increased to $107 for the three months ended June 30, 2000 from
$97 for the three months ended June 30, 1999. The increase in the average
daily resident fee 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 care services.
Management and contract services revenue decreased $1.4 million to $1.2
million for the three months ended June 30, 2000 from $2.6 million for the
three months ended June 30, 1999. This decrease is due to the number of
third-party pre-opening services contracts in place during each of the
respective periods, and the stage of completion on each contact. There were
15 pre-opening services contracts in place during the three months ended June
30, 2000 compared to 18 contracts for the three months ended June 30, 1999.
During the three months ended June 30, 2000, Sunrise Properties income
from property sales was $6.7 million compared to $1.8 million for the three
months ended June 30, 1999, for an increase of $4.9 million. The $6.7 million
of income recognized in the second quarter of 2000 was from the sale of three
communities in June 2000. In the second quarter of 1999, Sunrise recognized
income of $0.9 million on the June 1999 sale of two assisted living
communities and $0.9 million that was part of the income deferred from
previous property sales until certain contingencies were met or waived by the
buyers. These sales were part of Sunrise's property sale/long-term
manage-back program.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating Expenses. Sunrise Properties operating expenses for the three
months ended June 30, 2000 increased 24% to $61.0 million from $49.2 million
for the three months ended June 30, 1999. Facility operating expenses for the
three months ended June 30, 2000 increased 37% to $42.0 million from $30.7
million for the three months ended June 30, 1999. Of the $11.3 million
increase, approximately $5.0 million was attributable to expenses from
operations of additional assisted living facilities open during the three
months ended June 30, 2000 that were not open during the same period in 1999
and an increase of approximately $4.7 million in expenses for Karrington
properties that were owned a full three months in 2000 compared to one and
one-half months in 1999. The remaining balance of the increase was primarily
due to an increase in labor and other expenses at facilities that were
operational for a full quarter in both periods.
Management and contract services expense represents amounts Sunrise
Properties pays to Sunrise Management Services for management of its
wholly-owned and majority owned facilities. Management and contract services
expense for the three months ended June 30, 2000 increased $2.4 million to
$7.0 million from $4.6 million for the three months ended June 30, 1999. This
increase is primarily attributable to the growth in the number of properties
managed during the three months ended June 30, 2000 compared to the three
months ended June 30, 1999.
Depreciation and amortization for the three months ended June 30, 2000
increased $1.7 million, or 29%, to $7.6 million from $5.9 million for the
three months ended June 30, 1999. Of this increase, $0.3 million relates to
the depreciable assets acquired from Karrington and the remainder is due to
the increase in the number of facilities open during the three months ended
June 30, 2000 that were not open during the same period in 1999.
Facility lease expense was $2.6 million for the three months ended June
30, 2000 compared to $1.7 million for the three months ended June 30, 1999.
This is primarily attributable to the addition of 14 leased facilities in
conjunction with the Karrington acquisition in May 1999.
Sunrise recorded a non-recurring charge of $4.4 million in the second
quarter of 1999 related to the consolidation and integration of the acquired
operations and development pipeline of Karrington.
Interest Expense. Interest expense increased for the three months ended
June 30, 2000 to $12.9 million from $7.7 million for the three months ended
June 30, 1999. Of this $5.2 million increase, $1.7 million was due to
additional borrowings and an increase in the variable interest rate under the
$400.0 million credit facility. The remaining increase is due to an overall
increase in total debt as of June 30, 2000 compared to June 30, 1999 and an
increase to 8.16% in the weighted-average interest rate on Sunrise's variable
rate debt for the second quarter of 2000 compared to 7.00% for the second
quarter of 1999.
Equity in losses of unconsolidated assisted living facilities. Equity
in losses of unconsolidated assisted living facilities was $0.9 million for
the three months ended June 30,
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2000 compared to $0.2 million for the three months ended June 30, 1999. The
primary reason for the increase is start-up losses on 13 joint venture
facilities opened in the twelve months ended June 30, 2000 versus five joint
venture facilities opened in the twelve months ended June 30, 1999.
