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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 2002 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From ______ to ______
Commission file number: 0-20765
SUNRISE ASSISTED LIVING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1746596
(State or other jurisdiction of (I.R.S.Employer
incorporation of organization) Identification No.)
7902 WESTPARK DRIVE
MCLEAN, VIRGINIA 22102
(Address of principal executive offices)
(703) 273-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
As of May 1, 2002, there were 22,461,118 shares of the Registrant's Common
Stock outstanding.
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SUNRISE ASSISTED LIVING, INC.
FORM 10-Q
MARCH 31, 2002
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Income for the three
months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 26
2
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 60,683 $ 50,275
Accounts receivable, net 24,806 23,252
Notes receivable - affiliates 5,269 1,294
Deferred income taxes 17,156 21,736
Prepaid expenses and other current assets 20,929 20,920
---------- ----------
Total current assets 128,843 117,477
Property and equipment, net 767,734 841,414
Notes receivable - affiliates 94,949 94,305
Management contracts and leaseholds, net 12,797 22,999
Costs in excess of assets acquired, net 32,749 32,749
Investments in unconsolidated assisted living facilities 38,714 36,589
Investments 5,750 5,750
Other assets 25,282 26,332
---------- ----------
Total assets $1,106,818 $1,177,615
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,833 $ 12,164
Accrued expenses and other current liabilities 35,900 32,117
Deferred revenue 37,848 7,468
Current maturities of long-term debt 76,248 26,925
---------- ----------
Total current liabilities 153,829 78,674
Long-term debt, less current maturities 444,330 603,831
Investments in unconsolidated assisted living facilities 2,236 2,284
Deferred income taxes 73,416 72,016
Other long-term liabilities 5,906 7,658
---------- ----------
Total liabilities 679,717 764,463
Minority interests 2,552 2,451
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, 22,403,800 and
22,166,406 shares issued and outstanding in 2002 and 2001, respectively 224 222
Additional paid-in capital 314,897 310,423
Retained earnings 111,742 104,270
Accumulated other comprehensive loss (2,314) (4,214)
---------- ----------
Total stockholders' equity 424,549 410,701
---------- ----------
Total liabilities and stockholders' equity $1,106,818 $1,177,615
========== ==========
Note: The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three months ended
March 31,
-----------------------------------
2002 2001
--------- --------
(Unaudited) (Unaudited)
Operating revenue:
Resident fees $ 66,796 $ 62,568
Management and contract services 32,069 20,977
Income from property sales 12,252 20,504
-------- --------
Total operating revenue 111,117 104,049
-------- --------
Operating expenses:
Facility operating 44,432 41,815
Management and contract services 24,460 13,144
Facility development and pre-rental 2,568 1,741
General and administrative 8,143 7,407
Depreciation and amortization 6,791 7,465
Facility lease 2,167 2,656
-------- --------
Total operating expenses 88,561 74,228
-------- --------
Income from operations 22,556 29,821
Interest income (expense):
Interest income 2,878 3,218
Interest expense (9,213) (11,491)
-------- --------
Total interest expense (6,335) (8,273)
Equity in losses of unconsolidated assisted
living facilities (52) (414)
Minority interests (101) (25)
-------- --------
Income before income taxes 16,068 21,109
Provision for income taxes (6,106) (8,233)
-------- --------
Net income before extraordinary gain (loss) 9,962 12,876
-------- --------
Extraordinary gain (loss), net of tax (2,490) 315
-------- --------
Net income $ 7,472 $ 13,191
======== ========
Net income per common share:
Basic:
Net income before extraordinary gain (loss) $ 0.45 $ 0.60
Extraordinary gain (loss) (0.11) 0.01
-------- --------
Basic net income per common share $ 0.33 $ 0.61
======== ========
Diluted:
Net income before extraordinary gain (loss) $ 0.42 $ 0.55
Extraordinary gain (loss) (0.09) 0.01
-------- --------
Diluted net income per common share $ 0.32 $ 0.56
======== ========
See accompanying notes.
