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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
       For the Period Ended June 30, 2002

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     For the Transition Period From                               to                               

Commission file number:     0-20765

SUNRISE ASSISTED LIVING, INC.
(Exact name of registrant as specified in its charter)

7902 Westpark Drive
McLean, Virginia 22102
(Address of principal executive offices)

(703) 273-7500
(Registrant’s telephone number, including area code)

	Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X             No      

                 As of August 1, 2002, there were 22,811,781 shares of the Registrant’s Common Stock outstanding.

SUNRISE ASSISTED LIVING, INC.

Form 10-Q

June 30, 2002

INDEX

2

SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

	Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

3

SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

See accompanying notes.

4

SUNRISE ASSISTED LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See accompanying notes.

5

SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The accompanying consolidated financial statements of Sunrise Assisted Living, Inc. and subsidiaries (“Sunrise”) are unaudited and include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the three- and six-month periods ended June 30, 2002 and 2001 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read together with Sunrise’s consolidated financial statements and the notes thereto for the year ended December 31, 2001 included in Sunrise’s 2001 Annual Report on Form 10-K. Operating results for the three-and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2002.

     Certain 2001 balances have been reclassified to conform with the 2002 presentation.

2. Significant Accounting Policies

Goodwill and Other Intangible Assets

     On January 1, 2002, Sunrise adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In accordance with the new rule, goodwill and indefinite lived intangible assets are no longer amortized but reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The Company completed its initial test for goodwill impairment using the two-step process prescribed in Statement 142. Based on the results of this test, the Company was not required to record an impairment charge. Diluted net income and diluted earnings per share before extraordinary items would have been $15 million and $0.55 per share for the second quarter of 2001 and $29 million and $1.12 per share for the first six months of 2001 if Statement 142 had been applied to 2001.

3. Commitments

     Sunrise has entered into contracts to purchase properties for development of additional assisted living facilities. Total contracted purchase price of these sites amounts to $92 million. Sunrise is pursuing additional development opportunities and also plans to acquire additional facilities as market conditions warrant.

     As a part of Sunrise’s operating strategy, Sunrise has provided limited debt guarantees to certain of its joint ventures, has guaranteed that properties will be completed at budgeted costs approved by all partners in the joint venture and has provided operating deficit guarantees as a part

6

SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

of certain management contracts. In addition to the guarantees disclosed in its 2001 Annual Report on Form 10-K, Sunrise guaranteed an additional $16 million of debt during the first six months of 2002 on five properties. All five properties are owned in joint ventures with Sunrise ownership ranging from 20% to 50%. Of the $16 million in additional guarantees, $2 million will be removed upon the stabilization of two properties, $10 million will be removed upon completion of construction and stabilization of one property and $4 million will be removed upon the placement of permanent debt financing on two properties.

7

SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

4. Net Income Per Common Share

     The following table summarizes the computation of basic and diluted net income per share amounts presented in the accompanying consolidated statements of income (in thousands, except per share data):

     Certain shares issuable upon the exercise of stock options or convertible notes have been excluded from the computation because the effect of their inclusion would be anti-dilutive.

8

SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

5. Transactions with Unconsolidated Entities

     Included in prepaid expenses and other current assets are net receivables from unconsolidated partnerships or limited liability companies of $19 million as of both June 30, 2002 and June 30, 2001, which relate primarily to development activities.

     Summary financial information for unconsolidated entities (7% to 50% owned) accounted for by the equity method is as follows (in thousands):

     Total revenues from related unconsolidated entities was $39 million and $19 million for the three months ended June 30, 2002 and 2001, respectively, and $66 million and $35 million for the six months ended June 30, 2002 and June 30, 2001, respectively.