SUNRISE VENTURES
Operating Expenses. Sunrise Ventures operating expenses for the three
months ended June 30, 2000 were $0.1 million. These expenses were primarily
general and administrative expenses. Sunrise Ventures did not have any
revenues in the three months ended June 30, 2000.
CORPORATE EXPENSES
Operating Expenses. Parent company operating expenses for the three
months ended June 30, 2000 increased $1.4 million to $2.1 million from $0.7
million for the three months ended June 30, 1999. The increase was primarily
due to the addition of personnel and other infrastructure in anticipation of
the continuing substantial growth of the company.
Provision for Income Taxes. The provision for income taxes for Sunrise
was $3.1 million for the three months ended June 30, 2000 compared to $2.1
million for the three months ended June 30, 1999. The increase was due to an
increase in the effective tax rate to 39% in the second quarter of 2000
compared to 28% in the second quarter of 1999. Utilization of
operations-related deferred tax benefits reduced Sunrise's federal and state
income taxes by $0.8 million for the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1999
CONSOLIDATED
Sunrise has continued to experience growth in operations over the 12
months ended June 30, 2000. During this period, Sunrise began operating an
additional 26 facilities in which it has an ownership interest (including
facilities held for sale following the acquisition of Karrington) and
managing an additional four facilities for independent third parties. As a
result, operating revenue increased to $159.1 million for the six months
ended June 30, 2000 from $112.9 million for the six months ended June 30,
1999. Net income decreased by $3.6 million to $9.0 million for the six months
ended June 30, 2000, or $0.41 per share (diluted), from $12.6 million for the
six months ended June 30, 1999, or $0.60 per share (diluted). The decrease in
net income between the two periods was primarily due to $9.3 million in
pre-tax start-up losses recognized in the first half of 2000 for the 26
communities opened by Sunrise in the preceding twelve months in which Sunrise
has an ownership interest, almost double the number of homes Sunrise opened
during the same period last year. The decrease was also driven by an increase
in the effective tax rate to 39% for the six months ended June 30, 2000
compared to 25% for the six months ended June 30, 1999. Sunrise recognized
$12.8 million in income from the sale of properties. In the six months ended
June 30, 1999, Sunrise
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
recorded a non-recurring charge of $4.4 million related to the Karrington
acquisition. See below for further discussion of these items.
SUNRISE MANAGEMENT SERVICES
The following table sets forth the components of Sunrise Management Services
net income (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------- ---------------------------------------------
2000 1999
--------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Operating revenue:
Management and contract services $105,593 $73,501
Operating expenses:
Management and contract services 88,626 58,289
General and administrative 8,887 4,982
Depreciation and amortization 642 415
--------------------------------------------------------------- ---------------------- ----------------------
Total operating expenses 96,155 63,686
--------------------------------------------------------------- ---------------------- ----------------------
Operating income 9,438 9,815
Provision for income taxes (3,681) (2,476)
--------------------------------------------------------------- ---------------------- ----------------------
Sunrise Management Services net income $5,757 $ 7,339
--------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
Note: Management and contract services revenues include revenue from Sunrise
Properties in the amounts of $95,157 and $64,844 for the six months ended
June 30, 2000 and 1999, respectively.
During the first six months of 2000, Sunrise Management Services began
managing 15 new communities and provided pre-opening services for 23 new
communities under construction, nine of which began in the first six months
of 2000. Sunrise Management Services had net income of $5.8 million, or $0.26
per share (diluted), for the six months ended June 30, 2000 compared to $7.3
million, or $0.35 per share (diluted), for the same period in the prior year.
The reduction in net income was due primarily to an increase in divisional
general and administrative expenses and an increase in the income tax rate
between the six months ended June 30, 2000 and the six months ended June 30,
1999.
