SUNRISE ASSISTED LIVING INC - 10-Q Quarterly Report

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.

As of November 1, 2002, there were 22,254,165 shares of the Registrant’s Common Stock outstanding.

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.

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 nine-month periods ended September 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 nine-month periods ended September 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.

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. Sunrise completed its initial test for goodwill impairment using the two-step process prescribed in Statement 142. Based on the results of this test, Sunrise was not required to record an impairment charge. Diluted net income and diluted earnings per share before extraordinary items would have been $13 million and $0.50 per share for the three months ended September 30, 2001 and $42 million and $1.61 per share for the nine months ended September 30, 2001 if Statement 142 had been applied to 2001.

In April 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 145, Recission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 requires companies to no longer report gains and losses associated with the extinguishment of debt as a component of extraordinary gains and losses, net of tax. These gains and losses will now be required to be presented within the statement of income in appropriate segregated line items. This Statement is effective for fiscal years beginning after December 15, 2002. Upon adoption, we will be required to reclassify current and prior year’s amounts to reflect this new Statement.

Sunrise has entered into contracts to purchase properties for development of additional assisted living properties. Total contracted purchase price of these sites amounts to $65 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 of certain management contracts. In addition to the guarantees disclosed in its 2001 Annual Report on Form 10-K, Sunrise has guaranteed an additional $16 million of debt during the first nine months of 2002 on five properties. No additional guarantees

were entered into during the third quarter of 2002. 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.

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.

Included in prepaid expenses and other current assets are net receivables from unconsolidated entities of $21 million as of September 30, 2002 and $7 million as of December 31, 2001, which relate primarily to

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

Total revenues reflected in Sunrise’s income statement from related unconsolidated entities was $43 million and $24 million for the three months ended September 30, 2002 and 2001, respectively, and $109 million and $58 million for the nine months ended September 30, 2002 and September 30, 2001, respectively.

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 senior living management services, in the U.S. and internationally, for all properties 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.

Total comprehensive income was $15 million and $9 million for the three months ended September 30, 2002 and September 30, 2001, respectively, and $35 million for both the nine months ended September 30, 2002 and 2001. The difference between net income and total comprehensive income is primarily due to the impact of the fair value accounting of interest rate swaps.

On August 21, 2002, Sunrise completed the sale/long-term manage back of one assisted living property to a real estate joint venture owned 80% by Beach Cities Health District and 20% by Sunrise for an aggregate sales price of $18 million. Sunrise will continue to operate the property under a long-term management agreement. The property had a book value of approximately $10 million. Based on the sale of an 80% interest and transaction costs of approximately $400,000, Sunrise expects to realize up to $6 million in gain over the four quarters following the sale, subject to meeting certain operating contingencies, of which $2 million was recognized in the third quarter of 2002.

valued at $30 million, closed at the end of September 2002. These two properties had a book value of approximately $18 million. Based on the sale of the 80% interest and transaction costs of approximately $2 million, Sunrise expects to realize up to $8 million in gain over the four quarters following the sale, subject to meeting certain operating contingencies, of which $2 million was recognized in the third quarter of 2002. The remaining 11 properties are scheduled to close in two stages. Two properties, with a combined value of $22 million, are scheduled to close in the fourth quarter of 2002 and the remaining nine properties, with a combined value of $144 million, are expected to close early in the first quarter of 2003. All sales are subject to customary closing conditions.

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 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.

We are a provider of senior living services. We operate independent and assisted living properties. As of September 30, 2002, we operated or managed 197 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 16,300 residents, including 87 properties that are wholly owned by us, four properties in which we have a controlling interest, 87 properties in which we have minority ownership interests and 28 properties managed for third parties. In our assisted living properties, which are the majority of our operated properties, 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.


	•	Expanding our position as a provider of high quality senior living services by developing new prototype independent and assisted living 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 senior 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.

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 have guaranteed an additional $16 million of debt during the first nine months of 2002 on five properties. No additional guarantees were entered into during the third quarter of 2002. 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 August 21, 2002, we completed the sale/long-term manage back of one assisted living property to a real estate joint venture owned 80% by Beach Cities Health District and 20% by us for an aggregate sales price of $18 million. We will continue to operate the property under a long-term management agreement. The property had a book value of approximately $10 million. Based on the sale of an 80% interest and transaction costs of approximately $400,000, we expect to realize up to $6 million in gain over the four quarters following the sale, subject to meeting certain operating contingencies, of which $2 million was recognized in the third quarter of 2002.

During the third quarter of 2002, Sunrise also announced sale/long-term manage back agreements for 13 properties for $196 million with an international investor group advised by Macquarie Capital Partners LLC. The investor group will acquire an 80 percent interest in the venture and Sunrise will have a 20 percent interest and will continue to operate the properties under long-term management agreements. Two properties, valued at $30 million, closed at the end of September 2002. These two properties had a book value of approximately $18 million. Based on the sale of the 80% interest and transaction costs of approximately $2 million, Sunrise expects to realize up to $8 million in gain over the four quarters following the sale, subject to meeting certain operating contingencies, of which $2 million was recognized in the third quarter of 2002. The remaining 11 properties are scheduled to close in two stages. Two properties, with a combined value of $22 million, are scheduled to close in the fourth quarter of 2002 and the remaining nine properties, with a combined value of $144 million, are expected to close early in the first quarter of 2003. All sales are subject to customary closing conditions.

