<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 September 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.
Yes X No
------ ------
As of November 1, 2000, there were 21,389,618 shares of the Registrant's
Common Stock outstanding.
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<PAGE> 2
SUNRISE ASSISTED LIVING, INC.
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Income for the three
months ended September 30, 2000 and 1999 and nine months
ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine
months ended September 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 33
PART II. OTHER INFORMATION
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>
September 30, December 31,
2000 1999
----------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 76,602 $ 53,540
Accounts receivable, net 18,418 15,441
Notes receivable 3,247 1,051
Deferred income taxes - 8,221
Assets held for sale - 33,724
Prepaid expenses and other current assets 29,914 54,568
---------------- ---------------
Total current assets 128,181 166,545
Property and equipment, net of accumulated depreciation
and amortization of $67,488 and $55,983, respectively 805,260 763,306
Notes receivable 76,139 59,654
Management contracts and leaseholds, net 24,428 33,994
Costs in excess of assets acquired, net 33,709 35,412
Investments in unconsolidated assisted living facilities, net 26,296 20,435
Investments 5,750 5,750
Other assets 18,528 18,355
---------------- ---------------
Total assets $ 1,118,291 $ 1,103,451
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,905 $ 4,114
Accrued expenses and other current liabilities 25,802 23,373
Deferred revenue 24,286 7,475
Current maturities of long-term debt 109,088 36,103
---------------- ---------------
Total current liabilities 164,081 71,065
Long-term debt, less current maturities 580,689 664,840
Investments in unconsolidated assisted living facilities 3,373 2,561
Deferred income taxes 22,128 22,128
Other long-term liabilities 3,967 4,071
---------------- ---------------
Total liabilities 774,238 764,665
Minority interests 3,843 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,
21,389,201 and 21,938,424 shares issued and outstanding
in 2000 and 1999 214 219
Currency translation adjustment (851) (86)
Additional paid-in capital 294,478 304,014
Retained earnings 46,369 30,891
---------------- ---------------
Total stockholders' equity 340,210 335,038
---------------- ---------------
Total liabilities and stockholders' equity $ 1,118,291 $ 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 Nine months ended
September 30, September 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenue:
Resident fees $ 72,293 $ 58,896 $ 205,845 $ 155,571
Management and contract services 9,389 7,881 22,213 21,311
Income from property sales 8,802 1,356 21,558 4,153
-------------- -------------- --------------- --------------
Total operating revenue 90,484 68,133 249,616 181,035
-------------- -------------- --------------- --------------
Operating expenses:
Facility operating 44,848 36,914 127,012 93,066
Management and contract services 3,629 2,134 8,013 4,270
Facility development and pre-rental 1,367 1,774 4,575 3,874
General and administrative 6,663 5,956 20,296 13,558
Depreciation and amortization 9,321 6,621 25,308 18,637
Facility lease 2,690 2,682 8,125 5,064
Non-recurring charge - - - 4,408
-------------- -------------- --------------- --------------
Total operating expenses 68,518 56,081 193,329 142,877
-------------- -------------- --------------- --------------
Income from operations 21,966 12,052 56,287 38,158
Interest income (expense):
Interest income 2,938 2,453 9,167 8,214
Interest expense (13,814) (8,659) (37,863) (23,088)
-------------- -------------- --------------- --------------
Net interest expense (10,876) (6,206) (28,696) (14,874)
Equity in losses of unconsolidated
assisted living facilities (456) (310) (2,045) (552)
Minority interests (2) (79) (167) (368)
-------------- -------------- --------------- --------------
Income before income taxes 10,632 5,457 25,379 22,364
Provision for income taxes (4,146) (1,746) (9,898) (6,011)
-------------- -------------- --------------- --------------
Net income $ 6,486 $ 3,711 $ 15,481 $ 16,353
-------------- -------------- --------------- --------------
Net income per common share:
Basic $ 0.30 $ 0.17 $ 0.71 $ 0.79
-------------- -------------- --------------- --------------
Diluted $ 0.30 $ 0.17 $ 0.70 $ 0.76
-------------- -------------- --------------- --------------
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 15,481 $ 16,353
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from property sales (8,246) (70)
Equity in losses of unconsolidated assisted living facilities 2,045 552
Minority interests 167 368
Provision for bad debts 1,024 597
Provision for deferred income taxes 9,897 5,262
Depreciation and amortization 25,308 18,637
Amortization of discount on investments - (575)
Amortization of premium on investments - 9
Amortization of financing costs and discount on long-term debt 2,855 1,717
Non-recurring charge - 4,408
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable (4,620) 3,563
Prepaid expenses and other current assets 1,381 (10,020)
Other assets (150) (1,422)
Increase (decrease):
Accounts payable and accrued expenses 24 (10,092)
Deferred revenue (1,099) (1,915)
Other liabilities 788 (329)
------------- -------------
Net cash provided by operating activities 44,855 27,043
------------- -------------
INVESTING ACTIVITIES
Proceeds from sales of assets 58,020 26,923
Acquisition of interests in facility (1,098) -
Investment in property and equipment (64,943) (148,100)
Increase in investment and notes receivable (100,657) (52,154)
Proceeds from investments and notes receivable 105,558 7,488
Increase in restricted cash and cash equivalents (949) (1,315)
Contributions to investments in unconsolidated
assisted living facilities (2,046) (975)
Distributions from investments in unconsolidated
assisted living facilities 52 49
------------- -------------
Net cash used in investing activities (6,063) (168,084)
------------- -------------
FINANCING ACTIVITIES
Net proceeds from exercised options 100 3,667
Additional borrowings under long-term debt 123,439 244,864
Repayment of long-term debt (126,646) (121,017)
Financing costs paid (2,980) (4,931)
Capital contribution from minority interest - 1,000
Repurchase of stock (9,643) -
------------- -------------
Net cash (used in) provided by financing activities (15,730) 123,583
------------- -------------
Net increase (decrease) in cash and cash equivalents 23,062 (17,458)
Cash and cash equivalents at beginning of period 53,540 54,197
------------- -------------
Cash and cash equivalents at end of period $ 76,602 $ 36,739
============= =============
</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 nine-month periods ended September 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
nine-month periods ended September 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 $689.8 million at September 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 $191.7 million of advances outstanding under this
credit facility as of September 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 $21.7 million as of September 30, 2000 and bear interest
at LIBOR plus 1.80% 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
6
<PAGE> 7
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
Sunrise has an $85.2 million, excluding a $0.3 million discount,
multi-property mortgage, collateralized by a blanket first mortgage on all
assets of a subsidiary of Sunrise, consisting of 12 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 $20.2 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
September 30, 2000, $86.2 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. The eight
properties securing the debt were sold on September 30, 2000 to a joint
venture in which Sunrise has a 25% interest. The joint venture assumed the
debt with an outstanding balance of $74.6 million as of September 30, 2000.