Operating Revenue. Total revenues for Sunrise Management Services
increased 44% to $105.6 million for the six months ended June 30, 2000 from
$73.5 million for the six months ended June 30, 1999. This increase was
primarily due to the growth in the number of communities operated by the
Management Services division. The total number of communities operated
increased 22% to 155 as of June 30, 2000 up from 127 communities as of June
30, 1999. This growth resulted from the completion and opening of 26
additional facilities and the addition of 4 managed facilities, net of the
sale of 2 facilities.
Operating Expenses. Total operating expenses for the six months ended
June 30, 2000 increased 51% to $96.2 million from $63.7 million for the six
months ended June 30, 1999. Management and contract services expenses for the
six months ended June 30, 2000 increased $28.3 million, or 49%, to $86.6
million from $58.3 million for the six months ended June 30, 1999. This
increase was directly related to the increase in the number of communities
operated by Management Services to 155 as of June 30, 2000 compared to 127
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
as of June 30, 1999. General and administrative expenses increased $3.9
million to $8.9 million for the six months ended June 30, 2000 from $5.0
million for the six months ended June 30, 1999. The general and
administrative expenses for the Management Services division have increased
due to the substantial growth in the number of facilities operated, through
acquisition and new home openings, during the last twelve months.
SUNRISE PROPERTIES
The following table sets forth the components of Sunrise Properties net
income (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------- ---------------------------------------------
2000 1999
--------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Operating revenue:
Resident fees $133,552 $96,675
Management and contract services 2,388 4,773
Income from property sales 12,755 2,797
--------------------------------------------------------------- ---------------------- ----------------------
Total operating revenue 148,695 104,245
Operating expenses:
Facility operating 82,163 56,152
Management and contract services 12,915 8,691
Facility development and pre-rental 3,209 2,100
General and administrative 1,531 1,261
Depreciation and amortization 14,277 11,506
Facility lease 5,435 2,382
Non-recurring charges - 4,408
--------------------------------------------------------------- ---------------------- ----------------------
Total operating expenses 119,530 86,500
--------------------------------------------------------------- ---------------------- ----------------------
Operating income 29,165 17,745
Interest expense, net (17,820) (8,668)
Equity in losses of unconsolidated assisted
living facilities (1,590) (242)
Minority interest (165) (289)
Provision for income taxes (3,740) (2,156)
--------------------------------------------------------------- ---------------------- ----------------------
Sunrise Properties net income $ 5,850 $ 6,390
--------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
Note: Operating expenses include costs with Sunrise Management Services in
the amounts of $95,157 and $64,844 for the six months ended June 30, 2000 and
1999, respectively.
Sunrise Properties is responsible for all Sunrise real estate
operations, including development, construction, project and permanent
financing, and real estate sales. As of June 30, 2000, the Sunrise Properties
division wholly-owned 107 communities, a 10% increase over the 97 communities
wholly-owned as of June 30, 1999. In addition, Sunrise Properties has
majority ownership interests in 4 communities, minority ownership interests
in another 26 communities, 23 communities under construction, and 45 other
properties under development.
Sunrise Properties' operating objectives include its
previously-announced plan of
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
selling selected real estate properties, 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
properties as a normal part of operations is expected to enable Sunrise to
reduce debt, redeploy its capital into new development projects and realize
gains on appreciated real estate. On June 29, 2000, Sunrise entered into a
definitive agreement for the sale of 11 assisted living communities to a real
estate venture company in which Sunrise owns a 25 percent interest. The
venture company has closed on three of the 11 properties, located in Wayland,
Massachusetts, West Essex, New Jersey and Oakton, Virginia, for an aggregate
sales price of $44 million. The transaction resulted in the realization of
$13.3 million in gain over the four quarters following the sale, subject to
certain contingencies being met, of which $6.7 million was recognized as of
June 30, 2000. The Sunrise Management Services Division will continue to
provide day-to-day management of the communities under long term operating
agreements. We expect to close on the remaining eight properties during the
third quarter and recognize the gain over the four quarters following the
sale, subject to certain contingencies being met.
