##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
   FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 Commission File Number 1-16499 SUNRISE SENIOR LIVING, INC. 
  Delaware
    
    54-1746596(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)7902 Westpark DriveMcLean, VA
    
    22102(Address of principal
    
    (Zip Code)executive offices)
 Registrants telephone number, including area code: (703) 273-7500 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon stock, $.01 par value per share
    
    New York Stock Exchange
 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
þ  No o 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes þ  No o The aggregate market value of the common stock held by non-affiliates (based upon the closing price
on the New York Stock Exchange on June 30, 2004) was $677.1 million. Solely for the purposes of
this calculation, all directors and executive officers of the registrant are considered to be
affiliates. There were 20,689,303 shares of common stock outstanding at March 10, 2005. DOCUMENTS INCORPORATED BY REFERENCE Portions of our 2005 annual meeting proxy statement are incorporated by reference into Part
III of this report.




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TABLE OF CONTENTS Page(s)PART I
    
    Item 1.
    
    Business
    
    3Item 2.
    
    Properties
    
    35Item 3.
    
    Legal Proceedings
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    36PART II
    
    Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    36Item 6.
    
    Selected Financial Data
    
    38Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    

    39Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    63Item 8.
    
    Financial Statements and Supplementary Data
    
    64Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    105Item 9A.
    
    Controls and Procedures
    
    105Item 9B.
    
    Other Information
    
    105PART III
    
    Item 10.
    
    Directors and Executive Officers of the Registrant
    
    106Item 11.
    
    Executive Compensation
    
    106Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    106Item 13.
    
    Certain Relationships and Related Transactions
    
    106Item 14.
    
    Principal Accountant Fees and Services
    
    106PART IV
    
    Item 15.
    
    Exhibits and Financial Statement Schedules
    
    107SIGNATURES
    
    
    
    
    
    116
 -2-




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ThisForm 10-Kcontains forward-looking statements that involve risks and uncertainties.
Although we believe the expectations reflected in such forward-looking statements are based on
reasonable assumptions, there can be no assurance that our expectations will be realized. Our
actual results could differ materially from those anticipated in these forward-looking statements
as a result of various factors, including, but not limited to, our
ability to successfully complete The Fountains transaction and
integrate it into our operations, development and construction risks,
acquisition risks, licensing risks, business conditions, competition, changes in interest rates,
our ability to manage our expenses, market factors
that could affect the value of our properties, the risks of downturns in general economic
conditions, 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 Senior Living, Inc. and our consolidated subsidiaries. PART I Item 1. Business Overview Sunrise, a Delaware corporation, is a leading provider of senior living services, with
operations in the United States, Canada, the United Kingdom, and Germany. 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. At December 31, 2004, we operated 380
communities, of which 367 communities are in the United States, 10 communities are in Canada and
three communities are in the United Kingdom, with a total resident capacity of approximately
43,100. We own or have an ownership interest in 185 of these communities and 195 are managed for
third parties. In addition, we were providing pre-opening management services to 33 communities
under construction at December 31, 2004, including four
communities in Germany. We offer a full range of personalized senior living
services, from independent living, to assisted living, to care for individuals with Alzheimers and
other forms of memory loss, to nursing and rehabilitative care. We also develop senior living
communities for ourselves, for joint ventures in which we retain an ownership interest, and for
third parties. Our long-range strategic objective is to grow our senior living business through a management
services business model that is built on long-term management contracts. Our three primary growth
drivers consist of: (1) generating revenue growth from our existing operating portfolio of owned
and managed communities, (2) adding additional communities through new construction, primarily with
joint venture partners, and (3) adding communities through selective acquisitions. We believe this
management services business model will continue to result in -3-




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more stable and predictable revenue and earnings streams as they become increasingly based on
long-term management contracts. Recent Developments Sunrise Senior Living Real Estate Investment Trust In December 2004, we closed the initial public offering of Sunrise Senior Living Real Estate
Investment Trust (Sunrise REIT), an independent entity we established in Canada. Concurrently
with the closing of its initial public offering, Sunrise REIT issued Cdn. $25 million (US $21
million at December 31, 2004) principal amount of 5 3/4%
subordinated convertible debentures due December 31, 2009 to
Sunrise, convertible at the rate of Cdn. $11.00 per unit. The proceeds from the offering and
placement of the debentures were used by Sunrise REIT to acquire interests in 23 senior living
communities from Sunrise and Sunrise joint ventures, eight of which are in Canada and 15 of which
are in the United States. Three of these communities were acquired directly from us and 20 were
acquired from joint ventures in which we participated. We contributed our interest in the 15 U.S.
communities to an affiliate of Sunrise REIT in exchange for a 15% ownership interest in that
entity. Sunrise REIT also acquired an 80 percent interest in a recently completed Sunrise
community that is in lease-up in Canada, with Sunrise retaining a 20 percent interest. In
addition, we have identified nine development projects that will be presented to Sunrise REIT for
their potential acquisition. Sunrise REIT was formed to indirectly acquire, own and invest in income producing senior
living communities in Canada and the United States. We established Sunrise REIT in order to create
an efficient, low cost source of capital that would be a long-term holder of real estate. In
addition, Sunrise REIT provides a potential exit alternative for our existing joint venture
partners. In connection with establishing Sunrise REIT, we entered into a 30-year strategic
alliance agreement with Sunrise REIT that gives us the right of first opportunity to manage all
Sunrise REIT communities. Development Joint Venture In December 2004, we entered into an agreement with JPMorgan Fleming Asset Managements
Special Situation Property Fund (the Fund) to jointly fund a venture for the development of eight
senior living communities with a combined capacity for 716 residents. Seven of the communities
were acquired by the venture at closing and the remaining community is expected to be acquired by
the joint venture in early 2005. Under the terms of the venture agreement, the Fund will have an 80 percent interest in the
newly developed communities and we will have a 20 percent interest. Seven of the eight venture
communities will feature assisted living care and services for seniors, including residents with
Alzheimers disease and other forms of memory impairment. The remaining community -4-




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will offer independent living residences and services and will be located on the same campus
of one of the assisted living communities included in this development venture. We will manage the
communities under long-term management agreements. Proposed Transaction with The Fountains In January 2005, we announced that we had entered into asset purchase agreements with The
Fountains, a Tucson, Arizona based owner and operator of senior living communities, to acquire
management of 19 senior living communities, ownership of 18 of the
communities, several undeveloped
land parcels, and certain other assets. Our prospective capital partner for this transaction is an
affiliate of Arcapita, Inc. (formerly, Crescent Capital Investments, Inc.). The Arcapita affiliate
is expected to acquire an 80 percent interest in the real estate associated with 17 senior living
communities to be held in a joint venture to be formed by Sunrise and the Arcapita affiliate. We
will acquire the remaining 20% interest in the real estate associated
with the 17 communities and 100% of the 18th community and assume management of The Fountains 19 senior living
communities (which have capacity for approximately 5,000 residents) under long-term management
contracts upon the closing of the transaction, which is expected in mid-2005. Our portion of the
asset purchase is estimated to be $63 million, which will be funded by cash on hand and existing
credit facilities. Funding for United Kingdom Joint Venture In January 2005, we secured an increase in equity development funding for our United Kingdom
(UK) joint venture with an affiliate of Prudential Real Estate Investors that will provide for, in
conjunction with loans provided by third-party lenders, total development funding for this venture
of approximately $864.2 million. This represents a $467.1 million, or 118 percent increase over
the ventures initial capital structure, which was announced in May 2002. The Sunrise and
Prudential UK joint venture currently has eight sites under development in the UK, four of which
are under construction with final planning approval received on an additional four. We will manage
all of these properties under long-term management agreements. This increase in development capital
will allow us to increase our development program in the UK and further expand our UK management
business. Sunrise of Klein-Flottbek In January 2005, we opened our first community in Germany, Sunrise of Klein-Flottbek. This
community has 86 units and capacity for 97 residents. We currently expect our second Germany
community, Sunrise of Reinbek, to open in the second quarter of 2005. In addition to these two
communities, we also have two sites under construction, one site under contract, and other sites
under negotiation in Germany. -5-




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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 livingis 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 livingmeets 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 nursingmeets 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, a
broken hip or stroke). In all of these settings, seniors may elect to bring in additional care and services as
needed, such as home-health care (except in a skilled nursing setting) and end-of-life or hospice
care. The senior living industry is highly fragmented and characterized predominantly by numerous
local and regional 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). Senior Living Services Throughout our history, we have advocated a resident-centered approach to senior living and
offered a broad range of service and care options to meet the needs of our residents. In select
communities, we offer independent living services, which include housing, meals, transportation,
activities and housekeeping, and in some communities, we provide licensed skilled nursing services
for residents who require 24-hour skilled nursing care. A majority of our communities currently
are assisted living communities, which offer basic care and services for seniors who need
assistance with some activities of daily living. -6-




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Assisted Living Upon a residents move-in to an assisted living community, we assess each resident, generally
with input from a residents family and physician, and develop 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 and service for such resident. The service plan is
periodically reviewed and updated by us and communicated to the resident, the residents family, or
both. We offer a choice of care levels in our assisted living communities based on the frequency and
intensity of assistance and care that a resident needs or prefers. Most of our assisted living
communities also offer a Reminiscence neighborhood, which provides specially designed
accommodations, service and care to support cognitively impaired residents, including residents
with Alzheimers disease. By offering a full range of services, we are better able to accommodate
residents changing needs as they age and develop further physical or cognitive frailties. Daily
resident fee schedules are generally revised annually whereas fees for additional care are revised
when a change in care needs arises. Basic Assisted Living Our basic assisted living program 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;
    emergency call systems in each unit;
    transportation to stores and community services;
    assistance with coordination of physician care, physical therapy and other medical
services;
    health promotion and related programs;
    housekeeping services; and
    social and recreational activities. -7-




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Assisted Living Extended Levels of Care We offer various levels of care for assisted living residents who require more frequent or
intensive assistance or increased care or supervision. We charge an additional daily fee based on
additional staff hours of care and services provided. These extended levels of care allow us,
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. Approximately 30% of our assisted
living residents participated in extended levels of care at December 31, 2004. Reminiscence Care We believe our Reminiscence neighborhoods distinguish us from many other senior living
providers that do not provide such specialized care. Our Reminiscence neighborhoods provide a
specialized environment, extra attention, and 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 our communities. Cognitively
impaired residents who require additional care and services pay a higher daily rate based on
additional staff hours of care and services provided. Approximately 26% of our assisted living
residents participated in the Reminiscence program at December 31, 2004. Medication Management Many of our 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. We
charge an additional fixed daily fee for this service. Independent Living, Skilled Nursing and Other Services In some of our communities, we also offer independent living for residents and in other
communities we offer skilled nursing care. We have team members specially trained to serve
residents in these communities in compliance with the appropriate state and federal licensing
statutes. Additionally, we, through our minority interest in a joint venture, offer At Home
Assisted Living services in several East Coast markets and Chicago. 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 we serve the vast majority of a residents needs with our own staff, some services, such
as hospice care, physician care, infusion therapy, physical and speech therapy and other -8-




