| SUNRISE SENIOR LIVING INC Item 1A Risk Factors 12 Item 1A Risk Factors In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, set forth below are cautionary statements identifying important factors that could cause actual events or results to differ materially from any forward-looking statements made by or on behalf of us, whether oral or written |
| We wish to ensure that any forward-looking statements are accompanied by meaningful cautionary statements in order to maximize to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995 |
| Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause actual events or results to differ materially from our forward-looking statements |
| Risks Relating to Our Business We may be unable to manage effectively our growth and expansion, which may harm our financial condition and operating results |
| At December 31, 2005, we operated 415 communities, including 397 communities in the United States, 11 communities in Canada, five communities in the United Kingdom and two communities in Germany, with a total resident capacity of approximately 51cmam000 |
| We currently expect that the number of our managed communities will increase substantially as we pursue our future growth plans |
| We plan to grow through our existing operations, development and acquisition of senior living communities and entering into new management contracts for senior living communities in top US and international major metropolitan markets |
| As we continue to grow our business, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems or to continue to be able to attract, train, motivate, manage and retain key employees to successfully integrate new acquisitions into our existing business and manage any future acquisitions of additional senior living communities without operating disruptions or unanticipated costs |
| In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets |
| Similarly, we could encounter unforeseen difficulties and expenditures relating to 12 _________________________________________________________________ our acquisitions, including contingent or other unexpected liabilities |
| Our failure to successfully integrate any future acquisitions into our existing business could have a material adverse effect on our results of operations and financial condition |
| The operations of Sunrise and other entities that we have or may acquire may not be integrated successfully, and the intended benefits of such transactions may not be realized, each of which could have a negative impact on our revenues, expenses and operating results |
| Our recent acquisitions of Greystone and The Fountains pose risks for our ongoing operations, including the risks that: • the acquired portfolios may not perform as well as we anticipate due to various factors, including disruptions caused by the integration of operations with us and changes in macro-economic conditions; • the diversion of management attention to the integration of the operations of the acquisitions could have a material adverse effect on the continued operation and expansion of our existing business; • we may not effectively integrate the operations of Greystone and The Fountains; • we may experience difficulties and incur greater than anticipated expenses related to the assimilation and retention of Greystone and The Fountains’ employees; and • following the transaction, we may not achieve expected cost savings and operating efficiencies in connection with the acquisition of Greystone and The Fountains, such as the elimination of redundant administrative costs and community management costs |
| Our acquisition of other entities in the ordinary course of business may pose similar risks to us |
| If we fail to successfully integrate Greystone and The Fountains or other acquisitions and/or fail to realize the intended benefits of such transactions, such failure could have a material adverse effect on our revenues, expenses and operating results and the market price of our common stock could decline from its market price at the time of completion of such acquisitions |
| We are a “promoter” of Sunrise REIT under Canadian securities laws and, as such, are jointly and severally liable with Sunrise REIT for any misrepresentation in Sunrise REIT’s prospectus |
| In December 2004, Sunrise REIT completed an initial public offering in Canada |
| Under applicable Canadian securities laws, we were deemed to be a “promoter” of Sunrise REIT As a promoter of Sunrise REIT, we were required to sign a certificate in Sunrise REIT’s prospectus stating that it contains full, true and plain disclosure of all material facts relating to the securities being offered |
| Under applicable Canadian securities laws, we will continue to be a “promoter” of Sunrise REIT for two years following the initial public offering and, as such, we may be required to sign any prospectus that Sunrise REIT files within such two year period |
| By signing the prospectus, we are statutorily liable to investors of Sunrise REIT, on a joint and several basis with Sunrise REIT, if the prospectus contains a misrepresentation |
| Under Canadian securities laws, a misrepresentation is defined as “an untrue statement of a material fact, or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it is made” |
| A “material fact” is a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of the securities offered by the prospectus |
| We are, however, entitled to certain defenses in respect of any such liability, the most important of which is the so-called “due diligence” defense |
| Because we have promoter liability under the Canadian securities laws, any misrepresentation for which we were found to be jointly and severally liable could materially and adversely affect our financial results |
| Liability claims against us in excess of insurance limits could adversely affect our financial condition and results of operations |
