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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

OR

SUNRISE ASSISTED LIVING, INC.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

          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 period 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[ ]

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes    X    No

          The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold as of June 28, 2002 was $283,953,102. */

          The number of shares of the registrant’s common stock outstanding at March 1, 2003 was 22,440,574.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s 2003 annual meeting proxy statement are incorporated by reference into Part III hereof.

TABLE OF CONTENTS

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     This Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Although Sunrise believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that Sunrise’s expectations will be realized. Sunrise’s 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, success in integrating Marriott Senior Living Services operations, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere herein. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Unless the context suggests otherwise, references herein to “Sunrise”, the “Company”,“we”, “us” and “our” mean Sunrise Assisted Living, Inc. and its consolidated subsidiaries.

PART I

Item 1. Business

Overview

     Sunrise is a provider of senior living services in the United States, Canada and the United Kingdom. Founded in 1981, Sunrise began with a simple but innovative vision – to create an alternative senior living option that would emphasize quality of life and quality of care. As of December 31, 2002, Sunrise operated 200 communities in the United States, seven communities in Canada and two communities in the United Kingdom, with a total resident capacity of more than 16,000, including 181 communities owned by Sunrise or in which it has an ownership interest and 28 communities managed for third parties. Sunrise has traditionally served as an operator of assisted living communities but has also offered independent living services and skilled nursing services at some communities. Sunrise also develops senior living communities for itself and for joint ventures in which it retains an ownership interest.

     Sunrise’s long-range strategic objective is to transform itself into a senior living management services company. Sunrise believes that this transformation will result in its revenue and earnings becoming increasingly based on long-term management contracts resulting in more stable and predictable revenue and earnings streams. Through the execution of its business plan, Sunrise has made significant progress toward this goal. Sunrise expects that its progress in this area will be accelerated primarily by (1) the closing of our acquisition and subsequent integration of Marriott Senior Living Services, Inc. (see “Recent Developments”

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below), (2) the development of new communities primarily through joint ventures and (3) the continuation of our sale/long-term manage back program.

Recent Developments

     In December 2002, Sunrise signed a definitive purchase agreement with Marriott International, Inc. to acquire all of the outstanding stock of Marriott’s wholly owned subsidiary, Marriott Senior Living Services, Inc., which owns and operates senior independent full-service and assisted living communities. Upon the closing of this transaction, which is currently expected to occur in late March 2003, Sunrise expects to assume management of an additional 126 operating properties with a total resident capacity of 23,157. These properties are expected to consist of 110 management contracts and 16 operating leases. Through Sunrise’s acquisition of all of Marriott Senior Living’s outstanding stock, Sunrise will also acquire 12 land parcels as well as certain other assets of Marriott Senior Living. At closing, Marriott Senior Living’s approximately 15,000 employees are expected to remain employed by Marriott Senior Living, which is expected to be renamed Sunrise Senior Living Services. The closing of this transaction is subject to the receipt of required regulatory approvals and other closing conditions.

     To reflect the substantial expansion of Sunrise’s senior living business and the broad scope of services the combined organization will offer, Sunrise intends to change its name to Sunrise Senior Living, Inc. In addition, in connection with this transaction, J.W. Marriott, Jr., chairman and chief executive officer of Marriott International, will join Sunrise’s Board of Directors upon the closing of the transaction.

     Sunrise will pay approximately $88 million in cash, subject to various adjustments set forth in the purchase agreement, to acquire all of the outstanding stock of Marriott Senior Living. Sunrise will also assume approximately $38 million of working capital liabilities and other funding obligations, including credit enhancements, and approximately $23 million of life care endowment obligations, the majority of which are expected to be refinanced with proceeds from the issuance of new endowment obligations as new residents enter the communities. In addition, pursuant to the terms of the purchase agreement, Sunrise expects to pay Marriott approximately $10 million in connection with Marriott Senior Living’s expected acquisition of certain real property prior to the closing of the transaction. Sunrise will use cash on hand, including proceeds from its recently completed sale/long-term manage back transactions, and capacity under its various credit facilities to fund this purchase price.

     The Marriott Senior Living portfolio currently includes 126 properties located in 29 states with a resident capacity of 23,157. The majority of the properties are clustered in major metropolitan markets, which is consistent with Sunrise’s operating strategy. Based on data provided to us by Marriott International, approximately 50 percent (11,605 resident capacity) of the portfolio is assisted living, 34 percent (7,846 resident capacity) is independent living and 16

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percent (3,706 resident capacity) is skilled nursing. At closing, the properties are expected to be owned by six major owner groups with the two largest owners comprising 66 percent of the portfolio. Based on data provided to us by Marriott International, the two largest owners are CNL Retirement Properties, Inc. (38 properties) and Senior Housing Properties Trust (45 properties). Sunrise is aware of pending litigation between Senior Housing Properties Trust and Marriott. The definitive purchase agreement between Sunrise and Marriott provides protection for Sunrise regarding certain management contracts, including the contracts for the Senior Housing Properties Trust properties.

The Senior Living Industry

     The senior living industry encompasses a broad spectrum of senior living service and care options, which include independent living, assisted living and skilled nursing care.

•		Independent living is designed to meet the needs of seniors who choose to live in an environment surrounded by their peers where they receive services such as housekeeping, meals and activities, but are not reliant on assistance with activities of daily living (for example, bathing, eating and dressing), although some residents may contract out for those services.
•		Assisted living meets the needs of seniors who seek housing with supportive care and services including assistance with activities of daily living, Alzheimer’s care and other services (for example, housekeeping, meals and activities).
•		Skilled nursing meets the needs of seniors whose care needs require 24-hour skilled nursing services or who are receiving rehabilitative services following an adverse event (for example, broken hip and stroke).

     In all of these settings, seniors may elect to bring in additional care and services as needed, such as home-health care and end-of-life or hospice care.

     The senior living industry is highly fragmented and characterized by numerous senior living operators. Senior living providers may operate freestanding independent living, assisted living or skilled nursing residences, or communities that feature a combination of senior living options such as continuing care retirement communities (“CCRCs”), which typically consist of large independent living campuses with assisted living and skilled nursing sections. The level of care and services offered by providers varies along with the size of communities, number of residents served and design of properties (for example, purpose-built communities or refurbished structures).

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Sunrise Senior Living Services

     Throughout its history, Sunrise has advocated a resident-centered approach to resident care and service delivery. In select communities, Sunrise offers independent living services, which include housing, meals, transportation, activities and housekeeping, and in some communities, Sunrise provides licensed skilled nursing services for residents who require 24-hour skilled nursing care. The substantial majority of Sunrise’s communities currently are assisted living communities, which offer basic care and services for seniors who need assistance with some activities of daily living.

     Assisted Living

     Upon move-in to an assisted living community, Sunrise assesses each resident, generally with the resident’s family and physician, and develops an individualized service plan for the resident. This individual service plan includes the selection of resident accommodations and a determination of the appropriate level of care for such resident. The plan is periodically reviewed and updated by Sunrise, and communicated to the resident, the resident’s family, or both.

     The range of services offered by Sunrise in its assisted living communities includes: basic care, consisting of assistance with activities of daily living and other personalized support services; plus care, consisting of more frequent and intensive assistance or increased care; and reminiscence care, consisting of care programs and services to help cognitively impaired residents, including residents with Alzheimer’s disease. By offering a full range of services, Sunrise believes it is better able to accommodate residents’ changing needs as they age and develop further physical or cognitive frailties. Daily net resident fees are generally revised annually whereas fees for additional care are revised when a change in care needs arises.

     Basic Assisted Living Care

     Sunrise’s basic care program provided to assisted living residents includes:

	•		assistance with activities of daily living, such as eating, bathing, dressing, personal hygiene, and grooming;
	•		three meals per day served in a common dining room;
	•		coordination of special diets;
	•		24-hour security; emergency call systems in each unit;
	•		transportation to stores and community services;

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	•		assistance with coordination of physician care, physical therapy and other medical services;
	•		health promotion and related programs;
	•		housekeeping services; and
	•		social and recreational activities.

     Assisted Living Plus Care

     Through Sunrise’s assisted living plus care program, assisted living residents who require more frequent or intensive assistance or increased care or supervision are provided extra care and supervision. Sunrise charges an additional daily fee based on additional staff hours of care and services provided. The plus care program allows Sunrise, through consultation with the resident, the resident’s family and the resident’s personal physician, to create an individualized care and supervision program for residents who might otherwise have to move to a more medically intensive facility. At December 31, 2002, approximately 40% of Sunrise’s assisted living residents participated in the plus care program.