4
SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
-----------------------
2002 2001
--------- ---------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 7,472 $ 13,191
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income from property sales (1,439) (10,415)
Equity in earnings of unconsolidated assisted living facilities 52 531
Minority interests 101 25
Provision for bad debts 165 674
Provision for deferred income taxes 4,580 8,434
Depreciation and amortization 6,791 7,348
Amortization of financing costs and discount on long-term debt 952 890
Extraordinary (gain) loss, net of tax 2,490 (315)
Changes in operating assets and liabilities:
(Increase) decrease:
Accounts receivable (2,540) (4,113)
Prepaid expenses and other current assets 1,543 257
Other assets 641 113
Increase (decrease):
Accounts payable and accrued expenses (7,565) 2,174
Deferred revenue (194) 297
Other liabilities 940 744
--------- ---------
Net cash provided by operating activities 13,989 19,835
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of properties 44,139 33,435
Investment in property and equipment, net 65,966 46,121
Increase in investment and notes receivable (12,525) (25,693)
Proceeds from investments and notes receivable 8,905 27,814
Increase in restricted cash and cash equivalents 4,092 (316)
Contributions to investments in unconsolidated
assisted living facilities (126) (429)
--------- ---------
Net cash provided by investing activities 110,451 80,932
--------- ---------
FINANCING ACTIVITIES
Net proceeds from exercised options 4,476 351
Additional borrowings under long-term debt 219,505 16,265
Repayment of long-term debt (332,195) (106,173)
Financing costs paid (5,818) (66)
--------- ---------
Net cash used in financing activities (114,032) (89,623)
--------- ---------
Net increase in cash and cash equivalents 10,408 11,144
Cash and cash equivalents at beginning of period 50,275 42,874
--------- ---------
Cash and cash equivalents at end of period $ 60,683 $ 54,018
========= =========
See accompanying notes.
5
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Sunrise Assisted
Living, Inc. and subsidiaries ("Sunrise") are unaudited and include all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the three-month periods ended March 31,
2002 and 2001 pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with Sunrise's consolidated financial statements and the notes
thereto for the year ended December 31, 2001 included in Sunrise's 2001 Annual
Report to Shareholders. Operating results for the three-month periods ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2002.
Certain 2001 balances have been reclassified to conform with the 2002
presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, Sunrise adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In accordance
with 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 Company will test goodwill for impairment using the
two-step process prescribed in Statement 142. The first step is a screen for
potential impairment, while the second step measures the amount of the
impairment, if any. Sunrise expects to perform the first of the required
impairment tests as of January 1, 2002 in the second quarter of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as a cumulative effect of a change in accounting principle in the
first quarter 2002. Net income and earnings per share before extraordinary items
would have been $13 million and $0.55 per share for the first quarter of 2001 if
Statement 142 had been applied to the first quarter of 2001.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
On January 1, 2002, Sunrise adopted Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. 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. Long-lived assets 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
6
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. The adoption of FAS 144 did not have a material
impact on the consolidated financial position or results of operation of
Sunrise.
3. DEBT
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 bear interest at 5 1/2% per annum, payable semiannually on
June 15 and December 15 of each year. 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.
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 an extraordinary loss
of approximately $4 million ($2 million net of tax) 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.
4. COMMITMENTS
Sunrise has entered into contracts to purchase properties for
development of additional assisted living facilities. Total contracted purchase
price of these sites amounts to $78 million. Sunrise is pursuing 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, may guarantee that properties
will be completed at budgeted costs approved by all partners in the joint
venture and may provide operating deficit guarantees as a part of certain
management contracts. The only change to Sunrise's guarantees disclosed in its
2001 Annual Report on Form 10-K is the addition of $2 million of debt guarantees
on two facilities. These new guarantees will be removed upon stabilization of
the underlying facilities.
7
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. NET INCOME PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income per share amounts presented in the accompanying consolidated statements
of income (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
Numerator for basic net income per share:
Net income before extraordinary gain (loss) $ 9,962 $12,876
Extraordinary gain (loss), net of tax (2,490) 315
------- -------
Net income $ 7,472 $13,191
======= =======
Numerator for diluted net income per share:
Net income before extraordinary gain (loss) $ 9,962 $12,876
Assumed conversion of convertible notes, net of tax 1,229 1,336
------- -------
Diluted net income before extraordinary gain (loss) 11,191 14,212
Extraordinary gain (loss), net of tax (2,490) 315
------- -------
Diluted net income $ 8,701 $14,527
======= =======
Denominator:
Denominator for basic net income per common
share-weighted average shares 22,339 21,603
Effect of dilutive securities:
Employee stock options 716 527
Convertible notes 3,749 3,886
------- -------
Denominator for diluted net income per common
share-weighted average shares plus assumed
conversions 26,804 26,016
======= =======
Basic net income per common share:
Net income before extraordinary gain (loss) $ 0.45 $ 0.60
Extraordinary gain (loss), net of tax (0.11) 0.01
------- -------
Net income $ 0.33 $ 0.61
======= =======
Diluted net income per common share:
Net income before extraordinary gain (loss) $ 0.42 $ 0.55
Extraordinary gain (loss), net of tax (0.09) 0.01
------- -------
Net income $ 0.32 $ 0.56
======= =======
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.