We derive our consolidated revenues from three primary sources: (1) resident fees for the delivery of senior 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 85% and 89% of total operating revenues for the three months ended September 30, 2002 and September 30, 2001, respectively, and 87% and 84% for the nine months ended September 30, 2002 and September 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 nine months ended September 30, 2002 and September 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 revenue represents fees from contracts for properties owned by unconsolidated joint ventures and other third party owners. Reimbursable expenses paid by us for the unconsolidated joint ventures are also reflected as revenues in the income statement, as required by contract accounting, and are offset by a corresponding amount reflected in the management and contract services expense line item. Management services revenue includes fees for operating properties, which are generally in

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

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 from joint ventures; (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.

We continued to experience growth in operations over the 12 months ended September 30, 2002 and continued to capitalize on our brand awareness by accepting third-party management and development contracts. During this period, we began operating 22 additional properties in which we have an ownership interest and managing eight 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 $130 million for the three months ended September 30, 2002 from $108 million for the three months ended September 30, 2001. Net income increased by $3 million to $15 million for the three months ended September 30, 2002, or $0.63 per share (diluted), from $12 million for the three months ended September 30, 2001 (including an after tax extraordinary gain of $100,000 and non-recurring items of $1 million), or $0.49 per share (diluted). The increase in net income between the three months ended September 30, 2002 and September 30, 2001 was mainly due to an increase in income from property sales relating primarily to the timing of property sales. Additional details comparing the corresponding periods is provided below.

Sunrise Management Services provides full-service senior 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.

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 $46,995 and $49,470 for the third 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 properties managed by Sunrise Management Services for Sunrise Properties in amounts totaling $40,924 and $42,729 for the third 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 21% to $95 million for the three months ended September 30, 2002 from $78 million for the three months ended September 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 14% to 206 properties at September 30, 2002, up from 181 properties at September 30, 2001. This growth resulted from the completion and opening of 22 additional properties and the addition of eight 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 (87 versus 55), 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, third-party owners and Sunrise Properties. Total operating expenses for the three months ended September 30, 2002 increased 23% to $87 million from $71 million for the three months ended September 30, 2001. Management and contract services expenses for the three months ended September 30, 2002 increased $15 million, or 24%, to $80 million from $65 million for the three months ended September 30, 2001. This increase was directly related to the increase in the number of properties operated by Management Services. General and administrative expenses increased $600,000 for the three months ended September 30, 2002 versus the three months ended September 30, 2001. This increase was due to the continued investment in infrastructure, especially in Europe, in advance of revenue.

Sunrise Properties is responsible for our real estate operations, including development, construction, project and permanent financing and property sales. As of September 30, 2002, Sunrise Properties wholly owned 87 properties, a 12% decrease from the 99 properties wholly owned as of September 30, 2001, reflecting the sale during the last twelve months of a 75% to 80% interest in 21 formerly wholly owned properties, the opening during the last twelve months of 10 wholly owned properties and the 100% sale of a property in Iowa. In addition, Sunrise Properties has majority or controlling ownership interests in four properties and minority ownership interests in another 87 properties.

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


Note:	Management and contract services expense includes an intercompany management fee for properties owned by Sunrise Properties and managed by Sunrise Management Services in amounts totaling $6,071 and $6,741 for the three months ended September 30, 2002 and 2001, respectively, that is eliminated in the consolidated financial statements.

During the third quarter of 2002, we recognized $16 million of gains previously deferred on asset sales completed during 2001 and the first half of 2002 as a result of certain operating contingencies being met in the third quarter of 2002. Also, as previously described, we recognized $4 million of gain from the sale/long-term manage back transactions in the third quarter of 2002.

Operating Revenue. Sunrise Properties revenues include resident fees from our owned properties, management and contract service revenues from pre-opening services contracts with third parties, and income from the sales of properties. Sunrise Properties revenues increased 3% to $82 million for the three months ended September 30, 2002 from $80 million for the three months ended September 30, 2001, primarily due to an increase in income from property sales, partially offset by a reduction in resident fees. Resident fees,

including community fees, for the three months ended September 30, 2002 decreased $5 million, or 9%, to $62 million from $67 million for the three months ended September 30, 2001. This decrease was due primarily to a $4 million decrease as a result of the sale of five properties in the second half of 2001 and a $13 million decrease as a result of the sale of 14 properties in the first half of 2002. Offsetting this decrease, in part, was an increase of $5 million in resident fees from the remaining stabilized properties and $7 million in resident fees from the lease-up properties. We define stabilized properties as those we have owned and operated for at least 12 months or those that have achieved occupancy percentages of 95% or above at the beginning of the measurement period.