| The senior living business entails an inherent risk of liability |
| In recent years, we, as well as other participants in our industry, have become subject to an increasing number of lawsuits alleging negligence or related legal theories |
| Many of these lawsuits involve large claims and significant legal costs |
| We maintain liability insurance policies in amounts we believe are adequate based on the nature and risks of our business, historical experience and industry standards |
| We purchase insurance for property, casualty and other risks from insurers based on published ratings by recognized rating agencies, advice from national insurance brokers and consultants and other insurance industry-recognized information sources |
| Moreover, certain insurance policies cover events for which payment obligations and the timing of payments are only determined in the future |
| Any of these insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims |
| Certain liability risks, including general and professional liability, workers’ compensation and automobile liability, are insured in loss-sensitive insurance policies with affiliated and unaffiliated insurance companies |
| For these self-insured liability risks, we are 13 _________________________________________________________________ responsible for the cost of claims up to a self-insured limit determined by individual policies and subject to aggregate limits in certain prior policy periods |
| General and professional liability and workers’ compensation liabilities within these self-insured limits are estimated annually by independent actuaries and reviewed monthly by the Company, including a provision for the estimate of the costs of incurred but not reported claims |
| In the event these estimates are inadequate, we may have to fund the shortfall and our operating results could be negatively impacted |
| We cannot be sure that claims will not arise that are in excess of the limits of our insurance policies or that are not covered by our insurance policies |
| If a successful claim is made against us and it is not covered by our insurance or exceeds the policy limits, our financial condition and results of operations could be materially and adversely affected |
| Our obligations to pay the cost of claims within our self-insured limits include the cost of claims that arise today but are reported in the future |
| In the event these estimates are inadequate, we may have to fund the shortfall and our operating results could be negatively affected |
| Claims against us, regardless of their merit or eventual outcome, also could have a material adverse effect on our ability to attract residents or expand our business and could require our management to devote time to matters unrelated to the operation of our business |
| We also have to renew our policies periodically and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases, and we cannot be sure that we will be able to obtain insurance in the future at acceptable levels |
| We may not be successful in identifying suitable development projects or acquisitions that meet our criteria, which may impede our growth |
| A central part of our business strategy is expansion through development projects and acquisitions, which requires us to identify suitable development or acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth strategy |
| We may not be successful in identifying suitable senior living communities or other assets that meet our development or acquisition criteria or in completing developments, acquisitions or investments on satisfactory terms |
| Failure to identify or complete developments or acquisitions could slow our growth, which could in turn adversely affect our operations |
| Any delays we experience in developing new communities could impede our growth and adversely affect our revenues and results of operations |
| Our growth objectives include the development of a significant number of new senior living communities, both domestically and internationally |
| At December 31, 2005, we had 50 communities under construction with a resident capacity of over 6cmam400 residents |
| At December 31, 2005, we had entered into contracts to purchase or lease 36 additional development sites |
| Of these sites, we have received zoning approval from the applicable municipal authority to construct a senior living community on 23 sites and we are pursuing zoning approval on the remaining sites |
| In the ordinary course of our business, we evaluate new sites and opportunities for further growth on an ongoing basis |
| Our ability to successfully achieve these development plans will depend upon a variety of factors, many of which are outside our control |
| These factors include: • difficulties or delays experienced in obtaining zoning, land use, building, occupancy, licensing and other required governmental permits for the construction of new communities; • failure to complete construction of new communities on budget and on schedule; • failure of third-party contractors and subcontractors to perform under their contracts; • shortages of labor or materials that could delay projects or make them more expensive; • adverse weather conditions or acts of God that could delay construction projects; • difficulties in developing new types of senior living products with which we have less experience; • difficulties in finding suitable sites for future development activities at acceptable prices; • increased costs resulting from changes in general economic conditions or increases in the costs of materials; and • increased costs as a result of addressing changes in laws and regulations or how existing laws and regulations are applied |
| We cannot give any assurance that we will not experience delays in completing communities under construction or in development or that we will be able to identify suitable sites at acceptable prices for future development activities |