     Reminiscence Care

     Sunrise believes its reminiscence care program distinguishes it from many other senior living providers that do not provide such specialized care. Sunrise’s reminiscence program provides the attention, care programs and services needed to help cognitively impaired residents, including residents with Alzheimer’s disease, maintain a higher quality of life. Specially trained staff members provide basic care and other specifically designed care and services to cognitively impaired residents in separate areas of communities. Sunrise charges each cognitively impaired resident a daily fee that includes additional staff time per resident per day. Cognitively impaired residents who require additional care and services pay a higher daily rate based on additional staff hours of care and services provided. At December 31, 2002, approximately 33% of Sunrise’s assisted living residents participated in the reminiscence program.

     Medication Management

     Many of Sunrise’s assisted living residents also require assistance with medications. To the extent permitted by state law, the medication management program includes the storage of medications, the distribution of medications as directed by the resident’s physician and compliance monitoring. Sunrise charges an additional fixed daily fee for this service.

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     Independent Living, Skilled Nursing and Other Services

     In some of its communities, Sunrise also offers independent living for residents and in other communities, Sunrise offers skilled nursing care. Sunrise has team members specially trained to serve residents in these communities in compliance with the appropriate state and federal licensing statutes. Additionally, Sunrise, through its minority interest in a joint venture, offers At-Home Assisted Living services in several east coast markets. The At-Home program offers assisted living services by highly trained staff members in customers’ own homes. The At-Home program offers different services (for example, emergency response/notification, medication set-up and monitoring, health monitoring and assistance with activities of daily living), and levels of care from which customers may choose to meet their specific care needs.

     While Sunrise serves the vast majority of a resident’s needs with its own staff, some services, such as hospice care, physician care, infusion therapy, physical and speech therapy and other home health care services, may be provided to residents at Sunrise communities by third parties. Sunrise’s staff members assist residents in locating qualified providers for such health care services.

     Senior Living Community Resident Fees

     The average daily resident fee, consisting of net resident fees plus additional care fees combined, for owned senior living communities opened or operated by Sunrise for at least 12 months, or that have achieved occupancy percentages of 95% or above, was approximately $109 for 2002, $104 for 2001 and $106 for 2000. Approximately 99% of Sunrise’s resident fee revenues are derived from private pay sources.

     Managed Communities

     In addition to managing its owned communities and communities in which it retains an ownership interest, Sunrise also manages for third-party owners 28 operating communities and two communities under development with a total resident capacity of over 2,500. The management contracts for these properties have various terms, in some cases, running through December 2030. Sunrise intends to continue to capitalize on its brand awareness and further its transformation to a management services company by seeking to enter into third-party management and development contracts with other owners of senior living properties.

Properties

     As of December 31, 2002, Sunrise operated 209 senior living properties with a resident capacity of more than 16,000. In addition, Sunrise had 24 properties with a resident capacity of 2,055 under construction. Sunrise manages both properties that it owns or in which it has an ownership interest and properties owned by third parties. The following charts summarize

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Sunrise’s portfolio of operating properties and properties under construction as of December 31, 2002.

     Operating Properties

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     Properties Under Construction

Facility Development

     As part of its growth strategy, Sunrise develops and acquires senior living communities in top U.S. and international major metropolitan markets. The company develops and acquires these senior living communities for itself and for joint ventures in which it retains an ownership interest. Sunrise targets sites for development and acquisition in major metropolitan areas and their surrounding suburban communities. In evaluating a prospective market, Sunrise considers a number of factors, including:

	•		population;
	•		income and age demographics;

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	•		target site visibility;
	•		probability of obtaining zoning approvals;
	•		estimated level of market demand; and
	•		the ability to maximize management resources in a specific market by clustering its development and operating activities.

   Development

     Since its initial public offering in June 1996 through December 31, 2002, Sunrise has completed development of 119 new model communities with a resident capacity of approximately 10,400. At December 31, 2002, Sunrise had 24 communities under construction with resident capacity of approximately 2,055 and had entered into contracts to purchase or lease 42 additional sites. These sites are located in California, Colorado, Illinois, Louisiana, Michigan, Missouri, New Jersey, New York, Pennsylvania, Washington, Canada, Germany and the United Kingdom. Sunrise is pursuing additional development opportunities as market conditions warrant. Sunrise bases its development primarily upon its model facility that it has developed and refined since the first model facility was designed in 1985. Use of a standard model allows Sunrise to control development costs, maintain facility consistency and improve operational efficiency. Use of the Sunrise model also creates “brand” awareness in Sunrise’s markets.

     The primary milestones in the development process are:

	•		site selection and contract signing;
	•		feasibility;
	•		zoning, site plan approval and building permits; and
	•		completion of construction.

     Once a market has been identified, site selection and contract signing typically take approximately three to nine months. Zoning and site plan approval generally take 12 months and are typically the most difficult steps in the development process due to Sunrise’s selection of sites in mature communities which usually require site rezoning. Community construction normally takes 10 to 12 months. Sunrise believes its extensive development experience gives it an advantage relative to certain of its competitors in obtaining necessary governmental approvals and completing construction in a timely manner. After a community receives a certificate of occupancy, residents usually begin to move in within one month. The cost of any particular community may vary considerably based on a variety of site-specific factors.

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     Consistent with Sunrise’s long-range strategic goal of transforming itself into a senior living management services company, Sunrise expects substantially all of its future development activities to be conducted with joint venture partners. Sunrise has already entered into unconsolidated joint venture arrangements with third parties to develop projects in the United States, United Kingdom, Germany and Canada. Sunrise is providing management and development services to the joint ventures on a contract-fee basis with rights to acquire the assets in the future, but with no obligation to acquire such assets. Sunrise has ownership interests in these joint ventures ranging from seven to twenty percent.

     Sunrise’s development activities are coordinated by its experienced development staff, which has extensive real estate acquisition, engineering, general construction and project management experience. Architectural design and hands-on construction functions are contracted to experienced, outside architects and contractors.

   Facility Acquisitions

     As part of its growth strategy, Sunrise also seeks to acquire attractive senior living communities in top U.S. and international major metropolitan markets. In evaluating possible acquisitions, Sunrise considers various factors, including:

	•		location, construction quality, condition and design of the community;
	•		current and projected community cash flow;
	•		the ability to increase revenue, occupancy and cash flow by providing a full range of senior living services;
	•		costs of community repositioning, including any renovations; and
	•		the extent to which the acquisition will complement Sunrise’s development plans.

     Sunrise has entered into an investment agreement with the private equity group of Deutche Bank Real Estate (“DBREPE”), pursuant to which Sunrise and DBREPE have agreed to form a joint venture to acquire senior living properties in the United States. The venture will have approximately $25 million of available capital and, combined with debt financing, intends to acquire up to $200 million of senior living properties. Sunrise will operate the acquired properties under management agreements and will be responsible for the day-to-day management of the joint venture. During 2002, the joint venture was established and acquired two properties in which Sunrise has a minority ownership position. Sunrise has entered into a long-term management contract to provide management services to these properties.

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     In 1999, Sunrise acquired Karrington Health, Inc., a provider of senior living services, which, as of the time of the acquisition, had developed 50 communities in the United States with a resident capacity of approximately 2,900.

   Sale/Long-Term Manage Back Program

     In 2000, Sunrise announced its intention to sell a select number of its properties, subject to market conditions, while retaining minority ownership interests and long-term management through operating agreements. This strategy, as a normal part of operations, enables Sunrise to reduce debt, re-deploy its capital into new development projects and realize gains on appreciated real estate. As of December 31, 2002, Sunrise has completed the sale of interests ranging from 75% to 100% in 57 communities. Sunrise continues to operate 56 of these 57 communities under long-term operating agreements. Based on a high level of interest from institutional real estate buyers and Sunrise’s plans to accelerate further its transformation to a senior living management services company, Sunrise expects to expand its sale/long-term manage back program to include the sale/long-term manage back of more than 20 properties in 2003.

