SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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.
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(Exact name of registrant as specified in its charter)
Delaware 54-1746596
- -------------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7902 Westpark Drive
McLean, VA 22102
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(703) 273-7500
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
5 1/2% Convertible Subordinated Notes due 2002
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(Title of class)
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 period 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the registrant's common
stock as of March 12, 2001 was $346,967,013. */
The number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share.
Outstanding at March 12, 2002: 22,352,751 shares.
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*/ Solely for the purposes of this calculation, all directors and executive
officers of the registrant and all stockholders beneficially owning more than
5% of the registrant's common stock are considered to be affiliates.
TABLE OF CONTENTS
Page(s)
PART I Item 1. Business........................................................ 3
Item 2. Properties...................................................... 31
Item 3. Legal Proceedings............................................... 32
Item 4. Submission of Matters to a Vote of Security Holders............. 32
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters.................................... 32
Item 6. Selected Financial Data......................................... 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 35
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk............................................... 57
Item 8. Financial Statements and Supplementary Data..................... 57
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 57
PART III Item 10. Directors and Executive Officers of the Registrant.............. 57
Item 11. Executive Compensation.......................................... 57
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 57
Item 13. Certain Relationships and Related Transactions.................. 58
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K..................................................... 58
SIGNATURES............................................................................... 60
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This Form 10-K contains certain forward-looking statements that
involve risks and uncertainties. Although Sunrise believes the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, there can be no assurance that Sunrise's expectations will be
realized. Sunrise's actual results could differ materially from those
anticipated in these forward-looking statements as a result of various
factors, including, but not limited to, development and construction risks,
acquisition risks, licensing risks, business conditions, competition, changes
in interest rates, our ability to execute on our sale/manage back program,
market factors that could affect the value of our properties, the 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 herein. We assume no obligation to update or
supplement forward-looking statements that become untrue because of subsequent
events. Unless the context suggests otherwise, references herein to "Sunrise",
the "Company","we", "us" and "our" mean Sunrise Assisted Living, Inc. and its
consolidated subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
THE ASSISTED LIVING INDUSTRY
Sunrise believes that the assisted living industry has emerged as a
preferred alternative to meet the growing demand for a cost-effective setting
in which to care for the elderly who do not require the more intensive medical
attention provided by a skilled nursing facility but cannot live independently
due to physical or cognitive frailties. In general, assisted living represents
a combination of housing and 24-hour a day personal support services designed
to aid elderly residents with activities of daily living, such as bathing,
eating, personal hygiene, grooming and dressing. Some assisted living
facilities may also provide assistance to residents with low acuity medical
needs, or may offer higher levels of personal assistance for incontinent
residents or residents with Alzheimer's disease or other forms of dementia.
Sunrise believes that consumer preference and demographic trends should allow
assisted living to remain one of the fastest growing segments of elder care.
The assisted living industry is highly fragmented and characterized by
numerous small operators. The scope of assisted living services varies
substantially from one operator to another. Many smaller assisted living
providers do not operate in purpose-built facilities, do not have
professionally trained staff, and may provide only limited assistance with
low-level care activities. Sunrise believes that few assisted living operators
provide a comprehensive range of assisted living services, such as Alzheimer's
care and other services designed to permit residents to "age in place" within
the facility as they develop further physical or cognitive frailties.
SERVICES
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Sunrise offers a full range of assisted living services based upon
individual resident needs. Upon move-in, Sunrise assesses the resident,
generally with the resident's family and physician, to determine the level of
care required and develops an individualized service plan. This individual
service plan includes selection of resident accommodations and determination
of the appropriate level of care. The plan is periodically reviewed and
updated by Sunrise, and communicated to the resident and/or the resident's
family. The range of services offered by Sunrise includes: Basic Care,
consisting of assistance with activities of daily living and other
personalized support services; Plus Care, consisting of more frequent and
intensive assistance or increased care; and Reminiscence Care, consisting of
care programs and services to help cognitively impaired residents, including
residents with Alzheimer's disease. By offering a full range of services, we
believe we are better able to accommodate the changing needs of our residents
as they age and develop further physical or cognitive frailties. Daily net
resident fees are generally revised annually whereas fees for additional care
are revised when a change in care needs arises.
The average daily resident fee, consisting of net resident fees plus
additional care fees combined, for owned facilities opened or operated by
Sunrise for at least 12 months, or that have achieved occupancy percentages of
95% or above, was approximately $104 for 2001, $106 for 2000, and $97 for
1999. Approximately 99% of our resident fee revenues were derived from private
pay sources.
BASIC CARE
Sunrise's basic care program provided to all residents includes:
- assistance with activities of daily living, such as eating, bathing,
dressing, personal hygiene, and grooming;
- three meals per day served in a common dining room;
- coordination of special diets;
- 24-hour security; emergency call systems in each unit;
- transportation to stores and community services;
- assistance with coordination of physician care, physical therapy and
other medical services;
- health promotion and related programs;
- housekeeping services; and
- social and recreational activities.
-4-
ASSISTED LIVING PLUS CARE
Through Sunrise's plus care program, residents who require more
frequent or intensive assistance or increased care or supervision are provided
extra care and supervision. Sunrise charges an additional daily fee based on
additional staff hours of care and services provided. The plus care program
allows Sunrise, through consultation with the resident, the resident's family
and the resident's personal physician, to create an individualized care and
supervision program for residents who might otherwise have to move to a more
medically intensive facility. At December 31, 2001, approximately 30% of
Sunrise's assisted living residents participated in the plus care program.
MEDICATION MANAGEMENT
Many of Sunrise's residents also require assistance with medications.
To the extent permitted by state law, the medication management program
includes the storage of medications, the distribution of medications as
directed by the resident's physician and compliance monitoring. Sunrise
charges an additional fixed daily fee for this service. At December 31, 2001,
approximately 41% of Sunrise's assisted living residents participated in the
medication management program.
REMINISCENCE CARE
Sunrise believes its reminiscence care program distinguishes it from
many other assisted living providers who do not provide such specialized care.
Sunrise's reminiscence program provides the attention, care programs and
services needed to help cognitively impaired residents, including residents
with Alzheimer's disease, maintain a higher quality of life. Specially trained
staff provide basic care and other specifically designed care and services to
cognitively impaired residents, in separate areas of facilities. Sunrise
charges each cognitively impaired resident a daily fee that includes
additional staff time per resident per day. Cognitively impaired residents who
require additional care and services pay a higher daily rate based on
additional staff hours of care and services provided. At December 31, 2001,
approximately 26% of Sunrise's assisted living residents participated in the
reminiscence program.
THE SUNRISE "VICTORIAN" MODEL FACILITY
Sunrise's signature Victorian model facility, first designed in 1985,
is a freestanding, residential-style facility generally with a capacity of 65
to 110 residents. The building ranges in size from approximately 37,000 to
65,000 square feet and is built generally on sites ranging from two to five
acres. Approximately 40% of the building is devoted to common areas and
amenities, including a reading room, activity room, family or living room and
other areas, such as dining room and bistro, designed to promote interaction
among residents. Sunrise has several basic building plan designs, which
provide it with flexibility in adapting the model to a particular site. The
building is usually two or three stories and of steel frame construction built
to institutional health care standards but strongly residential in appearance.
The interior layout is
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designed to promote a home-like environment, efficient delivery of resident
care and resident independence.
Resident units are functionally arranged to provide a
"community-within-a-community" atmosphere. The model facility may be
configured with as many as eight different types of resident units, including
double occupancy units, single units and two- and three-room suites. Sitting
areas on each floor serve as either family or living rooms. The ground level
typically contains a kitchen and common dining area, administrative offices, a
laundry room, a private dining room, library, living room, and bistro.
Typically, one floor or one or two wings of a facility contain resident units
and common areas, including separate dining facilities, specifically designed
to serve residents with Alzheimer's disease or other special needs.
The architectural and interior design concepts incorporate the Sunrise
operating philosophy of protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a homelike
setting. Sunrise believes its model facility meets the desire of many
individuals to move to a residence at least as comfortable as their former
home. Sunrise believes that its residential environments also accomplish
several other objectives, including: (1) lessening the trauma of change for
elderly residents and their families; (2) achieving operational efficiencies
through proven designs; (3) facilitating resident mobility and ease of access
by care givers; and (4) differentiating Sunrise from other assisted living and
long-term care operators.
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OWNED AND PARTIALLY OWNED FACILITIES
The table below sets forth certain information regarding owned
facilities or facilities in which Sunrise has an ownership interest that were
operating at December 31, 2001, as well as those under construction or subject
to purchase contracts and zoned:
DEVELOPED, SUNRISE
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YEAR ACQUIRED OR MODEL
OPENED BY ----------- -----
FACILITY LOCATION SUNRISE CONSTR. STATUS FACILITY RESIDENT OWNERSHIP
-------- -------- ------- -------------- -------- -------- ---------
CAPACITY PERCENTAGE
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Sunrise of Oakton Oakton, VA 1981 Acquired(3) 51 100.0%(1)
Sunrise of Leesburg Leesburg, VA 1984 Acquired(3) 35 100.0(1)
Sunrise of Warrenton Warrenton, VA 1986 Acquired(3) 37 100.0(1)
Sunrise of Arlington Arlington, VA 1988 Developed X 58 100.0(1)
Sunrise at Bluemont Arlington, VA 1990 100.0(1)
Park
Potomac Developed X 59
Shenandoah Developed X 77
James Developed X 59
Sunrise of Mercer
Island Seattle, WA 1990 Developed X 59 100.0(1)
Sunrise of Fairfax Fairfax, VA 1990 Developed X 52 100.0(1)(4)
Sunrise of Frederick Frederick, MD 1992 Developed X 74 100.0(1)
Sunrise at Countryside Sterling, VA 1992 100.0(1)
East Building Developed(5) X 66
West Building Developed(5) X 64
Sunrise of Gunston Lorton, VA 1992 Developed(5) X 67 100.0(1)
Sunrise Atrium of Boca Boca Raton, FL 1992 Acquired 196 100.0(1)
Raton
Sunrise of Falls Church Falls Church, VA 1993 Developed X 66 100.0(1)
Sunrise at Montgomery Gaithersburg, 1993 Acquired 155(6) 100.0(1)
Village MD
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Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(2)
Sunrise at Gardner Park Peabody, MA 1994 Developed X 59 25.0(2)(7)
Sunrise of Santa Rosa Santa Rosa, CA 1996 Acquired 120 100.0(1)
Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 100.0(8)
Huntcliff Summit Atlanta, GA 1996 Acquired 251 100.0(1)(9)
Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0
Sunrise at Brookside Columbus, GA 1996 Acquired 26 100.0
Glen
Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0
Sunrise of Blue Bell Philadelphia, 1996 Developed X 97 100.0(8)
PA
Sunrise at Hunter Mill Oakton, VA 1997 Developed X 90 25.0(2)(13)
Sunrise at Sterling Valencia, CA 1997 Acquired 130 100.0(1)
Canyon
Sunrise of Napa Napa Valley, 1997 Acquired 65 100.0(1)
CA
Sunrise of Petaluma Petaluma, CA 1997 Developed 84 100.0(10)
Sunrise of Springfield Springfield, 1997 Developed X 95 25.0(2)(15)
VA
Sunrise of Severna Severna Park, 1997 Developed X 93 50.0(2)(4)(10)
Park Building I MD
Sunrise of Severna Severna Park, 1997 Developed X 66 50.0(2)(4)(10)
Park Building II MD
Sunrise of Morris Morris 1997 Developed X 92 25.0(2)(15)
Plains Plains, NJ
Sunrise of Old Tappan Old Tappan, NJ 1997 Developed X 92 25.0(2)(15)
Sunrise at Granite Run Granite Run, 1997 Developed X 104 25.0(2)(15)
PA
Sunrise of Abington, PA 1997 Developed X 95 25.0(2)(15)
Abington
Building I
Sunrise of Abington Abington, PA 1997 Developed X 66 25.0(2)(15)
Building II
-8-
Sunrise of Alexandria Alexandria, VA 1997 Developed X 91 100.0(1)(4)
Sunrise of Wayne Wayne, NJ 1997 Developed X 90 25.0(2)(15)
Sunrise of Wayland Wayland, MA 1997 Developed X 71 25.0(2)(13)
Sunrise of Westfield Westfield, NJ 1997 Developed X 92 25.0(2)(15)
Sunrise at East Cobb East Cobb, GA 1997 Developed X 94 100.0(1)
Sunrise of Dunwoody Dunwoody, GA 1997 Acquired 30 100.0
Sunrise of Weston Weston, MA 1997 Acquired 31 100.0(1)
Sunrise of Fresno Fresno, CA 1998 Developed 84 100.0(10)
Sunrise of Haverford Haverford, PA 1998 Developed X 72 25.0(2)(15)
Sunrise of Decatur Decatur, GA 1998 Developed X 92 25.0(2)(14)
Sunrise of Walnut Creek Walnut Creek, 1998 Developed X 85 25.0(2)(14)
CA
Sunrise of Glen Cove Glen Cove, NY 1998 Developed X 91 25.0(2)(14)
Sunrise at Ivey Ridge Ivey Ridge, GA 1998 Developed X 102 100.0(1)
Sunrise of Cohasset Cohasset, MA 1998 Developed X 74 25.0(2)(14)
Sunrise at Orchard Denver, CO 1998 Developed X 94 100.0(1)
Sunrise of Pinehurst Denver, CO 1998 Developed X 102 100.0(1)
Sunrise at Huntcliff Atlanta, GA 1998 Developed X 91 100.0
Summit
Sunrise of Danville Danville, CA 1998 Developed X 86 100.0(10)
Sunrise of Lafayette Lafayette 1998 Developed X 84 25.0(2)(14)
Hill Hill, PA
Sunrise of Bellevue Bellevue, WA 1998 Developed X 84 25.0(2)(14)
Sunrise of Paramus Paramus, NJ 1998 Developed X 76 25.0(2)(14)
Sunrise at West Essex Fairfield, NJ 1998 Developed X 94 25.0(2)(13)
Sunrise of Paoli Malvern, PA 1998 Developed X 98 25.0(2)(14)
Sunrise of Mission Mission 1998 Developed X 103 100.0(1)
Viejo Viejo, CA
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Sunrise at Oakland Oakland, CA 1998 Developed X 91 25.0(2)(16)
Hills
Sunrise of Rochester Detroit, MI 1999 Developed X 101 100.0(1)
Sunrise of East East 1999 Developed X 94 20.0(2)
Brunswick Brunswick, NJ
Sunrise on Providence Charlotte, NC 1999 Developed X 91 9.0(2)
Sunrise of Smithtown Long Island, 1999 Developed X 90 100.0(1)
NY
Sunrise of Buffalo Buffalo 1999 Developed X 94 100.0(1)
Grove Grove, IL
Sunrise at La Costa Carlsbad, CA 1999 Developed X 103 20.0(2)
Sunrise of Naperville Naperville, IL 1999 Developed X 91 20.0(2)
Sunrise of Richmond Richmond, VA 1999 Developed X 84 20.0(2)
Sunrise at Canyon Crest Riverside, CA 1999 Developed X 77 100.0(1)
Sunrise at Fleetwood Mt. Vernon, NY 1999 Developed X 96 100.0(1)
Sunrise of Flossmoor Flossmoor, IL 1999 Developed X 74 100.0
Sunrise of Bloomingdale Bloomingdale, 1999 Developed X 91 100.0(1)
IL
Sunrise of Wilton Wilton, CT 1999 Developed X 74 100.0(1)
Sunrise of Stamford Stamford, CT 1999 Developed X 102 20.0(2)
Sunrise at North North 1999 Developed X 98 20.0(2)
Lynbrook Lynbrook, NY
Sunrise at Frognal Sidcup, London 1999 Developed X 145 7.24(2)
House
Sunrise of New City New City, NY 1999 Developed X 91 9.0(2)
Sunrise of Farmington Detroit, MI 1999 Acquired 80 100.0(1)
Hills
Sunrise of Edina Minneapolis, 1999 Acquired 110 100.0
MN
Sunrise of Bexley Columbus, OH 1999 Acquired 61 100.0(10)
Sunrise at the Scioto Columbus, OH 1999 Acquired 61 100.0(10)
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Sunrise at Tucker Creek Columbus, OH 1999 Acquired 62 100.0(10)
Sunrise Place for the Columbus, OH 1999 Acquired 30 100.0(10)
Memory Impaired
Sunrise of Carmel Indianapolis, 1999 Acquired 66 100.0(10)
IN
Sunrise of Bath Akron, OH 1999 Acquired 75 100.0(10)
Sunrise of Gahanna Columbus, OH 1999 Acquired 54 100.0(10)
Sunrise of Rocky River Cleveland, OH 1999 Acquired 72 100.0(10)
Sunrise at Presque Erie, PA 1999 Acquired 79 100.0(10)
Isle Bay
Sunrise of Eastover Charlotte, NC 1999 Acquired 52 100.0
Sunrise of Poland Youngstown, OH 1999 Acquired 75 100.0
Sunrise of Ann Arbor Ann Arbor, MI 1999 Acquired 77 100.0(10)
Sunrise of Shaker Cleveland, OH 1999 Acquired 68 100.0
Heights
Sunrise at South Hills Pittsburgh, PA 1999 Acquired 77 100.0(1)
Sunrise at Fall Creek Indianapolis, 1999 Acquired 71 100.0
IN
Sunrise of Willow Lake Indianapolis, 1999 Acquired 71 100.0
IN
Sunrise of Fort Wayne Fort Wayne, IN 1999 Acquired 71 100.0
Sunrise of Wooster Wooster, OH 1999 Acquired 98(11) 100.0(4)
Sunrise of South Charlotte, NC 1999 Acquired 75 100.0(1)
Charlotte
Sunrise of Monroeville Pittsburgh, PA 1999 Acquired 72 100.0(1)
Sunrise at St. Francis Albuquerque, 1999 Acquired 32 19.9(2)
Place for the Memory NM
Impaired
Sunrise at Oakwood Dayton, OH 1999 Acquired 61 50.0(2)
Sunrise of Colorado Colorado 1999 Acquired 74 19.9(2)
Springs Springs, CO
Sunrise at of Kenwood Cincinnati, OH 1999 Acquired 77 35.0(2)
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Sunrise of Englewood Dayton, OH 1999 Acquired 58 19.9(2)
Sunrise of Albuquerque Albuquerque, 1999 Acquired 69 19.9(2)
NM
Sunrise of Findlay Findlay, OH 1999 Acquired 55 50.0(2)
Sunrise Cottages of Bismarck, ND 1999 Acquired 20 100.0(1)
Bismark
Sunrise Cottages of Waterloo, IA 1999 Acquired 20 100.0(1)
Waterloo
Sunrsie of Bismark Bismarck, ND 1999 Acquired 76 100.0(1)
Sunrise Cottages of Buffalo, MN 1999 Acquired 21 100.0(1)
Buffalo 1
Sunrise Cottages of Buffalo, MN 1999 Acquired 20 100.0(1)
Buffalo 2
Sunrise of Buffalo Buffalo, MN 1999 Acquired 78 100.0(1)
Sunrise Cottages of Rochester, MN 1999 Acquired 19 100.0(1)
Rochester 1
Sunrise Cottages of Rochester, MN 1999 Acquired 19 100.0(1)
Rochester 2
Sunrise Cottages of Rochester, MN 1999 Acquired 27 100.0(1)
Rochester 3
Sunrise Cottages of Rochester, MN 1999 Acquired 27 100.0(1)
Rochester 4
Sunrise Cottages of Rochester, MN 1999 Acquired 30 100.0(1)
Rochester 5
Sunrise Cottages of Mankato, MN 1999 Acquired 21 100.0(1)
Mankato
Sunrise of Park Ridge Chicago, IL 1999 Acquired 93 100.0(1)(12)
Sunrise at Northville Northville, MI 2000 Developed X 84 100.0(1)
Sunrise of Hermosa Hermosa 2000 Developed X 96 100.0(1)(4)
Beach Beach, CA
Sunrise of Exton Exton, PA 2000 Developed X 76 9.0(2)
Sunrise of Westtown Westtown, PA 2000 Developed X 95 9.0(2)
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Sunrise of Hamilton Hamilton, OH 2000 Developed 44 100.0
Sunrise Cottages of Rochester, MN 2000 Acquired 27 100.0(1)
Rochester 7
Sunrise at Finneytown Cincinnati, OH 2000 Developed 82 35.0(2)
Sunrise of Glen Ellyn Glen Ellyn, IL 2000 Developed X 102 9.0(2)
Sunrise at Sheepshead Brooklyn, NY 2000 Developed 125 70.0(1)(2)
Bay
Sunrise of Willowbrook Willowbrook, 2000 Developed X 98 25.0(2)(17)
IL
Sunrise at Ann Arbor Ann Arbor, MI 2000 Developed X 86 9.0(2)
North
Sunrise of Cuyahoga Akron, OH 2000 Developed X 59 9.0(2)
Falls
Sunrise of Sunnyvale Sunnyvale, CA 2000 Developed X 96 9.0(2)
Sunrise at CherryCreek Denver, CO 2000 Developed X 104 9.0(2)
Sunrise at Parma Parma, OH 2000 Developed X 61 100.0(1)
Sunrise of Baton Rouge Baton Rouge, 2000 Developed X 70 100.0(1)
LA
Sunrise of West West 2000 Developed X 62 9.0(2)
Bloomfield Bloomfield, MI
Sunrise of Woodcliff Woodcliff 2000 Developed X 102 20.0(2)
Lake Lake, NJ
Sunrise of Westminister Westminister, 2000 Developed X 94 100.0(1)
CO
Sunrise at Bayou - St. New Orleans, 2000 Developed X 91 100.0(1)(4)
Johns LA
Sunrise of Tustin Tustin, CA 2000 Developed X 58 9.0(2)
Sunrise of Chesterfield St. Louis, MO 2000 Developed X 90 100.0(1)
Sunrise of Edgewater- Edgewater, NJ 2000 Developed X 84 9.0(2)
Phase I
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Sunrise of Wall Wall 2000 Developed X 70 100.0(1)
Township, NJ
Sunrise of Claremont Claremont, CA 2000 Developed X 65 100.0(1)
Sunrise of Alta Loma Rancho 2001 Developed X 73 100.0(1)
Cucamonga, CA
Sunrise at University Colorado 2001 Developed X 65 9.0(2)
Park Springs, CO
Sunrise of Crystal Lake Crystal Lake, 2001 Developed X 71 9.0(2)
IL
Sunrise of West West 2001 Developed X 94 100.0(1)
Hartford Hartford, CT
Sunrise of Troy Troy, MI 2001 Developed X 71 100.0(1)
Sunrise of Palos Park Palos Park, IL 2001 Developed X 105 100.0(1)
Sunrise of Pacific Pacific 2001 Developed X 46 100.0(1)
Palisades Palisades, CA
Sunrise of Holbrook Holbrook, NY 2001 Developed X 93 9.0(2)
Sunrise of Unionville Markham, ON 2001 Developed X 98 7.24(2)
Sunrise of Victoria Victoria, BC 2001 Developed X 106 7.24(2)
Sunrise of Schaumburg Schaumburg, IL 2001 Developed X 99 9.0(2)
Sunrise of Mississauga Mississaugua, 2001 Developed X 103 7.24(2)
ON
Sunrise at Windsor Windsor, ON 2001 Developed X 104 7.24(2)
Sunrise of Arlington Arlington, MA 2001 Developed X 102 100.0(1)(4)
Sunrise of Lincroft Lincroft, NJ 2001 Developed X 72 9.0(2)
Sunrise of Roseville Roseville, MN 2001 Developed X 92 9.0(2)
---------
12,607
---------
Sunrise of Plainview Plainview, NY 1st half Construction X 61 9.0(2)
2002
Sunrise of Lynn Valley North 1st half Construction X 107 7.24 (2)
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Vancouver, 2002
B.C.
Sunrise at Mill Basin Brooklyn, NY 1st half Construction X 118 70.0(1)(2)
2002
Sunrise of Marlboro Marlboro, NJ 1st half Construction X 77 100.0(1)
2002
Sunrise of Dix Hills Dix Hills, NY 1st half Construction X 91 100.0
2002
Sunrise of Gurnee Gurnee, IL 1st half Construction X 71 9.0(2)
2002
Sunrise of Oakville Oakville, ON 1st half Construction X 107 7.24(2)
2002
Sunrise of East Meadow East Meadow, 1st half Construction X 98 100.0(1)(4)
NY 2002
Sunrise of Richmond Richmond 1st half Construction X 90 7.24(2)
Hill Hill, ON 2002
Sunrise of White Oak Silver 1st half Construction 78 100.0(1)
Spring, MD 2002
Sunrise at Virginia Surrey, UK 1st half Construction X 81 7.24(2)
Water 2002
Sunrise of West Hills Canoga Park, 1st half Construction X 78 100.0(1)
CA 2002
Sunrise at East East 1st half Construction X 98 100.0(1)
Setauket Setauket, NY 2002
Sunrise of Fair Oaks Sacramento, CA 1st half Construction X 71 100.0(1)
2002
Sunrise of Naperville Naperville, IL 1st half Construction X 95 100.0(1)
2002
Sunrise of McLean McLean, VA 2nd half Construction X 106 40.0(2)
2002
Sunrise of Belmont Belmont, CA 2nd half Construction X 85 100.0(1)(4)
2002
Sunrise of Bernards Basking 2nd half Construction X 92 100.0(1)
Township Ridge, NJ 2002
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Sunrise of Pacific San Diego, CA 2nd half Construction X 60 100.0
Beach 2002
Sunrise at Elstree Elstree, UK 2nd half Construction X 75 7.24(2)
Manor 2002
Sunrise of West Babylon NY 1st half Construction X 95 100.0(1)
2003
Sunrise at West 57th Vancouver, CAD Zoned X 106 7.24(2)
and Oak
Sunrise of Lincoln Lincoln Park, Zoned X 72 100.0
Park IL
Sunrise of Edgewater II Edgewater, NJ Zoned X 84 100.0
Sunrise of Washington, Washington, Zoned X 116 100.0
D.C. D.C.