| If we fail to achieve our development plans, our growth could slow or we may not meet our growth objectives, which would adversely impact our revenues and results of operations |
| 14 _________________________________________________________________ Our failure to attract partners for developing senior living communities in the future could adversely affect our revenues and results of operations, and harm our ability to finance the construction of new communities |
| As part of our normal operations, we develop senior living communities with third-party partners and enter into long-term management contracts to manage these communities |
| This strategy of developing senior living communities with partners has enabled us to reduce our debt, re-deploy our capital into new development projects, finance development and expand our portfolio of managed communities |
| The development of new communities with third-party partners is subject to various market conditions and the attractiveness of other investment opportunities available to our partners and we cannot give any assurance that we can continue to develop communities with such partners at or near the pace we have maintained in the past |
| If we are unable to continue to implement our strategy of developing senior living communities with third-party partners on terms that are acceptable to us, we may not meet our development objectives and our revenues, results of operations and our ability to finance the construction of new communities could be materially adversely affected |
| Our current and future investments in ventures could be adversely affected by our lack of sole decision-making authority, our reliance on venture partners’ financial condition, any disputes that may arise between us and our venture partners and our exposure to potential losses from the actions of our venture partners |
| We owned non-controlling interests in 187 senior living communities (31 of which are under development) through ownership interests in 30 unconsolidated ventures at December 31, 2005 |
| These ventures involve risks not present with respect to our wholly-owned communities, including the following: • we may share decision-making authority with our venture partners regarding major decisions affecting the ownership or operation of the venture and the community, such as the sale of the community or the making of additional capital contributions for the benefit of the community, which may prevent us from taking actions that are opposed by our venture partners; • prior consent of our venture partners may be required for a sale or transfer to a third party of our interests in the venture, which restricts our ability to dispose of our interest in the venture; • our venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a community or increase our financial commitment to the venture; • our venture partners may have business interests or goals with respect to the community that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the community; • disputes may develop with our venture partners over decisions affecting the community or the venture, which may result in litigation or arbitration that would increase our expenses and distract our officers and/or directors from focusing their time and effort on our business, and possibly disrupt the day-to-day operations of the community such as delaying the implementation of important decisions until the conflict or dispute is resolved; and • we may suffer losses as a result of the actions of our venture partners with respect to our venture investments |
| Our failure to secure additional financing to fund our development and acquisition activities could slow our growth and could adversely affect our revenues and results of operations |
| We will need to obtain additional financial resources to fund our development and construction activities either on balance sheet or with ventures |
| We currently estimate that existing credit facilities, together with existing working capital, cash generated from operations, financing commitments and financing expected to be available will be sufficient to fund communities currently under construction |
| Additional financing will, however, be required to complete additional development and to refinance existing indebtedness |
| We estimate that it will cost approximately dlra140dtta0 million to complete the communities we currently have under construction |
| At December 31, 2005, we had entered into contracts to purchase 32 additional development sites for a total contracted purchase price of dlra124dtta7 million and had also entered into contracts to lease four additional development sites for 50 to 75 years |
| We estimate that it will cost us or the applicable ventures approximately dlra1dtta2 billion to develop these communities |
| We expect that our cash flow from operations, together with borrowings under existing credit facilities and financing expected to be available, will be sufficient to fund the development sites for these additional senior living communities for at least the next 12 months |
| We expect from time to time to seek additional funding through public or private financing sources, including equity or debt financing |
| If we are not able to obtain additional financing on favorable terms, we may have to delay or eliminate all or some of our development projects, which could adversely affect our revenues and results of operations |
| 15 _________________________________________________________________ Continued expansion of our business through the acquisition of existing senior living communities may also require additional capital, particularly if we were to increase our acquisition activity |
| Financing may not be available to us or may be available to us only on terms that are not favorable |