Company Operations

   Operating Structure

     Sunrise has centralized accounting, finance and other operational functions at the corporate headquarters and regional office levels in order to allow community-based personnel to focus on resident care, consistent with Sunrise’s operating philosophy. Sunrise maintains its corporate headquarters office in McLean, Virginia and a business office in Fairfax, Virginia. Corporate staff members are responsible for: the establishment of company-wide policies and procedures relating to resident care, employee hiring, training and retention, community design and development, and community operations; accounting and finance functions including billing and collection, accounts payable, general finance and accounting, and tax planning and compliance; and providing overall strategic direction to Sunrise. Regional staff are responsible for: overseeing all aspects of community-based operations, including marketing and sales activities; resident care; the hiring of community executives, care managers and other community-based personnel; compliance with applicable local and state regulatory requirements; and implementation of Sunrise’s development and acquisition plans within a given geographic region.

     Sunrise is currently organized into two large geographic regions: East and West, with multiple cluster regions under each. Sunrise has regional offices in Boston, MA, Long Island, NY, Villanova, PA, Atlanta, GA, Chicago, IL, Columbus, OH and Claremont, CA that support the currently opened and/or to-be-opened properties in these markets. All international activities are currently conducted through joint ventures. Sunrise also has regional offices in London, England and Toronto, Canada supporting the Sunrise communities open or under construction in

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those locations. Each of the regions is headed by either a vice president or manager of operations with extensive experience in the senior housing, health care and assisted living industries. Each regional cluster is supported typically by a sales/marketing specialist, a resident care specialist, a human resources specialist and a dining services specialist. Sunrise expects that all regional clusters will create similar staff positions as the number of communities in those regions increases.

   Community Staffing

     Each of Sunrise’s communities has an executive director responsible for the day-to-day operations of the community, including quality of care, resident services, sales and marketing, and financial performance. Each executive director receives specialized training from Sunrise. Sunrise believes that the quality and size of its communities, coupled with its competitive compensation philosophy, have enabled it to attract high-quality, professional executive directors. The executive director is supported by (a) the department heads, who oversee the care and service of the community’s assisted living neighborhood and Alzheimer neighborhood, (b) a nurse, who serves as a case manager responsible for coordinating the services necessary to meet residents’ health care needs and (c) the director of community relations, who is responsible for selling Sunrise services. Other key positions include the dining services coordinator, the program coordinator and the maintenance coordinator.

     Care managers, who work on full-time, part-time and flex-time schedules, provide most of the hands-on resident care, such as bathing, dressing and other personalized care services, including housekeeping, meal service and resident activities. As permitted by state law, care managers who complete a special training program supervise the storage and distribution of medications. The use of care managers to provide substantially all services to residents has the benefits of consistency and continuity in resident care. In most cases, the same care manager assists the resident in dressing, dining and coordinating daily activities. The number of care managers working in a community varies according to the level of care required by the residents of the community and the numbers of residents receiving Alzheimer’s care and plus care services.

     Sunrise believes that its communities can be most efficiently managed by maximizing direct resident and staff contact. Employees involved in resident care, including the administrative staff, are trained in the care manager duties and participate in supporting the care needs of the residents.

   Staff Education and Training

     Sunrise has attracted, and continues to seek, highly dedicated, experienced personnel. Sunrise has developed a formal training program, the “five star training program,” which focuses on providing every employee with the appropriate skills that are required to ensure the highest quality of resident care. All managers and direct care staff must complete a comprehensive

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orientation and the core curriculum, which consists of basic resident care procedures, Alzheimer’s care, communication systems, and activities and dining programming. For the supervisors of direct care staff, additional program levels provide education in medical awareness and management skills.

     For department managers, Sunrise has developed the “mentor program,” which partners each new manager with an experienced, successful manager. Under this program, new managers typically receive several weeks of training including classroom, on the job and corporate orientation. Thereafter, the mentor maintains regular contact with the new manager to provide ongoing support and guidance. Region-based classroom training also is provided monthly for department managers in specialized areas, including Sunrise’s “reminiscence program,” the social and volunteer programs, human resources, staffing and scheduling and medication management.

     Sunrise also has developed the “executive director in training program,” which offers a structured curriculum to train individuals to become executive directors at Sunrise. This program recruits successful, strong leaders from both Sunrise department head ranks as well as professionals from outside Sunrise and provides them with an accelerated training curriculum to prepare them to be Sunrise executive directors.

   Quality Improvement Processes

     Sunrise coordinates quality assurance programs at each of its communities through its corporate headquarters staff and through its regional offices. Sunrise’s commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services provided by Sunrise. In addition to ongoing training and performance reviews of care managers and other employees, Sunrise’s quality control measures include:

     Family and Resident Feedback. Sunrise surveys residents and family members on a regular basis to monitor the quality of services provided to residents. Annual written surveys are used to appraise and monitor the level of satisfaction of residents and their families. A toll-free telephone line also is maintained which may be used at any time by a resident’s family members to convey comments.

     Regular Community Inspections. Community inspections are conducted by regional operations staff on a regular basis. These inspections cover: the appearance of the exterior and grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; resident care plans; the quality of activities and the dining program; observance of residents in their daily living activities; and compliance with government regulations.

     Third-Party Reviews. To further evaluate customer service, Sunrise engages an independent service evaluation company to “mystery shop” Sunrise’s communities. These

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professionals assess Sunrise’s performance from the perspective of a customer, without the inherent biases of a company employee. Each community is “shopped” at least three times per year in person, as well as one or more times per month by telephone. To evaluate medication management, third-party pharmacists conduct periodic reviews of on-site handling and storage of medications, record keeping and coordination of medications.

   Sales and Marketing

     Sunrise’s marketing strategy is intended to create awareness of and preference for Sunrise’s unique product/service positioning, leading to inquiries and visits to Sunrise communities from potential residents and their family members as well as positive referrals from key community sources such as hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing communities, home health agencies, social workers, financial planners and consultants, and others. A central marketing staff develops overall strategies, systems and programs for promoting Sunrise throughout its markets and monitors the success of overall and site/region specific marketing efforts.

     Each community has at least one dedicated sales person responsible for property-specific sales efforts, and each regional cluster generally has a sales leader responsible for coaching and performance oversight of community sales staff as well as marketing coordination with the national marketing staff.

     Core marketing and sales communication elements include local and regional print, local and network radio, direct mail, yellow pages, property signage, personal contacts with prospective referral sources, open houses, health fairs, grand openings for new communities, various community receptions and more.

Competition

     The senior living industry is competitive. Sunrise competes with numerous other companies that provide similar senior living alternatives, such as home health care agencies, community-based service programs, retirement communities, convalescent centers and other senior living providers. Sunrise believes there are no one or more dominant companies in the senior living segment. In general, regulatory and other barriers to competitive entry in the independent living and assisted living segments of the senior living industry are not substantial, but such barriers to competitive entry are more substantial for the skilled nursing segment. Although new construction of senior living communities has declined significantly, Sunrise has experienced and expects to continue to experience competition in its efforts to develop, acquire and operate senior living communities. Some of the present and potential senior living competitors of Sunrise have, or may obtain, greater financial resources than Sunrise. Consequently, Sunrise may encounter competition that could limit its ability to attract residents or expand its business, which could have a material adverse effect on its revenues and earnings.

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Government Regulation

     Senior living communities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. Although requirements vary from state to state and facility to facility, in general, these requirements include:

	•		personnel education, training, and records;
	•		community services, including:
			- administration of medication;
			- assistance with self-administration of medication; and
			- the provision of limited nursing services;
	•		monitoring of resident wellness;
	•		physical plant specifications;
	•		furnishing of resident units;
	•		food and housekeeping services;
	•		emergency evacuation plans, and
	•		resident rights and responsibilities; including, in some states, the right to receive health care services from providers of a resident’s choice.

     Some communities are also licensed to provide independent living services, which generally involve lower levels of resident assistance. Other communities are licensed to provide skilled nursing services, which generally involve significantly higher levels of resident assistance. Communities which are licensed, or will be licensed, to provide skilled nursing services may participate in federal health care programs, including the Medicare and Medicaid programs. Such communities must meet certain federal requirements regarding their operations, including requirements related to physical environment, resident rights, and the provision of health services. Communities which participate in federal health care programs are entitled to receive reimbursement from such programs for care furnished to program beneficiaries. In several of the states in which Sunrise operates or intends to operate, senior living communities also require a certificate of need before the community can be opened. In most states, senior living communities are also subject to state or local building code, fire code, and food service licensing or certification requirements. Senior living communities are subject to periodic survey

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or inspection by governmental authorities to assess and assure compliance with regulatory requirements. Surveys occur on a regular (often annual or bi-annual) schedule, and special surveys may result from a specific complaint filed by a resident, a family member, or a Sunrise competitor.