Sunrise at Richmond St. Louis, MO Zoned X 78 100.0
Heights
Sunrise of San Gabriel San Gabriel, Zoned X 71 100.0
CA
Sunrise of Boulder Boulder, CO Zoned X 101 100.0
Sunrise of Santa Monica Santa Monica, Zoned X 84 25.0(2)
CA
Sunrise of La Palma La Palma, CA Zoned X 71 100.0
Sunrise of Studio City Studio City, Zoned X 94 100.0
CA
Sunrise of Seal Beach Seal Beach, CA Zoned X 94 100.0
I
Sunrise of Seal Beach Seal Beach, CA Zoned X 87 100.0
II
Sunrise of Bonita Bonita, CA Zoned X 71 100.0
Sunrise of Cresskill I Cresskill, NJ Zoned X 90 100.0
Sunrise of Cresskill II Cresskill, NJ Zoned X 91 100.0
Sunrise of Newton Newton Zoned X 92 100.0
Square Square, PA
Sunrise of Willmington Willmington, Zoned X 71 100.0
DE
Sunrise of Des Peres Des Peres, MO Zoned X 91 100.0
------------
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3,398 (18)
------------
Total 16,005
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============
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(1) Serves as collateral for outstanding debt on facilities in which Sunrise
has an ownership percentage. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and note 7 of notes to consolidated financial
statements.
(2) All facilities that are wholly owned by Sunrise are consolidated in the
consolidated financial statements. The Severna Park, Sheepshead Bay, and
Mill Basin facilities are held by limited liability companies in which
Sunrise holds the ownership interests indicated in the table. Sunrise is
the managing member of these entities and through the operating
agreements and the management agreements for the facilities Sunrise
controls their ordinary course business operations. Therefore, Severna
Park, Sheepshead Bay, and Mill Basin facilities were also consolidated in
Sunrise's consolidated financial statements. The consolidated statements
of income includes one limited partnership which holds the Gardner Park
facility in which Sunrise had a 50% partnership interest and controlled
through December 28, 2001 at which date, Sunrise sold one-half of its
partnership interest (see note 12 of notes to consolidated financial
statements). Therefore, this facility was not consolidated in the balance
sheet at December 31, 2001. The ordinary course business operations of
the Towson, Gardner Park, Hunter Mill, Springfield, Morris Plains, Old
Tappan, Granite Run, Abington Building I, Abington Building II, Wayne,
Wayland, Westfield, Haverford, Decatur, Walnut Creek, Glen Cove,
Cohasset, Lafayette Hill, Bellevue, Paramus, West Essex, Paoli, Oakland
Hills, East Brunswick, Providence, La Costa, Naperville, Richmond,
Stamford, North Lynbrook, Frognal House, New City, St. Francis Place,
Oakwood, Colorado Springs, Kenwood, Englewood, Albuquerque, Findlay,
Exton, Westtown, Finneytown, Glen Ellyn, Willowbrook, Ann Arbor, Cuyahoga
Falls, Sunnyvale, Cherry Creek, West Bloomfield, Woodcliff Lake, Tustin,
Edgewater I, University Park, Crystal Lake, Holbrook, Unionville,
Victoria, Schaumburg, Mississauga, Windsor, Lincroft, Roseville,
Plainview, Lynn Valley, Gurnee, Oakville, Richmond Hill, Virginia Water,
Mclean, Elstree Manor, West 57th and Oak and Santa Monica facilities were
not controlled as of December 31, 2001 by Sunrise and, therefore, were
accounted for under the equity method of accounting. The remaining
ownership interests in these facilities are owned by third parties.
Sunrise manages each of these facilities.
(3) Each of these facilities has been redeveloped in a manner consistent with
the Sunrise model.
(4) Subject to long-term ground lease.
(5) These facilities were initially developed by Sunrise for third parties
and were subsequently acquired by Sunrise in 1992.
(6) This facility is licensed for 40 assisted living residents. The
remainder of the resident capacity is for independent living residents.
(7) Two former employees of Sunrise each have a 25% ownership interest in
this facility. In December 2001, one former employee exercised an option
to acquire an additional 25 percent interest in this property. As a
result of this transaction, Sunrise's interest in the property was
reduced from 50 percent to 25 percent. Sunrise has the right to acquire
these minority ownership interests for fair market value, as determined
by an appraiser mutually agreeable to the parties.
-17-
(8) Serves as collateral for one of Sunrise's operating leases. See note 14
of notes to consolidated financial statements.
(9) Excludes 10 units owned by the occupants of the units. The occupants can
require Sunrise to repurchase the units for their original purchase
prices, aggregating approximately $1.3 million, under specified
circumstances. Sunrise has a right to purchase the units at fair market
value upon the occurrence of specified events and has a right of first
refusal on sales of the units.
(10) Sunrise leases these facilities under operating leases, which range from
3 to 20 years. See note 14 of notes to consolidated financial statements.
(11) Includes 43 rental apartment units for which no independent or assisted
living services are offered.
(12) In February 2000, Sunrise acquired the remaining 30% minority interest of
this facility.
(13) On June 29, 2000, three facilities were sold to a real estate venture
company in which Sunrise owns a 25% interest.
(14) On September 30, 2000, eight facilities were sold to a real estate
venture company in which Sunrise owns a 25% interest.
(15) On February 23, 2001, nine facilities were sold to a real estate venture
company in which Sunrise owns a 25% interest.
(16) On October 30, 2001, a facility was sold to a real estate venture company
in which Sunrise owns a 25% interest.
(17) On December 20, 2001, a facility was sold to a real estate venture
company in which Sunrise owns a 25% interest.
(18) There can be no assurance that construction delays will not be
experienced.
FACILITY DEVELOPMENT
Sunrise targets sites for development located in major metropolitan
areas and their surrounding suburban communities. In evaluating a prospective
market, Sunrise considers a number of factors, including:
- population;
- income and age demographics;
- target site visibility;
- probability of obtaining zoning approvals;
- estimated level of market demand; and
-18-
- the ability to maximize management resources in a specific market
by clustering its development and operating activities.
Sunrise continues to develop its Victorian model facilities in major
metropolitan markets.
Sunrise's growth objectives include developing new Sunrise model
assisted living facilities. Since its initial public offering in June 1996,
Sunrise has completed development of 105 such new model facilities with a
resident capacity of approximately 9,200. At December 31, 2001, Sunrise had 23
facilities under construction with resident capacity of approximately 2,000
and entered into contracts to purchase 38 additional sites. These sites are
located in California, Connecticut, Colorado, Delaware, Georgia, Michigan,
Missouri, New Jersey, New York, District of Columbia, Canada and the United
Kingdom. Sunrise is pursuing additional development opportunities as market
conditions warrant. Sunrise bases its development primarily upon its
"Victorian" model facility that it has developed and refined since the first
model facility was designed in 1985. Use of a standard model allows Sunrise to
control development costs, maintain facility consistency and improve
operational efficiency. Use of the Sunrise model also creates "brand"
awareness in Sunrise's markets.
The primary milestones in the development process are:
- site selection and contract signing;
- feasibility;
- zoning, site plan approval and building permits; and
- completion of construction.
Once a market has been identified, site selection and contract
signing typically take approximately three to nine months. Zoning and site
plan approval generally take 12 months and are typically the most difficult
steps in the development process due to Sunrise's selection of sites in mature
communities which usually require site rezoning. Facility construction
normally takes 10 to 12 months. Sunrise believes its extensive development
experience gives it an advantage relative to certain of its competitors in
obtaining necessary governmental approvals and completing construction in a
timely manner. After a facility receives a certificate of occupancy, residents
usually begin to move in within one month. The cost of any particular facility
may vary considerably based on a variety of site-specific factors.
Sunrise's development activities are coordinated by its experienced
development staff, which has extensive real estate acquisition, engineering,
general construction and project management experience. Architectural design
and hands-on construction functions are contracted to experienced outside
architects and contractors.
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:
-19-
- 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.
FACILITY ACQUISITIONS
Since its 1996 initial public offering, Sunrise has acquired nine
existing independent living and assisted living facilities and has completed
its acquisition of Karrington.
In evaluating possible acquisitions, Sunrise considers various
factors, including:
- location, construction quality, condition and design of the
facility;
- current and projected facility cash flow;
- the ability to increase revenue, occupancy and cash flow by
providing a full range of assisted living services;
- costs of facility repositioning, including any renovations; and
- the extent to which the acquisition will complement Sunrise's
development plans.
There can be no assurance that any acquisitions of additional assisted
living facilities or interests therein will be completed. The success of
Sunrise's acquisitions will be determined by numerous factors, including
Sunrise's ability to identify suitable acquisition candidates,
-20-
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.
Sunrise has entered into an investment agreement with the private equity
group of Deutche Bank Real Estate ("DBREPE"), pursuant to which Sunrise and
DBREPE have agreed to form a joint venture to acquire senior living properties
in the United States. The joint venture, once formed, will be owned by DBREPE
and Sunrise. The venture will have approximately $25 million of available
capital and, combined with debt financing, intends to acquire up to $200
million of senior living properties. Sunrise will operate the acquired
properties under management agreements and will be responsible for the
day-to-day management of the joint venture. The parties are currently
reviewing several potential senior living property acquisitions.
NEED FOR ADDITIONAL FINANCING AND MANAGEMENT OF GROWTH
Sunrise will need to obtain substantial additional resources to fund
its development, construction and acquisition activities, as well as such
activities conducted through our joint ventures. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation."
Sunrise expects that the number of owned and operated facilities will increase
as it pursues its development and acquisition programs for new assisted living
facilities. This growth will place significant demands on Sunrise's management
resources. Sunrise's ability to manage its growth effectively will require it
to continue to expand its operational, financial and management information
systems and to continue to attract, train, motivate, manage and retain key
employees. If Sunrise is unable to manage its growth effectively, its
business, revenues, expenses and operating results could be adversely
affected.
MANAGED FACILITIES
Sunrise also manages for third-party owners 26 operating facilities
and one facility under development with total resident capacity of over 2,400,
including two in California, one in the District of Columbia, one in Florida,
one in Georgia, two in Louisiana, four in Maryland, six in Massachusetts, one
in Michigan, one in Nebraska, two in New Jersey, one in Pennsylvania and four
in Virginia. The facilities in Georgia, Maryland, and New Jersey and one
facility in Massachusetts and California are Sunrise model facilities. The
management contract expiration dates range from June 2004 to December 2030.
Sunrise owns $5.8 million carrying value of tax exempt mortgage bonds on the
Pennsylvania facility. Under the management agreement for one of the New
Jersey facilities, Sunrise has a right of first refusal to purchase the
facility if the owner receives a bona fide offer to purchase the facility
during the term of the management agreement. Sunrise does not provide
financial or accounting services to one of the Virginia facilities.
-21-
COMPANY OPERATIONS
OPERATING STRUCTURE
Sunrise has centralized accounting, finance and other operational
functions at the corporate headquarters and regional office levels in order to
allow facility-based personnel to focus on resident care, consistent with
Sunrise's operating philosophy. Sunrise maintains its corporate headquarters
office in McLean, Virginia and a business office in Fairfax, Virginia. The
business office comprises mainly accounting and information technology staff,
and the new Sunrise "At-Home" joint venture business owned by Schroder
Ventures Life Sciences and Sunrise is headquartered in the Fairfax office.
Corporate staff members are responsible for: the establishment of Company-wide
policies and procedures relating to resident care, employee hiring, training
on retention, facility design and development, and facility operations; and
accounting and finance functions including billing and collection, accounts
payable, general finance and accounting, and tax planning and compliance; and
providing overall strategic direction to Sunrise. Regional staff are
responsible for: overseeing all aspects of facility-based operations,
including marketing and sales activities; resident care; the hiring of
facility executives, care managers and other facility-based personnel;
compliance with applicable local and state regulatory requirements; and
implementation of Sunrise's development and acquisition plans within a given
geographic region.
Sunrise is currently organized into four large geographic regions:
Northeast, Mid-Atlantic and Southeast, Midwest and West, with multiple cluster
regions under each. Sunrise has regional offices in Boston, MA, Long Island,
NY, Paramus, NJ, Villanova, PA, Atlanta, GA, Chicago, IL, Columbus, OH,
Claremont, CA, and Oakland, CA that support the currently opened and/or to be
opened properties in these markets. All international activities are currently
conducted through joint ventures. Sunrise also has regional offices in London,
England and Toronto, Canada supporting the Sunrise homes open or under
construction in those locations. Each of the regions is headed by either a
vice president or director of operations with extensive experience in the
senior housing, health care and assisted living industries. Each regional
cluster is supported typically by a sales/marketing specialist, a resident
care specialist, a human resources specialist and a dining services
specialist. Sunrise expects that all regional clusters will create similar
staff positions as the number of facilities in those regions increases.
FACILITY STAFFING
Each of Sunrise's facilities has an executive director responsible for
the day-to-day operations of the facility, including: quality of care;
resident services; sales and marketing; and financial performance. Each
executive director receives specialized training from Sunrise. Sunrise
believes that the quality and size of its facilities, coupled with its
competitive compensation philosophy, have enabled it to attract high-quality,
professional executive directors. The executive director is supported by (a)
the department heads, who oversee the care and service of the facility's
assisted living neighborhood and Alzheimer neighborhood, (b) a nurse, who
serves as a case manager responsible for coordinating the services necessary
to meet
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the health care needs of our residents and (c) the director of community
relations, who is responsible for selling Sunrise services. Other key
positions include the dining services coordinator, the program coordinator
and, the maintenance coordinator
Care managers, who work on full-time, part-time and flex-time schedules,
provide most of the hands-on resident care, such as bathing, dressing and
other personalized care services, including housekeeping, meal service and
resident activities. As permitted by state law, care managers who complete a
special training program supervise the storage and distribution of
medications. The use of care managers to provide substantially all services to
residents has the benefits of consistency and continuity in resident care. In
most cases, the same care manager assists the resident in dressing, dining and
coordinating daily activities. The number of care managers working in a
facility varies according to the level of care required by the residents of
the facility and the numbers of residents receiving Alzheimer's care and plus
care services.
Sunrise believes that its facilities can be most efficiently managed by
maximizing direct resident and staff contact. Employees involved in resident
care, including the administrative staff, are trained in the care manager
duties and participate in supporting the care needs of the residents.
Accounting functions are centralized so that administrative staff may devote
substantially all of their time to care giving.
STAFF EDUCATION AND TRAINING
Sunrise has attracted, and continues to seek, highly dedicated,
experienced personnel. Sunrise has developed a formal training program, the
"five star training program," which focuses on providing every employee with
the appropriate skills that are required to ensure the highest quality of
resident care. All managers and direct care staff must complete a
comprehensive orientation and the core curriculum, which consists of basic
resident care procedures, Alzheimer's care, communication systems, and
activities and dining programming. For the supervisors of direct care staff,
additional program levels provide education in medical awareness and
management skills.
For department managers, Sunrise has developed the "mentor program,"
which partners each new manager with an experienced, successful manager. Under
this program, new managers typically receive several weeks of training
including classroom, on the job and corporate orientation. Thereafter, the
mentor maintains regular contact with the new manager to provide ongoing
support and guidance. Region-based classroom training also is provided monthly
for department managers in specialized areas, including Sunrise's
"reminiscence program," the social and volunteer programs, human resources,
staffing and scheduling and medication management.
Sunrise also has developed the "executive director in training program,"
which offers a structured curriculum to train individuals to become executive
directors at Sunrise. This program recruits successful, strong leaders from
both Sunrise department head ranks as well as
-23-
professionals from outside Sunrise and provides them with an accelerated
training curriculum to prepare them to be Sunrise executive directors.
QUALITY IMPROVEMENT PROCESSES
Sunrise coordinates quality assurance programs at each of its
facilities through its corporate headquarters staff and through its regional
offices. Sunrise's commitment to quality assurance is designed to achieve a
high degree of resident and family member satisfaction with the care and
services provided by Sunrise. In addition to ongoing training and performance
reviews of care managers and other employees, Sunrise's quality control
measures include:
Family and Resident Feedback. Sunrise surveys residents and family
members on a regular basis to monitor the quality of services provided to
residents. Annual written surveys are used to appraise and monitor the level
of satisfaction of residents and their families. A toll-free telephone line
also is maintained which may be used at any time by a resident's family
members to convey comments.
Regular Facility Inspections. Facility inspections are conducted by
regional operations staff on a regular basis. These inspections cover: the
appearance of the exterior and grounds; the appearance and cleanliness of the
interior; the professionalism and friendliness of staff; resident care plans;
the quality of activities and the dining program; observance of residents in
their daily living activities; and compliance with government regulations.
Third-Party Reviews. To further evaluate customer service, Sunrise
engages an independent service evaluation company to "mystery shop" Sunrise's
facilities. These professionals assess Sunrise's performance from the
perspective of a customer, without the inherent biases of a company employee.
Each facility is "shopped" at least three times per year in person, as well as
one or more times per month by telephone. To evaluate medication management,
third-party pharmacists conduct periodic reviews of on-site handling and
storage of medications, record-keeping and coordination of medications.
SALES AND MARKETING
Sunrise's marketing strategy is intended to create awareness of and
preference for our unique product/service positioning, leading to inquiries
and visits to Sunrise properties from potential residents and their family
members as well as positive referrals from key community sources such as
hospital discharge planners, physicians, clergy, area agencies for the
elderly, skilled nursing facilities, home health agencies, social workers,
financial planners and consultants, and others. A central marketing staff
develops overall strategies, systems and programs for promoting Sunrise
throughout its markets and monitors the success of overall and site/region
specific marketing efforts.
Sunrise's sales strategy is intended to convert inquiries generated by
marketing efforts as well as by local/regional sales networking into qualified
leads and sales/move-ins based upon
-24-
best-in-class selling principles and strategies aligned with the purchase
cycle and buying dynamics in the assisted living industry. Each property has
at least one dedicated sales person responsible for property-specific sales
efforts, and each regional cluster generally has a sales leader responsible
for coaching and performance oversight of property sales staff as well as
marketing coordination with the national marketing staff.
Core marketing and sales communication elements include local and regional
print, local and network radio, direct mail, yellow pages, property signage,
personal contacts with prospective referral sources, open houses, health
fairs, grand openings for new communities, various community receptions and
more.
THIRD-PARTY RESIDENT, MANAGEMENT AND DEVELOPMENT SERVICES
Agreements with Jefferson Health System and Inova Health System Services, Inc.
While Sunrise serves the vast majority of a resident's needs with its
own staff, some services, such as physician care, infusion therapy, physical
and speech therapy and other home health care services, may be provided to
residents at Sunrise facilities by third parties. Company staff assist
residents in locating qualified providers for such health care services.
Sunrise continues to capitalize on its brand awareness by accepting
third-party management and development contracts. For example, Sunrise
previously entered into an agreement with Inova Health System Services, Inc.,
the largest not-for-profit integrated health care system in the Washington,
D.C. metropolitan area, to manage Inova's two assisted living communities and
provide development and management services for an additional four to eight
assisted living communities with a total resident capacity of up to 800.
Joint Ventures
Sunrise has also entered into unconsolidated joint venture arrangements
with third parties to develop up to 36 projects in the United States, United
Kingdom and Canada. The joint ventures have completed 20 assisted living
facilities, 15 in the United States, four in Canada and one in the United
Kingdom and are currently developing six assisted living facilities, four in
Canada and two in the United Kingdom. Sunrise is providing management and
development services to the joint ventures on a contract-fee basis with rights
to acquire the assets in the future. Sunrise has ownership interests in these
joint ventures ranging from seven to nine percent.
Sale/Long-Term Manage Back Program
Sunrise is continuing its previously-announced plan of selling selected
real estate assets, subject to market conditions, as a normal part of its
operations while retaining minority ownership interests and long-term
management through operating agreements, to include the potential sale of
approximately 15 - 20 properties each year. This strategy of selling selected
real estate assets as a normal part of operations should enable Sunrise to
reduce debt, re-deploy its capital into new development projects and realize
gains on appreciated real estate. As of
-25-
December 31, 2001, Sunrise has completed the sale of interests ranging from 75%
to 100% in 29 facilities. Sunrise continues to operate 28 of these facilities
under long-term operating agreements.
COMPETITION
The long-term care industry is 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. Although
some competitors are significantly larger, Sunrise believes there are no one or
more dominant companies in the assisted living segment. In general, regulatory
and other barriers to competitive entry in the assisted living industry are not
substantial. Although new construction of assisted living facilities have
declined significantly, Sunrise has experienced and expects to continue to
experience competition in their efforts to develop, acquire and operate 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
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.
OVERBUILDING IN THE ASSISTED LIVING INDUSTRY
Sunrise believes that some secondary assisted living markets have become
or are on the verge of becoming overbuilt. As described above, regulation and
other barriers to entry into the assisted living industry are not substantial.
Although the construction of assisted living facilities has declined
significantly, 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.
STAFFING AND LABOR COSTS
Sunrise competes with various health care services providers, including
other elderly care providers, in attracting and retaining qualified and skilled
personnel. A shortage of nurses or other trained personnel or general
inflationary pressures may require that Sunrise enhance its pay and benefits
package to compete effectively for such personnel. If there is an increase in
these costs or if Sunrise fails to attract and retain qualified and skilled
personnel, the business and financial results of Sunrise could be adversely
affected.
GOVERNMENT REGULATION
Assisted living facilities are subject to regulation and licensing by
state and local health and social service agencies and other regulatory
authorities. Although requirements vary from state to state, in general, these
requirements address:
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- personnel education, training, and records;
- facility services, including:
-- administration of medication;
-- assistance with self-administration of medication; and
-- the provision of limited nursing services;
- monitoring of resident wellness;
- physical plant specifications;
- furnishing of resident units;
- food and housekeeping services;
- emergency evacuation plans, and
- resident rights and responsibilities; including, in some states,
the right to receive health care services from providers of a
resident's choice.
Some facilities are also licensed to provide independent living
services, which generally involve lower levels of resident assistance. In
several of the states in which Sunrise operates or intends to operate, assisted
living facilities also require a certificate of need before the facility can be
opened. In most states, assisted living facilities are also subject to state or
local building code, fire code, and food service licensing or certification
requirements. Assisted living facilities are subject to periodic survey or
inspection by governmental authorities to assess and assure compliance with
regulatory requirements. Surveys occur on a regular (often annual or bi-annual)
schedule, and special surveys may result from a specific complaint filed by a
resident, a family member, or a Sunrise competitor.
From time to time in the ordinary course of business, Sunrise receives
deficiency reports, which Sunrise reviews to take appropriate corrective action.
Most inspection deficiencies are resolved through a plan of corrective action.
However, the reviewing agency typically has the authority to take action against
a licensed facility where deficiencies are noted. This action may include
imposition of fines, imposition of a provisional or conditional license, or
suspension or revocation of a license, or other sanctions. If Sunrise fails to
comply with applicable requirements, Sunrise's business and revenues could be
materially and adversely affected. To date, none of the deficiency reports
received by Sunrise has resulted in a suspension, fine, or other disposition
that has had a material adverse effect on Sunrise's revenues.
Regulation of the assisted living industry is evolving. Sunrise's
operations could suffer if future regulatory developments, such as mandatory
increases in scope and quality of care given
-27-
to residents or consumer protection regulations are enacted, licensing and
certification standards are revised, or a determination is made that the care
provided by one or more of Sunrise's facilities exceeds the level of care for
which the facility is licensed. If regulatory requirements increase, whether
through enactment of new laws or regulations or changes in the application of
existing rules, Sunrise's operations could be adversely affected.
Sunrise is also subject to federal and state anti-remuneration laws,
such as the federal health care programs anti-kickback law, which governs
various types of financial arrangements among health care providers and other
who may be in a position to refer or recommend patients to these providers. This
law prohibits direct and indirect remuneration that is intended to induce the
referral of patients to, the arranging of services by, or the recommending of, a
particular provider of health care items or services. The federal health care
program anti-kickback laws has been interpreted to apply to some contractual
relationships between health care providers and sources of patient referral.
Additionally, in five states, Sunrise operates or will operate facilities for
which bills are submitted to federal and/or state health care programs,
including state Medicaid waiver programs for assisted living facilities, the
Medicare skilled nursing facility benefit program, or some other federal or
state health care program. Consequently, Sunrise is subject to federal and state
laws which prohibit anyone from presenting, or causing to be presented, claims
for reimbursement which are false, fraudulent, or are for items or services that
were not provided as claimed. Violation of any of these laws can result in loss
of licensure, civil or criminal penalties, and exclusion of health care
providers or suppliers from furnishing covered items or services to
beneficiaries of the federal health care program. Similar state laws vary from
state to state, are sometimes vague, and have rarely been interpreted by courts
of regulatory agencies. Sunrise cannot be sure that these laws will be
interpreted consistently with Sunrise's practices.
ENVIRONMENTAL RISKS
Under various federal, state, and local environmental laws, ordinances,
and regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of hazardous or toxic
substances, including asbestos-containing materials, that could be located on,
in, or under a property. These laws and regulations often impose liability
without regard to whether or not the owner or operator knew of, or was
responsible for, the presence or release of the hazardous or toxic substances.
The costs of any required remediation or removal of these substances could be
substantial. In addition, the liability of an owner or operator is generally not
limited and could exceed the property's value and the aggregate assets of the
owner or operator. An owner or operator or an entity that arranges for the
disposal of hazardous or toxic substances as a disposal site also may be liable
for the costs of any required remediation or removal of hazardous or toxic
substances at the disposal site.
Sunrise engages consultants to conduct Phase I environmental studies of
development sites that are placed under contract. If the Phase I study indicates
the existence or the possibility of the existence of hazardous or toxic
substances on the property, a Phase II study is requested and performed. The
Phase I and Phase II studies, as applicable, may not reveal all environmental
-28-
liabilities. There could be, therefore, material environmental liabilities if
which Sunrise is unaware. In connection with the ownership or operation of
Sunrise's facilities, Sunrise could be liable for the costs of remediation or
removal of hazardous or toxic substances. Sunrise also could be liable for other
costs, including governmental fines and damages for injuries to persons or
properties. As a result, the presence, with or without Sunrise's knowledge, of
hazardous or toxic substances at any property owned or operated by Sunrise, or
acquired or operated by Sunrise in the future, could have an adverse effect on
Sunrise's financial condition or earnings.
