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EX-2.1 - EX-2.1 - SUNRISE SENIOR LIVING INCw76123exv2w1.htm
EX-2.3 - EX-2.3 - SUNRISE SENIOR LIVING INCw76123exv2w3.htm
EX-2.2 - EX-2.2 - SUNRISE SENIOR LIVING INCw76123exv2w2.htm
EX-10.5 - EX-10.5 - SUNRISE SENIOR LIVING INCw76123exv10w5.htm
EX-31.2 - EX-31.2 - SUNRISE SENIOR LIVING INCw76123exv31w2.htm
EX-10.2 - EX-10.2 - SUNRISE SENIOR LIVING INCw76123exv10w2.htm
EX-10.6 - EX-10.6 - SUNRISE SENIOR LIVING INCw76123exv10w6.htm
EX-10.9 - EX-10.9 - SUNRISE SENIOR LIVING INCw76123exv10w9.htm
EX-31.1 - EX-31.1 - SUNRISE SENIOR LIVING INCw76123exv31w1.htm
EX-10.4 - EX-10.4 - SUNRISE SENIOR LIVING INCw76123exv10w4.htm
EX-10.7 - EX-10.7 - SUNRISE SENIOR LIVING INCw76123exv10w7.htm
EX-10.3 - EX-10.3 - SUNRISE SENIOR LIVING INCw76123exv10w3.htm
EX-32.2 - EX-32.2 - SUNRISE SENIOR LIVING INCw76123exv32w2.htm
EX-10.1 - EX-10.1 - SUNRISE SENIOR LIVING INCw76123exv10w1.htm
EX-10.8 - EX-10.8 - SUNRISE SENIOR LIVING INCw76123exv10w8.htm
EX-32.1 - EX-32.1 - SUNRISE SENIOR LIVING INCw76123exv32w1.htm
EX-10.14 - EX-10.14 - SUNRISE SENIOR LIVING INCw76123exv10w14.htm
EX-10.13 - EX-10.13 - SUNRISE SENIOR LIVING INCw76123exv10w13.htm
EX-10.31 - EX-10.31 - SUNRISE SENIOR LIVING INCw76123exv10w31.htm
EX-10.19 - EX-10.19 - SUNRISE SENIOR LIVING INCw76123exv10w19.htm
EX-10.20 - EX-10.20 - SUNRISE SENIOR LIVING INCw76123exv10w20.htm
EX-10.16 - EX-10.16 - SUNRISE SENIOR LIVING INCw76123exv10w16.htm
EX-10.17 - EX-10.17 - SUNRISE SENIOR LIVING INCw76123exv10w17.htm
EX-10.29 - EX-10.29 - SUNRISE SENIOR LIVING INCw76123exv10w29.htm
EX-10.28 - EX-10.28 - SUNRISE SENIOR LIVING INCw76123exv10w28.htm
EX-10.32 - EX-10.32 - SUNRISE SENIOR LIVING INCw76123exv10w32.htm
EX-10.23 - EX-10.23 - SUNRISE SENIOR LIVING INCw76123exv10w23.htm
EX-10.22 - EX-10.22 - SUNRISE SENIOR LIVING INCw76123exv10w22.htm
EX-10.21 - EX-10.21 - SUNRISE SENIOR LIVING INCw76123exv10w21.htm
EX-10.15 - EX-10.15 - SUNRISE SENIOR LIVING INCw76123exv10w15.htm
EX-10.12 - EX-10.12 - SUNRISE SENIOR LIVING INCw76123exv10w12.htm
EX-10.18 - EX-10.18 - SUNRISE SENIOR LIVING INCw76123exv10w18.htm
EX-10.11 - EX-10.11 - SUNRISE SENIOR LIVING INCw76123exv10w11.htm
EX-10.10 - EX-10.10 - SUNRISE SENIOR LIVING INCw76123exv10w10.htm
EX-10.30 - EX-10.30 - SUNRISE SENIOR LIVING INCw76123exv10w30.htm
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
     
(Mark One)    
 
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Quarterly Period Ended September 30, 2009
Or
o
  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: 1-16499
 
SUNRISE SENIOR LIVING, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
  54-1746596
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
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 þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
There were 51,565,282 shares of the Registrant’s common stock outstanding at October 31, 2009.
 


Table of Contents

 
SUNRISE SENIOR LIVING, INC.

Form 10-Q
For the Quarterly Period Ended September 30, 2009

TABLE OF CONTENTS
 
                 
        Page
 
PART I. FINANCIAL INFORMATION
  Item 1.     Condensed Financial Statements        
        Consolidated Balance Sheets at September 30, 2009 (unaudited) and December 31, 2008     3  
        Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)        
        Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited)     7  
        Notes to Consolidated Financial Statements     8  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     37  
  Item 3.     Quantitative and Qualitative Disclosure About Market Risk     55  
  Item 4.     Controls and Procedures     55  
PART II. OTHER INFORMATION
  Item 1.     Legal Proceedings     56  
  Item 1A.     Risk Factors     56  
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds     57  
  Item 3.     Defaults Upon Senior Securities     57  
  Item 4.     Submission of Matters to a Vote of Security Holders     57  
  Item 5.     Other Information     57  
  Item 6.     Exhibits     57  
Signatures     58  
 EX-2.1
 EX-2.2
 EX-2.3
 EX-10.1
 EX-10.2
 EX-10.3
 EX-10.4
 EX-10.5
 EX-10.6
 EX-10.7
 EX-10.8
 EX-10.9
 EX-10.10
 EX-10.11
 EX-10.12
 EX-10.13
 EX-10.14
 EX-10.15
 EX-10.16
 EX-10.17
 EX-10.18
 EX-10.19
 EX-10.20
 EX-10.21
 EX-10.22
 EX-10.23
 EX-10.28
 EX-10.29
 EX-10.30
 EX-10.31
 EX-10.32
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


2


Table of Contents

 
SUNRISE SENIOR LIVING, INC.
 
 
                 
    September 30,
    December 31,
 
    2009     2008  
(In thousands, except per share and share amounts)   (Unaudited)        
 
ASSETS
Current Assets:
               
Cash and cash equivalents
  $ 43,382     $ 29,513  
Accounts receivable, net
    37,265       54,842  
Income taxes receivable
    7,330       30,351  
Due from unconsolidated communities
    24,146       45,255  
Deferred income taxes, net
    14,999       25,341  
Restricted cash
    31,857       37,392  
Assets held for sale
    88,254       49,076  
German assets held for sale
    105,554        
Prepaid insurance
    3,838       9,512  
Prepaid expenses and other current assets
    17,058       23,626  
                 
Total current assets
    373,683       304,908  
Property and equipment, net
    419,871       681,352  
Due from unconsolidated communities
    18,978       31,693  
Intangible assets, net
    54,400       70,642  
Goodwill
          39,025  
Investments in unconsolidated communities
    71,161       66,852  
Investments accounted for under the profit-sharing method
    13,531       22,005  
Restricted cash
    100,966       123,772  
Restricted investments in marketable securities
    33,670       31,080  
Other assets, net
    9,893       10,228  
                 
Total assets
  $ 1,096,153     $ 1,381,557  
                 
 
LIABILITIES AND EQUITY
Current Liabilities:
               
Current maturities of debt
  $ 335,749     $ 377,449  
Outstanding draws on bank credit facility
    68,878       95,000  
Debt relating to German assets held for sale
    200,034        
Accounts payable and accrued expenses
    155,332       184,144  
Liabilities associated with German assets held for sale
    9,908        
Due to unconsolidated communities
    1,883       914  
Deferred revenue
    7,398       7,327  
Entrance fees
    35,158       35,270  
Self-insurance liabilities
    46,174       35,317  
                 
Total current liabilities
    860,514       735,421  
Debt, less current maturities
    19,964       163,682  
Investment accounted for under the profit-sharing method
          8,332  
Guarantee liabilities
    13,777       13,972  
Self-insurance liabilities
    62,947       68,858  
Deferred gains on the sale of real estate and deferred revenues
    17,480       88,706  
Deferred income tax liabilities
    14,999       28,129  
Other long-term liabilities, net
    102,442       126,543  
                 
Total liabilities
    1,092,123       1,233,643  
                 
Equity:
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding
           
Common stock, $0.01 par value, 120,000,000 shares authorized, 51,072,275 and 50,872,711 shares issued and outstanding, net of 392,961 and 342,525 treasury shares, at September 30, 2009 and December 31, 2008, respectively
    511       509  
Additional paid-in capital
    461,945       458,404  
Retained loss
    (471,407 )     (327,056 )
Accumulated other comprehensive income
    8,864       6,671  
                 
Total stockholders’ (deficit) equity
    (87 )     138,528  
                 
Noncontrolling interests
    4,117       9,386  
                 
Total equity
    4,030       147,914  
                 
Total liabilities and equity
  $ 1,096,153     $ 1,381,557  
                 
 
See accompanying notes


3


Table of Contents

SUNRISE SENIOR LIVING, INC.
 
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
(In thousands, except per share amounts)   (Unaudited)     (Unaudited)  
 
Operating revenue:
                               
Management fees
  $ 26,795     $ 36,179     $ 84,305     $ 101,071  
Resident fees for consolidated communities
    106,098       106,112       319,842       314,462  
Ancillary fees
    11,067       11,235       34,148       32,197  
Professional fees from development, marketing and other
    809       12,631       11,343       33,632  
Reimbursed costs incurred on behalf of managed communities
    237,810       246,460       709,158       751,158  
                                 
Total operating revenues
    382,579       412,617       1,158,796       1,232,520  
Operating expenses:
                               
Community expense for consolidated communities
    80,761       81,248       242,384       234,389  
Community lease expense
    15,608       15,184       44,765       44,916  
Depreciation and amortization
    11,659       11,630       41,454       34,264  
Ancillary expenses
    10,378       9,480       31,880       28,339  
General and administrative
    34,024       37,147       91,829       116,017  
Development expense
    1,797       7,995       10,462       28,417  
Write-off of capitalized project costs
    652       47,512       14,147       84,209  
Accounting Restatement, Special Independent Committee inquiry,
                               
SEC investigation and stockholder litigation
    1,108       5,072       3,541       26,436  
Restructuring costs
    8,960       7,219       25,883       7,219  
Provision for doubtful accounts
    331       2,280       11,335       5,716  
Loss on financial guarantees and other contracts
    809       975       1,463       1,703  
Impairment of long-lived assets
    9,922             34,962       2,349  
Costs incurred on behalf of managed communities
    240,494       246,076       719,735       749,384  
                                 
Total operating expenses
    416,503       471,818       1,273,840       1,363,358  
                                 
Loss from operations
    (33,924 )     (59,201 )     (115,044 )     (130,838 )
Other non-operating income (expense):
                               
Interest income
    572       1,000       1,428       3,973  
Interest expense
    (3,661 )     (3,997 )     (10,809 )     (7,937 )
Gain (loss) on investments
    95       720       904       (4,000 )
Other income (expense)
    2,957       780       4,276       (4,866 )
                                 
Total other non-operating expense
    (37 )     (1,497 )     (4,201 )     (12,830 )
Gain on the sale and development of real estate and equity interests
    3,627       4,717       20,330       19,029  
Sunrise’s share of (loss) earnings and return on investment
                               
in unconsolidated communities
    (4,613 )     (15,549 )     9,362       (7,207 )
(Loss) income from investments accounted for under the profit-sharing method
    (2,897 )     594       (9,157 )     95  
                                 
Loss before (provision for) benefit from income
                               
taxes and discontinued operations
    (37,844 )     (70,936 )     (98,710 )     (131,751 )
(Provision for) benefit from income taxes
    (1,010 )     33,248       1,449       49,476  
                                 
Loss before discontinued operations
    (38,854 )     (37,688 )     (97,261 )     (82,275 )
Discontinued operations, net of tax
    (5,523 )     (32,035 )     (46,959 )     (54,945 )
                                 
Net loss
    (44,377 )     (69,723 )     (144,220 )     (137,220 )
Less: Net (income) loss attributable to noncontrolling interests
    (25 )     1,057       (131 )     3,653  
                                 
Net loss attributable to common shareholders
  $ (44,402 )   $ (68,666 )   $ (144,351 )   $ (133,567 )
                                 
Earnings per share data:
                               
Basic net loss per common share
                               
Loss before discontinued operations
  $ (0.77 )   $ (0.75 )   $ (1.93 )   $ (1.64 )
Discontinued operations, net of tax
    (0.11 )     (0.61 )     (0.92 )     (1.01 )
                                 
Net loss
  $ (0.88 )   $ (1.36 )   $ (2.85 )   $ (2.65 )
                                 
Diluted net loss per common share
                               
Loss before discontinued operations
  $ (0.77 )   $ (0.75 )   $ (1.93 )   $ (1.64 )
Discontinued operations, net of tax
    (0.11 )     (0.61 )     (0.92 )     (1.01 )
                                 
Net loss
  $ (0.88 )   $ (1.36 )   $ (2.85 )   $ (2.65 )
                                 
 
See accompanying notes


4


Table of Contents

SUNRISE SENIOR LIVING, INC.
 
 
                 
    Nine Months Ended
 
    September 30,  
    2009     2008  
(In thousands)   (Unaudited)  
 
Operating activities
               
Net loss
  $ (144,220 )   $ (137,220 )
Less: Net loss from discontinued operations
    46,959       54,945  
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Gain on sale and development of real estate and equity interests
    (20,330 )     (19,029 )
Loss (income) from investments accounted for under the profit-sharing method
    9,157       (95 )
(Gain) loss on investments
    (904 )     4,000  
Unrealized gain on interest rate swap
          (313 )
Impairment of long-lived assets
    34,962       2,349  
Sunrise’s share of (earnings) loss and return on investment in unconsolidated communities
    (9,362 )     7,207  
Loss on financial guarantees and other contracts
    1,463       1,703  
Distributions of earnings from unconsolidated communities
    15,438       12,690  
Provision for doubtful accounts
    11,335       5,716  
Benefit from deferred income taxes
    (2,788 )     (76,083 )
Depreciation and amortization
    41,454       34,264  
Amortization of financing costs, debt discount and guarantee liabilities
    1,007       1,815  
Write-off of capitalized project costs
    14,147       84,209  
Stock-based compensation
    3,480       2,490  
Changes in operating assets and liabilities:
               
(Increase) decrease in:
               
Accounts receivable
    7,521       (5,031 )
Due from unconsolidated communities
    19,601       (4,839 )
Prepaid expenses and other current assets
    11,312       36,683  
Captive insurance restricted cash
    891       7,639  
Other assets
    21,946       (4,120 )
Increase (decrease) in:
               
Accounts payable and accrued expenses
    (28,989 )     (79,473 )
Entrance fees
    (112 )     159  
Self-insurance liabilities
    5,135       (658 )
Guarantee liabilities
    (125 )     (34,924 )
Deferred gains on the sale of real estate and deferred revenues
    560       (460 )
Net cash used in discontinued operations
    (753 )     (10,636 )
                 
Net cash provided by (used in) operating activities
    38,785       (117,012 )
                 
Investing activities
               
Capital expenditures
    (17,226 )     (167,162 )
Net funding for condominium project
    (2,927 )     (49,323 )
Dispositions of assets
    8,595       54,402  
Change in restricted cash
    7,641       59,575  
Purchases of short-term investments
          (102,800 )
Proceeds from short-term investments
    500       62,800  
Increase in advances to communities under development and notes receivable
    (74,589 )     (136,387 )
Proceeds from advances to communities under development and notes receivable
    83,637       154,742  
Investments in unconsolidated communities
    (4,820 )     (16,869 )
Distributions of capital (to) from unconsolidated communities
    (142 )     6,655  
Consolidation of German communities
          25,557  
Net cash provided by (used in) discontinued operations
    3,711       (41,096 )
                 
Net cash provided by (used in) investing activities
    4,380       (149,906 )
                 
Financing activities
               
Net proceeds from exercised options
    206       4,165  
Additional borrowings of debt
    3,614       194,826  
Repayment of debt
    (7,181 )     (12,096 )
Net repayments on Bank Credit Facility
    (24,800 )     (5,000 )
Financing costs paid
    (65 )     (2,465 )
Distributions to noncontrolling interests
    (1,070 )     (967 )
Net cash provided by discontinued operations
          3,080  
                 
Net cash (used in) provided by financing activities
    (29,296 )     181,543  
                 
Net increase (decrease) in cash and cash equivalents
    13,869       (85,375 )
Cash and cash equivalents at beginning of period
    29,513       138,212  
                 
Cash and cash equivalents at end of period
  $ 43,382     $ 52,837  
                 
 
See accompanying notes.


5


Table of Contents

 
Sunrise Senior Living, Inc.
 
 
1.   Interim Financial Presentation
 
Our accompanying unaudited consolidated financial statements include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the three and nine month periods ended September 30, 2009 and 2008 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 U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read together with our consolidated financial statements and the notes thereto for the year ended December 31, 2008 included in our 2008 Form 10-K, as amended on March 31, 2009. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. We have reclassified certain amounts to conform with the current period presentation.
 
The accompanying consolidated financial statements have been prepared on the basis of us continuing as a going concern. In our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission (“SEC”) on March 2, 2009, we disclosed that there was substantial doubt regarding our ability to continue as a going concern. In response, we have undertaken or expect to commence certain efforts to reduce expenses and preserve liquidity including: (i) extending the term of our Bank Credit Facility to December 2, 2010 (subject to certain conditions as discussed more fully in Note 6); (ii) seeking to reduce operating costs; (iii) seeking to restructure the terms of our other indebtedness including extension of scheduled maturity dates; and (iv) pursuing sales of selected assets. No assurance can be given that we will be successful in achieving any of these efforts.
 
2.   New and Future Accounting Standards
 
New Accounting Standards
 
We adopted provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Fair Value Measurements Topic for non-financial assets and liabilities on January 1, 2009. We had previously adopted the other provisions of fair value measurement for financial assets and liabilities on January 1, 2008. The provisions are required to be applied prospectively as of the beginning of the first fiscal year in which the provisions are applied. Adoption of these provisions of the ASC did not have a material impact on our reported consolidated financial position, results of operations or cash flows.
 
We adopted provisions of the ASC Business Combination Topic on January 1, 2009. These provisions require most identifiable assets, liabilities, non-controlling interests and goodwill acquired in business combinations to be recorded at “full fair value.” Transaction costs are no longer be included in the measurement of the business acquired and instead should be expensed as incurred. These provisions apply prospectively to business combinations occurring on or after 2009.
 
We adopted provisions of the ASC Consolidation Topic on January 1, 2009. These provisions establish new accounting and reporting requirements for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, these provisions require the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income attributable to the non-controlling interest is now included in consolidated net income on the face of the income statement. The provisions also clarify that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions. In addition, the provisions require that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. The provisions also include expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. Adoption of the provisions under


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
the Consolidation Topic regarding non-controlling interests on January 1, 2009 did not have a material impact on our reported consolidated financial position, results of operations or cash flows.
 