     From time to time in the ordinary course of business, Sunrise receives deficiency reports, which Sunrise reviews to take appropriate corrective action. Most inspection deficiencies are resolved through a plan of corrective action. However, the reviewing agency typically has the authority to take action against a licensed community where deficiencies are noted. This action may include imposition of fines, imposition of a provisional or conditional license, or suspension or revocation of a license, loss of certification as a provider under federal health care program, or other sanctions. If Sunrise fails to comply with applicable requirements, Sunrise’s business and revenues could be materially and adversely affected. To date, none of the deficiency reports received by Sunrise has resulted in a suspension, fine, or other disposition that has had a material adverse effect on Sunrise’s revenues.

     Regulation of the senior living industry is evolving. Sunrise’s operations could suffer if future regulatory developments, such as mandatory increases in scope and quality of care given to residents or consumer protection regulations are enacted, licensing and certification standards are revised, or a determination is made that the care provided by one or more of Sunrise’s communities exceeds the level of care for which the community is licensed. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the application of existing rules, Sunrise’s operations could be adversely affected. Furthermore, there have been numerous initiatives on the federal and state levels in recent years for reform affecting payment of health care services. Some aspects of these initiatives could adversely affect Sunrise, following the closing of Sunrise’s acquisition of Marriott Senior Living Services, such as reductions in Medicare or Medicaid program funding. For example, the Balanced Budget Act of 1997 established a Prospective Payment System for Medicare skilled nursing facilities under which facilities are paid a federal per diem rate for most covered nursing facility services. Under this system, skilled nursing facilities are no longer assured of receiving Medicare reimbursement adequate to cover the costs of operating the facilities. The Balanced Budget Act of 1997 also repealed rules which required state Medicaid payments to nursing facilities to be “reasonable and adequate” to cover the costs of efficiently and economically operated facilities.

     Sunrise is also subject to certain federal and state anti-remuneration laws, such as the federal health care programs anti-kickback law, which governs various types of financial arrangements among health care providers and others who may be in a position to refer or recommend patients to these providers. This law prohibits direct and indirect remuneration that is intended to induce the referral of patients to, the arranging of services by, or the recommending of, a particular provider of health care items or services. The federal health care program anti-kickback laws has been interpreted to apply to some contractual relationships between health

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care providers and sources of patient referral. Additionally, in some states, Sunrise operates or will operate communities for which bills are submitted to federal and/or state health care programs, including state Medicaid waiver programs for assisted living communities, the Medicare skilled nursing community benefit program, the Medicaid nursing facility benefit program or some other federal or state health care program. Consequently, Sunrise is subject to federal and state laws which prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent, or are for items or services that were not provided as claimed. Violation of any of these laws can result in loss of licensure, civil or criminal penalties, and exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the federal health care program. Similar state laws vary from state to state, are sometimes vague, and have rarely been interpreted by courts or regulatory agencies. Sunrise cannot be sure that these laws will be interpreted consistently with Sunrise’s practices.

     Sunrise is also subject to federal and state laws designed to protect the confidentiality of patient health information. The U.S. Department of Health and Human Services (HHS) has issued rules pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to the privacy of such information. Although many of the announced standards have not yet become effective, they will govern Sunrise’s use and disclosure of health information at some communities. Sunrise is in the process of evaluating the effect of the HIPAA rules on these communities. Although the new health information standards may have a significant effect on the manner in which Sunrise handles health data and communicates with payors at some communities, Sunrise believes that the cost of compliance will not have a material adverse effect on our business, financial condition or results of operations.

Employees

     At December 31, 2002, Sunrise had 11,808 employees, including 7,525 full-time employees, of which 319 were employed at Sunrise’s headquarters and business office. Sunrise believes employee relations are good.

Website

     Sunrise’s Internet website is at http://www.sunriseassistedliving.com. Sunrise makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

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Segments

     Sunrise has two business segments: Sunrise Management Services and Sunrise Properties. For information regarding these segments, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 20 to Sunrise’s consolidated financial statements.

Risk Factors

     In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, set forth below are cautionary statements identifying important factors that could cause actual events or results to differ materially from any forward-looking statements made by or on behalf of us, whether oral or written. We wish to ensure that any forward-looking statements are accompanied by meaningful cautionary statements in order to maximize to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause actual events or results to differ materially from our forward-looking statements.

     Risks Relating to Sunrise’s Business

•

The operations of Sunrise and Marriott Senior Living Services may not be integrated successfully, and the intended benefits of the transaction may not be realized, each of which could have a negative impact on the revenues, expenses and operating results of Sunrise

     The completion of Sunrise’s acquisition of Marriott Senior Living Services poses risks for the ongoing operations of Sunrise, including that:

	-		the Marriott Senior Living Services portfolio may not perform as well as Sunrise anticipates due to various factors, including disruptions caused by the integration of operations with Sunrise, changes in macro-economic conditions and the termination of some of the management agreements that comprise the Marriott Senior Living Services portfolio;
	-		the diversion of management attention to the integration of the operations of Marriott Senior Living Services could have a material adverse effect on the continued operation and expansion of Sunrise’s existing business;
	-		Sunrise may not effectively integrate the operations of Marriott Senior Living Services;

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	-		Sunrise may experience difficulties and incur greater than anticipated expenses related to the assimilation and retention of Marriott Senior Living Services employees; and
	-		following the transaction, Sunrise may not achieve expected cost savings and operating efficiencies, such as the elimination of redundant administrative costs and property management costs.

If Sunrise fails to successfully integrate Marriott Senior Living Services and/or fails to realize the intended benefits of the transaction, such failure could have a material adverse effect on the revenues, expenses and operating results of Sunrise and the market price of Sunrise’s common stock could decline from its market price at the time of completion of the acquisition.

•

Liability claims against us in excess of insurance limits could adversely affect our financial condition and results of operations.

     The senior living business entails an inherent risk of liability. In recent years, we, as well as other participants in our industry, have become subject to an increasing number of lawsuits alleging negligence or related legal theories. Many of these lawsuits involve large claims and significant legal costs. We maintain liability insurance policies in amounts and with the coverage and deductibles we believe are adequate based on the nature and risks of our business, historical experience and industry standards. The liability insurance currently maintained by us has the following coverage limits:

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     We cannot be sure that claims will not arise that are in excess of our coverage or not covered by our insurance policies. Also, the above deductible, or self-insured retention, is accrued based on an actuarial projection of future liabilities. In the event this accrual is inadequate, our operating results could be negatively affected. If a successful claim is made against us and it is not covered by our insurance or exceeds the policy limits, our financial condition and results of operations could be materially and adversely affected. Claims against us, regardless of their merit or eventual outcome, also could have a material adverse effect on our ability to attract residents or expand our business and could require our management to devote

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time to matters unrelated to the operation of our business. We also have to renew our policies every year and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases.

•

Any delays we experience in developing new facilities could impede our growth and adversely affect our revenues and results of operations.

     Our growth objectives include the development of a significant number of new senior living communities, both domestically and internationally and either directly or through joint ventures with development partners. We currently have 20 communities under construction with a resident capacity of approximately 1,675 residents. As of December 31, 2002, we had entered into contracts to purchase or lease 42 additional development sites. Of these sites, we have received zoning approval from the applicable municipal authority to construct a senior living facility on 36 sites and we are pursuing zoning approval on the remaining sites. In the ordinary course of our business, we evaluate new sites and opportunities for further growth on an ongoing basis.

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

	•		difficulties or delays experienced in obtaining zoning, land use, building, occupancy, licensing and other required governmental permits for the construction of new facilities;
	•		failure to complete construction of new communities on budget and on schedule;
	•		failure of third-party contractors and subcontractors to perform under their contracts;
	•		Shortages of labor or materials that could delay projects or make them more expensive;
	•		adverse weather conditions that could delay construction projects;
	•		difficulties in finding suitable sites for future development activities at acceptable prices; and
	•		increased costs as a result of addressing changes in laws and regulations or how existing laws and regulations are applied.

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     We cannot assure you that we will not experience delays in completing facilities under construction or in development or that we will be able to identify suitable sites at acceptable prices for future development activities. If we fail to achieve our development plans, our growth could slow, which would adversely impact our revenues and results of operations.

•

Our failure to secure additional financing to fund our development activities could slow our growth and could adversely affect our revenues and results of operations.