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ancillary care services may be provided to residents at our communities by third parties. Our
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 daily net resident fees plus additional care
fees, for senior living communities that we own or have an ownership interest in and that have been
operated by us for at least 12 months, or that have achieved occupancy percentages of 95% or above,
was approximately $135 for 2004, $127 for 2003, and $109 for 2002. During 2004, approximately 92%
of our resident fee revenues were derived from private pay sources. Managed Communities In addition to managing our owned communities and communities in which we retain an ownership
interest, we also manage for third-party owners 195 operating communities and four communities
under development with a total resident capacity of over 24,500. The management contracts for
these properties have various terms extending as far as December 2030. We intend to continue to
capitalize on our brand awareness and management services experience by seeking to enter into
third-party management and development contracts with other owners of senior living properties. Properties We operated 380 senior living properties with a resident capacity of approximately 43,100 at
December 31, 2004. In addition, we had 33 properties with a resident capacity of approximately
3,000 under construction at December 31, 2004. We manage both properties that we own or in which
we have an ownership interest and properties owned by third parties. The following charts summarize
our portfolio of operating properties and properties under construction at December 31, 2004. Operating Properties Number of Properties
    
    Total Resident CapacityJoint
    
    
    
    
    
    JointLocation
    
    Consolidated
    
    Venture
    
    Managed
    
    Consolidated
    
    Venture
    
    ManagedAlabama
    


    
    
    
    1
    
    
    
    
    
    101Arizona
    
    2
    
    
    
    3
    
    293
    
    
    
    881Arkansas
    
    
    
    
    
    1
    
    
    
    
    
    163California
    
    5
    
    25
    
    18
    
    715
    
    2,099
    
    2,694Colorado
    
    1
    
    6
    
    3
    
    74
    
    558
    
    479Connecticut
    
    2
    
    1
    
    3
    
    168
    
    102
    
    518Delaware
    
    
    
    1
    
    5
    
    
    
    82
    
    875District of Columbia
    
    
    
    1
    
    1
    
    
    
    110
    
    136Florida
    
    6
    
    
    
    7
    
    1,687
    
    
    
    1,598Georgia
    
    3
    
    5
    
    16
    
    98
    
    630
    
    1,213Illinois
    
    1
    
    13
    
    7
    
    303
    
    1,174
    
    777Indiana
    
    4
    
    
    
    1
    
    279
    
    
    
    221Kansas
    
    
    
    
    
    2
    
    
    
    
    
    371Kentucky
    
    
    
    
    
    6
    
    
    
    
    
    941Louisiana
    
    
    
    2
    
    2
    
    
    
    161
    
    98Maryland
    
    3
    
    2
    
    11
    
    513
    
    233
    
    1,282Massachusetts
    
    
    
    6
    
    9
    
    
    
    416
    
    785Michigan
    
    1
    
    5
    
    3
    
    77
    
    404
    
    300Minnesota
    
    
    
    2
    
    12
    
    
    
    198
    
    518Missouri
    
    
    
    1
    
    2
    
    
    
    89
    
    179Nebraska
    
    
    
    
    
    1
    
    
    
    
    
    166New Jersey
    
    1
    
    15
    
    11
    
    124
    
    1,255
    
    1,507New Mexico
    
    2
    
    
    
    1
    
    101
    
    
    
    209New York
    
    
    
    11
    
    2
    
    
    
    1,007
    
    243North Carolina
    
    2
    
    1
    
    7
    
    166
    
    91
    
    750North Dakota
    
    2
    
    
    
    
    
    94
    
    
    
    
 -9-




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Number of Properties
    
    Total Resident CapacityJoint
    
    
    
    
    
    JointLocation
    
    Consolidated
    
    Venture
    
    Managed
    
    Consolidated
    
    Venture
    
    ManagedOhio
    
    13
    
    4
    
    6
    
    840
    
    229
    
    822Oklahoma
    
    
    
    
    
    2
    
    
    
    
    
    240Pennsylvania
    
    4
    
    13
    
    1
    
    765
    
    1,047
    
    188South Carolina
    
    1
    
    
    
    7
    
    39
    
    
    
    741Tennessee
    
    
    
    
    
    1
    
    
    
    
    
    115Texas
    
    1
    
    
    
    14
    
    145
    
    
    
    2,535Utah
    
    
    
    
    
    1
    
    
    
    
    
    168Virginia
    
    6
    
    5
    
    15
    
    1,462
    
    460
    
    1,223Washington
    
    
    
    1
    
    5
    
    
    
    84
    
    407United Kingdom
    
    
    
    3
    
    
    
    
    
    302
    
    Canada
    
    
    
    2
    
    8
    
    
    
    198
    
    793Total Open
Properties/Resident
Capacity
    
    60
    
    125
    
    195
    
    7,943
    
    10,929
    
    24,237
 Properties Under Construction Number of Properties
    
    Total Resident CapacityJoint
    
    
    
    
    
    JointLocation
    
    Consolidated
    
    Venture
    
    Managed
    
    Consolidated
    
    Venture
    
    ManagedCalifornia
    
    1
    
    3
    
    1
    
    96
    
    294
    
    96Illinois
    
    
    
    1
    
    
    
    
    
    90
    
    Kansas
    
    
    
    1
    
    
    
    
    
    98
    
    Massachusetts
    
    
    
    2
    
    
    
    
    
    190
    
    Michigan
    
    
    
    2
    
    
    
    
    
    154
    
    Minnesota
    
    
    
    2
    
    
    
    
    
    168
    
    New Jersey
    
    
    
    1
    
    2
    
    
    
    91
    
    181New York
    
    1
    
    1
    
    
    
    94
    
    95
    
    Pennsylvania
    
    
    
    1
    
    
    
    
    
    89
    
    Texas
    
    
    
    2
    
    
    
    
    
    180
    
    Virginia
    
    
    
    
    
    1
    
    
    
    
    
    72
 -10-




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Number of Properties
    
    Total Resident CapacityJoint
    
    
    
    
    
    JointLocation
    
    Consolidated
    
    Venture
    
    Managed
    
    Consolidated
    
    Venture
    
    ManagedUnited Kingdom
    
    
    
    6
    
    
    
    
    
    569
    
    Canada
    
    1
    
    
    
    
    
    84
    
    
    
    Germany
    
    
    
    4
    
    
    
    
    
    404
    
    Total Properties
Under Construction
/Resident Capacity
    
    3
    
    26
    
    4
    
    274
    
    2,422
    
    349Total
Properties/Resident
Capacity Open and
Under Construction
    
    63
    
    151
    
    199
    
    8,217
    
    13,351
    
    24,586
 New Community Development As part of our growth strategy, we develop and acquire senior living communities in top
U.S. and international major metropolitan markets. We develop and acquire these senior living
communities for ourselves, for joint ventures in which we retain an ownership interest and for
third parties. We target sites for development and acquisition in major metropolitan areas and
their surrounding suburban communities. In evaluating a prospective location, we consider a
number of factors, including:  
    market area demographics (population, income, age, etc.);
    market area demand and competitive supply;
    target site characteristics (visibility, etc.);
    probability of obtaining zoning approvals; and
    the ability to cluster our communities to optimize management resources. -11-




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Development Since our initial public offering in June 1996, we have completed development of 150 new
communities with the capacity for over 13,000 residents. At December 31, 2004, we had an
additional 33 communities under construction with resident capacity of approximately 3,000 and had
entered into contracts to purchase or lease 31 additional sites for new community development.
These sites are located in Arizona, California, Illinois, Kansas, Louisiana, Massachusetts,
Michigan, Pennsylvania, Texas, Utah, Virginia, Canada, and the United Kingdom. We continue to
pursue additional locations in these and other states as market conditions warrant. The majority of our new development continues to be Sunrise assisted living mansions, the
model that we have developed and refined since 1985. Continuous improvement of
our signature mansion model allows us to control development costs, maintain consistency and
improve operational efficiency. An increasing percentage of our development will be in the form of Independent Living
communities with a variety of structures, including both rental and equity purchase models. These
Independent Living communities will leverage our experience. Like our prototype assisted living
mansions, we believe our Independent Living communities are intended to establish distinctive
Sunrise signatures and reinforce the awareness of Sunrise as the premier senior living brand in our
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. In the United States, it generally takes two to three years to deliver a new Sunrise community
once a market has been identified. Site selection and contract signing typically take 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 our selective location strategy and focus on
mature communities. Community construction normally takes 12 to 15 months. We believe our
extensive development experience gives us an advantage relative to many of our -12-




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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. Our development activities are coordinated by experienced staff, who have extensive real
estate acquisition, engineering, general construction and project management experience.
Architectural design and construction functions are contracted to experienced, outside architects
and contractors. Consistent with our transformation into a senior living management services company, we expect
substantially all of our future development activities to be conducted with joint venture partners
or for third parties. We have already entered into unconsolidated joint venture arrangements with
third parties to develop projects in the United States, the United Kingdom, Germany and Canada. We
are 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. We
have ownership interests in these joint ventures ranging from seven to 50 percent. We will manage
these properties pursuant to long-term management contracts. As
we continue to increase our development activities outside the United
States, we intend to follow a similar process to that pursued in the
United States. Facility Acquisitions As part of our growth strategy, we also seek to acquire attractive senior living communities
in top U.S. and international major metropolitan markets. We expect to partner with capital
providers for such transactions. In evaluating possible acquisitions, we consider 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 our development plans. Sale/Long-Term Manage Back Program In 2000, we announced our intention to initiate a program to sell our consolidated properties,
subject to market conditions, while retaining long-term management agreements. This sale/long-term
manage back program has enabled us to reduce debt, re-deploy our capital into new development
projects and realize gains on appreciated real estate. We have 60 remaining -13-




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consolidated and majority owned communities at December 31, 2004. Since 29 of the communities
are leased, we have 31 remaining operating communities (2,038 resident capacity) that are wholly
owned and potentially available for our sale/long-term manage back program. Company Operations Operating Structure We have centralized accounting, finance and other operational functions at our corporate
headquarters and at regional office levels that enable community-based personnel to focus on
resident care, consistent with our operating philosophy. We maintain our corporate headquarters
office in McLean, 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 our development and acquisition plans within a given geographic region. In
the United States, we are currently organized into seven geographic regions: Northeast, Mid-Atlantic, Southeast, Southwest, Midwest, Southern California, and Northwest. We have regional
offices in each region. We also have regional offices in London, England, Frankfurt, Germany and
Toronto, Canada, supporting our communities open or under construction in those locations. Each
region is headed by a vice president of operations with extensive experience in the senior housing,
health care and senior living industries that oversee area managers or area vice presidents of
operations. Each region is supported by sales/marketing specialists, resident care specialists, a
human resource specialist, a dining specialist and a programming specialist. Community Staffing Each of our 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 us. We believe that the
quality and size of our communities, coupled with our competitive compensation philosophy, have
enabled us to attract high-quality, professional executive directors. The executive director is
supported by the department heads, who oversee the care and services provided in the community and
other specialists such as a nurse, who serves as a case manager responsible for coordinating the
services necessary to meet residents health care needs, and a -14-




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director of community relations, who is responsible for selling our 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. 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 extended levels of care or
care in connection with cognitive impairments such as Alzheimers disease. We believe that our 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 We have attracted, and continue to seek, highly dedicated, experienced personnel. We have
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 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, we have 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 our Reminiscence Program, social and volunteer programs, human
resources, staffing and scheduling and medication management. We also have 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 our department head ranks as well as -15-