MEDICAL WASTE
Some of Sunrise's facilities generate infectious medical waste due to
the illness or physical condition of the residents, including, for example,
blood soaked bandages, swabs, and other medical waste products and incontinence
products of those residents diagnosed with an infectious disease. The management
of infectious medical waste, including handling, storage, transportation,
treatment, and disposal, is subject to regulation under various laws, including
federal and state environmental laws. These environmental laws set forth the
management requirements, as well as permit, recordkeeping, notice and reporting
obligations. Each of Sunrise's facilities has an agreement with a waste
management company for the proper disposal of all infectious medical waste. Any
finding that Sunrise is not in compliance with these environmental laws could
adversely affect Sunrise's business operations and financial condition.
Because these environmental laws are amended from time to time, Sunrise
cannot predict when and to what extent liability may arise. In addition, because
these environmental laws vary from state to state, expansion of Sunrise's
operations to states where Sunrise does not currently operate may subject
Sunrise to additional restrictions on the manner in which Sunrise operates its
facilities.
LIABILITY AND INSURANCE
The assisted living business entails an inherent risk of liability. In
recent years, we, as well as other participants in our industry, have become
subject to an increasing number of lawsuits alleging negligence or related legal
theories. Many of these lawsuits involve large claims and significant legal
costs. We maintain liability insurance policies in amounts and with the coverage
and deductibles we believe are adequate based on the nature and risks of our
business, historical experience and industry standards. The liability insurance
currently maintained by us has the following coverage limits:
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Type of Coverage Coverage Limits Examples of Incidents Covered
- ---------------- --------------- -----------------------------
- - General - $10,000,000 per occurrence, - premises claims by third
liability with additional specific parties, not including residents;
limitations for particular
categories of claims that fall - personal injury and
under the general liability advertising injury;
category. The general liability
coverage carries a $1,000,000 - independent contractors; and
per occurrence deductible.
- fire damage to other rented
locations
- - Health care - $10,000,000 per occurrence - negligence claims involving
professional $10,000,000 total for all residents
liability claims per policy year;
coverage limits for the
general and professional
liability are combined with
each eroding the annual aggregate.
The professional liability
carries a $1,000,000 per
occurrence deductible
- - Umbrella - $40,000,000 per policy year; - same as under general
excess liability coverage is in excess of the liability and medical liability
general liability and medical professional liability coverages
liability limits
- - Non-medical - $5,000,000 per wrongful - claims against our
professional act/$7,000,000 total; coverage development or management
liability limits do not overlap with company subsidiaries by third
general liability, medical parties for whom we develop or
liability or umbrella excess manage properties
liability limits
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We cannot be sure that claims will not arise that are in excess of our
coverage or not covered by our insurance policies. Also, the above deductible,
or self-insured retention, is accrued based on an actuarial projection of future
liabilities. In the event this accrual is inadequate, this could have a negative
impact on operating results. If a successful claim is made against us and it is
not covered by our insurance or exceeds the policy limits, our financial
condition and results of operations could be materially and adversely affected.
Claims against us, regardless of their merit or eventual outcome, also could
have a material adverse effect on our ability to attract residents or expand our
business and could require our management to devote time to matters unrelated to
the operation of our business. We also have to renew our policies every year and
negotiate acceptable terms for coverage, exposing us to the volatility of the
insurance markets, including the possibility of rate increases.
EMPLOYEES
At December 31, 2001, Sunrise had 12,003 employees, including 6,967
full-time employees, of which 258 were employed at Sunrise's headquarters and
business office. Sunrise believes employee relations are good.
SEGMENTS
We have two business segments: Sunrise Management Services and Sunrise
Properties. For information regarding these segments, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 19 to Sunrise's consolidated financial statements.
ITEM 2. PROPERTIES
Sunrise leases its corporate and business offices, regional operations
and development offices, and warehouse space under various leases. The leases
have terms of five to twelve years. The corporate headquarters lease commenced
upon completion of the building in July 1999 and expires in July 2011. The lease
has an initial annual base rent of $1.2 million. The base rent escalates
approximately 2.5% per year in accordance with a base rent schedule. In
September 1999, Sunrise amended another corporate lease to increase the amount
of leased premises and extend the maturity date to October 2004. The initial
annual lease payments of the business office leases amount to $462,000, and the
base rent is subject to annual increases based on the consumer price index from
a minimum of 2% to a maximum cap of 3% per year. The initial annual base rent
payments under the warehouse lease amount to $148,000, subject to annual
increases of 3%. Also required are an amortization rent of $88,000 and a portion
of operating expenses. Various other leases expire during 2001 and 2003.
Sunrise has also entered into operating leases for eleven facilities and
five long-term ground leases related to other facilities. The operating lease
terms vary from 15 years, with two ten-year extension options, to 20 years and
ground leases have terms of 30 to 99 years. For
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information regarding facilities owned by Sunrise or in which it holds
interests, see " Item 1. Business - Owned Facilities" and "Facility
Development."
ITEM 3. LEGAL PROCEEDINGS
Sunrise is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of Sunrise's management, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on Sunrise's business, financial condition,
and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sunrise's common stock is traded on the New York Stock Exchange under
the symbol "SRZ." Trading of Sunrise's common stock commenced on May 31, 1996.
Our common stock began trading on the New York Stock Exchange on May 23, 2001
under the symbol "SRZ." Prior to that date, our common stock was traded on The
Nasdaq National Market under the symbol "SNRZ." As of March 12, 2002, there were
258 stockholders of record. No cash dividends have been paid in the past, and
none are expected to be paid in the foreseeable future. The following table sets
forth, for the quarterly periods indicated, the high and low sales prices of our
common stock:
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
Quarter Ended High Low
- --------------------------------- ------------ -----------
March 31, 2000 $15.75 $12.00
June 30, 2000 $20.00 $12.375
September 30, 2000 $24.13 $15.00
December 31, 2000 $31.00 $18.69
Quarter Ended High Low
- --------------------------------- ------------ -----------
March 31, 2001 $25.625 $18.125
June 30, 2001 $27.50 $18.375
September 30, 2001 $32.00 $22.50
December 31, 2001 $31.81 $23.65
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with Sunrise's Consolidated Financial Statements and
notes thereto included elsewhere herein.
DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 (1) 1998 1997
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Operating revenue $ 428,219 $ 344,786 $ 255,219 $ 170,712 $ 89,884
Facility and management contract
operating expenses 243,387 185,897 137,494 89,929 53,286
Facility development and pre-rental expenses 7,949 6,226 7,184 5,197 5,586
General and administrative expenses 32,809 27,418 20,715 12,726 10,454
Depreciation and amortization expenses 28,475 33,902 25,448 21,650 10,592
Interest expense, net 26,176 37,566 21,750 15,430 4,613
Net income (2) 49,101 24,278 20,213 22,312 4,001
Net income per common share:
Basic 2.25 1.12 0.96 1.16 0.21
Diluted 2.08 1.10 0.94 1.11 0.20
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 50,275 $ 42,874 $ 53,540 $ 54,197 $ 82,643
Working capital (deficit) 38,803 (34,063) 95,480 69,573 70,340
Total assets 1,177,615 1,129,361 1,101,413 683,411 556,260
Total debt 630,756 674,703 700,943 428,326 340,987
Stockholders' equity 410,701 354,045 335,124 227,655 195,340
OPERATING AND OTHER DATA:
Ratio of earnings to fixed charges (3) 2.48 1.57 1.52 1.61 0.86
EBITDA (excluding non-recurring items
and charges) (4) $ 132,838 $ 111,268 $ 80,308 $ 59,392 $ 19,206
Net cash provided by operating activities 71,429 51,632 42,787 27,138 12,183
Net cash used in investing activities (22,462) (23,413) (235,065) (146,471) (225,765)
Net cash (used in) provided by
financing activities (41,566) (38,885) 191,621 90,887 194,414
Facilities (at end of period):
Owned 162 147 126 66 54
Managed 24 17 14 11 7
----------- ----------- ----------- ----------- -----------
Total 186 164 140 77 61
Resident capacity:
Owned 12,607 11,380 9,756 5,617 4,632
Managed 2,190 1,503 1,289 1,010 683
----------- ----------- ----------- ----------- -----------
Total 14,797 12,883 11,045 6,627 5,315
Number of stabilized consolidated
facilities 83 68 49 32 22
Occupancy rate (5) 91% 94% 96% 94% 94%
(1) On May 14, 1999, we completed our acquisition of Karrington through a
tax-free, stock-for-stock transaction in which we issued 2.3 million shares
of our common stock in exchange for all outstanding shares of Karrington and
Karrington became a wholly owned subsidiary of Sunrise. The common stock
issued in the transaction, together with related merger costs, had a value
of $85 million. The transaction was accounted for using the purchase method
of accounting and, accordingly, the results of operations of Karrington
since the acquisition are included in our financial information for 1999.
(2) Net income for the year ended December 31, 2001 included a $2 million
non-recurring item ($1 million after tax), which consisted of a $9 million
cash payment, net of expenses, received by us in connection with a
settlement of a lawsuit filed by Karrington prior to our acquisition of
Karrington, and $7 million of non-recurring charges associated with writing
down project costs as a result of our decision not to proceed with our
planned development of five sites. Net income for the year ended December
31, 1999 included $5 million of non-recurring charges ($4 million after
tax), of which $4 million related to the consolidation and integration of
the acquired operations and development pipeline of Karrington and $1
million related to the termination of a property acquisition agreement. Of
these non-recurring charges, $4 million were non-cash transactions.
(3) Computed by dividing earnings by total fixed charges. Earnings consist of
earnings from continuing operations excluding unusual charges or
extraordinary items, plus fixed charges, reduced by the amount of
unamortized interest capitalized. Fixed charges consist of interest on debt,
including amortization of debt issuance costs, and a portion of rent expense
estimated by management to be the interest component of such rentals.
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(4) EBITDA (excluding non-recurring items and charges) are presented because we
believe this data is used by some investors to evaluate our ability to meet
debt service requirements. We consider EBITDA to be an indicative measure of
our operating performance due to the significance of our long-lived assets
and because this data can be used to measure our ability to service debt,
fund capital expenditures and expand our business. However, this data should
not be considered as an alternative to net income, operating profit, cash
flows from operations or any other operating or liquidity performance
measure prescribed by generally accepted accounting principles. In addition,
our calculation of EBITDA may not be comparable to similarly titled measures
reported by other companies. Interest, taxes, depreciation and amortization,
which are not reflected in our presentation of EBITDA, have been, and will
be incurred by us. Investors are cautioned that these excluded items are
significant components in understanding and assessing our financial
performance. We calculate EBITDA as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Net income (loss) $ 49,101 $ 24,278 $ 20,213 $ 22,312 $ 4,001
Plus interest expense, net 26,176 37,566 21,750 15,430 4,613
Plus taxes 31,393 15,522 7,828 -- --
Plus depreciation and amortization 28,475 33,902 25,448 21,650 10,592
Less non-recurring items (2,307) -- -- -- --
Plus non-recurring charges -- -- 5,069 -- --
Earnings before interest, taxes, depreciation and
amortization (excluding non-recurring items
and charges): $ 132,838 $ 111,268 $ 80,308 $ 59,392 $ 19,206
========= ========= ========= ========= =========
(5) Based on occupancy for owned facilities, opened or operated for at least 12
months, or that have achieved occupancy percentages of 95% or above at the
beginning of the year. The occupancy rate excludes resident capacity
affected by temporary vacancies and resident relocations generally of
between three to six months due to renovations. Stabilized occupancy levels
for 2001 were negatively impacted by the inclusion of the Karrington
portfolio (28 properties), the impact of the sale of mature Sunrise
properties under the sale/long-term manage back program (21 properties) and
the addition of newly developed properties (eight properties) through our
development program. Although the financial performance of stabilized
Karrington properties has improved, they generally exhibit lower occupancy
levels compared to Sunrise prototype properties.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read together with the information
contained in the consolidated financial statements, including the related notes,
and other financial information appearing elsewhere herein. This management's
discussion and analysis contains certain forward-looking statements that involve
risks and uncertainties. Although we believe the expectations reflected in such
forward looking statements are based on reasonable assumptions, there can be no
assurance that our expectations will be realized. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including, but not limited to, development and
construction risks, acquisition risks, licensing risks, business conditions,
competition, changes in interest rates, our ability to execute on our
sale/manage back program, market factors that could affect the value of our
properties, the 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 herein. We
assume no obligation to update or supplement forward-looking statements that
become untrue because of subsequent events. Unless the context suggests
otherwise, references herein to "we", "us" and "our" mean Sunrise Assisted
Living, Inc. and its consolidated subsidiaries.
OVERVIEW
We are a provider of assisted living services for seniors. At December
31, 2001, we operated or managed 181 facilities in 24 states and the District of
Columbia, four in Canada and one in the United Kingdom, with a resident capacity
of more than 14,700 residents, including 97 facilities that are wholly owned by
us, three facilities in which we have a 50% interest, 62 facilities in which we
have minority ownership interests and 24 facilities managed for third parties.
We provide assistance with the activities of daily living and other personalized
support services in a residential setting for elderly residents who cannot live
independently but who do not need the level of medical care provided in a
skilled nursing facility. We also provide additional specialized care and
services to residents who require more frequent and intensive assistance or
increased care and care programs and services to help cognitively impaired
residents, including residents with Alzheimer's disease. By offering this full
range of services, we believe we are better able to accommodate the changing
needs of residents as they age and develop further physical or cognitive
frailties.
Our business strategy includes:
- Expanding our position as a provider of high quality assisted living
services by developing new prototype facilities in major markets in the
United States;
- Growing the number of facilities that we operate and have interests in
outside the United States;
- Maintaining and expanding our position as a preferred provider of
assisted living management services;
- Continuing our sale/long-term manage back program as a normal part of
our operations; and
- Selectively acquiring facilities or interests in facilities that
complement our current facility portfolio.
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Our critical accounting policies include the development of facilities,
both on and off balance sheet, the estimates associated with financing and
managing such facilities, and the selling of completed facilities. The following
is a discussion of our critical accounting policies:
Development of Facilities
We undertake to develop a number of wholly owned facilities each year.
We also develop facilities in partnership with others. We believe we have
maintained a disciplined approach to site selection and refinement of our
operating model, first introduced over 20 years ago, and are constantly
searching for ways to improve our facilities.
At December 31, we had 13 wholly owned facilities under construction
with a resident capacity of over 1,100 residents. With respect to these
development properties, we are required to fund the construction of the facility
not otherwise financed by construction loans, recognize the facility development
costs associated with construction, recognize initial operating losses from the
facility during the initial one to two years prior to the facility achieving
occupancy stabilization and recognize ongoing depreciation expense associated
with owning the real estate. We are committed to this investment in costs and
expenses because we have historically been able to create significant value
through the successful development and operation of wholly owned prototype
facilities. In 2001, start-up losses for 100% owned facilities that have not
reached stabilized occupancy were $4 million and depreciation expense for our
owned facilities was $22 million.
We enter into development joint ventures in order to reduce our initial
capital requirements, while enabling us to enter into long-term management
agreements that are intended to provide us with a stream of revenue.
Additionally, these development joint ventures allow us to reduce the risk of
our international expansion, which we conduct through joint ventures, with the
assistance of knowledgeable international partners. When development is
undertaken in partnership with others, our joint venture partners provide
significant cash equity investments. Additionally, third-party construction debt
is obtained to provide the majority of funds necessary to complete development.
At December 31, 2001, these joint ventures have developed or are developing 38
facilities (seven of which are under construction) with approximately $381
million of third-party debt and approximately $83 million of third-party equity.
We have provided $18 million of last dollar guarantees on this debt that
is generally removed upon stabilization. "Last dollar" guarantee means the
third-party debt would have to default, the bank would have to foreclose and
sell the facility, after which we would have to provide any required funds to
make up any difference between the loan amount and the amount recovered from the
sale of the facility. We also have provided $6 million of other debt guarantees,
which remain in effect as long as the respective debt is outstanding. We receive
a fee in all situations where we have provided a debt guarantee. These fees are
recognized over the period covered by the respective debt guarantee. To date, we
have not been required to fund any debt guarantees due to the positive
performance of the underlying facilities. As of December 31, 2001, we do not
believe that we will be required to fund any of these outstanding guarantees. If
we were required to fund a debt guarantee, we would loan the joint venture the
required funds at the prevailing market interest rate. If circumstances were to
suggest that any amounts with
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respect to these loans would be uncollectible, we would establish a reserve to
write-down the loan to its collectible value.
In addition to the foregoing, we have provided debt guarantees on
approximately $10 million of operating joint venture debt. Of this amount,
approximately $3 million was assumed in our acquisition of Karrington Health,
Inc. in 1999. The remaining $7 million of debt guarantees generally are subject
to release of a portion of the guarantee as the property reaches certain
occupancy levels. As stated previously, to date we have not been required to
fund any debt guarantees. If we were required to fund a debt guarantee, we would
loan the joint venture the required funds at the prevailing market interest
rate. If circumstances were to suggest that any amounts with respect to these
loans would be uncollectible, we would establish a reserve to write-down the
loan to its collectible value.
In addition to the third-party debt, we may provide financing necessary
to complete the construction of the facilities within these joint ventures.
These loans are presented on our consolidated balance sheet in the "Notes
receivable" line item and were $89 million at December 31, 2001. This financing
is provided at negotiated prevailing market interest rates. We monitor the
collectibility of these notes based on the current performance of the open
facilities, the budgets and projections for future performance and the estimated
fair value that has been created by the successful completion and operation of
these facilities. To date, we have not recorded any reserves against these notes
based on our analysis of the preceding factors and, at December 31, 2001, expect
that repayment of these notes will be made. If circumstances were to suggest
that any amounts with respect to these notes would be uncollectible, we would
establish a reserve to write-down the note to its collectible value.
For all of our development joint ventures, we earn pre-opening fees for
site selection, zoning, construction supervision, employee selection, licensing,
training and marketing efforts. These fees are included in the "Management and
contract services" line item on our consolidated income statement. As we are
minority owners in these joint ventures, we only record the fee revenue
associated with the third-party ownership percentage of the joint venture. For
example, our joint venture partner has a 75% ownership interest in the joint
venture, we only record 75% of the fee revenue. We also typically provide
development completion guarantees that ensure that the construction of the
facility will be completed for the cost approved by all partners in the joint
venture. At December 31, 2001, seven properties are under construction and
subject to completion guarantees. We have over 20 years experience in the
development and construction of our prototype facilities. Our construction
contractors have similar experience constructing our prototype and assume much
of the completion risk by entering into fixed price contracts. To date, we have
not funded any amounts under these development completion guarantees. We do not
currently expect to fund any amounts under these development completion
guarantees during 2002. If we were required to provide funds under a development
completion guarantee, we could provide additional capital contributions to the
joint venture to meet our obligation, if provided in the joint venture and
guarantee agreement, or we would expense amounts provided under the development
completion guarantee.
Management of Facilities
We manage and operate facilities wholly owned by us, owned by joint
ventures in which we have a minority ownership interest and owned completely by
third parties. For the facilities
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that we manage for third parties, we typically are paid a management fee of
approximately 5% to 8% of the facility's revenue. In addition, in certain
management contracts, we have the opportunity to earn incentive management fees
based on monthly or yearly operating or cash flow results. Management fee
revenue is included in the "Management and contract services" line item on our
consolidated income statement.
As a part of some third party management contracts, we may provide an
operating deficit guarantee. This means that if a facility has depleted all of
its operating reserves and does not generate enough cash flow during a month to
cover its expenses, we would provide a short-term loan to the facility to cover
the cash shortfall. These guarantees are generally included within our joint
venture development portfolios and usually are provided for a limited period of
time, generally until the property reaches stabilization. Currently, 24
operating properties are subject to a Sunrise operating deficit guarantee and
seven additional properties will be subject to a guarantee upon opening. To
date, we have not been required to fund any of these operating deficit
guarantees, and based on the current performance of the managed facilities for
which we have furnished these guarantees, we do not expect to fund any amounts
during 2002 under these guarantees. If we were required to fund an operating
deficit guarantee, we would loan the joint venture the required funds at the
prevailing market interest rate. If evidence were to suggest that any amounts
with respect to these loans would be uncollectible, we would establish a reserve
to write-down the loan to its collectible value.
Sale/Long-Term Manage Back Program
In 2000, we announced our intention to continue to sell selected owned
facilities as a normal part of our operations and retain long-term management
contracts and, in many cases, minority equity interests in the facilities. We
believe that this strategy of selling selected facilities as part of our normal
operations has and will continue to enable us to reduce our debt, re-deploy our
capital into new development projects and realize cash gains on appreciated real
estate. Under our sale/long-term manage back program, we sell wholly owned
properties that we previously developed. This approach requires that we reflect
in our income statement many expenses associated with these facilities prior to
their sale, including certain development expenses, start-up losses and
depreciation.
We have performed under our sale/long-term manage back program by
selling some facilities 100% to third-parties and retaining a long-term
management contract and selling some facilities to joint ventures in which we
have a minority ownership interest, generally ranging from 20% to 25%. If we
sell 100% of a facility to a third-party owner, we recognize as a gain from the
sale the difference between the purchase price and the book value of the
facility, less the costs to sell. Generally accepted accounting principles
require that we remove the book value of the facility from the "Property and
equipment" line item on our consolidated balance sheet and remove from
liabilities any debt assumed by the new owner in the transaction.
If we sell a facility to a joint venture in which we have a minority
ownership interest, we will recognize as a gain from the sale the difference
between the purchase price and the book value of the facility, less the costs to
sell, adjusted to reflect only the gain associated with the third-party
ownership in the joint venture. Generally accepted accounting principles require
that we not record a gain on the portion of the sale associated with our
remaining ownership in the joint venture. Generally accepted accounting
principles also require that we record, at historical
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cost basis, our remaining ownership of the facility sold and debt assumed by the
joint venture as an investment. This investment is included in the "Investment
in unconsolidated assisted living facilities" line item on the balance sheet.
Further, as is the case with the sale of a 100% interest in a facility,
generally accepted accounting principles require that we remove the book value
of the facility from the "Property and equipment" line on our consolidated
balance sheet and remove from liabilities any debt assumed by the new owner in
the transaction. We generally do not provide seller financing in these
transactions.
The recognition of the gain from these sales, as calculated above, in
our consolidated income statement, which is recorded in the "Income from
property sales" line item, is determined by the terms of the purchase and sale
agreement. Often, the purchasers in these transactions require that the
properties perform at a certain operating level for up to one-year following the
sale transaction. The operating contingencies placed in these agreements require
us, in accordance with generally accepted accounting principles, to defer a
portion of the gains until such operating contingencies have been met. If the
operating contingencies are not met for an identified period, we would be
required to repay a portion of the cash proceeds related to the specific
contingency and would not be able to recognize the portion of the gain
associated with that contingency. There have been sale transactions in this
sale/long-term manage back program that have not required such operating
contingencies. In these instances, we would record the gain in the period in
which the sale occurred. The balance of the unrecognized gains on properties
sold in prior periods is included in the "Deferred revenue" line of our
consolidated balance sheet.
We have been successful in negotiating incentive management fees into
several of our sale/long-term manage back transactions in which we have retained
a minority ownership interest. The payment of these incentive management fees
often coincides with the cash distributions to our partners in these joint
ventures. We have reflected these incentive management fees, amounting to
approximately $4 million in 2001, in the "Management and contract services" line
item on the consolidated statement of income. Therefore, the "Equity in earnings
of unconsolidated facilities" line item of our consolidated statement of income
is net of these incentive payments.
For financial statement purposes, we record a provision for income taxes
on all gains we recognize on the sale of facilities at the applicable statutory
rate. For federal income tax purposes, many of our sales are treated as tax-free
exchanges.
RESULTS OF OPERATIONS
We derive our consolidated revenues from three primary sources: (1)
resident fees for the delivery of assisted living services, (2) management and
contract services income for management and contract services of facilities
owned by unconsolidated joint ventures and other third parties and (3) income
from property sales. Historically, most of our operating revenues have come from
resident fees and management and contract services. In 2001, 2000 and 1999,
resident fees and management contract services comprised 85%, 91% and 97% of
total operating revenues, respectively. The balance of our total operating
revenues was derived from income from property sales.
Residents, their families or other responsible parties typically pay
resident fees monthly. In 2001, 2000 and 1999 approximately 99% of our resident
fee revenue was derived from private
-39-
pay sources. Resident fees include revenue derived from basic care, community
fees, plus care, Reminiscence(TM) and other resident related services. Plus care
and Reminiscence(TM) fees are paid by residents who require personal care in
excess of services provided under the basic care program.
Management and contract services income represents fees from long-term
contracts for facilities owned by unconsolidated joint ventures and other third
party owners. Management services income includes management fees for operating
properties, which are generally in the range of 5% to 8% of a managed property's
total operating revenue for homes in operation, and pre-opening service fees for
site selection, zoning, property design, construction management, hiring,
training, licensing and marketing services.
Income from property sales represents the gain recognized from the sale
of assisted living properties. Generally, upon sale of a property, we will enter
into a long-term management agreement to manage the property.
We classify our operating expenses into the following categories: (1)
facility operating, which includes labor, food, marketing and other direct
facility expenses; (2) management and contract services, which includes
operating expenses reimbursable to us; (3) facility development and pre-rental,
which includes non-capitalized development expenses and pre-rental labor and
marketing expenses; (4) general and administrative, which primarily includes
headquarters and regional staff expenses and other overhead costs; (5)
depreciation and amortization; and (6) facility lease, which represents rental
expenses for facilities and properties not owned by us.
We have two business segments: Sunrise Management Services and Sunrise
Properties.