     We will need to obtain additional financial resources to fund our development and construction activities. We currently estimate that the existing credit facilities, together with existing working capital, proceeds from sales of selected senior living communities as a normal part of our operations, financing commitments and financing expected to be available, will be sufficient to fund communities currently under construction. Additional financing will, however, be required to complete additional development and to refinance existing indebtedness. We estimate that it will cost approximately $54 million to complete the communities we currently have under construction. As of December 31, 2002, we had entered into contracts to purchase or lease 42 additional sites for a total contracted purchase price of $92 million. We estimate that it will cost approximately $445 million to develop these communities. We expect that our cash flow from operations, together with borrowings under existing credit facilities and proceeds from expected future sales of selected senior living facilities, will be sufficient to fund the development sites for these additional senior living facilities 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. If we are not able to obtain additional financing on favorable terms, we may have to delay or eliminate all or some of our development projects, which could adversely affect our revenues and results of operations.

•

Our failure to generate sufficient cash flow to cover required interest, principal and operating lease payments could result in defaults of the related debt or operating leases.

     At December 31, 2002, we had mortgage, construction and other indebtedness totaling $457 million and unused lines of credit totaling $304 million. We intend to continue financing our communities through mortgage financing and possibly operating leases or other types of financing, including lines of credit. We cannot assure you that we will generate sufficient cash flow from operations to cover required interest, principal and operating lease payments. Any payment or other default could cause the lender to foreclose upon the facilities securing the indebtedness or, in the case of an operating lease, could terminate the lease, with a consequent loss of income and asset value to us. In some cases, the indebtedness is secured by the community and a pledge of our interests in the community. In the event of a default, the lender could avoid judicial procedures required to foreclose on real property by foreclosing on the pledge instead, thus accelerating the lender’s acquisition of the facility. Further, because our

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mortgages generally contain cross-default and cross-collateralization provisions, a payment or other default by us could affect a significant number of facilities.

•

Our failure to comply with financial covenants contained in debt instruments could result in the acceleration of the related debt.

     There are various financial covenants and other restrictions in our debt instruments, including provisions which:

	•		require us to meet specified financial tests. For example, our $265 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 $265 million construction line of credit requires the lender’s consent for any merger where Paul Klaassen or Teresa Klaassen does not serve as our chairman of the board and chief executive officer;
	•		restrict the ability of our subsidiaries to borrow additional funds, dispose of assets or engage in mergers or other business combinations without lender consent; and
	•		require that we maintain minimum occupancy levels at our facilities. For example, our $265 million construction line of credit requires that 85% occupancy be achieved after 15 months for a newly opened facility and, following this 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 prior to its stated due date. We cannot assure you that we could pay this debt if it became due. Further, our construction line of credit contains a cross-default provision pursuant to which a default on other indebtedness by us or by any of our consolidated subsidiaries under the 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.

•

Our failure to sell selected senior living facilities in the future could adversely affect our revenues and results of operations, and harm our ability to finance the construction of new communities.

     As part of our normal operations, we sell selected senior living communities and, in connection with these sales, we generally enter into long-term management contracts to manage

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these communities and, in many cases, retain an equity interest in the projects. This strategy of selling selected senior living communities has enabled us to reduce our debt, re-deploy our capital into new development projects and realize gains on appreciated real estate. The sale of our facilities is subject to various market conditions and we cannot assure you that we can continue to sell communities 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 senior living communities, our revenues, results of operations and our ability to finance the construction of new facilities could be materially adversely affected.

•

Interest rate increases could adversely affect our earnings because a portion of our total debt is floating rate debt.

     At December 31, 2002, we had approximately $114 million of floating-rate debt at a weighted average interest rate of 3.87%. Debt incurred in the future also may bear interest at floating rates. Therefore, increases in prevailing interest rates could increase our interest payment obligations, which would negatively impact earnings. For example, a one percent increase in interest rates would increase annual interest expense by approximately $1 million based on the amount of floating-rate debt at December 31, 2002.

•

Early termination of our management service agreements could cause a loss in revenues.

     Approximately $180 million in revenues were generated through third-party and joint venture management service agreements in 2002. We provide management services to third party and joint venture owners to operate senior living communities and provide management and consulting services to third parties on market and site selection, pre-opening sales and marketing, start-up training and management services for facilities under development and construction. The terms of our third-party management service agreements generally are five years and the terms of our management agreements entered into in connection with our sale/long-term manage back transactions generally range from 25 to 30 years. In most cases, either party to the agreements may terminate upon the occurrence of an event of default caused by the other party. In addition, subject to our rights to cure deficiencies, property owners may terminate us as manager if any licenses or certificates necessary for operation are revoked, if there is a change in control of Sunrise or if we do not maintain a minimum stabilized occupancy level in the community. Also, in some instances, a property owner may terminate the management agreement relating to a particular community if we are in default under other management agreements relating to other communities owned by the same property owner or its affiliates. Early termination of our management agreements could cause a loss in revenues.

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•

Our revenues have historically depended on private pay sources.

     Assisted living services, which represents a substantial portion of our senior living services, currently are not generally reimbursable under government reimbursement programs, such as Medicare and Medicaid. Accordingly, substantially all of our resident fee revenues are derived from private pay sources consisting of income or assets of residents or their family members. In general, because of the expense associated with building new facilities and the staffing and other costs of providing the assisted living services at these facilities, only seniors with income or assets meeting or exceeding the comparable median in the regions where our facilities are located typically can afford to pay the daily resident fees.

•

If development of new senior living communities outpaces demand, we could experience decreased occupancy, depressed margins or lower operating results.

     We believe that some secondary senior living markets have become or are on the verge of becoming overbuilt. Regulation and other barriers to entry into the assisted living industry, which represents a substantial portion of our senior living services, are not substantial. Consequently, development of new senior living communities could outpace demand. Overbuilding in any of our market areas could, therefore, cause us to experience decreased occupancy, depressed margins or lower operating results.

•

Termination of resident agreements could adversely affect our revenues and earnings.

     State regulations governing assisted living facilities require written resident agreements with each resident. Most of these regulations also require that each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, the resident agreements signed by us allow residents to terminate their agreement on 30 days’ notice. Thus, we cannot contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with specified leasing periods of up to a year or longer. If a large number of residents elected to terminate their resident agreements at or around the same time, then our revenues and earnings could be adversely affected. In addition, the advanced age of our average residents means that the resident turnover rate in our senior living facilities may be difficult to predict.

•

If we do not effectively manage our growth, our business and financial results could be adversely affected.

     We expect that the number of our owned and operated communities will increase substantially as we pursue our future growth plans. This rapid growth will place demands on our management resources. Our ability to manage our growth effectively will require that we continue to expand our operational, financial and management systems and that we continue to

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attract, train, motivate, manage and retain key employees. If we are unable to manage our growth effectively, our business and financial results could be adversely affected.

•

Departure of our key officers could harm our business.

     Our future success depends, to a significant extent, upon the continued services of Paul J. Klaassen, our chairman of the board and chief executive officer and founder; Teresa M. Klaassen, our executive vice president, secretary, chief cultural officer and founder; and Thomas B. Newell, our president. Other than Mr. Klaassen, who entered into a five-year employment agreement with us in September 2000, none of our key officers have employment agreements. If we were to lose the services of any of these individuals, our business and financial results could be adversely affected.

•

The discovery of environmental problems on any of the communities we own or operate could result in substantial costs to us.

     Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removal or remediation of hazardous or toxic substances, including asbestos-containing materials, that could be located on, in or under a property. These laws and regulations often impose liability without regard to whether or not the owner or operator knew of, or was responsible for, the presence or release of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial. In addition, the liability of an owner or operator is generally not limited and could exceed the property’s value and the aggregate assets of the owner or operator. An owner or operator or an entity that arranges for the disposal of hazardous or toxic substances at a disposal site also may be liable for the costs of any required remediation or removal of hazardous or toxic substances at the disposal site.

     We engage consultants to conduct Phase I environmental studies of development sites that are placed under contract. If the Phase I study indicates the existence or the possibility of the existence of hazardous or toxic substances on the property, a Phase II study is requested and performed. The Phase I and Phase II studies, as applicable, may not reveal all environmental liabilities. There could be, therefore, material environmental liabilities of which we are unaware. In connection with the ownership or operation of our communities, we could be liable for the costs of remediation or removal of hazardous or toxic substances. We also could be liable for other costs, including governmental fines and damages for injuries to persons or properties. As a result, the presence, with or without our knowledge, of hazardous or toxic substances at any property owned or operated by us, or acquired or operated by us in the future, could have an adverse effect on our financial condition or earnings.