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professionals from outside Sunrise and provides them with an accelerated training curriculum
to prepare them to be Sunrise executive directors. Quality Improvement Processes We coordinate quality assurance programs at each of our communities through our corporate
headquarters staff and through our regional offices. Our commitment to quality assurance is
designed to achieve a high degree of resident and family member satisfaction with the care and
services provided by us. In addition to ongoing training and performance reviews of care managers
and other employees, our quality control measures include: Family and Resident Feedback.We survey 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. In addition, a
headquarters-based team visits each community annually to review these same areas . Third-Party Reviews.To further evaluate customer service, we engage an independent
service evaluation company to mystery shop our communities. These professionals assess our
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 Our sales and marketing strategy is intended to create awareness of and preference for our
unique product/service positioning, leading to inquiries and visits to our 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 supports the field and communities by
developing overall strategies, systems, processes and programs for promoting Sunrise in our local
markets and monitors the success of overall and site/region specific marketing efforts. -16-




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Each community has at least one dedicated sales person responsible for property-specific sales
efforts. The community-based sales staff and executive director is supported by an area sales
manager who is responsible for coaching, development and performance management of community sales
staff as well as supporting the development of the local marketing strategy. 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. Sales training and development programs are in place to continuously increase
the skills and competencies of community-based sales staff and area sales managers. Competition The senior living industry is competitive. We compete with numerous other companies that
provide similar senior living alternatives, such as home health care agencies, community-based
service programs, retirement communities, convalescent centers and other senior living providers.
In general, regulatory and other barriers to competitive entry in the independent 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, we have experienced and expect to continue to experience
competition in our efforts to develop, acquire and operate senior living communities. Some of our
present and potential senior living competitors have, or may obtain, greater financial resources
than us. Consequently, we may encounter competition that could limit our ability to attract
residents or expand our business, which could have a material adverse effect on our revenues and
earnings. Government Regulation Senior living communities are generally subject to regulation and licensing by federal, state
and local health and social service agencies and other regulatory authorities. Although
requirements vary from state to state and facility to facility, in general, these requirements may
include or address:  
    personnel education, training, and records;
    community services, including:  -
    administration and supervision of medication;-
    the provision of limited nursing services;-
    admission and discharge criteria; and-
    documentation and reporting requirements;  
    staffing requirements;
    monitoring of resident wellness;
    physical plant specifications;
    furnishing of resident units;
    food and housekeeping services;
    emergency evacuation plans; and
    resident rights and responsibilities. -17-




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In several of the states in which we operate or intend to operate, laws may require a
certificate of need before a senior living community can be opened. In most states, senior living
communities are also subject to state or local building codes, fire codes, and food service
licensing or certification requirements. Communities licensed to provide skilled nursing services generally provide significantly
higher levels of resident assistance. Communities that are licensed, or will be licensed, to
provide skilled nursing services may participate in federal health care programs, including the
Medicare and Medicaid programs. In addition, some licensed assisted living communities may
participate in state Medicaid-waiver programs. Such communities must meet certain federal
requirements regarding their operations, including requirements related to physical environment,
resident rights, and the provision of health services. Communities that participate in federal
health care programs are entitled to receive reimbursement from such programs for care furnished to
program beneficiaries and recipients. Senior living communities that include assisted living facilities, nursing facilities, or home
health care agencies are subject to periodic surveys or inspections by governmental authorities to
assess and assure compliance with regulatory requirements. Such unannounced surveys may occur
annually or bi-annually, or can occur following a states receipt of a complaint about the
community. As a result of any such inspection, authorities may allege that the senior living
community has not complied with all applicable regulatory requirements. Typically, senior living
communities then have the opportunity to correct alleged deficiencies by implementing a plan of
correction. In other cases, the authorities may enforce compliance through imposition of fines,
imposition of a provisional or conditional license, suspension or revocation of a license,
suspension or denial of admissions, loss of certification as a provider under federal health care
programs, or imposition of other sanctions. Failure to comply with applicable requirements could
lead to enforcement action that can materially and adversely affect business and revenues. Like
other senior living communities, we have received notice of deficiencies from time to time in the
ordinary course of business; however, we have not, to date, faced enforcement action that has had a
material adverse effect on our revenues. -18-




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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 communities
exceeds the level of care for which the community is licensed. If regulatory requirements
increase, whether through enactment of new laws or regulations or changes in the application of
existing rules, our operations could be adversely affected. Furthermore, there have been numerous
initiatives on the federal and state levels in recent years for reform affecting payment of health
care services. Some aspects of these initiatives could adversely affect us, such as reductions in
Medicare or Medicaid program funding. We are also subject to certain federal and state laws that regulate financial arrangements by
health care providers, such as the Federal Anti-Kickback Law. This law makes it unlawful for any
person to offer or pay (or to solicit or receive) any remuneration...directly or indirectly,
overtly or covertly, in cash or in kind for referring or recommending for purchase any item or
service which is eligible for payment under the Medicare and Medicaid programs. Authorities have
interpreted this statute very broadly to apply to many practices and relationships between health
care providers and sources of patient referral. If a health care provider were to violate the
Anti-Kickback Law, it may face criminal penalties and civil sanctions, including fines and possible
exclusion from government programs such as Medicare and Medicaid. Similarly, health care providers
are subject to the False Claims Act with respect to their participation in federal health care
reimbursement programs. Under the False Claims Act, the government or private individuals acting
on behalf of the government may bring an action alleging that a health care provider has defrauded
the government and seek treble damages for false claims and the payment of additional monetary
civil penalties. Recently other health care providers have faced enforcement action under the
False Claims Act. While we endeavor to comply with all laws that regulate the licensure and
operation of our senior living communities, it is difficult to predict how our revenue could be
affected if it were subject to an action alleging such violations. We are 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. Rules that became effective April 14, 2003 govern our use and
disclosure of health information at certain HIPAA covered communities. We established procedures
to comply with HIPAA privacy requirements at these communities. The HIPAA rule establishing
administrative, physical and technical security standards for health information will become
effective in April of 2005. We are addressing these requirements and expect to be in compliance by
April 2005. Although both current and pending HIPAA requirements affect the manner in which we
handle health data and communicate with payors at covered communities, we believe that the cost of
compliance will not have a material adverse effect on our business, financial condition or results
of operations. -19-




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Employees We had 35,865 employees at December 31, 2004, including 19,816 full-time employees, of which
759 were employed at our headquarters and business office. We believe employee relations are good. Website Our Internet website is at http://www.sunriseseniorliving.com. We make available free of
charge on or through our website our 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. Risk Factors In connection with the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, set forth below are cautionary statements identifying important factors that could cause
actual events or results to differ materially from any forward-looking statements made by or on
behalf of us, whether oral or written. We wish to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to maximize to the fullest extent
possible the protections of the safe harbor established in the Private Securities Litigation Reform
Act of 1995. Accordingly, any such statements are qualified in their entirety by reference to, and
are accompanied by, the following important factors that could cause actual events or results to
differ materially from our forward-looking statements. Risks Relating to Our Business  
    We may be unable to manage effectively our growth and expansion, which may harm our
financial condition and operating results. The operations of Sunrise and other entities that we have or may acquire, may not be
integrated successfully, and the intended benefits of such transactions may not be realized, each
of which could have a negative impact on our revenues, expenses and operating results. Our pending acquisition of The Fountains poses risks for our ongoing operations, including:  -
    the Fountains portfolio may not perform as well as we anticipate due
to various factors, including disruptions caused by the integration of
operations with us and changes in macro-economic conditions; -20-




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-
    the diversion of management attention to the integration of the
operations of The Fountains could have a material adverse effect on
the continued operation and expansion of our existing business;-
    we may not effectively integrate the operations of The Fountains;-
    we may experience difficulties and incur greater than anticipated
expenses related to the assimilation and retention of The Fountains
employees; and-
    following the transaction, we may not achieve expected cost savings
and operating efficiencies, such as the elimination of redundant
administrative costs and property management costs. Our acquisition of other entities in the ordinary course of business may pose similar risks to us.
If we fail to successfully integrate The Fountains or other acquisitions and/or fail to realize the intended benefits of
such transactions, such failure could have a material adverse effect on our revenues, expenses and
operating results and the market price of our common stock could decline from its market price at
the time of completion of such acquisitions. We currently expect the
number of our managed 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 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.  
    We are a promoter of Sunrise REIT under Canadian securities laws and, as such, are
jointly and severally liable with Sunrise REIT for any misrepresentation in Sunrise REITs
prospectus. In December 2004, Sunrise REIT completed an initial public offering in Canada. Under
applicable Canadian securities laws, we were deemed to be a promoter of Sunrise REIT. As a
promoter of Sunrise REIT, we were required to sign a certificate in Sunrise REITs prospectus
stating that it contains full, true and plain disclosure of all material facts relating to the
securities being offered. Under applicable Canadian securities laws, we will continue to be a
promoter of Sunrise REIT for two years following the initial public offering and, as such, we may
be required to sign any prospectus that Sunrise REIT files within such two year period. By signing
the prospectus, we are statutorily liable to investors of Sunrise REIT, on a joint and
several basis with Sunrise REIT, if the prospectus contains a misrepresentation. Under Canadian
securities laws, a misrepresentation is defined as an untrue statement of a material fact, or an
omission to state a material fact that is required to be stated or that is necessary to make a
statement not misleading in the light of the circumstances in which it is made. A
material fact is a fact that significantly affects, or would reasonably be expected to have a -21-




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significant effect on, the market price or value of the securities offered by the prospectus.
We are, however, entitled to certain defenses in respect of any such liability,
the most important of which is the so-called due
diligence defense. Because we have promoter liability under the
Canadian securities laws any misrepresentation for which we were
found to be jointly and severally liable could materially and
adversely affect our financial results.  
    Liability claims against us in excess of insurance limits could adversely affect our
financial condition and results of operations. The senior living business entails an inherent risk of liability. In recent years, we, as well
as other participants in our industry, have become subject to an increasing number of lawsuits
alleging negligence or related legal theories. Many of these lawsuits involve large claims and
significant legal costs. We maintain liability insurance policies in amounts we believe are
adequate based on the nature and risks of our business, historical experience and industry
standards. We purchase insurance for property, casualty and other risks from insurers based on published
ratings by recognized rating agencies, advice from national insurance brokers and consultants and
other insurance industry-recognized information sources. Moreover, certain insurance policies cover
events for which payment obligations and the timing of payments are only determined in the future.
Any of these insurers could become insolvent and unable to fulfill their obligation to defend, pay
or reimburse us for insured claims. Certain liability risks, including general and professional liability, workers compensation
and automobile liability, are insured in loss-sensitive insurance policies with affiliated and
unaffiliated insurance companies. For these self-insured liability risks, we are responsible for
the cost of claims up to a self-insured limit determined by individual policies and subject to
aggregate limits in certain prior policy periods. General and professional liability and workers
compensation liabilities within these self-insured limits are estimated annually by independent
actuaries and reviewed monthly by the Company, including a provision for the estimate of the costs
of incurred but not reported claims. We cannot be sure that claims will not arise that are in excess of the limits of our insurance
policies or that are not covered by our insurance policies. If a successful claim is made against
us and it is not covered by our insurance or exceeds the policy limits, our financial condition and
results of operations could be materially and adversely affected. Our obligations to pay the cost
of claims within our self-insured limits include the cost of claims that arise today but are
reported in the future. We estimate an amount to reserve for these future claims. In the event
these estimates are inadequate, we may have to fund the shortfall and our operating results could
be negatively affected. Claims against us, regardless of their merit or eventual outcome, also
could have a material adverse effect on our ability to attract residents or expand our business and
could require our management to devote time to matters unrelated to the operation of our -22-