Average resident occupancy for our 83 stabilized properties for the three months ended September 30, 2002 was 90.1% compared to 91.3% for our 90 properties stabilized for the three months ended September 30, 2001. We attribute the stabilized occupancy decrease to the change in composition of the stabilized portfolio. Our sale/long-term manage back program has the effect of removing seasoned properties from the stabilized portfolio as less mature properties are added each quarter. Two newly stabilized properties entered the stabilized portfolio in the third quarter of 2002 and had a blended occupancy of 69.9%. Due in part to the larger size of our developments and the general increase in competition, the lease-up period (period of time from opening to stabilization) is now typically taking 12 to 15 months. Although the lease-up period is taking longer, we have not changed our definition of what we consider a stabilized property. For the 72 properties owned and stabilized in both the three months ended September 30, 2002 and 2001, average resident occupancy increased to 91.5% from 90.9% and operating margins increased to 34.4% from 34.2%.

Average daily rate for stabilized properties for the three months ended September 30, 2002 was $111 compared to $106 for the three months ended September 30, 2001. The increase is due to the inclusion of additional prototype properties that have higher basic care rates and a general increase in the basic care rate. For the 72 properties owned and stabilized in both the three months ended September 30, 2002 and 2001, average daily rate increased by 4% to $107 from $103.

Operating Expenses. Sunrise Properties operating expenses for the three months ended September 30, 2002 decreased 5% to $58 million from $61 million for the three months ended September 30, 2001. Facility operating expenses for the three months ended September 30, 2002 decreased $2 million, or 4%, to $41 million from $43 million for the three months ended September 30, 2001. This decrease was due primarily to a $3 million decrease as a result of the sale of five properties in the second half of 2001 and a $7 million decrease as a result of the sale of 14 properties in the first half of 2002. Offsetting this decrease, in part, was an increase of $3 million in facility operating expenses from the remaining stabilized properties and $5 million in facility operating expenses from the lease-up properties.

Management and contract services expense represents intercompany expense amounts attributed to Sunrise Properties for the management by Sunrise Management Services of Sunrise Properties wholly owned and majority owned properties. Management and contract services expense for the three months ended September 30, 2002 decreased 10% to $6 million from $7 million for the three months ended September 30, 2001 due to a reduction in the number of properties owned and consolidated. At September 30, 2002, Sunrise Properties consolidated 91 properties compared to 103 properties at September 30, 2001. These intercompany payments are eliminated in the consolidated financial statements.

Facility development and pre-rental expense represents non-capitalizable costs associated with the development and construction of properties and costs incurred to initially lease the property. These costs will vary depending on the number of properties in development and the stage that each property is within development. Additionally, the number of properties in the initial stages of lease-up will impact these costs.

Depreciation and amortization expense for the three months ended September 30, 2002 decreased 25% to $5 million from $7 million for the three months ended September 30, 2001 as a direct result of the cessation of amortization of goodwill in accordance with new accounting guidance (see Note 2 of the consolidated financial statements), the timing of sales of properties and the opening of new properties.

Net Interest Expense. Net interest expense decreased for the three months ended September 30, 2002 to $5 million from $7 million for the three months ended September 30, 2001. This decline was due to a

decrease in the average balance of debt outstanding, as well as a decline in the interest rate that we pay on our variable rate debt, during the three months ended September 30, 2002 compared to the same period in the prior year. Debt decreased from $615 million to $493 million, or 22%. The weighted-average interest rate on our variable rate debt at September 30, 2002 was 4.30% compared to 4.54% at September 30, 2001.

Operating Expenses. Parent company expenses before extraordinary items were $3 million and $2 million for the three months ended September 30, 2002 and 2001, respectively. This increase is generally due to an investment in corporate and regional overhead as we continue to expand our operating and managed portfolio.

Provision for Income Taxes. The provision for income taxes for Sunrise was $9 million for the three months ended September 30, 2002 compared to $7 million for the three months ended September 30, 2001. The increase is due to an increase in pre-tax income in the third quarter of 2002 which was slightly offset by the use of an effective tax rate of 38% for the three months ended September 30, 2002 compared to 39% for the three months ended September 30, 2001. The decrease in the effective tax rate is due to a decrease in our state effective tax rate.

Total operating revenue increased 14% to $361 million for the nine months ended September 30, 2002 from $316 million for the nine months ended September 30, 2001. Net income decreased by $4 million to $34 million for the nine months ended September 30, 2002 (including an after tax extraordinary loss of $2 million), or $1.42 per share (diluted), from $38 million for the nine months ended September 30, 2001 (including an after tax extraordinary gain of $600,000 and non-recurring items of $1 million), or $1.61 per share (diluted). The decrease in net income between September 2002 and September 2001 periods was mainly due to a decrease in income from property sales. In addition, we recorded an extraordinary loss, after tax, of $2 million during the first quarter of 2002 for fees associated with our $92 million term loan and the premium paid for the early redemption of the convertible notes. Additional details comparing the corresponding periods is provided below.

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 $144,298 and $142,841 for the nine months ended September 30, 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 properties managed by Sunrise Management Services for Sunrise Properties in amounts totaling $126,087 and $124,907 for the nine months ended September 30, 2002 and 2001, respectively, which is also eliminated in the consolidated financial statements.