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•

Failure to comply with existing environmental laws regarding management of infectious medical waste could harm our business and financial condition.

     Some of our facilities generate infectious medical waste due to the illness or physical condition of the residents, including, for example, blood soaked bandages, swabs and other medical waste products and incontinence products of those residents diagnosed with an infectious disease. The management of infectious medical waste, including handling, storage, transportation, treatment and disposal, is subject to regulation under various laws, including federal and state environmental laws. These environmental laws set forth the management requirements, as well as permit, recordkeeping, notice and reporting obligations. Each of our facilities has an agreement with a waste management company for the proper disposal of all infectious medical waste. Any finding that we are not in compliance with these environmental laws could adversely affect our business operations and financial condition.

     Because these environmental laws are amended from time to time, we cannot predict when and to what extent liability may arise. In addition, because these environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our facilities.

Risks Relating to the Senior Living Industry

•

Competition in our industry is high and may increase, which could impede our growth and have a material adverse effect on our revenues and earnings.

     The senior living industry is highly competitive. We compete with numerous other companies that provide similar senior living alternatives, such as home health care agencies, facility-based service programs, retirement communities, convalescent centers and other senior living providers. In general, regulatory and other barriers to competitive entry in the independent and assisted living segments of the senior living industry are not as substantial as in other health industries, but such barriers to competitive entry are more substantial for the skilled nursing segment of the senior living industry. In pursuing our growth strategies, we have experienced and expect to continue to experience competition in our efforts to develop, acquire and operate senior living facilities. Consequently, we may encounter competition that could limit our ability to attract new residents or expand our business, which could have a material adverse effect on our revenues and results of operations.

•

Our success depends on attracting and retaining skilled personnel, and increased competition for or a shortage of skilled personnel could increase our staffing and labor costs, which we may not be able to offset by increasing the rates we charge to our residents.

     We compete with various health care services providers, including other elderly care providers, in attracting and retaining qualified and skilled personnel. We depend on our ability to

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attract and retain skilled management personnel who are responsible for the day-to-day operations of each of our residences. A shortage of nurses or other trained personnel or general inflationary pressures may require that we enhance our pay and benefits package to compete effectively for such personnel. We may not be able to offset such added costs by increasing the rates we charge to our residents. If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business and operating results could be harmed. Employee compensation, including salary increases and the hiring of additional personnel to support our growth initiatives, have previously had a negative impact on operating margins and may again do so in the foreseeable future.

•

The need to comply with government regulation of senior living facilities may increase our costs of doing business and increase our operating costs.

     Senior living facilities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. Although requirements vary from state to state and facility to facility, in general, these requirements include:

	•		personnel education, training, and records;
	•		facility services, including:
			— administration of medication;
			— assistance with self-administration of medication; and
			— the provision of limited nursing services;
	•		monitoring of resident wellness;
	•		physical plant specifications;
	•		furnishing of resident units;
	•		food and housekeeping services;
	•		emergency evacuation plans; and

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•

resident rights and responsibilities, including in some states the right to receive health care services from providers of a resident’s choice.

     Some of our communities are licensed to provide skilled nursing services, which generally involve significantly higher levels of resident assistance. Communities which are licensed, or will be licensed, to provide skilled nursing services may participate in federal health care programs, including the Medicare and Medicaid programs. Such communities must meet certain federal requirements regarding their operations, including requirements related to physical environment, resident rights, and the provision of health care services. Communities which participate in federal health care programs are entitled to receive reimbursement from such programs for care furnished to program beneficiaries. In several of the states in which we operate or intend to operate, senior living communities also require a certificate of need before the community can be opened. In most states, senior living communities also are subject to state or local building code, fire code and food service licensing or certification requirements. Like other health care communities, senior living communities are subject to periodic survey or inspection by governmental authorities to assess and assure compliance with regulatory requirements. Surveys occur on a regular (often annual or bi-annual) schedule, and special surveys may result from a specific complaint filed by a resident, a family member, or a Sunrise competitor.

     From time to time in the ordinary course of business, we receive deficiency reports, which we review to take appropriate corrective action. Most inspection deficiencies are resolved through a plan of corrective action. However, the reviewing agency typically has the authority to take action against a licensed facility where deficiencies are noted. This action may include imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license, loss of certification as a provider under federal health care programs or other sanctions. If we fail to comply with applicable requirements, our business and revenues could be materially and adversely affected. To date, none of the deficiency reports received by us has resulted in a suspension, fine or other disposition that has had a material adverse effect on our revenues.

     Regulation of the senior living industry is evolving. Our operations could suffer if future regulatory developments, such as mandatory increases in scope and quality of care given to residents or consumer protection regulations are enacted, licensing and certification standards are revised or a determination is made that the care provided by one or more of our facilities exceeds the level of care for which the community is licensed. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the application of existing rules, our operations could be adversely affected. Furthermore, there have been numerous initiatives on the federal and state levels in recent years for reform affecting payment for health care services. Some aspects of these initiatives could adversely affect Sunrise, such as, following

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the closing of Sunrise’s acquisition of Marriott Senior Living Services, reductions in Medicare or Medicaid program funding. For example, the Balanced Budget Act of 1997 (BBA) established a Prospective Payment System for Medicare skilled nursing facilities under which facilities are paid a federal per diem rate for most covered nursing facility services. Under this system, skilled nursing facilities are no longer assured of receiving Medicare reimbursement adequate to cover the costs of operating the facilities. The BBA also repealed rules which required state Medicaid payments to nursing facilities to be “reasonable and adequate” to cover the costs of efficiently and economically operated facilities.

     We also are subject to certain federal and state anti-remuneration laws, such as the federal health care programs anti-kickback law, which governs various types of financial arrangements among health care providers and others who may be in a position to refer or recommend patients to these providers. This law prohibits direct and indirect remuneration that is intended to induce the referral of patients to, the arranging of services by, or the recommending of, a particular provider of health care items or services. The federal health care program anti-kickback law has been interpreted to apply to some contractual relationships between health care providers and sources of patient referral. Additionally, in five states, we operate facilities for which bills are submitted to federal and/or state health care programs, including state Medicaid waiver programs for senior living facilities, the Medicare skilled nursing facility benefit program, the Medicaid nursing facility benefit program or some other federal or state health care program. Consequently, we are subject to federal and state laws which prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent, or are for items or services that were not provided as claimed. Violation of any of these laws can result in loss of licensure, civil or criminal penalties, and exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the federal health care program. Similar state laws vary from state to state, are sometimes vague and have rarely been interpreted by courts or regulatory agencies. We cannot be sure that these laws will be interpreted consistently with our practices.

     Sunrise is also subject to federal and state laws designed to protect the confidentiality of patient health information. The U.S. Department of Health and Human Services (“HHS”) has issued rules pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) relating to the privacy of such information. Although many of the announced standards have not yet become effective, they will govern Sunrise’s use and disclosure of health information at some communities. Sunrise is in the process of evaluating the effect of the HIPAA rules on these communities. Although the new health information standards may have a significant effect on the manner in which Sunrise handles health data and communicates with payors, Sunrise believes that the cost of compliance will not have a material adverse effect on our business, financial condition or results of operations.

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Item 2. Properties

     Sunrise leases its corporate offices, regional operations and development offices, and warehouse space under various leases. The leases have terms of five to twelve years. The corporate headquarters lease commenced upon completion of the building in July 1999 and expires in July 2011. The lease has an initial annual base rent of $1 million. The base rent escalates approximately 2.5% per year in accordance with a base rent schedule. In September 1999, Sunrise amended another corporate lease to increase the amount of leased premises and extend the maturity date to October 2004. The initial annual lease payments of the business office leases amount to $462,000, and the base rent is subject to annual increases based on the consumer price index from a minimum of 2% to a maximum cap of 3% per year. The initial annual base rent payments under the warehouse lease amount to $148,000, subject to annual increases of 3%. Also required are an amortization rent of $88,000 and a portion of operating expenses. Various other leases expire during 2003 and 2004.

     Sunrise has also entered into operating leases for five communities and seven long-term ground leases related to other communities. The operating lease terms vary from 15-20 years, with two ten-year extension options, and ground leases have terms of 15 to 99 years. For information regarding these leases, see Note 15 to Sunrise’s consolidated financial statements. For information regarding communities owned by Sunrise or in which it holds interests, see “ Item 1. Business.”