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business. We also have to renew our policies periodically and negotiate acceptable terms for coverage,
exposing us to the volatility of the insurance markets, including the possibility of rate
increases, and we cannot be sure that we will be able to obtain insurance in the future at
acceptable levels.  
    Any delays we experience in developing new communities could impede our growth and
adversely affect our revenues and results of operations. Our growth objectives include the development of a significant number of new senior living
communities, both domestically and internationally. At December 31, 2004, we had 33 communities
under construction with a resident capacity of approximately 3,000 residents. At December 31, 2004,
we had entered into contracts to purchase or lease 31 additional development sites. Of these sites,
we have received zoning approval from the applicable municipal authority to construct a senior
living facility on six 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;
    increased costs resulting from changes in general economic conditions or increases in
the costs of materials; and
    increased costs as a result of addressing changes in laws and regulations or how
existing laws and regulations are applied. We cannot give any assurance that we will not experience delays in completing 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, -23-




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our growth could slow or we may not meet our growth objectives, which would adversely impact our revenues and results of operations.  
    Our failure to attract joint venture and third party partners for developing senior
living communities in the future could adversely affect our revenues and results of
operations, and harm our ability to finance the construction of new communities. As part of our normal operations, we develop senior living communities with joint venture and
third party partners and enter into long-term management contracts to manage these communities.
This strategy of developing senior living communities with partners has enabled us to reduce our
debt, re-deploy our capital into new development projects, finance development and expand our
portfolio of managed communities. The development of new communities with joint venture and third
party partners is subject to various market conditions and the attractiveness of other investment
opportunities available to our partners and we cannot give any assurance that we can continue to
develop communities with such partners at or near the pace we have maintained in the past. If we
are unable to continue to implement our strategy of developing senior living communities with joint
venture and third party partners, we may not meet our development objectives and our revenues,
results of operations and our ability to finance the construction of new facilities could be
materially adversely affected.  
    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 either on balance sheet or with joint ventures. We currently estimate that existing
credit facilities, together with existing working capital, cash generated from operations,
financing commitments and financing expected to be available, will be sufficient to fund
communities currently under construction. Additional financing will, however, be required to
complete additional development and to refinance existing indebtedness. We estimate that it will
cost approximately $55 million to complete the communities we currently have under construction. At
December 31, 2004, we had entered into contracts to purchase 27 additional development sites for a
total contracted purchase price of $101 million and had also entered into contracts to lease four
additional development sites for 50 to 75 years. We estimate that it will cost Sunrise or the
applicable joint venture approximately $801 million to develop these communities. We expect that
our cash flow from operations, together with borrowings under existing credit facilities and
financing expected to be available, will be sufficient to fund the development sites for these
additional senior living communities for at least the next 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. -24-




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
    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, 2004, we had mortgage, construction and other indebtedness totaling $192
million and unused lines of credit totaling $166 million. We intend to continue financing our
communities through mortgage financing and possibly operating leases or other types of financing,
including lines of credit. We cannot give any assurance that we will generate sufficient cash flow
from operations to cover required interest, principal and operating lease payments. Any payment or
other default could cause the lender to foreclose upon the facilities securing the indebtedness or,
in the case of an operating lease, could terminate the lease, with a consequent loss of income and
asset value to us. In some cases, the indebtedness is secured by the community and a pledge of our
interests in the community. In the event of a default, the lender could avoid judicial procedures
required to foreclose on real property by foreclosing on the pledge instead, thus accelerating the
lenders acquisition of the facility. Further, because our mortgages generally contain
cross-default and cross-collateralization provisions, a payment or other default by us could affect
a significant number of facilities.  
    Our failure to comply with financial covenants contained in debt instruments could
result in the acceleration of the related debt and may restrict our operating and
acquisition activity. There are various financial covenants and other restrictions in our debt instruments,
including provisions which:  
    require us to meet specified financial tests. For example, our $200
million line of credit requires us to not to exceed certain leverage
ratios, maintain certain fixed charges coverage ratios and have a
consolidated net worth of at least $387 million as adjusted each
quarter and to meet other financial ratios;
    require consent for changes in control of us; and
    restrict our ability and our subsidiaries ability to borrow
additional funds, dispose of all or substantially all assets or engage
in mergers or other business combinations in which we are not the
surviving entity without lender consent. These covenants could reduce our flexibility in conducting our operations by limiting our
ability to borrow money and may create a risk of default on our debt if we cannot continue to
satisfy these covenants. If we default under our debt, the related indebtedness could
become due and payable prior to its stated due date. We cannot give any assurance that we could pay
this debt if it became due. Further, our line of credit contains a cross-default provision pursuant
to which a default on other indebtedness by us or by any of our consolidated subsidiaries under the
line of credit could result in the ability of the lenders to declare a default under and accelerate
the indebtedness due under the line of credit. -25-




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
    Interest rate increases could adversely affect our earnings because a portion of our
total debt is floating rate debt. At December 31, 2004, we had approximately $43 million of floating-rate debt at a weighted
average interest rate of 4.57%. 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 $0.4 million based on the
amount of floating-rate debt at December 31, 2004.  
    Early termination or non-renewal of our management service agreements could cause a loss
in revenues. Approximately $1.1 billion of our revenues were generated through third-party and joint
venture management service agreements in 2004. 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, in some cases,
subject to our rights to cure deficiencies, community owners may terminate us as manager if any
licenses or certificates necessary for operation are revoked, if there is a change in control of
Sunrise or if we do not maintain a minimum stabilized occupancy level in the community. Also, in
some instances, a community owner may terminate the management agreement relating to a particular
community if we are in default under other management agreements relating to other communities
owned by the same owner or its affiliates. Early termination of our management agreements or
non-renewal or renewal on less favorable terms could cause a loss in revenues and could negatively
impact earnings.  
    Due to the dependency of our revenues on private pay sources, events which adversely
affect the ability of seniors to afford our daily resident fees could cause our resident
fee revenues and results of operations to decline. Assisted living services, which represent a substantial portion of our senior living services,
currently are not generally reimbursable under government reimbursement programs, such as Medicare
and Medicaid. Accordingly, substantially all of our resident fee revenues are derived from private
pay sources consisting of income or assets of residents or their family -26-




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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. Economic downturns or
changes in demographics could adversely affect the ability of seniors to afford our daily resident
fees. If we are unable to attract seniors with sufficient income, assets or other resources, our
resident fee revenues and results of operations may decline.  
    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
represent 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 generally require written resident
agreements with each resident. Most of these regulations also require that each resident have the
right to terminate the resident agreement for any reason on reasonable notice. Consistent with
these regulations, the resident agreements signed by us 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.  
    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, chief executive officer and founder; and Thomas B. Newell, our
president. Other than Mr. Klaassen, who entered into an amended and restated employment agreement
with us in November 2003 providing for a rolling five-year term, 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. -27-




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##### 




    The discovery of environment 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 community
owned or operated by us, or acquired or operated by us in the future, could have an adverse effect
on our financial condition or earnings.  
    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. -28-




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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. Increased competition for residents could also require us to undertake
unbudgeted capital improvements or to lower our rates, which could adversely affect our results of
operations.  
    Our success depends on attracting and retaining skilled personnel, and increased
competition for or a shortage of skilled personnel could increase our staffing and labor
costs, which we may not be able to offset by increasing the rates we charge to our
residents. We compete with various health care services providers, including other senior
living providers, in attracting and retaining qualified and skilled personnel. We depend on our
ability to attract and retain skilled management personnel who are responsible for the day-to-day
operations of each community. A shortage of nurses or other trained personnel or general
inflationary pressures may require that we enhance our pay and benefits package to compete
effectively for such personnel. We may not be able to offset such 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 communities are generally subject to regulation and licensing by federal, state
and local health and social service agencies and other regulatory authorities. Although
requirements vary from state to state and facility to facility, in general, these requirements may
include or address: -29-




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##### 




    personnel education, training, and records;
    community services, including:  -
    administration and supervision of medication;-
    the provision of limited nursing services;-
    admission and discharge criteria; and-
    documentation and reporting requirements;  
    staffing requirements;
    monitoring of resident wellness;
    physical plant specifications;
    furnishing of resident units;
    food and housekeeping services;
    emergency evacuation plans, and
    resident rights and responsibilities. In several of the states in which we operate or intend to operate, laws may require a
certificate of need before a senior living community can be opened. In most states, senior living
communities are also subject to state or local building codes, fire codes, and food service
licensing or certification requirements. Communities licensed to provide skilled nursing services generally provide significantly
higher levels of resident assistance. Communities that are licensed, or will be licensed, to
provide skilled nursing services may participate in federal health care programs, including the
Medicare and Medicaid programs. In addition, some licensed assisted living communities may
participate in state Medicaid-waiver programs. Such communities must meet certain federal
requirements regarding their operations, including requirements related to physical environment,
resident rights, and the provision of health services. Communities that participate in federal
health care programs are entitled to receive reimbursement from such programs for care furnished to
program beneficiaries and recipients. Senior living communities that include assisted living facilities, nursing facilities, or home
health care agencies are subject to periodic surveys or inspections by governmental authorities to
assess and assure compliance with regulatory requirements. Such unannounced surveys may occur
annually or bi-annually, or can occur following a states receipt of a complaint about the
community. As a result of any such inspection, authorities may allege that the senior living
community has not complied with all applicable regulatory requirements. Typically, senior living
communities then have the opportunity to correct alleged deficiencies by -30-




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implementing a plan of correction. In other cases, the authorities may enforce compliance
through imposition of fines, imposition of a provisional or conditional license, suspension or
revocation of a license, suspension or denial of admissions, loss of certification as a provider
under federal health care programs, or imposition of other sanctions. Failure to comply with
applicable requirements could lead to enforcement action that can materially and adversely affect
business and revenues. Like other senior living communities, we have received notice of
deficiencies from time to time in the ordinary course of business. Regulation of the senior living industry is evolving. Our operations could suffer if future
regulatory developments, such as mandatory increases in scope 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 communities
exceeds the level of care for which the community is licensed. If regulatory requirements
increase, whether through enactment of new laws or regulations or changes in the application of
existing rules, our operations could be adversely affected. Furthermore, there have been numerous
initiatives on the federal and state levels in recent years for reform affecting payment of health
care services. Some aspects of these initiatives could adversely affect us, such as reductions in
Medicare or Medicaid program funding. We are also subject to certain federal and state laws that regulate financial arrangements by
health care providers, such as the Federal Anti-Kickback Law. This law makes it unlawful for any
person to offer or pay (or to solicit or receive) any remuneration...directly or indirectly,
overtly or covertly, in cash or in kind for referring or recommending for purchase of any item or
service which is eligible for payment under the Medicare and Medicaid programs. Authorities have
interpreted this statute very broadly to apply to many practices and relationships between health
care providers and sources of patient referral. If a health care provider were to violate the
Anti-Kickback Law, it may face criminal penalties and civil sanctions, including fines and possible
exclusion from government programs such as Medicare and Medicaid. Similarly, health care providers
are subject to the False Claims Act with respect to their participation in federal health care
reimbursement programs. Under the False Claims Act, the government or private individuals acting
on behalf of the government may bring an action alleging that a health care provider has defrauded
the government and seek treble damages for false claims and the payment additional monetary civil
penalties. Recently other health care providers have faced enforcement action under the False
Claims Act. It is difficult to predict how our revenue could be affected if we were subject to an
action alleging violations. We are also subject to federal and state laws designed to protect the confidentiality of
patient health information. The 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. Rules that became effective April 14, 2003 govern our use and
disclosure of health information at certain HIPAA covered communities. We -31-