Operating Revenue. Total revenues for Sunrise Management Services increased 25% to $268 million for the nine months ended September 30, 2002 from $214 million for the nine months ended September 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 14% to 206 properties at September 30, 2002, up from 181 properties at September 30, 2001. This growth resulted from the completion and opening of 22 additional properties and the addition of eight 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 (87 versus 55), 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. Total operating expenses for the nine months ended September 30, 2002 increased 27% to $245 million from $193 million for the nine months ended September 30, 2001. Management and contract services expenses for the nine months ended September 30, 2002 increased $49 million, or 28%, to $225 million from $176 million for the nine months ended September 30, 2001. This increase was directly related to the increase in the number of properties operated by Management Services. General and administrative expenses increased $2 million to $18 million for the nine months ended September 30, 2002 from $16 million for the nine months ended September 30, 2001. This increase in general and administrative expenses is due to the investment in Sunrise Management Services infrastructure in anticipation of the continued growth in the number of properties operated and managed.

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


Note:	Management and contract services expense includes an intercompany management fee for properties owned by Sunrise Properties and managed by Sunrise Management Services in amounts totaling $18,211 and $17,934 for the nine months ended September 30, 2002 and 2001, respectively, that is eliminated in the consolidated financial statements.

During the nine months ended September 30, 2002, we recognized $7 million of gains previously deferred on asset sales during 2001 as a result of certain operating contingencies being met in the first half of 2002. Also, as previously described, we recognized $40 million of gain from the sale/long-term manage back transactions in the first nine months of 2002.

Operating Revenue. Sunrise Properties revenues decreased 3% to $237 million for the nine months ended September 30, 2002 from $245 million for the nine months ended September 30, 2001, due to a decrease in resident fees and income from property sales. Resident fees, including community fees, for the nine months ended September 30, 2002 decreased $4 million, or 2%, to $188 million from $192 million for the nine months ended September 30, 2001. This decrease was due primarily to a $15 million decrease as a result of the sale of 14 properties in 2001 and a $20 million decrease as a result of the sale of 14 properties in the first half of 2002. Offsetting this decrease, in part, was an increase of $14 million in resident fees from the remaining stabilized properties and $17 million in resident fees from the lease-up properties.

Operating Expenses. Sunrise Properties operating expenses for the nine months ended September 30, 2002 increased 1% to $179 million from $177 million for the nine months ended September 30, 2001. Facility operating expenses for the nine months ended September 30, 2002 increased $1 million, or 1%, to $126 million from $125 million for the nine months ended September 30, 2001. This increase was due primarily to a

$7 million increase in facility operating expenses from the remaining stabilized properties and a $14 million increase in facility operating expenses from the lease-up properties. Offsetting this increase, in part, was a decrease of $9 million due to the sale of 14 properties sold in 2001 and $11 million due to the sale of 14 properties in the first half of 2002.

Management and contract services expense represents intercompany expense amounts attributed to Sunrise Properties for the management by Sunrise Management Services of Sunrise Properties wholly owned and majority owned properties. Management and contract services expense remained constant at $18 million for the nine months ended September 30, 2002 and 2001. These amounts are eliminated in the consolidated financial statements. These costs remained relatively constant as the portfolio of owned homes increases due to home openings and decreases due to property sales. At September 30, 2002, Sunrise Properties consolidated 91 properties compared to 103 properties at September 30, 2001.

Depreciation and amortization expense for the nine months ended September 30, 2002 decreased to $18 million from $19 million for the nine months ended September 30, 2001 as a direct result of the cessation of amortization of goodwill in accordance with new accounting guidance (see Note 2 of the consolidated financial statements), the timing of sales of properties and the opening of new properties.

Net Interest Expense. Net interest expense decreased for the nine months ended September 30, 2002 to $16 million from $22 million for the nine months ended September 30, 2001. This decline was due to a decrease in the average balance of debt outstanding, as well as a decline in the interest rate that we pay on our variable rate debt, during the nine months ended September 30, 2002 compared to the same period in the prior year. Debt decreased from $615 million to $493 million, or 22%. The weighted-average interest rate on our variable rate debt at September 30, 2002 was 4.30% compared to 4.54% at September 30, 2001.

Operating Expenses. Parent company expenses before extraordinary items remained constant at $7 million for the nine months ended September 30, 2002 and 2001.

Provision for Income Taxes. The provision for income taxes for Sunrise was $23 million for the nine months ended September 30, 2002 compared to $24 million for the nine months ended September 30, 2001. The decrease is due to a decrease in pre-tax income for the nine months ended September 30, 2002 and the use of an effective tax rate of 38% for the nine months ended September 30, 2002 compared to 39% for the nine months ended September 30, 2001. The decrease in the effective tax rate is due to a decrease in our state effective tax rate.

Extraordinary Gain (Loss). During the nine months ended September 30, 2002, we recognized an extraordinary loss, net of tax, of $2 million for fees associated with our $92 million term loan and the premium paid for the early redemption of our 5 1/2% convertible notes. In the same period in 2001, we recognized an extraordinary gain, net of tax, of $600,000 in connection with the early extinguishment of $41 million of the outstanding 5 1/2% convertible notes.