On January 1, 2009, we adopted provisions of the ASC Derivative and Hedging Topic which provides guidance on certain disclosures about credit derivatives and certain guarantees. Adoption of these provisions did not have a material impact on our reported consolidated financial position, results of operations or cash flows.
 
We adopted provisions of the ASC Investments — Equity Method and Joint Venture Topic effective on January 1, 2009. The intent of these provisions is to clarify the accounting for certain transactions and impairment considerations related to equity method investments. The adoption of these provisions did not have a material impact on our reported consolidated financial position, results of operations or cash flows.
 
We adopted each of the following provisions to the ASC in the second quarter of 2009. These provisions did not have a material impact on our reported consolidated financial position, results of operations or cash flows.
 
In April 2009, we adopted provisions of the ASC Investments — Debt and Equity Securities Topic which modifies the other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and non-credit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and an aging of securities with unrealized losses.
 
In April 2009, we adopted provisions of the ASC Financial Instruments Topic which requires fair value disclosures for financial instruments that are not reflected in the consolidated balance sheets at fair value. Prior to these provisions, the fair values of those assets and liabilities were disclosed only once each year. With the adoption of these provisions, we are now required to disclose this information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the consolidated balance sheets at fair value.
 
In April 2009, we adopted provisions of the ASC Fair Value Measurements Topic which clarifies the methodology used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. These provisions also reaffirm the objective of fair value measurement, which is to reflect how much an asset would be sold for in an orderly transaction. They also reaffirm the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive.
 
In May 2009, we adopted provisions of the ASC Subsequent Events Topic. These provisions establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued.
 
In the third quarter of 2009, we adopted the ASC as the single source of authoritative nongovernmental generally accepted accounting principles. The adoption of the ASC did not have a material impact on our consolidated financial position, results of operations or cash flows.
 
Future Adoption of Accounting Standards
 
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 requires an analysis to be performed to determine whether a variable interest entity gives an enterprise a controlling financial interest in a variable interest entity. The analysis identifies the primary beneficiary of a variable interest entity. Additionally, SFAS 167 requires ongoing assessments as to whether an enterprise is the primary beneficiary and eliminates the quantitative approach of FIN 46(R) in determining the primary beneficiary. SFAS 167 is effective for us January 1, 2010. We are currently evaluating whether SFAS 167 will have a material impact on our consolidated financial position, results of operations or cash flows.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 amends the Fair Value Measurement Topic by providing additional guidance clarifying the measurement of liabilities at fair value including how the price of a traded debt security should be considered in estimating the fair value of the issuer’s liability. ASU 2009-05 is effective for us for the fourth quarter of 2009. We are currently evaluating whether ASU 2009-05 will have a material impact on our consolidated financial position, results of operations or cash flows.
 
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). It requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. It eliminated the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognized revenue for an arrangement with multiple deliverables subject to ASU 605-25. ASU 2009-13 is effective for us for the year beginning January 1, 2011. We are currently evaluating whether ASU 2009-13 will have a material impact on our consolidated financial position, results of operations or cash flows.
 
3.   Fair Value Measurements
 
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the ASC Fair Value Measurements Topic establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:
 
Level 1:  Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
 
Level 2:  Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
 
Level 3:  Unobservable inputs are used when little or no market data is available.
 
Auction Rate Securities, Marketable Securities and Interest Rate Caps
 
The following table details the auction rate securities, marketable securities and interest rate caps measured at fair value as of September 30, 2009 (in thousands):
 
                                 
          Fair Value Measurements at Reporting Date Using  
          Quoted Prices in
    Significant Other
    Significant
 
          Active Markets for
    Observable
    Unobservable
 
    September 30,
    Identical Assets
    Inputs
    Inputs
 
Asset
  2009     (Level 1)     (Level 2)     (Level 3)  
 
Auction rate securities
  $ 31,484     $     $     $ 31,484  
Marketable securities
    2,186       2,186              
Interest rate caps
    64             64        
                                 
    $ 33,734     $ 2,186     $ 64     $ 31,484  
                                 
 
At September 30, 2009, we held investments in five Student Loan Auction-Rate Securities (“SLARS”), four with a face amount of $8.0 million and one with a face amount of $6.4 million, for a total of $38.4 million. These SLARS are issued by non-profit corporations and their proceeds are used to purchase portfolios of student loans. The SLARS holders are repaid from cash flows resulting from the student loans in a trust estate. The student loans are 98% guaranteed by the Federal government against default. The interest rate for these five SLARS are reset every 7 to 35 days. The interest rates at September 30, 2009 ranged from 0.63% to 0.88%. Uncertainties in the credit markets have prevented us and other investors from liquidating our holdings of auction rate securities in recent


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
auctions. We classify our investments in auction rate securities as trading securities and carry them at fair value. The fair value of the securities at September 30, 2009 was determined to be $31.5 million and we recorded unrealized gains (losses) of $0.1 million and $0.7 million for the three months ended September 30, 2009 and 2008, respectively, and $0.9 million and $(4.0) million for the nine months ended September 30, 2009 and 2008, respectively.
 
Due to the lack of actively traded market data, the valuation of these securities was based on Level 3 unobservable inputs. These inputs include an analysis of sales discounts realized in the secondary market, as well as assumptions about risk after considering recent events in the market for auction rate securities. The discount range of SLARS in the secondary market ranged from 16% to 38% at September 30, 2009 with an average SLARS discount on closed deals of 23% at September 30, 2009.
 
In October 2009, $8.0 million of our auction rate securities were called and redeemed at par. These securities were carried at an estimated fair value of $6.4 million on our consolidated balance sheet as of September 30, 2009. As a result, we will recognize a gain on the redemption of those securities of $1.6 million in the fourth quarter of 2009. The proceeds from the disposition of these securities will be reflected as restricted cash as it relates to our insurance reserves.
 
The following table reconciles the beginning and ending balances for the auction rates securities using fair value measurements based on significant unobservable inputs for the nine months ended September 30, 2009 (in thousands):
 
         
    Auction
 
    Rate Securities  
 
Beginning balance - 1/1/09
  $ 31,080  
Total gains
    904  
Sales
    (500 )
         
Ending balance - 9/30/09
  $ 31,484  
         
 
At September 30, 2009, we have an investment in marketable securities related to a consolidated entity in which we have control but no ownership interest. The fair value of the investment is approximately $2.2 million. The valuation was based on Level 1 data.
 
At September 30, 2009, we have interest rate caps relating to mortgage debt for 16 of our wholly owned communities. The fair value of the interest rate caps is approximately $0.1 million at September 30, 2009. The valuation was based on Level 2 prevailing market data.
 
German Assets Held for Sale, Assets Held for Sale and Assets Held and Used
 
German Assets Held for Sale
 
The German assets held for sale at September 30, 2009 consists of the following (in thousands):
 
         
    September 30,
 
    2009  
 
Cash and cash equivalents
  $ 897  
Accounts receivable, net
    3,216  
Property and equipment, net
    101,032  
Prepaid and other assets
    409  
         
German assets held for sale
  $ 105,554  
         
Accounts payable and accrued expenses
  $ 9,908  
         


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
Assets Held for Sale
 
Other assets held for sale with a lower of carrying value or fair value less estimated costs to sell consists of the following (in thousands):
 
                 
    September 30,
    December 31,
 
    2009     2008  
 
Land
  $ 79,049     $ 46,018  
Closed community
    2,514        
Condominium units
    6,691       3,058  
                 
Assets held for sale
  $ 88,254     $ 49,076  
                 
 
In the second quarter of 2009, we recorded our land parcels held for sale at the lower of their carrying value or fair value less estimated costs to sell. We used appraisals, market knowledge and broker opinions of value to determine fair value. As the carrying value of some of the assets was in excess of the fair value less estimated costs to sell, we recorded a charge of $1.3 million which is included in operating expenses under impairment of long-lived assets.
 
In the third quarter of 2009, all of the criteria were met for additional parcels of land, two closed construction sites and a closed property to be classified as assets held for sale. We recorded them at the lower of their carrying value or fair value less estimated costs to sell. We used appraisals, market knowledge and brokers opinions of value to determine fair value. As the carrying value of some of the assets was in excess of the fair value less estimated costs to sell, we recorded a charge of $0.8 million which is included in operating expenses under impairment of long-lived assets.
 
Assets Held and Used
 
In the second quarter of 2009, we recorded impairment charges of $15.8 million related to certain operating communities that are held and used as the carrying value of these assets was in excess of the fair value. We also recorded impairment charges of $7.9 million for certain land parcels held and used as the carrying value of these assets was in excess of the fair value. We used appraisals and recent sales to estimate fair value of all of these assets. The charges are included in operating expenses under impairment of long-lived assets.
 
In the third quarter of 2009, we recorded impairment charges of $9.1 million related to certain operating communities that are held and used as the carrying value of these assets was in excess of the fair value. We used an appraisal for one community and applied a cost of capital rate to the communities’ average net operating income to arrive at fair value for all the other communities. The impairment charge is included in operating expenses under impairment of long-lived assets.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
Fair Value Measurements of German Assets Held for Sale, Assets Held for Sale and Assets Held and Used
 
Upon designation as assets held for sale, we recorded the assets at the lower of carrying value or their fair value less estimated costs to sell. The following table details only assets held for sale and assets held and used where fair value was lower than the carrying value and an impairment loss was recorded (in thousands):
 
                                         
          Fair Value Measurements at Reporting Date Using        
          Quoted Prices in
    Significant Other
    Significant
       
          Active Markets for
    Observable
    Unobservable
    Total
 
    September 30,
    Identical Assets
    Inputs
    Inputs
    Impairment
 
Asset
  2009     (Level 1)     (Level 2)     (Level 3)     Losses  
 
German assets held for sale
  $ 82,669     $     $     $ 82,669     $ (52,414 )
Other assets held for sale
    37,301                   37,301       (2,142 )
Assets held and used
    61,659                   61,659       (32,820 )
                                         
    $ 181,629     $     $     $ 181,629     $ (87,376 )
                                         
 
Other Fair Value Information
 
Cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses, equity investments and other current assets and liabilities are carried at amounts which reasonably approximate their fair values. At September 30, 2009, the carrying amount of our cost method investment is $5.5 million. The fair value of the cost method investment was not estimated as there were no events or changes in circumstances that may have a significant adverse effect on the fair value of the investment, and we determined that it is not practicable to estimate the fair value of the investment.
 
The fair value of our debt has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. We have applied Level 2 and Level 3 type inputs to determine the estimated fair value of our debt. Note that debt is reflected on the face of our consolidated balance sheets at the stated value, except for the German debt which was initially recorded at fair value at September 1, 2008. The following table details by category the principal amount, the average interest rate and the estimated fair market value of our debt (in thousands):
 
                 
    Fixed Rate
    Variable Rate
 
    Debt     Debt  
 
Total Carrying Value
  $ 5,270     $ 619,355  
                 
Average Interest Rate
    6.8 %     3.1 %
                 
Estimated Fair Market Value
  $ 5,489     $ 530,037  
                 
 
Disclosure about fair value of financial instruments is based on pertinent information available to us at September 30, 2009.
 
4.   Investments in Unconsolidated Communities
 
During the first quarter of 2009, a U.K. venture in which we have a 20% interest sold three communities to a different U.K. venture in which we have a 10% interest. As a result of the gains on these asset sales recorded in the venture, we recorded earnings in unconsolidated communities of $19.0 million. When the first U.K. venture was formed, we established a bonus pool in respect to the venture for the benefit of employees and others responsible for the success of the venture. At the time, we agreed with our venture partner that after certain return thresholds were met, we would each reduce our percentage interests in the venture distributions with such excess to be used to fund


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Table of Contents

 
Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
these bonus pools. During the first quarter of 2009, we recorded bonus expense of $1.1 million with respect to the bonus pool relating to the U.K. venture. We did not record any additional bonus expense related to this venture in the second and third quarters of 2009.
 
In March 2009, a venture in which we have a 20% interest received a notice of default from its lender for alleged violation of financial covenants and other matters. Based on the notice of default from the lender and poor rental experience in the venture, we considered our equity to be other than temporarily impaired and wrote off the balance, $1.1 million, in March 2009. In addition, based on discussions with the lender as of March 31, 2009, we believed that the lender did not intend to fund to the venture the amount that would be necessary to repay our receivables and accordingly, any repayment of our receivables from advances we made to the venture would need to be from excess proceeds from the ultimate sale of the community after the loan has been repaid. We did not believe that collectability of our receivable was reasonably assured and we wrote-down the carrying value of our receivable, $5.4 million, to zero in March 2009. We made additional advances of $0.8 million in the second and third quarters of 2009 which are fully reserved at September 30, 2009. In the third quarter of 2009, the residents were relocated to other senior living facilities and the facility was shut down. The lender is in the process of foreclosing on the asset.
 
Summarized S-X Rule 3-09 Income Statement Information
 
The following is summarized income statement information for an equity investee, PS UK Investment (Jersey) LP, a U.K. venture in which we own a 20% interest, for which annual audited financial statements are expected to be required for the year 2009 under S-X Rule 3-09 (in thousands):
 
                         
          Net (Loss)
       
    Total
    Income Before
    Net
 
    Operating
    Provision for
    (loss)
 
    Revenues     Income Taxes     Income  
 
Three Months Ended September 30, 2009
  $ 4,115     $ (1,411 )   $ (1,411 )
Three Months Ended September 30, 2008
    3,910       (6,809 )     (6,809 )
Nine Months Ended September 30, 2009
    9,869       18,414       18,414  
Nine Months Ended September 30, 2008
    14,761       15,634       15,634  
 
The venture is treated as a partnership for federal income tax purposes. No provision for federal income taxes is made since taxable income or loss passes through and is reportable by the venture’s members.
 
5.   Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consist of the following (in thousands):
 
                 
    September 30,
    December 31,
 
    2009     2008  
 
Accounts payable and accrued expenses
  $ 41,272     $ 66,760  
Accrued salaries and bonuses
    38,403       30,123  
Accrued employee health and other benefits
    39,676       47,685  
Accrued legal, audit and professional fees
    6,719       8,933  
Other accrued expenses
    29,262       30,643  
                 
    $ 155,332     $ 184,144  
                 


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
 
6.   Bank Credit Facility and Debt
 
Bank Credit Facility
 
On March 23, 2009, we entered into the Eleventh Amendment to our Bank Credit Facility. The Eleventh Amendment, among other matters, suspended until May 1, 2009 the obligation of the lenders under the Bank Credit Facility to (1) advance any additional proceeds of the loans to the borrowers under the Bank Credit Facility or (2) issue any new letters of credit. However, the lenders agreed to renew certain scheduled outstanding letters of credit in accordance with the annual renewal provisions of such letters of credit. The Eleventh Amendment also waived compliance with certain financial covenants of the Bank Credit Facility through April 29, 2009 and the applicability of certain cross-default provisions through April 30, 2009.
 
The Eleventh Amendment also permanently reduced the aggregate commitments of the lenders under the Bank Credit Facility from $160.0 million to $118.0 million (outstanding borrowings of $93.5 million plus outstanding letters of credit of $24.5 million at the time of the Eleventh Amendment).
 
On April 28, 2009, we entered into the Twelfth Amendment to the Bank Credit Facility. The significant terms include:
 
  •  waiver of all existing financial covenants through December 2, 2009, the maturity date of the Bank Credit Facility;
 
  •  agreement for renewal of existing letters of credit;
 
  •  an amendment fee of $0.5 million;
 
  •  authorization to consummate certain transactions;
 
  •  restriction on the disposition of assets except to permit the transfer of scheduled assets;
 
  •  requirement to maintain minimum cash balance as of the last day of each month and of not less than $5 million at any time;
 
  •  a cash sweep as of the last day of October and November 2009 to reduce principal equal to the greater of consolidated cash in excess of $35 million or $2 million; and
 
  •  a permanent reduction of the commitment after an agreed-upon repayment of the outstanding balance from dispositions consented to by our lenders, federal income tax refunds of $20.8 million and payments received from the cash sweep.
 
On October 19, 2009, we entered into the Thirteenth Amendment to the Bank Credit Facility. The significant terms include:
 
  •  an extension of the maturity date from December 2, 2009 to December 2, 2010;
 
  •  renewal of existing letters of credit;
 
  •  an amendment fee of $0.5 million of which $250,000 was paid on October 19, 2009 and $250,000 to be paid upon the earlier of the sale of properties or January 4, 2010;
 
  •  principal payment of $6.0 million which was paid on October 19, 2009;
 
  •  principal payments previously due on October 31 and November 30, 2009 are no longer due;
 
  •  modifies the minimum liquidity covenant to not less than $10.0 million of unrestricted cash on hand the last day of the month;


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Table of Contents

 
Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
 
  •  modifies the restriction on the disposal of assets to permit disposition of certain assets as long as 50% of the net sale proceeds are allocated to the lenders;
 
  •  the proceeds from the pending sale of 21 properties are allocated as follows:
 
  •  a principal payment of $25 million;
 
  •  $20 million deposited into a collateral account for the benefit of other creditors;
 
  •  either cause a return of $3.7 million in letters of credit or make a principal payment of that same amount;
 
  •  if the pending sale of the 21 properties does not close by June 30, 2010, we will either make a principal payment of $28.7 million or make a $5 million principal payment, pay an additional $1 million extension fee and grant mortgage liens junior to existing mortgages or a perfected first priority pledge of and security interest in, the equity interests in the entities owning 16 certain properties (the granting of such mortgages of security interest is subject to the existing mortgage lenders’ consent). If we are unable to deliver these items, the Bank Credit Facility will be in default and become due and payable; and
 
  •  a permanent reduction of the commitment after future principal repayments or cancellation of letters of credit.
 
We have no borrowing availability under the Bank Credit Facility, and we have significant scheduled debt maturities in 2009 and 2010 and significant long-term debt that is in default. We are endeavoring to extend debt maturity dates, re-finance debt and obtain waivers from applicable lenders. We are engaged in discussions with various venture partners and third parties regarding the sale of certain assets with the purpose of increasing liquidity and reducing obligations to enable us to continue operations.
 
In April 2009, we received federal income tax refunds of $20.8 million which was used to pay down the Bank Credit Facility and $1 million of the proceeds from the sale of our equity interest and receivable from the Aston Gardens venture was also used to pay down the Bank Credit Facility. In June 2009, $2.5 million of proceeds from an agreement with Trinity’s prior owners (Note 12) was used to pay down the Bank Credit Facility. At September 30, 2009, the outstanding borrowings under the Bank Credit Facility were $68.9 million. On October 19, 2009, after paying $6.0 million of principal in connection with the Thirteenth Amendment, the outstanding borrowings under the Bank Credit Facility were $62.9 million.
 