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 resulted in
the realization of $11.3 million in gain over the 3 quarters following the
sale, subject to certain contingencies being met or waived by the buyers, of
which the final $6.1 million was recognized during the three months ended
March 31, 2000. Previously, in September 1998, Sunrise completed the sale of
two assisted living facilities located in Maryland for an aggregate sales
price of $29.3 million in cash that will result in the realization of up to a
$6.4 million gain. As of June 30, 2000, Sunrise has recognized $3.4 million
of the gain. The remaining gain is deferred, the recognition of which is
contingent upon future events. For tax purposes, the transactions are
tax-free exchanges. Sunrise continues to operate the facilities under
long-term operating agreements.
Sunrise Properties continues 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. Currently,
the joint venture has one property operating in the United Kingdom, eight
properties under development in Canada, and purchase commitments for two
properties in the United Kingdom. Sunrise Properties and Sunrise Management
Services provide management and contract services to the joint venture on a
contract-fee basis with rights to acquire the assets in the future and have
agreed to invest up to $2.8 million of equity capital in the joint venture.
As of June 30, 2000, the third party has provided approximately $20.8 million
and Sunrise Properties has provided $1.7 million of equity capital to the
joint venture.
Sunrise Properties had net income of $5.9 million, or $0.27 per share
(diluted), for the six months ended June 30, 2000 compared to $6.4 million,
or $0.30 per share (diluted), in the prior year period. This decrease in net
income was due primarily to start-up losses from the record number of new
communities opened in the previous twelve months. These start-up losses have
been offset by income from property sales.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating Revenue. Sunrise Properties revenues increased 43% to $148.7
million for the six months ended June 30, 2000 from $104.2 million for the
six months ended June 30, 1999. Resident fees, including community fees, for
the six months ended June 30, 2000 increased $36.9 million, or 38%, to $133.6
million from $96.7 million for the six months ended June 30, 1999. This
increase was due primarily to the inclusion for the six months ended June 30,
2000 of approximately $10.6 million of resident fees generated from the
operations of assisted living facilities open during the six months ended
June 30, 2000 that were not open during the six months ended June 30, 1999
and an increase of approximately $16.5 million in resident fees for
Karrington properties that were owned for the entire six months ended June
30, 2000 compared to one and one-half months in the same period ended June
30, 1999. The remaining increase in resident fees was due primarily to an
increase in the average daily resident rate for facilities that were owned
and operated by Sunrise during both periods.
Average resident occupancy for owned facilities operated by Sunrise for
at least 12 months or that have achieved stabilization of 95% or above at the
beginning of the period, decreased to 93.9% for the six months ended June 30,
2000 compared to 95.5% for the six months ended June 30, 1999. The average
daily resident fee, excluding community fees, for these stabilized facilities
increased to $106 for the six months ended June 30, 2000 from $96 for the six
months ended June 30, 1999. The increase in the average daily resident fee 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 care services.
Management and contract services revenue decreased $2.4 million to $2.4
million for the six months ended June 30, 2000 from $4.8 million for the six
months ended June 30, 1999. This decrease is due to the number of third-party
pre-opening services contracts in place during each of the respective
periods, and the stage of completion on each contact. There were 17
pre-opening services contracts in place during the six months ended June 30,
2000 compared to 18 contracts for the six months ended June 30, 1999.
During the six months ended June 30, 2000, Sunrise Properties income
from property sales was $12.8 million compared to $2.8 million for the six
months ended June 30, 1999, for an increase of $10 million. The $12.8 million
of income recognized in the current period is comprised of $6.7 million from
the June 2000 sale of three properties and $6.1 million that had been
deferred from a previous property sale until certain contingencies were met
or waived by the buyers. The $2.8 million of income recognized in the prior
year period was comprised of $0.9 million from the sale of two assisted
living communities in June 1999 and $1.9 million from the sale of two
assisted living communities in September 1998. These sales were part of
Sunrise's property sale/long-term manage-back program.