At September 30, 2002, we had approximately $46 million in unrestricted cash and cash equivalents, $206 million available under credit facilities and $31 million in working capital, excluding the $42 million of current debt maturities. We have extensions or refinancing commitments on the majority of our current debt maturities and expect to refinance or pay off the debt as it matures.

Excluding current debt maturities, working capital decreased $35 million from $66 million at December 31, 2001 primarily due to increases in deferred revenue from property sales and accrued expenses and

other current liabilities and a decrease in deferred tax asset, partially offset by increases in short-term notes receivable and prepaid expenses and other current assets. Additionally, we repurchased approximately $15 million of our common stock during the third quarter.

Net cash provided by operating activities for the nine months ended September 30, 2002 and 2001 was approximately $46 million and $57 million, respectively. Net cash provided by operating activities for the nine months ended September 30, 2002 reflects the corresponding decrease in the number of consolidated properties operated by Sunrise from 103 properties at September 30, 2001 to 91 properties September 30, 2002.

Net cash provided by investing activities was $101 million for the nine months ended September 30, 2002 and net cash used in investing activities was $2 million for the nine months ended September 30, 2001. Cash proceeds from the sale of 17 senior living properties in the nine months ended September 30, 2002 amounted to $72 million compared to $33 million from the sale of nine senior living properties for the nine months ended September 30, 2001. Investment in property and equipment, net represents our investment in property and equipment offset by the property and equipment sold during the period.

Net cash used in financing activities was $152 million and $58 million for nine months ended September 30, 2002 and 2001, respectively. Financing activities in the nine months ended September 30, 2002 and 2001 included additional borrowings of $287 million and $220 million, respectively, offset by debt repayments of $427 million and $279 million, respectively. The increased levels of repayments are primarily the result of our sale-manageback program. The additional borrowings under our credit facility during the first nine months of 2002 and 2001 were used to fund our continued development of senior living properties. Additionally, during the nine months ended September 30, 2002, we repurchased approximately $15 million of our common stock.

To date, we have financed our operations primarily with cash generated from operations, both short-term and long-term borrowings and proceeds from the sale of properties pursuant to our sale/long-term manage back program. As of September 30, 2002, we had $493 million of outstanding debt at a weighted average interest rate of 6.12%. Of the amount of outstanding debt, we had $370 million of fixed-rate debt at a weighted average interest rate of 6.73% and $123 million of variable rate debt at a weighted average interest rate of 4.30%.

On January 11, 2002, we entered into a $92 million secured term facility with Fleet National Bank, Credit Suisse First Boston Corporation and First Union National Bank in order to provide us with a committed source of funds to enable us to redeem our outstanding 5 1/2% convertible subordinated notes due June 15, 2002. Craig Callen, a director of Sunrise, is a managing director of Credit Suisse First Boston Corporation. In February 2002, we used $92 million drawn under our new term loan and approximately $18 million of our cash to redeem all of the outstanding 5 1/2% convertible notes due 2002 at a redemption price of 101.1% of the principal amount, plus accrued and unpaid interest. The term loan was collateralized by 14 properties, accrued interest at LIBOR plus 6% and matured in May 2004, subject to a six-month extension option. The $92 million drawn under the term loan was repaid within the same day from the proceeds of a convertible notes offering that closed in January 2002, as described below. We recorded an extraordinary loss, net of tax, of approximately $2 million during the first quarter of 2002 for fees associated with the term loan and the premium paid for the early redemption of the convertible notes.

In January 2002, we issued and sold $125 million aggregate principal amount of 5 1/4% convertible subordinated notes due February 2009 to Credit Suisse First Boston Corporation, Robertson Stephens, Inc. and First Union Securities, Inc., as the initial purchasers, in a private placement. The convertible notes bear interest at 5 1/4% per annum payable semiannually on February 1 and August 1 each year beginning on August 1, 2002. These notes are convertible into shares of our common stock at the conversion price of $35.84, which is equivalent to a conversion rate of 27.9018 shares per $1,000 principal amount of the convertible notes. The notes, which are subordinated to our existing and future senior indebtedness, are redeemable at our option commencing February 5, 2006. In addition, the holders of the convertible notes may require us to repurchase the notes upon a change of control as defined in the convertible notes.

As of September 30, 2002, we had $42 million of debt that is due within the next twelve months. The majority of this debt is mortgage financing secured by wholly owned facilities that we expect to refinance, extend or pay off during the next twelve months.

We have entered into swap transactions whereby $125 million of advances outstanding on our variable LIBOR based revolving construction credit facility bear interest at a fixed rate. We have recorded net interest expense of $3 million in the nine months ended September 30, 2002. The fair value of the swaps was negative $3 million as of September 30, 2002. Based on the fair value of the swaps at September 30, 2002, we expect to incur approximately $1 million of interest expense related to the swaps for the remainder of 2002. The fair value of the swaps are adjusted quarterly.