Debt
 
At September 30, 2009, we had $624.6 million of outstanding debt with a weighted average interest rate of 3.13% as follows (in thousands):
 
                 
    September 30,
    December 31,
 
    2009     2008  
 
Community mortgages
  $ 248,955     $ 241,851  
German communities(1)
    200,034       185,901  
Bank Credit Facility
    68,878       95,000  
Land loans
    34,327       37,407  
Other
    28,286       30,655  
Variable interest entity
    23,225       23,905  
Margin loan (auction rate securities)
    20,920       21,412  
                 
    $ 624,625     $ 636,131  
                 
 
 
(1) The face amount of the debt related to the German communities was $219.3 million at September 30, 2009.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
 
Of the outstanding debt we had $5.3 million of fixed-rate debt with a weighted average interest rate of 6.82% and $619.3 million of variable rate debt with a weighted average interest rate of 3.10%.
 
Debt that is in default at September 30, 2009 consists of the following (in thousands):
 
         
    September 30,
 
    2009  
 
German communities(1)
  $ 200,034  
Community mortgages
    147,930  
Variable interest entity
    23,225  
Land loans
    12,420  
Other
    28,286  
         
    $ 411,895  
         
 
 
(1) The face amount of the debt related to the German communities was $219.3 million at September 30, 2009.
 
We are working with our lenders to either re-schedule certain of these obligations or obtain waivers.
 
For debt that is not in default, we have scheduled debt maturities as follows (in thousands):
 
                                                         
          1st Qtr.
    2nd Qtr.
    3rd Qtr.
    4th Qtr.
             
    2009     2010     2010     2010     2010     Thereafter     Total  
 
Bank Credit Facility(1)
  $ 68,878     $     $     $     $     $     $ 68,878  
Community mortgages
    39,796       40,573       195       497       198       19,766       101,025  
Land loans
    21,907                                     21,907  
Margin loan (auction rate securities)
    20,920                                     20,920  
                                                         
    $ 151,501     $ 40,573     $ 195     $ 497     $ 198     $ 19,766     $ 212,730  
                                                         
 
 
(1) As of 10/19/09, maturity date changed to 12/2/10 (subject to certain conditions, refer to discussion above).
 
Sunrise ventures have total debt of $4.2 billion with near-term scheduled debt maturities of $69.7 million in 2009 and $576.1 million in 2010. Of this $4.2 billion of debt, there is long-term debt that is in default of $1.4 billion. The debt in the ventures is non-recourse to us with respect to principal payment guarantees and we and our venture partners are working with the venture lenders to obtain covenant waivers. However, in certain cases, we have provided operating deficit and completion guarantees to the lenders or ventures. We have minority non-controlling interests in these ventures. See Note 12 of the Notes to Consolidated Financial Statements of our 2008 Form 10-K, as amended, for a list of our ventures and our related ownership interest.
 
7.   Gains on the Sale of Real Estate
 
We accounted for the sale of three communities in 2004 under the profit-sharing method of accounting as we provided a guarantee to make monthly payments to the buyer equal to the amount by which a net operating income target exceeded actual net operating income for the communities for an extended period of time. The guarantee expired in the second quarter of 2009 and we recorded a gain of approximately $8.9 million. In addition, we recognized gains of approximately $2.3 million and $9.9 million during the three and nine months ended September 30, 2009, respectively, relating to transactions which recognition of gain had been previously deferred due to various forms of continuing involvement and are being accounted for under the basis of performance method of accounting.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
 
8.   Income Taxes
 
The (provision for) benefit from income taxes related to continuing operations was $(1.0) million and $33.2 million for the three months ended September 30, 2009 and 2008, respectively, and $1.4 million and $49.5 million for the nine months ended September 30, 2009 and 2008, respectively. Our effective tax (rate) benefit from continuing operations was (2.63)% and 46.9% for the three months ended September 30, 2009 and 2008, respectively, and 1.56% and 37.6% for the nine months ended September 30, 2009 and 2008, respectively. At December 31, 2008, we determined that deferred tax assets in excess of reversing tax liabilities were not likely to be realized and we recorded a valuation allowance on net deferred tax assets. Income tax expense of $4.8 million attributable to gains in discontinued operations recorded in the first quarter of 2009 reversed in the second quarter due to current period losses in discontinued operations. As of September 30, 2009, we are continuing to offset our net deferred tax asset by a full valuation allowance.
 
The IRS is currently examining our U.S. federal income tax returns for 2005 through 2008. There are no income tax returns under audit by the Canadian government with the years after 2004 remaining open and subject to audit. The German government is currently auditing income tax returns for the years 2006 through 2008. During the third quarter, the 2003-2005 German audits were closed resulting in no significant adjustments. There are no returns under audit by the U.K. government with years after 2004 remaining open and subject to audit. At this time, we do not expect the results from any income tax audit to have a material impact on our financial statements; however, it is reasonably possible that the amount of the FIN 48 state liability for unrecognized tax benefits could decrease by $2 to $3 million during the remainder of 2009.
 
9.   Stock-Based Compensation
 
In February 2009, we granted 14 employees non-qualified stock options to purchase 360,000 shares of common stock at a price of $0.77. One-third of the options vest yearly beginning in 2010. In 2009, 131,998 shares of restricted stock have vested.
 
In addition in May 2009, we accelerated the vesting of our former chief financial officer’s stock options and restricted stock per the terms of his separation agreement (refer to Note 11). The options expire 12 months after the termination of his consulting term, which can be up to nine months after his termination date of May 29, 2009. 70,859 shares of restricted stock and 750,000 options vested. We recorded non-cash compensation expense of $0.8 million as a result of the vesting acceleration.
 
In August 2009, we granted three employees non-qualified stock options to purchase 150,000 shares of common stock at a price of $2.34. These options vest one-third per year beginning in 2010.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
 
10.   Commitments and Contingencies
 
Guarantees
 
The maximum potential amount of future fundings for outstanding guarantees, the carrying amount of the liability for expected future fundings at September 30, 2009 and fundings during 2009 are as follows (in thousands):
 
                                         
          ASC
    ASC
             
          Guarantee
    Contingencies
             
    Maximum
    Topic
    Topic
    Total
    Fundings
 
    Potential
    Liability
    Liability
    Liability
    from
 
    Amount
    for Future
    for Future
    for Future
    January 1, 2009
 
    of Future
    Fundings at
    Fundings at
    Fundings at
    through
 
Guarantee Type
  Fundings     September 30, 2009     September 30, 2009     September 30, 2009     September 30, 2009  
 
Operating deficit
    Uncapped     $ 476     $ 500     $ 976     $  
Income support
    Uncapped       560       12,241       12,801        
Other
                            125  
                                         
Total
          $ 1,036     $ 12,741     $ 13,777     $ 125  
                                         
 
Aston Gardens
 
In July 2008, we received notice of default from our equity partner alleging a default under our management agreement for six communities as a result of the venture’s receipt of a notice of default from a lender. In December 2008, the venture’s debt was restructured and we entered into an agreement with our venture partner under which we agreed to resign as managing member of the venture and manager of the communities when we are released from various guarantees provided to the venture’s lender.
 
At loan inception, we provided the lender a guarantee of monthly principal and interest payments and during 2008 we made payments under this guarantee since the venture did not have enough available cash flow to cover the default interest payments. Advances under this guarantee are recoverable in the form of a loan in a capital or refinancing event prior to the repayment of capital to the partners but subordinate to the repayment of the debt. Through April 30, 2009, the date we sold our equity interest in Aston Gardens, we had funded $7.0 million under this guarantee which was fully reserved at the time of sale.
 
On April 30, 2009, we sold our 25% equity interest in the venture and were released from all guarantee obligations. Our management contract was terminated on April 30, 2009. We received proceeds of approximately $4.8 million for our equity interest and our receivable from the venture for fundings under the operating deficit guarantees. We received management fees of $3.2 million and $3.7 million in 2008 and 2007, respectively.
 
Fountains
 
In 2008, the Fountains venture, in which we hold a 20% interest, failed to comply with the financial covenants in the venture’s loan agreement. The lender has been charging a default rate of interest (5.51% at September 30, 2009) since April 2008. At loan inception, we provided the lender a guarantee of operating deficits including payments of monthly principal and interest payments, and in 2008 we funded payments under this guarantee as the venture did not have enough available cash flow to cover the full amount of the interest payments at the default rate. Advances under this guarantee are recoverable in the form of a loan to the venture, which must be repaid prior to the repayment of equity capital to the partners, but is subordinate to the repayment of other venture debt. Through September 30, 2009, we have funded $14.2 million under this operating deficit guarantee which also has been written-down to zero. These advances under the operating deficit guarantee are in addition to the $12.8 million we have funded under our income support guarantee to our venture partner, which has been written-down to zero.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
In January 2009, we informed the venture’s lenders and our venture partner that we were suspending payment of default interest and payments under the income support guarantee, and that we would seek a comprehensive restructuring of the loan, our operating deficit guarantees and our income support guarantee. Our failure to pay default interest on the loan was an additional default of the loan agreement. In October 2009, we entered into agreements with our venture partner, as well as with the lender to release us from all claims that our venture partner and the lender had against us prior to the date of the agreements and from all of our future funding obligations in connection with the Fountains portfolio.
 
Pursuant to the agreements relating to the Fountains portfolio, the lender and our venture partner released us from all past and future funding commitments in connection with the Fountains portfolio, as well as from all other liabilities prior to the date of the agreements arising under the Fountains joint venture, loan and management agreements, including obligations under operating deficit and income support obligations. We will retain certain management and operating obligations going forward during a temporary transition period.
 
In exchange for these releases, we have, among other things:
 
  •  Transferred our 20-percent ownership interest in the Fountains joint venture to our joint venture partner;
 
  •  Contributed vacant land parcels adjacent to six of the Fountains communities and owned by us to the Fountains venture;
 
  •  Agreed to transition from management of the 16 Fountains communities as soon as the transition closing conditions are met and the new manager has obtained the regulatory approvals necessary to assume control of the facilities (we expect to transition from management of the Fountains communities during the course of 2010); and
 
  •  Agreed to repay the venture the management fee we had earned to date in 2009 of $1.8 million.
 
The contributed vacant land parcels were carried on our consolidated balance sheet at a book value of $12.9 million at September 30, 2009, in addition to a guarantee liability of $12.9 million both of which will be written off upon closing of the transaction resulting in no gain or loss.
 
Senior Living Condominium Project
 
In 2006, we sold a majority interest in one condominium venture and one related assisted living venture to third parties. In conjunction with the development agreement for this project, we agreed to be responsible for actual project costs in excess of budgeted project costs of more than $10.0 million (subject to certain limited exceptions). The $10.0 million is recoverable as a loan from the venture. Through September 30, 2009, we have paid $50.7 million in cost overruns. Construction of this project is now complete. We account for the condominium and assisted living ventures under the profit-sharing method of accounting, and our investment carrying value at September 30, 2009 is $13.5 million for the two ventures, which includes our $10.0 million recoverable loan and advances we have made to the ventures. We recorded a loss of $2.9 million and $9.9 million from the two ventures in the three and nine months ended September 30, 2009, respectively. The pace of sales of condominium units and prices could impact the recovery of our investment carrying value. The weak economy in the Washington, D.C. area will require us to implement more aggressive marketing and sales plans. No assurance can be given that additional pre-tax charges will not be required in subsequent periods with respect to this condominium venture.
 
In July 2009, the lender notified us that an event of default had occurred. The event of default was related to providing certain financial information for the venture that the lender had previously requested. In October 2009, we received a notice of default related to the nonpayment of interest. We are in discussions with the lender on these matters.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
Agreements with Marriott International, Inc.
 
Our agreements with Marriott International, Inc. (“Marriott”) related to our purchase of Marriott Senior Living Services, Inc. in 2003 provide that Marriott has the right to demand that we provide cash collateral security for Assignee Reimbursement Obligations, as defined in the agreements, in the event that our implied debt rating is not at least B- by Standard and Poors or B1 by Moody’s Investor Services. Assignee Reimbursement Obligations relate to possible liability with respect to leases assigned to us in 2003 and entrance fee obligations assumed by us in 2003 that remain outstanding (approximately $53.4 million at September 30, 2009). Marriott has informed us that they reserve all of their rights to issue a Notice of Collateral Event under the Assignment and Reimbursement Agreement.
 
Other
 
Generally, the financing obtained by our ventures is non-recourse to the venture members, with the exception of the debt repayment guarantees discussed above. However, we have entered into guarantees with the lenders with respect to acts which we believe are in our control, such as fraud or voluntary bankruptcy of the venture, that create exceptions to the non-recourse nature of debt. If such acts were to occur, the full amount of the venture debt could become recourse to us. The combined amount of venture debt underlying these guarantees is approximately $3.3 billion at September 30, 2009. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.
 
To the extent that a third party fails to satisfy an obligation with respect to two continuing care retirement communities we manage, we would be required to repay this obligation, the majority of which is expected to be refinanced with proceeds from the issuance of entrance fees as new residents enter the communities. At September 30, 2009, the remaining liability under this obligation is $45.2 million. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.
 
Legal Proceedings
 
HCP, Inc.
 
In June 2009, various affiliates of HCP, Inc. and their associated tenant entities filed nine complaints in the Delaware Court of Chancery naming the Company and several of its subsidiaries as defendants. The complaints allege monetary and non-monetary defaults under a series of owner and management agreements that govern nine portfolios comprised of 64 properties with annual management fees of approximately $25.4 million in 2008 and $15.5 million for the nine months ended September 30, 2009. We have $18.5 million of unamortized management contract intangibles relating to these contracts. In each case, the plaintiffs include (a) the HCP affiliates that own various assisted living community properties that are managed by Sunrise, and (b) certain tenant entities alleged to be independent from HCP that lease those properties from HCP affiliates and have management agreements with Sunrise. The complaints assert claims for (1) declaratory judgment; (2) injunctive relief; (3) breach of contract; (4) breach of fiduciary duties; (5) aiding and abetting breach of fiduciary duty; (6) equitable accounting; and (7) constructive trust. The complaints seek equitable relief, including a declaration of a right to terminate the agreements, disgorgement, unspecified money damages, and attorneys’ fees. Plaintiffs filed a motion to expedite the proceedings. Following briefing by the parties, the Delaware Court of Chancery on July 9, 2009 denied the Plaintiff’s motion. In July 2009, various affiliates of HCP, Inc. and their associated tenant entities refiled a complaint, which had been voluntarily withdrawn in the Delaware actions, in the federal district court for the Eastern District of Virginia (the “Virginia action”). On August 17, 2009, Sunrise answered all of the complaints in both jurisdictions and asserted counterclaims.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
Trinity OIG Investigation and Qui Tam Action
 
As previously disclosed, on September 14, 2006, we acquired all of the outstanding stock of Trinity Hospice Inc. (“Trinity”). As a result of this transaction, Trinity became an indirect, wholly owned subsidiary of the Company. On January 3, 2007, Trinity received a subpoena from the Phoenix field office of the OIG requesting certain information regarding Trinity’s operations in three locations for the period January 1, 2000 through June 30, 2006, a period that was prior to the Company’s acquisition of Trinity. The Company was advised that the subpoena was issued in connection with an investigation being conducted by the Commercial Litigation Branch of the U.S. Department of Justice and the civil division of the U.S. Attorney’s office in Arizona. The subpoena indicates that the OIG is investigating possible improper Medicare billing under the FCA. In addition to recovery of any Medicare reimbursements previously paid for false claims, an entity found to have submitted false claims under the FCA may be subject to treble damages plus a fine of between $5,500 and $11,000 for each false claim submitted. Trinity has complied with the subpoena and continues to supplement its responses as requested.
 
On September 11, 2007, Trinity and the Company were served with a complaint filed on September 5, 2007 in the United States District Court for the District of Arizona. That filing amended a complaint filed under seal on November 21, 2005 by four former employees of Trinity under the qui tam provisions of the FCA. On July 3, 2008, an amended complaint was revised in the form of a second amended complaint which replaced the loss sustained range of $75 million to $100 million with an alleged loss by the United States of at least $100 million. The original complaint named KRG Capital, LLC (an affiliate of former stockholders of Trinity) and Trinity Hospice LLC (a subsidiary of Trinity) as defendants. The second amended complaint names Sunrise Senior Living, Inc., KRG Capital, LLC, aka KRG Capital Partners, LLC, KRG Capital, LLC, KRG Capital Fund II, L.P., KRG Capital Fund II (PA), L.P., KRG Capital Fund II (FF), L.P., KRG Co-Investment, L.L.C., American Capital Strategies, LTD, and Trinity as defendants. On October 21, 2008, the United States, through the Civil Division of the U.S. Department of Justice, and the U.S. Attorney’s Office for the District of Arizona, filed a motion with the District Court to intervene in the pending case, but only as the case relates to defendant Trinity Hospice, Inc.
 
All parties entered into a settlement agreement on June 3, 2009 which was subsequently approved by the District Court. The lawsuit is styled United States ex rel. Joyce Roberts, et al., v. KRG Capital, LLC, et al., CV05 3758 PHX-MEA (D. Ariz.).
 
On February 13, 2008, Trinity received a subpoena from the Los Angeles regional office of the OIG requesting information regarding Trinity’s operations in 19 locations for the period between December 1, 1998 through February 12, 2008. It is anticipated that further response to this subpoena, as well as the subpoena issued by the OIG Phoenix field office noted above, will be unnecessary upon final closure of the Qui Tam action.
 
IRS Audit
 
The Internal Revenue Service is auditing our federal income tax returns for the years ended December 31, 2005 through 2008. In July 2008, our 2005 federal income tax return audit was settled with the IRS, resulting in a tax liability of approximately $0.2 million. In January 2009, the IRS reopened the audit of our 2005 federal income tax return as a result of a refund claim filed with our 2007 federal income tax return relating to the 2007 net operating loss carryback for which we were seeking reimbursement of a certain portion of the federal income taxes we had paid in 2005.
 
In February 2009, we settled with the IRS on our employment tax audits and paid a penalty of $0.2 million in November 2008 for the years 2004, 2005, and 2006. The IRS determined that we were liable for payroll tax deposit penalties on stock option exercises during 2004, 2005, and 2006 for certain withholdings that were made after the prescribed due dates.


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Table of Contents

 
Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
SEC Investigation
 
We previously announced on December 11, 2006 that we had received a request from the SEC for information about insider stock sales, timing of stock option grants and matters relating to our historical accounting practices that had been raised in media reports in the latter part of November 2006 following receipt of a letter by us from the Service Employees International Union. On May 25, 2007, we were advised by the staff of the SEC that it had commenced a formal investigation. We have fully cooperated, and intend to continue to fully cooperate, with the SEC. The Company has commenced discussions with the SEC staff concerning potential resolution of the matter and conclusion of the investigation.
 