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established procedures to comply with HIPAA privacy requirements at these communities. The
HIPAA rule establishing administrative, physical and technical security standards for health
information will become effective in April 2005. We are addressing these requirements and
expect to be in compliance by April 2005.  
    Anti-takeover provisions in our governing documents and under Delaware law could make it
more difficult to effect a change in control even if it were in the best interests of our
stockholders. Our restated certificate of incorporation and amended and restated bylaws and Delaware law
contain provisions that could make it more difficult for a third party to obtain control of us or
discourage an attempt to do so. In addition, these provisions could limit the price some investors
are willing to pay for our common stock. These provisions include:  
    Board authority to issue preferred stock without stockholder approval.
Our board of directors is authorized to issue preferred stock having a
preference as to dividends or liquidation over the common stock
without stockholder approval. The issuance of preferred stock could
adversely affect the voting power of the holders of our common stock
and could be used to discourage, delay or prevent a change in control
of Sunrise;
    Staggered board and board size fixed within range.Our board of
directors is divided into three classes. The total number of directors
is fixed by a two-thirds vote of the board within a range of a minimum
of two and a maximum of 11. These provisions may make it more
difficult for a third party to gain control of our board of directors.
At least two annual meetings of stockholders, instead of one, would
generally be required to effect a change in a majority of our board of
directors;
    Filling of Board Vacancies; Removal.Any vacancy occurring in the
board of directors, including any vacancy created by an increase in
the number of directors, shall be filled for the unexpired term by the
vote of a majority of the directors then in office, and any director
so chosen shall hold office for the remainder of the full term of the
class in which the new directorship was created or the vacancy
occurred. Directors may only be removed with cause by the affirmative
vote of the holders of at least a majority of the outstanding shares
of our capital stock then entitled to vote at an election of
directors;
    Other constituency provision.Our board of directors is required under
our certificate of incorporation to consider other constituencies,
such as employees, residents, their families and the communities in
which we and our subsidiaries operate, in evaluating any proposal to
acquire us. This provision may allow our board of directors to reject
an acquisition proposal even though the proposal was in the best
interests of our stockholders;
    Call of special meetings.A special meeting of our stockholders may be
called only by the chairman of the board, the president, by a majority
of the directors or by stockholders possessing at least 25% of the voting power of the issued and outstanding voting stock entitled to
vote generally in the election of directors. This provision limits the
ability of stockholders to call special meetings; -32-




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
    Stockholder action instead of meeting by unanimous written consent.
Any action required or permitted to be taken by the stockholders must
be effected at a duly called annual or special meeting of such holders
and may not be effected by any consent in writing by such holders,
unless such consent is unanimous. This provision limits the ability of
stockholders to take action by written consent in lieu of a meeting;
    Supermajority vote of stockholders or the directors required for bylaw
amendments.A two-thirds vote of the outstanding shares of common
stock is required for stockholders to amend the bylaws. Amendments to
the bylaws by directors require approval by at least a two-thirds vote
of the directors. These provisions may make more difficult bylaw
amendments that stockholders may believe are desirable;
    Two-thirds stockholder vote required to approve some amendments to the
certificate of incorporation.A two-thirds vote of the
outstanding shares of common stock is required for approval of amendments to the
foregoing provisions that are contained in our certificate of
incorporation. All amendments to the certificate of incorporation must
first be proposed by a two-thirds vote of directors. These
supermajority vote requirements may make more difficult amendments to
these provisions of the certificate of incorporation that stockholders
may believe are desirable; and
    Advance notice bylaw.We have an advance notice bylaw provision
requiring stockholders intending to present nominations for directors
or other business for consideration at a meeting of stockholders to
notify us no later than 60 days before the meeting or 15 days after
the date notice of the meeting is mailed or public notice of the
meeting is given, if less than 75 days notice of the date of the
meeting is given or made to stockholders. This provision limits the
ability of stockholders to make nominations for directors or introduce
other proposals that are not timely received for consideration at a
meeting. In addition to the anti-takeover provisions described above, we are subject to Section 203 of
the Delaware General Corporation Law. Section 203 generally prohibits a person owning 15% or more
of our outstanding common stock from engaging in a business combination with us for three years
after the person acquired the stock. However, this prohibition does not apply if (A) our board of
directors approves in advance the persons acquisition of the shares or the business combination or
(B) the business combination is approved by our stockholders by a vote of at least a two-thirds of
the outstanding shares not owned by the acquiring person. When we
were formed in December 1994, the Klaassens and their respective affiliates and estates were
exempted from this provision. -33-




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##### 




    Our board of directors has adopted a stockholder rights plan that could discourage a
third party from making a proposal to acquire us. In 1996, our board of directors adopted a stockholder rights plan, which may discourage a
third party from making a proposal to acquire us. Under the plan, preferred purchase rights, which
are attached to our common stock, generally will be triggered upon the acquisition of 20% or more
of our outstanding common stock, unless the board of directors redeems the rights. If triggered,
these rights would entitle our stockholders other than the acquiror to purchase our common stock,
and possibly the common stock of the acquiror, at a price equal to one-half the market value of our
common stock.  
    Our management has influence over matters requiring the approval of stockholders. At December 31, 2004, the Klaassens beneficially owned approximately 15% of our outstanding
common stock and our executive officers and directors as a group, including the Klaassens,
beneficially owned approximately 21% of the outstanding common stock. As a result, the Klaassens
and our other executive officers and directors have influence over matters requiring the approval
of our stockholders, including business combinations and the election of directors. -34-




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##### 



Item 2. Properties We lease our corporate offices, regional operations and development offices, and warehouse
space under various leases. The leases have terms of five to twelve years. Of the 380 communities we operated at December 31, 2004, 31 are wholly owned, 29 are leased
under operating leases, 125 are owned in joint ventures and 195 are
owned by third parties. See the
Properties section under Item 1, Business, for a description of our properties. Item 3. Legal Proceedings We are a defendant in a lawsuit filed by CGB Occupational Therapy, Inc. (CGB) on September
28, 2000 in the U.S. District Court for the Eastern District of Pennsylvania. CGB provided therapy
services to two nursing home facilities in Pennsylvania that were owned by RHA Pennsylvania Nursing
Homes (RHA) and managed by one of our subsidiaries. In 1998, RHA terminated CGBs contract. In
its lawsuit, CGB alleged (among other things) that in connection with that termination, we
tortiously interfered with their contractual relationships with (i) RHA and (ii) several of the
therapists that CGB employed on an at-will basis. In June 2002, a jury awarded CGB $685,000 in
compensatory damages and $1.3 million in punitive damages. $576,000 of the compensatory award was
attributed to the claim of tortious interference with the contract between RHA and CGB, and
$109,000 was attributed to the claim of tortious interference with the at-will employment
relationship between CGB and its therapists. We appealed this jury verdict to the U.S. Court of
Appeals for the Third Circuit. In a January 2004 decision, the Third Circuit reversed the verdict for tortious interference
with the contract between RHA and Sunrise, but affirmed the $109,000 compensatory damage award for
tortious interference with the relationship between CGB and its therapists (which Sunrise
subsequently paid). Because it was impossible to tell what portion of the $1.3 million punitive
damages award was attributable to the invalid claim, the court of appeals remanded for a new trial
limited to the issues of liability for and amount of punitive damages. On January 19, 2005,
following the retrial concerning punitive damages, a new jury awarded CGB $30 million in punitive
damages. On January 28, 2005, we filed a motion with the district court seeking a new trial on the
grounds that, among other things, the jurys finding that punitive damages are warranted is against
the weight of the evidence, and that the verdict is the product of the jurys passion and
prejudice. In the alternative, we are seeking to have the trial court reduce the jurys award to a
constitutionally permissible amount. The trial court has stayed the execution of the judgment
pending the consideration of these post-trial motions. We believe that the trial court or, if
necessary, the Third Circuit should vacate the judgment or reduce the judgment to a
constitutionally permissible range. However, we cannot give any assurance as to the outcome of
these motions or this lawsuit. -35-




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In addition, we are involved in various lawsuits and claims arising in the normal course of
business. In the opinion of management, although the outcomes of these suits and claims are
uncertain, in the aggregate they should not have a material adverse effect on our 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, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the New York Stock Exchange under the symbol SRZ. Trading of
our 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. There were 271 stockholders of record at
March 4, 2005. No cash dividends have been paid in the past and we have no intentions to pay cash
dividends in the foreseeable future. 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 Quarter Ended
    
    High
    
    
    LowMarch 31, 2003
    
    $
    25.54
    
    
    $
    21.37June 30, 2003
    
    $
    28.95
    
    
    $
    19.60September 30, 2003
    
    $
    27.45
    
    
    $
    21.26December 31, 2003
    
    $
    40.00
    
    
    $
    26.40
 Quarter Ended
    
    High
    
    
    LowMarch 31, 2004
    
    $
    43.11
    
    
    $
    34.10June 30, 2004
    
    $
    39.46
    
    
    $
    30.00September 30, 2004
    
    $
    39.36
    
    
    $
    33.00December 31, 2004
    
    $
    46.49
    
    
    $
    35.07
 -36-




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Fourth Quarter 2004 Issuer Purchases of Equity Securities Total
Numberof SharesPurchased as
    
    
    ApproximatePart of
    
    
    Dollar Value ofTotal
    
    
    
    
    
    
    Publicly
    
    
    Shares That MayNumber of
    
    
    Average
    
    
    Announced
    
    
    Be PurchasedShares
    
    
    Price Paid
    
    
    Plans or
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs (1)
    
    
    or Programs (1)October 1  October 31, 2004
    
    
    84,800
    
    
    $
    35.10
    
    
    
    84,800
    
    
    $
    13,141,139November 1  November 30, 2004
    
    
    60,968
    
    
    
    41.00
    
    
    
    60,968
    
    
    
    10,641,154December 1  December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,641,154Total
    
    
    145,768
    
    
    $
    37.59
    
    
    
    145,768
    
    
    $
    10,641,154
 (1) On March 11, 2004, our Board of Directors approved a repurchase program for the repurchase of
outstanding shares of common stock and/or our outstanding 5 1/4% convertible subordinated notes due
2009 up to an aggregate purchase price of $50 million. The program expires in May 2005. -37-




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Item 6. Selected Financial Data The selected consolidated financial data set forth below should be read in conjunction with
our Consolidated Financial Statements and notes thereto included elsewhere herein. December 31,2004
    
    
    2003 (1)
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands, except per share amounts, property and resident capacity data)STATEMENT OF OPERATIONS DATA:Operating revenues (2)
    
    $
    1,461,924
    
    
    $
    1,108,540
    
    
    $
    427,689
    
    
    $
    366,065
    
    
    $
    312,665Management services expenses
    
    
    1,015,562
    
    
    