-40-
SUNRISE MANAGEMENT SERVICES
Sunrise Management Services provides full-service assisted living
management services, both in the United States and internationally, for all
facilities that are owned or managed by us. In addition, the Sunrise Management
Services division provides management and pre-opening services to third parties
and joint ventures on market and site selection, pre-opening sales and
marketing, start-up training, and management services for properties under
development and construction.
The following table sets forth the components of Sunrise Management
Services net income (in thousands):
Year Ended December 31,
---------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------------
Operating revenue:
Management and contract services $295,459 $227,278 $170,892
Operating expenses:
Management and contract services 243,016 186,095 137,494
General and administrative 21,797 18,470 13,216
Depreciation and amortization 1,543 1,495 947
------------------------------------------------------------------------------------------------
Total operating expenses 266,356 206,060 151,657
------------------------------------------------------------------------------------------------
Operating income 29,103 21,218 19,235
Provision for income taxes (11,350) (8,275) (5,551)
------------------------------------------------------------------------------------------------
Sunrise Management Services net income $17,753 $12,943 $ 13,684
------------------------------------------------------------------------------------------------
Note: Management and contract services revenue includes intercompany revenue
from Sunrise Properties in the amounts of $193,025, $195,302 and $150,293 for
the years ended December 31, 2001, 2000 and 1999, respectively, that is
eliminated in the consolidated financial statements. Management and contract
services expense includes intercompany facility operating expenses of Sunrise
Properties for facilities managed by Sunrise Management Services for Sunrise
Properties in amounts totaling $168,602, $169,966 and $131,055 for the years
ended December 31, 2001, 2000 and 1999, respectively, which is also eliminated
in the consolidated financial statements.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Operating Revenue. Sunrise Management Services revenues include
management and contract services revenues from unconsolidated joint ventures and
third-party owners and internal management services revenues for services
provided to Sunrise Properties. Internal fees reflect estimated market-based
fees for the management services provided to Sunrise Properties and are
eliminated in the consolidated financial statements. Total revenues for Sunrise
Management Services increased 30% to $295 million for the year ended December
31, 2001 from $227 million for the year ended December 31, 2000. This increase
was primarily due to the growth in the number of facilities operated or managed
by Sunrise Management Services or in the pre-opening phase. The total number of
facilities operated or managed increased 13% to 186 facilities at December 31,
2001, up from 164 facilities at December 31, 2000. This growth resulted from the
completion and opening of 17 additional facilities and the addition of five
managed facilities. Additionally, there was a 51% increase in the number of
facilities in unconsolidated joint ventures (62 versus 41), many of which are
accounted for under contract accounting which requires the presentation of
reimbursable expenses as revenues in the income
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statement. These revenues are offset by a corresponding amount reflected in the
management and contract services expense line item.
Operating Expenses. Sunrise Management Services operating expenses
include all operating expenses of facilities managed for unconsolidated joint
ventures and third-party owners and Sunrise Properties. Total operating expenses
for the year ended December 31, 2001 increased 29% to $266 million from $206
million for the year ended December 31, 2000. Management and contract services
expenses for the year ended December 31, 2001 increased $57 million, or 31%, to
$243 million from $186 million for the year ended December 31, 2000. This
increase is consistent with the corresponding increase in revenue. General and
administrative expenses increased $4 million to $22 million for the year ended
December 31, 2001 from $18 million for the year ended December 31, 2000. The
general and administrative expenses for Sunrise Management Services continue to
increase due to the substantial growth in the number of facilities operated
during the last twelve months.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Operating Revenue. Total revenues for Sunrise Management Services
increased 33% to $227 million for the year ended December 31, 2000 from $171
million for the year ended December 31, 1999. This increase was primarily due to
the growth in the number of facilities operated or managed by Sunrise Management
Services. The total number of facilities operated or managed increased 17% to
164 at December 31, 2000, up from 140 communities at December 31, 1999. This
growth resulted from the completion and opening of 25 additional facilities and
the addition of two managed facilities, net of the sale of two former Karrington
facilities that we will not continue to manage and the termination of one
management contract with a third-party owner. Additionally, there was a 128%
increase in the number of facilities in unconsolidated joint ventures (41 versus
18), many of which were accounted for under contract accounting which reflects
reimbursable expenses as revenues to us.
Operating Expenses. Total operating expenses for the year ended December
31, 2000 increased 36% to $206 million from $152 million for the year ended
December 31, 1999. Management and contract services expenses for the year ended
December 31, 2000 increased $49 million, or 36%, to $186 million from $137
million for the year ended December 31, 1999. This increase was directly related
to the increase in the number of facilities operated by Sunrise Management
Services. General and administrative expenses increased $5 million to $18
million for the year ended December 31, 2000 from $13 million for the year ended
December 31, 1999. The general and administrative expenses for Sunrise
Management Services increased due to the substantial growth in the number of
facilities operated or managed during 2000 compared to 1999.
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SUNRISE PROPERTIES
Sunrise Properties is responsible for all our real estate operations,
including development, construction, project and permanent financing and
property sales. As of December 31, 2001, Sunrise Properties wholly owned 97
facilities compared to 102 facilities wholly owned as of December 31, 2000. In
addition, Sunrise Properties has majority ownership interests in three
facilities and minority ownership interests in another 62 facilities.
The following table sets forth the components of Sunrise Properties net
income (in thousands):
------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------
Operating revenue:
Resident fees $260,524 $274,236 $217,397
Management and contract services 3,107 6,453 10,206
Income from property sales 62,154 32,121 7,017
-------------------------------------------------- ---------------- ------------- --------------
Total operating revenue 325,785 312,810 234,620
Operating expenses:
Facility operating 168,602 169,966 131,055
Management and contract services 24,794 25,138 19,238
Facility development and pre-rental 7,949 6,226 7,184
General and administrative 3,200 2,772 3,922
Depreciation and amortization 25,779 30,102 24,368
Facility lease 10,159 10,833 7,903
-------------------------------------------------- ---------------- ------------- --------------
Total operating expenses 240,483 245,037 193,670
-------------------------------------------------- ---------------- ------------- --------------
Non-recurring items 2,307 - (5,069)
-------------------------------------------------- ---------------- ------------- --------------
Operating income 87,609 67,773 35,881
Interest expense, net (26,101) (37,566) (21,750)
Equity in losses of unconsolidated
assisted living facilities (1,169) (2,941) (1,239)
Minority interest (769) (203) (376)
Provision for income taxes (23,232) (10,555) (3,370)
-------------------------------------------------- ---------------- ------------- --------------
Sunrise Properties net income before
extraordinary loss 36,338 16,508 9,146
-------------------------------------------------- ---------------- ------------- --------------
Extraordinary loss, tax effected (77) - -
-------------------------------------------------- ---------------- ------------- --------------
Sunrise Properties net income $36,261 $16,508 $9,146
-------------------------------------------------- ---------------- ------------- --------------
Note: Management and contract services expense includes an intercompany
management fee for facilities owned by Sunrise Properties and managed by Sunrise
Management Services in amounts totaling $24,423, $25,336 and $19,238 for the
years ended December 31, 2001, 2000 and 1999, respectively, that is eliminated
in the consolidated financial statements.
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Income from property sales has resulted from the following transactions:
On December 28, 2001, one of our joint venture partners exercised an
option to acquire an additional 25% interest in one property. As a result of the
transaction, our ownership in the property was reduced to 25% from 50%. We will
continue to operate the property under a long-term management agreement. The
transaction will result in up to $1 million in gain over the next four quarters,
subject to certain contingencies being met, of which $200,000 was recognized in
2001.
On December 20, 2001, we completed a sale/long-term manage back
transaction of a 75% interest in one property. The property was valued at $16
million. The transaction will result in up to $2 million in gain over the next
four quarters, subject to certain contingencies being met, of which $500,000 was
recognized in 2001. We may receive up to an additional $2 million in incentive
payments based on 2002 operating performance.
On December 18, 2001, we completed the 100% sale of one of our two
existing Florida properties for total consideration of $8 million. The buyer
will assume management of the property after a 90-day transition period. The
transaction resulted in a gain of $1 million that was recognized in the fourth
quarter of 2001.
On October 30, 2001, we completed a sale/long-term manage back
transaction for one property with a real estate venture company in which we own
a 25% interest for an aggregate sale price of $17 million. The transaction will
result in up to $3 million in gain over the next four quarters, subject to
certain contingencies being met, of which $1 million was recognized in 2001.
On February 23, 2001, we closed the sale of nine assisted living
properties for approximately $131 million. We will continue to operate the
properties under long-term management agreements and we will retain a 25%
ownership interest in the limited partnership. The transaction resulted in a $40
million gain, all of which was recognized in 2001.
On December 28, 2000, we completed the sale of two properties for an
aggregate sales price of $28 million. Following the sale, we continue to operate
the properties under a long-term operating agreement. The transaction will
result in up to $8 million in gain over the four quarters following the sale,
subject to certain contingencies being met, of which $5 million and $2 million
were recognized during 2001 and 2000, respectively.
On June 29, 2000, we entered into a definitive agreement for the sale of
11 assisted living properties to a real estate venture company ("venture
company") in which we own a 25% interest. Also, on June 29, 2000, the venture
company closed on three of the 11 properties, for an aggregate sales price of
$44 million. The transaction resulted in a $13 million gain, of which $2 million
and $11 million was recognized during 2001 and 2000, respectively. On September
29, 2000, the venture company closed on the remaining eight properties for an
aggregate sales price of $111 million. The venture company assumed approximately
$75 million of debt secured by the eight properties. The transaction resulted in
a $26 million gain, of which $13 million and $13 million was recognized during
2001 and 2000, respectively. We continue to provide day-to-day management of the
properties under long-term operating agreements.
In June 1999, we completed the sale of two assisted living facilities
for an aggregate sales price of $28 million. The transaction resulted in the
realization of $11 million in gain, subject to
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certain contingencies being met, of which $6 million and $5 million was
recognized during 2000 and 1999, respectively. Previously, in September 1998, we
completed the sale of two assisted living facilities for an aggregate sales
price of $29 million that will result in the realization of up to a $6 million
gain. We recognized a gain of $2 million and $2 million on the sale in 1999 and
1998, respectively. The remaining gain is deferred, the recognition of which is
contingent upon future events. We continue to operate these facilities under
long-term operating agreements.
Pending sale/long-term manage back transactions are as follows:
On December 28, 2001, we entered into a definitive agreement to sell 12
assisted living properties to a real estate investment entity advised by
Macquarie Capital Partners for an aggregate sales price of $198 million. We will
continue to operate the properties under long-term management agreements and
will retain a 20% ownership interest in the joint venture. Also on December 28,
2001, we entered into a definitive agreement to sell two additional assisted
living properties. We will continue to operate the properties under long-term
management agreements. The closing of these transactions is subject to customary
closing conditions, assumption of original financing and receipt of required
regulatory approvals. On March 22, 2002, we closed the sale of twelve of these
properties and we expect to close the sale of the remaining two properties
during the second quarter of 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2000
Operating Revenue. Sunrise Properties revenues include resident fees
from our owned properties, management and contract service revenues from
pre-opening services contracts with third parties, and income from the sales of
properties. Sunrise Properties revenues increased 4% to $326 million for the
year ended December 31, 2001 from $313 million for the year ended December 31,
2000. Resident fees, including community fees, for the year ended December 31,
2001 decreased $13 million, or 5%, to $261 million from $274 million for the
year ended December 31, 2000. This decrease was due primarily to the sale of 13
properties in the second half of 2000 resulting in a $34 million decrease and
the sale of nine properties at the beginning of 2001 resulting in a $33 million
decrease in resident fee revenue in 2001. These decreases were partially offset
by a $6 million increase due to the inclusion of the Karrington properties
previously held for sale for a full year in 2001 and a $46 million increase
primarily due to an increase in the average daily rate for properties that were
owned and operated by us during both periods.
Average resident occupancy for our 83 stabilized facilities during 2001
was 91% compared to 94% for our 68 stabilized facilities during 2000. Stabilized
occupancy levels for 2001 were negatively impacted by the inclusion of the
Karrington portfolio (28 properties), the impact of the sale of mature
properties under our sale/long-term manage back program (21 properties) and the
addition of newly developed properties (eight properties) through our
development program. Although the financial performance of stabilized Karrington
properties has improved, they generally exhibit lower occupancy levels compared
to our prototype properties. Comparing the 46 stabilized facilities owned and
operated by us for both 2001 and 2000 (which excludes the Karrington facilities
that are now stabilized), average resident occupancy decreased from 94% to 92%.
We define stabilized facilities as those that we have 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.
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Average daily rate for stabilized facilities during 2001 was $104
compared to $106 during 2000. The 2001 results reflect the inclusion of 28
Karrington properties that are not included in the 2000 results. The Karrington
portfolio generally has lower average daily rates than our prototype properties.
For the 46 stabilized facilities owned and operated by us for both 2001 and
2000, average daily rate increased from $98 to $102. The increase is due to the
inclusion of additional prototype facilities that have higher basic care rates
and a general increase in the basic care rate.
Management and contract services revenue decreased $3 million to $3
million for the year ended December 31, 2001 from $6 million for the year ended
December 31, 2000. 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 2001 compared to 25 contracts for
2000.
Operating Expenses. Sunrise Properties operating expenses for the year
ended December 31, 2001 decreased 2% to $240 million from $245 million for the
year ended December 31, 2000. Facility operating expenses for the year ended
December 31, 2001 decreased 0.6% to $169 million from $170 million for the year
ended December 31, 2000. This decrease was due primarily to the sale of the 13
properties in the second half of 2000 and the sale of nine properties at the
beginning of 2001 resulting in a total decrease of $34 million. This decrease
was partially offset by a $5 million increase due to the inclusion of the
Karrington properties previously held for sale for a full year in 2001 and a $28
million increase due to an increase in labor and other expenses at facilities
that were operational for a full year in both periods.
Management and contract services expense represents intercompany expense
amounts attributed to Sunrise Properties for the management by Sunrise
Management Services of Sunrise Properties wholly owned and majority owned
facilities. Management and contract services expense stayed constant at $25
million for the years ended December 31, 2001 and December 31, 2000. These
amounts are eliminated in the consolidated financial statements. At December 31,
2001, Sunrise Properties consolidated 100 facilities compared to 106 facilities
at December 31, 2000.
Depreciation and amortization for the year ended December 31, 2001
decreased $4 million, or 13%, to $26 million from $30 million for the year ended
December 31, 2000. This decrease was primarily due to the timing of property
sales and opening of new properties.
Net Interest Expense. Net interest expense decreased for the year ended
December 31, 2001 to $26 million from $38 million for the year ended December
31, 2000. Of this $12 million decrease, $2 million was due to repayments and a
decrease in the variable interest rate under Sunrise's $300 million credit
facility. The remaining decrease is due to an overall decrease in average
borrowings during 2001 compared to 2000, which was due to funds provided by
property sales, and a decrease to 6.13 % in the weighted-average interest rate
on our fixed and variable rate debt for 2001 compared to 7.61% for 2000,
reflecting the lower interest rate environment in 2001.
Non-recurring items. During 2001, Karrington Health Inc., one of our
wholly owned subsidiaries, received a cash payment in the amount of $10 million
to settle a lawsuit filed by
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Karrington prior to its acquisition by us. Karrington brought the suit alleging
that Omega Healthcare Investors, Inc. had breached a financing commitment it had
made to Karrington. Expenses incurred to settle the lawsuit have been netted
against the settlement.
Given the current industry environment and the increasing number of
opportunities to acquire properties and management contracts, we determined, in
the third quarter, that the costs to develop five specific sites outweighed the
costs of acquiring facilities and/or management contracts in those areas.
Accordingly, management elected not to proceed with its planned development for
these five sites and wrote down associated project costs by $7 million to their
estimated net realizable value.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999
Operating Revenue. Sunrise Properties revenues increased 33% to $313
million for the year ended December 31, 2000 from $235 million for the year
ended December 31, 1999. Resident fees, including community fees, for the year
ended December 31, 2000 increased $57 million, or 26%, to $274 million from $217
million for the year ended December 31, 1999. This increase was due primarily to
the inclusion for the year ended December 31, 2000 of approximately $12 million
of resident fees generated from the operations of the 12 consolidated assisted
living facilities open during the year ended December 31, 2000 that were not
open during the year ended December 31, 1999. In addition, resident fees of $7
million were included in the year ended December 31, 2000 from properties
previously held for sale. The remaining increase in resident fees was due
primarily to a full year of operations for the Karrington facilities acquired in
May 1999 and an increase in the average daily resident rate for facilities that
were owned and operated by us during both periods.
Average resident occupancy for our 68 stabilized facilities during 2000
was 94.2% compared to 95.6% for the 49 stabilized facilities during 1999. We
define stabilized facilities as those that we have 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 2000 was $106
compared to $97 during 1999. For the 47 stabilized facilities owned and operated
by us for both 2000 and 1999, average daily rate increased from $97 to $102. The
increase is due to the inclusion of additional prototype facilities that have
higher basic care rates and a general increase in the basic care rate.
Management and contract services revenue decreased $4 million to $6
million for the year ended December 31, 2000 from $10 million for the year ended
December 31, 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 25
pre-opening services contracts in place during 2000 compared to 28 contracts for
1999.
Operating Expenses. Sunrise Properties operating expenses for the year
ended December 31, 2000 increased 26% to $245 million from $194 million for the
year ended December 31, 1999. Facility operating expenses for the year ended
December 31, 2000 increased 30% to $170 million from $131 million for the year
ended December 31, 1999. Of the $39 million increase, approximately $8 million
was attributable to expenses from operations of the 12 consolidated additional
assisted living facilities open during 2000 that were not open during 1999. In
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addition, facility-operating expenses of $5 million were included in 2000 from
properties previously held for sale. The remaining balance of the increase was
primarily due to a full year of operations for the Karrington facilities
acquired in May 1999 and an increase in labor and other expenses at facilities
that were operational for a full year in both periods.
We recorded non-recurring charges of $5 million during 1999, of which $4
million related to the consolidation and integration of the acquired operations
and development pipeline of Karrington and $1 million related to the termination
of a property acquisition agreement.
Management and contract services expense represents intercompany expense
amounts attributed to Sunrise Properties for the management by Sunrise
Management Services of Sunrise Properties wholly owned and majority owned
facilities, and is eliminated in the consolidated financial statements.
Management and contract services expense for the year ended December 31, 2000
increased $6 million to $25 million from $19 million for the year ended December
31, 1999. This increase is primarily attributable to the growth in the number of
properties managed during 2000 compared to 1999.
Depreciation and amortization for the year ended December 31, 2000
increased $6 million, or 25%, to $30 million from $24 million for the year ended
December 31, 1999. This increase is primarily due to the increase in the number
of facilities open during 2000 that were not open during 1999.
Net Interest Expense. Net interest expense increased for the year ended
December 31, 2000 to $38 million from $22 million for the year ended December
31, 1999. Of this $16 million increase, $5 million was due to additional
borrowings and an increase in the variable interest rate under Sunrise's $400
million credit facility. The remaining increase is due to an overall increase in
average borrowings during 2000 compared to 1999 and an increase to 7.61% in the
weighted-average interest rate on our fixed and variable rate debt for 2000
compared to 7.17% for 1999.
CORPORATE EXPENSES
Operating Expenses. Parent company operating expenses were $9 million,
$8 million and $4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. These increases were primarily attributable to the addition of
personnel and other infrastructure in anticipation of the continuing growth of
the company.
Provision for Income Taxes. The provision for income taxes for us was
$31 million, $16 million and $8 million for the years ended December 31, 2001,
2000 and 1999, respectively. The increase was due primarily to an increase in
pre-tax income and the use of an effective tax rate of 39% for 2001 compared to
39% for 2000 and 28% for 1999. Utilization of operations-related deferred tax
benefits reduced our federal and state income tax rate in 1999.
Realization of the deferred tax asset of $22 million at December 31,
2001 is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforwards. We expect to fully utilize the loss
carryforwards prior to expiration.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had approximately $50 million in unrestricted
cash and cash equivalents, including $8 million in high quality short-term
investments, $183 million available under credit facilities and $39 million in
working capital.
Working capital increased $73 million from $(34) million at December 31,
2000 primarily due to the refinancing of our convertible subordinated notes due
2002, as discussed below.
Net cash provided by operating activities for 2001 and 2000 was
approximately $71 million and $52 million, respectively. Net cash provided by
operating activities for 2001 reflects the corresponding increase in the number
of facilities operated by us at December 31, 2001 versus December 31, 2000, as
well as a $30 million increase in income from property sales.
During 2001 and 2000, we used $22 million and $23 million, respectively,
for investing activities. Investing activities included investment in property
and equipment in the amounts of $68 million and $46 million, respectively,
related to the construction of assisted living facilities, net of sales of
facilities. In 2001, we also invested $124 million to facilitate the development
of assisted living facilities with third parties, compared to $153 million in
2000. These investing activities were offset by proceeds from the sale of 12
assisted living facilities in 2001 amounting to $52 million plus $130 million of
collections of notes receivable.
Net cash used in financing activities was $42 million and $39 million
for 2001 and 2000, respectively. Financing activities in 2001 and 2000 included
additional borrowings of $401 million and $187 million, respectively, offset by
debt repayments of $444 million and $216 million, respectively. The increased
levels of repayments are partially a result of our strategy to sell certain
assisted living facilities. The additional borrowings under our credit facility
during 2001 and 2000 were used to fund our continued development of assisted
living facilities.
To date, we have financed our operations primarily with cash generated
from operations, both short-term and long-term borrowings and proceeds from the
sale of properties pursuant to our sale/long-term manage back program. As of
December 31, 2001, we had $631 million of outstanding debt at a weighted average
interest rate of 6.13%. Of the amount of outstanding debt, we had $448 million
of fixed-rate debt at a weighted average interest rate of 6.86% and $183 million
of variable rate debt at a weighted average interest rate of 4.36%. See Note 7
Long-Term Debt and Note 14 Commitments for a discussion of our outstanding debt
and obligations and the maturity schedule of that outstanding debt and
obligations.
On January 11, 2002, we entered into a $92 million secured term facility
with Fleet National Bank, Credit Suisse First Boston Corporation and First Union
National Bank in order to provide us with a committed source of funds to enable
us to redeem our outstanding 5 1/2% convertible subordinated notes due June 15,
2002. In February 2002, we used $92 million drawn under our new term loan and
approximately $18 million of our cash to redeem all of the outstanding 5 1/2%
convertible notes due 2002 at a redemption price of 101.1% of the principal
amount, plus accrued and unpaid interest. The term loan was collateralized by 14
properties, accrued interest at LIBOR plus 6% and matured in May 2004, subject
to a six-month extension option. The $92 million drawn under the term loan was
repaid within the same day from the
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proceeds of a convertible notes offering that closed in January 2002, as
described below. We will record expense of approximately $4 million during the
first quarter of 2002 for fees associated with the term loan and the premium
paid for the early redemption of the convertible notes.
In January 2002, we issued and sold $125 million aggregate principal
amount of 5 1/4% convertible subordinated notes due February 2009. The
convertible notes bear interest at 5 1/4% per annum payable semiannually on
February 1 and August 1 each year beginning on August 1, 2002. These notes are
convertible into shares of our common stock at the conversion price of $35.84,
which is equivalent to a conversion rate of 27.9018 shares per $1,000 principal
amount of the convertible notes. The notes, which are subordinated to our
existing and future senior indebtedness, are redeemable at our option commencing
February 5, 2006. In addition, the holders of the convertible notes may require
us to repurchase the notes upon a change of control as defined in the
convertible notes.
As of December 31, 2001, we had $27 million of debt that is due within
the next twelve months. The majority of this debt is mortgage financing secured
by wholly owned facilities that will be refinanced or extended during 2002.
In June 2001, we refinanced our syndicated revolving credit facility,
which was secured by cross-collateralized first mortgages on the real property
and improvements and first liens on all assets of the borrowing subsidiaries,
and reduced the commitment amount to up to $300 million. The maturity date was
extended from July 2002 to June 2004 and the interest rate increased from LIBOR
plus 1.75% to LIBOR plus 2.00%, which, as of December 31, 2001, amounted to
3.83%. We are required to pay commitment fees of 0.25% on the unused portion of
the credit facility. As of December 31, 2001, we had $155 million available for
borrowing under this credit facility. We continue to expect to use this credit
facility for general corporate purposes, including the continued construction
and development of assisted living facilities.
We have entered into swap transactions whereby $125 million of advances
outstanding on our variable LIBOR based revolving construction credit facility
bear interest at a fixed rate. We have recorded net interest expense of $1
million in 2001 for swap transactions. The fair value of the swaps was negative
$3 million as of December 31, 2001. Based on the fair value of the swaps at
December 31, 2001, we would incur approximately $2 million of interest expense
related to the swaps in 2002. The fair value of the swaps are adjusted
quarterly.
Our debt instruments contain various financial covenants and other
restrictions, including provisions which:
- - require us to meet specified financial tests. For example, our $300
million construction line of credit requires us to have a
consolidated tangible net worth of at least $284 million and to
maintain a consolidated minimum cash liquidity balance of at least
$25 million and to meet other financial ratios. These tests are
administered on a monthly or quarterly basis depending on the
covenant;
- - require consent for changes in management or control of us. For
example, our $300 million construction 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;
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- restrict the ability of our subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business
combinations without lender consent; and
- require that we maintain minimum occupancy levels at our
facilities. For example, our $300 million construction credit
facility requires that 85% occupancy be achieved after 15 months
for newly opened facilities with 77 units or less and 18 months
for 78 units or more and, following this 15 month and 18 month
period, be maintained at or above that level.
If we fail to comply with any of these requirements, then the related
indebtedness could become due and payable before its stated due date. At
December 31, 2001, we were in compliance with the financial covenants
contained in our debt instruments. Our construction line of credit also
contains a cross-default provision pursuant to which a default by us or by any
of our consolidated subsidiaries under the construction line of credit could
result in the ability of the lenders to declare a default under and accelerate
the indebtedness due under the construction line of credit.