Putative Class Action Litigation
 
Two putative securities class actions, styled United Food & Commercial Workers Union Local 880-Retail Food Employers Joint Pension Fund, et al. v. Sunrise Senior Living, Inc., et al., Case No. 1:07CV00102, and First New York Securities, L.L.C. v. Sunrise Senior Living, Inc., et al., Case No. 1:07CV000294, were filed in the U.S. District Court for the District of Columbia on January 16, 2007 and February 8, 2007, respectively. Both complaints alleged securities law violations by Sunrise and certain of its current or former officers and directors based on allegedly improper accounting practices and stock option backdating, violations of generally accepted accounting principles, false and misleading corporate disclosures, and insider trading of Sunrise stock. Both sought to certify a class for the period August 4, 2005 through June 15, 2006, and both requested damages and equitable relief, including an accounting and disgorgement. Pursuant to procedures provided by statute, two other parties, the Miami General Employees’ & Sanitation Employees’ Retirement Trust and the Oklahoma Firefighters Pension and Retirement System, appeared and jointly moved for consolidation of the two securities cases and appointment as the lead plaintiffs, which the Court ultimately approved. The cases were consolidated on July 31, 2007. Thereafter, a stipulation was submitted pursuant to which the new putative class plaintiffs filed their consolidated amended complaint (under the caption In re Sunrise Senior Living, Inc. Securities Litigation, Case No. 07-CV-00102-RBW) on June 6, 2008. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and names as defendants the Company, Paul J. Klaassen, Teresa M. Klaassen, Thomas B. Newell, Tiffany L. Tomasso, Larry E. Hulse, Carl G. Adams, Barron Anschutz, and Kenneth J. Abod.
 
On February 27, 2009, Sunrise and its current or former directors or officers who were named individually as defendants entered into an agreement. The settlement calls for the certification by the court of a class consisting of persons (with certain exceptions) who purchased Sunrise common stock between February 26, 2004 and July 28, 2006, and payment of $13.5 million in cash into an interest-bearing escrow account by March 6, 2009.
 
Concurrently with entering into the settlement agreement, Sunrise and the Individual Defendants also are entering into agreements and releases with two of its insurance carriers, which provided primary and excess insurance coverage, respectively, under certain Directors’ and Officers’ Liability insurance policies for the relevant periods. The two insurance carriers are combining to pay $13.4 million toward the settlement amount, which will exhaust the coverage limits under the primary policy (after taking account of prior payments for related defense costs), but will not exhaust coverage limits under the excess policy. These payments pursuant to the settlement were made under the then applicable policies and, therefore, do not reduce the amount of insurance proceeds available under current policies now in effect. Sunrise and the Individual Defendants have provided releases to the carrier. Taking into account the insurance contribution, the net cost of the settlement of the putative securities class action lawsuit to Sunrise is expected to be approximately $0.1 million. No amounts are to be paid by the Individual Defendants.
 
The settlement agreement was approved by the U.S. District Court for the District of Columbia on June 26, 2009 and follows the settlement agreement entered into on February 19, 2009 by Sunrise and the individuals named as defendants in two putative stockholder derivative actions brought by certain alleged stockholders of Sunrise for the


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Table of Contents

 
Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
benefit of the company, entitled In re Sunrise Senior Living Derivative Litigation, Inc., Case No. 1:07CV00143-RBW and Young, et al. v. Klaassen, et al., Case No. 2770-N (CCNCC) which settlement agreement and related funding arrangements are described in greater detail below.
 
Putative Shareholder Derivative Litigation
 
On January 19, 2007, the first of three putative shareholder derivative complaints was filed in the U.S. District Court for the District of Columbia against certain of our current and former directors and officers, and naming us as a nominal defendant. Counsel for the plaintiffs subsequently agreed among themselves to the appointment of lead plaintiffs and lead counsel. On June 29, 2007, the lead plaintiffs filed a Consolidated Shareholder Derivative Complaint, again naming us as a nominal defendant, and naming as individual defendants Paul J. Klaassen, Teresa M. Klaassen, Ronald V. Aprahamian, Craig R. Callen, Thomas J. Donohue, J. Douglas Holladay, William G. Little, David G. Bradley, Peter A. Klisares, Scott F. Meadow, Robert R. Slager, Thomas B. Newell, Tiffany L. Tomasso, John F. Gaul, Bradley G. Rush, Carl Adams, David W. Faeder, Larry E. Hulse, Timothy S. Smick, Brian C. Swinton and Christian B. A. Slavin. The consolidated case is captioned: In re Sunrise Senior Living Derivative Litigation, Inc, Case No. 1:07CV00143 (the “District of Columbia action”). The consolidated complaint alleges violations of federal securities laws and breaches of fiduciary duty by the individual defendants, arising out of the same matters as are raised in the purported class action litigation described above. The plaintiffs seek damages and equitable relief on behalf of Sunrise. We and the individual defendants filed separate motions to dismiss the consolidated complaint. Subsequently, the plaintiffs filed an amended consolidated complaint that did not substantially alter the nature of their claims. The amended consolidated complaint was accepted by the Court and deemed to have been filed on March 28, 2008. We and the individual defendants filed motions to dismiss the amended consolidated complaint on June 16, 2008. The plaintiffs also filed a motion to lift the stay on discovery in this derivative suit. The motion was denied after briefing.
 
On March 6, 2007, a putative shareholder derivative complaint was filed in the Court of Chancery in the State of Delaware against Paul J. Klaassen, Teresa M. Klaassen, Ronald V. Aprahamian, Craig R. Callen, Thomas J. Donohue, J. Douglas Holladay, David G. Bradley, Robert R. Slager, Thomas B. Newell, Tiffany L. Tomasso, Carl Adams, David W. Faeder, Larry E. Hulse, Timothy S. Smick, Brian C. Swinton and Christian B. A. Slavin, and naming us as a nominal defendant. The case is captioned Peter V. Young, et al. v. Paul J. Klaassen, et al., Case No. 2770-N (CCNCC) (the “Delaware action”). The complaint alleges breaches of fiduciary duty by the individual defendants arising out of the grant of certain stock options that are the subject of the purported class action and shareholder derivative litigation described above. The plaintiffs seek damages and equitable relief on behalf of Sunrise. We and the individual defendants separately filed motions to dismiss this complaint on June 6, 2007 and June 13, 2007. The plaintiffs amended their original complaint on September 17, 2007. On November 2, 2007, we and the individual defendants moved to dismiss the amended complaint. In connection with the motions to dismiss, and at plaintiffs’ request, the Chancery Court issued an order on April 25, 2008 directing us to produce a limited set of documents relating to the Special Independent Committee’s findings with respect to historic stock option grants. We produced those documents to the plaintiffs on May 16, 2008. Supplemental briefing on defendants’ motions to dismiss has been completed and, while the motions were pending, the plaintiffs requested that the Chancery Court stay the action, at least temporarily. The defendants did not oppose that request, and the Chancery Court granted an indefinite stay of proceedings on November 19, 2008, and directed the parties to provide a further status report by February 1, 2009. Following the parties’ status report, in which it was proposed that the stay remain in place, the Chancery Court extended the stay on February 17, 2009, and directed the parties to provide a further report by May 4, 2009.
 
On February 19, 2009, the Company and the individual defendants entered into an agreement to settle the District of Columbia and Delaware actions. Under the terms of this settlement, the Company, in addition to corporate governance measures that it already has implemented or is in the process of implementing, has agreed to (1) require independent directors to certify that they are independent under the rules of the New York Stock


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Table of Contents

 
Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
Exchange and to give prompt notification of any changes in their status that would render them no longer independent and (2) implement a minimum two-year vesting period, with appropriate exceptions, for stock option awards to employees. In addition, Paul J. Klaassen, the Company’s non-executive chairman, and the Company have agreed that the 700,000 stock options granted to Mr. Klaassen in conjunction with his previous employment agreement executed in September 2000 will be repriced from (a) $8.50 per share, the price set on September 11, 2000 by the Compensation Committee of the Company’s Board based on the prior day’s closing price, to (b) $13.09 per share, the closing price on the business day prior to November 10, 2000, the date on which the Company’s full Board approved the terms of the employment agreement. The agreement also provides that if plaintiffs in the District of Columbia action apply to the court for an award of attorneys’ fees and expenses, the Company and/or its insurers will pay the amount so awarded, not to exceed $1.0 million, within 10 days following final approval of the settlement and the fee and expense award. Plaintiffs in the Delaware action will not make any separate application for an award of fees or expenses. The amount of attorneys’ fees and expenses that the court awards to plaintiffs is to be funded by one of the Company’s directors’ and officers’ liability insurance carriers under an applicable policy of insurance. No amounts are to be paid by the Company or by the individual defendants in the District of Columbia and Delaware actions. The settlement was approved by the U.S. District Court for the District of Columbia on June 26, 2009. On August 4, 2009, the court in the Delaware action entered an order formally dismissing that action.
 
Other Pending Lawsuits and Claims
 
In addition to the lawsuits and litigation matters described above, we are involved in various lawsuits and claims arising in the normal course of business. In the opinion of management, although the outcomes of these other suits and claims are uncertain, in the aggregate they are not expected to have a material adverse effect on our business, financial condition, and results of operations.
 
11.   Severance and Restructuring Plan
 
In May 2009, we announced a plan to continue to reduce corporate expenses through reorganization of our corporate cost structure, including a reduction in spending related to, among other areas, administrative processes, vendors, and consultants. The plan is designed to reduce our annual recurring general and administrative expenses (including expenses previously classified as venture expense) by over $20 million, from our 2009 budgeted annual recurring level of approximately $120 million (after the sale of Greystone, which is presented in discontinued operations in our financial statements) to approximately $100 million, and to reduce our centrally administered services which are charged to the communities by approximately $1.5 million. Under the plan, approximately 150 positions will be eliminated. As of September 30, 2009, we have eliminated 114 positions and will be eliminating an additional 49 positions by early 2010. We have recorded severance expense of $5.6 million as a result of the plan through September 30, 2009 and expect to record an additional $0.6 million through early 2010. These costs are incremental to the restructuring plan implemented by us in 2008, which provided for the elimination of 165 positions and corresponding expense reductions.
 
In May 2009, we entered into a separation agreement with our chief financial officer, Richard Nadeau, in connection with this plan. Pursuant to the separation agreement, Mr. Nadeau’s employment with us terminated effective as of May 29, 2009. Pursuant to Mr. Nadeau’s employment agreement, Mr. Nadeau received severance benefits that included a lump sum cash payment of $1.4 million. In addition, Mr. Nadeau received a bonus in the amount of $0.5 million and Mr. Nadeau’s outstanding and unvested stock options, restricted stock and other long-term equity compensation awards were fully vested, resulting in a non-cash compensation expense to us of $0.8 million.
 
In September 2009, we terminated a portion of our lease on our corporate headquarters in McLean, Virginia. We recorded a charge of $2.7 million related to the termination.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
The following table reflects the activity related to our severance and restructuring plans during the nine months ended September 30, 2009:
 
                                         
    Liability at
                Cash Payments
    Liability at
 
    January 1,
    Additional
          and Other
    September 30,
 
    2009     Charges     Adjustments     Settlements     2009  
(In thousands)                              
 
Voluntary severance
  $ 3,312     $ 1,066     $     $ (4,105 )   $ 273  
Involuntary severance
    1,518       9,045             (8,781 )     1,782  
CEO retirement compensation
    1,523       41                   1,564  
Professional fees
          12,523             (12,523 )      
Lease termination costs
    2,394       3,208       591       (2,576 )     3,617  
                                         
    $ 8,747     $ 25,883     $ 591     $ (27,985 )   $ 7,236  
                                         
 
Included in the above table is legal and professional fees of $4.3 million, $3.7 million and $4.6 million in the first, second and third quarters, respectively, relating to corporate restructuring.
 
12.   German Assets Held for Sale and Discontinued Operations
 
German Assets Held for Sale
 
We own nine communities (two of which are closed) in Germany. The debt related to these communities has partial recourse to us as the debt for four of the communities of €50.0 million ($73.0 million at September 30, 2009) has a stipulated release price for each community and for the remaining five communities, we have provided guarantees to the lenders of the repayment of the monthly interest payments and principal amortization and operating shortfalls until the maturity dates of the loans. As a result of the violation of a covenant in one of the loan documents, one of the lenders has asserted that we are effectively obligated to repay a portion of the principal at this time. Subsequent to September 30, 2009, in connection with the German debt restructure, we have settled with this lender. The face amount of the total debt related to the German communities at September 30, 2009 is $219.3 million.
 
In January 2009, we informed the lenders to our German communities and the Hoesel land, an undeveloped land parcel, that our German subsidiary was suspending payment of principal and interest on all loans for our German communities and that we would seek a comprehensive restructuring of the loans and our operating deficit guarantees. As a result of the failure to make payments of principal and interest on the loans for our German communities, we are in default of the loan agreements but have entered into standstill agreements with the lenders pursuant to which the lenders have agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements until the earliest of the occurrence of certain other events relating to the loans.
 
In October 2009, we entered into a restructuring agreement, in the form of a binding term sheet, with two of our lenders to seven of the nine communities, to settle and compromise their claims against us, including under operating deficit and principal repayment guarantees provided by us in support of our German subsidiaries. These two lenders contended that these claims had an aggregate value of approximately $121.6 million. The binding term sheet contemplates that, on or before the first anniversary of the execution of definitive documentation for the restructuring, certain other of our identified lenders may elect to participate in the restructuring with respect to their asserted claims. The claims being settled by the two lenders represent approximately 77.5 percent of the aggregate amount of claims asserted by the lenders that may elect to participate in the restructuring transaction.
 
The restructuring agreement provides that the electing lenders will release and discharge us from certain claims they may have against us. We will issue to the lenders that elect to participate in the restructuring on or before


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
the first execution of the definitive documentation, their pro rata share of up to an aggregate of 5 million shares of our common stock and will grant mortgages for the benefit of all electing lenders on certain of our unencumbered North American properties. Following the first execution of the definitive documentation for the restructuring, we will pursue the sale of such mortgaged properties and distribute the net sale proceeds to the electing lenders. We have guaranteed that, within 30 months of the first execution of the definitive documentation for the restructuring, the electing lenders will receive a minimum of $58.3 million from the net proceeds of any such sale, which equals 80 percent of the most recent aggregate appraised value of these properties. If the electing lenders do not receive at least $58.3 million by such date, we will make payment to cover any shortfall or, at such lenders’ option, convey to them the remaining unsold properties.
 
In addition, we will market for sale the German assisted living communities subject to loan agreements with the electing lenders and will remain responsible for all costs of operating, preserving and maintaining these communities until the earlier of either their sale or December 31, 2010.
 
The closing of the transaction, including the execution of the definitive documentation, the release of claims and the issuance of Sunrise common stock, is conditioned upon receipt of consent for the transaction from Bank of America, N.A., as the administrative agent under our Bank Credit Facility, on or before November 11, 2009. In accordance with the binding term sheet, definitive documentation shall be executed as soon as reasonably possible (but no later than 40 days) after the receipt of such required consent.
 
We continue to be liable under certain operating deficit and repayment guarantees for the Klein Flottbeck and Wiesbaden communities, and certain principal repayment guarantees for the Hoesel land which is not part of the restructuring agreement.
 
As of September 30, 2009, we have classified the German communities as assets held for sale. During the second quarter of 2009, we classified the German communities as assets held for sale as all of the following criteria were met:
 
  •  Executive management has committed to a plan to sell the assets;
 
  •  The assets are available for immediate sale in their present condition;
 
  •  There is an active program to locate a buyer and other actions required to complete the sale have been initiated;
 
  •  The assets are being actively marketed; and
 
  •  The sale of the assets is probable and it is unlikely that significant changes to the sale plan will be made.
 
Upon designation as assets held for sale, we recorded the assets at the lower of their carrying value or their fair value less estimated costs to sell. We used the average of the bids received to date in the determination of fair value. As the carrying value of a majority of the assets was in excess of the fair value less estimated costs to sell, during the second quarter of 2009 we recorded a charge of $52.4 million which is included in discontinued operations. Also, upon designation as assets held for sale, the results of operations for the German communities are reported as discontinued operations.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
The German assets held for sale at September 30, 2009 consists of the following (in thousands):
 
         
    September 30,
 
    2009  
 
Cash and cash equivalents
  $ 897  
Accounts receivable, net
    3,216  
Property and equipment, net
    101,032  
Prepaid and other assets
    409  
         
German assets held for sale
  $ 105,554  
         
Accounts payable and accrued expenses
  $ 9,908  
         
 
Discontinued Operations
 
In March 2009, we sold our Greystone subsidiary and our interests in Greystone seed capital partnerships to an entity controlled by Michael Lanahan and Paul Steinhoff, two senior executives of the Greystone subsidiary. Total consideration was (i) $2,000,000 in cash at closing; (ii) $5,700,000 in short-term notes, (iii) a $6,000,000 7-year note (iv) a $2,500,000 note payable, and (v) 35% of the net proceeds received by the seed capital investors for each of the seed capital interests purchased from us. We collected $5.7 million of short-term notes through September 30, 2009.
 
As Greystone’s contracts were multiple element arrangements and there was not sufficient objective and reliable evidence of the fair value of undelivered elements at each billing milestone, revenue recognition was deferred until the completion of the development contract. The sale of Greystone generated a book gain resulting from the realization of previously deferred revenue. The sale of Greystone generated a tax loss of approximately $40 million. Due to the uncertainty of collectability of the $6.0 million note, initial gain recognition is not appropriate and gain will be recognized as payment is received. The $2.5 million note payable is contingent on future income of Greystone and gain will be recognized when the contingency is resolved and consideration is received.
 
In the fourth quarter of 2008, we determined not to provide any additional funding to our Trinity subsidiary due to our review of our future cash requirements. As of December 31, 2008, Trinity had ceased operations. In order to resolve and settle the claims among us and Trinity’s prior owners, in June 2009, we entered into a settlement agreement with the former majority stockholders of Trinity, which, among other matters, provides for the release and discharge of all claims and causes of action between the parties to the settlement agreement. In consideration of the settlement agreement, the former majority stockholders of Trinity paid us an aggregate amount of approximately $9.8 million. The parties to the settlement agreement also agreed to cooperate to achieve voluntary dismissal of certain litigation matters.
 
We had previously recorded a receivable of $2.7 million from the former stockholders of Trinity for various liabilities relating to events occurring prior to our purchase of Trinity. Accordingly, $2.7 million of the proceeds were applied against the receivable and the remaining amount of $7.1 million has been recorded as income from discontinued operations.
 