    692,917
    
    
    
    156,251
    
    
    
    82,734
    
    
    
    22,157Facility operating expenses
    
    
    258,667
    
    
    
    254,203
    
    
    
    167,354
    
    
    
    168,602
    
    
    
    169,966General and administrative expenses
    
    
    73,263
    
    
    
    72,596
    
    
    
    36,944
    
    
    
    32,809
    
    
    
    27,418Depreciation and amortization expense
    
    
    21,378
    
    
    
    16,406
    
    
    
    25,317
    
    
    
    28,475
    
    
    
    33,902Interest income (expense), net
    
    
    1,464
    
    
    
    (16,571
    )
    
    
    (24,120
    )
    
    
    (25,315
    )
    
    
    (37,566
    )Net income (3)
    
    
    50,687
    
    
    
    62,178
    
    
    
    54,661
    
    
    
    49,101
    
    
    
    24,278Net income per common share:Basic
    
    
    2.50
    
    
    
    2.92
    
    
    
    2.44
    
    
    
    2.25
    
    
    
    1.12Diluted
    
    
    2.24
    
    
    
    2.63
    
    
    
    2.23
    
    
    
    2.08
    
    
    
    1.10BALANCE SHEET DATA (at end of period):Cash and cash equivalents
    
    $
    156,783
    
    
    $
    102,548
    
    
    $
    173,119
    
    
    $
    50,275
    
    
    $
    42,874Working capital (deficit)
    
    
    102,096
    
    
    
    71,123
    
    
    
    139,639
    
    
    
    38,803
    
    
    
    (34,063
    )Total assets
    
    
    1,085,714
    
    
    
    1,009,798
    
    
    
    1,116,151
    
    
    
    1,177,615
    
    
    
    1,129,361Total debt (2)
    
    
    191,666
    
    
    
    198,122
    
    
    
    456,969
    
    
    
    630,756
    
    
    
    674,703Stockholders equity
    
    
    523,518
    
    
    
    490,276
    
    
    
    465,818
    
    
    
    410,701
    
    
    
    354,045OPERATING AND OTHER DATA:Ratio of earnings to fixed charges (4)
    
    
    3.30
    x
    
    
    2.97
    x
    
    
    2.50
    x
    
    
    2.49
    x
    
    
    1.57
    xNet cash provided by (used in) operating activities (2)
    
    
    89,078
    
    
    
    (11,686
    )
    
    
    24,418
    
    
    
    59,541
    
    
    
    36,411Net cash provided by (used in) investing activities (2)
    
    
    6,410
    
    
    
    287,562
    
    
    
    286,334
    
    
    
    (10,574
    )
    
    
    (8,192
    )Net cash used in financing activities (2)
    
    
    (41,253
    )
    
    
    (346,447
    )
    
    
    (187,908
    )
    
    
    (41,566
    )
    
    
    (38,885
    )Properties (at end of period):Owned
    
    
    185
    
    
    
    186
    
    
    
    181
    
    
    
    162
    
    
    
    147Managed
    
    
    195
    
    
    
    187
    
    
    
    28
    
    
    
    24
    
    
    
    17380
    
    
    
    373
    
    
    
    209
    
    
    
    186
    
    
    
    164Resident capacity:Owned
    
    
    18,872
    
    
    
    19,100
    
    
    
    14,278
    
    
    
    12,607
    
    
    
    11,380Managed
    
    
    24,237
    
    
    
    23,651
    
    
    
    2,322
    
    
    
    2,190
    
    
    
    1,503Total
    
    
    43,109
    
    
    
    42,751
    
    
    
    16,600
    
    
    
    14,797
    
    
    
    12,883
   (1)
    
    On March 28, 2003, Sunrise completed its acquisition of all of the outstanding stock of Marriott International, Inc.s wholly owned subsidiary, Marriott Senior
Living Services, Inc. (MSLS), which owns and operates senior independent full-service and assisted living properties. Sunrise paid approximately
$92 million in cash to acquire all of the outstanding stock of MSLS. Sunrise also assumed approximately $48 million of working capital liabilities
and other funding obligations as well as approximately $25 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. The acquisition of MSLS was
accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values.(2)
    
    Consistent with our transformation to a management services company, certain balances have been reclassified to conform with the 2004 presentation.
See Note 2 to our Consolidated Financial Statements.(3)
    
    Net income for the year ended December 31, 2001 included a $2 million non-recurring item ($1 million after tax), which consisted of a $9 million
cash payment, net of expenses, received by us in connection with a settlement of a lawsuit filed by Karrington prior to our acquisition of Karrington Health, Inc, and $7 million
of non-recurring charges associated with writing down project costs as a result of our decision not to proceed with our planned development of five sites. Net
income for the year ended December 31, 1999 included $5 million of non-recurring charges ($4 million after tax), of which $4 million related to the consolidation
and integration of the acquired operations and development pipeline of Karrington and $1 million related to the termination of a property acquisition agreement.
Of these non-recurring charges, $4 million were non-cash transactions.(4)
    
    Computed by dividing earnings by total fixed charges. Earnings consist of earnings from continuing operations excluding unusual charges or
extraordinary items, plus fixed charges, reduced by the amount of unamortized interest capitalized. Fixed charges consist of interest on debt,
including amortization of debt issuance costs, and a portion of rent expense estimated by management to be the interest component of such rentals. -38-




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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, our ability to successfully complete The Fountains
transaction and integrate it into our operations, development and construction risks,
acquisition risks, licensing risks, business conditions, competition,
changes in interest rates, our ability to manage our expenses,
market factors that could affect the value of our properties, the risks of downturns in
economic conditions generally, satisfaction of closing conditions and availability of financing for
development and acquisitions. Some of these factors are discussed elsewhere herein. 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 Senior Living, Inc. and our consolidated subsidiaries. Overview We are a leading provider of senior living services, with operations in the United States,
Canada, the United Kingdom, and Germany. 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. At December 31, 2004, we operated 380 communities, of which 367 communities are in
the United States, 10 communities are in Canada and three communities are in the United Kingdom, with a
total resident capacity of approximately 43,100. We own or have an ownership interest in 185 of
these communities and 195 are managed for third parties. In addition, we were providing pre-opening
management services to 33 communities under construction at December 31, 2004, including four
communities in Germany. We offer a full range of personalized senior living services, from
independent living, to assisted living, to care for individuals with Alzheimers and other forms of
memory loss, to nursing and rehabilitative care. We also develop senior living communities for
ourselves, for joint ventures in which we retain an ownership interest, and for third parties. Our long-range strategic objective is to grow our senior living business through a management
services business model that is built on long-term management contracts. Our three primary growth
drivers consist of: (1) generating revenue growth from our existing operating portfolio of owned
and managed communities, (2) adding additional communities through new construction, primarily with
joint venture partners, and (3) adding communities through selective acquisitions. We believe this management services business model will continue to result in
more stable and predictable revenue and earnings streams as they become increasingly based on
long-term management contracts. -39-




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Recent Developments Sunrise Senior Living Real Estate Investment Trust In December 2004, we closed the initial public offering of Sunrise Senior Living Real Estate
Investment Trust (Sunrise REIT), an independent entity we established in Canada. Concurrently
with the closing of its initial public offering, Sunrise REIT issued Cdn. $25 million (US $21
million at December 31, 2004) principal amount of 5 3/4%
subordinated convertible debentures due December 31, 2009 to
Sunrise, convertible at the rate of Cdn. $11.00 per unit. The proceeds from the offering and
placement of the debentures were used by Sunrise REIT to acquire interests in 23 senior living
communities from Sunrise and Sunrise joint ventures, eight of which are in Canada and 15 of which
are in the United States. Three of these communities were acquired directly from us and 20 were
acquired from joint ventures in which we participated. We contributed our interest in the 15 U.S.
communities to an affiliate of Sunrise REIT in exchange for a 15% ownership interest in that
entity. Sunrise REIT also acquired an 80 percent interest in a recently completed Sunrise
community that is in lease-up in Canada, with Sunrise retaining a 20 percent interest. In
addition, we have identified nine development projects that will be presented to Sunrise REIT for
their potential acquisition. Sunrise REIT was formed to indirectly acquire, own and invest in income producing senior
living communities in Canada and the United States. We established Sunrise REIT in order to create
an efficient, low cost source of capital that would be a long-term holder of real estate. In
addition, Sunrise REIT provides a potential exit alternative for our existing joint venture
partners. In connection with establishing Sunrise REIT, we entered into a 30-year strategic
alliance agreement with Sunrise REIT that gives us the right of first opportunity to manage all
Sunrise REIT communities. Development Joint Venture In December 2004, we entered into an agreement with JPMorgan Fleming Asset Managements
Special Situation Property Fund (the Fund) to jointly fund a venture for the development of eight
senior living communities with a combined capacity for 716 residents. Seven of the communities
were acquired by the venture at closing and the remaining community is expected to be acquired by
the joint venture in early 2005. Under the terms of the venture agreement, the Fund will have an 80 percent interest in the
newly developed communities and we will have a 20 percent interest. Seven of the eight venture
communities will feature assisted living care and services for seniors, including residents with
Alzheimers disease and other forms of memory impairment. The remaining community -40-




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will offer
independent living residences and services and will be located on the same campus as one of the
assisted living communities included in this development venture. We will manage the communities
under long-term management agreements. Proposed Transaction with The Fountains In January 2005, we announced that we had entered into asset purchase agreements with The
Fountains, a Tucson, Arizona based owner and operator of senior living communities, to acquire
management of 19 senior living communities, ownership of 18 of the communities, several undeveloped
land parcels, and certain other assets. Our prospective capital partner for this transaction is an
affiliate of Arcapita, Inc. (formerly, Crescent Capital Investments, Inc.). The Arcapita affiliate
is expected to acquire an 80 percent interest in the real estate associated with 17 senior living
communities to be held in a joint venture to be formed by Sunrise and the Arcapita affiliate. We
will acquire the remaining 20% interest in the real estate associated
with the 17 communities and 100% of the 18th community and assume management of The Fountains 19 senior living
communities (which have capacity for approximately 5,000 residents) under long-term management
contracts upon the closing of the transaction, which is expected in mid-2005. Our portion of the
asset purchase is estimated to be $63 million, which will be funded by cash on hand and existing
credit facilities. Funding for United Kingdom Joint Venture In January 2005, we secured an increase in equity development funding for our United Kingdom
(UK) joint venture with an affiliate of Prudential Real Estate Investors that will provide for, in
conjunction with loans provided by third-party lenders, total development funding for this venture
of approximately $864.2 million. This represents a $467.1 million, or 118 percent increase over
the ventures initial capital structure, which was announced in May 2002. The Sunrise and
Prudential UK joint venture currently has eight sites under development in the UK, four of which
are under construction with final planning approval received on an additional four. We will manage
all of these properties under long-term management agreements. This increase in development capital
will allow us to increase our development program in the UK and further expand our UK management
business. Sunrise of Klein-Flottbek In January 2005, we opened our first community in Germany, Sunrise of Klein-Flottbek. This
community has 86 units and capacity for 97 residents. We currently expect our second Germany
community, Sunrise of Reinbek, to open in the second quarter of 2005. In addition to these two
communities, we also have two sites under construction, one site under contract, and other sites
under negotiation in Germany. -41-