6. Information about Sunrise’s Segments

     Sunrise reports the results of its operations by its two operating segments – Sunrise Management Services and Sunrise Properties. Sunrise Assisted Living, Inc. is the parent company of each segment and develops Sunrise’s strategy and overall business plan and coordinates the activities of all business segments. Sunrise Management Services provides full-service assisted living management services, in the U.S. and internationally, for all homes owned by Sunrise or managed by Sunrise for third-parties. Sunrise Management Services also provides consulting services on market and site selection and pre-opening sales and marketing. Sunrise Properties is responsible for all Sunrise real estate operations, including development, construction, property management, project and permanent financing, real estate and property sales.

9

SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

     Segment information is as follows (in thousands):

7. Comprehensive Income

     Total comprehensive income was $11 million and $13 million for the three months ended June 30, 2002 and June 30, 2001, respectively, and $20 million and $26 million for the six months ended June 30, 2002 and June 30, 2001, respectively. The difference between net income and total comprehensive income is primarily due to the impact of the fair value accounting of interest rate swaps.

8. Property Sale / Long-Term Manage Back Program

     On June 27, 2002, Sunrise completed the sale/long-term manage back of two assisted living properties to a real estate joint venture owned 80% by CalPERS and 20% by Sunrise for an aggregate sales price of $30 million. Sunrise will continue to operate the properties under long-term management agreements. The properties had a combined book value of approximately $18 million. Based on the sale of an 80% interest and transaction costs of approximately $200,000, Sunrise expects to realize up to $9 million in gain over the four quarters following the sale, subject to meeting certain operating contingencies, of which $2 million was recognized in the second quarter of 2002.

10

SUNRISE ASSISTED LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9. Restricted Stock

     The Company’s stockholders approved the 2002 stock option and restricted stock plan at the Company’s annual meeting of stockholders held on May 17, 2002. On March 21, 2002, a total of 148,100 shares of restricted stock were granted to Paul J. Klaassen, Chairman of the Board and Chief Executive Officer, and Thomas B. Newell, President, subject to approval of the 2002 stock option and restricted stock plan at the 2002 annual meeting of stockholders. These grants vest over three to ten years. Unvested amounts are reflected in the balance sheet and represent the fair value of shares at the date of grant, which will be amortized as compensation expense over the period of vesting.

11

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read together with the information contained in the consolidated financial statements, including the related notes, and other financial information appearing elsewhere herein. This management’s discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Although we believe the expectations reflected in such forward looking statements are based on reasonable assumptions, there can be no assurance that our expectations will be realized. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, development and construction risks, acquisition risks, licensing risks, business conditions, competition, changes in interest rates, our ability to execute on our sale/manage back program, market factors that could affect the value of our properties, the risks of downturns in economic conditions generally, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere herein and in our 2001 Annual Report on Form 10-K. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Unless the context suggests otherwise, references herein to “we”, “us” and “our” mean Sunrise Assisted Living, Inc. and its consolidated subsidiaries.

Overview

     We are a provider of assisted living services for seniors. At June 30, 2002, we operated or managed 196 properties in 23 states and the District of Columbia, seven in Canada and two in the United Kingdom, with a resident capacity of more than 16,200 residents, including 89 properties that are wholly owned by us, four properties in which we have a controlling interest, 84 properties in which we have minority ownership interests and 28 properties managed for third parties. We provide assistance with the activities of daily living and other personalized support services in a residential setting for elderly residents who cannot live independently but who do not need the level of medical care provided in a skilled nursing facility. We also provide additional specialized care and services to residents who require more frequent and intensive assistance or increased care and care programs and services to help cognitively impaired residents, including residents with Alzheimer’s disease. By offering this full range of services, we believe we are better able to accommodate the changing needs of residents as they age and develop further physical or cognitive frailties.

     Our business strategy includes:

	•		Expanding our position as a provider of high quality assisted living services by developing new prototype properties in major markets in the United States;
	•		Growing the number of properties that we operate and have interests in outside the United States;
	•		Maintaining and expanding our position as a preferred provider of assisted living management services;
	•		Continuing our sale/long-term manage back program as a normal part of our operations; and
	•		Selectively acquiring properties or interests in properties that complement our current property portfolio.