In December 2008, two wholly owned communities were sold to unrelated third parties for which we have no continuing involvement. In the second quarter of 2009, a wholly owned community ceased operations. All three of these communities are classified as discontinued operations. In the third quarter of 2009, a wholly owned community was sold to an unrelated third party for approximately $2.0 million. We received $0.3 million of cash and a note receivable for $1.7 million, recognizing gain of $0.3 million. We have no continuing involvement with this property.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
The results of operations for our German communities, Greystone, Trinity and the four communities have been reclassified to discontinued operations. The following amounts related to our German communities, Greystone, Trinity and the four communities have been segregated from continuing operations and reported as discontinued operations (in thousands):
 
                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2009     2008     2009     2008  
 
Revenue
  $ 8,231     $ 23,355     $ 29,975     $ 70,635  
Expenses
    (9,432 )     (41,486 )     (42,200 )     (123,745 )
Impairment losses
                (52,414 )      
Other expense
    (4,666 )     (2,923 )     (6,412 )     (2,884 )
Gain on sale
    344             24,092        
Income taxes
          2,274             14,304  
Extraordinary loss, net of tax
          (13,255 )           (13,255 )
                                 
Loss from discontinued operations
  $ (5,523 )   $ (32,035 )   $ (46,959 )   $ (54,945 )
                                 
 
13.   Net Loss per Common Share
 
The following table summarizes the computation of basic and diluted net loss per share amounts presented in the accompanying consolidated statements of operations (in thousands, except per share data):
 
                 
    For the Three Months
 
    Ended September 30,  
    2009     2008  
 
Loss attributable to common shareholders:
               
Loss before discontinued operations, net of noncontrolling interests
  $ (38,879 )   $ (37,884 )
Loss from discontinued operations, net of noncontrolling interests
    (5,523 )     (30,782 )
                 
Net loss
  $ (44,402 )   $ (68,666 )
                 
Weighted-average shares outstanding — basic and diluted
    50,682       50,346  
Basic and diluted net loss per common share
               
Loss before discontinued operations, net of noncontrolling interests
  $ (0.77 )   $ (0.75 )
Loss from discontinued operations, net of noncontrolling interests
    (0.11 )     (0.61 )
                 
Net loss per share attributable to common shareholders
  $ (0.88 )   $ (1.36 )
                 
 
                 
    For the Nine Months
 
    Ended September 30,  
    2009     2008  
 
Loss attributable to common shareholders:
               
Loss before discontinued operations, net of noncontrolling interests
  $ (97,578 )   $ (82,583 )
Loss from discontinued operations, net of noncontrolling interests
    (46,773 )     (50,984 )
                 
Net loss
  $ (144,351 )   $ (133,567 )
                 
Weighted-average shares outstanding — basic and diluted
    50,620       50,317  
                 
Basic and diluted net loss per common share
               
Loss before discontinued operations, net of noncontrolling interests
  $ (1.93 )   $ (1.64 )
Loss from discontinued operations, net of noncontrolling interests
    (0.92 )     (1.01 )
                 
Net loss per share attributable to common shareholders
  $ (2.85 )   $ (2.65 )
                 


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
Options and restricted stock are included under the treasury stock method to the extent they are dilutive. Shares issuable upon exercise of stock options of 4,668,152 and 3,239,297 for the three months ended September 30, 2009 and 2008, respectively, and 4,751,099 and 3,261,235 for the nine months ended September 30, 2009 and 2008, respectively, have been excluded from the computation because the effect of their inclusion would be anti-dilutive.
 
14.   Information about Sunrise’s Segments
 
Effective in 2009, we changed our operating segments.  In 2008, we reported five operating segments: domestic operations, international operations (Canada and the United Kingdom), Germany, Greystone and Trinity. We now have six operating segments for which operating results are regularly reviewed by our chief operating decision makers:
 
North American Management, which is the results from the management of third party, joint venture and wholly owned/leased Sunrise senior living communities in the United States and Canada.
 
North American Development, which is the results from the development of Sunrise senior living communities in the United States and Canada.
 
Equity Method Investments, which is the results from our investment in domestic and international ventures.
 
Consolidated (Wholly Owned/Leased), which is the results from the operation of wholly owned and leased Sunrise senior living communities in the United States and Canada net of an allocated management fee of $6.9 million and $7.8 million for the three months ended September 30, 2009 and 2008, respectively, and $20.6 million and $21.2 million for the nine months ended September 30, 2009 and 2008, respectively.
 
United Kingdom, which is the results from the development and management of Sunrise senior living communities in the United Kingdom.
 
Germany, which is the results from the management of nine (two of which are closed) Sunrise senior living communities in Germany through September 1, 2008. The operation of nine Sunrise senior living communities after September 1, 2008 when we began consolidating the communities are included in discontinued operations.
 
The old North American segment was split into the new North American Management, North American Development, Equity Method Investments and Consolidated (Wholly Owned/Leased) segments. Results from Canadian operations are now included in the North American Management and Wholly Owned/Leased segments, while previously they were included in the International segment. The operating results from the United Kingdom development and management activities are now its own separate segment. The Germany segment remains unchanged. Greystone, which was sold in March 2009, and Trinity, which ceased operations in December 2008, are now reported as discontinued operations.
 
Our historical segment reporting has been restated to reflect the changes made in 2009.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
Segment results are as follows (in thousands):
 
                                                                 
    For the Three Months Ended September 30, 2009  
                      Consolidated
                Unallocated
       
                Equity
    (Wholly
          Germany
    Corporate
       
    North American
    North American
    Method
    Owned/
    United
    Management
    and
       
 
  Management     Development     Investments     Leased)     Kingdom     Company     Eliminations     Total  
 
Revenues
  $ 276,835     $ 802     $ 134     $ 106,047     $ 6,145     $ 57     $ (7,441 )   $ 382,579  
Community expense
    218       6       7       87,150                   (6,620 )     80,761  
Development expense
    (201 )     2,787       58       11       476       7       (1,341 )     1,797  
Depreciation and amortization
    1,904       430             5,676       147       28       3,474       11,659  
Other operating expenses
    271,082       2,932       2,186       24,983       6,829       976       13,298       322,286  
Income (loss) from operations
    3,832       (5,353 )     (2,117 )     (11,773 )     (1,307 )     (954 )     (16,252 )     (33,924 )
Interest income
    181       326       2       57       1       2       3       572  
Interest expense
    (119 )     (225 )           (2,124 )                 (1,193 )     (3,661 )
Foreign exchange gain/(loss)
                      2,717       74       (24 )           2,767  
Sunrise’s share of losses and return on investment
in unconsolidated communities
                (4,572 )                       (41 )     (4,613 )
Income (loss) before income taxes, discontinued operations, and noncontrolling interests
    5,459       (5,810 )     (6,687 )     (11,408 )     (1,232 )     (968 )     (17,198 )     (37,844 )
 
                                                                 
    For the Three Months Ended September 30, 2008  
                      Consolidated
                Unallocated
       
                Equity
    (Wholly
          Germany
    Corporate
       
    North American
    North American
    Method
    Owned/
    United
    Management
    and
       
 
  Management     Development     Investments     Leased)     Kingdom     Company     Eliminations     Total  
 
Revenues
  $ 294,500     $ 8,633     $ (211 )   $ 106,563     $ 9,141     $ 2,930     $ (8,939 )   $ 412,617  
Community expense
    2,079       194       31       87,056             450       (8,562 )     81,248  
Development expense
    1,035       4,911       626             1,261       48       114       7,995  
Depreciation and amortization
    2,018       234             5,565       50       31       3,732       11,630  
Other operating expenses
    276,639       51,248       2,850       15,371       6,090       3,887       14,860       370,945  
Income (loss) from operations
    12,729       (47,954 )     (3,718 )     (1,429 )     1,740       (1,486 )     (19,083 )     (59,201 )
Interest income
    242       34       197       92       (21 )     25       431       1,000  
Interest expense
    (70 )     (344 )           (3,671 )           94       (6 )     (3,997 )
Foreign exchange gain (loss)
          (2,001 )           (121 )     (601 )     4,414             1,691  
Sunrise’s share of earnings and return on investment in unconsolidated communities
                (15,455 )                       (94 )     (15,549 )
Income (loss) before income taxes, discontinued operations, and noncontrolling interests
    13,201       (45,394 )     (19,022 )     (5,009 )     1,084       3,046       (18,842 )     (70,936 )
 


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
                                                                 
    For the Nine Months Ended September 30, 2009  
                      Consolidated
                Unallocated
       
                Equity
    (Wholly
          Germany
    Corporate
       
    North American
    North American
    Method
    Owned/
    United
    Management
    and
       
 
  Management     Development     Investments     Leased)     Kingdom     Company     Eliminations     Total  
 
Revenues
  $ 832,715     $ 6,649     $ 1,594     $ 319,704     $ 19,534     $ 114     $ (21,514 )   $ 1,158,796  
Community expense
    1,500       (94 )     34       259,919       32       158       (19,165 )     242,384  
Development expense
    (244 )     10,608       1,187       48       1,257       127       (2,521 )     10,462  
Depreciation and amortization
    10,849       1,514             17,570       281       82       11,158       41,454  
Other operating expenses
    815,662       34,352       5,666       71,155       18,466       3,422       30,817       979,540  
Income (loss) from operations
    4,948       (39,731 )     (5,293 )     (28,988 )     (502 )     (3,675 )     (41,803 )     (115,044 )
Interest income
    305       1,098       2       181       8       8       (174 )     1,428  
Interest expense
    (165 )     (653 )           (6,812 )           (13 )     (3,166 )     (10,809 )
Foreign exchange gain/(loss)
                      4,567       (301 )     (43 )           4,223  
Sunrise’s share of earnings (losses) and return on investment in unconsolidated communities
                9,509                   (16 )     (131 )     9,362  
Income (loss) before income taxes, discontinued operations, and noncontrolling interests
    8,758       (30,254 )     4,224       (31,850 )     (1,167 )     (3,868 )     (44,553 )     (98,710 )
 
                                                                 
    For the Nine Months Ended September 30, 2008  
                      Consolidated
                Unallocated
       
                Equity
    (Wholly
          Germany
    Corporate
       
    North American
    North American
    Method
    Owned/
    United
    Management
    and
       
 
  Management     Development     Investments     Leased)     Kingdom     Company     Eliminations     Total  
 
Revenues
  $ 884,342     $ 20,765     $ 1,801     $ 314,906     $ 25,772     $ 10,225     $ (25,291 )   $ 1,232,520  
Community expense
    898       762       39       255,255       (45 )     813       (23,333 )     234,389  
Development expense
    8,298       18,363       2,767       9       3,384       140       (4,544 )     28,417  
Depreciation and amortization
    5,373       789             16,231       150       105       11,616       34,264  
Other operating expenses
    842,563       92,054       10,006       48,404       17,171       13,085       43,005       1,066,288  
Income (loss) from operations
    27,210       (91,203 )     (11,011 )     (4,993 )     5,112       (3,918 )     (52,035 )     (130,838 )
Interest income
    696       78       726       244       590       40       1,599       3,973  
Interest expense
    (168 )     (834 )     (365 )     (7,316 )                 746       (7,937 )
Foreign exchange gain (loss)
          (1,886 )           (85 )     (1,030 )     212             (2,789 )
Sunrise’s share of earnings (losses) and return on investment in unconsolidated communities
                (7,105 )                       (102 )     (7,207 )
Income (loss) before income taxes, discontinued operations, and noncontrolling interests
    28,041       (76,234 )     (17,037 )     (11,741 )     4,639       (3,670 )     (55,749 )     (131,751 )

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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
 
15.   Comprehensive Loss and Capital Structure
 
Comprehensive loss for the three and nine months ended September 30, 2009 and 2008 was as follows (in thousands):
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Net loss attributable to common shareholders
  $ (44,402 )   $ (68,666 )   $ (144,351 )   $ (133,567 )
Foreign currency translation adjustment
    (5,306 )     2,479       (5,268 )     66  
Unrealized gain on investments
    103             103        
Equity interest in investees’ other comprehensive loss
    633       1,045       7,358       (473 )
                                 
Comprehensive loss attributable to common shareholders
  $ (48,972 )   $ (65,142 )   $ (142,158 )   $ (133,974 )
                                 
 
The following table details changes in shareholders’ equity, including changes in equity attributable to common shareholders and changes in equity attributable to the noncontrolling interests.
 
                                                 
                            Accumulated
    Equity
 
    Shares of
          Additional
          Other
    Attributable
 
    Common
    Common
    Paid-in
    Retained
    Comprehensive
    to Noncontrolling
 
    Stock     Stock     Capital     Loss     Income(Loss)     Interests  
(In thousands)                                    
 
Balance at December 31, 2008
    50,872     $ 509     $ 458,404     $ (327,056 )   $ 6,671     $ 9,386  
Net (loss) income
                      (144,351 )           218  
Foreign currency translation,
                                               
net of tax
                            (5,268 )      
Sunrise’s share of investee’s other
                                               
comprehensive income
                            7,358        
Unrealized gain on investments
                            103        
Exercise of stock options
    250       3       203                    
Forfeiture of restricted stock
    (34 )                              
Surrender of shares for taxes
    (16 )     (1 )     (116 )                  
Stock compensation expense
                3,596                    
Distributions to noncontrolling
                                               
interests
                (142 )                 (1,069 )
Consolidation of controlling
                                               
interest
                                  2,215  
Sale of Greystone
                                  (6,633 )
                                                 
Balance at September 30, 2009
    51,072     $ 511     $ 461,945     $ (471,407 )   $ 8,864     $ 4,117  
                                                 
 
16.   Supplemental Cash Flow Information
 
Interest paid was $10.2 million and $16.2 million for the nine months ended September 30, 2009 and 2008, respectively. Interest capitalized was $0.5 million and $5.6 million for the nine months ended September 30, 2009 and 2008, respectively. Income taxes (refunded) paid was $(23.9) million and $2.1 million for the nine months ended September 30, 2009 and 2008, respectively.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
For the nine months ended September 30, 2008, significant non-cash transactions included the addition of $166.1 million of fixed assets and $216.7 million of long-term debt as the result of the consolidation of our German venture.
 
17.   Variable Interest Entities
 
Generally accepted accounting principles require if an entity is determined to be a variable interest entity (“VIE”), it must be consolidated by the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns or both. We perform a qualitative and quantitative analysis using the methodology as described under the ASC Consolidation Topic to calculate expected losses to determine if the entity is a VIE. If the entity is a VIE, we determine which party has the greater variability and is the primary beneficiary. At September 30, 2009, we are the primary beneficiary of one VIE and therefore consolidate that entity.
 
VIEs where Sunrise is the Primary Beneficiary
 
We have a management agreement with a not-for-profit corporation established to own and operate a continuing care retirement community (“CCRC”) in New Jersey. This entity is a VIE. The CCRC contains a 60-bed skilled nursing unit, a 32-bed assisted living unit, a 27-bed Alzheimer’s care unit and 252 independent living apartments. We have included $18.4 million and $19.2 million, respectively, of net property and equipment and debt of $23.2 million and $23.9 million, respectively, in our September 30, 2009 and December 31, 2008 consolidated balance sheets for this entity. The majority of the debt is bonds that are secured by a pledge of and lien on revenues, a letter of credit with Bank of New York and by a leasehold mortgage and security agreement. We guarantee the letter of credit. Proceeds from the bonds’ issuance were used to acquire and renovate the CCRC. As of September 30, 2009, we guaranteed $21.9 million of the bonds. The entity has incurred losses and has experienced negative working capital for several years and has failed the debt service coverage ratio related to the bonds. Management fees earned by us were $0.1 million for both the three months ended September 30, 2009 and 2008, respectively, and $0.4 million for both the nine months ended September 30, 2009 and 2008, respectively. The management agreement also provides for reimbursement to us for all direct cost of operations. Payments to us for direct operating expenses were $2.4 million and $1.7 million for the three months ended September 30, 2009 and 2008, respectively, and $8.3 million and $5.6 million for the nine months ended September 30, 2009 and 2008, respectively. The entity obtains professional and general liability coverage through our affiliate, Sunrise Senior Living Insurance, Inc. The entity incurred $39,334 and $47,992 for the three months ended September 30, 2009 and 2008, respectively, and $0.1 million and $0.2 million for the nine months ended September 30, 2009 and 2008, respectively, related to the professional and general liability coverage. The entity also has a ground lease with us. Rent expense is recognized on a straight-line basis at $0.7 million per year. Deferred rent relating to this agreement is $6.0 million and $5.6 million at September 30, 2009 and December 31, 2008, respectively. These amounts are eliminated in our consolidated financial statements.
 
Beginning in September 2008, we consolidated the German communities. In January 2009, we exercised our option and acquired a controlling interest of 94.9% in the German communities. In June 2009, we exercised our option and acquired the remaining 5.1% interest in our German communities therefore wholly owning those communities.
 
We previously consolidated six VIEs that were investment partnerships formed with third-party partners to invest capital in the pre-financing stage of Greystone projects. Five of these investment partnerships were sold as part of the Greystone transaction in March 2009 (refer to Note 12) and we retained ownership in one which we deconsolidated as we are no longer affiliated with the general partner and do not control the entity. We expect that this entity will be dissolved by year end. We own 49.5% of the investment partnership with 50.5% owned by third-parties. The purpose of the venture had been to develop a senior living community owned by a nonprofit entity.


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
VIEs Where We Are Not the Primary Beneficiary but Hold a Significant Variable Interest in the VIEs
 
In July 2007, we formed a venture with a third party to purchase six communities from our first U.K. development venture. The entity was financed with £187.6 million of debt. The venture also entered into a firm commitment to purchase 11 additional communities from our first U.K. development venture. As of September 30, 2009, the venture has 14 operating communities in the U.K. Our equity investment in the venture is $1.0 million at September 30, 2009. The line item “Due from unconsolidated communities” on our consolidated balance sheet contains $0.7 million due from the venture. Our maximum exposure to loss is our equity investment of $1.0 million. We calculated the maximum exposure to loss as the maximum loss (regardless of probability of being incurred) that we could be required to record in our statement of operations as a result of our involvement with the VIE.
 
In September 2006, a venture was formed to acquire and operate six senior living facilities located in Florida. We owned a 25% interest in the venture as managing member and our venture partner owned the remaining 75% interest. The venture was financed with $156 million of equity and $304 million of debt. In December 2008, the venture’s debt was restructured and we entered into an agreement with our venture partner under which we agreed to resign as managing member of the venture and manager of the communities when we are released from various guarantees provided to the venture’s lender. On April 30, 2009, we sold our equity interest in the venture and were released from all guarantee obligations. Our management contract was terminated on April 30, 2009. We received proceeds of approximately $4.8 million for our equity interest and our receivable from the venture for fundings under the operating deficit guarantees.
 
18.   Related Parties
 
In October 2008, we entered into a contract with SecureNet Payment Systems LLC (“SecureNet”) to provide consulting services in connection with the processing of direct deposit and credit card payments by community residents of their monthly fees. The sales agent representing SecureNet, whose compensation will be based on SecureNet’s revenue from the contract, is the wife of a Sunrise employee. In November 2008, after the award of the contract, that employee became Senior Vice President, North American Operations and an officer of the Company. The Governance Committee reviewed this transaction at its meeting on July 20, 2009 and concluded that the bidding process was done with integrity, that the award to SecureNet appeared to have been in our best interest and that our employee’s relationship to the SecureNet sales representative did not have any influence over the decision to select SecureNet. As of September 30, 2009, $0.1 million of fees were paid to SecureNet.
 
In November 2008, we entered into an oral consulting arrangement with Mr. Klaassen. Under the consulting arrangement, we agreed to pay Mr. Klaassen a fee of $25,000 per month for consulting with us and Mr. Ordan, our new chief executive officer, on senior living matters. This was in addition to any benefits Mr. Klaassen was entitled to under his employment agreement. Fees totaling $87,500 were paid to Mr. Klaassen for three and a half months commencing in November 2008.
 