As of September 30, 2000, Sunrise has various other debt outstanding
totaling approximately $155.3 million with interest rates ranging from 6.1%
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)
3. STOCK OPTION PLANS (CONTINUED)
A summary of Sunrise's stock option activity and related information
as of September 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 1,681 14.67
Exercised (36) 5.58
Canceled (669) 27.01
----------------
Outstanding - September 30, 2000 6,226 21.48
================
Exercisable - September 30, 2000 2,260
================
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (000) Contractual Life Price (000) Price
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.00 - 8.00 128 5 $ 5.08 128 $ 5.08
8.01 - 20.00 2,616 9.0 14.49 384 16.28
20.01 - 25.63 2,591 6.8 24.96 1,442 24.97
25.64 - 44.56 891 8.1 33.80 306 34.02
---------- -----------
6,226 2,260
========== ===========
</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 $71.4 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------
2000 1999 2000 1999
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income
per share $ 6,486 $ 3,711 $ 15,481 $ 16,353
Denominator: ========== ========== =========== ===========
Denominator for basic net income per
common share-weighted average shares 21,503 21,935 21,713 20,744
Effect of dilutive securities:
Employee stock options 410 343 266 785
Denominator for diluted net income per common ---------- ---------- ----------- -----------
share-weighted average shares plus assumed
conversions 21,913 22,278 21,979 21,529
---------- ---------- ----------- -----------
Basic net income per common share $ 0.30 $ 0.17 $ 0.71 $ 0.79
========== ========== =========== ===========
Diluted net income per common share $ 0.30 $ 0.17 $ 0.70 $ 0.76
========== ========== =========== ===========
</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 $22.1 million and $38.6 million as of September 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, see Note 9)
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 nine-month period ended September 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>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------------------
<S> <C>
Revenue $193,424
Net income 8,446
Basic earnings per share 0.37
Diluted earnings per share 0.36
</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
<PAGE> 11
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. During the third quarter of 2000,
Sunrise Ventures entered into an agreement with Schroder Ventures Life
Sciences ("SVLS") to form a new business that will provide private pay
assisted living services to frail seniors in their own homes. SVLS will
initially hold a majority interest in the new business, Sunrise At-Home
Senior Living. Under the venture agreements, Sunrise has the ability to
acquire a 75% interest in Sunrise At-Home under certain conditions and has
an option to purchase the SVLS ownership interest.
Upon completion of the SVLS investment, management determined that
the remaining activity of Sunrise Ventures was more appropriately reflected
as a component of Sunrise Management Services. Therefore, Sunrise Ventures'
operations have been included with Sunrise Management Services in the
current and prior periods. 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.
11
<PAGE> 12
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. INFORMATION ABOUT SUNRISE'S SEGMENTS (CONTINUED)
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenue:
Sunrise Management Services $ 59,683 $ 47,715 $164,569 $121,180
Sunrise Properties 82,493 62,516 231,896 166,797
Elimination of intersegment revenue (51,692) (42,098) (146,849) (106,942)
-------------------------------------------------------
Total consolidated operating revenue 90,484 68,133 249,616 181,035
-------------------------------------------------------
Operating Expenses:
Sunrise Management Services 53,393 43,106 149,829 106,824
Sunrise Properties 64,458 54,034 183,988 140,534
Elimination of intersegment expenses (51,692) (42,098) (146,849) (106,942)
-------------------------------------------------------
Total consolidated operating expenses 66,159 55,042 186,968 140,416
-------------------------------------------------------
Segment operating income 24,325 13,091 62,648 40,619
Reconciliation to net income:
Corporate operating expenses 2,359 1,039 6,361 2,461
-------------------------------------------------------
Income from operations 21,966 12,052 56,287 38,158
Interest expense, net (10,876) (6,206) (28,696) (14,874)
Equity in losses of unconsolidated assisted
living facilities (456) (310) (2,045) (552)
Minority interests (2) (79) (167) (368)
Provision for income taxes (4,146) (1,746) (9,898) (6,011)
-------------------------------------------------------
Total consolidated net income $6,486 $ 3,711 $15,481 $ 16,353
=======================================================
</TABLE>
Management and contract services revenue from operations in England
was $0.3 million and $0.2 million for the three months ended September 30,
2000 and 1999, respectively, and $0.5 million and $1.0 million for the nine
months ended September 30, 2000 and 1999, respectively. Management and
contract services revenue from operations in Canada was $0.8 million and
$0.5 million for the three months ended September 30, 2000 and 1999,
respectively, and $1.6 million and $0.9 million for the nine months ended
September 30, 2000 and 1999, respectively. The remaining revenues and all
long-lived assets are domestic.
9. ASSETS HELD FOR SALE
Sunrise has concluded its efforts to sell former Karrington operating
properties held for sale. In September, the Company sold two former
Karrington operating properties for their book value of approximately $7.0
million. Sunrise terminated discussions to sell the remaining 14 operating
properties held for sale because market conditions for selling such
properties in secondary markets are depressed and the Company believes that
it can obtain better prices in the future. Accordingly, these properties
have been reclassified from assets held for sale to operating properties
and the operations of these properties have been included in Sunrise's
consolidated results beginning in the third quarter of 2000.
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, the Company's ability to execute on its
sale/manage back program, market factors that could affect the value of the
Company's properties, changes in interest rates, 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 162 facilities in 25 states with a capacity of
over 12,700 residents, including 147 facilities owned by Sunrise or in
which it has ownership interests and 15 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. During the third quarter of 2000,
Sunrise Ventures entered into an agreement with Schroder Ventures Life
Sciences ("SVLS") to form a new business that will provide private pay
assisted living services to frail seniors in their own homes. SVLS will
initially hold a majority interest in the new business, Sunrise At-Home
Senior Living, Inc. Under the venture agreements, Sunrise has the ability
to acquire a 75% interest in Sunrise At-Home under certain conditions and
has an option to purchase the SVLS ownership interest.
Upon completion of the SVLS investment, management determined that
the remaining activity of Sunrise Ventures was more appropriately reflected
as a component of Sunrise Management Services. Therefore, Sunrise Ventures'
operations have been included with Sunrise Management Services in the
current and prior periods. 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.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
CONSOLIDATED
Sunrise has continued to experience growth in operations over the 12
months ended September 30, 2000. During this period, Sunrise began
operating an additional 34 facilities. As a result, operating revenue
increased to $90.5 million for the three months ended September 30, 2000
from $68.1 million for the three months ended September 30, 1999. Net
income increased by $2.8 million to $6.5 million for the three months ended
September 30, 2000, or $0.30 per share (diluted), from $3.7 million for the
three months ended September 30, 1999, or $0.17 per share (diluted).
Sunrise recognized $8.8 million in income from property sales in the third
quarter of 2000. This income from property sales was offset, in part, by
$4.8 million in pre-tax start-up losses recognized in the third quarter
2000 for the 34 communities opened by Sunrise in the preceding twelve
months, almost triple the 12 homes Sunrise opened during the same period
last year. There was also an increase in the effective tax rate to 39% in
the third quarter of 2000 compared to 32% in the third quarter of 1999. 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 September 30,
-------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue:
Management and contract services $59,683 $47,715
Operating expenses:
Management and contract services 48,597 39,048
General and administrative 4,450 3,829
Depreciation and amortization 346 229
-------------------------------------------------------------------------------------------------------------
Total operating expenses 53,393 43,106
-------------------------------------------------------------------------------------------------------------
Operating income 6,290 4,609
Provision for income taxes (2,453) (1,474)
-------------------------------------------------------------------------------------------------------------
Sunrise Management Services net income $3,837 $3,135
-------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management and contract services revenues include revenue from
Sunrise Properties in the amounts of $51,692 and $42,098 for the third
quarter of 2000 and 1999, respectively.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sunrise Management Services provides full-service assisted living
management services, in the U.S. and internationally, for all communities
owned or managed by Sunrise. 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 third quarter 2000, Sunrise Management Services
provided pre-opening services to Sunrise communities under construction,
including two new communities which began construction in the third
quarter. Sunrise Management Services had net income of $3.8 million, or
$0.18 per share (diluted), for the third quarter 2000 compared to $3.1
million, or $0.14 per share (diluted), in the prior year quarter.