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Critical Accounting Policies Development of Communities We develop senior living communities in partnership with others and typically develop several
wholly owned senior living communities each year. 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 communities. At December 31, 2004, we had three wholly owned communities under construction with a resident
capacity of over 274 residents. We expect these communities will be contributed to a joint venture
before construction is completed. Prior to forming a joint venture, we are required to fund the
construction of the community not otherwise financed by construction loans, capitalize the
community development costs associated with construction, recognize initial operating losses from
the community during the initial one to two years prior to the community 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 prototype communities.
In 2004, start-up losses for 100% owned communities that have not reached stabilized occupancy
were $1 million and depreciation expense for our owned communities was $10 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, 2004,
these joint ventures have developed or are developing 72 communities, 26 of which are under
construction. The 46 opened communities were funded with approximately $987 million of third-party
debt and approximately $305 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. At December 31, 2004, we guaranteed $23 million of debt for our development joint
ventures. Of the $23 million in debt guarantees to development joint ventures, $10 million will be
removed upon achieving certain debt service coverage targets and the
remaining $13 million will remain in place throughout the term of the loans. We receive a -42-




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fee in all situations where we have provided a debt guarantee. These fees are 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 communities. At December 31,
2004, we do not believe that we will be required to fund under our current outstanding 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 services operating revenue line item on our
consolidated statements of income. As we are minority owners in these joint ventures, we only
record the pre-opening 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 pre-opening fee revenue. As part of our pre-opening fee, we typically guarantee that communities 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, 2004, 28 properties were under construction and subject to completion guarantees.
We have over 20 years experience in the development and construction of senior living communities.
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 2005. 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 communities within these joint ventures. These loans are presented on our
consolidated balance sheet in the Notes receivable  affiliates line item and were $11 million at
December 31, 2004. 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 communities,
the budgets and projections for future performance and the estimated fair value that
has been created by the successful completion and operation of these communities. To date, we
have not recorded any reserves against these notes based on our analysis of the preceding -43-




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factors
and 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 notes to their fair value. In addition to the foregoing, we may provide limited debt guarantees to certain other 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, 2004, we have guaranteed $16 million of debt for our other business ventures,
which represents our maximum exposure under these debt guarantees. Of the $16 million, $2 million
of guarantees are for our sale/long-term manage back ventures. These guarantees will be removed
upon reaching certain occupancy and debt service coverage targets. Of the $16 million, $4 million
represents a debt guarantee to a joint venture that was acquired in June 2002. This debt guarantee
remains in place throughout the term of the loan. We have provided $10 million of debt guarantees
to hospital partnerships that remain in place throughout the term of the loan. At December 31,
2004, we have not been required to fund any debt guarantees. We have also provided $78 million in financing obligations associated with management
contracts. In connection with the acquisition of Marriott Senior Living Services (MSLS) in March
2003, CNL Retirement Properties, Inc. (CNL) agreed to assume the obligation to repay life care
endowment obligations issued by MSLS with respect to two continuing care retirement communities
($76 million at December 31, 2004). To the extent that CNL fails to satisfy this obligation, we
would be required to repay this obligation, the majority of which is expected to be refinanced with
proceeds from the issuance of new endowment obligations as new residents enter the communities.
The remaining $2 million of financing obligations associated with management contracts is made up
of $1 million of obligations to provide financing under existing credit facilities with respect to
four communities and $1 million of payment guarantees under operating agreements with respect to
one community. Management of Properties We manage and operate communities wholly owned by us, owned by joint ventures in which we
have a minority ownership interest and owned completely by third parties. For the communities that
we manage for third parties, we typically are paid a management fee of approximately 5% to 8% of
the community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. These
fees are included in the Management services operating revenue line item on our consolidated
statements of income. As a part of certain management contracts, we may provide an operating deficit credit
facility. This means that if a community 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 -44-




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community to cover the cash shortfall. These loans are generally included with our development
joint ventures and usually are provided for a limited period of time, generally until the community
reaches stabilization, which is generally within 12 to 20 months. Typically, the terms of these loans
provide for no limitation to the maximum potential future payments under the loans. At December
31, 2004, 16 operating communities were subject to a Sunrise operating deficit credit facility and
25 additional communities will be subject to a credit facility upon opening. We funded $.6 million
under these credit facilities through 2003 related to six communities. We funded $1.8 million
under these credit facilities in 2004 related to three communities. At December 31, 2004, $0.7
million has been repaid. We expect to fund an additional $0.8 million in 2005 related to two
Canadian communities. The amounts funded in 2004 and 2005 are expected to be recoverable from cash
flows from operations of the ventures. In certain transactions, we have provided credit support arrangements and commitments to
advance funds to portfolios of properties that we have developed or
for which we acquired management contracts with an opportunity for significant
occupancy increases. Generally, credit support arrangements are for limited periods of time and require payments if cash
flow is below stated targets. For portfolios that we sell, we establish reserves from property sale transaction proceeds to
fund these potential payments. Payments in excess of reserve amounts are expensed unless they are
in the form of contractual advances. At December 31, 2004, we had three joint venture agreements
comprising 25 properties that were subject to credit support arrangements. Generally, these
arrangements terminate within two to 22 months. We expect to
fund $2 million in 2005 under these arrangements. At
December 31, 2004, we have commitments to advance funds on 46
communities, the longest of which is for less than two years. Advances under these commitments are recoverable as loans and are generally
repayable to us from property operating cash flows and/or proceeds from the sale of the property. We
expect to fund $13 million in 2005 under these commitments. Sale/Long-Term Manage Back Program In 2000, we announced our intention to sell owned properties and retain long-term management
contracts and, in many cases, minority equity interests in the properties. This strategy of
selling properties enabled us to reduce our debt, re-deploy our capital into new development
projects and realize cash gains on appreciated real estate. Additionally, the sale/long-term
manage back program assisted our long-range strategic objective of transforming ourselves into a
senior living management services company. We currently operate 60 remaining consolidated and
majority owned communities. Twenty-nine of the communities are leased and 31 communities are
wholly owned. The 31 remaining wholly owned communities have a book value of approximately $231
million and are secured by $29 million of debt. 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 -45-




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properties to joint
ventures in which we have a minority ownership interest, generally ranging from 10% to 25%. If we
sell a property to a joint venture in which we have a minority ownership interest, generally
accepted accounting principles require that we record a gain limited to the portion of the sale
associated with third-party ownership in the joint venture and the cash we received in the
transaction. 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 Investments in unconsolidated senior living
properties line item on the balance sheet. The recognition of the gain from these sales in our consolidated statements of income, which
is recorded in Income from property sales, 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 to defer a portion of the gain 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 sheets. For financial statement purposes, we record a provision for income taxes on all gains we
recognize on the sale of properties. For federal income tax purposes, some of our sales are
treated as tax-free exchanges. Off-Balance Sheet Arrangements We utilize off-balance sheet arrangements in the form of real estate joint ventures. We
believe that we reduce the risk to our shareholders of real estate ownership and receive
potential upside from the sale of a joint venture by owning a minority interest in the real
estate underlying our long-term management contracts. These joint ventures significantly
reduce the amount of capital required of us to develop new communities. As part of our
operating strategy, we may be required to provide some level of guarantees to these ventures,
including limited debt guarantees and operating deficit guarantees. In addition, with respect
to development joint ventures, we may provide financing necessary to complete the construction
and we often provide development completion guarantees in the event actual
costs of development exceed approved budgeted costs (see Critical Accounting Policies
above). -46-




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For summary financial information for unconsolidated entities (7% to 50% owned) in which we
have made investments, see Note 7 to our consolidated financial statements. For information
regarding the notes receivable from our joint ventures, and guarantees and other commitments and
contingencies to our joint ventures, see Notes 5 and 14 to our consolidated financial statements.
Eight of our joint ventures are variable interest entities under FASB Interpretation No. 46,
Consolidation of Variable Interest Entities. See Note 2 to our consolidated financial statements
for a more detailed discussion of these eight joint ventures. Results of Operations We currently derive our consolidated operating revenues from two primary sources: (1)
management services revenue for management services provided to communities owned by unconsolidated
joint ventures and other third party owners, and (2) resident fees for the delivery of senior
living services to our consolidated communities. As we have continued our long-term strategy of
transforming ourselves into a senior management services company, management services revenue has
become a larger part of our total operating revenues. Management services revenue comprised 77%,
69% and 42% of total operating revenues for 2004, 2003, and 2002, respectively. Management services revenue represents fees from long-term contracts for communities
owned by unconsolidated joint ventures and other third party owners and pre-opening service fees.
We receive management fees for operating communities, which are
generally in the range of 5% to 8%
of a managed communitys total operating revenue. In addition, we receive pre-opening service fees
for site selection, zoning, property design, construction management, financing, hiring, training,
licensing and marketing services. Reimbursable expenses paid by us for the unconsolidated joint
ventures also are reflected as management services operating revenue in the statements of income, as
required by contract accounting, and are offset by a corresponding amount reflected in the
management services operating expense line item. Residents, their families, other responsible parties and Medicare / Medicaid typically pay
resident fees monthly. In 2004, 2003, and 2002, approximately 92%,
93%, and 99%, respectively, of our resident
fee revenue was derived from private pay sources. Approximately eight percent of our resident fee
revenue in 2004 was derived from Medicare / Medicaid. Resident fees from residents in our assisted
living communities include revenue derived from basic care, skilled nursing care, community fees,
extended levels of care, Reminiscence care and other resident related services. Residents who
require personal care in excess of services provided under the basic care program pay additional
fees. We classify our operating expenses into the following categories: (1) management services,
which includes development and pre-opening expense and operating expenses reimbursable to us from
communities owned by unconsolidated joint ventures and other third party owners; (2) facility
operating, which includes labor, food, marketing and other direct -47-




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facility expenses for our
consolidated communities; (3) general and administrative, which primarily includes headquarters and
regional staff expenses and other administrative costs; (4) depreciation and amortization; and (5)
facility lease, which represents rental expenses for consolidated communities not owned by us. 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 community. We operate within one defined business segment providing senior living services both
domestically and internationally. Our senior living services operations include full-service senior
living management services, pre-opening services to third parties and
joint ventures for market and
site selection, pre-opening sales and marketing, start-up training, development and construction of
senior living properties, securing project and permanent financing for senior living properties and
our sale/long-term manage back of senior living properties. See Note 19 of our consolidated
financial statements. The following summarized table sets forth the components of our net income (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Total operating revenues
    
    $
    1,461,924
    
    
    $
    1,108,540
    
    
    $
    427,689Total operating expenses
    
    
    (1,415,955
    )
    
    
    (1,074,633
    )
    
    
    (394,164
    )Income from property sales
    
    
    24,330
    
    
    
    75,579
    
    
    
    74,211Income from operations
    
    
    70,299
    
    
    
    109,486
    
    
    
    107,736Interest income
    
    
    8,533
    
    
    
    8,869
    
    
    
    11,338Interest expense
    
    
    (7,069
    )
    
    
    (25,440
    )
    
    
    (35,458
    )Equity in earnings of unconsolidated senior
living properties
    
    
    9,394
    
    
    
    5,343
    
    
    
    4,707Minority interests
    
    
    (701
    )
    
    
    (1,105
    )
    
    
    (160
    )Income before provision for income taxes
    
    
    80,456
    
    
    