| In addition, certain of our outstanding indebtedness restrict, among other things, our ability to incur additional debt |
| If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon some or all of our growth strategies |
| Further, if additional funds are raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted |
| Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock |
| Our failure to generate sufficient cash flow to cover required interest, principal and operating lease payments could result in defaults of the related debt or operating leases |
| At December 31, 2005, we had mortgage, construction and other indebtedness totaling dlra82dtta9 million and available lines of credit totaling dlra184 million |
| We intend to continue financing our communities through mortgage financing and possibly operating leases or other types of financing, including lines of credit |
| We cannot give any assurance that we will generate sufficient cash flow from operations to cover required interest, principal and operating lease payments |
| Any payment or other default could cause the lender to foreclose upon the facilities securing the indebtedness or, in the case of an operating lease, could terminate the lease, with a consequent loss of income and asset value to us |
| In some cases, the indebtedness is secured by the community and a pledge of our interests in the community |
| In the event of a default, the lender could avoid judicial procedures required to foreclose on real property by foreclosing on the pledge instead, thus accelerating the lender’s acquisition of the community |
| Further, because our mortgages generally contain cross-default and cross-collateralization provisions, a payment or other default by us could affect a significant number of communities |
| Our failure to comply with financial covenants contained in debt instruments could result in the acceleration of the related debt and may restrict our operating and acquisition activity |
| There are various financial covenants and other restrictions in our debt instruments, including provisions that: • require us to meet certain financial tests |
| For example, our dlra250 million corporate credit facility requires us to not to exceed certain leverage ratios, to maintain certain fixed charges coverage ratios and have a consolidated net worth of at least dlra450 million as adjusted each quarter and to meet other financial ratios; • require consent for a change in control; and • restrict our ability and our subsidiaries’ ability to borrow additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which we are not the surviving entity without lender consent |
| These covenants could reduce our flexibility in conducting our operations by limiting our ability to borrow money and may create a risk of default on our debt if we cannot continue to satisfy these covenants |
| If we default under our debt, the related indebtedness could become due and payable prior to its stated due date |
| We cannot give any assurance that we could pay this debt if it became due |
| Further, our line of credit contains a cross-default provision pursuant to which a default on other indebtedness by us or by any of our consolidated subsidiaries under the line of credit could result in the ability of the lenders to declare a default under and accelerate the indebtedness due under the line of credit |
| Our results of operations could be adversely affected if we are required to perform under various financial guarantees or support arrangements that we have entered into as part of our operating strategy |
| As part of our normal operations, we may provide construction completion guarantees, debt guarantees, operating deficit credit facilities, credit support arrangements or liquidity support agreements to certain of our ventures or third party owners |
| In addition, we may also undertake certain financing obligations in connection with acquisitions |
| The terms of some of these obligations generally provide for no limitation on the maximum potential future payments under such agreements |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a description of construction completion guarantees, debt guarantees, operating deficit credit facilities, credit support arrangements and liquidity support agreements provided to certain of our unconsolidated ventures or third-party owners and certain financing obligations undertaken in connection with acquisitions |
| If we are required to fund or perform under these arrangements, the amounts funded either become loans to the venture or are recorded as a reduction in revenue or as an expense |
| If we are required to fund any amounts related to these arrangements, we may not be able to recover the loan from the venture or, if it is recorded as a reduction in revenue or an expense, our results of operations and earnings could be adversely affected |
| 16 _________________________________________________________________ Interest rate increases could adversely affect our earnings because a portion of our total debt is floating rate debt |
| At December 31, 2005, we had approximately dlra19dtta0 million of floating-rate debt at a weighted average interest rate of 5dtta69prca |
| Debt incurred in the future also may bear interest at floating rates |
| Therefore, increases in prevailing interest rates could increase our interest payment obligations, which would negatively impact earnings |
| For example, a one percent increase in interest rates would increase annual interest expense by approximately dlra0dtta2 million based on the amount of floating-rate debt at December 31, 2005 |
| We may be adversely affected by fluctuations in currency exchange rates |
| Historically, our primary exposure to currency exchange rates has been related to non-US dollar denominated intercompany advances and loans to ventures |
| As we increase our international presence through development and operations, we may decide to transact additional business in currencies other than the US dollar |