As indicated above, as part of our normal operations, we sell
selected assisted living facilities and, in connection with these sales, we
generally enter into long-term management contracts to manage these facilities
and, in certain cases, retain minority interest in the properties. This
strategy of selling selected assisted living facilities has enabled us to
reduce our debt, re-deploy our capital into new development projects and
realize gains on depreciated real estate. The sale of our facilities is
subject to various market conditions, including current capitalization rates,
interest rates and the general economic environment. As such, we cannot assure
that we can continue to sell facilities or realize gains at or near amounts
that have been recognized in the past. If we are unable to continue to
implement our strategy of selling selected assisted living facilities, our
revenues and results of operations and our ability to finance the construction
of new facilities could be materially adversely affected.
We currently estimate that the existing credit facilities, together
with existing working capital, proceeds from sales of selected real estate
facilities as a normal part of our operations, financing commitments and
financing expected to be available, will be sufficient to fund facilities
short term liquidity needs, including facilities currently under construction.
Additional financing will, however, be required to complete additional
development and to refinance existing indebtedness. We estimate that it will
cost approximately $104 million to complete the facilities we currently have
under construction. We have entered into contracts to purchase and lease
additional sites. The total contracted purchase price of these sites is $116
million. We estimate that it will cost approximately $500 million to develop
these properties. We expect that the cash flow from operations, together with
borrowings under existing credit facilities and proceeds from the sale of
selected real estate facilities will be sufficient to fund the development and
construction for these additional properties for at least the next twelve
months. We expect from time to time to seek additional funding through public
or private financing sources, including equity or debt financing. We can
provide no assurance that such financing and refinancing will be available on
acceptable terms.
Our ability to achieve our development plans will depend upon a
variety of factors, many of which will be outside our control. These factors
include:
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- 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.
These factors also apply to developments undertaken by unconsolidated
entities in which we have made investments. We cannot assure you that we will
not experience delays in completing facilities under construction or in
development or that we will be able to identify suitable sites at acceptable
prices for future development activities. If we fail to achieve our
development plans, our growth could slow, which would adversely impact our
revenues and results of operations.
Our growth plan includes the acquisition of assisted living
facilities or interests in such facilities. The success of our acquisitions
will be determined by numerous factors, including our ability to identify
suitable acquisition candidates, competition for such acquisitions, the
purchase price, the financial performance of the facilities after acquisition
and our ability to integrate or operate acquired facilities effectively. Any
failure to do so may have a material adverse effect on our business, financial
condition and results of operations.
We expect that the number of owned and operated facilities will
continue to increase substantially as we pursue our development and
acquisition programs for new assisted living facilities. This rapid growth
will place significant demands on our management resources. Our ability to
manage our growth effectively will require us to continue to expand our
operational, financial and management information systems and to continue to
attract, train, motivate, manage and retain key employees. If we are unable to
manage our growth effectively, our business, financial condition and results
of operations could be adversely affected.
We believe that some assisted living markets have become or are on
the verge of becoming overbuilt. 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 our market areas could, therefore, cause us to experience
decreased occupancy, depressed margins or lower operating results. We believe
that each local market is different and we are and will continue to react in a
variety of ways, including selective price discounting, to the specific
competitive environment that exists in each market.
JOINT VENTURE ARRANGEMENTS
For summary financial information for unconsolidated entities in
which we have made investments, see Note 6 to our consolidated financial
statements. For information regarding commitments and contingencies to our
joint ventures, see "Overview" above and Notes 4 and 14 to our consolidated
financial statements.
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As discussed in Note 16 to our consolidated financial statements, a
director of Sunrise, Craig Callen, is a managing director in the third party
that is providing the equity capital for our international joint venture and a
former director of Sunrise is a general partner in the third party. We are
providing management and pre-opening services to the joint venture on a
contract fee basis with rights to acquire the assets in the future.
We may allow minority equity ownership interests in joint ventures
for our officers as a means of incentive. Currently, two of our executive vice
presidents, Christian Slavin and Tiffany Tomasso, have minority ownership
interests (less than 1% combined on a fully diluted basis) in one of our
international joint ventures. Brian Swinton, another of our executive vice
presidents, has a 0.05% minority ownership interest computed on a fully
diluted basis in our at-home assisted living joint venture.
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MARKET RISK
We are exposed to market risks related to fluctuations in interest
rates on our notes receivable, investments and debt. The purpose of the
following analyses is to provide a framework to understand our sensitivity to
hypothetical changes in interest rates as of December 31, 2001.
We have investments in notes receivable and bonds. Investments in
notes receivable are primarily with joint venture arrangements in which we
have a minority equity ownership interest ranging from 7% to 50%. We have 31
facilities in which we own less than 10%, 12 facilities in which we own
between 10% and 20%, 24 facilities in which we own between 20% and 30% and 5
facilities in which we own more than 30%. Investments in bonds are secured by
the operating properties subject to the debt and are with properties that are
managed by us. The majority of the investments have fixed rates. One of the
notes has an adjustable rate.
We utilize a combination of debt and equity financing to fund our
development, construction and acquisition activities. We seek the financing at
the most favorable terms available at the time. When seeking debt financing,
we use a combination of variable and fixed rate debt, whichever is more
favorable in our judgment at the time of financing. We have used interest rate
swaps to manage the interest rates on some of our long-term borrowings. As of
December 31, 2001, we had five interest rate swap agreements that effectively
convert $125 million of floating-rate debt to fixed-rate debt. The maturity
dates of the swap agreements range from June 2003 to June 2004 and have an
effective weighted-average fixed interest rate of 6.59%. We do not utilize
forward or option contracts on foreign currencies or commodities, or other
types of derivative financial instruments.
For fixed rate debt, changes in interest rates generally affect the
fair market value of the debt, but not earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact fair
market value of the debt, but do affect the future earnings and cash flows. We
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 we would be required to
refinance such debt. Holding the variable rate debt balance of $182 million at
December 31, 2001 constant, each one-percentage point increase in interest
rates would result in an increase in interest expense for the coming year of
approximately $2 million.
The table below details by category the principal amount, the average
interest rates and the estimated fair market value. Some of the notes
receivable and some items in the various categories of debt, excluding the
convertible notes, require periodic principal payments prior to the final
maturity date. The fair value estimates for the notes receivable are based on
the estimates of management and on rates currently prevailing for comparable
loans. The fair market value estimates for debt securities are based on
discounting future cash flows utilizing current rates offered to Sunrise for
debt of the same type and remaining maturity. The fair market value estimate
of the convertible notes is based on the market value at December 31, 2001.
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Estimated
Maturity Date Fair Market
(dollars in thousands) 2002 2003 2004 2005 2006 Thereafter Value
---- ---- ---- ---- ---- ---------- -----
ASSETS
Notes receivable
Fixed rate $1,189 $24,123 -- -- $28,612 $37,578 $91,502
Average interest rate 7.9% 10.4% -- -- 10.0% 12.4% --
Variable rate $105 $3,992 -- -- -- -- $4,097
Average interest rate 4.6% 4.6% -- -- -- -- --
Investments
Bonds -- -- -- -- -- $5,750 $5,750
Average interest rate -- -- -- -- -- 11.0% --
LIABILITIES
Debt
Fixed rate $8,083 $79,844 $129,528 $2,421 $3,995 $116,612 $347,031
Average interest rate 5.6% 6.4% 7.7% 7.5% 8.2% 7.5% --
Variable rate $18,842 $83,623 $40,346 $7,366 $28,060 $4,200 $182,437
Average interest rate 4.3% 5.1% 4.0% 3.6% 3.0% 1.5% --
Convertible notes -- -- -- -- -- $107,836 $109,454
Average interest rate -- -- -- -- -- 5.5% --
IMPACT OF CHANGES IN ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under the new
rule, goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill
and intangible assets acquired after June 30, 2001. With respect to goodwill
and intangible assets acquired prior to July 1, 2001, we will apply the new
accounting rules beginning January 1, 2002. We recorded approximately $1
million of goodwill amortization during 2001. We are currently assessing the
financial impact SFAS No. 142 will have on our consolidated financial
statements. However, we do not expect to incur an impairment charge upon
adoption.
In August 2001, the FASB issued Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). The Statement
supercedes Statement 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of and APB Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for segments of a business to be disposed of. SFAS No. 144
retains the requirements of Statement 121 relating to recognition and
measurement of an impairment loss and resolves certain implementation issues
resulting from Statement 121. This Statement is effective for fiscal years
beginning after December 15, 2001. We are currently assessing the impact of
this statement on us. However, we do not anticipate this statement to have a
material impact on our consolidated financial position or results of
operations.
In February 2002, the FASB agreed to rescind SFAS 4, Reporting Gains
and Losses from Extinguishment of Debt. SFAS 4 required companies to report
gains and losses associated with the extinguishment of debt as a component of
extraordinary gains and losses, net of tax. These gains and losses will now be
required to be presented within the statement of income in
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appropriate segregated line items. We will be required to reclassify prior
year's amounts to reflect this new rule upon adoption.
The FASB continues to have in process a consolidation project to
interpret and potentially modify existing consolidation accounting guidance.
Recent FASB meetings have discussed changes to the principles of
consolidation, including those for special purpose entities and potentially
for joint ventures. Sunrise does not currently utilize special purpose
entities. Sunrise does have transactions with joint ventures. Any proposed
changes to current accounting guidance may impact the Company's accounting for
these transactions. The impact of rule changes, if any, is not known at this
time.
IMPACT OF INFLATION
Resident fees from owned assisted living facilities and management
services income from facilities operated by us for third parties are the
primary sources of revenue. 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 our growth initiatives, have previously had a
negative impact on operating margins and may again do so in the foreseeable
future.
Substantially all of our 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 us 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 our facilities. We believe,
however, that the short-term nature of its resident agreements generally
serves to reduce the risk to us 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk appears in
the liquidity and capital resources, market risk section of item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements appear on pages F-1 through
F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the sections "Election of Directors -
Information as to Nominees and Other Directors," "--Other Executive Officers,"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in Sunrise's
2002 Annual Meeting Proxy Statement, which Sunrise intends to file within 120
days after its fiscal year-end, is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the sections "Compensation of Directors"
and "Executive Compensation and Other Information" in Sunrise's 2002 Annual
Meeting Proxy Statement, which Sunrise intends to file within 120 days after
its fiscal year-end, is incorporated by reference herein.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the sections "Stock Owned by Management"
and "Principal Holders of Voting Securities" in Sunrise's 2002 Annual Meeting
Proxy Statement, which Sunrise intends to file within 120 days after its
fiscal year-end, is incorporated by reference herein.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the sections "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in Sunrise's
2002 Annual Meeting Proxy Statement, which Sunrise intends to file within 120
days after its fiscal year-end, is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of Form 10-K.
Page
----
(1) Financial Statements:
Report of Independent Auditors. F-1
Consolidated Balance Sheets -- December 31, 2001 and 2000. F-2
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999. F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999. F-5
Notes to Consolidated Financial Statements. F-6
(2) Financial Statements Schedules:
All schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the
related instructions or are inapplicable or are included in
the consolidated financial statements.
(3) Exhibits:
Sunrise files as part of this Annual Report on Form 10-K the
Exhibits listed in the Index to Exhibits.
(b) Reports on Form 8-K.
On November 15, 2001, Sunrise filed a Form 8-K with the Securities
and Exchange Commission to provide a copy of Sunrise's slideshow
presentation placed on its internet website on November 15, 2001.
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(c) Exhibits.
Sunrise hereby files as part of this Annual Report on Form 10-K
the Exhibits listed in the Index to Exhibits.
(d) Financial Statement Schedules.
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUNRISE ASSISTED LIVING, INC.
-----------------------------------
Registrant
By: /s/ Paul J. Klaassen
--------------------------------
Paul J. Klaassen
Chairman of the Board and
Chief Executive Officer
3/27/02
--------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Paul J. Klaassen 3/27/02
-------------------------------- --------------------------------
Paul J. Klaassen Date
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Larry E. Hulse 3/27/02
-------------------------------- --------------------------------
Larry E. Hulse Date
Chief Financial Officer
(Principal Financial Officer)
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By: /s/ Carl G. Adams 3/27/02
-------------------------------- --------------------------------
Carl G. Adams Date
Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ David W. Faeder 3/27/02
--------------------------------- --------------------------------
David W. Faeder Date
Vice Chairman of the Board
Director
By: /s/ Ronald V. Aprahamian 3/27/02
--------------------------------- --------------------------------
Ronald V. Aprahamian Date
Director
By:
--------------------------------- --------------------------------
Craig R. Callen Date
Director
By:
--------------------------------- --------------------------------
David G. Bradley Date
Director
By: /s/ Thomas J. Donohue 3/27/02
--------------------------------- --------------------------------
Thomas J. Donohue Date
Director
By: /s/ Teresa M. Klaassen 3/27/02
--------------------------------- --------------------------------
Teresa M. Klaassen Date
Executive Vice President,
Secretary and Director
By: /s/ Pete A. Klisares 3/27/02
--------------------------------- --------------------------------
Pete A. Klisares Date
Director
By: /s/ J. Douglas Holladay 3/27/02
--------------------------------- --------------------------------
J. Douglas Holladay Date
Director
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INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- ----------
2.1 Amended and Restated Operating Agreement of Sunrise First
Assisted Living Holdings, LLC by and between Sunrise Assisted
Living Investments, Inc., as the Managing Member and US Assisted
Living Facilities, Inc., as the Investor Member dated as of
March 22, 2002
2.2 Amended and Restated Transaction Agreement by and among Sunrise
Assisted Living Investments, Inc., Sunrise Development, Inc.,
Sunrise Assisted Living, Inc. and certain Sunrise property
owning entities and US Assisted Living Facilities, Inc. dated
as of January 30, 2002
3.1 Restated Certificate of Incorporation of Sunrise (Exhibit 3.1 to
Sunrise's Form S-1 Registration Statement No. 333- 13731).
3.2 Amended and Restated Bylaws of Sunrise, as amended (Exhibit 3 to
Sunrise's Form 10-Q for the quarter ended September 30, 1997).
4.1 Form of common stock certificate (Exhibit 4.1 to Sunrise's Form
S-1 Registration Statement No. 333-13731).
4.2 Stockholder Rights Agreement (Exhibit 4.2 to Sunrise's Form S-1
Registration Statement No. 333-13731).
4.3 Amendment No. 1 to Rights Agreement, dated as of December 17,
1998, between Sunrise and First Union National Bank of North
Carolina (Exhibit 99(a) to Sunrise's Form 8-K dated December 18,
1998).
10.1 Assignment and Contribution Agreement, effective as of January 4,
1995, by and between Paul and Teresa Klaassen and Sunrise
(Exhibit 10.1.1 to Sunrise's Form S-1 Registration Statement No.
333-2582).
10.2 Assignment and Contribution Agreement, dated as of January 4,
1995, by and between Paul J. Klaassen and Teresa M. Klaassen,
Sunrise Partners, L.P. and Sunrise Assisted Living Investments,
Inc. (Exhibit
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10.1.2 to Sunrise's Form S-1 Registration Statement No.
333-2582).
10.3 Letter Agreement, dated January 4, 1995, from Paul J. Klaassen
and Teresa M. Klaassen to the Series A Preferred Stockholders
regarding cash distributions from Sunrise Retirement Investments,
Inc., Sunrise Terrace of Gunston, Inc., Sunrise Terrace of
Countryside, Inc. and Sunrise Atrium, Inc. (Exhibit 10.19 to
Sunrise's Form S-1 Registration Statement No. 33-2852).
10.4 Registration Agreement, dated January 4, 1995, by and among
Sunrise, the Investors (as defined therein) and Paul and Teresa
Klaassen (Exhibit 10.3 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.5 Promissory Note, dated June 8, 1994, executed by Sunrise Assisted
Living Limited Partnership in favor of General Electric Capital
Corporation (Exhibit 10.4 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.6 Indemnity Agreement dated as of June 8, 1994 by Paul J. Klaassen
and Teresa M. Klaassen to and for the benefit of General Electric
Capital Corporation (Exhibit 10.4.1 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.7 First Loan Modification Agreement dated as of February 15, 1996
by and between General Electric Capital Corporation and Sunrise
Assisted Living Limited Partnership (Exhibit 10.4.2 to Sunrise's
Form S-1 Registration Statement No. 333-2582).
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10.8 Second Loan Modification Agreement dated as of May 1, 1996 by and
between General Electric Capital Corporation and Sunrise Assisted
Living Limited Partnership (Exhibit 10.4.3 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.9 Letter Agreement dated as of May 1, 1996 by and between General
Electric Capital Corporation and Sunrise Assisted Living Limited
Partnership (Exhibit 10.4.4 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.10 Letter agreement dated as of December 30, 1996 by and between
General Electric Capital Corporation and Sunrise Assisted Living
Partnership (Exhibit 10.11 to Sunrise's 1996 Form 10-K).
10.11 Third Loan Modification Agreement dated as of March 4, 1997 by
and between General Electric Capital Corporation and Sunrise
Assisted Living Limited Partnership (Exhibit 10.11 to Sunrise's
1997 Form 10-K).
10.12 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated
as of June 8, 1994 (Arlington, Bluemont Park and Falls Church)
(Exhibit 10.5 to Sunrise's Form S-1 Registration Statement No.
333-2582).
10.13 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated
as of June 8, 1994 (Gunston and Oakton) (Exhibit 10.6 to
Sunrise's Form S-1 Registration Statement No. 333-2582).
10.14 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and financing Statement, dated
as of June 8, 1994 (Fairfax Leasehold) (Exhibit 10.7 to Sunrise's
Form S-1 Registration Statement No. 333-2582).
10.15 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and
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Financing Statement, dated as of June 8, 1994 (Warrenton)
(Exhibit 10.8 to Sunrise's Form S-1 Registration Statement No.
333-2582).
10.16 Credit Line Deed of Trust and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing Statement, dated
as of June 8, 1994 (Countryside and Leesburg) (Exhibit 10.9 to
Sunrise's Form S-1 Registration Statement No. 333-2582).
10.17 First Mortgage and Security Agreement, Assignment of Leases and
Rents, Fixture Filing and Financing Statement, dated as of June
8, 1994 (Boca Raton) (Exhibit 10.10 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.18 First Deed of Trust and Security Agreement, Assignment of Leases
and Rents, Fixture Filing and Financing Statement, dated as of
June 8, 1994 (Frederick) (Exhibit 10.11 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.19 First Deed of Trust and Security Agreement, Assignment of Leases
and Rents, Fixture Filing and Financing Statement, Dated as of
June 8, 1994 (Mercer Island) (Exhibit 10.12 to Sunrise's Form S-1
Registration Statement No. 333-2582).
10.20 Amended and Restated Lease Agreement and Assignment of Leasehold
Right, dated June 6, 1994, by and among Barbara M. Volentine and
Teresa M. Klaassen, the Executor of the Estate of Eldon J.
Merritt, Sunrise Assisted Living Limited Partnership Assisted
Living Group -- Fairfax Associates, and Sunrise Foundation, Inc.
(Exhibit 10.15 to Sunrise's Form S-1 Registration Statement No.
333-2582).
10.21 Ground Lease, dated June 7, 1994, by and between Sunrise Assisted
Living Limited Partnership and Paul J. Klaassen and Teresa M.
Klaassen (Exhibit 10.16 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
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10.22 Amended and Restated Agreement of Sublease, Indemnification and
Easements dated February 5, 1995 by and between Assisted Living
Group -- Fairfax Associates and Sunrise Foundation, as amended
(Exhibit 10.17 to Sunrise's Form S-1 Registration Statement No.
333-2582).
10.23 Indenture, dated as of June 5, 1997, between Sunrise and First
Union National Bank of Virginia, as trustee (Exhibit 4.1 to
Sunrise's Form 10-Q for the quarter ended June 30, 1997).
10.24 Amended, Restated, Consolidated and Increased Master Promissory
Note dated as of December 23, 1997 by and between NationsBank, N.
A. as agent and for certain additional lenders and Sunrise East
Assisted Living Limited Partnership (Exhibit 10.31.1 to Sunrise's
1997 Form 10-K).
10.25 Amended and Restated Financing and Security Agreement dated as of
December 23, 1997 by and between NationsBank, N.A. as agent and
for certain additional lenders and Sunrise East Assisted Living
Limited Partnership (Exhibit 10.31.2 to Sunrise's 1997 Form
10-K).
10.26 Amended and Restated Master Construction Loan Agreement dated as
of December 23, 1997 by and between NationsBank, N. A. as agent
and for certain additional lenders and Sunrise East Assisted
Living Limited Partnership (Exhibit 10.31.3 to Sunrise's 1997
Form 10-K).
10.27 Management Fee Subordination Agreement dated as of December 23,
1997 by and between NationsBank, N. A. as agent and for certain
additional lenders and Sunrise East Assisted Living Limited
Partnership (Exhibit 10.31.4 to Sunrise's 1997 Form 10-K).
10.28 Amended and Restated Pledge, Assignment and Security Agreement
dated as of December 23, 1997 by and between NationsBank, N. A.
as agent and for certain additional lenders and Sunrise East
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Assisted Living Limited Partnership (Exhibit 10.31.5 to Sunrise's
1997 Form 10-K).
10.29 Master Guaranty of Performance dated as of December 23, 1997 by
and between NationsBank, N. A. as agent and for certain
additional lenders and Sunrise East Assisted Living Limited
Partnership (Exhibit 10.31.6 to Sunrise's 1997 Form 10-K)
10.30 Amended and Restated Collateral Assignment of Operating
Agreements and Management Contracts dated as of December 23, 1997
by and between NationsBank, N. A. as agent and for certain
additional lenders and Sunrise East Assisted Living Limited
Partnership (Exhibit 10.31.7 to Sunrise's 1997 Form 10-K).
10.31 Amended and Restated Collateral Assignment of Licenses,
Participation Agreements and Resident Agreements dated as of
December 23, 1997 by and between NationsBank, N. A. as agent and
for certain additional lenders and Sunrise East Assisted Living
Limited Partnership (Exhibit 10.31.8 to Sunrise's 1997 Form
10-K).
10.32 Amended and Restated Master Guarantee of Payment Agreement dated
as of December 23, 1997 by and between NationsBank, N. A. as
agent and for certain additional lenders and Sunrise East
Assisted Living Limited Partnership (Exhibit 10.31.9 to Sunrise's
1997 Form 10-K).
10.33 + Form of Indemnification Agreement (Exhibit 10.24 to Sunrise's
Form S-1 Registration Statement No. 333-2582).
10.34 + 1995 Stock Option Plan, as amended (Exhibit 10.20 to Sunrise's
1997 Form 10-K).
10.35 + 1996 Directors' Stock Option Plan, as amended. (Exhibit 10.21 to
Sunrise's 1997 Form 10-K).
10.36 + Stock Option Agreement, entered into, effective as of January 4,
1995, by and between Sunrise and
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David W. Faeder (Exhibit 10.14 to Sunrise's Form S-1 Registration
Statement No. 333-2582).
10.37 + 1996 Non-Incentive Stock Option Plan, as amended (Exhibit 10.24
to Sunrise's 1997 Form 10-K).
10.38 + 1997 Stock Option Plan, as amended (Exhibit 10.25 to Sunrise's
1997 Form 10-K).
10.39 + 1998 Stock Option Plan, as amended. (Exhibit 10.41 to Sunrise's
1998 Form 10-K)
10.40 + 1999 Stock Option Plan (Exhibit 10.1 to Sunrise's Form 10-Q for
the quarter ended March 31, 1999).
10.41 Trust Agreement, dated as of December 2, 1998, between the
several holders from time to time parties thereto, as the
holders, and First Security Bank, National Association, as the
Owner Trustee (Sunrise Trust 1998-1) (Exhibit 2.2 to Sunrise's
Form 8-K dated December 17, 1998).
10.42 Credit Agreement, dated as of December 2, 1998, among First
Security Bank, National Association, not individually, except as
expressly stated therein, but solely as the Owner Trustee under
the Sunrise Trust 1998-1, as the Borrower, the several lenders
from time to time parties thereto, and NationsBank, N.A., as the
Agent (Exhibit 2.3 to Sunrise's Form 8-K dated December 17,
1998).
10.43 Participation Agreement, dated as of December 2, 1998, among
Sunrise Midwest Leasing, L.L.C., as the Construction Agent and as
the Lessee, Sunrise, as the Guarantor, First Security Bank,
National Association, not individually, except as expressly
stated therein, but solely as the Owner Trustee under the Sunrise
Trust 1998-1, the various banks and other lending institutions
which are parties thereto from time to time, as the holders, the
various banks and other lending institutions which are parties
thereto from time to time, as the lenders, and NationsBank,
N.A., as the Agent for the Lenders and respecting the Security
Documents, as
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the Agent for the Lenders and the Holders, to the extent of their
interests (Exhibit 2.4 to Sunrise's Form 8-K dated December 17,
1998).
10.44 Security Agreement, dated as of December 2, 1998, between First
Security Bank, National Association, not individually, but solely
as the owner trustee under the Sunrise Trust 1998-1 and
NationsBank, N.A., as the agent for the lenders and the holders
and accepted and agreed to by Sunrise Midwest Leasing, L.L.C.
(Exhibit 2.5 to Sunrise's Form 8-K dated December 17, 1998).
10.45 Lease Agreement, dated as of December 2, 1998, between First
Security Bank, National Association, not individually, but solely
as the Owner Trustee under the Sunrise Trust 1998-1, as Lessor
and Sunrise Midwest Leasing, L.L.C., as Lessee (Exhibit 2.6 to
Sunrise's Form 8-K dated December 17, 1998).
10.46 Cross-Collateralization, Cross-Default, and Mortgage Modification
Agreement, dated as of May 20, 1999, by and among Sunrise
Borrowers (as defined in the agreement) and GMAC Commercial
Mortgage Corporation (Exhibit 10.1 to Sunrise's Form 10-Q for the
quarter ended June 30, 1999).
10.47 Form of Exceptions to Non-Recourse Guaranty (Multistate), dated
as of May 20, 1999, between Sunrise Borrower (as defined in the
guaranty) and GMAC Commercial Mortgage Corporation (Exhibit 10.2
to Sunrise's Form 10-Q for the quarter ended June 30, 1999).