Our debt instruments contain various financial covenants and other restrictions, including provisions which:


	•	require us to meet specified financial tests. For example, our $300 million construction line of credit requires us to have a consolidated tangible net worth of at least $284 million and to maintain a consolidated minimum cash liquidity balance of at least $25 million and to meet other financial ratios. These tests are administered on a monthly or quarterly basis depending on the covenant;

	•	require consent for changes in management or control of us. For example, our $300 million construction credit facility requires the lender’s consent for any merger where Paul Klaassen or Teresa Klaassen does not remain chairman of the board and chief executive officer;

	•	restrict the ability of our subsidiaries to borrow additional funds, dispose of assets or engage in mergers or other business combinations without lender consent; and

	•	require that we maintain minimum occupancy levels at our properties. For example, our $300 million construction credit facility requires that 85% occupancy be achieved after 15 months for newly opened properties with 77 units or less and 18 months for 78 units or more and, following this 15 month and 18 month period, be maintained at or above that level.

If we fail to comply with any of these requirements, then the related indebtedness could become due and payable before its stated due date. At September 30, 2002, we were in compliance with the financial covenants contained in our debt instruments. Our construction line of credit also contains a cross-default provision pursuant to which a default by us or by any of our consolidated subsidiaries under the construction line of credit could result in the ability of the lenders to declare a default under and accelerate the indebtedness due under the construction line of credit.

As indicated above, as part of our normal operations, we sell selected senior living properties and, in connection with these sales, we generally enter into long-term management contracts to manage these properties and, in certain cases, retain minority interest in the properties. This strategy of selling selected properties has enabled us to reduce our debt, re-deploy our capital into new development projects and realize gains on depreciated real estate. The sale of our properties is subject to various market conditions, including current capitalization rates, interest rates and the general economic environment. As such, we cannot assure that we can continue to sell properties or realize gains at or near amounts that have been recognized in the past. If we are unable to continue to implement our strategy of selling selected properties, our revenues and results of operations and our ability to finance the construction of new properties could be materially adversely affected.

We currently estimate that the existing credit facilities, together with existing working capital, proceeds from sales of selected real estate properties as a normal part of our operations, financing commitments and financing expected to be available, will be sufficient to fund properties short term liquidity needs, including properties 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 $135 million to complete the properties we currently have under construction. We have entered into contracts to purchase additional sites. Currently, the total contracted purchase price of these sites is $49 million. We estimate that it will cost approximately $476 million to develop these properties. We expect that the cash flow from

operations, together with borrowings under existing credit facilities and proceeds from the sale of selected real estate properties will be sufficient to fund the development and construction for these additional properties for at least the next twelve months. We expect from time to time to seek additional funding through public or private financing sources, including equity or debt financing. We can provide no assurance that such financing and refinancing will be available on acceptable terms.

Our ability to achieve our development plans will depend upon a variety of factors, many of which will be outside our control. These factors include:


	•	obtaining zoning, land use, building, occupancy, licensing and other required governmental permits for the construction of new properties without experiencing significant delays;

	•	completing construction of new properties on budget and on schedule;

	•	the ability to work with third-party contractors and subcontractors who construct the properties;

	•	shortages of labor or materials that could delay projects or make them more expensive;

	•	adverse weather conditions that could delay projects;

	•	finding suitable sites for future development activities at acceptable prices; and

	•	addressing changes in laws and regulations or how existing laws and regulations are applied.

These factors also apply to developments undertaken by unconsolidated entities in which we have made investments and provided certain guarantees. We cannot assure you that we will not experience delays in completing properties under construction or in development or that we will be able to identify suitable sites at acceptable prices for future development activities. If we fail to achieve our development plans, our growth could slow, which would adversely impact our revenues and results of operations.

Our growth plan includes the acquisition of senior living properties or interests in such properties. The success of our acquisitions will be determined by numerous factors, including our ability to identify suitable acquisition candidates, competition for such acquisitions, the purchase price, the financial performance of the properties after acquisition and our ability to integrate or operate acquired properties effectively. Any failure to do so may have a material adverse effect on our business, financial condition and results of operations.

We expect that the number of operated properties will continue to increase substantially as we pursue our development and acquisition programs for new senior living properties. This rapid growth will place significant demands on our management resources. Our ability to manage our growth effectively will require us to continue to expand our operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. If we are unable to manage our growth effectively, our business, financial condition and results of operations could be adversely affected.

We believe that some senior living markets have become or are on the verge of becoming overbuilt. Regulation and other barriers to entry into the senior living industry are not substantial. Consequently, the development of new senior living properties could outpace demand. Overbuilding in our market areas could, therefore, cause us to experience decreased occupancy, depressed margins or lower operating results. We believe that each local market is different and we are and will continue to react in a variety of ways, including selective price discounting, to the specific competitive environment that exists in each market.

On July 23, 2002, we announced that our Board of Directors authorized us to repurchase outstanding shares of our common stock up to an aggregate purchase price of $50 million over the next 12 months. During the third quarter, we purchased 581,400 shares at an average price of $25.57 per share through open-market purchases.