| As a result, we would be subject to the impact of foreign exchange translation on our financial statements |
| To date, we have not hedged against foreign currency fluctuations; however, we may pursue hedging alternatives in the future |
| Although exposure to currency fluctuations to date has not had an adverse effect on our business, there can be no assurance that exchange rate fluctuations in the future will not have a material adverse effect on our business, operating results, or financial condition |
| Early termination or non-renewal of our management service agreements could cause a loss in revenues |
| We operate senior living communities for third parties and unconsolidated ventures pursuant to management services agreements |
| In most cases, either party to the agreements may terminate upon the occurrence of an event of default caused by the other party |
| In addition, in some cases, subject to our rights to cure deficiencies, community owners may terminate us as manager if any licenses or certificates necessary for operation are revoked, if there is a change in control of Sunrise or if we do not maintain a minimum stabilized occupancy level in the community |
| Also, in some instances, a community owner may terminate the management agreement relating to a particular community if we are in default under other management agreements, particularly our long-term agreements, relating to other communities owned by the same owner or its affiliates |
| In some of our agreements, as was the case in November 2005 when one of our community owners terminated 12 management agreements, the community owner may terminate the management agreement for any reason or no reason provided it pays the termination fee specified in the agreement |
| Early termination of our management agreements or non-renewal or renewal on less favorable terms could cause a loss in revenues and could negatively impact earnings |
| Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford our daily resident fees could cause our resident fee revenues and results of operations to decline |
| Assisted living services, which represent a substantial portion of our senior living services, currently are not generally reimbursable under government reimbursement programs, such as Medicare and Medicaid |
| Accordingly, substantially all of our resident fee revenues are derived from private pay sources consisting of income or assets of residents or their family members |
| In general, because of the expense associated with building new communities and the staffing and other costs of providing the assisted living services at these communities, only seniors with income or assets meeting or exceeding the comparable median in the regions where our communities are located typically can afford to pay the daily resident fees |
| Economic downturns or changes in demographics could adversely affect the ability of seniors to afford our daily resident fees |
| If we are unable to attract seniors with sufficient income, assets or other resources, our resident fee revenues and results of operations may decline |
| Termination of resident agreements could adversely affect our revenues and earnings |
| State regulations governing assisted living communities generally require written resident agreements with each resident |
| Most of these regulations also require that each resident have the right to terminate the resident agreement for any reason on reasonable notice |
| Consistent with these regulations, the resident agreements signed by us generally allow residents to terminate their agreement on 30 days’ notice |
| Thus, we cannot contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with specified leasing periods of up to a year or longer |
| If a large number of residents elected to terminate their resident agreements at or around the same time, and if our units remained unoccupied, then our revenues and earnings could be adversely affected |
| In addition, the advanced age of our average residents means that the resident turnover rate in our senior living communities may be difficult to predict |
| Departure of our key officers could harm our business |
| Our future success depends, to a significant extent, upon the continued services of our key officers, including Paul J Klaassen, our chairman of the board, chief executive officer and founder; and Thomas B Newell, our president |
| Klaassen, who entered into an amended and restated employment agreement with us in November 2003 providing for a rolling five-year term, none 17 _________________________________________________________________ of our key officers have employment agreements |
| If we were to lose the services of any of these individuals, our business and financial results could be adversely affected |
| We are subject to risks associated with complying with Section 404 of the Sarbanes-Oxley Act of 2002 |
| We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002 |
| Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to include a report with each Annual Report on Form 10-K regarding its internal controls over financial reporting |
| We have implemented processes documenting and evaluating our system of internal controls |
| Complying with these new requirements is extremely expensive, time consuming and subject to changes in regulatory requirements |
| The existence of one or more material weaknesses, management’s conclusion that its internal controls over financial reporting are not effective, or the inability of our auditors to express an opinion or attest that our management’s report is fairly stated, could result in a loss of investor confidence in our financial reports, adversely affect our stock price and/or subject us to sanctions or investigation by regulatory authorities |
| The discovery of environmental problems on any of the communities we own or operate could result in substantial costs to us |
| Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removal or remediation of hazardous or toxic substances, including asbestos-containing materials that could be located on, in or under a property |
| These laws and regulations often impose liability without regard to whether or not the owner or operator knew of, or was responsible for, the presence or release of the hazardous or toxic substances |
| Although we have not incurred any significant costs to date, the costs of any required remediation or removal of these substances could be substantial |
| In addition, the liability of an owner or operator is generally not limited and could exceed the property’s value and the aggregate assets of the owner or operator |
| An owner or operator or an entity that arranges for the disposal of hazardous or toxic substances at a disposal site also may be liable for the costs of any required remediation or removal of hazardous or toxic substances at the disposal site |
| We engage consultants to conduct Phase I environmental studies of development sites that are placed under contract |
| If the Phase I study indicates the existence or the possibility of the existence of hazardous or toxic substances on the property, a Phase II study is requested and performed |
| The Phase I and Phase II studies, as applicable, may not reveal all environmental liabilities |
| There could be, therefore, material environmental liabilities of which we are unaware |
| In connection with the ownership or operation of our communities, we could be liable for the costs of remediation or removal of hazardous or toxic substances |
| We also could be liable for other costs, including governmental fines and damages for injuries to persons or properties |
| As a result, the presence, with or without our knowledge, of hazardous or toxic substances at any community owned or operated by us, or acquired or operated by us in the future, could have an adverse effect on our financial condition or earnings |
| The senior living industry is highly competitive |
| We compete with numerous other companies that provide similar senior living alternatives, such as home health care agencies, community-based service programs, retirement communities, convalescent centers and other senior living providers |
| In general, regulatory and other barriers to competitive entry in the independent and assisted living segments of the senior living industry are not as substantial as in the skilled nursing segment of the senior living industry |
| In pursuing our growth strategies, we have experienced and expect to continue to experience competition in our efforts to develop, acquire and operate senior living communities |
| We expect that there will be competition from existing competitors and new market entrants, some of whom may have greater financial resources and lower costs of capital than we are able to obtain |
| Consequently, we may encounter competition that could limit our ability to attract new residents or expand our business, which could have a material adverse effect on our revenues and results of operations |
| Increased competition for residents could also require us to undertake unbudgeted capital improvements or to lower our rates, which could adversely affect our results of operations |
| Our success depends on attracting and retaining skilled personnel, and increased competition for or a shortage of skilled personnel could increase our staffing and labor costs, which we may not be able to offset by increasing the rates we charge to our residents |
| We compete with various health care services providers, including other senior living providers, in attracting and retaining qualified and skilled personnel |
| We depend on our ability to attract and retain skilled management personnel who are responsible for the day-to-day operations of each community |
| A shortage of nurses or other trained personnel or general inflationary pressures may require that we enhance our pay and benefits package to compete effectively for such personnel |
| We may not be able to offset such 18 _________________________________________________________________ added costs by increasing the rates we charge to our residents |
| If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business and operating results could be harmed |
| Employee compensation, including salary increases and the hiring of additional personnel to support our growth initiatives, have previously had a negative impact on operating margins and may again do so in the foreseeable future |
| The need to comply with government regulation of senior living communities may increase our costs of doing business and increase our operating costs |
| Senior living communities are generally subject to regulation and licensing by federal, state and local health and social service agencies and other regulatory authorities |
| Although requirements vary from state to state and community to community, in general, these requirements may include or address: • personnel education, training, and records; • administration and supervision of medication; • the provision of limited nursing services; • admission and discharge criteria; • documentation and reporting requirements; • staffing requirements; • monitoring of resident wellness; • physical plant specifications; • furnishing of resident units; • food and housekeeping services; • emergency evacuation plans, and • resident rights and responsibilities |
| In several of the states in which we operate or intend to operate, laws may require a certificate of need before a senior living community can be opened |
| In most states, senior living communities are also subject to state or local building codes, fire codes, and food service licensing or certification requirements |
| Communities licensed to provide skilled nursing services generally provide significantly higher levels of resident assistance |