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 25% to $59.7 million for the three months ended September 30,
2000 from $47.7 million for the three months ended September 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 25% to 160 for third quarter 2000, up from
128 communities in the third quarter of 1999. This growth resulted from the
completion and opening of 32 additional facilities and the addition of two
managed facilities, net of the sale of two former Karrington facilities
that Sunrise will not continue to manage.
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 September 30, 2000 increased 24% to
$53.4 million from $43.1 million for the three months ended September 30,
1999. Management and contract services expenses for the three months ended
September 30, 2000 increased $9.6 million, or 25%, to $48.6 million from
$39.0 million for the three months ended September 30, 1999. This increase
was directly related to the increase in the number of communities operated
by Management Services to 160 in the third quarter of 2000 compared to 128
in the third quarter of 1999. General and administrative expenses increased
$0.7 million to $4.5 million for the three months ended September 30, 2000
from $3.8 million for the three months ended September 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 during the last twelve months. However, as a percent of operating
revenues, general and administrative expenses have decreased in the current
quarter to 7.5% from 8.0% in the prior year quarter.
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 September 30,
-------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue:
Resident fees $72,293 $58,896
Management and contract services 1,398 2,264
Income from property sales 8,802 1,356
-------------------------------------------------------------------------------------------------------------
Total operating revenue 82,493 62,516
Operating expenses:
Facility operating 44,848 36,914
Management and contract services 6,724 5,184
Facility development and pre-rental 1,367 1,774
General and administrative 644 1,120
Depreciation and amortization 8,185 6,360
Facility lease 2,690 2,682
-------------------------------------------------------------------------------------------------------------
Total operating expenses 64,458 54,034
-------------------------------------------------------------------------------------------------------------
Operating income 18,035 8,482
Interest expense, net (10,876) (6,206)
Equity in losses of unconsolidated assisted
living facilities (456) (310)
Minority interest (2) (79)
Provision for income taxes (2,613) (604)
-------------------------------------------------------------------------------------------------------------
Sunrise Properties net income $ 4,088 $1,283
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Operating expenses include costs with Sunrise Management Services in
the amounts of $51,692 and $42,098 for the third 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 September 30, 2000, the Sunrise
Properties division wholly-owned 101 communities, a 23% increase over the
82 communities wholly-owned as of September 30, 1999. In addition, Sunrise
Properties has majority ownership interests in four communities and
minority ownership interests in another 40 communities.
Sunrise Properties' growth objectives include developing new Sunrise
model assisted living facilities and selectively acquiring existing
facilities. Sunrise Properties currently has 21 facilities under
construction with a resident capacity of over 1,800. 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.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sunrise Properties' operating objectives include its
previously-announced plan of 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. Also, on June 29, 2000, the
venture company 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, which is expected to be recognized
over the four quarters following the sale, subject to certain contingencies
being met, of which $2.2 million was recognized in the current quarter. On
September 30, 2000, the venture company closed on the remaining eight
properties for an aggregate sales price of $111 million. The eight
properties are located in seven states. The venture company assumed
approximately $75 million of debt secured by the eight properties. The
transaction resulted in the realization of $26.0 million in gain which is
expected to be recognized over the four quarters following the sale,
subject to certain contingencies being met, of which $6.6 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.
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 three 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 September 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. As of September 30, 2000, the third
party has provided approximately $20.8 million and Sunrise Properties has
provided $3.3 million of equity capital to the joint venture.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sunrise Properties had net income of $4.1 million, or $0.19 per share
(diluted), for the third quarter 2000 compared to $1.3 million, or $0.06
per share (diluted), in the prior year period. This increase in net income
was due primarily to the income from 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 2000.
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 32% to
$82.5 million for the three months ended September 30, 2000 from $62.5
million for the three months ended September 30, 1999. Resident fees,
including community fees, for the three months ended September 30, 2000
increased $13.4 million, or 23%, to $72.3 million from $58.9 million for
the three months ended September 30, 1999. This increase was due primarily
to the inclusion for the three months ended September 30, 2000 of
approximately $7.7 million of resident fees generated from the operations
of assisted living facilities open during the three months ended September
30, 2000 that were not open during the three months ended September 30,
1999. In addition, resident fees of $3.0 million were included in the three
months ended September 30, 2000 from properties previously held for sale.
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 Sunrise's 96 stabilized communities
during the third quarter of 2000 was 91.4% compared to 94.4% for the 58
Sunrise communities stabilized during the third quarter of 1999. The third
quarter of 2000 marks the first time that all Karrington facilities were
included in the stabilized consolidated portfolio. Although the financial
performance of these properties continues to improve, they have a negative
impact on occupancy and margins for the stabilized portfolio. Comparing the
67 same-store properties for the third quarter of 2000 and the second
quarter of 2000 (which excludes the Karrington facilities that are now
stabilized) would have resulted in occupancy of 93.4% versus 93.2%,
respectively. Sunrise defines stabilized communities as those it has owned
and operated for at least 12 months or those that have achieved occupancy
percentages of 95% or above at the beginning of the measurement period.
Average daily rate for stabilized facilities during the third quarter
of 2000 was $105 compared to $99 during the third quarter of 1999. For the
56 facilities currently owned which were stabilized in both the third
quarter of 1999 and the third quarter of 2000, average daily rate increased
from $98 to $104. The increase is due to the inclusion of additional
prototype facilities which have higher basic care rates and a general
increase in the basic care rate.
Management and contract services revenue decreased $0.9 million to
$1.4 million for the three months ended September 30, 2000 from $2.3
million for the three months ended September 30, 1999. This decrease is due
to a reduction in the number of third-party pre-opening services contracts
in place during each of the respective periods, and the stage of completion
on each contract. There were 16 pre-opening services contracts in place
during
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the three months ended September 30, 2000 compared to 21 contracts for the
three months ended September 30, 1999.
During the three months ended September 30, 2000, Sunrise Properties
income from property sales was $8.8 million compared to $1.4 million for
the three months ended September 30, 1999, for an increase of $7.4 million.
Of the $8.8 million of income recognized in the third quarter of 2000, $6.6
million was from the sale of eight communities in September 2000 and $2.2
million was income previously deferred from the sale of three communities
in June 2000. In the third quarter of 1999, Sunrise recognized $1.4 million
that was part of the income deferred from previous property sales until
certain contingencies were met or waived by the buyers.
Operating Expenses. Sunrise Properties operating expenses for the
three months ended September 30, 2000 increased 19% to $64.5 million from
$54.0 million for the three months ended September 30, 1999. Facility
operating expenses for the three months ended September 30, 2000 increased
21% to $44.8 million from $36.9 million for the three months ended
September 30, 1999. Of the $7.9 million increase, approximately $4.9
million was attributable to expenses from operations of additional assisted
living facilities open during the three months ended September 30, 2000
that were not open during the same period in 1999. In addition, facility
operating expenses of $2.1 million were included in the three months ended
September 30, 2000 from properties previously held for sale. 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 September 30, 2000 increased
$1.5 million to $6.7 million from $5.2 million for the three months ended
September 30, 1999. This increase is primarily attributable to the growth
in the number of properties managed during the three months ended September
30, 2000 compared to the three months ended September 30, 1999.