Item 3. Legal Proceedings

     Sunrise is involved in various lawsuits and claims arising in the normal course of business. In the opinion of Sunrise’s management, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on Sunrise’s business, financial condition, and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     Sunrise’s common stock is traded on the New York Stock Exchange under the symbol “SRZ.” Trading of Sunrise’s common stock commenced on May 31, 1996. Our common stock began trading on the New York Stock Exchange on May 23, 2001 under the symbol ''SRZ.’’ Prior to that date, our common stock was traded on The Nasdaq National Market under the symbol ''SNRZ.’’ As of March 14, 2003, there were 263 stockholders of record. No cash

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dividends have been paid in the past. The following table sets forth, for the quarterly periods indicated, the high and low sales prices of our common stock:

Quarterly Market Price Range of Common Stock

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Item 6. Selected Financial Data

     The selected consolidated financial data set forth below should be read in conjunction with Sunrise’s Consolidated Financial Statements and notes thereto included elsewhere herein.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read together with the information contained in our consolidated financial statements, including the related notes, and other financial information appearing elsewhere herein. This management’s discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Although we believe the expectations reflected in such forward looking statements are based on reasonable assumptions, there can be no assurance that our expectations will be realized. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, 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, success in integrating Marriott Senior Living’s operations, satisfaction of closing conditions and availability of financing for development and acquisitions. Some of these factors are discussed elsewhere herein. 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 senior living services in the United States, Canada and the United Kingdom. Founded in 1981, we began with a simple but innovative vision — to create an alternative senior living option that would emphasize quality of life and quality of care. As of December 31, 2002, we operated 200 communities in the United States, seven communities in Canada and two communities in the United Kingdom, with a total resident capacity of more than 16,000, including 181 communities owned by us or in which we have an ownership interest and 28 communities managed for third parties. We have traditionally served as an operator of assisted living communities but have also offered independent living services and skilled nursing services at some communities. In addition to operating senior living communities, we also develop senior living communities for ourselves and for joint ventures in which we retain an ownership interest.

     Our long-range strategic objective is to transform ourselves into a senior living management services company. We believe this transformation will result in our revenue and earnings becoming increasingly based on long-term management contracts resulting in more stable and predictable revenue and earnings streams. Through the execution of our business plan, we have made significant progress toward this goal. We expect that our progress in this area will be accelerated primarily by (1) the closing of our acquisition and subsequent integration of Marriott Senior Living (see “Recent Developments” below), (2) the development of new communities primarily through joint ventures and (3) the continuation of our sale/long-term manage back program.

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Recent Developments

     In December 2002, we signed a definitive purchase agreement with Marriott International, Inc. to acquire all of the outstanding stock of Marriott’s wholly owned subsidiary, Marriott Senior Living Services, Inc., which owns and operates senior independent full-service and assisted living communities. Upon the closing of this transaction, which is currently expected to occur in late March 2003, we expect to assume management of an additional 126 operating properties with a total resident capacity of 23,157. These properties are expected to consist of 110 management contracts and 16 operating leases. Through our acquisition of all of Marriott Senior Living’s outstanding stock, we will also acquire 12 land parcels as well as certain other assets of Marriott Senior Living. At closing, Marriott Senior Living’s approximately 15,000 employees are expected to remain employed by Marriott Senior Living, which is expected to be renamed Sunrise Senior Living Services. The closing of this transaction is subject to the receipt of required regulatory approvals and other closing conditions.

     We will pay approximately $88 million in cash, subject to various adjustments set forth in the purchase agreement, to acquire all of the outstanding stock of Marriott Senior Living. We will also assume approximately $38 million of working capital liabilities and other funding obligations, including credit enhancements, and approximately $23 million of life care endowment obligations, the majority of which are expected to be refinanced with proceeds from the issuance of new endowment obligations as new residents enter the communities. In addition, pursuant to the terms of the purchase agreement, Sunrise expects to pay Marriott approximately $10 million in connection with Marriott Senior Living’s expected acquisition of certain real property prior to the closing of the transaction. We will use cash on hand, including proceeds from our recently completed sale/long-term manage back transactions, and capacity under our various credit facilities to fund the purchase price.

     The Marriott Senior Living portfolio currently includes 126 properties located in 29 states with a resident capacity of 23,157. The majority of the properties are clustered in major metropolitan markets, which is consistent with Sunrise’s operating strategy. Based on data provided to us by Marriott International, approximately 50 percent of the resident capacity of the portfolio is assisted living, 34 percent is independent living and 16 percent is skilled nursing. At closing, the properties are expected to be owned by six major owner groups with the two largest owners comprising 66 percent of the portfolio. Based on data provided to us by Marriott International, the two largest owners are CNL Retirement Properties, Inc. (38 properties) and Senior Housing Properties Trust (45 properties). We are aware of pending litigation between Senior Housing Properties Trust and Marriott. The definitive purchase agreement between Sunrise and Marriott provides protection for us regarding certain management contracts, including the contracts for the Senior Housing Properties Trust properties.

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Critical Accounting Policies

Development of Properties

     We undertake to develop a number of wholly owned senior living properties each year. We also develop senior living properties in partnership with others. We believe we have maintained a disciplined approach to site selection and refinement of our operating model, first introduced over 20 years ago, and are constantly searching for ways to improve our properties.

     At December 31, 2002, we had seven wholly owned properties under construction with a resident capacity of over 500 residents. With respect to these development properties, we are required to fund the construction of the property not otherwise financed by construction loans, capitalize the property development costs associated with construction, recognize initial operating losses from the property during the initial one to two years prior to the property achieving occupancy stabilization and recognize ongoing depreciation expense associated with owning the real estate. We are committed to this investment in costs and expenses because we have historically been able to create significant value through the successful development and operation of wholly owned prototype properties. In 2002, start-up losses for 100% owned properties that have not reached stabilized occupancy were $6 million and depreciation expense for our owned properties was $20 million.

     We also enter into development joint ventures in order to reduce our initial capital requirements, while enabling us to enter into long-term management agreements that are intended to provide us with a stream of revenue. Additionally, these development joint ventures allow us to reduce the risk of our international expansion, which we conduct through joint ventures, with the assistance of knowledgeable international partners. When development is undertaken in partnership with others, our joint venture partners provide significant cash equity investments, and we take a minority interest in such ventures. Additionally, non-recourse third-party construction debt is obtained to provide the majority of funds necessary to complete development. At December 31, 2002, these joint ventures have developed or are developing 51 properties (14 of which are under construction) with approximately $547 million of third-party debt and approximately $144 million of third-party equity.

     As a part of our operating strategy, we may provide limited debt guarantees to certain of our development joint ventures. Unless otherwise stated, we would be required to perform under a debt guarantee if the business venture failed to perform under the debt agreement and the bank pursued our guarantee. We currently guaranty $34 million of debt four our development joint ventures. Of the $34 million, $18 million are last dollar debt guarantees on international development. Last dollar guarantee means the third-party debt would have to default, the bank would have to enforce any remedies against the venture, including foreclosure, after which we would have to provide any required funds to make up any difference between the loan amount and the amount recovered from such enforcement. Of the $34 million in debt guarantees to development joint ventures, $21 million are removed upon stabilization of the underlying properties. The remaining $13 million will remain in place throughout the term of the loan. We receive a fee in all situations where we have provided a debt guarantee. These fees are

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recognized over the period covered by the respective debt guarantee. To date, we have not been required to fund any debt guarantees due to the positive performance of the underlying properties. At December 31, 2002, we do not believe that we will be required to fund under our current outstanding debt guarantees and therefore no liabilities are reflected in our financial statements for these debt guarantees. If we were required to fund a debt guarantee, we would loan the joint venture the required funds at the prevailing market interest rate. If circumstances were to suggest that any amounts with respect to these loans would be uncollectible, we would establish a reserve to write-down the loan to its collectible value.

     For all of our development joint ventures, we earn pre-opening fees for site selection, zoning, construction supervision, employee selection, licensing, training and marketing efforts. These fees are included in the “Management and contract services” line item on our consolidated income statement. As we are minority owners in these joint ventures, we only record the fee revenue associated with the third-party ownership percentage of the joint venture. For example, when our joint venture partner has a 75% ownership interest in the joint venture, we only record 75% of the fee revenue.