Operating Expenses. Sunrise Properties operating expenses for the six
months ended June 30, 2000 increased 38% to $119.5 million from $86.5 million
for the six months ended June 30, 1999. Facility operating expenses for the
six months ended June 30, 2000 increased 46% to $82.2 million from $56.2
million for the six months ended June 30, 1999. Of the
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$26.0 million increase, approximately $7.9 million was attributable to
expenses from operations of additional assisted living facilities open during
the six months ended June 30, 2000 that were not open during the same period
in 1999 and an increase of approximately $12.8 million in expenses for
Karrington properties that were owned for the entire six months ended June
30, 2000 compared to one and one-half months in the same period ended June
30, 1999. The remaining balance of the increase was primarily due to an
increase in labor and other expenses at facilities that were operational for
a full six months in both periods.
Management and contract services expense represents amounts Sunrise
Properties pays to Sunrise Management Services for management of its
wholly-owned and majority owned facilities. Management and contract services
expense for the six months ended June 30, 2000 increased $4.2 million to
$12.9 million from $8.7 million for the six months ended June 30, 1999. This
increase is primarily attributable to the growth in the number of properties
managed during the six months ended June 30, 2000 compared to the six months
ended June 30, 1999.
Facility development and pre-rental expense increased $1.1 million to
$3.2 million for the six months ended June 30, 2000 compared to $2.1 million
for the same period in 1999. The primary cause of this increase is the number
of properties that incurred pre-rental expenses in each period; 13 properties
(4 wholly-owned) which were opened during the six months ended June 30, 2000
compared to 7 properties (2 wholly-owned) which were opened during the six
months ended June 30, 1999.
Depreciation and amortization for the six months ended June 30, 2000
increased $2.8 million, or 24%, to $14.3 million from $11.5 million for the
six months ended June 30, 1999. Of this increase, $0.8 million relates to the
depreciable assets acquired from Karrington and the remainder is due to the
increase in the number of facilities open during the six months ended June
30, 2000 that were not open during the same period in 1999.
Facility lease expense was $5.4 million for the six months ended June
30, 2000 compared to $2.4 million for the six months ended June 30, 1999.
This increase is directly attributable to the addition of 14 leased
facilities in conjunction with the Karrington acquisition in May 1999. The
lease expense on these facilities was incurred for the entire six months
ended June 30, 2000 compared to only one and one-half months in the same
period ended June 30, 1999.
Sunrise recorded a non-recurring charge of $4.4 million in the second
quarter of 1999 related to the consolidation and integration of the acquired
operations and development pipeline of Karrington.
Interest Income (Expense). Interest income increased to $6.2 million
for the six months ended June 30, 2000 compared to $5.8 million for the six
months ended June 30, 1999. This increase was primarily due to an increase in
notes receivable. Interest expense increased for the six months ended June
30, 2000 to $24.0 million from $14.4 million for the six months ended June
30, 1999. Of this $9.6 million increase, $3.2 million was due to
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
additional borrowings and an increase in the variable interest rate under the
$400.0 million credit facility and the remainder due to an overall increase
in total debt as of June 30, 2000 compared to June 30, 1999 and an increase
in the weighted-average interest rate on Sunrise's variable rate debt for the
six months ended June 30, 2000 compared to the same period in 1999.
Equity in losses of unconsolidated assisted living facilities. Equity
in losses of unconsolidated assisted living facilities was $1.6 million for
the six months ended June 30, 2000 compared to $0.2 million for the six
months ended June 30, 1999. The primary reason for the increase is start-up
losses on 13 joint venture facilities opened in the twelve months ended June
30, 2000 versus five joint venture facilities opened in the twelve months
ended June 30, 1999.
SUNRISE VENTURES
Operating Expenses. Sunrise Ventures operating expenses for the six
months ended June 30, 2000 were $0.3 million compared to $0.03 million for
the six months ended June 30, 1999. These expenses were primarily general and
administrative expenses.