Depreciation and amortization for the three months ended September
30, 2000 increased $1.8 million, or 28%, to $8.2 million from $6.4 million
for the three months ended September 30, 1999. This increase is primarily
due to the increase in the number of facilities open during the three
months ended September 30, 2000 that were not open during the same period
in 1999.
Net Interest Expense. Net interest expense increased for the three
months ended September 30, 2000 to $10.9 million from $6.2 million for the
three months ended September 30, 1999. Of this $4.7 million increase, $1.5
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 September 30,
2000 compared to September 30, 1999 and an increase to 8.3% in the
weighted-average
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
interest rate on Sunrise's variable rate debt for the third quarter of 2000
compared to 7.2% for the third quarter of 1999.
CORPORATE EXPENSES
Operating Expenses. Parent company operating expenses for the three
months ended September 30, 2000 increased $1.4 million to $2.4 million from
$1.0 million for the three months ended September 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 $4.1 million for the three months ended September 30, 2000
compared to $1.7 million for the three months ended September 30, 1999. The
increase was due to an increase in pre-tax income and an increase in the
effective tax rate to 39% in the third quarter of 2000 compared to 32% in
the third quarter of 1999. Utilization of operations-related deferred tax
benefits reduced Sunrise's federal and state income taxes by $0.4 million
for the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
CONSOLIDATED
Sunrise has continued to experience growth in operations over the 12
months ended September 30, 2000. During this period, Sunrise began
operating an additional 34 facilities. As a result, operating revenue
increased to $249.6 million for the nine months ended September 30, 2000
from $181.0 million for the nine months ended September 30, 1999. Net
income decreased by $0.9 million to 15.5 million for the nine months ended
September 30, 2000, or $0.70 per share (diluted), from $16.4 million for
the nine months ended September 30, 1999, or $0.76 per share (diluted).
Sunrise recognized $21.6 million in income from the sale of properties.
This income from property sales was offset, in part, by $13.4 million in
pre-tax start-up losses recognized in the first nine months of 2000 for the
communities opened by Sunrise in the preceding twelve months in which
Sunrise has an ownership interest, almost triple the number of homes
Sunrise opened during the same period last year. Interest expense increased
by $14.8 million during the nine months ended September 30, 2000 compared
to the year ago period primarily due to increased borrowings and an
increase in the weighted average interest rate. There was also an increase
in the effective tax rate to 39% for the nine months ended September 30,
2000 compared to 27% for the nine months ended September 30, 1999. In the
nine months ended September 30, 1999, Sunrise recorded a non-recurring
charge of $4.4 million related to the Karrington acquisition. See below for
further discussion of these items.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SUNRISE MANAGEMENT SERVICES
The following table sets forth the components of Sunrise Management
Services net income (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue:
Management and contract services $164,569 $121,180
Operating expenses:
Management and contract services 135,223 97,337
General and administrative 13,567 8,811
Depreciation and amortization 1,039 676
-------------------------------------------------------------------------------------------------------------
Total operating expenses 149,829 106,824
-------------------------------------------------------------------------------------------------------------
Operating income 14,740 14,356
Provision for income taxes (5,749) (3,990)
-------------------------------------------------------------------------------------------------------------
Sunrise Management Services net income $ 8,991 $10,366
-------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Management and contract services revenues include revenue from
Sunrise Properties in the amounts of $146,849 and $106,942 for the nine
months ended September 30, 2000 and 1999, respectively.
During the first nine months of 2000, Sunrise Management Services
began operating 22 new communities and provided pre-opening services for
Sunrise communities under construction, eleven of which began in the first
nine months of 2000. Sunrise Management Services had net income of $9.0
million, or $0.41 per share (diluted), for the nine months ended September
30, 2000 compared to $10.4 million, or $0.48 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 nine months ended
September 30, 2000 and the nine months ended September 30, 1999.
Operating Revenue. Total revenues for Sunrise Management Services
increased 36% to $164.6 million for the nine months ended September 30,
2000 from $121.2 million for the nine months ended September 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 25% to 160 as of September 30, 2000 up from
128 communities as of September 30, 1999. This growth resulted from the
completion and opening of 32 additional facilities and the addition of 2
managed facilities, net of the sale of 2 former Karrington facilities that
Sunrise will not continue to manage.
Operating Expenses. Total operating expenses for the nine months
ended September 30, 2000 increased 40% to $149.8 million from $106.8
million for the nine months ended September 30, 1999. Management and
contract services expenses for the nine months ended September 30, 2000
increased $37.9 million, or 39%, to $135.2 million from $97.3 million for
the nine months ended September 30, 1999. This increase was directly
related to the
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
increase in the number of communities operated by Management Services to
160 as of September 30, 2000 compared to 128 as of September 30, 1999.
General and administrative expenses increased $4.8 million to $13.6 million
for the nine months ended September 30, 2000 from $8.8 million for the nine
months ended September 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>
Nine Months Ended September 30,
-------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue:
Resident fees $205,845 $155,571
Management and contract services 4,493 7,073
Income from property sales 21,558 4,153
-------------------------------------------------------------------------------------------------------------
Total operating revenue 231,896 166,797
Operating expenses:
Facility operating 127,012 93,066
Management and contract services 19,639 13,875
Facility development and pre-rental 4,575 3,874
General and administrative 2,175 2,381
Depreciation and amortization 22,462 17,866
Facility lease 8,125 5,064
Non-recurring charges - 4,408
-------------------------------------------------------------------------------------------------------------
Total operating expenses 183,988 140,534
-------------------------------------------------------------------------------------------------------------
Operating income 47,908 26,263
Interest expense, net (28,696) (14,874)
Equity in losses of unconsolidated assisted
living facilities (2,045) (552)
Minority interest (167) (368)
Provision for income taxes (6,630) (2,715)
-------------------------------------------------------------------------------------------------------------
Sunrise Properties net income $10,370 $ 7,754
-------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Operating expenses include costs with Sunrise Management Services in
the amounts of $146,849 and $106,942 for the nine months ended September
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 September 30, 2000, the Sunrise
Properties division wholly-owned 101 communities, a 23% increase over the
82 communities wholly-owned as of September 30, 1999. In addition, Sunrise
Properties has majority ownership interests in 4 communities, minority
ownership interests in another 40 communities.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sunrise Properties' operating objectives include its
previously-announced plan of 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. Also on June 29, 2000, the
venture company 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, which is expected to be recognized
over the four quarters following the sale, subject to certain contingencies
being met, of which $8.9 million was recognized in the nine months ended
September 30, 2000. On September 30, 2000, the venture company closed on
the remaining eight properties for an aggregate sales price of $111
million. The eight properties are located in seven states. The venture
company assumed approximately $75 million of debt secured by the eight
properties. The transaction resulted in the realization of $26.0 million in
gain, which is expected to be recognized over the four quarters following
the sale, subject to certain contingencies being met, of which $6.6 million
was recognized in the nine months ended September 30, 2000. The Sunrise
Management Services division will continue to provide day-to-day management
of the communities under long-term operating agreements.
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 September 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. As of September 30, 2000, the third party
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
has provided approximately $20.8 million and Sunrise Properties has
provided $3.3 million of equity capital to the joint venture.
Sunrise Properties had net income of $10.4 million, or $0.47 per
share (diluted), for the nine months ended September 30, 2000 compared to
$7.7 million, or $0.36 per share (diluted), in the prior year period. This
increase in net income was due primarily to income from property sales as
part of Sunrise Properties' long-term property sale/manage back program.