We are exposed to market risks related to fluctuations in interest rates on our notes receivable, investments and debt. The purpose of the following analyses is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of September 30, 2002.

We have investments in notes receivable and bonds. Investments in notes receivable are primarily with joint venture arrangements in which we have a minority equity ownership interest ranging from 7% to 50%. We have 25 properties in which we own less than 10%, 33 properties in which we own between 10% and 20%, 25 properties in which we own between 20% and 30% and 4 properties in which we own between 30% and 50%. Investments in bonds are secured by the operating properties subject to the debt and are with properties that are managed by us. The majority of the investments have fixed rates. One of the notes has an adjustable rate.

We utilize a combination of debt and equity financing to fund our development, construction and acquisition activities. We seek the financing at the most favorable terms available at the time. When seeking debt financing, we use a combination of variable and fixed rate debt, whichever is more favorable in our judgment at the time of financing. We have used interest rate swaps to manage the interest rates on some of our long-term borrowings. As of September 30, 2002, we had five interest rate swap agreements that effectively convert $125 million of floating-rate debt to fixed-rate debt. The maturity dates of the swap agreements range from June 2003 to June 2004 and have an effective weighted-average fixed interest rate of 6.5%. We do not utilize forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments.

For fixed rate debt, changes in interest rates generally affect the fair market value of the debt, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact fair market value of the debt, but do affect the future earnings and cash flows. We generally cannot prepay fixed rate debt prior to maturity without penalty. Therefore, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until we would be required to refinance such debt. Holding the variable rate debt balance of $123 million at September 30, 2002 constant, each one-percentage point increase in interest rates would result in an increase in interest expense for the coming year of approximately $1 million.

The table below details by category the principal amount, the average interest rates and the estimated fair market value. Some of the notes receivable and some items in the various categories of debt, excluding the convertible notes, require periodic principal payments prior to the final maturity date. The fair value estimates for the notes receivable are based on the estimates of management and on rates currently prevailing for comparable loans. The fair market value estimates for debt securities are based on discounting future cash flows utilizing current rates offered to Sunrise for debt of the same type and remaining maturity. The fair market value estimate of the convertible notes is based on the market value at September 30, 2002.


(1)	Includes the effect of interest rate swaps that convert $125.0 million of variable rate debt to fixed rate.

Within the 90 days prior to the date of this report, Sunrise carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Sunrise’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Sunrise’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in Sunrise’s periodic SEC filings. There were no significant changes in the Sunrise’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date of our most recent evaluation.

The exhibits required by this Item are set forth on the Index of Exhibits attached hereto.

On August 14, 2002, Sunrise filed a Form 8-K with the Securities and Exchange Commission that included a copy of the written statement of the Chief Executive Officer and Chief Financial Officer required under Section 906 of the Sarbanes-Oxley Act of 2002 in connection with the filing of its Form 10-Q for the quarter ended June 30, 2002.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Sunrise Assisted Living, Inc.
	(Registrant)

	/s/ LARRY E. HULSE
Date: November 13, 2002	Larry E. Hulse Chief Financial Officer


	/s/ CARL G. ADAMS
Date: November 13, 2002	Carl G. Adams Chief Accounting Officer


1.	I have reviewed this quarterly report on Form 10-Q of Sunrise Assisted Living, Inc.;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


1.	I have reviewed this quarterly report on Form 10-Q of Sunrise Assisted Living, Inc.;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under


	which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period Ended September 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


Delaware		54-1746596
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification No.)


		Page

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2002 and December 31, 2001		3
	Consolidated Statements of Income for the three months ended September 30, 2002 and 2001 and nine months ended September 30, 2002 and 2001		4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		23
Item 4.	Controls and Procedures		24
PART II.	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		25
	Signatures		26
	Certifications		27


				September 30,			December 31,
				2002			2001

				(Unaudited)
ASSETS
	Current Assets:
		Cash and cash equivalents		$	45,640		$	50,275
		Accounts receivable, net			24,732			23,252
		Notes receivable — affiliates			7,395			1,294
		Deferred income taxes			692			21,736
		Prepaid expenses and other current assets			27,932			20,920

			Total current assets		106,391			117,477
	Property and equipment, net				777,355			841,414
	Notes receivable — affiliates				88,816			94,305
	Management contracts and leaseholds, net				12,359			22,999
	Costs in excess of assets acquired, net				32,749			32,749
	Investments in unconsolidated assisted living facilities				47,923			36,589
	Investments				5,610			5,750
	Other assets				25,095			26,332

			Total assets	$	1,096,298		$	1,177,615

LIABILITIES AND STOCKHOLDERS’ EQUITY
	Current Liabilities:
		Accounts payable		$	7,257		$	12,164
		Accrued expenses and other current liabilities			39,754			32,117
		Deferred revenue			27,981			7,468
		Current maturities of long-term debt			42,426			26,925

			Total current liabilities		117,418			78,674
	Long-term debt, less current maturities				450,935			603,831
	Investments in unconsolidated assisted living facilities				3,320			2,284
	Deferred income taxes				73,416			72,016
	Other long-term liabilities				7,520			7,658