8
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
Included in prepaid expenses and other current assets are net
receivables from unconsolidated partnerships or limited liability companies of
$12 million and $14 million as of March 31, 2002 and March 31, 2001,
respectively, which relate primarily to development activities.
Summary financial information for unconsolidated entities (7% to 50%
owned) accounted for by the equity method is as follows:
As of and for the quarter ended March 31,
2002 2001
(in thousands)
Assets, principally property and equipment 1,064,060 704,217
Liabilities, principally long-term debt 788,495 547,009
Equity 275,565 157,208
Revenues 51,061 35,098
Net loss (6,496) (8,798)
Total revenues from related unconsolidated entities was $26 million and
$16 million for the quarters ended March 31, 2002 and 2001, respectively.
7. INFORMATION ABOUT SUNRISE'S SEGMENTS
Sunrise reports the results of its operations by its two operating
segments - Sunrise Management Services and Sunrise Properties. Sunrise Assisted
Living, Inc. is the parent company of each segment and develops Sunrise's
strategy and overall business plan and coordinates the activities of all
business segments. Sunrise Management Services provides full-service assisted
living management services, in the U.S. and internationally, for all homes owned
by Sunrise or managed by Sunrise for third-parties. Sunrise Management Services
also provides consulting services on market and site selection and pre-opening
sales and marketing. Sunrise Properties is responsible for all Sunrise real
estate operations, including development, construction, property management,
project and permanent financing, real estate and property sales.
9
SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Segment information is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
2002 2001
------------- --------------
Operating Revenue:
Sunrise Management Services $ 82,102 $ 66,884
Sunrise Properties 79,722 84,393
Elimination of intersegment revenue (50,707) (47,228)
------------- --------------
Total consolidated operating revenue 111,117 104,049
------------- --------------
Operating Expenses:
Sunrise Management Services 74,850 60,394
Sunrise Properties 62,530 59,006
Elimination of intersegment expenses (50,707) (47,228)
------------- --------------
Total consolidated operating expenses 86,673 72,172
------------- --------------
Segment operating income 24,444 31,877
Reconciliation to net income:
Corporate operating expenses 1,888 1,939
------------- --------------
Income from operations 22,556 29,938
Interest expense, net (6,335) (8,273)
Equity in losses of unconsolidated assisted
living facilities (52) (531)
Minority interests (101) (25)
Provision for income taxes (6,106) (8,233)
------------- --------------
Total consolidated net income
before extraordinary gain (loss) 9,962 12,876
Extraordinary gain (loss), net of tax (2,490) 315
------------- --------------
Total consolidated net income $ 7,472 $ 13,191
============= ==============
8. COMPREHENSIVE INCOME
Total comprehensive income was $9 million and $13 million,
respectively, for the three months ended March 31, 2002 and March 31, 2001. The
difference between net income and total comprehensive income is primarily due to
the impact of the fair value accounting of interest rate swaps.
9. PROPERTY SALE / LONG-TERM MANAGE BACK PROGRAM
On March 22, 2002, Sunrise completed the previously announced
sale/long-term manage back of 12 assisted living properties to a real estate
investment entity advised by Macquarie Capital Partners for an aggregate sales
price of $197 million. Sunrise retained a 20% ownership interest in the joint
venture. Sunrise will continue to operate the properties under long-term
management agreements. The properties had a combined book value of approximately
$137 million. Based on the sale of an 80% interest and transaction costs of
approximately $5 million, Sunrise expects to realize up to $43 million in gain
over the four quarters following the sale, subject to meeting certain operating
contingencies being met, of which $11 million was recognized in the first
quarter of 2002.
10
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 and in
our 2001 Annual Report on Form 10-K. 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 March 31,
2002, we operated or managed 184 facilities in 24 states and the District of
Columbia, six in Canada and one in the United Kingdom, with a resident capacity
of more than 15,200 residents, including 87 facilities that are wholly owned by
us, four facilities in which we have a controlling interest, 77 facilities in
which we have minority ownership interests and 23 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Refer to our 2001 Annual Report on Form 10-K for a discussion of our
critical accounting policies which include the development of facilities, both
wholly owned or through joint ventures, the estimates associated with financing
and managing such facilities, and the selling of completed facilities. As a part
of Sunrise's operating strategy, Sunrise may provide limited debt guarantees to
certain of its joint ventures, may guarantee that properties will be completed
at budgeted costs approved by all partners in the joint venture and may provide
operating deficit guarantees as a part of certain management contracts. The only
change to Sunrise's guarantees disclosed in its 2001 Annual Report on Form 10-K
is the addition of $2 million of debt guarantees on two facilities. These new
guarantees will be removed upon stabilization of the underlying facilities.