12

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Refer to our 2001 Annual Report on Form 10-K for a discussion of our critical accounting policies which include the development of properties, both wholly owned or through joint ventures, the estimates associated with financing and managing such properties, and the selling of completed properties. As a part of Sunrise’s operating strategy, Sunrise has provided limited debt guarantees to certain of its joint ventures, has guaranteed that properties will be completed at budgeted costs approved by all partners in the joint venture and has provided operating deficit guarantees as a part of certain management contracts. In addition to the guarantees disclosed in our 2001 Annual Report on Form 10-K, we guaranteed an additional $16 million of debt during the first six months of 2002 on five properties. All five properties are owned in joint ventures with our ownership ranging from 20% to 50%. Of the $16 million in additional guarantees, $2 million will be removed upon the stabilization of two properties, $10 million will be removed upon completion of construction and stabilization of one property and $4 million will be removed upon the placement of permanent debt financing on two properties.

     On June 27, 2002, we completed the sale/long-term manage back of two assisted living properties to a real estate joint venture owned 80% by CalPERS and 20% by Sunrise for an aggregate sales price of $30 million. We will continue to operate the properties under long-term management agreements. The properties had a combined book value of approximately $18 million. Based on the sale of an 80% interest and transaction costs of approximately $200,000, we expect to realize up to $9 million in gain over the four quarters following the sale, subject to meeting certain operating contingencies, of which $2 million was recognized in the second quarter of 2002.

Results of Operations

     We derive our consolidated revenues from three primary sources: (1) resident fees for the delivery of assisted living services, (2) management and contract services income for management and contract services of properties owned by unconsolidated joint ventures and other third parties and (3) income from property sales. Historically, most of our operating revenues have come from resident fees and management and contract services. Resident fees and management contract services comprised 87% and 83% of total operating revenues for the three months ended June 30, 2002 and June 30, 2001, respectively, and 88% and 81% for the six months ended June 30, 2002 and June 30, 2001, respectively. The balance of our total operating revenues was derived from income from property sales.

     Residents, their families or other responsible parties typically pay resident fees monthly. For the three and six months ended June 30, 2002 and June 30, 2001, approximately 99% of our resident fee revenue was derived from private pay sources. Resident fees include revenue derived from basic care, community fees, plus care, Reminiscence™ and other resident related services. Plus care and Reminiscence™ fees are paid by residents who require personal care in excess of services provided under the basic care program.

     Management and contract services income represents fees from long-term contracts for properties owned by unconsolidated joint ventures and other third party owners. Management services income includes management fees for operating properties, which are generally in the range

13

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

of 5% to 8% of a managed property’s total operating revenue for homes in operation, and pre-opening service fees for site selection, zoning, property design, construction management, hiring, training, licensing and marketing services.

     Income from property sales represents the gain recognized from the sale of assisted living properties. Generally, upon sale of a property, we will enter into a long-term management agreement to manage the property.

     We classify our operating expenses into the following categories: (1) facility operating, which includes labor, food, marketing and other direct facility expenses; (2) management and contract services, which includes operating expenses reimbursable to us; (3) facility development and pre-rental, which includes non-capitalized development expenses and pre-rental labor and marketing expenses; (4) general and administrative, which primarily includes headquarters and regional staff expenses and other overhead costs; (5) depreciation and amortization; and (6) facility lease, which represents rental expenses for properties not owned by us.

     We have two business segments: Sunrise Management Services and Sunrise Properties.

Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30, 2001

     Consolidated

     We continued to experience growth in operations over the 12 months ended June 30, 2002 and continued to capitalize on our brand awareness by accepting third-party management and development contracts. During this period, we began operating 23 additional properties in which we have an ownership interest and managing 10 additional properties for independent third parties, partially offset by four third party management contract terminations and the 100% sale of a wholly owned property in Iowa.