For additional discussion of related parties transactions, refer to Note 18 to the Consolidated Financial Statements of our 2008 Form 10-K, as amended.
 
19.   Subsequent Events
 
Sale of 21 Communities
 
In October 2009, we entered into an agreement to sell 21 wholly owned assisted living communities, located in 11 states, to Brookdale Senior Living Inc. (“Brookdale”) for $204 million. Brookdale placed into escrow an earnest money deposit of $5 million toward the purchase price. The closing date is currently scheduled for November 16, 2009. At the closing of the sale, we expect to receive approximately $60 million in proceeds after payment or assumption by Brookdale of certain mortgage loans, the posting of required escrows, and payment of expenses by


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Sunrise Senior Living, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
(Unaudited)
 
us. We will use $25 million of proceeds to pay down our Bank Credit Facility and will place $20 million into a collateral account for the benefit of other creditors.
 
We recorded an impairment charge of $6.8 million in the third quarter of 2009 to write down five of the 21 communities to fair value. We expect to record a gain on the sale of real estate of approximately $50 million upon closing of the transaction.
 
Bank Credit Facility
 
See Note 6 for a discussion of the Thirteenth Amendment to our Bank Credit Facility.
 
Germany
 
See Note 12 for a discussion of the debt restructuring agreements with two of our lenders for our German communities.
 
Fountains
 
See Note 10 for a discussion regarding the release of our obligations related to the Fountains venture.
 
Other
 
See Note 3 for a discussion regarding the sale of auction rate securities.
 
We have evaluated all other events occurring after September 30, 2009 through November 8, 2009, the date our financial statements are issued.


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read together with the information contained in our 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, our ability to raise funds and maintain sufficient liquidity; our ability to extend the maturity dates of, obtain waivers with respect to, or refinance, some of our outstanding debt; our ability to achieve the anticipated savings from our cost-savings program; the sale of our German communities and the settlement of the related debt; the outcome of the HCP, Inc. litigation; the outcome of the SEC’s investigation; the outcome of the Trinity OIG investigation; risk of changes in our critical accounting estimates; risk of further write-downs or impairments of our assets; risk of future fundings of guarantees and other support arrangements to some of our ventures, lenders to the ventures or third party owners; risk of declining occupancies in existing communities or slower than expected leasing of new communities; development and construction risks; risks associated with past or any future acquisition; compliance with government regulations; risk of new legislation or regulatory developments; business conditions; competition; changes in interest rates; unanticipated expenses; market factors that could affect the value of our properties; the risks of further downturns in general economic conditions; availability of financing for development, including under construction loans as to which we are in default; and other risks detailed in our amended 2008 Annual Report on Form 10-K filed with the SEC on February 27, 2009 as amended on March 31, 2009 and April 30, 2009, and, as may be amended or supplemented in our Form 10-Q filings. 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 Senior Living, Inc. and its consolidated subsidiaries.
 
Overview
 
We are a Delaware corporation and a provider of senior living services in the United States, Canada, the United Kingdom and Germany.
 
At September 30, 2009, we operated 418 communities, including 371 communities in the United States, 15 communities in Canada, 25 communities in the United Kingdom and seven communities in Germany, with a total unit capacity of approximately 43,000.
 
The following table summarizes our portfolio of operating communities:
 
                         
    As of
    As of
       
    September 30,
    September 30,
    Percent
 
    2009     2008     Change  
 
Total communities
                       
Consolidated (owned or leased)
    68       64       6.3 %
Consolidated Variable Interest
                       
Entity
    1       10       (90.0 )%
Unconsolidated Ventures
    213       200       6.5 %
Managed
    136       170       (20.0 )%
                         
Total
    418       444       (5.9 )%
                         
 
During the first nine months of 2009 we continued to execute a strategy of 1) divesting of non-core assets and unprofitable operations to raise cash, improve our liquidity, avoid significant capital investment and reduce our operating and financial risks and 2) improve the efficiency of our operations and our administrative functions.
 
We had $43.4 million and $29.5 million of unrestricted cash at September 30, 2009 and December 31, 2008, respectively. The outstanding borrowings on the Bank Credit Facility were $68.9 million at September 30, 2009. On October 19, 2009, we entered into the Thirteenth Amendment to the Bank Credit Facility, which extended the


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maturity date to December 2, 2010 (subject to certain conditions as discussed more fully under Liquidity and Capital Resources). We have no borrowing availability under the Bank Credit Facility.
 
Debt that is in default at September 30, 2009 consists of the following (in thousands):
 
         
    September 30,
 
    2009  
 
German communities(1)
  $ 200,034  
Community mortgages
    147,930  
Variable interest entity
    23,225  
Land loans
    12,420  
Other
    28,286  
         
    $ 411,895  
         
 
 
(1) The face amount of the debt related to the German communities was $219.3 million at September 30, 2009.
 
We are working with our lenders to extend the maturities of, or otherwise either re-schedule obligations under debt in default or to obtain waivers.
 
For debt that is not in default, we have scheduled debt maturities as follows (in thousands):
 
                                                         
          1st Qtr.
    2nd Qtr.
    3rd Qtr.
    4th Qtr.
             
    2009     2010     2010     2010     2010     Thereafter     Total  
 
Bank Credit Facility(1)
  $ 68,878     $     $     $     $     $     $ 68,878  
Community mortgages
    39,796       40,573       195       497       198       19,766       101,025  
Land loans
    21,907                                     21,907  
Margin loan (auction rate securities)
    20,920                                     20,920  
                                                         
    $ 151,501     $ 40,573     $ 195     $ 497     $ 198     $ 19,766     $ 212,730  
                                                         
 
 
(1) As of 10/19/09, maturity date changed to 12/2/10 (subject to certain conditions).
 
As discussed more fully in Liquidity and Capital Resources, we are in default of the loan agreements relating to our German communities and the Hoesel land, but have entered into standstill agreements with the lenders pursuant to which the lenders have agreed not to foreclose on the communities that are collateral for their loans or to commence or prosecute any action or proceeding to enforce their demand for payment by us pursuant to our operating deficit agreements until the earliest of the occurrence of certain other events relating to the loans.
 
In October 2009, we entered into a restructuring agreement, in the form of a binding term sheet, with two of our lenders to seven of the nine communities, to settle and compromise their claims against us, including under operating deficit and principal repayment guarantees provided by us in support of our German subsidiaries. These two lenders contended that these claims had an aggregate value of approximately $121.6 million. The binding term sheet is discussed more fully in Liquidity and Capital Resources.
 
The restructuring agreement provides that the electing lenders will release and discharge us from certain claims they may have against us. We will issue to the lenders that elect to participate in the restructuring on or before the first execution of the definitive documentation, their pro rata share of up to an aggregate of 5 million shares of our common stock and will grant mortgages for the benefit of all electing lenders on certain of our unencumbered North American properties. Following the first execution of the definitive documentation for the restructuring, we will pursue the sale of such mortgaged properties and distribute the net sale proceeds to the electing lenders. We have guaranteed that, within 30 months of the first execution of the definitive documentation for the restructuring, the electing lenders will receive a minimum of $58.3 million from the net proceeds of any such sale, which equals 80 percent of the most recent aggregate appraised value of these properties. If the electing lenders do not receive at least $58.3 million by such date, we will make payment to cover any shortfall or, at such lenders’ option, convey to


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them the remaining unsold properties. As any gain or loss on the transaction is dependent upon the values at closing of the aforementioned consideration, we are unable to estimate any gain or loss at this time.
 
In addition, we will market for sale the German assisted living communities subject to loan agreements with the electing lenders and will remain responsible for all costs of operating, preserving and maintaining these communities until the earlier of either their sale or December 31, 2010.
 
The closing of the transaction, including the execution of the definitive documentation, the release of claims and the issuance of Sunrise common stock, is conditioned upon receipt of consent for the transaction from Bank of America, N.A., as the administrative agent under our Bank Credit Facility, on or before November 11, 2009. In accordance with the binding term sheet, definitive documentation shall be executed as soon as reasonably possible (but no later than 40 days) after the receipt of such required consent.
 
We continue to be liable under certain operating deficit and repayment guarantees for the Klein Flottbeck and Wiesbaden communities, and certain principal repayment guarantees for the Hoesel land which is not part of the restructuring agreement.
 
In the second quarter of 2009, we engaged a broker to assist in the sale of the nine German communities and at that time, classified the German assets as held for sale. As the book value of the majority of the assets was in excess of their fair value less estimated costs to sell, we recorded a charge of $52.4 million in the second quarter of 2009 which is included in discontinued operations.
 
In January 2009, we suspended payment of default interest and payments under the income support guarantee for the Fountains venture. Our failure to pay default interest on the loan was an additional default of the loan agreement. In October 2009 as described in Note 10 to the Financial Statements, we entered into agreements with our venture partner, as well as with the lender to release us from all claims that our venture partner and the lender had against us prior to the date of the agreements and from all of our future funding obligations in connection with the Fountains portfolio in exchange for which we have, among other things:
 
  •  Transferred our 20-percent ownership interest in the Fountains joint venture to our joint venture partner;
 
  •  Contributed vacant land parcels adjacent to six of the Fountains communities and owned by us to the Fountains venture;
 
  •  Agreed to transition from management of the 16 Fountains communities as soon as the transition closing conditions are met and the new manager has obtained the regulatory approvals necessary to assume control of the facilities (we expect to transition from management of the Fountains communities during the course of 2010); and
 
  •  Agreed to repay the venture the management fee we had earned to date in 2009 of $1.8 million.
 
The contributed vacant land parcels were carried on our consolidated balance sheet at a book value of $12.9 million at September 30, 2009, in addition to a guarantee liability of $12.9 million both of which will be written off upon closing of the transaction resulting in no gain or loss.
 
In March 2009, we sold our Greystone subsidiary and our interests in Greystone seed capital partnerships to an entity controlled by Michael Lanahan and Paul Steinhoff, two senior executives of the Greystone subsidiary. Total consideration was (i) $2,000,000 in cash at closing; (ii) $5,700,000 in short-term notes, (iii) a $6,000,000 7-year note (iv) a $2,500,000 note payable, and (v) 35% of the net proceeds received by the seed capital investors for each of the seed capital interests purchased from us. We collected $5.7 million of short-term notes through September 30, 2009.
 
In April 2009, we sold the equity interest in our Aston Gardens venture and were released from all guarantee obligations. Our management contracts for the six communities in the venture were terminated on April 30, 2009. We received proceeds of approximately $4.8 million for our equity interest and our receivable from the venture for fundings under the operating deficit guarantees. We received management fees of $3.2 million and $3.7 million in 2008 and 2007, respectively.


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In May 2009, we announced a plan to continue to reduce corporate expenses through reorganization of our corporate cost structure, including a reduction in spending related to, among other areas, administrative processes, vendors, and consultants. The plan is designed to reduce our annual recurring general and administrative expenses (including expenses previously classified as venture expense) by over $20 million, from our 2009 budgeted annual recurring level of approximately $120 million (after the sale of Greystone, which is presented in discontinued operations in our financial statements) to approximately $100 million, and to reduce our centrally administered services which are charged to the communities by approximately $1.5 million. Under the plan, approximately 150 positions will be eliminated. As of September 30, 2009, we have eliminated 114 positions and will be eliminating an additional 49 positions by early 2010. We have recorded severance expense of $5.6 million as a result of the plan through September 30, 2009 and expect to record an additional $0.6 million through early 2010. The costs from the 2009 restructuring plan are in addition to the costs incurred in 2009 related to the 2008 restructuring plan, which provided for the elimination of 165 positions and corresponding expense reductions.
 
In May 2009, we entered into a separation agreement with our chief financial officer, Richard Nadeau, in connection with this plan. Pursuant to the separation agreement, Mr. Nadeau’s employment with us terminated effective as of May 29, 2009. Pursuant to Mr. Nadeau’s employment agreement, Mr. Nadeau received severance benefits that included a lump sum cash payment of $1.4 million. In addition, Mr. Nadeau received a bonus in the amount of $0.5 million and Mr. Nadeau’s outstanding and unvested stock options, restricted stock and other long-term equity compensation awards were fully vested, resulting in a non-cash compensation expense to us of $0.8 million. The options expire 12 months after the termination of his consulting term, which can be up to nine months after his termination date of May 29, 2009. 70,859 shares of restricted stock and 750,000 options vested. We recorded non-cash compensation expense of $0.8 million as a result of the vesting acceleration.
 
In June 2009, we were terminated as manager for a portfolio of 15 communities. We managed these communities through October 1, 2009. The management fees for the years 2008, 2007 and the nine months ended September 30, 2009 were $3.0 million, $2.9 million and $2.3 million, respectively.
 
In August 2009, a wholly owned community was sold to an unrelated third party for approximately $2.0 million. We received $0.3 million of cash and a note receivable for $1.7 million, recognizing gain of $0.3 million.
 
In September 2009, we terminated our lease on a portion of our corporate headquarters in McLean, Virginia. We recorded a charge of $2.7 million which is reflected in restructuring expense on our consolidated statement of operations. We expect to save $5.6 million in cash over four years as a result of terminating this portion of the lease.
 
In October 2009, we entered into an agreement to sell 21 wholly owned assisted living communities, located in 11 states, to Brookdale Senior Living Inc. (“Brookdale”) for $204 million. Brookdale placed into escrow an earnest money deposit of $5 million toward the purchase price. The closing date is currently scheduled for November 16, 2009. At the closing of the sale, we expect to receive approximately $60 million in proceeds after payment or assumption by Brookdale of certain mortgage loans, the posting of required escrows, and payment of expenses by us. We will use $25 million of proceeds to pay down our Bank Credit Facility and will place $20 million into a collateral account for the benefit of other creditors.
 
In addition to selling the German communities and the 21 communities to Brookdale, we intend to sell 11 operating communities, of which eight are located in the United States and three in Canada. Of the 11 operating communities, five are collateral for the German lenders and future net proceeds of the remaining six operating communities would be split equally between us and the lenders of the Bank Credit Facility. We also intend to sell one closed community in the United States which is collateral for the German lenders.
 
We intend to sell 16 parcels of land, of which 12 are located in the United States and four in Canada. Of the 16 land parcels, 11 are collateral for the German lenders and future proceeds of the remaining five land parcels after repayment of related debt would be split equally between us and the lenders of the Bank Credit Facility. In addition, we intend to sell two closed construction sites and one building located in the United States which are collateral for the German lenders.


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Results of Operations
 
Our results of operations for each of the three and nine months ended September 30, 2009 and 2008 were as follows:
 
                                         
                      Percent
       
    For the Three Months Ended
    Variance
    Change
       
    September 30,     2009 vs.
    2009 vs.
    Favorable/
 
    2009     2008     2008     2008     (Unfavorable)  
(In thousands)   (Unaudited)                    
 
Operating revenue:
                                       
Management and buyout fees
  $ 26,795     $ 36,179     $ (9,384 )     25.9 %     U  
Resident fees for consolidated communities
    106,098       106,112       (14 )     0.0 %     U  
Ancillary fees
    11,067       11,235       (168 )     1.5 %     U  
Professional fees from development, marketing
                                       
and other
    809       12,631       (11,822 )     93.6 %     U  
Reimbursed costs incurred on behalf of managed communities
    237,810       246,460       (8,650 )     3.5 %     U  
                                         
Total operating revenue
    382,579       412,617       (30,038 )     7.3 %     U  
                                         
Operating expenses:
                                       
Community expense for consolidated communities
    80,761       81,248       (487 )     0.6 %     F  
Community lease expense
    15,608       15,184       424       2.8 %     U  
Depreciation and amortization
    11,659       11,630       29       0.2 %     U  
Ancillary expenses
    10,378       9,480       898       9.5 %     U  
General and administrative
    34,024       37,147       (3,123 )     8.4 %     F  
Development expense
    1,797       7,995       (6,198 )     77.5 %     F  
Write-off of capitalized project costs
    652       47,512       (46,860 )     98.6 %     F  
Accounting Restatement, Special Independent
                                       
Committee inquiry, SEC investigation and
                                       
stockholder litigation
    1,108       5,072       (3,964 )     78.2 %     F  
Restructuring costs
    8,960       7,219       1,741       24.1 %     U  
Provision for doubtful accounts
    331       2,280       (1,949 )     85.5 %     F  
Loss on financial guarantees and other contracts
    809       975       (166 )     17.0 %     F  
Impairment of long-lived assets
    9,922             9,922       NA       U  
Costs incurred on behalf of managed communities
    240,494       246,076       (5,582 )     2.3 %     F  
                                         
Total operating expenses
    416,503       471,818       (55,315 )     11.7 %     F  
                                         
Loss from operations
    (33,924 )     (59,201 )     25,277       42.7 %     F  
Other non-operating income (expense):
                                       
Interest income
    572       1,000       (428 )     42.8 %     U  
Interest expense
    (3,661 )     (3,997 )     336       8.4 %     F  
Gain on investments
    95       720       (625 )     NM       U  
Other income
    2,957       780       2,177       279.1 %     F  
                                         
Total other non-operating expense
    (37 )     (1,497 )     1,460       NM       F  
Gain on the sale and development of real estate
                                       
and equity interests
    3,627       4,717       (1,090 )     23.1 %     U  
Sunrise’s share of loss and return on
                                       
investment in unconsolidated communities
    (4,613 )     (15,549 )     10,936       70.3 %     F  
(Loss) income from investments accounted for under the
                                       
profit sharing method
    (2,897 )     594       (3,491 )     NM       U  
                                         
Loss before (provision for) benefit from
                                       
income taxes and discontinued operations
    (37,844 )     (70,936 )     33,092       46.7 %     F  
(Provision for) benefit from income taxes
    (1,010 )     33,248       (34,258 )     NM       U  
                                         
Loss before discontinued operations
    (38,854 )     (37,688 )     (1,166 )     3.1 %     F  
Discontinued operations, net of tax
    (5,523 )     (32,035 )     26,512       82.8 %     F  
                                         
Net loss
    (44,377 )     (69,723 )     25,346       36.4 %     F  
Less: Net (income) loss attributable to noncontrolling interests
    (25 )     1,057       (1,082 )     NM       U  
                                         
Net loss attributable to common shareholders
  $ (44,402 )   $ (68,666 )   $ 24,264       35.3 %     F  
                                         
 
Note: Not Meaningful (NM) is used when there is a positive number in one period and a negative number in another period.