Income from property sales has been offset by start-up losses from the
record number of new communities opened in the previous twelve months.
Operating Revenue. Sunrise Properties revenues increased 39% to
$231.9 million for the nine months ended September 30, 2000 from $166.8
million for the nine months ended September 30, 1999. Resident fees,
including community fees, for the nine months ended September 30, 2000
increased $50.2 million, or 32%, to $205.8 million from $155.6 million for
the nine months ended September 30, 1999. This increase was due primarily
to (1) the inclusion for the nine months ended September 30, 2000 of
approximately $17.1 million of resident fees generated from the operations
of assisted living facilities open during the nine months ended September
30, 2000 that were not open during the nine months ended September 30,
1999, (2) an increase of approximately $17.3 million in resident fees for
Karrington properties that were owned for the entire nine months ended
September 30, 2000 compared to four and one-half months in the same period
ended September 30, 1999 and (3) resident fees of $3.5 million from
properties previously held for sale. 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 94.0% for the nine months
ended September 30, 2000 compared to 95.5% for the nine months ended
September 30, 1999. For the 47 facilities currently owned which were
stabilized in both the nine months ended September 30, 1999 and 2000,
occupancy remained constant at 95.6%.
Average daily rate for stabilized facilities during the nine months
ended September 30, 2000 was $106 compared to $97 during the same period in
1999. For the 47 facilities currently owned which were stabilized in both
the nine months ended September 30, 2000 and 1999, average daily rate
increased from $96 to $102. The increase is due to the inclusion of
additional prototype facilities which have higher basic care rates and a
general increase in the basic care rate.
Management and contract services revenue decreased $2.6 million to
$4.5 million for the nine months ended September 30, 2000 from $7.1 million
for the nine months ended September 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 23 pre-opening services contracts in place during the nine
months ended September 30, 2000 compared to 25 contracts for the nine
months ended September 30, 1999.
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the nine months ended September 30, 2000, Sunrise Properties
income from property sales was $21.6 million compared to $4.2 million for
the nine months ended September 30, 1999, for an increase of $17.4 million.
The $21.6 million of income recognized in the current period is comprised
of $6.6 million from the September 2000 sale of eight properties, $8.9
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. During the nine months ended September
30, 1999, Sunrise recognized $4.2 million of income from property sales,
some of which was previously deferred until resolution of contractual
contingencies, relating to the prior sale of assisted living communities.
Operating Expenses. Sunrise Properties operating expenses for the
nine months ended September 30, 2000 increased 31% to $184.0 million from
$140.5 million for the nine months ended September 30, 1999. Facility
operating expenses for the nine months ended September 30, 2000 increased
36% to $127.0 million from $93.1 million for the nine months ended
September 30, 1999. This $33.9 million increase primarily was due to (1)
$12.2 million of expenses from operations of additional assisted living
facilities open during the nine months ended September 30, 2000 that were
not open during the same period in 1999, (2) $12.5 million of expenses for
Karrington properties that were owned for the entire nine months ended
September 30, 2000 compared to four and one-half months in the same period
ended September 30, 1999 and (3) $2.5 million of expenses from properties
previously held for sale. 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 nine 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 nine months ended September 30, 2000 increased
$5.7 million to $19.6 million from $13.9 million for the nine months ended
September 30, 1999. This increase is primarily attributable to the growth
in the number of properties managed during the nine months ended September
30, 2000 compared to the nine months ended September 30, 1999.
Facility development and pre-rental expense increased $0.7 million to
$4.6 million for the nine months ended September 30, 2000 compared to $3.9
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;
8 wholly-owned properties were opened during the nine months ended
September 30, 2000 compared to 3 wholly-owned properties which were opened
during the nine months ended September 30, 1999.
Depreciation and amortization for the nine months ended September 30,
2000 increased $4.6 million, or 26%, to $22.5 million from $17.9 million
for the nine months ended September 30, 1999. Of this increase, $1.8
million relates to the depreciable assets and costs in excess of assets
acquired from Karrington and the remainder is due to the increase in the
number of facilities open during the nine months ended September 30, 2000
that were not open during the same period in 1999.
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Facility lease expense was $8.1 million for the nine months ended
September 30, 2000 compared to $5.1 million for the nine months ended
September 30, 1999. This increase is primarily 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
nine months ended September 30, 2000 compared to only four and one-half
months in the same period ended September 30, 1999.
Net Interest Expense. Interest income increased to $9.2 million for
the nine months ended September 30, 2000 compared to $8.2 million for the
nine months ended September 30, 1999. This increase was primarily due to an
increase in notes receivable. Interest expense increased for the nine
months ended September 30, 2000 to $37.9 million from $23.1 million for the
nine months ended September 30, 1999. Of this $14.8 million increase, $4.7
million was due to additional borrowings and an increase in the variable
interest rate under the $400.0 million credit facility and $1.9 million was
from debt acquired in the Karrington acquisition. The remainder was due to
an overall increase in total debt as of September 30, 2000 compared to
September 30, 1999 and an increase in the weighted-average interest rate on
Sunrise's variable rate debt for the nine months ended September 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 $2.0 million for
the nine months ended September 30, 2000 compared to $0.6 million for the
nine months ended September 30, 1999. The primary reason for the increase
is start-up losses on 16 joint venture facilities opened in the twelve
months ended September 30, 2000 versus five joint venture facilities opened
in the twelve months ended September 30, 1999.
CORPORATE EXPENSES
Operating Expenses. Parent company operating expenses for the nine
months ended September 30, 2000 increased $3.9 million to $6.4 million from
$2.5 million for the nine months ended September 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 $9.9 million for the nine months ended September 30, 2000
compared to $6.0 million for the nine months ended September 30, 1999. The
increase was due to an increase in pre-tax income and an increase in the
effective tax rate to 39% for the nine months ended September 30, 2000
compared to 27% for the nine months ended September 30, 1999. Utilization
of operations-related deferred tax benefits reduced Sunrise's federal and
state income taxes by $2.7 million for the nine months ended September 30,
1999.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
To date, Sunrise has financed its operations from long-term borrowings,
equity offerings and cash generated from operations. At September 30, 2000,
Sunrise had $689.8 million of outstanding debt, at a weighted average
interest rate of 7.57%. Of the amount of outstanding debt, Sunrise had $360.3
million of fixed-rate debt, excluding a $0.3 million loan discount, at a
weighted average interest rate of 6.92%, and $329.8 million of variable rate
debt at a weighted average interest rate of 8.28%.
At September 30, 2000, Sunrise had approximately $76.6 million in
unrestricted cash and cash equivalents, including $12.1 million in
high-quality, short-term investments (A1/P1 rated) and currently has $225.4
million of unused lines of credit.
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 $191.7 million of advances outstanding under this credit facility
as of September 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 1.80% to 2.00% and totaled $21.7
million as of September 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 $85.2 million, excluding a $0.3 million discount,
multi-property mortgage, collateralized by a blanket first mortgage on all
assets of a subsidiary of Sunrise, consisting of 12 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
$20.2 million bears a variable interest rate of LIBOR plus 1.75% and is
payable in installments through May 2001. Given the maturity date of May
2001, this debt has been classified as current on Sunrise's balance sheet.
Sunrise believes that it will have the necessary proceeds to repay this debt
through the use of existing cash on hand, proceeds from property sales that
may
27
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
occur prior to maturity, existing credit lines, the repayment of
outstanding notes receivable and other financing expected to be available.