On March 22, 2002, we completed the previously announced sale/long-term
manage back of 12 assisted living properties to a real estate investment entity
advised by Macquarie Capital Partners for an aggregate sales price of $197
million. We retained a 20% ownership interest in the joint venture. We will
continue to operate the properties under long-term management agreements. The
properties had a combined book value of approximately $137 million. Based on the
sale of an 80% interest and transaction costs of approximately $5 million, we
expect to realize up to $43 million in gain over the four quarters following the
sale, subject to meeting certain operating contingencies being met, of which $11
million was recognized in the first quarter of 2002.
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. For the first quarter of
2002 and 2001, resident fees and management contract services comprised 89% and
80% 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 the first quarter of 2002 and 2001, approximately 99%
of our resident fee revenue was derived from private 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2001
CONSOLIDATED
We continued to experience growth in operations over the 12 months
ended March 31, 2002 and continued to capitalize on our brand awareness by
accepting third-party management and development contracts. During this period,
we began operating 19 additional facilities in which we have an ownership
interest and managing four additional facilities for independent third parties,
partially offset by three third party management contract terminations and the
100% sale of a wholly owned property in Iowa.
Total operating revenue increased to $111 million for the three months
ended March 31, 2002 from $104 million for the three months ended March 31,
2001. Net income decreased by $6 million to $7 million for the three months
ended March 31, 2002 (including an after tax extraordinary loss of $2 million),
or $.32 per share (diluted), from $13 million for the three months ended March
31, 2001 (including an after tax extraordinary gain of $300,000), or $0.56 per
share (diluted). The decrease in net income between March 2002 and March 2001
periods was mainly due to a decrease in income from property sales. In addition,
we recorded an extraordinary loss, after tax, of $2 million during the first
quarter of 2002 for fees associated with our $92 million term loan and the
premium paid for the early redemption of the convertible notes.
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, Sunrise Management
Services 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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth the components of Sunrise Management
Services net income (in thousands):
Three Months Ended
March 31,
-------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------------------
Operating revenue:
Management and contract services $82,102 $66,884
Operating expenses:
Management and contract services 68,892 54,969
General and administrative 5,566 5,047
Depreciation and amortization 392 378
-------------------------------------------------------------------------------------------
Total operating expenses 74,850 60,394
-------------------------------------------------------------------------------------------
Operating income 7,252 6,490
Provision for income taxes (2,756) (2,531)
-------------------------------------------------------------------------------------------
Sunrise Management Services net income $ 4,496 $ 3,959
-------------------------------------------------------------------------------------------
Note: Management and contract services revenue includes intercompany revenue
from Sunrise Properties in the amounts of $50,707 and $47,228 for the first
quarter of 2002 and 2001, 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 $44,432 and $41,825 for the first quarter of 2002 and 2001,
respectively, which is also eliminated in the consolidated financial
statements.
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 23% to $82 million for the three months ended
March 31, 2002 from $67 million for the three months ended March 31, 2001. 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 11% to 191 facilities at
March 31, 2002, up from 172 facilities at March 31, 2001. This growth resulted
from the completion and opening of 19 additional facilities and the addition of
four managed facilities, partially offset by three third party management
contract terminations and the 100% sale of a wholly owned property in Iowa.
Additionally, there was a 48% increase in the number of facilities in
unconsolidated joint ventures (77 versus 52), many of which are accounted for
under contract accounting which requires the presentation of reimbursable
expenses as revenues in the income 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 three months ended March 31, 2002 increased 24% to $75 million from $60
million for the three months ended March 31, 2001. Management and contract
services expenses for the three months ended March 31, 2002 increased $14
million, or 25%, to $69 million from $55 million for the three months ended
March 31, 2001. This increase was directly related to the increase in the number
of communities operated by Management Services. General and administrative
expenses increased $500,000 to $5.5 million for the three
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
months ended March 31, 2002 from $5 million for the three months ended March 31,
2001. 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.
SUNRISE PROPERTIES
Sunrise Properties is responsible for our real estate operations,
including development, construction, project and permanent financing and
property sales. As of March 31, 2002, Sunrise Properties wholly owned 87
communities, a 9% decrease from the 95 communities wholly owned as of March 31,
2001, reflecting the sale during the quarter of an 80% interest in 12 formerly
wholly owned communities and the opening during the quarter of four wholly owned
communities. In addition, Sunrise Properties has majority or controlling
ownership interests in four communities and minority ownership interests in
another 77 communities.