| Communities that are licensed, or will be licensed, to provide skilled nursing services may participate in federal health care programs, including the Medicare and Medicaid programs |
| In addition, some licensed assisted living communities may participate in state Medicaid-waiver programs |
| Such communities must meet certain federal and/or state requirements regarding their operations, including requirements related to physical environment, resident rights, and the provision of health services |
| Communities that participate in federal health care programs are entitled to receive reimbursement from such programs for care furnished to program beneficiaries and recipients |
| Senior living communities that include assisted living facilities, nursing facilities, or home health care agencies are subject to periodic surveys or inspections by governmental authorities to assess and assure compliance with regulatory requirements |
| Such unannounced surveys may occur annually or bi-annually, or can occur following a state’s receipt of a complaint about the community |
| As a result of any such inspection, authorities may allege that the senior living community has not complied with all applicable regulatory requirements |
| Typically, senior living communities then have the opportunity to correct alleged deficiencies by implementing a plan of correction |
| In other cases, the authorities may enforce compliance through imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal health care programs, or imposition of other sanctions |
| Failure to comply with applicable requirements could lead to enforcement action that can materially and adversely affect business and revenues |
| Like other senior living communities, we have received notice of deficiencies from time to time in the ordinary course of business |
| Regulation of the senior living industry is evolving |
| Our operations could suffer if future regulatory developments, such as mandatory increases in scope of care given to residents, licensing and certification standards are revised, or a determination is made that the care provided by one or more of our communities exceeds the level of care for which the community is licensed |
| If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the application of existing rules, our 19 _________________________________________________________________ operations could be adversely affected |
| Furthermore, there have been numerous initiatives on the federal and state levels in recent years for reform affecting payment of health care services |
| Some aspects of these initiatives could adversely affect us, such as reductions in Medicare or Medicaid program funding |
| We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback Law |
| This law makes it unlawful for any person to offer or pay (or to solicit or receive) “any remuneration |
| directly or indirectly, overtly or covertly, in cash or in kind” for referring or recommending for purchase of any item or service which is eligible for payment under the Medicare or Medicaid programs |
| Authorities have interpreted this statute very broadly to apply to many practices and relationships between health care providers and sources of patient referral |
| If a health care provider were to violate the Anti-Kickback Law, it may face criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid |
| Similarly, health care providers are subject to the False Claims Act with respect to their participation in federal health care reimbursement programs |
| Under the False Claims Act, the government or private individuals acting on behalf of the government may bring an action alleging that a health care provider has defrauded the government and seek treble damages for false claims and the payment additional monetary civil penalties |
| Many states have enacted similar anti-kickback and false claims laws that may have a broad impact on health care providers and their payor sources |
| Recently other health care providers have faced enforcement action under the False Claims Act |
| It is difficult to predict how our revenue could be affected if we were subject to an action alleging violations |
| We are also subject to federal and state laws designed to protect the confidentiality of patient health information |
| The US Department of Health and Human Services (HHS) has issued rules pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to the privacy of such information |
| In addition, many states have confidentiality laws, which in some cases may exceed the federal standard |
| We have adopted procedures for the proper use and disclosure of residents’ health information in compliance with the relevant state and federal laws, including HIPAA Anti-takeover provisions in our governing documents and under Delaware law could make it more difficult to effect a change in control |
| Our restated certificate of incorporation and amended and restated bylaws and Delaware law contain provisions that could make it more difficult for a third party to obtain control of us or discourage an attempt to do so |
| In addition, these provisions could limit the price some investors are willing to pay for our common stock |
| These provisions include: • Board authority to issue preferred stock without stockholder approval |
| Our Board of Directors is authorized to issue preferred stock having a preference as to dividends or liquidation over the common stock without stockholder approval |
| The issuance of preferred stock could adversely affect the voting power of the holders of our common stock and could be used to discourage, delay or prevent a change in control of Sunrise; • Staggered board and board size fixed within range |
| Our Board of Directors is divided into three classes |
| The total number of directors is fixed by a two-thirds vote of the board within a range of a minimum of two and a maximum of 11 |