CORPORATE EXPENSES
Operating Expenses. Parent company operating expenses for the six
months ended June 30, 2000 increased $2.6 million to $4.0 million from $1.4
million for the six months ended June 30, 1999. The increase was primarily
due to the addition of personnel and other infrastructure in anticipation of
the continuing substantial growth of the company.
Provision for Income Taxes. The provision for income taxes for Sunrise
was $5.8 million for the six months ended June 30, 2000 compared to $4.3
million for the six months ended June 30, 1999. The increase was due to an
increase in the effective tax rate to 39% for the six months ended June 30,
2000 compared to 25% for the six months ended June 30, 1999. Utilization of
operations-related deferred tax benefits reduced Sunrise's federal and state
income taxes by $2.2 million for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
To date, Sunrise has financed its operations from long-term borrowings,
equity offerings and cash generated from operations. At June 30, 2000,
Sunrise had $742.7 million of outstanding debt, at a weighted average
interest rate of 7.61%. Of the amount of outstanding debt, Sunrise had $435.6
million of fixed-rate debt, excluding a $0.4 million loan discount, at a
weighted average interest rate of 7.22%, and $307.5 million of variable rate
debt at a weighted average interest rate of 8.16%.
At June 30, 2000, Sunrise had approximately $40.7 million in
unrestricted cash and cash equivalents, including $2.0 million in
high-quality, short-term investments (A1/P1 rated) and currently has $223.9
million of unused lines of credit.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
A subsidiary of Sunrise has a syndicated revolving credit facility for
$400.0 million. Sunrise guarantees the repayment of all amounts outstanding
under this credit facility. The credit facility expires in July 2002. 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 1.75%.
There were $194.5 million of advances outstanding under this credit facility
as of June 30, 2000.
Two other subsidiaries of Sunrise have revolving credit facilities
totaling $38.7 million. The repayments of the amounts outstanding under these
credit facilities are guaranteed by Sunrise. The credit facilities are
secured by real property and first liens on other assets. Advances under
these facilities bear interest at LIBOR plus 1.95% to 2.00% and totaled $20.3
million as of June 30, 2000.
On June 6, 1997, Sunrise issued and sold $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.
Sunrise has an $85.4 million, excluding a $0.4 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
$20.4 million bears a variable interest rate of LIBOR plus 1.75% and is
payable in installments through May 2001.
In May 1999, Sunrise entered into a multi-property first mortgage 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 a fixed rate debt. At June 30, 2000, $86.6
million was outstanding.
On March 22, 2000, Sunrise closed a $75.0 million loan secured by eight
properties. The loan bears interest at a fixed rate of 8.66% and matures in
April 2007. The proceeds of the loan were used to repay $59.0 million of
floating rate construction debt and to help fund Sunrise's development and
$30.0 million stock repurchase programs. There was $74.8 million outstanding
as of June 30, 2000.
As of June 30, 2000, Sunrise had various other debt outstanding
totaling approximately $131.5 million with interest rates ranging from 4.6%
to 10.0%.
27
<PAGE> 28
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 recorded net interest expense for
the three months ended June 30, 2000 and 1999 in the amounts of $46,000 and
$152,000, 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 $85.4 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 $258.0 million
and to maintain a consolidated minimum cash liquidity balance of
at least $25.0 million. 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.
Net cash provided by operating activities for the six months ended June
30, 2000 and 1999 was approximately $25.9 million and $25.6 million,
respectively.
During the six months ended June 30, 2000 and 1999, Sunrise used $73.4
million and $102.8 million, respectively, for investing activities. Investing
activities included investment in property and equipment, related to the
construction of assisted living facilities, in the amount of $93.0 million
for the six months ended June 30, 2000 and $88.1 million, which included the
purchase of one assisted living facility, for the six months ended June 30,
1999. For the six months ended June 30, 2000, Sunrise also invested $72.2
million in notes receivable to facilitate the development of assisted living
facilities with third parties, offset by $66.2 million of proceeds from
investment in notes receivable. For the six months ended June 30, 1999,
Sunrise invested $47.9 million in notes receivable to facilitate the
development of assisted living facilities with third parties, offset by $7.5
million of proceeds from investment in notes receivable.