10.48 Second Amended and Restated Financial and Security Agreement
dated as of July 29, 1999 by and between Bank of America, N.A.
(formerly NationsBank, N.A.) as agent for certain additional
lenders and Sunrise East Assisted Living Limited Partnership and
other subsidiaries of Sunrise (Exhibit 10.48 to Sunrise's 1999
Form 10-K)
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10.49 Second Amended, Restated and Increased Master Promissory Note
dated as of July 29, 1999 by and between Bank of America, N.A.,
(formerly NationsBank, N.A.) as agent for certain additional
lenders and Sunrise East Assisted Living Limited Partnership and
other subsidiaries of Sunrise (as amended) (Exhibit 10.49 to
Sunrise's 1999 Form 10-K)
10.50 Second Amended and Restated Master Guaranty of Payment Agreement
dated as of July 29, 1999 by and between Bank of America, N.A.,
(formerly NationsBank, N.A.) as agent for certain additional
lenders and Sunrise (Exhibit 10.50 to Sunrise's 1999 Form 10-K)
10.51 Confirmation of and Amendment to Master Guaranty of Performance
dated as of July 29, 1999 by and between Bank of America, N.A.,
(formerly NationsBank, N.A.) as agent for certain additional
lenders and Sunrise (Exhibit 10.51 to Sunrise's 1999 Form 10-K)
10.52 Omnibus Confirmation of and Amendment to Security Documents dated
July 29, 1999 by Sunrise and certain subsidiaries, as Assignors,
in favor of Bank of America, N.A., (formerly NationsBank, N.A.)
as agent for certain additional lenders (Exhibit 10.52 to
Sunrise's 1999 Form 10-K)
10.53 Third Amended and Restated Financial and Security Agreement dated
as of March 14, 2000 by and between Bank of America, N.A.
(formerly NationsBank, N.A.) as agent for certain additional
lenders and Sunrise East Assisted Living Limited Partnership and
other subsidiaries of Sunrise (Exhibit 10.53 to Sunrise's 1999
Form 10-K)
10.54 Third Amended and Restated Master Guaranty of Payment Agreement
dated as of March 14, 2000 by and between Bank of America, N.A.,
(formerly NationsBank, N.A.) as agent for certain additional
lenders and Sunrise East Assisted Living Limited
-70-
Partnership and other subsidiaries of Sunrise (Exhibit 10.54 to
Sunrise's 1999 Form 10-K)
10.55 Amendment No. 1 to Certain Operative Agreements, dated as of
March 14, 2000, among Sunrise Midwest Leasing, L.L.C., as the
Construction Agent and Lessee, Sunrise as the Guarantor, First
Security Bank, National Association, not individually but solely
as the Owner Trustee under the Sunrise Trust 1998-1, the various
banks and other lending institutions which are parties thereto,
as Lenders, and Bank of America, N.A., as the Agent for the
Lenders and respecting the Security Documents, as the agent for
the Lenders and Holders, to the extent of their interests
(Exhibit 10.55 to Sunrise's 1999 Form 10-K)
10.56 Form of Multifamily Note (Multistate), dated as of May 20, 1999,
between Sunrise Borrower (as defined in the note) and GMAC
Commercial Mortgage Corporation (Exhibit 10.3 to Sunrise's Form
10-Q for the quarter ended June 30, 1999).
10.57 Form of Multifamily Mortgage, Assignment of Rents and Security
Agreement, dated as of May 20, 1999, between Sunrise Borrower (as
defined in the mortgage) and GMAC Commercial Mortgage (Exhibit
10.4 to Sunrise's Form 10-Q for the quarter ended June 30, 1999).
10.58 Amendment No. 1 to Stock Option Agreement by and between Sunrise
and David W. Faeder (Exhibit 10.14.1 to Sunrise's Form S-1
Registration Statement No. 333-13731).
10.59 Cross-Collateralization Agreement, dated as of March 22, 2000 by
and among GMAC Commercial Mortgage Corporation and Sunrise
Borrowers (as defined in the agreement) (Exhibit 10.1 to
Sunrise's Form 10-Q for the quarter ended March 31, 2000)
10.60 Form of Multifamily Note (Multistate), dated as of March 22,
2000, by and among GMAC Commercial
-71-
Mortgage Corporation and Sunrise Borrowers (as defined in the
note) (Exhibit 10.2 to Sunrise's Form 10-Q for the quarter ended
March 31, 2000)
10.61 Form of Multifamily Mortgage, Assignment of Rents and Security
Agreement, dated as of March 22, 2000 by and among GMAC
Commercial Mortgage Corporation and Sunrise Borrowers (as defined
in the mortgage) (Exhibit 10.3 to Sunrise's Form 10-Q for the
quarter ended March 31, 2000)
10.62 Form of Limited Guaranty, dated as of March 22, 2000, by and
among GMAC Commercial Mortgage Corporation and Sunrise Borrowers
(as defined in the guaranty) (Exhibit 10.4 to Sunrise's Form 10-Q
for the quarter ended March 31, 2000)
10.63 + Chief Executive Officer Severance Plan (Exhibit 10.5 to Sunrise's
Form 10-Q for the quarter ended March 31, 2000)
10.64 + Senior Executive Officer Severance Plan (Exhibit 10.6 to
Sunrise's Form 10-Q for the quarter ended March 31, 2000)
10.65 + Consulting Agreement dated as of April 1, 2000 by and between
Sunrise and David W. Faeder (Exhibit 10.7 to Sunrise's Form 10-Q
for the quarter ended March 31, 2000)
10.66 + 1996 Non-Incentive Stock Option Plan, as amended (Exhibit 10.8 to
Sunrise's Form 10-Q for the quarter ended March 31, 2000)
10.67 Limited Liability Company Agreement of Metropolitan Senior
Housing, LLC, a Delaware Limited Liability Company, dated as of
June 29, 2000 (Exhibit 10.1 to Sunrise's Form 10-Q for the
quarter ended June 30, 2000)
10.68 Purchase and Sale Agreement dated as of June 29, 2000, by and
between certain Sunrise affiliates and Metropolitan Senior
Housing, LLC for the sale of
-72-
three (3) properties (Exhibit 10.2 to Sunrise's Form 10-Q for the
quarter ended June 30, 2000)
10.69 Purchase and Sale Agreement dated as of June 29, 2000, by and
between certain Sunrise affiliates and Metropolitan Senior
Housing, LLC for the sale of eight (8) properties (Exhibit 10.3
to Sunrise's Form 10-Q for the quarter ended June 30, 2000)
10.70 + Employment Agreement, dated as of September 12, 2000, by and
between Sunrise Assisted Living, Inc. and Paul J Klaassen
(Exhibit 10.1 to Sunrise's Form 10-Q for the quarter ended
September 30, 2001)
10.71 Loan and Security Agreement dated as of May 8, 2001 by and among
Sunrise Fairfax Assisted Living, L.L.C. and Chevy Chase Bank,
F.S.B. (Exhibit 10.1 to Sunrise's Form 10-Q for the quarter
ended June 30, 2001)
10.72 Guaranty of Payment dated as of May 8, 2001 by Sunrise Assisted
Living, Inc. in favor of Chevy Chase Bank, F.S.B. for loan to
Sunrise Fairfax Assisted Living, L.L.C. (Exhibit 10.2 to
Sunrise's Form 10-Q for the quarter ended June 30, 2001)
10.73 Financing and Security Agreement (Accomodator Facility Agreement)
dated as of June 13, 2001 by and among East Meadow A.L., LLC and
White Oak Assisted Living L.L.C. and Additional Borrowers and
Bank of America, N.A., as administrative agent for itself and for
certain additional lenders. (Exhibit 10.3 to Sunrise's Form 10-Q
for the quarter ended June 30, 2001)
10.74 Master Guaranty of Payment Agreement (Accomodator Credit
Facility) dated as of June 13, 2001 by Sunrise Assisted living,
Inc. for the benefit of Bank of America, N.A., as administrative
agent for itself and for certain additional lenders (Exhibit 10.4
to Sunrise's Form 10-Q for the quarter ended June 30, 2001)
-73-
10.75 Fourth Amended and Restated Financing and Security Agreement
dated as of June 13, 2001 by and between Bank of America, N.A.,
as agent for certain additional lenders and Sunrise East Assisted
Living Limited Partnership and other subsidiaries of Sunrise
(Exhibit 10.5 to Sunrise's Form 10-Q for the quarter ended June
30, 2001)
10.76 Third Amended and Restated Master Promissory Note dated as of
June 13, 2001 by Sunrise East Assisted Living Limited Partnership
and other Subsidiaries of Sunrise and Bank of America, N.A., as
administrative agent for certain additional lenders (Exhibit 10.6
to Sunrise's Form 10-Q for the quarter ended June 30, 2001)
10.77 Fourth Amended and Restated Master Guaranty of Payment Agreement
dated as of June 13, 2001 by and between Bank of America, N.A. as
administrative agent for certain other lenders and Sunrise
(Exhibit 10.7 to Sunrise's Form 10-Q for the quarter ended June
30, 2001)
10.78 Financing and Security Agreement dated as of April 30, 2001 by
and among certain Sunrise subsidiaries and Bank of America, N.A.
(Exhibit 10.8 to Sunrise's Form 10-Q for the quarter ended June
30, 2001)
10.79 Guaranty of Payment Agreement dated as of April 30, 2001 by
Sunrise for the benefit of Bank of America, N.A. (Exhibit 10.9 to
Sunrise's Form 10-Q for the quarter ended June 30, 2001)
10.80 Revolving Credit Note dated as of April 30, 2001 by and among
certain Sunrise subsidiaries and Bank of America, N.A. (Exhibit
10.10 to Sunrise's Form 10-Q for the quarter ended June 30, 2001)
10.81 Second Amended and Restated Promissory Note dated as of May 7,
2001 by and between Sunrise Assisted Living Limited Partnership
and General Electric Capital Corporation (Exhibit 10.11 to
-74-
Sunrise's Form 10-Q for the quarter ended June 30, 2001)
10.82 Fourth Loan Modification Agreement dated as of May 7, 2001 by and
between Sunrise Assisted Living Limited Partnership and General
Electric Capital Corporation (Exhibit 10.12 to Sunrise's Form
10-Q for the quarter ended June 30, 2001)
10.83 Agreement for Purchase and Modification of Loan dated as of May
7, 2001 by and between General Electric Capital Corporation and
Sunrise Assisted Living Limited Partnership (Exhibit 10.13 to
Sunrise's Form 10-Q for the quarter ended June 30, 2001)
10.84 + Executive Deferred Compensation Plan, effective June 1, 2001
(Exhibit 10.14 to Sunrise's Form 10-Q for the quarter ended June
30, 2001)
10.85 + 2001 Stock Option Plan (Exhibit 10.15 to Sunrise's Form 10-Q for
the quarter ended June 30, 2001)
10.86 + Sunrise employee stock purchase plan (Exhibit 10.16 to Sunrise's
Form 10-Q for the quarter ended June 30, 2001)
10.87 + Consulting Agreement effective as of April 1, 2000 by and
between Sunrise and David W. Faeder, as amended, effective
May 31, 2001
10.88 + Form of Sunrise At-Home Senior Living, Inc. Restricted Stock
Agreement
10.89 + Form of Sunrise Assisted Living Holdings, L.P. Class A Limited
Partner Unit Agreement
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
- ----------------
+ Represents management contract or compensatory plan or arrangement.
-75-
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Sunrise Assisted Living, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise
Assisted Living, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sunrise Assisted
Living, Inc. as of December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
McLean, Virginia
February 26, 2002 /s/ Ernst & Young LLP
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
-------------------------
2001 2000
------------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 50,275 $ 42,874
Accounts receivable, net 23,252 22,482
Notes receivable - affiliates 1,294 9,127
Deferred income taxes, net 21,736 19,448
Prepaid expenses and other current assets 20,920 35,874
------------- -----------
Total current assets 117,477 129,805
Property and equipment, net 841,414 812,937
Notes receivable - affiliates 94,305 77,991
Management contracts and leaseholds, net 22,999 24,142
Costs in excess of assets acquired, net 32,749 33,709
Investments in unconsolidated assisted living facilities 36,589 27,773
Investments 5,750 5,750
Other assets 26,332 17,254
------------- -----------
Total assets $1,177,615 $1,129,361
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,164 $ 4,932
Accrued expenses and other current liabilities 32,117 19,905
Deferred revenue 7,468 21,977
Current maturities of long-term debt 26,925 117,054
------------- -----------
Total current liabilities 78,674 163,868
Long-term debt, less current maturities 603,831 557,649
Investments in unconsolidated assisted living facilities 2,284 3,353
Deferred income taxes, net 72,016 44,247
Other long-term liabilities 7,658 3,407
------------- -----------
Total liabilities 764,463 772,524
Minority interests 2,451 2,792
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,
22,166,402 and 21,595,569 shares issued and outstanding
in 2001 and 2000 222 216
Additional paid-in capital 310,423 298,660
Retained earnings 104,270 55,169
Accumulated other comprehensive loss (4,214) --
------------- -----------
Total stockholders' equity 410,701 354,045
------------- -----------
Total liabilities and stockholders' equity $1,177,615 $1,129,361
============= ===========
See accompanying notes.
F-2
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
---------------------------------------
2001 2000 1999
------------ ----------- ------------
Operating revenue:
Resident fees $ 260,524 $ 274,236 $ 217,397
Management and contract services 105,541 38,429 30,805
Income from property sales 62,154 32,121 7,017
------------ ----------- ------------
Total operating revenue 428,219 344,786 255,219
------------ ----------- ------------
Operating expenses:
Facility operating 168,602 169,966 131,055
Management and contract services 74,785 15,931 6,439
Facility development and pre-rental 7,949 6,226 7,184
General and administrative 32,809 27,418 20,715
Depreciation and amortization 28,475 33,902 25,448
Facility lease 10,159 10,833 7,903
------------ ----------- ------------
Total operating expenses 322,779 264,276 198,744
------------ ----------- ------------
Non-recurring items 2,307 - (5,069)
------------ ----------- ------------
Income from operations 107,747 80,510 51,406
Other income (expense):
Interest income 12,307 12,412 10,849
Interest expense (38,483) (49,978) (32,599)
------------ ----------- ------------
Total other expense (26,176) (37,566) (21,750)
Equity in losses of unconsolidated
assisted living facilities (1,169) (2,941) (1,239)
Minority interests (769) (203) (376)
------------ ----------- ------------
Income before income taxes 79,633 39,800 28,041
Provision for income taxes (31,057) (15,522) (7,828)
------------ ----------- ------------
Net income before extraordinary gain 48,576 24,278 20,213
------------ ----------- ------------
Extraordinary gain, net of tax 525 - -
------------ ----------- ------------
Net income $ 49,101 $ 24,278 $ 20,213
========= ========= ========
Net income per common share:
Basic $ 2.25 $ 1.12 $ 0.96
============ =========== ============
Diluted $ 2.08 $ 1.10 $ 0.94
============ =========== ============
See accompanying notes.
F-3
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Shares of Common Additional Other
Common Stock Paid-in Retained Comprehensive
Stock Amount Capital Earnings Loss Total
---------- --------- ------------ ----------- ------------- -----------
Balance at December 31, 1998 19,446 $ 194 $ 216,783 $ 10,678 $ 227,655
Net income 20,213 20,213
-----------
Total comprehensive income 20,213
-----------
Exercise of employee options
for common stock 214 2 3,666 3,668
Issuance of common stock to
acquire Karrington 2,279 23 75,663 75,686
Tax effect from the exercise of non-
qualified stock options 7,902 7,902
---------- --------- ------------ ----------- ------------- -----------
Balance at December 31, 1999 21,939 219 304,014 30,891 - 335,124
Net income 24,278 24,278
-----------
Total comprehensive income 24,278
-----------
Exercise of employee options
for common stock 242 3 3,233 3,236
Repurchase of common stock (585) (6) (9,641) (9,647)
Tax effect from the exercise of non-
qualified stock options 1,054 1,054
---------- --------- ------------ ----------- ------------- -----------
Balance at December 31, 2000 21,596 216 298,660 55,169 - 354,045
Net income 49,101 49,101
Interest rate swaps, net of tax (3,121) (3,121)
Foreign currency translation, net of tax (1,093) (1,093)
-----------
Total comprehensive income 44,887
-----------
Exercise of employee options
for common stock 570 6 9,110 9,116
Tax effect from the exercise of non-
qualified stock options 2,653 2,653
---------- --------- ------------ ----------- ------------- -----------
Balance at December 31, 2001 22,166 $ 222 $ 310,423 $ 104,270 $ (4,214) $ 410,701
========== ========= ============ =========== ============= ===========
See accompanying notes.
F-4
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------
2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 49,101 $ 24,278 $ 20,213
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income from property sales (50,266) (16,900) (70)
Equity in losses of unconsolidated
assisted living facilities 1,169 2,941 1,239
Minority interests 769 203 376
Provision for bad debts 1,320 1,250 1,380
Provision for deferred income taxes 26,226 11,267 1,930
Depreciation and amortization 28,475 33,902 25,448
Amortization of financing costs and discount on
long-term debt 3,488 3,754 2,676
Amortization of discount on investments - - (566)
Extraordinary gain, net of tax (525) - -
Non-recurring charges - - 3,786
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable (4,576) (9,871) 3,754
Assets held for sale - - (1,054)
Prepaid expenses and other current assets (2,304) 1,008 (71)
Other assets (2,523) 218 2,623
Increase (decrease):
Accounts payable and accrued expenses 18,991 807 (13,243)
Deferred revenue 354 (929) 94
Other liabilities 1,730 (296) (5,728)
------------ ------------ ------------
Net cash provided by operating activities 71,429 51,632 42,787
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of assets 52,008 45,704 26,923
Sale (acquisition) of interests in facilities 450 (1,098) (13,614)
Investment in property and equipment (67,990) (46,268) (178,443)
Increase in investments and notes receivable (123,950) (152,809) (75,259)
Proceeds from investments and notes receivable 130,222 142,422 7,574
Increase in restricted cash and cash equivalents (6,196) (830) (727)
Contributions to investments in unconsolidated
assisted living facilities (7,006) (10,534) (1,519)
------------ ------------ ------------
Net cash used in investing activities (22,462) (23,413) (235,065)
------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from exercised options 9,116 3,235 3,668
Additional borrowings under long-term debt 400,735 187,302 313,529
Repayment of long-term debt (444,440) (215,569) (122,079)
Net investment of minority interests - (1,088) 1,000
Financing costs paid (6,977) (3,118) (4,497)
Repurchase of stock - (9,647) -
------------ ------------ ------------
Net cash (used in) provided by financing activities (41,566) (38,885) 191,621
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 7,401 (10,666) (657)
Cash and cash equivalents at beginning of year 42,874 53,540 54,197
------------ ------------ ------------
Cash and cash equivalents at end of year $ 50,275 $ 42,874 $ 53,540
============ ============ ============
See accompanying notes.
F-5
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRESENTATION
Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") is a provider of
assisted living services for seniors. Assisted living services provide a
residence, meals and non-medical assistance to elderly residents for a monthly
fee. Sunrise's services are generally not covered by health insurance and,
therefore, monthly fees are generally payable by the residents, their family, or
another responsible party.
Sunrise was incorporated in Delaware on December 14, 1994. The consolidated
financial statements include Sunrise's wholly owned subsidiaries that manage,
own and develop assisted living facilities. In addition, the consolidated
financial statements include three limited liability companies. One of the
limited liability companies owns two facilities (Sunrise of Severna Park) in
which Sunrise owns a 50% membership interest. The other two limited liability
companies own one facility each (Sunrise of Sheepshead Bay and Sunrise of Mill
Basin) in which Sunrise owns a 70% membership interest. Sunrise controls the
three limited liability companies through its status as the manager of the
facilities and as sole managing member of the limited liability companies with
unilateral ability under the operating agreements to conduct the ordinary course
of business of the companies. The consolidated statements of income also
includes one limited partnership which owns a facility (Sunrise of Gardner Park)
in which Sunrise had a 50% partnership interest and controlled through December
28, 2001 at which date, Sunrise sold one-half of its partnership interest (see
Note 12). Therefore, this entity is not consolidated in the balance sheet at
December 31, 2001. It is Sunrise's policy to consolidate non-wholly owned
interests when, through its managing partnership or operating agreements, status
as manager of the facility and sole general partner or managing member, Sunrise
holds the unilateral ability to conduct the ordinary course of business of the
facility.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Sunrise considers cash and cash equivalents to include currency on hand,
demand deposits, and all highly liquid investments with a maturity of three
months or less at the date of purchase.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Details of the allowance for doubtful accounts receivable are as follows (in
thousands):
DECEMBER 31,
--------------------------------
2001 2000 1999
--------------------------------
Beginning balance $3,655 $3,716 $2,080
Acquired allowance - - 786
Provision for bad
debts 1,320 1,250 1,380
Accounts written off (787) (1,311) (530)
--------------------------------
Ending balance $4,188 $3,655 $3,716
================================
F-6
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and include interest and
property taxes capitalized on long-term construction projects during the
construction period, as well as other costs directly related to the development
and construction of facilities. Maintenance and repairs are charged to expense
as incurred. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Property and equipment are
reviewed for impairment whenever events or circumstances indicate that the
asset's undiscounted expected cash flows are not sufficient to recover its
carrying amount. Sunrise measures an impairment loss by comparing the fair value
of the asset to its carrying amount. Fair value of an asset is calculated as the
present value of expected future cash flows.
Construction in progress includes pre-acquisition costs and other direct
costs related to acquisition, development and construction of facilities,
including certain direct and indirect costs of Sunrise's development subsidiary.
If a project is abandoned, any costs previously capitalized are expensed.
INTANGIBLE ASSETS
Intangible assets relate primarily to the acquisition of Karrington Health,
Inc. and are comprised of management contracts, leaseholds and costs in excess
of assets acquired. Costs in excess of assets acquired represent costs of
business acquisitions in excess of the fair value of identifiable net assets
acquired. Such costs are being amortized over 38 years using the straight-line
method. The accounting for costs in excess of assets acquired will change
effective January 1, 2002. See "Impact of Recently Issued Accounting Standards"
in Note 2. Management contracts and leaseholds are also amortized using the
straight-line method over periods ranging from 11 to 40 years.
The carrying amounts of all intangible assets are reviewed for impairment
when indicators of impairment are identified. If the review indicates that the
intangible assets are not expected to be recoverable based on the undiscounted
cash flows of the acquired assets over the remaining amortization periods, the
carrying value of the intangible assets will be adjusted.
PRE-RENTAL COSTS
Costs incurred to initially rent facilities are capitalized and amortized
over 12 months. All other pre-rental costs are expensed as incurred.
DEFERRED FINANCING COSTS
Costs incurred in connection with obtaining permanent financing for
Company-owned facilities are deferred and amortized over the term of the
financing on a straight-line basis, which approximates the effective interest
method.
INVESTMENTS IN UNCONSOLIDATED ASSISTED LIVING FACILITIES
Sunrise owns non-controlling interests in 72 assisted living facilities, 10
of which are currently under development. Sunrise's interests, through limited
liability companies and partnerships, generally range from 7% to 50%. Sunrise
has 31 facilities in which it owns less than 10%, 12 facilities in which it owns
between 10% and 20%, 24 facilities in which it owns between 20% and 30% and five
facilities in which it owns more than 30%. Sunrise does not control these
entities, as major business decisions require approval by the other partners or
members. Accordingly, these investments are accounted for under the equity
method. As such, the investments are recorded at cost and subsequently are
adjusted for equity in net income (losses) and cash contributions and
distributions. Sunrise eliminates profits on sales of services to ventures to
the extent of our ownership interest. Differences between the carrying value of
investments and the underlying equity in net assets of the investee are
amortized on a straight line basis over the estimated useful life of the
underlying facilities. Sunrise's interests in accumulated losses of
unconsolidated assisted living facilities are recorded below Sunrise's cost
basis to the extent of other notes
F-7
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and advances to those unconsolidated assisted living facilities. For
information on commitments or contingencies of partnerships or limited liability
companies in which Sunrise is a general partner or managing member, see Note 14.
As of December 31, 2001, the underlying equity in net assets of the
investees exceeded the carrying value of investments in the net assets of
unconsolidated assisted living facilities by $15 million.
DERIVATIVES AND HEDGING ACTIVITIES
Sunrise recognizes all of its derivative instruments as either assets or
liabilities in the consolidated balance sheet at fair value. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and further, on
the type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, Sunrise must designate the
hedging instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
For derivative instruments that are designated and qualify as a cash flow
hedge (i.e., hedging the exposure to variability in expected future cash flows
that is attributable to a particular risk), the effective portion of the gain or
loss on the derivative instrument is reported on the balance sheet and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in current earnings during
the period of change.
In 2001, Sunrise entered into five interest rate swap agreements that
qualify as cash flow hedges to effectively convert a portion of floating-rate
debt to fixed-rate basis for the next two to three years, thus reducing the
impact of interest-rate changes on future interest expense. $125 million of
Sunrise's revolving credit facility was designated as the hedged item to the
interest rate swap agreements.
REVENUE RECOGNITION
Operating revenue consists of resident fee revenue, including resident
community fees, management services revenue, facility contract services revenue
and realized gain upon sale of assisted living facilities. Resident fee revenue
is recognized when services are rendered. Agreements with residents are for a
term of one year and are cancelable by residents with thirty days notice.
Management and contract services revenue is comprised of revenue from management
contracts, development contracts and facility contracts. Revenue from management
contracts is recognized in the month in which it is earned in accordance with
the terms of the management contract. Revenue from development contracts is
recognized over the term of the respective development contracts using the
percentage-of-completion method. Revenue from facility contract services is
comprised of fees plus reimbursable expenses of facilities operated with
Sunrise's employees under long-term operating agreements. Income from property
sales is recognized upon consummation of the sale of properties unless a portion
of the sale is contingent upon future events or performance. Deferred gains are
then recognized upon performance or resolution of the contingency.