The following table sets forth the components of Sunrise Properties net
income (in thousands):
Three Months Ended
March 31,
- --------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------
Operating revenue:
Resident fees $66,796 $62,568
Management and contract services 674 1,321
Income from property sales 12,252 20,504
- --------------------------------------------------------------------------------------
Total operating revenue 79,722 84,393
Operating expenses:
Facility operating 44,432 41,815
Management and contract services 6,275 5,403
Facility development and pre-rental 2,568 1,741
General and administrative 747 1,002
Depreciation and amortization 6,341 6,389
Facility lease 2,167 2,656
- --------------------------------------------------------------------------------------
Total operating expenses 62,530 59,006
- --------------------------------------------------------------------------------------
Operating income 17,192 25,387
Interest expense, net (6,297) (8,273)
Equity in losses of unconsolidated
assisted living facilities (52) (531)
Minority interest (101) (25)
Provision for income taxes (4,082) (6,458)
- --------------------------------------------------------------------------------------
Sunrise Properties net income $ 6,660 $10,100
- --------------------------------------------------------------------------------------
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 $6,275 and $5,403 for the
three months ended March 31, 2002 and 2001, respectively, that is eliminated
in the consolidated financial statements.
Income from property sales has resulted from the following
transactions:
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the first quarter of 2002, we recognized $1 million of gains
previously deferred on asset sales during 2001 as a result of certain
contingencies being met in the first quarter of 2002. Also, we recognized $11
million of gain from the sale/long-term manage back transaction in the first
quarter of 2002.
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 decreased 6% to $80 million for the
three months ended March 31, 2002 from $84 million for the three months ended
March 31, 2001. Resident fees, including community fees, for the three months
ended March 31, 2002 increased $4 million, or 7%, to $67 million from $63
million for the three months ended March 31, 2001. This increase was due
primarily to a $6 million increase in resident fees from stabilized communities
compared to the prior year period and a $5 million increase in resident fees
generated from the operations of nine consolidated assisted living facilities
open during the first quarter of 2002 that were not open in the same period in
the prior year. Offsetting this increase, in part, was a decrease of $7 million
due to the sale of nine communities sold in early 2001 and four communities sold
at the end of the fourth quarter in 2001.
Average resident occupancy for our 93 stabilized communities for the
three months ended March 31, 2002 was 89.2% compared to 91.2% for our 83
communities stabilized for the three months ended March 31, 2001. We attribute
the stabilized occupancy drop to the change in composition of the stabilized
portfolio. Our sale/long-term manage back program has the effect of removing
seasoned homes from the stabilized portfolio as less mature homes are added each
quarter. Four newly stabilized homes entered the stabilized portfolio in the
first quarter of 2002 and had a blended occupancy of 69.8%. Due in part to the
larger size of our developments and the general increase in competition, the
lease-up period (period of time from opening to stabilization) is now typically
taking 12 to 15 months. Although the lease-up period is taking longer, we have
not changed our definition of what we consider a stabilized home. For the 79
communities owned and stabilized in the three months ended March 31, 2002 and
2001, average resident occupancy slightly decreased to 90.6% from 90.7% and
operating margins increased to 34.8% from 33.6%. The strong improvement in the
operating margins can be attributed to expense controls and improvement in newly
stabilized homes. We define stabilized communities as those 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 communities for the three months
ended March 31, 2002 was $112 compared to $104 for the three months ended March
31, 2001. For the 79 facilities owned and stabilized in the three months ended
March 31, 2002 and 2001, average daily rate increased to $108 from $105. 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.
Operating Expenses. Sunrise Properties operating expenses for the three
months ended March 31, 2002 increased 6% to $63 million from $59 million for the
three months ended March 31, 2001. Facility operating expenses for the three
months ended March 31, 2002 increased 6% to $44 million from $42 million for the
three months ended March 31, 2001. This increase was due primarily to a $3
million increase in facility operating expenses from the stabilized communities
compared to the prior year period and a $3 million increase in facility
operating expenses, generated from the operations of nine consolidated assisted
living facilities open during the first quarter of 2002 that were not open in
the same period in the prior year. Offsetting this increase, in part, was a
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
decrease of $4 million due to the sale of nine communities sold in early 2001
and four communities sold at the end of the fourth quarter in 2001.
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 increased by 16% to $6
million for the three months ended March 31, 2002 from $5 million for the three
months ended March 31, 2001. These amounts are eliminated in the consolidated
financial statements. At March 31, 2002, Sunrise Properties consolidated 91
facilities compared to 99 facilities at March 31, 2001.