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                      Percent
       
    For the Nine Months Ended
    Variance
    Change
       
    September 30,     2009 vs.
    2009 vs.
    Favorable/
 
    2009     2008     2008     2008     (Unfavorable)  
(In thousands)   (Unaudited)                    
 
Operating revenue:
                                       
Management and buyout fees
  $ 84,305     $ 101,071     $ (16,766 )     16.6 %     U  
Resident fees for consolidated communities
    319,842       314,462       5,380       1.7 %     F  
Ancillary fees
    34,148       32,197       1,951       6.1 %     F  
Professional fees from development, marketing
                                       
and other
    11,343       33,632       (22,289 )     66.3 %     U  
Reimbursed costs incurred on behalf of managed communities
    709,158       751,158       (42,000 )     5.6 %     U  
                                         
Total operating revenue
    1,158,796       1,232,520       (73,724 )     6.0 %     U  
                                         
Operating expenses:
                                       
Community expense for consolidated communities
    242,384       234,389       7,995       3.4 %     U  
Community lease expense
    44,765       44,916       (151 )     0.3 %     F  
Depreciation and amortization
    41,454       34,264       7,190       21.0 %     U  
Ancillary expenses
    31,880       28,339       3,541       12.5 %     U  
General and administrative
    91,829       116,017       (24,188 )     20.8 %     F  
Development expense
    10,462       28,417       (17,955 )     63.2 %     F  
Write-off of capitalized project costs
    14,147       84,209       (70,062 )     83.2 %     F  
Accounting Restatement, Special Independent
                                       
Committee inquiry, SEC investigation and
                                       
stockholder litigation
    3,541       26,436       (22,895 )     86.6 %     F  
Restructuring costs
    25,883       7,219       18,664       258.5 %     U  
Provision for doubtful accounts
    11,335       5,716       5,619       98.3 %     U  
Loss on financial guarantees and other contracts
    1,463       1,703       (240 )     14.1 %     F  
Impairment of long-lived assets
    34,962       2,349       32,613       1388.4 %     U  
Costs incurred on behalf of managed communities
    719,735       749,384       (29,649 )     4.0 %     F  
                                         
Total operating expenses
    1,273,840       1,363,358       (89,518 )     6.6 %     F  
                                         
Loss from operations
    (115,044 )     (130,838 )     15,794       12.1 %     F  
Other non-operating income (expense):
                                       
Interest income
    1,428       3,973       (2,545 )     64.1 %     U  
Interest expense
    (10,809 )     (7,937 )     (2,872 )     36.2 %     U  
Gain (loss) on investments
    904       (4,000 )     4,904       NM       F  
Other expense
    4,276       (4,866 )     9,142       NM       F  
                                         
Total other non-operating expense
    (4,201 )     (12,830 )     8,629       67.3 %     F  
Gain on the sale and development of real estate
                                       
and equity interests
    20,330       19,029       1,301       6.8 %     F  
Sunrise’s share of earnings (loss) and return on
                                       
investment in unconsolidated communities
    9,362       (7,207 )     16,569       NM       F  
(Loss) gain from investments accounted for under the
                                       
profit sharing method
    (9,157 )     95       (9,252 )     NM       U  
                                         
Loss before benefit from
                                       
income taxes and discontinued operations
    (98,710 )     (131,751 )     33,041       25.1 %     F  
Benefit from income taxes
    1,449       49,476       (48,027 )     97.1 %     U  
                                         
Loss before discontinued operations
    (97,261 )     (82,275 )     (14,986 )     18.2 %     U  
Discontinued operations, net of tax
    (46,959 )     (54,945 )     7,986       14.5 %     F  
                                         
Net loss
    (144,220 )     (137,220 )     (7,000 )     5.1 %     U  
Less: Net (income) loss attributable to noncontrolling interests
    (131 )     3,653       (3,784 )     NM       U  
                                         
Net loss attributable to common shareholders
  $ (144,351 )   $ (133,567 )   $ (10,784 )     8.1 %     U  
                                         
 
Note: Not Meaningful (NM) is used when there is a positive number in one period and a negative number in another period.


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Results of Operations
 
Loss attributable to common shareholders was $44.4 million for the three months ended September 30, 2009 from $68.7 million for the three months ended September 30, 2008 and $144.4 million for the nine months ended September 30, 2009 from $133.6 million for the nine months ended September 30, 2008.
 
Adjusted (Loss) Income from Ongoing Operations
 
In the third quarter, net loss from operations for the three months ended September 30, 2009, was $33.9 million. Excluding the SEC investigation costs of $1.1 million and restructuring costs of $9.0 million and non-cash charges including depreciation and amortization of $11.7 million, the provision for doubtful accounts of $0.3 million, write-off of capitalized project costs of $0.7 million and impairment of long-lived assets of $9.9 million, adjusted loss from ongoing operations was $1.3 million. The following table reconciles adjusted (loss) income from ongoing operations to loss from operations (in thousands):
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2009     2008     2009     2008  
    (Unaudited)     (Unaudited)  
 
Loss from operations
  $ (33,924 )   $ (59,201 )   $ (115,044 )   $ (130,838 )
Non-cash expenses:
                               
Depreciation and amortization
    11,659       11,630       41,454       34,264  
Write-off of capitalized project costs
    652       47,512       14,147       84,209  
Provision for doubtful accounts
    331       2,280       11,335       5,716  
Impairment of long-lived assets
    9,922             34,962       2,349  
                                 
(Loss) income from operations before non-cash expenses
    (11,360 )     2,221       (13,146 )     (4,300 )
Accounting Restatement, Special Independent Committee inquiry, SEC investigation and stockholder litigation
    1,108       5,072       3,541       26,436  
Restructuring costs
    8,960       7,219       25,883       7,219  
                                 
Adjusted (loss) income from ongoing operations
  $ (1,292 )   $ 14,512     $ 16,278     $ 29,355  
                                 
 
Adjusted (loss) income from ongoing operations is a measure of operating performance that is not calculated in accordance with U.S. generally accepted accounting principles and should not be considered as a substitute for income/loss from operations or net income/loss. Adjusted income from ongoing operations is used by management to focus on cash generated from our ongoing operations and to help management assess if adjustments to current spending decisions are needed. As further outlined below, total revenue has decreased without proportionate decreases to expense. As a result, we incurred a loss from ongoing operations for the third quarter of 2009. We are continuing to focus on our cost restructuring initiative as further discussed in Note 11.
 
Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008
 
Operating Revenue
 
Management and buyout fees
 
The decrease in management and buyout fees of $9.4 million, or 25.9%, was primarily comprised of:
 
  •  $3.5 million decrease related to subordinating management fees from a venture;
 
  •  $2.0 million decrease primarily due to lower occupancy;
 
  •  $1.8 million decrease as a result of terminated management contracts;
 
  •  $2.1 million decrease in incentive management fees;


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  •  $0.2 million decrease related to international communities; partially offset by
 
  •  $0.9 million increase from communities in the lease-up phase.
 
Resident fees for consolidated communities
 
Resident fees for consolidated communities were relatively unchanged due to the following:
 
  •  $2.1 million from the addition of three consolidated Canadian communities and one domestic community;
 
  •  $2.6 million from increases in average daily rates; offset by a
 
  •  $3.0 million decrease from lower occupancy.
 
Ancillary fees
 
Ancillary fees were comprised of the following:
 
                 
    Three Months
 
    Ended September 30,  
    2009     2008  
    (In millions)  
 
New York Health Care Services
  $ 9.7     $ 9.1  
Fountains Health Care Services
    1.2       1.4  
International Health Care Services
    0.2       0.7  
                 
    $ 11.1     $ 11.2  
                 
 
Professional fees from development, marketing and other
 
The decrease in professional fees from development, marketing and other revenue of $11.8 million was primarily comprised of:
 
  •  $3.6 million decrease from the reduction of international projects from six unopened communities in 2008 to two unopened communities in 2009; and
 
  •  $7.4 million decrease from domestic design and development fees from the reduction of domestic projects from 33 unopened communities in 2008 to three unopened communities in 2009.
 
Reimbursed costs incurred on behalf of managed communities
 
Reimbursed costs incurred on behalf of managed communities were $237.8 million in the third quarter of 2009 compared to $246.5 million in the third quarter of 2008. The decrease of 3.5% was due primarily to 32 fewer communities in the third quarter of 2009 than the third quarter of 2008.
 
Operating Expenses
 
Community expense for consolidated communities
 
The decrease in community expense of $0.5 million, or 0.6%, was primarily comprised of:
 
  •  $2.6 million decrease from lower expenses in existing communities; offset by a
 
  •  $1.4 million increase from the addition of three Canadian communities and one domestic community; and
 
  •  $0.7 million from increased net insurance costs as insurance credits received in 2008 did not recur in 2009.
 
Community lease
 
Community lease expense increased $0.4 million primarily related to increases of $0.5 million in contingent rent.


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Depreciation and amortization
 
The depreciation and amortization expense was $11.7 million in the third quarter of 2009 and $11.6 million in the third quarter of 2008. The expense was comparable as the number of consolidated communities remained constant.
 
Ancillary expenses
 
Ancillary expenses were comprised of the following:
 
                 
    Three Months
 
    Ended September 30,  
    2009     2008  
    (In millions)  
 
New York Health Care Services
  $ 8.9     $ 8.0  
Fountains Health Care Services
    1.3       1.3  
International Health Care Services
    0.2       0.2  
                 
    $ 10.4     $ 9.5  
                 
 
General, administrative and venture expense
 
The decrease in general and administrative expenses of $3.1 million is primarily due to:
 
  •  $1.8 million decrease in salaries and bonus as result of our cost reduction program resulting in the elimination of 40 positions to date;
 
  •  $1.3 million decrease in general corporate expenses as a result of cost containment initiatives including a reduction of information technology costs, training and education and temporary help;
 
  •  $0.9 million decrease in travel; partially offset by
 
  •  $0.9 million increase related to our executive deferred compensation plan.
 
Development expense
 
The $6.2 million decrease in development expense related to the reduction of development activity, 39 unopened communities in 2008 compared to five unopened communities in 2009, was primarily comprised of:
 
  •  $3.5 million decrease in development labor costs; and
 
  •  $2.0 million decrease in development related expenses including travel, insurance, professional fees, legal, telecommunication, and other costs.
 
Write-off of capitalized project costs
 
Write-off of capitalized project costs was $0.7 million and $47.5 million in the third quarter of 2009 and 2008, respectively. We ceased all new development at the end of 2008 until suitable construction financing becomes available.
 
Accounting Restatement, Special Independent Committee Inquiry, SEC Investigation and Stockholder Litigation
 
Legal and accounting fees related to the accounting restatement, Special Independent Committee inquiry, SEC investigation and stockholder litigation decreased to $1.1 million in the third quarter of 2009 compared to $5.1 million in the third quarter of 2008. The Special Independent Committee activities and the accounting restatement were completed during the first quarter of 2008. However, we continue to incur legal fees and related expenses in connection with the SEC investigation. The stockholder litigation was settled in the second quarter of 2009.


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Restructuring costs
 
Costs associated with our 2008 and corporate 2009 restructuring plans were $9.0 million in the third quarter of 2009 which includes $4.6 million of legal and professional fees relating to corporate restructuring activities. In the third quarter of 2008, restructuring costs were $7.2 million.
 
Provision for doubtful accounts
 
The provision for doubtful accounts decreased $1.9 million during the three months ended September 30, 2009 compared to the three months ended September 30, 2008 primarily due to a $1.8 million reserve for operating advances to five ventures recorded in the third quarter of 2008.
 
Loss on financial guarantees and other contracts
 
We recorded a loss on our financial guarantees of $0.8 million and $1.0 million during the three months ended September 30, 2009 and 2008, respectively, related to construction cost overrun guarantees on a condominium project and a completion guarantee on an operating property.
 
Impairment of long-lived assets
 
Impairment of long-lived assets was $9.9 million in the third quarter 2009. This impairment charge related to six communities, one land parcel and two discontinued development projects.
 
Costs incurred on behalf of managed communities
 
Cost incurred on behalf of managed communities were $240.5 million in the third quarter of 2009 compared to $246.1 million in the third quarter of 2008. The decrease of 2.3% was due primarily to 32 fewer communities in the third quarter of 2009 than the third quarter of 2008.
 
Other Non-Operating Income and Expense
 
Total other non-operating expense was $37,000 and $1.5 million for the three months ended September 30, 2009 and 2008, respectively. The decrease in other non-operating expense was primarily due to:
 
  •  $0.4 million decrease in interest expense;
 
  •  $0.4 million decrease in interest income;
 
  •  $2.8 million for net foreign exchange gains in 2009 comprised of the $2.7 million and $0.1 million of gain related to the Canadian dollar and British pound, respectively, compared to $1.5 million of net foreign exchange gains in 2008 comprised of $(2.1) million and $(0.6) million of loss related to the Canadian dollar and British pound, respectively and $4.2 million of gain related to the Euro; and
 
  •  $0.1 million unrealized gain compared to a $0.7 unrealized gain on our investments in auction rate securities which are classified as trading securities and carried at fair value.
 
Gain on the Sale and Development of Real Estate and Equity Interests
 
Gain on the sale and development of real estate and equity interests was $3.6 million and $4.7 million for the three months ended September 30, 2009 and 2008, respectively. The gains primarily resulted from transactions which occurred in prior years for which the recognition of gain had been deferred due to various forms of continuing involvement.


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Sunrise’s Share of (Loss) Earnings and Return on Investment in Unconsolidated Communities
 
                 
    Three Months Ended September 30,  
    2009     2008  
    (In millions)  
 
Sunrise’s share of losses in unconsolidated communities
  $ (7.2 )   $ (20.5 )
Return on investment in unconsolidated communities
    2.6       5.0  
                 
    $ (4.6 )   $ (15.5 )
                 
 
The decrease in our share of losses in unconsolidated communities of $13.3 million was primarily due to non-recurring losses in the third quarter of 2008 of $10.2 million and $1.6 million from the Fountains and Aston Gardens ventures, respectively, and incrementally smaller operating losses from our unconsolidated communities.
 
Distributions from operations from investments where the book value is zero and we have no contractual or implied obligation to support the venture were $2.6 million and $5.0 million in the third quarter of 2009 and 2008, respectively.
 
(Loss) Income from Investments Accounted for Under the Profit-Sharing Method
 
(Loss) income from investments accounted for under the profit-sharing method was $(2.9) million and $0.6 million for the three months ended September 30, 2009 and 2008, respectively. The losses in the third quarter of 2009 were generated from our condominium community that recently opened and where profits associated with condominium sales are required to be deferred.
 
(Provision for) Benefit from Income Taxes
 
The (provision for) benefit from income taxes allocated to continuing operations was $(1.0) million and $33.2 million for the three months ended September 30, 2009 and 2008, respectively. Our effective tax (rate) benefit was (2.63)% and 46.9% for the three months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, we are continuing to offset our net deferred tax asset by a full valuation allowance.
 
Discontinued Operations
 
Discontinued operations consists of our German communities which we are marketing for sale, our Greystone subsidiary which was sold in the first quarter of 2009, our Trinity subsidiary which ceased operations in the fourth quarter of 2008, one community sold in the third quarter of 2009, one community which was closed in the second quarter of 2009 and two communities which were sold in 2008 and for which we have no continuing involvement.
 
Germany’s loss included in discontinued operations was $5.2 million for the three months ended September 30, 2009.
 
Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
 
Operating Revenue
 
Management and buyout fees
 
The decrease in management and buyout fees of $16.8 million, or 16.6%, was primarily comprised of:
 
  •  $6.7 million decrease related to subordinating management fees for a venture;
 
  •  $2.4 million decrease in incentive management fees;
 
  •  $3.4 million decrease as a result of terminated management contracts;
 
  •  $3.3 million decrease due primarily to lower occupancy;
 
  •  $0.8 million decrease associated with international communities; partially offset by


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  •  $1.7 million increase from communities in the lease-up phase.
 
Resident fees for consolidated communities
 
The increase in resident fees for consolidated communities of $5.4 million, or 1.7%, was primarily comprised of:
 
  •  $5.6 million from the addition of three consolidated Canadian communities and one domestic community;
 
  •  $6.1 million from increases in average daily rates; offset by a
 
  •  $4.4 million decrease due to lower occupancy.
 
Ancillary fees
 
Ancillary fees were comprised of the following:
 
                 
    Nine Months
 
    Ended September 30,  
    2009     2008  
    (In millions)  
 
New York Health Care Services
  $ 28.5     $ 26.2  
Fountains Health Care Services
    3.9       4.1  
International Health Care Services
    1.7       1.9  
                 
    $ 34.1     $ 32.2  
                 
 
Professional fees from development, marketing and other
 
The decrease in professional fees from development, marketing and other revenue of $22.3 million was primarily comprised of:
 
  •  $8.2 million decrease from the reduction of six unopened international communities in 2008 to two unopened communities in 2009;
 
  •  $1.1 million decrease from international financing guarantee fees; and
 
  •  $12.1 million decrease from domestic design and development fees due to a decrease in unopened communities from 33 in 2008 to three in 2009.
 
Reimbursed costs incurred on behalf of managed communities
 
Reimbursed costs incurred on behalf of managed communities were $709.2 million in the first nine months of 2009 compared to $751.2 million in the first nine months of 2008. The decrease of 5.6% was due primarily to 32 fewer communities in 2009 than 2008.
 
Operating Expenses
 
Community expense for consolidated communities
 
The increase in community expense of $8.0 million, or 3.4%, was primarily comprised of:
 
  •  $5.8 million from the consolidation of three Canadian communities and one domestic community; and
 
  •  $2.2 million from increased insurance, labor, utilities and other costs.
 
Community lease
 
Community lease expense decreased $0.2 million primarily related to a lease termination.


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Depreciation and amortization
 
The depreciation and amortization expense was $41.5 million in 2009 and $34.3 million in 2008. The increase of $7.2 million was primarily due to $5.8 million of additional amortization expense related to a change in the estimated life of a management contract intangible and $1.5 million of incremental depreciation expense related to four new communities (the three Canadian communities referred to above and a completed project in California which opened in January 2009).
 
Ancillary expenses
 
Ancillary expenses were comprised of the following:
 
                 
    Nine Months
 
    Ended September 30,  
    2009     2008  
    (In millions)  
 
New York Health Care Services
  $ 26.5     $ 22.9  
Fountains Health Care Services
    3.6       4.0  
International Health Care Services
    1.8       1.4  
                 
    $ 31.9     $ 28.3  
                 
 
General, administrative and venture expense
 
The decrease in general and administrative expenses of $24.2 million is primarily due to:
 
  •  $9.1 million decrease in salaries and bonus as a result of our cost reduction program resulting in the elimination of 169 positions to date;
 
  •  $8.2 million decrease in general corporate expenses as a result of cost containment initiatives including information technology costs, training and education and temporary help;
 
  •  $3.6 million decrease in travel;
 
  •  $2.0 million decrease in bonus expense related to one of our ventures;
 
  •  $1.5 million decrease related to an employee litigation settlement;
 
  •  $1.2 million decrease due to a 2008 penalty related to one of our communities; partially offset by
 
  •  $1.9 million increase in executive deferred compensation costs.
 
Development expense
 
The $18.0 million decrease in development expense related to the reduction of development activity, 39 unopened communities in 2008 compared to five unopened communities in 2009, was primarily comprised of:
 
  •  $8.6 million decrease in development labor costs; and
 
  •  $9.5 million decrease in development related expenses including travel, insurance, professional fees, legal, telecommunication, and other costs.
 