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
September 30, 2000, $86.2 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. The eight
properties securing the debt were sold on September 30, 2000 to a joint
venture in which Sunrise has a 25% interest. The joint venture assumed the
debt with an outstanding balance of $74.6 million as of September 30, 2000.
As of September 30, 2000, Sunrise had various other debt outstanding
totaling approximately $155.3 million with interest rates ranging from 6.1%
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%. Sunrise recorded net interest
expense for the nine months ended September 30, 2000 and 1999 in the
amounts of $142,000 and $410,000, 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 $85.2 million multi-property mortgage, which is
secured by 12 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
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 nine months ended
September 30, 2000 and 1999 was approximately $44.9 million and $27.0
million, respectively.
During the nine months ended September 30, 2000 and 1999, Sunrise
used $6.1 million and $168.1 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 $64.9 million (net of disposals related to sales) for the nine
months ended September 30, 2000 and $148.1 million, which included the
purchase of one assisted living facility, for the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, Sunrise
also invested $100.7 million in notes receivable to facilitate the
development of assisted living facilities with third parties, offset by
$105.6 million of proceeds from investment in notes receivable. For the
nine months ended September 30, 1999, Sunrise invested $52.2 million in
notes receivable to facilitate the development of assisted living
facilities with third parties, offset, in part, by $7.5 million of proceeds
from investment in notes receivable.
Net cash used for financing activities was $15.7 million for the nine
months ended September 30, 2000 compared to net cash provided by financing
activities of $123.6 million for the nine months ended September 30, 1999.
Financing activities for the nine months ended September 30, 2000 included
additional borrowings of $123.4 million, offset, by debt repayments of
$126.6 million, including debt of $105.8 million on the thirteen facilities
sold in 2000. Additional borrowings during the nine months ended September
30, 2000 were primarily used to fund Sunrise's continued development of
assisted living facilities and its stock repurchase program. During the
nine months ended September 30, 1999, additional borrowings were $244.9
million and debt repayments were $121.0 million.
Sunrise currently estimates that the existing credit facilities,
proceeds from sales of selected real estate properties 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 $94 million and $132 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:
29
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- 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
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
30
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
growth effectively, its business, financial condition and results of
operations could be adversely affected.
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 does 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's Board of Directors has authorized the Company to repurchase
its outstanding common stock and/or its outstanding 5 1/2% convertible
subordinated notes up to an aggregate purchase price of $50.0 million over
a period of 12 months. To date, Sunrise has repurchased 585,000 shares of
common stock at an average price of $16.66 per share through open-market
purchases during the period from March 30, 2000 to September 30, 2000.
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.
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101 (SAB 101), which is effective no later
than the fourth quarter of fiscal years beginning after December 15, 1999.
SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. Sunrise
will implement SAB 101 in the fourth quarter of 2000. Sunrise is in the
process of completing its review of the effects of SAB 101 on its
operations, however, it is not anticipated to materially affect results of
operations or the financial position of Sunrise.
31
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
32
<PAGE> 33
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 September 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. Two of the notes have 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 September 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 $329.8
million at September 30, 2000 constant, each one percentage point increase
in interest rates would result in an increase in annual interest expense of
approximately $3.3 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 September
30, 2000.
33
<PAGE> 34
<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 $ 3,247 $ 22,365 -- -- -- $ 26,186 $ 51,798
Average interest rate 7.2% 10.4% -- -- -- 10.0% --
Variable rate -- $ 970 -- $ 26,618 -- -- $ 27,588
Average interest rate -- 13.5% -- 11.6% -- -- --
Investments
Bonds -- -- -- -- -- $5,750 $ 5,750
Average interest rate -- -- -- -- -- 11.0% --
LIABILITIES
Debt
Fixed rate $ 67,127 $ 15,831 $2,398 $ 2,589 $ 4,110 $ 117,895 $202,218
Average interest rate 8.5% 7.1% 7.7% 7.7% 7.7% 7.7% --
Variable rate $ 41,682 $211,796 $ 53,793 $10,989 $ 7,172 $ 4,400 $329,832
Average interest rate 8.1% 8.3% 8.5% 8.3% 8.3% 6.1% --
Convertible notes -- $150,000 -- -- -- -- $139,948
Average interest rate -- 5.5% -- -- -- -- --
</TABLE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibits No. Exhibit Name
------------ ------------
<S> <C>
10.1 Employment Agreement, dated as of
September 12, 2000, by and between Sunrise
Assisted Living, Inc. and Paul J.
Klaassen.
27 Financial Data Schedule, which is
submitted electronically to the Securities
and Exchange Commission for information
only and is not filed.
</TABLE>
(b) REPORTS ON FORM 8-K
Not Applicable
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>
<CAPTION>
SUNRISE ASSISTED LIVING, INC.
(Registrant)
<S> <C>
Date: November 10, 2000 /s/ Larry E. Hulse
----------------------------------------- ------------------------------------------------
Larry E. Hulse
Chief Financial Officer
Date: November 10, 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 Employment Agreement, dated as of September 12,
2000, by and between Sunrise Assisted Living,
Inc. and Paul J. Klaassen
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and is not filed
</TABLE>
36
<PAGE> 37
Exhibit 10.1
September 12, 2000
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") made and effective as of
September 12, 2000, (the "Effective Date"), by and between Sunrise Assisted
Living, a corporation organized and existing under the laws of Delaware (the
"Company") and Paul J. Klaassen (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ the Executive as Chairman and Chief
Executive Officer on the terms and conditions set forth in this Agreement; and
WHEREAS, the Executive is willing to accept such employment on such terms
and conditions;
NOW, THEREFORE, in consideration of the premises and of the mutual
promises, representations and covenants herein contained, the parties hereto
agree as follows:
1. SCOPE OF EMPLOYMENT. The Company hereby agrees to employ the Executive
upon the terms and conditions herein set forth and to perform such
executive duties as may be determined and assigned to him by the Board of
Directors of the Company (the "Board"). The Executive hereby accepts such
employment, subject to the terms and conditions herein set forth. The
Executive shall have the title of Chairman and Chief Executive Officer.
While serving as Chairman and Chief Executive Officer, the Executive
shall have the customary duties and powers of such position. Executive
shall not be employed by any other organization during the Term of this
Agreement.
2. TERM.
(a) The term of Executive's employment under this Agreement shall be
for five (5) years. It shall begin on the Effective Date and thereafter
on an annual basis be extended for a five-year period, unless it is
earlier terminated as follows:
(i) By the Company for Good Cause (as hereinafter defined);
(ii) By the Company for other than Good Cause upon the giving of
thirty (30) days written notice. For purposes hereof,
Executive shall be deemed terminated by the Company for
other than Good Cause if he terminates employment for Good
Reason (as hereinafter defined);
(iii) In the event of the Company's dissolution or liquidation;
(iv) By the Executive for any reason other than retirement upon
the giving of thirty (30) days written notice;
<PAGE> 38
(v) In the event of the death of the Executive; or
(vi) In the event of the disability of Executive (as hereinafter
defined).
(b) For purposes hereof, "Good Cause" shall mean, and be limited to,
(i) any material breach by the Executive of the terms of this Agreement,
(ii) the Executive's willful commission of acts of dishonesty in
connection with his position, (iii) chronic absenteeism (other than by
reason of disability), (iv) the Executive's willful failure or refusal to
perform the essential duties of his position, (v) conviction of a felony,
or (vi) the Executive's engaging in illegal or other wrongful conduct
substantially detrimental to the business or reputation of the Company.