Depreciation and amortization expense stayed constant at $6 million for
the three months ended March 31, 2002 and 2001 as a direct result of the
cessation of amortization of goodwill in accordance with new accounting guidance
(see Note 2 of the consolidated financial statements), the timing of sales of
properties and the opening of new properties.
Net Interest Expense. Net interest expense decreased for the three
months ended March 31, 2002 to $6 million from $8 million for the three months
ended March 31, 2001. This decline was due to a decrease in the average balance
of debt outstanding, as well as a decline in the interest rate that we pay on
our variable rate debt, during the three months ended March 31, 2002 compared to
the same period in the prior year. The weighted-average interest rate on our
fixed and variable rate debt for the three months ended March 31, 2002 was 6.06%
compared to 6.85% for the three months ended 2001.
CORPORATE EXPENSES
Operating Expenses. Parent company expenses before extraordinary items
were $2 million and $2 million for the three months ended March 31, 2002 and
2001, respectively.
Provision for Income Taxes. The provision for income taxes for Sunrise
was $6 million for the three months ended March 31, 2002 compared to $8 million
for the three months ended March 31, 2001. The decrease is due to a decrease in
pre-tax income in the first quarter of 2002 and the use of an effective tax rate
of 38% for the three months ended March 31, 2002 compared to 39% for the three
months ended March 31, 2001. The decrease in the effective tax rate is due to a
decrease in Sunrise's state effective tax rate.
Extraordinary Gain (Loss). In the first quarter of 2002, we recognized
an extraordinary loss, net of tax, of $2 million for fees associated with our
$92 million term loan and the premium paid for the early redemption of our 5
1/2% convertible notes. In the same period in 2001, we recognized an
extraordinary gain, net of tax, of $300,000 in connection with the early
extinguishment of $6 million of the outstanding 5 1/2% convertible notes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had approximately $61 million in unrestricted
cash and cash equivalents, $205 million available under credit facilities and
$51 million in working capital, excluding the $76 million current debt
maturities. We have extension or take-out commitments on the majority of this
debt and expect to refinance or pay off the debt as it matures.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Excluding current debt maturities, working capital decreased $15
million from $66 million at December 31, 2001 primarily due to an increase in
deferred revenue from property sales, partially offset by an increase in cash
and cash equivalents and a decrease in accounts payable.
Net cash provided by operating activities for the three months ended
March 31, 2002 and 2001 was approximately $14 million and $20 million,
respectively. Net cash provided by operating activities for the three months
ended March 31, 2002 reflects the decrease in accounts payable, due to the
timing of payment of invoices, offset by the extraordinary loss associated with
our convertible debt and term loan activity.
During the three months ended March 31, 2002 and 2001, net cash
provided by investing activities was $110 million and $81 million, respectively.
Investing activities included investment in property and equipment related to
the construction of assisted living facilities that were exceeded by facility
sales in the amounts of $66 million and $46 million, respectively. Also cash
provided by proceeds from the sale of 12 assisted living facilities in the first
quarter of 2002 amounted to $44 million plus $9 million of collections of notes
receivable. In the first quarter of 2002, we invested $13 million to facilitate
the development of assisted living facilities with third parties, compared to
$26 million in the first quarter of 2001.
Net cash used in financing activities was $114 million and $90 million
for three months ended March 31, 2002 and 2001, respectively. Financing
activities in the first quarter of 2002 and 2001 included additional borrowings
of $220 million and $16 million (see Note 3 of the consolidated financial
statements), respectively, offset by debt repayments of $332 million and $106
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 the first quarter of 2002 and 2001
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
March 31, 2002, we had $521 million of outstanding debt at a weighted average
interest rate of 6.06%. Of the amount of outstanding debt, we had $372 million
of fixed-rate debt at a weighted average interest rate of 6.73% and $149 million
of variable rate debt at a weighted average interest rate of 4.41%.
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. Craig Callen, a director of Sunrise, is a managing
director of Credit Suisse First Boston Corporation. 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 proceeds of a convertible notes offering that closed in January 2002, as
described below. We recorded an extraordinary loss, net of tax, of approximately
$2 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.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In January 2002, we issued and sold $125 million aggregate principal
amount of 5 1/4% convertible subordinated notes due February 2009 to Credit
Suisse First Boston Corporation, Robertson Stephens, Inc. and First Union
Securities, Inc., as the initial purchasers, in a private placement. 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 March 31, 2002, we had $76 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 we expect to refinance, extend or pay off during
2002.