     Total operating revenue increased to $120 million for the three months ended June 30, 2002 from $104 million for the three months ended June 30, 2001. Net income decreased by $2 million to $11 million for the three months ended June 30, 2002, or $0.47 per share (diluted), from $13 million for the three months ended June 30, 2001 (including an after tax extraordinary gain of $200,000 million), or $0.55 per share (diluted). The decrease in net income between June 2002 and June 2001 periods was mainly due to a decrease in income from property sales relating primarily to the timing of property sales.

     Sunrise Management Services

     Sunrise Management Services provides full-service assisted living management services, both in the United States and internationally, for all properties that are owned or managed by us. In addition, Sunrise Management Services provides management and pre-opening services to third parties and joint ventures on market and site selection, pre-opening sales and marketing, start-up training, and management services for properties under development and construction.

14

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     The following table sets forth the components of Sunrise Management Services net income (in thousands):

Note: Management and contract services revenue includes intercompany revenue from Sunrise Properties in the amounts of $46,595 and $46,152 for the second quarter of 2002 and 2001, respectively, that is eliminated in the consolidated financial statements. Management and contract services expense includes intercompany facility operating expenses of Sunrise Properties for facilities managed by Sunrise Management Services for Sunrise Properties in amounts totaling $40,730 and $40,364 for the second quarter of 2002 and 2001, respectively, which is also eliminated in the consolidated financial statements.

     Operating Revenue. Sunrise Management Services revenues include management and contract services revenues from unconsolidated joint ventures and third-party owners and internal management services revenues for services provided to Sunrise Properties. Internal fees reflect estimated market-based fees for the management services provided to Sunrise Properties and are eliminated in the consolidated financial statements. Total revenues for Sunrise Management Services increased 32% to $91 million for the three months ended June 30, 2002 from $69 million for the three months ended June 30, 2001. This increase was primarily due to the growth in the number of properties operated or managed by Sunrise Management Services or in the pre-opening phase. The total number of properties operated or managed increased 16% to 205 facilities at June 30, 2002, up from 177 facilities at June 30, 2001. This growth resulted from the completion and opening of 23 additional properties and the addition of 10 managed properties, partially offset by four third party management contract terminations and the 100% sale of a wholly owned property in Iowa. Additionally, there was a 58% increase in the number of properties in unconsolidated joint ventures (84 versus 53), many of which are accounted for under contract accounting which requires the presentation of reimbursable expenses as revenues in the income statement. These revenues are offset by a corresponding amount reflected in the management and contract services expense line item.

     Operating Expenses. Sunrise Management Services operating expenses include all operating expenses of properties managed for unconsolidated joint ventures and third-party owners and Sunrise Properties. Total operating expenses for the three months ended June 30, 2002 increased 34% to $83 million from $62 million for the three months ended June 30, 2001. Management and contract services expenses for the three months ended June 30, 2002 increased $20 million, or 36%,

15

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

to $76 million from $56 million for the three months ended June 30, 2001. This increase was directly related to the increase in the number of properties operated by Management Services. General and administrative expenses increased $1 million to $6 million for the three months ended June 30, 2002 from $5 million for the three months ended June 30, 2001. The general and administrative expenses for Sunrise Management Services continue to increase due to the substantial growth in the number of properties operated during the last twelve months.

     Sunrise Properties

     Sunrise Properties is responsible for our real estate operations, including development, construction, project and permanent financing and property sales. As of June 30, 2002, Sunrise Properties wholly owned 89 properties, a 10% decrease from the 99 properties wholly owned as of June 30, 2001, reflecting the sale during the last twelve months of an 75% to 80% interest in 18 formerly wholly owned properties and the opening during the last twelve months of eight wholly owned properties. In addition, Sunrise Properties has majority or controlling ownership interests in four properties and minority ownership interests in another 84 properties.

     The following table sets forth the components of Sunrise Properties net income (in thousands):