| These provisions may make it more difficult for a third party to gain control of our Board of Directors |
| At least two annual meetings of stockholders, instead of one, would generally be required to effect a change in a majority of our Board of Directors; • Filling of Board vacancies; removal |
| Any vacancy occurring in the Board of Directors, including any vacancy created by an increase in the number of directors, shall be filled for the unexpired term by the vote of a majority of the directors then in office, and any director so chosen shall hold office for the remainder of the full term of the class in which the new directorship was created or the vacancy occurred |
| Directors may only be removed with cause by the affirmative vote of the holders of at least a majority of the outstanding shares of our capital stock then entitled to vote at an election of directors; • Other constituency provision |
| Our Board of Directors is required under our certificate of incorporation to consider other constituencies, such as employees, residents, their families and the communities in which we and our subsidiaries operate, in evaluating any proposal to acquire us |
| This provision may allow our Board of Directors to reject an acquisition proposal even though the proposal was in the best interests of our stockholders; • Call of special meetings |
| A special meeting of our stockholders may be called only by the chairman of the board, the president, by a majority of the directors or by stockholders possessing at least 25prca of the voting power of the issued and outstanding voting stock entitled to vote generally in the election of directors |
| This provision limits the ability of stockholders to call special meetings; • Stockholder action instead of meeting by unanimous written consent |
| Any action required or permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders, unless such consent is unanimous |
| This provision limits the ability of stockholders to take action by written consent in lieu of a meeting; 20 _________________________________________________________________ • Supermajority vote of stockholders or the directors required for bylaw amendments |
| A two-thirds vote of the outstanding shares of common stock is required for stockholders to amend the bylaws |
| Amendments to the bylaws by directors require approval by at least a two-thirds vote of the directors |
| These provisions may make more difficult bylaw amendments that stockholders may believe are desirable; • Two-thirds stockholder vote required to approve some amendments to the certificate of incorporation |
| A two-thirds vote of the outstanding shares of common stock is required for approval of amendments to the foregoing provisions that are contained in our certificate of incorporation |
| All amendments to the certificate of incorporation must first be proposed by a two-thirds vote of directors |
| These supermajority vote requirements may make more difficult amendments to these provisions of the certificate of incorporation that stockholders may believe are desirable; and • Advance notice bylaw |
| We have an advance notice bylaw provision requiring stockholders intending to present nominations for directors or other business for consideration at a meeting of stockholders to notify us no later than 60 days before the meeting or 15 days after the date notice of the meeting is mailed or public notice of the meeting is given, if less than 75 days’ notice of the date of the meeting is given or made to stockholders |
| This provision limits the ability of stockholders to make nominations for directors or introduce other proposals that are not timely received for consideration at a meeting |
| In addition to the anti-takeover provisions described above, we are subject to Section 203 of the Delaware General Corporation Law |
| Section 203 generally prohibits a person owning 15prca or more of our outstanding common stock from engaging in a business combination with us for three years after the person acquired the stock |
| However, this prohibition does not apply if (A) our Board of Directors approves in advance the person’s acquisition of the shares or the business combination or (B) the business combination is approved by our stockholders by a vote of at least two-thirds of the outstanding shares not owned by the acquiring person |
| When we were formed, the Klaassens and their respective affiliates and estates were exempted from this provision |
| Our Board of Directors has adopted a stockholder rights plan that could discourage a third party from making a proposal to acquire us |
| In 1996, our Board of Directors adopted a stockholder rights plan, which may discourage a third party from making a proposal to acquire us |
| Under the plan, preferred purchase rights, which are attached to our common stock, generally will be triggered upon the acquisition of 20prca or more of our outstanding common stock, unless the Board of Directors redeems the rights |
| If triggered, these rights would entitle our stockholders other than the acquiror to purchase our common stock, and possibly the common stock of the acquiror, at a price equal to one-half the market value of our common stock |
| This existing plan is scheduled to expire in April 2006 but may be renewed by our Board of Directors |
| Our management has influence over matters requiring the approval of stockholders |
| At December 31, 2005, the Klaassens beneficially owned approximately 14dtta8prca of our outstanding common stock and our executive officers and directors as a group, including the Klaassens, beneficially owned approximately 18dtta7prca of the outstanding common stock |
| As a result, the Klaassens and our other executive officers and directors have influence over matters requiring the approval of our stockholders, including business combinations and the election of directors |