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net cash provided by financing activities was $34.7 million for the six
months ended June 30, 2000 compared to $94.5 million for the six months ended
June 30, 1999. Financing activities for the six months ended June 30, 2000
included additional borrowings of $126.2 million, offset, in part, by debt
repayments of $84.7 million, including debt of $23.8 million on the three
facilities sold in June, 2000. Additional borrowings during the six months
ended June 30, 2000 were primarily used to fund Sunrise's continued
development of assisted living facilities and its stock repurchase program.
During the six months ended June 30, 1999, additional borrowings were $200.1
million and debt repayments were $107.8 million.
Sunrise currently estimates that the existing credit facilities,
together with 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 will, however, be required
to complete additional development and to refinance existing indebtedness.
Sunrise estimates that it will cost between $102.0 million and $144.0 million
to complete the facilities Sunrise currently has under construction. Sunrise
expects that the cash flow from operations, together with borrowings under
existing credit facilities, will be sufficient to fund Sunrise's needs for at
least the next twelve 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 on acceptable terms.
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 possible acquisition of assisted
living facilities or the companies operating assisted living facilities. The
success of Sunrise's acquisitions will be determined by numerous factors,
including Sunrise's ability to identify suitable acquisition
29
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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 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.
STOCK REPURCHASE PROGRAM
Sunrise previously announced that its Board of Directors has authorized
the Company to repurchase its outstanding shares up to an aggregate purchase
price of $30.0 million over a period of 12 months. In the second quarter of
2000, Sunrise expanded its stock repurchase program to include authorization
to repurchase up to $50.0 million of its common stock and/or its outstanding
5.5% convertible subordinated notes. To date, Sunrise has repurchased 360,000
shares at an average price of $14.86 per share through open-market purchases
during the period from March 30, 2000 to July 21, 2000.
30
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 and Hedging
Activities - Deferral of the Effective Date of FASB statement No. 133.
Statement No. 137 defers for one year the effective date of statement No.
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 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.
31
<PAGE> 32
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 Sunrise's
sensitivity to hypothetical changes in interest rates as of June 30, 2000.
Sunrise has investments in notes receivable and bonds. Investments in
notes receivable are primarily with joint venture arrangements in which
Sunrise has equity ownership percentages ranging from 9% to 20%. Sunrise's
investment in bonds is secured by the operating property subject to the debt
and 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, which ever 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 June 30, 2000, Sunrise has one
interest rate swap agreement which effectively establishes a fixed rate of
7.3% on up to $19.0 million of long-term debt until June 2001. 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, but not earnings or cash flows. Conversely, for variable
rate debt, changes in interest rates generally do not impact fair market
value, 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 $307.6 million
at June 30, 2000 constant, each one percentage point increase in interest
rates would result in an increase in annual interest expense of approximately
$3.1 million.
The table below details by category the principal amount, the average
interest rates and the estimated fair market value. Some items in the various
categories of debt, excluding the convertible debentures, require periodic
principal payments prior to the final maturity date. Management considers the
fair market value of notes receivable to be equivalent to book value. 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 June 30, 2000.