Write-off of capitalized project costs
 
Write-off of capitalized project costs was $14.1 million and $84.2 million in 2009 and 2008, respectively. We ceased all new development at the end of 2008 until suitable construction financing becomes available.


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Accounting Restatement, Special Independent Committee Inquiry, SEC Investigation and Stockholder Litigation
 
Legal and accounting fees related to the accounting restatement, Special Independent Committee inquiry, SEC investigation and stockholder litigation decreased to $3.5 million in 2009 compared to $26.4 million in 2008. The Special Independent Committee activities and the accounting restatement were completed during the first quarter of 2008. However, we continue to incur legal fees and related expenses in connection with the SEC investigation and stockholder litigation. The stockholder litigation was settled in the second quarter of 2009.
 
Restructuring costs
 
Costs associated with our 2008 and corporate 2009 restructuring plans were $25.9 million in 2009. Costs in 2008 were $7.2 million.
 
Provision for doubtful accounts
 
The provision for doubtful accounts increased $5.6 million during 2009 compared to 2008 primarily due to a reserve of $6.2 million for advances to a venture and a $1.6 million reserve write-off of the remaining Aston Gardens operating deficit guarantee. These increases were partially offset by a decrease in other reserves.
 
Loss on financial guarantees and other contracts
 
We recorded a loss on our financial guarantees of $1.5 million and $1.7 million during 2009 and 2008, respectively, related to construction cost overrun guarantees on a condominium project and a completion guarantee on an operating property.
 
Impairment of long-lived assets
 
Impairment of long-lived assets was $35.0 million in 2009 and $2.3 million in 2008. The 2009 impairment charge related to 10 operating communities, two discontinued development projects and nine land parcels and in 2008, one community.
 
Costs incurred on behalf of managed communities
 
Costs incurred on behalf of managed communities were $719.7 million in 2009 compared to $749.4 million in 2008. The decrease of 4.0% was due primarily to 32 fewer communities in 2009 than 2008 and higher insurance charges.
 
Other Non-Operating Income and Expense
 
Total other non-operating expense was $4.2 million and $12.8 million for the nine months ended September 30, 2009 and 2008, respectively. The decrease in other non-operating expense was primarily due to:
 
  •  $2.9 million increase in interest expense due to increased borrowings;
 
  •  $2.5 million decrease in interest income;
 
  •  $4.2 million for net foreign exchange gains in 2009 comprised of the $4.6 million of gain related to the Canadian dollar, $(0.3) million and $(0.1) million of loss related to the British pound and Euro, respectively, compared to $(2.9) million of net foreign exchange losses in 2008 comprised of $(2.0) million and $(1.0) million of loss related to the Canadian dollar and British pound, respectively, and $0.1 million of gain related to the Euro; and
 
  •  $4.9 million decrease in the unrealized loss on our investments in auction rate securities which are classified as trading securities and carried at fair value.


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Gain on the Sale and Development of Real Estate and Equity Interests
 
Gain on the sale and development of real estate and equity interests was $20.3 million and $19.0 million for the nine months ended September 30, 2009 and 2008, respectively. The gain in 2009 primarily resulted from transactions which occurred in prior years for which the recognition of gain had been deferred due to various forms of continuing involvement. We accounted for the sale of three communities in 2004 under the profit-sharing method of accounting as we provided guarantees to make monthly payments to the buyer equal to the amount by which a net operating income target exceeded actual net operating income for the community for an extended period of time. The guarantee expired in the second quarter of 2009 and we recorded a gain of approximately $8.9 million. During the first nine months of 2008, we completed the recapitalization of a venture with two underlying properties. As a result of this recapitalization, guarantees that were requiring us to use the profit-sharing method were released and we recorded a pre-tax gain on sale of approximately $6.7 million. In addition, we recognized a gain of $1.1 million from the sale of three land parcels.
 
Sunrise’s Share of Earnings and Return on Investment in Unconsolidated Communities
 
                 
    Nine Months Ended September 30,  
    2009     2008  
    (In millions)  
 
Sunrise’s share of income (losses) in unconsolidated communities
  $ 2.2     $ (30.2 )
Return on investment in unconsolidated communities
    8.4       23.0  
Impairment of equity investment
    (1.2 )      
                 
    $ 9.4     $ (7.2 )
                 
 
The increase in our share of income (losses) in unconsolidated communities of $32.4 million was primarily due to our UK venture, in which we have a 20% interest, selling three communities to a venture in which we have a 10% interest. As a result of sales, the venture recorded a gain of which we recognized $19.0 million for our equity interest in the earnings. In addition, there were non-recurring losses in 2008 of $11.6 million and $2.4 million from our Fountains and Aston Gardens ventures, respectively, and operating losses from joint ventures were smaller in 2009 compared to 2008.
 
Distributions from operations from investments where the book value is zero and we have no contractual or implied obligation to support the venture were $2.1 million lower in 2009 than 2008. During the first nine months of 2008, the expiration of contractual obligations resulted in the recognition of $9.2 million of gain and the recapitalization of one venture resulting in a return on investment of $3.3 million.
 
In March 2009, based on the receipt of a notice of default from the lender to a venture in which we own a 20% interest and the poor rental experience in the venture, we consider our equity to be other than temporarily impaired and wrote off the remaining equity balance of $1.1 million.
 
In June 2009, we determined the fair value of our investment in a venture in which we had a 1% interest had decreased to zero and was other than temporarily impaired. We wrote our investment down to zero and recorded an impairment charge of $0.1 million.
 
(Loss) Income from Investments Accounted for Under the Profit-Sharing Method
 
(Loss) income from investments accounted for under the profit-sharing method was $(9.2) million and $0.1 million for the nine months ended September 30, 2009 and 2008, respectively. The losses in 2009 were generated from our condominium community that recently opened and where profits associated with condominium sales are required to be deferred until such time as 50 percent of units are sold.
 
Benefit from Income Taxes
 
The benefit from income taxes allocated to continuing operations was $1.4 million and $49.5 million for the nine months ended September 30, 2009 and 2008, respectively. Our effective tax benefit was 1.56% and 37.6% for


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the nine months ended September 30, 2009 and 2008, respectively. At December 31, 2008, we determined that deferred tax assets in excess of reversing tax liabilities were not likely to be realized and we recorded a valuation allowance on net deferred tax assets. Income tax expense of $4.8 million attributable to gains in discontinued operations recorded in the first quarter of 2009 was reversed in the second quarter due to current period losses in discontinued operations. As of September 30, 2009, we are continuing to offset our net deferred tax asset by a full valuation allowance.
 
Discontinued Operations
 
Discontinued operations consists of our German communities which we are marketing for sale, our Greystone subsidiary which was sold in the first quarter of 2009, our Trinity subsidiary which ceased operations in the fourth quarter of 2008, one community sold in the third quarter of 2009, one community which was closed in the second quarter of 2009 and two communities which were sold in 2008 and for which we have no continuing involvement.
 
Germany’s loss, included in discontinued operations, was $73.9 million for the nine months ended September 30, 2009 which included an impairment charge of $52.4 million. Greystone’s income includes $23.7 million of gain related to its sale.
 
In order to resolve and settle the claims among us and Trinity’s prior owners, in June 2009, we entered into a settlement agreement with the former majority stockholders of Trinity, which, among other matters, provides for the release and discharge of all claims and causes of action between the parties to the settlement agreement.
 
In consideration of the settlement agreement, the former majority stockholders of Trinity paid us an aggregate amount of approximately $9.8 million. The parties to the settlement agreement also agreed to cooperate to achieve voluntary dismissal of certain litigation matters.
 
In exchange for the consideration, we and the former majority stockholders of Trinity have reciprocally released each other from any and all claims that each such parties had against other such parties relating to any matters through the date of the settlement agreement.
 
We had previously recorded a receivable of $2.7 million from the former stockholders of Trinity for various liabilities relating to events occurring prior to our purchase of Trinity. Accordingly, $2.7 million of the proceeds were applied against the receivable and the remaining amount of $7.1 million has been recorded as income from discontinued operations.
 
Liquidity and Capital Resources
 
We had $43.4 million and $29.5 million of unrestricted cash and cash equivalents at September 30, 2009 and December 31, 2008, respectively. Since January 1, 2009, we have had no borrowing availability under the Bank Credit Facility; as a result, during 2009, we have been and currently are financing our operations primarily with cash generated from operations and sales of assets, including the sale of our Greystone subsidiary in March 2009 and the sale of our Aston Gardens equity interest in April 2009.
 
In connection with communities under construction, we have provided project completion guarantees to venture lenders. In addition, we have provided operating deficit guarantees to venture lenders. These financial guarantees are designed to assure completion of development projects in the event of cost overruns, and, after depletion of reserves established in the loan agreements, guarantee scheduled principal amortization and interest during the term of the guarantee. We are not in compliance with one of these construction loans, and, as a result the lenders could cease funding the projects. Five communities remain under construction at September 30, 2009. We are working with our lenders and venture partners to address the defaults. Although we believe that completion of the projects will not involve material cost overruns and that established reserves are adequate to fund the lease-up period once the projects are completed, there can be no assurance that these lenders will continue to fund the construction and development of these projects. We estimate that completion of the five communities (two in the U.K. and three in the U.S.) we have under construction in ventures as of September 30, 2009 will require an additional $14.5 million, which we anticipate funding with the proceeds of committed construction financing. We have no further equity contribution commitments for projects under construction as of September 30, 2009,


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assuming the lenders continue to fund under existing construction loan financing commitments and we incur no cost overruns.
 
We do not currently have plans to commence any new projects in the U.S. or the U.K. Our U.S. and U.K. development team has been reduced to 10 people at September 30, 2009. We will reconsider future development when market conditions stabilize and the cost of capital for development projects is in line with projected returns.
 
In October 2009, we entered into an agreement to sell 21 wholly owned assisted living communities, located in 11 states, to Brookdale Senior Living Inc. for $204 million. Brookdale placed into escrow an earnest money deposit of $5 million toward the purchase price. The closing date is currently scheduled for November 16, 2009. At the closing of the sale, we expect to receive approximately $60 million in proceeds after payment or assumption by Brookdale of certain mortgage loans, the posting of required escrows, and payment of expenses by us. We anticipate that approximately $130 million of our debt will be assumed or repaid at closing. We will use $25 million of proceeds to pay down our Bank Credit Facility and will place $20 million into a collateral account for the benefit of other creditors.
 
In addition to selling the German communities and the 21 communities to Brookdale, we intend to sell 11 operating communities, of which eight are located in the United States and three in Canada. Of the 11 operating communities, five are collateral for the German lenders and future net proceeds of the remaining six operating communities would be split equally between us and the lenders of the Bank Credit Facility. We also intend to sell one closed community in the United States which is collateral for the German lenders.
 
We intend to sell 16 parcels of land, of which 12 are located in the United States and four in Canada. Of the 16 land parcels, 11 are collateral for the German lenders and future proceeds of the remaining five land parcels after repayment of related debt would be split equally between us and the lenders of the Bank Credit Facility. In addition, we intend to sell two closed construction sites and one building located in the United States which are collateral for the German lenders.
 
Additional financing resources will be required to refinance existing indebtedness that comes due within the next 12 months. We have undertaken or expect to commence certain efforts to reduce expenses and preserve liquidity including; (i) extending the term of our Bank Credit Facility to December 2, 2010 (subject to certain conditions as discussed more fully below), (ii) seeking to reduce operating costs; (iii) seeking to restructure the terms of our other indebtedness including extension of scheduled maturity dates; and (iv) pursuing sales of selected assets. No assurance can be given that we will be successful in achieving any of these efforts.
 
In April 2009, we received federal income tax refunds of $20.8 million and $1 million of the proceeds from the sale of our equity interest and receivable from the Aston Gardens venture which were used to pay down the Bank Credit Facility. In June 2009, $2.5 million of proceeds from an agreement with Trinity’s prior owners (Note 12) was used to pay down the Bank Credit Facility. At September 30, 2009, the outstanding borrowings were $68.9 million.
 
Bank Credit Facility
 
On March 23, 2009, we entered into the Eleventh Amendment to our Bank Credit Facility. The purpose of the Eleventh Amendment is to provide the parties with an additional period of time to negotiate the terms of a Twelfth Amendment to the Bank Credit Facility which would comprehensively address any remaining issues between the parties with respect to the Bank Credit Facility through the Bank Credit Facility’s current stated maturity date of December 2, 2009. The Eleventh Amendment is described in Note 6 to the Financial Statements.
 
On April 28, 2009, we entered into the Twelfth Amendment to the Bank Credit Facility. The significant terms include:
 
  •  waiver of all existing financial covenants through December 2, 2009, the maturity date of the Bank Credit Facility;
 
  •  agreement for renewal of existing letters of credit;
 
  •  an amendment fee of $0.5 million;
 
  •  authorization to consummate certain transactions;


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  •  restriction on the disposition of assets except to permit the transfer of scheduled assets;
 
  •  requirement to maintain minimum cash balance as of the last day of each month and of not less than $5 million at any time;
 
  •  a cash sweep as of the last day of October and November 2009 to reduce principal equal to the greater of consolidated cash in excess of $35 million or $2 million; and
 
  •  a permanent reduction of the commitment after an agreed-upon repayment of the outstanding balance from dispositions consented to by our lenders, federal income tax refunds of $20.8 million and payments received from the cash sweep.
 
On October 19, 2009, we entered into the Thirteenth Amendment to the Bank Credit Facility. The significant terms include:
 
  •  an extension of the maturity date from December 2, 2009 to December 2, 2010;
 
  •  renewal of existing letters of credit;
 
  •  an amendment fee of $0.5 million of which $250,000 was paid on October 19, 2009 and $250,000 to be paid upon the earlier of the sale of properties or January 4, 2010;
 
  •  principal payment of $6.0 million which was paid on October 19, 2009;
 
  •  principal payments previously due on October 31 and November 30, 2009 are no longer due;
 
  •  modifies the minimum liquidity covenant to not less than $10.0 million of unrestricted cash on hand the last day of the month;
 
  •  modifies the restriction on the disposal of assets to permit disposition of certain assets as long as 50% of the net sale proceeds are allocated to the lenders;
 
  •  the proceeds from the pending sale of 21 properties are allocated as follows:
 
  •  a principal payment of $25 million;
 
  •  $20 million deposited into a collateral account for the benefit of other creditors;
 
  •  either cause a return of $3.7 million in letters of credit or make a principal payment of that same amount;
 
  •  if the pending sale of the 21 properties does not close by June 30, 2010, we will either make a principal payment of $28.7 million or make a $5 million principal payment, pay an additional $1 million extension fee and grant mortgage liens junior to existing mortgages or a perfected first priority pledge of and security interest in, the equity interests in the entities owning 16 certain properties (the granting of such mortgages or security interest is subject to the existing mortgage lenders’ consent). If we are unable to deliver these items, the Bank Credit Facility will be in default and become due and payable; and
 
  •  a permanent reduction of the commitment after future principal repayments or cancellation of letters of credit.
 
We have no borrowing availability under the Bank Credit Facility, and we have significant scheduled debt maturities in 2009 and 2010 and significant long-term debt that is in default. We are endeavoring to extend debt maturity dates, re-finance debt and obtain waivers from applicable lenders. We are engaged in discussions with various venture partners and third parties regarding the sale of certain assets with the purpose of increasing liquidity and reducing obligations to enable us to continue operations.
 
In April 2009, we received federal income tax refunds of $20.8 million which was used to pay down the Bank Credit Facility and $1 million of the proceeds from the sale of our equity interest and receivable from the Aston Gardens venture was also used to pay down the Bank Credit Facility. In June 2009, $2.5 million of proceeds from an agreement with Trinity’s prior owners (Note 12) was used to pay down the Bank Credit Facility. At September 30, 2009, the outstanding borrowings under the Bank Credit Facility were $68.9 million and there were $23.1 million of letters of credit outstanding.


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Debt
 
At September 30, 2009, we had $624.6 million of outstanding debt with a weighted average interest rate of 3.13% as follows (in thousands):
 
                 
    September 30,
    December 31,
 
    2009     2008  
 
Community mortgages
  $ 248,955     $ 241,851  
German communities(1)
    200,034       185,901  
Bank Credit Facility
    68,878       95,000  
Land loans
    34,327       37,407  
Other
    28,286       30,655  
Variable interest entity
    23,225       23,905  
Margin loan (auction rate securities)
    20,920       21,412  
                 
    $ 624,625     $ 636,131  
                 
 
 
(1) The face amount of the debt related to the German communities was $219.3 million at September 30, 2009.
 
Of the outstanding debt we had $5.3 million of fixed-rate debt with a weighted average interest rate of 6.82% and $619.3 million of variable rate debt with a weighted average interest rate of 3.10%.
 
Debt that is in default at September 30, 2009 consists of the following (in thousands):
 
         
    September 30,
 
    2009  
 
German communities(1)
  $ 200,034  
Community mortgages
    147,930  
Variable interest entity
    23,225  
Land loans
    12,420  
Other
    28,286  
         
    $ 411,895  
         
 
 
(1) The face amount of the debt related to the German communities was $219.3 million at September 30, 2009.
 
We are working with our lenders to either re-schedule certain of these obligations or obtain waivers.
 
For debt that is not in default, we have scheduled debt maturities as follows (in thousands):
 
                                                         
          1st Qtr.
    2nd Qtr.
    3rd Qtr.
    4th Qtr.
             
    2009     2010     2010     2010     2010     Thereafter     Total  
 
Bank Credit Facility(1)
  $ 68,878     $     $     $     $     $     $ 68,878  
Community mortgages
    39,796       40,573       195       497       198       19,766       101,025  
Land loans
    21,907                                     21,907  
Margin loan (auction rate securities)
    20,920                                     20,920  
                                                         
    $ 151,501     $ 40,573     $ 195     $ 497     $ 198     $ 19,766     $ 212,730  
                                                         
 
 
(1) As of 10/19/09, maturity date changed to 12/2/10 (subject to certain conditions).
 
Sunrise ventures have total debt of $4.2 billion with near-term scheduled debt maturities of $69.7 million in 2009 and $576.1 million in 2010. Of this $4.2 billion of debt, there is long-term debt that is in default of $1.4 billion. The debt in the ventures is non-recourse to us with respect to principal payment guarantees and we and our venture partners are working with the venture lenders to obtain covenant waivers. However, in certain cases, we have provided operating deficit and completion guarantees to the lenders and joint ventures. We have minority non-


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controlling interests in these ventures. See Note 12 of the Notes to Consolidated Financial Statements of our 2008 Form 10-K, as amended, for a list of our ventures and our related ownership interest.
 
Germany Venture
 
We own nine communities (two of which are closed) in Germany. The debt related to these communities has partial recourse to us as the debt for four of the communities of €50.0 million ($73.0 million at September 30, 2009) has a stipulated release price for each community and for the remaining five communities, we have provided guarantees to the lenders of the repayment of the monthly interest payments and principal amortization and operating shortfalls until the maturity dates of the loans. As a result of the violation of a covenant in one of the loan documents, one of the lenders has asserte