INCOME TAXES
Sunrise accounts for income taxes under the asset and liability approach
which requires recognition of deferred tax assets and liabilities for the
differences between the financial reporting and tax bases of assets and
liabilities. A valuation allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
F-8
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
Sunrise grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
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.
IMPACT OF CHANGES IN ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. Under the new rule,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company will apply the new
accounting rules beginning January 1, 2002. Sunrise recorded approximately $1
million of goodwill amortization during 2001. We are currently assessing the
financial impact SFAS No. 142 will have on our consolidated financial
statements. However, we do not expect to incur an impairment charge upon
adoption.
In August 2001, the FASB issued Statement 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS No. 144"). The Statement supercedes
Statement 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of and APB Opinion No. 30, Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for segments of a business to be disposed of. SFAS No. 144 retains
the requirements of Statement 121 relating to recognition and measurement of an
impairment loss and resolves certain implementation issues resulting from
Statement 121. This Statement is effective for fiscal years beginning after
December 15, 2001. We are currently assessing the impact of this statement on
the Company. However, we do not anticipate this statement to have a material
impact on the consolidated financial position or results of operations of the
Company.
In February 2002, the FASB agreed to rescind SFAS 4, Reporting Gains and
Losses from Extinguishment of Debt. SFAS 4 required companies to report gains
and losses associated with the extinguishment of debt as a component of
extraordinary gains and losses, net of tax. These gains and losses will now be
required to be presented within the statement of income in appropriate
segregated line items. Sunrise will be required to reclassify prior year's
amounts to reflect this new rule upon adoption.
The FASB continues to have in process a consolidation project to interpret
and potentially modify existing consolidation accounting guidance. Recent FASB
meetings have discussed changes to the principles of consolidation, including
those for special purpose entities and potentially for joint ventures. Sunrise
does not currently utilize special purpose entities. Sunrise does have
transactions with joint ventures. Any proposed changes to current accounting
guidance may impact the Company's accounting for these transactions. The impact
of rule changes, if any, is not known at this time.
RECLASSIFICATIONS
Certain 2000 and 1999 balances have been reclassified to conform to the 2001
presentation.
F-9
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
----------------------
ASSET LIVES 2001 2000
----------------------
Land and land improvements 10-15 yrs. $122,267 $122,794
Building and building
Improvements 40 yrs. 559,094 576,820
Furniture and equipment 3-10 yrs. 81,766 82,982
----------------------
763,127 782,596
Less accumulated
depreciation
and amortization (83,133) (72,335)
----------------------
679,994 710,261
Construction in progress 161,420 102,676
----------------------
$841,414 $812,937
======================
Depreciation expense was $22 million, $25 million and $19 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
4. NOTES RECEIVABLE - AFFILIATES
Notes receivable plus accrued interest consist of the following (in
thousands):
DECEMBER 31,
-------------------
2001 2000
-------------------
LLC Note I, interest accrues at LIBOR plus 5.0% $ - $22,599
LLC Note II, interest accrues at 10.0% 9,269 8,534
LLC Note III, interest accrues at 10.0% 19,686 18,242
LLC Note IV, interest accrues at 10.0% 19,343 17,685
LLC Note V, interest accrues at 15.0% 19,711 9,388
Note I with United Kingdom joint venture,
variable interest 4,437 5,125
Note II with United Kingdom joint venture,
interest accrues at 15.0% - 696
Note III with international joint venture,
interest accrues at 12.5% 16,357 -
ADG Note, interest accrues at 10.0% 543 544
AMB Note, interest accrued at 8.0% 530 -
Property Note, interest accrues at 7.75% - 3,016
Promissory Note, interest accrues at 11.5%
through March 2001 and 13.5% thereafter - 999
Credit facility, interest accrues at LIBOR
plus 3.5%
(5.29% as of December 31, 2001) 898 -
Promissory Note, interest accrues at 10.0% 438 -
Promissory Note, interest accrues at LIBOR
plus 2.75% (4.58% at December 31, 2001) 4,060 -
Other notes receivable 327 290
-------------------
95,599 87,118
Current maturities (1,294) (9,127)
-------------------
$94,305 $77,991
===================
F-10
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 1997, Sunrise jointly formed a limited liability company ("LLC
I") with an unrelated third party in which Sunrise owned a 9% minority interest.
The purpose of LLC I was to develop, construct and own assisted living
facilities. Sunrise loaned LLC I $15 million (the "LLC Note I") to partially
finance the initial development and construction of six properties. The LLC Note
I was secured by the properties and subordinated to other lenders of LLC I. In
September 1998, Sunrise and LLC I amended the LLC Note I to increase the loan by
$6 million to a total of $21 million in order to partially finance the initial
development and construction of two additional properties. All eight properties
are completed and open at December 31, 2001. Principal and interest were due
October 2003. The LLC Note I, including accrued interest, was repaid in June
2001 when the joint venture partner's interest was acquired by a third party. In
connection with this transaction, Sunrise increased its ownership in the venture
to 20%.
In January 1999, Sunrise jointly formed a limited liability company ("LLC
II") in which Sunrise owns a 9% minority interest. The purpose of LLC II is to
develop, construct and own assisted living facilities. Sunrise loaned LLC II $7
million (the "LLC Note II") to partially finance the initial development and
construction of four properties. All four properties are completed and open at
December 31, 2001. The LLC Note II is secured by the properties and is
subordinated to other lenders of LLC II. The principal amount of the loan and
accrued interest are due on the earlier of March 30, 2006 or termination of the
management agreement between the parties. See Note 16 Related-Party
Transactions, Joint Ventures.
In March 1999, Sunrise jointly formed a limited liability company ("LLC
III") in which Sunrise owns a 9% minority interest. The purpose of LLC III is to
develop, construct and own assisted living facilities. Sunrise loaned LLC III
$16 million (the "LLC Note III") to partially finance the initial development
and construction of five properties. All five properties are completed and open
at December 31, 2001. The LLC Note III is secured by the properties and is
subordinated to other lenders of LLC III. The principal amount of the loan and
accrued interest are due on July 1, 2002. Sunrise has committed to extend the
maturity date of this note beyond 2002 for any amounts outstanding at July 1,
2002. See Note 16 Related-Party Transactions, Joint Ventures.
In March 1999, Sunrise jointly formed a limited liability company ("LLC IV")
in which Sunrise owns a 9% minority interest. The purpose of LLC IV is to
develop, construct and own assisted living facilities. Sunrise loaned LLC IV $6
million (the "LLC Note IV") to partially finance the initial development and
construction of six properties. All six properties are completed and open at
December 31, 2001. In December 1999, Sunrise and LLC IV amended the LLC Note IV
to increase the loan by $10 million. The LLC Note IV is secured by the
properties and is subordinated to other lenders of LLC IV. The principal amount
of the loan and accrued interest are due on the earlier of December 31, 2006 or
termination of the management agreement between the parties. See Note 16
Related-Party Transactions, Joint Ventures.
In December 2000, Sunrise jointly formed a limited liability company ("LLC
V") with an unrelated third party in which Sunrise owns a 9% minority interest.
The purpose of LLC V is to develop, construct and own assisted living
facilities. Sunrise has loaned LLC V $17 million (the "LLC Note V") to partially
finance the initial development and construction of five properties. Three of
these properties are completed and open at December 31, 2001. The LLC Note V is
secured by the properties and is subordinated to other lenders of LLC V. The
principal amount of the loan and accrued interest are due on December 16, 2007.
See Note 16 Related-Party Transactions, Joint Ventures.
F-11
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1998, Sunrise jointly formed a limited liability company ("International
LLC") with an unrelated third party in which Sunrise owns a 7% minority
interest. The purpose of International LLC is to develop, construct and own ten
assisted living facilities in the United Kingdom and Canada. Five of these
properties are completed and open at December 31, 2001. Sunrise agreed to make
available up to approximately $4 million ("Note I") to International LLC under a
revolving credit arrangement to partially finance the development a facility in
the United Kingdom. Interest on the first $3 million of advances made under Note
I accrues at 12.0%. Interest on an additional $1 million of advances accrues at
a variable rate (6.17% at December 31, 2001). In 2001, Sunrise received total
payments of $1 million. The outstanding principal and unpaid accrued interest
was due in November 2001. However, Note I is subordinated to a $17 million
mortgage loan on the United Kingdom facility and Sunrise has agreed to defer
payment until the mortgage loan is paid in full. See Note 16 Related-Party
Transactions, Joint Ventures.
In 2000, Sunrise agreed to make available up to approximately $1 million
("Note II") to International LLC under a promissory note to partially finance
the development of a facility in the United Kingdom. Interest on amounts
outstanding under Note II accrues at 15.0%. A portion of the outstanding
principal and unpaid accrued interest was converted to an investment in the
joint venture and the remainder was repaid in full in January 2001. See Note 16
Related-Party Transactions, Joint Ventures.
In 2001, Sunrise agreed to make funds available ("Note III") to
International LLC to partially finance the initial development and construction
of properties in the United Kingdom and Canada. Interest on amounts outstanding
under Note III accrues at 12.5%. The Note III to Sunrise is subordinated to
other lenders of the joint venture. Principal and interest become due as each
property is sold by the joint venture. See Note 16 Related-Party Transactions,
Joint Ventures.
In January 1999, a facility, in which Sunrise has a controlling interest,
accepted a $500,000 promissory note ("ADG Note") from its minority owner. The
ADG Note accrues interest at 10% per annum and is due annually beginning
February 22, 2000. The principal balance plus accrued and unpaid interest are
due on February 22, 2009.
In 2001, a facility, in which Sunrise has a controlling interest, accepted a
$500,000 promissory note ("AMB Note") from its minority owner. The AMB Note
accrues interest at 8% per annum and is due annually beginning March 2002. The
principal balance plus accrued and unpaid interest are due in March 2010.
In June 1999, Sunrise loaned $200,000 ("Property Note") to owners of certain
property on which Sunrise plans to develop an assisted living community.
Immediately following issuance of the Property Note, Sunrise entered into a
purchase agreement with the owners to acquire this property. In January 2000, an
additional $3 million was advanced to the owners of the property. The principal
and unpaid accrued interest was due in 2001. The Property Note, including
accrued interest, was paid in full in June 2001.
In September 2000, Sunrise agreed to make available up to $1 million
("Promissory Note") to the purchaser of two former Karrington operating
properties located in Ohio. The Promissory Note is secured by a second mortgage
and is subordinated to the purchaser's first mortgage. The Promissory Note
accrues interest at 11.5% through March 2001 and 13.5% thereafter. The
outstanding principal and unpaid accrued interest is due in September 2002. The
Promissory Note was repaid in January 2001.
In 2001, Sunrise agreed to make available up to approximately $3 million
("Credit Facility") to the owner of a facility that Sunrise manages under a
management contract. Interest accrues at LIBOR plus 3.5% per annum. Principal
and accrued and unpaid interest is due at the earlier date of the third party's
full repayment of its mortgage or September 2003.
In December 2001, Sunrise accepted a promissory note in the amount of
$400,000 ("Promissory Note") from a joint venture partner to finance a portion
of the acquisition of one-half of Sunrise's ownership interest in a facility.
Interest accrues at 10.0% per annum. Principal and interest are due monthly
until the promissory note is paid in full in January 2007.
F-12
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 2001, Sunrise accepted a promissory note in the amount of $4 million
("Promissory Note") from Sunrise Assisted Living Foundation, Inc. ("SALF"), a
not-for-profit organization that operates two schools. The Promissory Note
pertains to a school operated on an undivided parcel on which Sunrise operates
an assisted living facility and is secured by an interest in the whole parcel.
Interest accrues at LIBOR plus 2.75% per annum. Principal and interest payments
are made monthly based on a twenty-five year amortization schedule at the rate
of 6.689%. The unpaid principal balance plus accrued and unpaid interest are due
in January 2003. See Note 16, Related Party Transactions, Sunrise Assisted
Living Foundation.
Sunrise recorded interest income on these notes from related parties of $9
million, $7 million and $4 million during 2001, 2000 and 1999, respectively.
5. INTANGIBLES AND OTHER ASSETS
Intangible assets consist of the following (dollars in thousands):
DECEMBER 31,
----------------- ESTIMATED
2001 2000 USEFUL
LIFE
-----------------------------
Management contracts, less accumulated
amortization of $1,169 and $709 $ 6,219 $ 6,679 11-20 years
Leaseholds, less accumulated amortization of
$1,801 and $1,118 16,780 17,463 18-40 years
------------------
22,999 24,142
==================
Costs in excess of assets acquired, less
accumulated amortization of $2,179 and
$1,244 $ 32,749 $33,709 38 years
===================
Other assets consist of the following (in thousands):
DECEMBER 31,
------------------
2001 2000
------------------
Restricted cash $11,877 $5,211
Deferred financing costs less amortization of
$12,062 and $8,876 10,414 7,539
Pre-rental costs less amortization of $16,833
and $16,437 3,258 3,783
Other 783 721
------------------
$26,332 $17,254
==================
Restricted cash consists of real estate tax escrows, operating reserves and
capital reserves related to Sunrise's debt agreements and resident deposits.
6. TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
Included in prepaid expenses and other current assets are net receivables
from related unconsolidated partnerships or limited liability companies of $7
million and $21 million as of December 31, 2001 and 2000, respectively. Included
in other current liabilities are net payables to unconsolidated partnerships or
limited liability companies of $2 million and $3 million as of December 31, 2001
and 2000, respectively. Net receivables from unconsolidated partnerships or
limited liability companies relate primarily to development activities. Also,
see Note 4 for a discussion of notes receivable from affiliates.
F-13
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summary financial information for unconsolidated entities (7% to 50% owned)
accounted for by the equity method is as follows:
2001 2000 1999
(in thousands)
Assets, principally property and
equipment $858,079 $ 574,658 $280,064
Liabilities, principally long-term
debt 640,551 494,081 264,993
Equity 217,528 80,577 15,071
Revenues 169,453 72,922 23,174
Net loss (11,289) (19,941) (10,021)
Total revenues from related unconsolidated entities was $85 million, $24
million and $19 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
---------------------
2001 2000
---------------------
5 1/2% convertible subordinated notes due 2002 $107,836 $150,000
Syndicated revolving credit facility 155,060 177,456
Multi-property blanket first mortgage 79,418 85,109
Multi-property first mortgage -- 85,868
Revolving credit facility 27,860 --
Other mortgages and notes payable 260,582 176,445
Discount on the multi-property blanket first
mortgage less amortization of $3,200 and
$3,025 -- (175)
---------------------
630,756 674,703
Current maturities (26,925) (117,054)
---------------------
$603,831 $557,649
=====================
On June 6, 1997, Sunrise issued and sold $150 million aggregate principal
amount of 5 1/2% convertible subordinated notes due 2002. The convertible notes
bore interest at 5 1/2% per annum payable semiannually on June 15 and December
15 of each year, beginning on December 15, 1997. The conversion price was
$37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000 principal
amount of the convertible notes). The convertible notes were redeemable at the
option of Sunrise commencing June 15, 2000, at specified premiums. On September
14, 2001, Sunrise's Board of Directors authorized the repurchase of up to an
additional $50 million of its outstanding 5.5% subordinated convertible notes
(See Note 8). During 2001, Sunrise repurchased $42 million face value of the
convertible notes, resulting in an extraordinary gain, after tax, of $500,000.
In February 2002, Sunrise redeemed the remaining $108 million 5 1/2%
convertible notes at a redemption price of 101.1% of the principal amount, plus
accrued and unpaid interest from the proceeds of a new term loan (see below).
The aggregate redemption price was $110 million. None of the convertible notes
were converted into common stock. As a result of the redemption in 2002 from
proceeds of other long-term borrowings, the convertible notes have been
classified as long-term at December 31, 2001.
F-14
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2002, Sunrise obtained a term loan for $92 million to be used, in
part, to pay off the remaining $108 million of its outstanding 5 1/2%
subordinated convertible notes. The term loan was collateralized by 14
properties, accrued interest at LIBOR plus 6% and matured in May 2004, subject
to a six-month extension option. In February 2002, Sunrise drew $92 million on
the term loan and repaid it the same day. Sunrise incurred a non-recurring
charge of approximately $4 million during the first quarter of 2002 for fees
associated with the $92 million term loan and the premium paid for the early
redemption of the convertible notes.
In January 2002, Sunrise issued and sold $125 million aggregate principal
amount of 5 1/4% convertible subordinated notes due February 1, 2009. The
convertible notes bear interest at 5 1/4% per annum payable semiannually on
February 1 and August 1 each year beginning on August 1, 2002. The conversion
price is $35.84 (equivalent to a conversion rate of 27.9018 shares per $1,000
principal amount of the convertible notes). The notes are subordinated to
Sunrise's existing and future senior indebtedness. The convertible notes are
redeemable at the option of Sunrise commencing February 5, 2006, at specified
premiums. The holders of the convertible notes may require Sunrise to repurchase
the convertible notes upon a change of control of Sunrise as defined in the
convertible notes. In February 2002, $92 million of the net proceeds from the 5
1/4% convertible notes were used to pay off the term loan.
A subsidiary of Sunrise has obtained a syndicated revolving credit facility
for $400 million to be 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 assets of the subsidiary,
consisting of 23 properties. In June 2001, Sunrise refinanced its syndicated
revolving credit facility and reduced it from $400 million to up to $300
million. The maturity date was extended from July 2002 to June 2004 and the
interest rate increased from LIBOR plus 1.75% to LIBOR plus 2.00% (3.83% at
December 31, 2001). Sunrise pays commitment fees of 0.25% on the unused balance
of the credit facility. There were $155 million of advances outstanding under
this credit facility as of December 31, 2001.
In June 1994, Sunrise entered into a multi-property blanket first mortgage
that is collateralized by a blanket first mortgage on all assets of a subsidiary
of Sunrise, consisting of 15 properties. In May 2001, Sunrise modified its
multi-property blanket first mortgage to remove one of the properties as
collateral, thus reducing the principal balance to $79 million, and to extend
the maturity date from May 31, 2001 to May 31, 2004, subject to optional
extensions, at a fixed rate of interest equal to 8.20%. Prior to the
modification, the multi-property blanket first mortgage consisted of two
separate debt classes. Class A in the amount of $65 million had a fixed interest
rate of 8.56% and was interest only until the maturity date of May 31, 2001.
Class B in the amount of $20 million had a variable interest rate. Class B was
interest only until July 1, 1997 at which time principal and interest payments
were due using a 20-year amortization schedule. The interest rate applicable to
the floating rate debt was LIBOR plus 1.75% until the modification in May 2001.
A participation interest of $3 million payable in connection with the
multi-property blanket first mortgage was recorded at the loan date. A
corresponding amount recorded as a loan discount is being amortized over the
life of the loan. Amortization of the discount of approximately $200,000,
$400,000 and $400,000 has been included as interest expense in 2001, 2000 and
1999, respectively.
In May 1999, Sunrise entered into a multi-property first mortgage for $88
million secured by nine properties. The loan accrues interest at 7.14% and
matures on June 1, 2009. The nine properties securing the debt were sold on
February 23, 2001 to a joint venture in which Sunrise has a 25% interest. The
joint venture assumed the debt with an outstanding balance of $86 million as of
the date of sale.
In November 2001, Sunrise entered into a $60 million revolving credit
facility, expandable to $100 million. The revolving credit facility matures in
November 2006, subject to a five-year extension, accrues interest at LIBOR plus
1.20% (3.2% at December 31, 2001) and is collateralized by assisted living
properties. The revolving credit facility may be converted to a fixed rate
facility at any time during the
F-15
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
term. The proceeds were used to reduce the balance of one of Sunrise's credit
facilities. Sunrise pays commitment fees of 0.13% on the unused portion of the
credit facility. At December 31, 2001, the collateral of the revolving credit
facility consisted of five properties and $28 million was outstanding.
The other mortgages and notes payable relate primarily to 30 facilities
whereby outstanding balances are collateralized by the total assets of the
respective facility. Payments of principal and interest are made monthly.
Interest rates range from 1.5% to 10.0% with remaining maturities ranging from
less than one year to 32 years. These other mortgages and notes payable have
total borrowings of $261 million as of December 31, 2001, and an unused portion
on one of the loans of $6 million.
In March 2000, Sunrise entered into a multi-property first mortgage for $75
million secured by eight properties. The loan accrues interest at 8.66% and
matures in April 2007. The proceeds of the loan were used to repay $59 million
of floating rate construction debt and to help fund Sunrise's development and
stock repurchase programs. The eight properties securing the debt were sold on
September 29, 2000 to a joint venture in which Sunrise has a 25% interest. The
joint venture assumed the debt with an outstanding balance of $75 million as of
September 30, 2000.
During 2001, Sunrise entered into interest rate swap agreements that
effectively converted a portion of its floating-rate debt to fixed-rate debt,
thus reducing the impact of interest rate increase during the term of the swap.
$125 million of Sunrise's syndicated revolving credit facility has been
designated as the hedge item to the interest rate swap agreements. The maturity
dates of the swap agreements range from June 2003 to June 2004 and have an
effective weighted-average fixed interest rate of 6.59%. The fair value of the
swaps, net of tax, was negative $3 million as of December 31, 2001 and was
recorded in other long-term liabilities and accumulated other comprehensive
income. During 2001, the hedge ineffectiveness was immaterial. Based on the fair
value of the swaps at December 31, 2001, we would incur approximately $2 million
of interest expense related to the swaps in 2002. The fair value of the swaps
are adjusted quarterly.
There are various financial covenants and other restrictions in Sunrise's
debt instruments, including provisions which: (1) require it to meet certain
financial tests. For example, Sunrise's $300 million syndicated revolving credit
facility requires Sunrise to have a consolidated tangible net worth of at least
$284 million and to maintain a consolidated minimum cash liquidity balance of at
least $25 million. These tests are administered on a monthly or quarterly basis,
depending on the covenant; (2) require consent for changes in management or
control of Sunrise. For example, Sunrise's $300 million syndicated 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; (3) restrict the ability of Sunrise's subsidiaries to borrow
additional funds, dispose of assets or engage in mergers or other business
combinations without lender consent; and (4) require that Sunrise maintain
minimum occupancy levels at its facilities. For example, Sunrise's $300 million
syndicated revolving credit facility requires that 85% occupancy be achieved
after 15 months for newly opened facilities with 77 units or less and 18 months
for 78 units or more and, following this 15-month and 18-month period, be
maintained at or above that level. If this occupancy covenant is not met, the
amount borrowed against that property must be reduced.
Sunrise's syndicated revolving credit facility contains a cross-default
provision pursuant to which a default on other indebtedness by Sunrise or any of
its consolidated subsidiaries under the credit facility could result in the
ability of the lenders to declare a default and accelerate the indebtedness
under the credit facility.
As of December 31, 2001, Sunrise was in compliance with all of its debt
covenants.
F-16
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Principal maturities of long-term debt as of December 31, 2001 are as
follows (in thousands):
2002 $ 26,925
2003 88,467
2004 244,874
2005 9,787
2006 32,055
Thereafter 228,648
-----------
$ 630,756
===========
Interest paid totaled $42 million, $52 million and $36 million in 2001, 2000
and 1999, respectively. Interest capitalized was $7 million, $6 million and $6
million in 2001, 2000 and 1999, respectively.
As of December 31, 2001, Sunrise has $14 million in unused letters of credit
that have been pledged for the benefit of certain lending institutions and
municipalities. The letters of credit expire within two years.
8. STOCKHOLDERS' EQUITY
In 2000, Sunrise's Board of Directors authorized Sunrise to repurchase its
outstanding common stock and/or its outstanding 5 1/2% convertible subordinated
notes up to an aggregate purchase price of $50 million over a period of 12
months. Under the stock repurchase program, Sunrise was authorized to repurchase
common stock in the open market or in privately negotiated transactions, subject
to market conditions, applicable legal requirements and other factors. Sunrise
repurchased 585,000 shares of common stock at an average price of $16.66 per
share through open-market purchases during 2000.
9. STOCK OPTION PLANS
Sunrise has stock option plans providing for the grant of incentive and
nonqualified stock options to employees, directors, consultants and advisors. At
December 31, 2001, these plans provided for the grant of options to purchase up
to 8,148,910 shares of common stock. The option exercise price and vesting
provisions of the options are fixed when the option is granted. The options
expire ten years from the date of grant and generally vest over a four-year
period. The option exercise price is not less than the fair market value of a
share of common stock on the date the option is granted.
On April 25, 1996, the Board of Directors adopted the 1996 Directors' Stock
Option Plan (the "Directors' Plan"). Any director who was a member of the Board
of Directors but not an officer or employee of Sunrise or any of its
subsidiaries (other than the persons elected as director representatives of the
holders of Series A Preferred Stock) was eligible to receive options under the
Directors' Plan. In March 2000, the Directors' Plan was terminated. An aggregate
of 75,000 shares of common stock is reserved for issuance under existing option
agreements. The option exercise price is not less than the fair market value of
a share of common stock on the date the option was granted. The period for
exercising an option begins six months after the option was granted and
generally ends ten years from the date the option was granted. Options granted
under the Directors' Plan vested immediately. All options granted under the
Directors' Plan are non-incentive stock options. As of December 31, 2001, 75,000
options remained outstanding under the plan.