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 the first quarter of 2002 for swap transactions. The fair value of
the swaps was negative $2 million as of March 31, 2002. Based on the fair value
of the swaps at March 31, 2002, we would incur approximately $1 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;
- 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 March
31, 2002, 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
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $82 million to complete the facilities we currently have
under construction. We have entered into contracts to purchase and additional
sites. The total contracted purchase price of these sites is $78 million. We
estimate that it will cost approximately $443 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:
- - 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
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 145, Recission of FASB Statements 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. SFAS 145 requires companies
to no longer 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. This Statement is effective for fiscal years
beginning after December 15, 2002. Upon adoption, we will be required to
reclassify current and prior year's amounts to reflect this new Statement.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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 March 31, 2002.
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 26 facilities
in which we own less than 10%, 24 facilities in which we own between 10% and
20%, 23 facilities in which we own between 20% and 30% and 4 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 March 31,
2002, 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 $149 million at
March 31, 2002 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 March 31, 2002.
22
Estimated
Maturity Date Fair Market
2003 2004 2005 2006 2007 Thereafter Value
---- ---- ---- ---- ---- ---------- -----
(dollars in thousands)
ASSETS
Notes receivable
Fixed rate $ 1,189 $ 24,615 $ 2,703 $28,967 $ 400 $ 38,264 $ 96,138
Average interest rate 7.9% 10.4% 6.0% 10.0% 10.0% 13.7% --
Variable rate $ 4,080 -- -- -- -- -- $ 4,080
Average interest rate 4.6% -- -- -- -- -- --
Investments
Bonds -- -- -- -- -- $ 5,750 $ 5,750
Average interest rate -- -- -- -- -- 11.0% --
LIABILITIES
Debt
Fixed rate (1) $ 1,963 $ 78,679 $127,946 $ 1,010 $ 2,515 $ 34,326 $257,649
Average interest rate 8.6% 6.4% 7.8% 9.2% 9.4% 8.8% --
Variable rate $ 74,285 $ 18,669 $ 20,553 $ 200 $31,232 $ 4,200 $149,139
Average interest rate 4.3% 7.8% 4.0% 1.6% 3.0% 1.6% --
Convertible notes -- -- -- -- -- $125,000 $119,850
Average interest rate -- -- -- -- -- 5.3% --
(1) Includes the fair value of interest rate swaps that convert $125.0 million
of variable rate debt to fixed rate.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On January 30, 2002, Sunrise issued and sold a total of $125 million
aggregate principal amount of 5 1/4% convertible subordinated notes
due February 1, 2009 to Credit Suisse First Boston Corporation,
Robertson Stephens, Inc. and First Union Securities, Inc.
(collectively, the "Initial Purchasers") in a private placement. The
notes were sold to the Initial Purchasers at a price equal to 97% of
the aggregate principal amount of the notes. The offering was made
to qualified institutional buyers under Rule 144A of the Securities
Act of 1933. The notes are convertible at any time prior to maturity
into shares of Sunrise common stock at a conversion price of $35.84
per share, subject to certain adjustments. This is equivalent to a
conversion rate of approximately 27.9018 shares per $1,000 principal
amount of notes.
(d) Not applicable.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Exhibit Name
- ---------- ------------
4.1 Indenture, dated as of January 30, 2002, between Sunrise and
First Union National Bank, as Trustee (incorporated herein
by reference to Exhibit 4.1 to the Company's Form S-3
Registration Statement (No. 333-85622)
4.2 Registration Rights Agreement, dated as of January 24,
2002, by and among Sunrise and Credit Suisse First Boston
Corporation, Robertson Stephens, Inc. and First Union
Securities, Inc. (incorporated herein by reference to
Exhibit 4.2 to the Company's Form S-3 Registration
Statement (No. 333-85622)
10.1 Credit Agreement dated as of January 11, 2002 among
Sunrise Assisted Living, Inc., as Borrower, Fleet National
Bank, as Administrative Agent, and certain lenders from
time to time parties to the Credit Agreement
10.2 Term Note dated January 11, 2002 by and between Sunrise
Assisted Living, Inc., the Borrower and Fleet National
Bank, the Lender in the principal amount of $52 million
10.3 Term Note dated January 11, 2002 by and between Sunrise
Assisted Living, Inc., the Borrower and First Union
National Bank, as a Lender in the principal amount of $15
million
10.4 Term Note dated January 11, 2002 by and between Sunrise
Assisted Living, Inc., the Borrower and Credit Suisse
First Boston, Cayman Island Branch, as a Lender in the
principal amount of $25 million
10.5 Guaranty dated January 11, 2002 by and between certain
subsidiaries of Sunrise Assisted Living Investments, Inc.,
Sunrise Assisted Living Investments, Inc., (jointly and
severally, the Guarantors) for the benefit of Fleet National
Bank, as administrative agent for the Lenders
10.6 Master Credit Facility Agreement by and between Sunrise
Riverside Assisted Living, L.P., Sunrise Parma Assisted
Living, L.L.C., Sunrise Wilton Assisted Living, L.L.C.,
Sunrise Wall Assisted Living, L.L.C., Sunrise Weston
Assisted Living, Limited Partnership and Glaser Financial
Group, Inc. dated as of November 29, 2001, as amended
24
(b) REPORTS ON FORM 8-K
On January 15, 2002, Sunrise filed a Form 8-K with the Securities and
Exchange Commission to announce that on February 12, 2002 it will redeem all
of the remaining $108 million of its outstanding 5 1/2% convertible
subordinated notes due in 2002.