     As part of our fee-development for joint ventures, we typically guarantee that properties will be completed at budgeted costs approved by all partners in the joint venture. Budgeted costs typically include significant contingency reserves for unforeseen costs and potential overruns. We would be required to fund these guarantees if the actual costs of development exceeded the approved budgeted costs. At December 31, 2002, thirteen properties are under construction and subject to completion guarantees. We have over 20 years’ experience in the development and construction of senior living properties. Our construction contractors are experienced in building our prototype and assume much of the risk of on-time and on-budget completion by executing fixed-price contracts. Typically, the terms of these guarantees provide for no limitation to the maximum potential future payments under the guarantee. In certain agreements, if amounts are required to be funded by us, they would become loans to the venture and earn interest. We closely monitor these projects and do not expect to fund any amounts under these development completion guarantees during 2003. Therefore, no liabilities are reflected in our financial statements for these guarantees. If we were required to provide funds under a development completion guarantee, we could provide additional capital contributions to the joint venture to meet our obligation, if provided in the joint venture and guarantee agreement, or we would expense amounts provided under the development completion guarantee.

     In addition to the third-party debt, we may provide financing necessary to complete the construction of the properties within these joint ventures. These loans are presented on our consolidated balance sheet in the “Notes receivable” line item and were $77 million at December 31, 2002. This financing is provided at negotiated prevailing market interest rates. We monitor the collectibility of these notes based on the current performance of the open properties, the budgets and projections for future performance and the estimated fair value that has been created by the successful completion and operation of these properties. To date, we have not recorded any reserves against these notes based on our analysis of the preceding factors and, at December 31, 2002, expect that repayment of these notes will be made. If circumstances were to suggest that any amounts with respect to these notes would be uncollectible, we would establish a reserve to write-down the note to its collectible value.

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     In addition to the foregoing, we may provide limited debt guarantees to certain of our joint ventures. Unless otherwise stated, we would be required to perform under a debt guarantee if the business venture failed to perform under the debt agreement and the bank pursued our guarantee. At December 31, 2002, we have guaranteed $16 million of debt for our business ventures which represents our maximum exposure under our debt guarantees. Of the $16 million, $2 million of guarantees are for our sale long-term manage back partnerships. These guarantees are removed upon reaching certain occupancy and debt service coverage targets within the partnership. Of the $16 million, $4 million represents a debt guarantee to a joint venture that was acquired in the Karrington acquisition. This debt guarantee remains in place throughout the term of the loan. Sunrise has provided $10 million of debt guarantees to hospital partnerships that remain in place throughout the term of the loan. To date we have not been required to fund any debt guarantees.

Management of Properties

     We manage and operate properties wholly owned by us, owned by joint ventures in which we have a minority ownership interest and owned completely by third parties. For the properties that we manage for third parties, we typically are paid a management fee of approximately 5% to 8% of the property’s revenue. In addition, in certain management contracts, we have the opportunity to earn incentive management fees based on monthly or yearly operating or cash flow results. Management fee revenue is included in the “Management and contract services” line item on our consolidated income statement.

     As a part of some third party management contracts, we may provide an operating deficit guarantee. This means that if a property has depleted all of its operating reserves and does not generate enough cash flow during a month to cover its expenses, we would provide a loan to the property to cover the cash shortfall. These guarantees are generally included within our joint venture development portfolios and usually are provided for a limited period of time, generally until the property reaches stabilization. Typically, the terms of these operating deficit guarantees provide for no limitation to the maximum potential future payments under the guarantee. Currently, 26 operating properties are subject to a Sunrise operating deficit guarantee and 13 additional properties will be subject to a guarantee upon opening. Sunrise funded $300,000 under these guarantees in 2002 related to four properties in the international joint ventures and expects to fund approximately $200,000 in 2003 under these guarantees. The amounts funded in 2002 were recorded as loans to the ventures.

Sale/Long-Term Manage Back Program

     In 2000, we announced our intention to sell selected owned properties as a normal part of our operations and retain long-term management contracts and, in many cases, minority equity interests in the properties. We believe that this strategy of selling selected properties as part of our normal operations has and will continue to enable us to reduce our debt, re-deploy our capital into new development projects and realize cash gains on appreciated real estate. Under our sale/long-term manage back program, we sell wholly owned properties that we previously

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developed. This approach requires that we reflect in our income statement many expenses associated with these properties prior to their sale, including certain development expenses, start-up losses and depreciation.

     We have performed under our sale/long-term manage back program by selling some properties 100% to third-parties and retaining a long-term management contract and selling some properties to joint ventures in which we have a minority ownership interest, generally ranging from 20% to 25%. If we sell 100% of a property to a third-party owner, we recognize as a gain from the sale the difference between the purchase price and the book value of the property, less the costs to sell. Generally accepted accounting principles require that we remove the book value of the property from the “Property and equipment” line item on our consolidated balance sheet and remove from liabilities any debt paid off or assumed by the new owner in the transaction.

     If we sell a property to a joint venture in which we have a minority ownership interest, we will recognize as a gain from the sale the difference between the purchase price and the book value of the property, less the costs to sell, adjusted to reflect only the gain associated with the third-party ownership in the joint venture. Generally accepted accounting principles require that we not record a gain on the portion of the sale associated with our remaining ownership in the joint venture. Generally accepted accounting principles also require that we record, at historical cost basis, our remaining ownership of the property sold and debt assumed by the joint venture as an investment. This investment is included in the “Investment in unconsolidated senior living properties” line item on the balance sheet. Further, as is the case with the sale of a 100% interest in a property, generally accepted accounting principles require that we remove the book value of the property from the “Property and equipment” line on our consolidated balance sheet and remove from liabilities any debt assumed by the new owner in the transaction. We generally do not provide seller financing in these transactions.

     The recognition of the gain from these sales, as calculated above, in our consolidated income statement, which is recorded in the “Income from property sales” line item, is determined by the terms of the purchase and sale agreement. Often, the purchasers in these transactions require that the properties perform at a certain operating level for up to one-year following the sale transaction. The operating contingencies placed in these agreements require us, in accordance with generally accepted accounting principles, to defer a portion of the gains until such operating contingencies have been met. If the operating contingencies are not met for an identified period, we would be required to repay a portion of the cash proceeds related to the specific contingency and would not be able to recognize the portion of the gain associated with that contingency. There have been sale transactions in this sale/long-term manage back program that have not required such operating contingencies. In these instances, we would record the gain in the period in which the sale occurred. The balance of the unrecognized gains on properties sold in prior periods is included in the “Deferred revenue” line of our consolidated balance sheet.

     For financial statement purposes, we record a provision for income taxes on all gains we recognize on the sale of properties at the applicable statutory rate. For federal income tax purposes, many of our sales are treated as tax-free exchanges.

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Results of Operations

     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 provided to 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. In 2002, 2001, and 2000, resident fees and management and contract services comprised 85%, 85% and 91% of total operating revenues, respectively. The balance of our total operating revenues was derived from income from property sales.

     Residents, their families or other responsible parties typically pay resident fees monthly. In each of 2002, 2001 and 2000, 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. 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 and contract services income includes management fees for operating properties, which are generally in the range of 5% to 8% of a managed property’s total operating revenue for properties 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 senior 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.

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     Consolidated

     Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

     We continued to experience growth in operations in the year ended December 31, 2002 and continued to capitalize on our brand awareness by accepting additional third-party management and development contracts. During 2002, we began operating 21 additional properties in which we have an ownership interest and managing 7 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 18% to $506 million for the year ended December 31, 2002 from $428 million for the year ended December 31, 2001. Net income increased 11% to $55 million for the year ended December 31, 2002 (including an after tax extraordinary loss of $3 million), or $2.23 per share (diluted), from $49 million for the year ended December 31, 2001 (including an after tax extraordinary gain of $500,000 and non-recurring items of $1 million), or $2.08 per share (diluted). The increase in net income between the years ended December 31, 2002 and December 31, 2001 was mainly due to our sale/long-term manage back program which resulted in higher income, reduced interest expense as a result of a $174 million reduction in debt and lower depreciation and amortization expense.

     Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

     During 2001, we began operating 17 additional properties in which we have an ownership interest and managing 5 additional properties for independent third parties.

     Total operating revenue increased 24% to $428 million for the year ended December 31, 2001 from $345 million for the year ended December 31, 2000. Net income increased by $25 million to $49 million for the year ended December 31, 2001 (including an after tax extraordinary gain of $500,000 and non-recurring items of $1 million), or $2.08 per share (diluted), from $24 million for the year ended December 31, 2000, or $1.10 per share (diluted). The increase in net income between the years ended December 31, 2001 and December 31, 2000 was mainly due to an increase in income from property sales.

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

     Sunrise Management Services

     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, the Sunrise Management Services division 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.

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