F-17
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of Sunrise's stock option activity, and related information for
the years ended December 31 are presented below:
2001 2000 1999
--------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000) PRICE (000) PRICE (000) PRICE
- ---------------------------- -------- ------------ -------- ------------ ------- ------------
Outstanding-beginning
of year 5,959 $ 21.33 5,250 $ 23.28 4,170 $ 24.93
Granted 1,205 22.27 1,905 15.93 1,712 23.02
Exercised (570) 15.73 (242) 13.77 (213) 17.24
Canceled (426) 28.98 (954) 28.57 (419) 30.39
-------- -------- -------
Outstanding-end of year 6,168 21.52 5,959 21.33 5,250 23.28
======== ======== =======
Options exercisable at
year-end 3,030 2,523 1,853
Weighted-average fair
value of options granted
during the year $16.16 $11.78 $16.46
The following table summarizes information about stock options outstanding
at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES (000) LIFE PRICE (000) PRICE
- ------------------- ------------ ---------------- ---------------- ----------- ----------------
$ 3.00 - $ 8.00 52 3.6 $ 3.95 52 $ 3.95
8.01 - 20.00 2,398 8.2 15.51 672 15.68
20.01 - 25.63 2,876 6.3 24.41 1,951 24.82
25.64 - 44.56 842 7.9 29.85 355 32.91
------------ ------------
6,168 3,030
============ ============
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation, and has been
determined as if Sunrise had accounted for its employee stock options under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for 2001, 2000 and 1999: risk-free
interest rate of 4.4% to 6.5%; dividend yield of 0%; expected lives of 7 to 10
years; and volatility of 36.8% to 57.54%.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Sunrise's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-18
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures below, the estimated fair value of the
options is amortized to expense over the options' vesting period. Sunrise's pro
forma information follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
---------- ---------- ---------
Net income:
As reported $49,101 $24,278 $20,213
Pro forma $29,240 $7,686 $7,882
Diluted net income per share:
As reported $2.08 $1.10 $0.94
Pro forma $1.13 $0.35 $0.37
10. STOCKHOLDER RIGHTS AGREEMENT
The Board of Directors adopted a Stockholders Rights Agreement ("Rights
Agreement") effective April 25, 1996, as amended. All shares of common stock
issued by Sunrise between the date of adoption of the Rights Agreement and the
Distribution Date (as defined below) have rights attached to them. The rights
expire ten years after adoption of the Rights Agreement. Each right, when
exercisable, entitles the holder to purchase one one-thousandth of a share of
Series C Junior Participating Preferred Stock at a price of $85.00 (the
"Purchase Price"). Until a right is exercised, the holder thereof will have no
rights as a stockholder of Sunrise.
The rights initially attach to the common stock. The rights will separate
from the common stock and a distribution of rights certificates will occur (a
"Distribution Date") upon the earlier to occur of (1) ten days following a
public announcement that a person or group (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of common stock (the "Stock Acquisition Date") or (2) ten
business days (or such later date as the Board of Directors may determine)
following the commencement of a tender offer or exchange offer, the consummation
of which would result in the beneficial ownership by a person of 20% or more of
the outstanding shares of common stock. However, neither Paul J. Klaassen nor
Teresa M. Klaassen (nor their affiliates, associates and estates), each of whom,
as of the date of adoption of the Rights Agreement, beneficially owned in excess
of 20% of the outstanding shares of common stock, will be deemed an "Acquiring
Person," unless they acquire an additional 2% of the common stock which was
outstanding at the time of completion of Sunrise's initial public offering.
In general, if a person becomes the beneficial owner of 20% or more of the
then outstanding shares of common stock, each holder of a right may exercise the
right by purchasing common stock having a value equal to two times the Purchase
Price. If at any time following the Stock Acquisition Date (1) Sunrise is
acquired in a merger or other business combination transaction in which it is
not the surviving corporation (other than a merger which follows an offer
described in the preceding paragraph), or (2) 50% or more of Sunrise's assets or
earning power is sold or transferred, each holder of a right shall have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the Purchase Price. The Board of Directors of Sunrise
generally may redeem the rights at a price of $.005 per right at any time until
ten days after an Acquiring Person has been identified as such.
F-19
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income per common share amounts presented in the accompanying consolidated
statements of operations (in thousands, expect per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------------------------------------
Numerator for basic net income per share:
Net income before extraordinary gain $48,576 $24,278 $ 20,213
Extraordinary gain, net of tax
525 - -
------------------------------------------
Net income $49,101 $24,278 $ 20,213
==========================================
Numerator for diluted net income per share:
Net income before extraordinary gain $48,576 $24,278 $ 20,213
Assumed conversion of convertible notes, net
of tax 4,795 - -
------------------------------------------
Diluted net income before extraordinary gain 53,371 24,278 20,213
Extraordinary gain, net of tax
525 - -
------------------------------------------
Diluted net income $53,896 $24,278 $ 20,213
==========================================
Denominator:
Denominator for basic net income per common
share-weighted average shares 21,825 21,654 21,045
Effect of dilutive securities:
Employee stock options 651 366 544
Convertible notes 3,476 - -
------------------------------------------
Denominator for diluted net income per
common share-weighted average shares plus
assumed conversions 25,952 22,020 21,589
==========================================
Basic net income per common share:
Net income before extraordinary gain $ 2.23 $ 1.12 $ 0.96
Extraordinary gain, net of tax 0.02 - -
------------------------------------------
Net income $ 2.25 $ 1.12 $ 0.96
==========================================
Diluted net income per common share:
Net income before extraordinary gain $ 2.06 $ 1.10 $ 0.94
Extraordinary gain, net of tax 0.02 - -
------------------------------------------
Net income $ 2.08 $ 1.10 $ 0.94
==========================================
Certain shares issuable upon the exercise of stock options or convertible
notes have been excluded from the computation because the effect of their
inclusion would be anti-dilutive. Options are included under the treasury
stock method to the extent they are dilutive.
12. ACQUISITIONS AND DISPOSITIONS
In September 1998, Sunrise completed the sale of two facilities for an
aggregate sales price of $29 million. Sunrise will realize up to a $6 million
gain from the transaction. Sunrise recognized a gain of $2 million and $2
million on the sale in 1999 and 1998, respectively. The remaining gain was
deferred at December 31, 2001, the recognition of which is contingent upon
future events. Sunrise operates the two facilities under long-term operating
agreements.
F-20
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1999, Sunrise completed the sale of two facilities for an
aggregate sales price of $28 million. Sunrise realized an $11 million gain
from the transaction over three quarters. Sunrise recognized a gain of $5
million on the sale in 1999 and $6 million in 2000. Sunrise operates the two
facilities under long-term operating agreements.
In May 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 transaction was
accounted for as a purchase and was valued at $85 million, including merger
and stock issuance costs of $8 million and the fair value of assumed employee
stock options of $2 million. Karrington operates assisted living facilities
providing services to the elderly.
In June 2000, Sunrise completed the sale of three facilities for an
aggregate sales price of $44 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise realized $13 million in gain, subject to
certain contingencies being met, of which $2 million and $11 million was
recognized in 2001 and 2000, respectively. In September 2000, Sunrise
completed the sale of eight facilities for an aggregate sales price of $111
million to the same venture company. The venture company assumed approximately
$75 million of debt secured by the eight properties. Sunrise realized $26
million in gain, subject to certain contingencies being met, of which $13
million and $13 million was recognized in 2001and 2000, respectively. Sunrise
continues to operate the facilities under long-term operating agreements.
In December 2000, Sunrise completed the sale of two facilities for an
aggregate sales price of $28 million. Sunrise realized up to $8 million in
gain, subject to certain contingencies being met, of which $5 million and $2
million was recognized in 2001 and 2000, respectively. Sunrise continues to
operate the facilities under long-term operating agreements.
In February 2001, Sunrise completed the sale of nine facilities for an
aggregate sales price of $131 million to a limited partnership in which
Sunrise owns a 25% interest. Sunrise realized $40 million in gain, subject to
certain contingencies being met, of which $40 million was recognized during
2001. Sunrise continues to operate the facilities under long-term operating
agreements.
In October 2001, Sunrise completed the sale of one facility for an
aggregate sales price of $17 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise will realize up to $3 million in gain
over four quarters, subject to certain contingencies being met, of which $1
million was recognized in 2001. Sunrise continues to operate the facilities
under long-term operating agreements.
In December 2001, Sunrise completed the sale of one of our two existing
Florida facilities for an aggregate sales price of $8 million. The buyer will
assume management of the property after a 90-day transition period. Sunrise
realized $1 million in gain, which was recognized in 2001.
In December 2001, Sunrise completed the sale of one facility for an
aggregate sales price of $16 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise will realize up to $2 million in gain
over four quarters, subject to certain contingencies being met, of which
$500,000 was recognized in 2001. Sunrise may receive up to an additional $2
million in incentive payments based on 2002 operating performance. Sunrise
continues to operate the facilities under long-term operating agreements.
In December 2001, one of Sunrise's joint venture partners exercised an
option to acquire an additional 25% interest in one property (Sunrise of
Gardner Park). As a result of the transaction, Sunrise's ownership in the
property was reduced to 25% from 50%. Sunrise will continue to operate the
community under a long-term management agreement. Sunrise will realize up to
$1 million in gain over four quarters, subject to certain contingencies being
met, of which $200,000 was recognized in 2001.
In connection with Sunrise's property sale/long-term manage back program,
Sunrise specifically identifies properties that it intends to sell within a
twelve-month period and, accordingly, designates these properties as held for
sale. Management believes that the sales value of these properties exceeds
their book value and therefore no related write-down has been recorded. The
operating results of these properties are
F-21
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reflected in Sunrise's consolidated operating results. Depreciation expense
for these properties is included in Sunrise's consolidated depreciation
expense up to the point that management specifically identifies the properties
it intends to sell and believes the sale of the properties is probable. The
book value of these properties (approximately $150 million) continues to be
reflected in the property and equipment line item of the balance sheet.
In December 2001, Sunrise entered into a definitive agreement to sell 12
assisted living properties to a real estate investment entity advised by
Macquarie Capital Partners for an aggregate sales price of $198 million.
Sunrise will continue to operate the properties under long-term management
agreements and Sunrise will retain a 20% ownership interest in the joint
venture. Also on December 28, 2001, Sunrise entered into a definitive
agreement to sell two additional assisted living properties. Sunrise will
continue to operate the properties under long-term management agreements. The
closing of these transactions is subject to customary closing conditions,
assumptions of original financing and receipt of required regulatory
approvals. Sunrise expects to close the sale of 12 of these properties during
the first quarter of 2002 and the balance during the second quarter of 2002.
13. NON-RECURRING ITEMS
In August 2001, Karrington Health Inc. (Karrington), a wholly owned
subsidiary of Sunrise, received a cash payment in the amount of $10 million to
settle a lawsuit filed by Karrington prior to its acquisition by Sunrise in
1999. Karrington brought the suit alleging that Omega Healthcare Investors,
Inc. had breached a financing commitment it had made to Karrington. Expenses
incurred to settle the lawsuit have been netted against the settlement.
Given the current industry environment and the increasing number of
opportunities to acquire properties and management contracts, Sunrise
determined, in the third quarter of 2001, that the costs to develop five
specific sites outweighed the costs of acquiring facilities and/or management
contracts in those areas. Accordingly, management elected not to proceed with
its planned development for these five sites and wrote down associated project
costs by $7 million to their estimated net realizable value.
Sunrise recorded non-recurring charges of $5 million during 1999, of which
$4 million related to the consolidation and integration of the acquired
operations and development pipeline of Karrington and $1 million related to
the termination of a property acquisition agreement. Of the $5 million of
non-recurring charges, $4 million were non-cash transactions.
14. COMMITMENTS
Sunrise leases its corporate offices, regional offices, development
offices and warehouse space under various leases. During 1998, Sunrise entered
into an agreement to lease new office space for its corporate headquarters.
The lease commenced upon completion of the building in July 1999 and expires
in July 2011. The lease has an initial annual base rent of $1 million. The
base rent escalates approximately 2.5% per year in accordance with a base rent
schedule. In September 1999, Sunrise amended another corporate lease to
increase the amount of leased premises and extend the maturity date to October
2004. The initial annual lease payments amount to $462,000, and the base rent
is subject to annual increases based on the consumer price index from a
minimum of 2% to a maximum cap of 3% per year. The warehouse lease has a term
of seven years and expires in May 2004. The initial annual base rent payments
amount to $148,000, subject to annual increases of 3%. In addition, Sunrise is
required to amortize an additional $88,000 of rent related to the straight
lining of rent benefits and a portion of operating expenses. Various other
leases expire between 2001 and 2005.
Sunrise has also entered into operating leases for five facilities. Two
facilities commenced operations during 1997, two facilities commenced
operations in 1998, and the other facility commenced operations in 1999. In
May 1999 in connection with the acquisition of Karrington, Sunrise assumed six
operating leases for six assisted living properties and a ground lease. The
operating lease terms vary from 15-20 years, with two ten-year extension
options. Sunrise also has four other ground leases related to two facilities
in operation and two facilities under construction. Lease terms range from 30
to 99 years and are subject to annual increases based on the consumer price
index and/or stated increases in the lease.
F-22
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1998, a subsidiary of Sunrise entered into a three-year
operating lease for six assisted living facilities. Sunrise guaranteed the
payment of all obligations of its subsidiary under the lease. There were no
extension options. However, Sunrise had the option, 120 days prior to the
expiration date of the lease, of either purchasing or selling all the leased
properties. If Sunrise exercised its option to sell the properties and the
proceeds from the sale exceeded the obligation under the lease, Sunrise was
entitled to the excess. However, if the proceeds from the sale were less than
the obligation under the lease, Sunrise would be obligated to fund the
difference. Sunrise was responsible for the payment of real estate taxes,
insurance and other operating expenses. The lease required Sunrise to maintain
certain coverage ratios, liquidity and net worth. These six leased properties
were sublet to Karrington until the acquisition of Karrington in May 1999.
During 2000, Sunrise purchased two of the properties for $18 million. In 2001,
Sunrise exercised its option to purchase the remaining leased properties and
closed on the purchase of the remaining four properties for $29 million in
January 2002. The effect of purchasing these six properties was to record the
property and newly financed debt associated with these properties on Sunrise's
consolidated balance sheet.
Future minimum lease payments under office, equipment, ground and other
operating leases as of December 31, 2001, excluding the leased properties
purchased in January 2002 indicated above, are as follows (in thousands):
2002 $ 11,074
2003 10,761
2004 10,296
2005 9,700
2006 9,704
Thereafter 124,297
--------------
$175,832
==============
Sunrise has entered into contracts to purchase and lease additional sites.
Total contracted purchase price of these sites is $116 million. Sunrise is
pursing additional development opportunities and also plans to acquire
additional facilities as market conditions warrant.
As a part of Sunrise's operating strategy, Sunrise may provide limited
debt guarantees to certain of its joint ventures. At December 31, 2001,
Sunrise has provided $18 million of last dollar debt guarantees, $15 million
of which are removed upon stabilization of the underlying facility. Last
dollar guarantee means the third-party debt would have to default, the bank
would have to enforce any remedies against the venture, including foreclose,
after which Sunrise would have to provide any required funds to make up any
difference between the loan amount and the amount recovered from such
enforcement. Sunrise has provided $16 million of other debt guarantees, $6
million of which are removed at stabilization for the underlying facility. At
December 31, 2001, Sunrise does not believe that it will be required to fund
any debt under its current outstanding debt guarantees.
As part of Sunrise's fee-development for joint ventures, it typically
guarantees that properties will be completed at budgeted costs approved by all
partners in the joint venture. Budgeted costs typically include significant
contingency reserves for unforeseen costs and potential overruns. At December
31, 2001, seven properties are under construction and subject to completion
guarantees. Sunrise has over 20 years experience in the development and
construction of assisted living communities. Its construction contractors are
experienced in building its prototype and assume much of the risk of on-time
and on-budget completion by executing fixed-price contracts. Sunrise closely
monitors these projects and does not expect to fund any amounts under these
development completion guarantees during 2002. If amounts are required to be
funded by Sunrise, they would typically become loans to the venture and earn
interest.
As a part of certain management contracts, Sunrise may provide an
operating deficit guarantee. This means that if a property has depleted all of
its operating reserves and does not generate enough cash flow during a month
to cover its expenses, Sunrise would provide a loan to the property to cover
the cash shortfall. These guarantees are generally included with our
development joint ventures and usually are
F-23
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provided for a limited period of time, generally until the property reaches
stabilization. Currently, 24 operating properties are subject to a Sunrise
operating deficit guarantee and seven additional properties will be subject a
guarantee upon opening. Sunrise does not expect to fund any amounts during
2002 under these guarantees.
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
The primary components of Sunrise's net deferred tax asset are as follows
(in thousands):
DECEMBER 31,
-------------------
2001 2000
-------------------
Deferred tax assets:
Operating loss carryforward $16,973 $ 11,632
Accrued expenses 2,624 5,792
Other 2,139 2,024
-------------------
Total deferred tax assets $21,736 $19,448
-------------------
Deferred tax liabilities:
Property and equipment $(66,542) $(41,128)
Other (5,474) (3,119)
-------------------
Total deferred tax liabilities (72,016) (44,247)
-------------------
Net deferred tax liability $(50,280) $(24,799)
===================
At December 31, 2001, Sunrise had regular federal net operating loss
carryforwards available to offset future taxable income of approximately $40
million, which expire from 2010 through 2019. This amount includes
approximately $6 million of net operating loss carryforwards acquired from
Karrington, which are subject to certain limitations on utilization. At
December 31, 2001, Sunrise had alternative minimum tax credits of
approximately $1 million and Work-Opportunity Tax Credits of approximately
$500,000 available to offset future federal tax liabilities. These tax credits
do not expire. Various Sunrise entities have fully utilized their net
operating loss carryforwards for state tax purposes.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Sunrise expects to fully utilize the loss carryforward prior to expiration.
F-24
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the provision for income taxes are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Current:
Federal $ 2,778 $ 1,501 $ 4,738
State 2,389 2,754 1,160
-----------------------------------------
Total current 5,167 4,255 5,898
Deferred:
Federal 23,805 11,235 4,507
State 2,421 32 (8)
Decrease in valuation allowance - - (2,569)
-----------------------------------------
Total deferred 26,226 11,267 1,930
-----------------------------------------
Total tax expense $ 31,393 $ 15,522 $ 7,828
=========================================
In 2001, 2000 and 1999, Sunrise paid federal and state income taxes, net
of refunds of $1 million, $3 million and $2 million, respectively. Current
taxes payable for 2001, 2000 and 1999 have been reduced by approximately $3
million, $1 million, and $8 million respectively, reflecting the tax benefit
to Sunrise of employee stock options exercised during the year. The tax
benefit has been recognized as an increase to additional paid-in capital.
The differences between the tax provision calculated at the statutory
federal income tax rate and the actual tax provision recorded for each year
are as follows:
YEAR ENDED DECEMBER 31,
2001 2000 1999
------------------------------------
Statutory rate 35% 35% 35%
State taxes, net 6 7 7
Tax exempt interest (1) (1) (3)
Other (1) (2) (2)
Valuation allowance - - (9)
------------------------------------
39% 39% 28%
====================================
16. RELATED-PARTY TRANSACTIONS
SUNRISE ASSISTED LIVING FOUNDATION
Sunrise Assisted Living Foundation, Inc. ("SALF"), a not-for-profit
organization, operates two schools, including day care centers. Paul and
Teresa Klaassen, Sunrise's founders, are on the Board of Directors of SALF.
SALF reimbursed Sunrise monthly for use of office facilities and support
services in the amount of $84,000 in 2001, 2000 and 1999. Such amounts are
included in operating revenue. Sunrise has also accepted a promissory note
from SALF during 2001 (see Note 4).
During 1999, a subsidiary of SALF provided certain health care services to
residents of Sunrise facilities located in Illinois. The SALF subsidiary
entered into various administrative, accounting and collection service
agreements with Sunrise affiliates. The service agreements allow for
reimbursement of costs of service plus a management fee. Sunrise recognized
management fees of $400,000, $200,000 and $49,000 in 2001, 2000 and 1999,
respectively. As of December 31, 2001, Sunrise owed SALF $500,000 under such
service agreements.
F-25
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GROUND LEASE
Sunrise has a 99 year ground lease with one of Sunrise's founders. The
ground lease expires in May 2085. The basic monthly rent is adjusted annually
based on the consumer price index. Rent expense under this lease was $296,000
for December 31,2001 and $262,000 for each of the years ended December 31,
2000 and 1999. Sunrise subleases one-half of this ground lease to SALF. The
sublease expires in May 2085 and requires payments equal to 50% of all
payments made by Sunrise under the ground lease. Sublease rental income was
$148,000 for December 31, 2001 and $131,000 for each of the years ended
December 31, 2000 and 1999. Lease expense is recorded net of the sublease
income.
JOINT VENTURES
Sunrise has entered into unconsolidated joint venture arrangements with a
third party that is providing up to $71 million of the equity capital to
develop up to 36 projects in the United States, United Kingdom and Canada. A
director of Sunrise, Craig Callen, is a managing director in the third party
that is providing the equity capital and a former director of Sunrise is a
general partner in the third party. Sunrise is providing management and
pre-opening services to the joint ventures on a contract-fee basis with rights
to acquire the assets in the future and has agreed to invest up to $8 million
of equity capital in the joint ventures. Sunrise recognized management and
contract services fees from these joint ventures of $4 million, $7 million and
$13 million, respectively, in 2001, 2000 and 1999. As of December 31, 2001,
2000 and 1999, the third party had provided approximately $51 million, $42
million and $23 million, respectively, and Sunrise has provided $8 million, $4
million and $2 million, respectively, of equity capital to the joint ventures.
For information on committed and funded loans to this third party, see Note 4.
17. PROFIT-SHARING PLAN
Sunrise has a profit-sharing plan (the "Plan") under Internal Revenue Code
Section 401(k). All employees of Sunrise are covered by the Plan and are
eligible to participate in the Plan after meeting certain eligibility
requirements. Deferred salary contributions are made through pre-tax salary
deferrals of between 1% and 16%. During 1999 and 2000, the Plan contained
three elements -- employee salary contributions, discretionary matching
employer contributions and special discretionary employer contributions.
Effective January 1, 2001, employees will vest in their matching employer
contributions 100% over four years at 25% each year. When an employee reaches
5 years of service, Sunrise will contribute $0.50 for every dollar the
employee contributes up to 7% of the employee's annual compensation. If the
employee has less than 5 years of service, the employer contribution will be
$0.25 for every dollar the employee contributes up to 7% of the employee's
annual compensation. The Plan has eliminated the discretionary matching
contributions and all employees who earn $85,000 or less annually are eligible
to receive regular matching contributions by Sunrise provided the employee
meets certain eligibility requirements. Matching contributions made by Sunrise
totaled $500,000, $300,000 and $300,000 during 2001, 2000 and 1999,
respectively.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts Sunrise could realize on disposition of
the financial instruments. The use of different market assumptions or
estimation methodologies may have an effect on the estimated fair value
amounts. The fair values of the notes receivable are discussed in Note 4.
Cash equivalents, accounts receivable, accounts payable and accrued
expenses, marketable securities, investments and other current assets and
liabilities are carried at amounts which reasonably approximate their fair
values.
F-26
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fixed rate debt with an aggregate carrying value of $448 million has an
estimated aggregate fair value of $347 million at December 31, 2001. Estimated
fair value of fixed rate debt is based on interest rates currently available
to Sunrise for issuance of debt with similar terms and remaining maturities.
The estimated fair value of Sunrise's variable rate debt is estimated to be
approximately equal to its carrying value of $182 million at December 31,
2001. The interest rate swap related to floating rate debt, net of taxes, (see
Note 7) has an estimated fair value of negative $3 million at December 31,
2001.
Management believes the net carrying amount of the notes receivable
approximates market value at December 31, 2001 and 2000.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 2001. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, these amounts have not been comprehensively
revalued for purposes of these financial statements since December 31, 2001
and current estimates of fair value may differ from the amounts presented
herein.
19. INFORMATION ABOUT SUNRISE'S SEGMENTS
Sunrise reports the results of its operations by its two operating
divisions - Sunrise Management Services and Sunrise Properties. Sunrise
Assisted Living, Inc. is 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 properties 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.
Segment information is as follows (in thousands):
YEAR ENDED DECEMBER 31,
2001 2000 1999
------------------------------
Operating Revenue:
Sunrise Management Services $295,459 $227,278 $170,892
Sunrise Properties 325,785 312,810 234,620
Elimination of intersegment revenue (193,025) (195,302) (150,293)
------------------------------
Total consolidated operating revenue 428,219 344,786 255,219
------------------------------
Operating Expenses:
Sunrise Management Services 266,356 206,060 151,657
Sunrise Properties 240,483 245,037 193,670
Elimination of intersegment expenses (193,025) (195,302) (150,293)
------------------------------
Total consolidated operating expenses 313,814 255,795 195,034
------------------------------
Properties - nonrecurring items 2,307 - (5,069)
------------------------------
Segment operating income 116,712 88,991 55,116
Reconciliation to net income:
Corporate operating expenses 8,965 8,481 3,710
------------------------------
Income from operations 107,747 80,510 51,406
Interest expense, net (26,176) (37,566) (21,750)
Equity in losses of unconsolidated assisted living facilities (1,169) (2,941) (1,239)
Minority interests (769) (203) (376)
Provision for income taxes (31,057) (15,522) (7,828)
Extraordinary gain, net of tax 525 - -
------------------------------
Total consolidated net income $49,101 $ 24,278 $ 20,213
==============================
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SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management services revenue from operations in England were $1 million, $1
million and $1 million for 2001, 2000 and 1999, respectively. Management
services revenue from operations in Canada were $3 million, $2 million and $1
million for 2001, 2000 and 1999, respectively. The remaining revenues and all
long-lived assets are domestic and substantially all assets are held by
Sunrise Properties.
20. QUARTERLY RESULT OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the
fiscal quarters: (in thousands, except per share amounts):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- -------------- ------------ -----------
2001
- ----
Operating revenue $104,049 $103,521 $108,359 $112,290
Net income 13,191 13,109 11,687 11,114
Diluted net income per
Common share $ 0.56 $ 0.55 $ 0.49 $ 0.47
2000
- ----
Operating revenue $76,802 $82,329 $90,484 $95,171
Net income 4,094 4,901 6,486 8,797
Diluted net income per
Common share
$ 0.19 $ 0.22 $ 0.30 $ 0.39
The sum of diluted net income per common share for the four quarters in
2001 and 2000 may not equal diluted net income per common share for the year
due to the changes in the number of weighted average shares outstanding and
fluctuations in the market price of Sunrise's common stock during the year.
F-28