On January 22, 2002, Sunrise filed a Form 8-K with the Securities and
Exchange Commission to announce its intention, subject to market and other
conditions, to offer in a private placement approximately $100 million in
Convertible Subordinated Notes due February 1, 2009.
On January 25, 2002, Sunrise filed a Form 8-K with the Securities and
Exchange Commission to announce that it had entered into an agreement on
January 24, 2002 to sell $100 million of 5 1/4% Convertible Subordinated
Notes due February 1, 2009 in a private placement.
On January 30, 2002, Sunrise filed a Form 8-K with the Securities and
Exchange Commission to announce that it had closed its issuance and sale of
$125 million aggregate principal amount of 5 1/4% Convertible Subordinated
Notes due February 1, 2009.
On February 12, 2002, Sunrise filed a Form 8-K with the Securities and
Exchange Commission to provide information on Exhibit 99.1 to be included in
its slideshow presentation.
On February 28, 2002, Sunrise filed a Form 8-K with the Securities and
Exchange Commission to revise Exhibit 99.1 to be included in its slideshow
presentation.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE ASSISTED LIVING, INC.
(Registrant)
Date: May 14, 2002 /s/ Larry E. Hulse
- ------------------------------- -------------------------------------
Larry E. Hulse
Chief Financial Officer
Date: May 14, 2002 /s/ Carl G. Adams
- ------------------------------- -------------------------------------
Carl G. Adams
Chief Accounting Officer
26
INDEX OF EXHIBITS
Exhibit No. Exhibit Name Page
----------- ------------ ----
4.1 Indenture, dated as of January 30, 2002, between
Sunrise and First Union National Bank, as Trustee
(incorporated herein by reference to Exhibit 4.1 to
the Company's Form S-3 Registration Statement (No.
333-85622)
4.2 Registration Rights Agreement, dated as of January
24, 2002, by and among Sunrise and Credit Suisse
First Boston Corporation, Robertson Stephens, Inc.
and First Union Securities, Inc. (incorporated
herein by reference to Exhibit 4.2 to the
Company's Form S-3 Registration Statement (No.
333-85622)
10.1 Credit Agreement dated as of January 11, 2002
among Sunrise Assisted Living, Inc., as Borrower,
Fleet National Bank, as Administrative Agent, and
certain lenders from time to time parties to the
Credit Agreement
10.2 Term Note dated January 11, 2002 by and between
Sunrise Assisted Living, Inc., the Borrower and
Fleet National Bank, the Lender in the principal
amount of $52 million
10.3 Term Note dated January 11, 2002 by and between
Sunrise Assisted Living, Inc., the Borrower and
First Union National Bank, as a Lender in the
principal amount of $15 million
10.4 Term Note dated January 11, 2002 by and between
Sunrise Assisted Living, Inc., the Borrower and
Credit Suisse First Boston, Cayman Island Branch,
as a Lender in the principal amount of $25 million
10.5 Guaranty dated January 11, 2002 by and between
certain subsidiaries of Sunrise Assisted Living
Investments, Inc., Sunrise Assisted Living
Investments, Inc., (jointly and severally, the
Guarantors) for the benefit of Fleet National
Bank, as administrative agent for the Lenders
10.6 Master Credit Facility Agreement by and between
Sunrise Riverside Assisted Living, L.P., Sunrise
Parma Assisted Living, L.L.C., Sunrise Wilton
Assisted Living, L.L.C., Sunrise Wall Assisted
Living, L.L.C., Sunrise Weston Assisted Living,
Limited Partnership and Glaser Financial Group,
Inc. dated as of November 29, 2001, as amended
27