If a ground for termination under this Section 2(b) is amenable to cure,
the Company shall provide the Executive with written notice describing
the nature of the ground for termination. If the Executive cures same
within thirty (30) days after receiving such notice, there shall be no
termination for Good Cause.
(c) For purposes hereof, the term "Good Reason" shall mean the
occurrence of any one or more of the following events unless Executive
specifically agrees in writing that such event shall not be Good Reason:
(i) the assignment to Executive by the Board of Directors or
other officers or representatives of Company of duties
materially inconsistent with the duties associated with the
position described in Section 1 as such duties are
constituted as of the Effective Date;
(ii) a material change in the nature or scope of Executive's
authority from those applicable to him as Chairman and
Chief Executive Officer as such duties are constituted on
the Effective Date;
(iii) the occurrence of material acts or conduct on the part of
Company or its officers and representatives which have as
their purpose forcing the resignation of Executive or
preventing him from performing his duties and
responsibilities pursuant to this Agreement;
(iv) a material breach by Company of any material provision of
this Agreement, provided that failure of Company to pay any
amount, or to provide any benefit, pursuant to the
provision of Articles 3 and 4 hereof shall be deemed to be
a material breach by Company of a material provision of
this Agreement and shall provide Executive the right to
terminate his employment under this Agreement at any time
after such 30 day period; or
(v) requiring Executive to be principally based at any office
or location more than 50 miles from the current offices of
the Company in McLean, Virginia.
(d) For purposes hereof, the term "disability" shall have the same
definition as is set forth in the then current group disability policy,
if any, maintained by the Company for its executive employees. In the
event that the Company does not have such a group term disability policy,
the definition of "disability" shall be as is set forth in the individual
disability policy, if any, purchased in order to fund the Company's
liability under this
<PAGE> 39
Agreement in the event of the Executive's disability. In the event that
the Company maintains no such disability policies, "disability" shall
mean the inability of the Executive, due to illness, accident or any
other physical or mental incapacity, to perform his duties in a normal
manner for a period of six (6) consecutive months.
3. COMPENSATION.
(a) Annual Salary. The Company agrees to pay the Executive, and the
Executive agrees to accept, in payment for services to be rendered by the
Executive hereunder, an initial base salary of Three Hundred Thousand
Dollars ($300,000) per annum. The salary shall be payable in equal
periodic installments, not less frequently than monthly, less such sums
as may be required to be deducted or withheld under the provisions of
federal, state or local law. The Company agrees to review the Executive's
salary annually at or around January 1st of each calendar year (or such
other time as the Company and Executive mutually agree), commencing on or
about January 1, 2001, for adjustment based on the Executive's
performance.
(b) Annual Bonus. In addition to Executive's salary, the Executive
shall be eligible to receive an annual bonus based upon the achievement
of goals established by the compensation committee of the Board of the
Company (the "Compensation Committee") after due consultation with the
Executive. Initially, the Executive's annual bonus will be targeted at a
minimum of $300,000.
The Compensation Committee in its discretion, shall base such
bonus payment upon the satisfaction of one or more performance goals
("Performance Goals"). The Performance Goals shall be based upon the
achievement of (i) a specified level, of (x) the Company's consolidated
pre-tax or after-tax earnings or EBITDA or (y) the pre-tax or after-tax
earnings, or the EBITDA, of any particular subsidiary, division or other
business unit of the Company, (ii) the achievement of a specified level
of revenues, earnings, costs, return on assets, return or equity, return
on capital, return on investment, return on assets under management, net
operating income or net operating income as a percentage of book value
with regard to the Company, particular subsidiaries, divisions or
business units of the Company, particular assets or groups of assets or
particular employees or groups of employees, or (iii) any combination of
the foregoing. Prior to the payment of any such bonus hereunder, the
Compensation Committee shall have certified that any applicable
Performance Goals have been satisfied.
(c) Stock Options. Executive was awarded an incentive stock option
grant on September 11, 2000 under the Company's Stock Option Plan for
350,000 shares of stock. Such grant will vest at the rate of 25% (87,500
shares per year) at the end of each calendar year beginning on December
31, 2000, and ending on December 31, 2003.
<PAGE> 40
4. FRINGE BENEFITS, REIMBURSEMENT OF EXPENSES, ETC.
(a) The Executive shall be entitled to paid vacation, holidays and
sick leave benefits in accordance with the Company's policies for
executive employees.
(b) The Executive and/or his family shall be entitled to medical
insurance from the Company in accordance with the Company's policies for
employees. In addition, Executive shall be entitled to a fully-insured
executive medical/dental plan providing supplemental coverage for
Executive and his family for those items not covered under the Company's
general health plan (for example, prescriptions, orthodontia, eye surgery
or other coverages which may be excluded from the group medical plan).
Notwithstanding the termination of this Agreement for any reason, the
Company and any of its successors and assigns, shall provide to Executive
until age 65, similar medical coverage to that described above, at the
expense of the Company.
(c) The Company agrees to pay the premiums on a permanent life
insurance policy equal to $150,000 per year for 12 years and to pay
Executive an additional amount equal to the tax due to the income imputed
to Executive as a consequence of such policy. Such policy shall be a
"split dollar" policy such that the Company shall recapture the cost of
the premiums paid on the policy, to the extent and at such time as is
permissible under the policy. Such policy shall be owned by the Executive
and funded by the Company for the above described period even if this
Agreement is terminated.
(d) The Company agrees to pay, or promptly reimburse the Executive
for, all reasonable expenses incurred by the Executive in furtherance of
or in connection with the business of the Company, provided that the
Executive furnishes appropriate documentation for such expenses in
accordance with the Company's practices and procedures.
(e) Executive shall be entitled to participate in those retirement
plans, both defined contribution and defined benefit, qualified and
non-qualified, as are then currently available to the Company's executive
employees and such new retirement plans, if any, as may be adopted by the
Company from time to time.
5. TERMINATION BENEFITS: In addition to the benefits described under the
Agreement that survive the termination of the Agreement, the following
benefits will be paid on account of the termination of the Agreement for
the following reasons:
(a) Upon termination of this Agreement by the Company for Good Cause
pursuant to Section 2(a)(i), or by the Executive for other than Good
Reason, death or disability, Company shall pay to Executive immediately
after the date of termination an amount equal to
(i) the sum of Executive's accrued base salary and any bonus
amount earned but not yet paid;
<PAGE> 41
(ii) the Company shall make additional payments to the Executive
each year for three consecutive years following said termination
equal to his annual salary and bonus for the year of termination;
and
(iii) the Company shall provide to Executive's spouse (and
children through their attainment of age 22), in the event of
death (after termination of the Agreement under this section), and
the Executive in the event of disability (after the termination of
the Agreement under this section), medical insurance through the
date the Executive attains age 65.
(b) Upon termination of this Agreement due to the Executive's death or
disability, the Company shall pay to Executive, immediately after the
Date of Termination, an amount which is equal to the Executive's base
salary and annual bonus amount for the remaining term of the Agreement.
The Company shall make additional payments each year for three
consecutive years following said termination equal to his annual salary
and bonus for the year of termination. The Company shall provide to
Executive's spouse (and children through their attainment of age 22), in
the event of death, and to the Executive and his family, in the event of
disability (after the termination of the Agreement under this section)
medical insurance through the date the Executive would attain age 65. In
addition, any stock options, shall be fully vested in the event of the
Executive's death or disability.