32
<PAGE> 33
<TABLE>
<CAPTION>
Estimated
Maturity Date Fair Market
2001 2002 2003 2004 2005 Thereafter Value
---- ---- ---- ---- ---- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Notes receivable
Fixed rate $ 3,229 $ 5,012 $ 17,433 -- -- $ 15,091 $ 40,765
Average interest rate 7.2% 12.0% 10.0% -- -- 10.0% --
Variable rate -- -- -- $25,994 -- -- $ 25,994
Average interest rate -- -- -- 11.6% -- -- --
Investments
Bonds -- -- -- -- -- $5,750 $ 5,750
Average interest rate -- -- -- -- -- 11.0% --
LIABILITIES
Debt
Fixed rate $ 68,249 $ 3,513 $ 16,741 $ 3,685 $ 5,408 $ 187,961 $286,966
Average interest rate 8.5% 7.9% 7.2% 8.0% 8.0% 8.1% --
Variable rate $ 49,244 $ 19,906 $ 215,211 $11,034 $ 7,559 $ 4,600 $307,554
Average interest rate 8.1% 8.6% 8.2% 8.3% 8.6% 4.6% --
Convertible notes -- -- $ 150,000 -- -- -- $129,750
Average interest rate -- -- 5.5% -- -- -- --
</TABLE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 12, 2000, Sunrise held its 2000 annual meeting of stockholders
at The Ritz-Carlton (Tysons Corner), 1700 Tysons Boulevard, McLean, Virginia.
The annual meeting was called for the following purposes: (1) to elect two
directors for terms of three years each; (2) to approve the 2000 Stock Option
Plan; and (3) to transact such other business as may properly come before the
annual meeting or any adjournments thereof.
The following table sets forth the names of the directors elected at
the annual meeting for new three year terms and the number of votes cast for
and withheld for each director:
<TABLE>
<CAPTION>
WITHHOLD
AUTHORITY
Directors FOR TO VOTE
--------- --- -------
<S> <C> <C>
Thomas J. Donohue 17,167,107 94,176
David W. Faeder 17,167,070 94,213
</TABLE>
The names of each of the other directors whose terms of offices
continued after the annual meeting are as follows: Paul J. Klaassen, Teresa
M. Klaassen, David G. Bradley, Ronald V. Aprahamian, Richard R. Slager, and
Craig R. Callen.
33
<PAGE> 34
The 2000 Stock Option Plan also was approved at the meeting. The vote
tabulation was as follows: 15,621,144 (90.5% of the total eligible votes
excluding broker-non-votes) were cast for approval of the 2000 Stock Option
Plan, 1,564,110 votes (9.06% of the total eligible votes excluding
broker-non-votes) were cast against such approval and 76,029 votes (0.44% of
the total eligible votes excluding broker-non-votes) were abstentions. Broker
non-votes totaled 1,812,370.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS
Exhibit No. Exhibit Name
----------- ------------
<S> <C>
10.1 Limited Liability Company Agreement of Metropolitan Senior Housing, LLC,
a Delaware Limited Liability Company, dated as of June 29, 2000
10.2 Purchase and Sale Agreement dated as of June 29, 2000, by and
between certain Sunrise affiliates and Metropolitan Senior Housing,
LLC for the sale of three (3) properties
10.3 Purchase and Sale Agreement dated as of June 29, 2000, by and
between certain Sunrise affiliates and Metropolitan Senior Housing,
LLC for the sale of eight (8) properties
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
None
</TABLE>
34
<PAGE> 35
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>
<S> <C>
SUNRISE ASSISTED LIVING, INC.
(Registrant)
Date: August 11, 2000 /s/ Larry E. Hulse
----------------------------------------- ---------------------------------------------------------
Larry E. Hulse
Chief Financial Officer
Date: August 11, 2000 /s/ Carl G. Adams
----------------------------------------- ---------------------------------------------------------
Carl G. Adams
Chief Accounting Officer
</TABLE>
35
<PAGE> 36
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name Page
----------- ------------ ----
<S> <C> <C>
10.1
Limited Liability Company Agreement of Metropolitan
Senior Housing, LLC, a Delaware Limited Liability
Company, dated as of June 29, 2000
10.2 Purchase and Sale Agreement dated as of June 29,
2000, by and between certain Sunrise affiliates
and Metropolitan Senior Housing, LLC for the
sale of three (3) properties
Purchase and Sale Agreement dated as of June 29,
10.3 2000, by and between certain Sunrise affiliates
and Metropolitan Senior Housing, LLC for the
sale of eight (8) properties
Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
27 Commission for information only and is not filed.
</TABLE>
36