			Total liabilities		652,609			764,463
	Minority interests				2,627			2,451
	Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding				—			—
	Common stock, $0.01 par value, 60,000,000 shares authorized, 22,251,490 and 22,166,406 shares issued and outstanding in 2002 and 2001, respectively				223			222
	Additional paid-in capital				309,051			310,423
	Retained earnings				138,604			104,270
	Deferred compensation — restricted stock				(3,569	)		—
	Accumulated other comprehensive loss				(3,247	)		(4,214	)

			Total stockholders’ equity		441,062			410,701

			Total liabilities and stockholders’ equity	$	1,096,298		$	1,177,615



			Three months ended						Nine months ended
			September 30,						September 30,

			2002			2001			2002			2001

			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Operating revenue:
	Resident fees		$	61,505		$	67,454		$	187,891		$	191,692
	Management and contract services			48,464			29,326			125,776			74,109
	Income from property sales			20,088			11,579			47,393			50,128

		Total operating revenue		130,057			108,359			361,060			315,929

Operating expenses:
	Facility operating			40,924			42,729			126,087			124,907
	Management and contract services			39,080			21,961			99,184			50,973
	Facility development and pre-rental			3,091			1,604			7,934			5,014
	General and administrative			9,480			8,176			26,615			23,827
	Depreciation and amortization			5,835			7,354			19,403			21,648
	Facility lease			2,075			2,530			6,294			7,757

		Total operating expenses		100,485			84,354			285,517			234,126

Non-recurring items				—			2,307			—			2,307

Income from operations				29,572			26,312			75,543			84,110
Interest income (expense):
	Interest income			2,705			2,808			8,575			9,388
	Interest expense			(7,768	)		(9,691	)		(24,954	)		(30,975	)

		Total interest expense		(5,063	)		(6,883	)		(16,379	)		(21,587	)
Equity in earnings (losses) of unconsolidated assisted living facilities				359			(122	)		405			(741	)
Minority interests				(30	)		(273	)		(175	)		(496	)

Income before income taxes				24,838			19,034			59,394			61,286
Provision for income taxes				(9,438	)		(7,423	)		(22,570	)		(23,902	)

Net income before extraordinary gain (loss)				15,400			11,611			36,824			37,384

Extraordinary gain (loss), net of tax				—			76			(2,490	)		602

Net income			$	15,400		$	11,687		$	34,334		$	37,986

Net income per common share:
	Basic:
		Net income before extraordinary gain (loss)	$	0.69		$	0.53		$	1.64		$	1.72
		Extraordinary gain (loss)		—			—			(0.11	)		0.03

		Basic net income per common share	$	0.69		$	0.53		$	1.53		$	1.75

	Diluted:
		Net income before extraordinary gain (loss)	$	0.63		$	0.49		$	1.51		$	1.58
		Extraordinary gain (loss)		—			—			(0.09	)		0.02

		Diluted net income per common share	$	0.63		$	0.49		$	1.42		$	1.61



	As of September 30,

	2002		2001

Assets, principally property and equipment	$	1,205,214	$	768,898
Liabilities, principally long-term debt		868,144		571,959
Equity		337,070		196,939



									Maturity Date												Estimated
																					Fair Market
			2003			2004			2005			2006			2007			Thereafter			Value


									(dollars in thousands)
Assets
Notes receivable
	Fixed rate		$	939		$	25,689		$	156			—		$	20,833		$	39,368		$	86,985
		Average interest rate		10.0	%		10.4	%		8.0	%		—			10.0	%		13.8	%		—
	Variable rate		$	6,456		$	2,770			—			—			—			—		$	9,226
		Average interest rate		4.8	%		4.7	%		—			—			—			—			—
Investments
	Bonds			—			—			—			—			—		$	5,610		$	5,610
		Average interest rate		—			—			—			—			—			11.0	%		—
Liabilities
Debt
	Fixed rate (1)		$	2,066		$	205,099		$	1,024		$	2,417		$	15,989		$	18,795		$	250,872
		Average interest rate		8.6	%		7.2	%		9.2	%		9.4	%		9.9	%		7.9	%		—
	Variable rate		$	40,360		$	10,196		$	16,394		$	4,479		$	47,542		$	4,000		$	122,971
		Average interest rate		4.6	%		6.6	%		4.8	%		5.3	%		3.6	%		2.9	%		—
	Convertible notes			—			—			—			—			—		$	125,000		$	102,969
		Average interest rate		—			—			—			—			—			5.3	%		—


Exhibit No.		Exhibit Name	Page

	2.1	Transaction Agreement by and among Sunrise Assisted Living Investments, Inc., Sunrise Second Assisted Living Holdings, LLC and the Other Parties Named Therein dated as of September 30, 2002
	10.1	Sunrise Assisted Living, Inc. Long Term Incentive Cash Bonus Plan effective August 23, 2002



	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2002			2001			2002			2001

Revenues	$	74,075		$	43,983		$	192,247		$	122,772
Net loss		(3,715	)		(6,981	)		(16,427	)		(22,155	)