(c) Upon termination of this Agreement by the Company for other than
Good Cause or by the Executive for Good Reason, Executive shall be
entitled to:
(i) the Company shall pay to Executive or his beneficiaries, as
the case may be, immediately after the Date of Termination an
amount which is equal to the Executive's base salary and annual
bonus amount for the remaining term of the Agreement;
(ii) the Company shall make additional payments each year for
three consecutive years following said termination equal to his
annual salary and bonus for the year of termination;
(iii) the Company shall provide to Executive's spouse (and
children through their attainment of age 22), in the event of
death (after the termination of the Agreement under this section),
and the Executive in the event of disability (after the
termination of the Agreement under this section), medical
insurance through the date the Executive would attain age 65; and
(iv) the Company shall fully vest any stock options previously
granted to the Executive.
(d) Upon a Change In Control, Executive shall be entitled to the
following from either the Company or its successor, if any:
(i) the Company shall pay to Executive or his beneficiaries, as
the case may be, immediately after the Date of Termination an
amount which is equal to the
<PAGE> 42
Executive's base salary and annual bonus amount for the remaining
term of the Agreement;
(ii) the Company shall make additional payments each year for
three consecutive years following said termination equal to his
annual salary and bonus for the year of termination;
(iii) Executive's spouse (and any children through their
attainment of age 22), in the event of death (after the
termination of the Agreement under this section), and the
Executive in the event of disability (after the termination of the
Agreement under this section) shall be entitled to medical
insurance through the date the Executive would attain age 65;
(iv) the Company shall fully vest any stock options previously
granted to the Executive and shall pay Executive an amount
determined in accordance with Section 4(a)(i)(D) of the Senior
Executive Severance Plan in effect on the date of this Agreement;
(v) In recognition of services by Executive in connection with
any corporate activity that constitutes a Change of Control, the
Company shall pay the Executive in a lump sum concurrent with or
as soon as practicable following a Change in Control as defined in
(vii)(A), (B) or (C), a disposition fee in the amount of 1% of the
Company's enterprise value, defined as its market cap plus debt as
of the date of the Change in Control. To the extent such amount is
determined to be a golden parachute payment under section 280G of
the Internal Revenue Code of 1986, as amended, the Company and its
successors or assigns shall pay to the Executive an amount
necessary to gross-up such amount for any taxes associated with
such amount; and
(vi) A "Change in Control" means any of the following events:
(A) any person (as such term is used in Rule 13d-5 under
the Securities Exchange Act of 1934 ("Exchange Act")) or
group (as such term is defined in Sections 3(a)(9) and
13(d)(3) of the Exchange Act), other than a subsidiary or
any employee benefit plan (or any related trust) of the
Company or a subsidiary, becomes, after effective date of
the Agreement the beneficial owner of 20% or more of the
common stock or of securities of the Company that are
entitled to vote generally in the election of directors of
the Company ("Voting Securities") representing 20% or more
of the combined voting power of all Voting Securities of
the Company.
(B) individuals who, as of the effective date of this
Agreement, constitute the Board (the "Incumbent Board")
cease for any reason to constitute a majority of the
members of the Board; provided that any individual who
becomes a director after the effective date of this
Agreement whose election or nomination for election by the
Company's shareholders was approved by a majority of the
members of the Incumbent
<PAGE> 43
Board (other than an election or nomination of an
individual whose initial assumption of office is in
connection with an actual or threatened "election contest"
relating to the election of the directors of the Company
(as such terms are used in Rule 14a-11 under the Exchange
Act), "tender offer" (as such term is used in Section 14(d)
of the Exchange Act) or a proposed Merger (as defined
below)) shall be deemed to be members of the Incumbent
Board; or
(C) approval by the stockholders of the Company of
either of the following:
(I) a merger, reorganization, consolidation or
similar transaction (any of the foregoing, a
"Merger") as a result of which the persons
who were the respective beneficial owners of
the outstanding common stock and Voting
Securities of the Company immediately before
such Merger are not expected to beneficially
own, immediately after such Merger, directly
or indirectly, more than 60% of,
respectively, the common stock and the
combined voting power of the Voting
Securities of the corporation resulting from
such Merger in substantially the same
proportions as immediately before such
Merger, or
(II) a plan of liquidation of the Company or a
plan or agreement for the sale or other
disposition of all or substantially all of
the assets of the Company.
Notwithstanding the foregoing, there shall not be a Change in
Control if, in advance of such event, Executive agrees in writing
that such event shall not constitute a Change in Control.
(e) The Company's obligations under this Section 6 shall survive
termination of this Agreement.
6. INSURANCE. It is understood that the Company may purchase insurance
policies to fund all or part of the obligations set forth in this
Agreement, provided it is understood that said obligations shall not be
affected by the availability or unavailability of insurance coverage.
Executive agrees to execute such applications for insurance and to make
himself available for and to undergo all reasonable medical examinations
which may be required in the event the Company determines to procure or
place any insurance to fund all or any part of the aforementioned
obligations.
7. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between the parties hereto and supersede all other oral and written
agreements or understandings between them. All previous oral or written
agreements between the parties hereto shall be deemed to have been
completely fulfilled by both parties and shall be superseded by
<PAGE> 44
this Agreement. No modification or addition hereto or waiver or
cancellation of any provision shall be valid except by a writing signed
by the party to be charged therewith.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their heirs, successors,
assigns and personal representatives. As used herein, the successors of
the Company shall include, but not be limited to, any successor by way of
merger, consolidation, sale of all or substantially all of its assets, or
similar reorganization. In no event may the Executive assign any duties
or obligations under this Agreement.
9. CONTROLLING LAW. The validity and construction of this Agreement or of
any of its provisions shall be determined under the laws of the
Commonwealth of Virginia. The invalidity or unenforceability of any
provision of this Agreement shall not affect or limit the validity and
enforceability of the other provisions hereof.
10. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
11. HEADINGS. The headings herein are inserted only as a matter of
convenience and reference, and in no way define, limit or describe the
scope of this Agreement or the intent of any provisions thereof.
12. INDEMNIFICATION. The Company shall indemnify and hold Executive harmless
from and against all claims, investigations, actions, awards and
judgments, including costs and attorneys' fees, incurred by Executive in
connection with acts or decisions made by Executive in good faith in his
capacity as either a director or as an officer of the Company, so long as
Executive reasonably believed that the acts or decisions were in the best
interests of the Company. The Company further agrees to retain and pay
the fees and costs of counsel selected by Executive to represent him in
any action or proceeding covered by this indemnification or in enforcing
or pursuing his rights under this Agreement. The Company shall not settle
any claim or action or pay any award or judgment against Executive
without Executive's prior written consent, which shall not be
unreasonably withheld. The Company may obtain coverage for Executive
under an insurance policy covering the directors and officers of the
Company against claims set forth herein if such coverage is possible at a
reasonable cost, provided, however, it is understood and agreed that the
Company's obligation to indemnify Executive as set forth in this Section
12 shall not be affected by the Company's ability or inability to obtain
insurance coverage.
<PAGE> 45
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date and year first above written.
WITNESS: Sunrise Assisted Living
/s/ Gregori Lebedev By: /s/ Thomas J. Donohue
----------------------------------- --------------------------
Thomas J. Donohue
Director and
Chairman, Compensation Committee
WITNESS:
/s/ Linda Bolino /s/ Paul J. Klaassen
-------------------------------------- --------------------------------
Paul J. Klaassen