    97,153
    
    
    
    88,163Provision for income taxes
    
    
    (29,769
    )
    
    
    (34,975
    )
    
    
    (33,502
    )Net income
    
    $
    50,687
    
    
    $
    62,178
    
    
    $
    54,661
 We reclassified income from property sales from operating revenues and it is now reflected in
other income. These amounts remain a component of income from operations. -48-




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Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003 During 2004, we continued to capitalize on our brand and management services experience
by adding additional third-party management and development contracts. In 2004, we began operating
nine additional communities which we lease or in which we have an ownership interest and managing
seven additional communities for independent third parties. We terminated two management contracts
and three leases acquired through the MSLS acquisition, closed three previously acquired smaller
communities, and sold one other community. Total operating revenue increased by $353 million to $1.5 billion for the year ended December
31, 2004 from $1.1 billion for the year ended December 31, 2003. Net income decreased 18% to $51
million for the year ended December 31, 2004, or $2.24 per share (diluted), from $62 million for
the year ended December 31, 2003, or $2.63 per share (diluted). The decrease in net income between
the years ended December 31, 2004 and December 31, 2003 was primarily due to the anticipated
reduction in income from property sales of $51 million, which was partially offset by continued
strong growth in management services revenues, net of management
services expenses, of $29 million,
and the ability to generate positive net interest income in 2004 as opposed to net interest expense
in 2003. Operating Revenue Management services operating revenue increased by $351 million to $1.1 billion for the year
ended December 31, 2004 from $768 million for the year ended December 31, 2003. This increase was
primarily due to the growth in the number of communities operated or managed by us for
unconsolidated joint ventures and other third party owners or in the pre-opening phase, including
those facilities acquired on March 28, 2003 from MSLS. The total number of communities managed
for unconsolidated joint ventures and other third party owners increased 4% to 320 communities at
December 31, 2004, up from 307 communities at December 31, 2003. Of the 307 communities managed
at December 31, 2003, 108 communities were acquired on March 28, 2003 and therefore only
contributed approximately nine months of revenues during the year ended December 31, 2003. Of the
$351 million increase in management services revenue, $155 million was due to the properties
included in the MSLS acquisition. In addition, there was an increase of $73 million due to new
third-party managed properties being added on or subsequent to December 31, 2003 and $52 million
from newly opened joint venture communities. We also saw an increase of $57 million from 17 new
communities in unconsolidated joint ventures added from June 30, 2003 to September 30, 2003 as a
result of sales of consolidated properties on or subsequent to June 30, 2003, many of which are
accounted for under contract accounting, which requires the presentation of reimbursable expenses
as revenues in the statements of income. Since these 17 consolidated communities were sold
between June 30 and September 30, 2003, they had twelve months of revenue for year ended
December 31, 2004 but less than six months of revenue for year ended December 31, 2003. These
revenues are offset by a corresponding amount reflected in the management services operating
expense line item. The remaining increase was due to a
$9 million increase in revenues from existing joint ventures and managed communities and a $5 million increase in pre-opening fees. -49-




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Resident fees represent operating revenues earned from residents in our consolidated
communities. Resident fees increased $2 million to $343 million for the year ended December 31,
2004 from $341 million for the year ended December 31, 2003. While there was a slight net change
in the total resident fees, a number of significant offsetting items contributed to this. Resident
fees increased by $49 million due to the acquisition of MSLS communities with operating leases and
by $8 million due to the acquisition of other consolidated communities at the end of the second
quarter of 2003. In addition, there was an increase of $10 million in resident fees from other
consolidated communities existing at December 31, 2003 driven by increases in occupancy and daily
rate. These increases were offset by a decrease of $57 million as a result of the sale of 33
consolidated senior living communities between June 30, 2003 and September 30, 2003. Since these
33 consolidated communities were sold between June 30 and September 30, 2003, they had
approximately nine to twelve months of revenue for the year ended December 31, 2003 but none for
the year ended December 31, 2004. We also experienced a decrease of $5 million due to the closure
of two communities in the second quarter of 2004, one community in the third quarter of 2004 and
one community in the fourth quarter of 2004. In addition, there was a decrease in resident fees
of $3 million due to the sale of ten consolidated communities on March 28, 2003. Since these ten
consolidated communities were sold on March 28, 2003, they had approximately three months of
revenue for the year ended December 31, 2003 but none for the year ended December 31, 2004. All
of these 43 consolidated communities sold continue to be managed by us, and as such, management
revenue from these facilities is included in management services operating revenue for the year
ended December 31, 2004. Average resident occupancy for the 131 stabilized communities that we operated in both 2004
and 2003 and in which we have an ownership interest was 90.56% compared to 89.58%, respectively.
We believe occupancy is an important indicator of revenue growth. Due in part to the larger size
of our developments and the general increase in competition, the lease-up period (period of time
from opening to stabilization) is now typically 12 to 20 months. Although the lease-up period is
longer, we have not changed our definition of what we consider a stabilized community. We define
stabilized communities as those we have an ownership interest in and have operated for at least 12
months or those that have achieved occupancy percentages of 95% or above at the beginning of the
measurement period. The average daily rate paid by residents for the 131 stabilized communities that we operated
in both 2004 and 2003 and in which we have an ownership interest in was $134.74 in
2004 compared to $128.05 in 2003. The increase is primarily due to a general increase in the basic
care rate. -50-




---



##### 



Operating Expenses Management services operating expense increased $323 million to $1.0 billion for the year
ended December 31, 2004 from $693 million for the year ended December 31, 2003. This increase is
consistent with the increase in management services operating revenue and is dictated by the
number of unconsolidated joint venture and other third party owned communities accounted for under
contract accounting. Contract accounting requires us to reflect the operating expenses of those
managed communities as expenses of Sunrise. An offsetting revenue reimbursement is reflected in
the management services operating revenue line item. Facility operating expense for the year ended December 31, 2004 increased $5 million, or 2%,
to $259 million from $254 million for year ended December 31, 2003. This increase includes $35
million due to the acquisition of MSLS communities with operating leases. In addition, there was
an increase of $6 million in facility operating expenses from other consolidated communities
acquired since December 31, 2003 and an increase of $8 million in facility operating expenses from
consolidated communities existing at December 31, 2003 driven by increases in occupancy.
Offsetting this increase, in part, was a decrease of $37 million in facility operating expense as
a result of the sale of 33 consolidated senior living communities from June 30, 2003 to September
30, 2003 and a decrease of $2 million in facility operating expense resulting from the sale of 10
consolidated communities on March 28, 2003. We also saw a decrease of $5 million due to the
closure of two communities in the second quarter of 2004, one community in the third quarter of
2004 and one community in the fourth quarter of 2004. Since all of these communities continue to
be managed by us, operating expenses from these facilities are included in management services
operating expense for the year ended December 31, 2004. General and administrative expense was $73 million for both the years ended December 31, 2004
and December 31, 2003. The year ended December 31, 2004 includes $3 million in costs related to
the implementation of Sarbanes-Oxley internal control requirements. The year ended December 31, 2003 included $11 million in
transition expenses related to the acquisition of MSLS. Excluding these costs, general and
administrative expense increased $8 million due to the substantial growth in the number of
communities managed. Depreciation and amortization expense for the year ended December 31, 2004 increased to $21
million from $16 million for the year ended December 31, 2003. This increase was primarily due to
the full year of amortization related to the leasehold intangibles recorded from the acquisition
of MSLS in March 2003 and other fixed assets placed in service in 2004 and 2003. Facility
lease expense for the year ended December 31, 2004 increased $8
million to $47 million from $39 million for the year ended December
31, 2003. This increase was due to the March 28, 2003 acquisition of
18 MSLS communities with operating leases, which only contributed
approximately nine months of expense for the year ended December 31,
2003. Income from Property Sales Income from property sales fluctuates depending on the timing of property sale transactions
and the satisfaction of certain required operating contingencies in the sales transactions. For
the year ended December 31, 2004, income from property sales decreased $51 -51-




---



##### 



million from the year ended December 31, 2003 primarily due to the number of properties sold in each year. In 2003, we
substantially completed the sale/long-term manage back program. We sold 43 properties in 2003 and
only four properties in 2004, three of which were sold in December 2004. All of the $24 million
in income from property sales in 2004 were gains previously deferred on property sales completed
during 2003 as a result of certain operating contingencies being met in 2004. With respect to the
three properties sold in December 2004, we deferred approximately $2 million of income because of
certain future operating contingencies. In addition, income from property sales was reduced by $2
million for incentive compensation to certain employees directly related to the establishment of
the Sunrise REIT.  See Note 13 to our consolidated financial statements for a discussion
of our sale/long-term manage back transactions. Interest Net interest income for the year ended December 31, 2004 was $1 million compared to net
interest expense of $17 million for the year ended December 31, 2003. The $18 million decrease was
due to a decrease in interest expense. The decline in interest expense was due to a $259 million
net reduction in debt during 2003. As such, we incurred interest expense on this debt during 2003
but no interest expense on this debt in 2004. In addition, our debt decreased further from $198
million at December 31, 2003 to $192 million at December 31, 2004, or 3%. The weighted-average
interest rate on our fixed and variable rate debt at December 31, 2004 was 5.48% compared to 5.03%
at December 31, 2003. Interest income for the year ended December 31, 2004 was consistent with
interest income for the year ended December 31, 2003. Equity in Earnings of Unconsolidated Senior Living Properties Equity in earnings of unconsolidated senior living properties increased to $9 million for the
year ended December 31, 2004 compared to $5 million for the year ended December 31, 2003. The
increase was primarily attributable to improved operations and additional incentive fees from the
unconsolidated senior living properties. Provision for Income Taxes The provision for income taxes was $30 million for the year ended December 31, 2004 compared
to $35 million for the year ended December 31, 2003. The decrease was due to a decrease in pre-tax
income primarily as a result of lower income from property sales. Our
effective tax rate for the year ended December 31, 2004 was 37% compared to 36% for the year
ended December 31, 2003. Realization of the deferred tax asset of $25 million at December 31, 2004 is dependent mostly
on generating sufficient taxable income prior to the expiration of the loss carryforwards. We
expect to fully utilize the loss carryforwards prior to expiration. -52-




---



##### 



Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002 In 2003, we began operating 35 additional communities which we lease or in which we have an
ownership interest and managing 133 additional communities for independent third parties and we
terminated one management contract and three leases acquired through the MSLS acquisition. Total operating revenue increased by $681 million to $1.1 billion for the year ended December
31, 2003 from $428 million for the year ended December 31, 2002 primarily due to the increase in
our operating portfolio resulting from the MSLS acquisition in March 2003. Net income increased
14% to $62 million for the year ended December 31, 2003, or $2.63 per share (diluted), from $55
million for the year ended December 31, 2002, or $2.23 per share (diluted). The increase in net
income between the years ended December 31, 2003 and December 31, 2002 was mainly due to increased
income from operations due to the MSLS acquisition and reduced interest expense as a result of a
$259 million reduction in debt. Operating Revenue Management services operating revenues increased by $588 million to $768 million for the year
ended December 31, 2003 from $180 million for the year ended December 31, 2002. This increase was
primarily due to the growth in the number of communities we manage or in the pre-opening phase.
The total number of communities managed increased 140% to 307 communities at December 31, 2003, up
from 128 communities at December 31, 2002. Excluding the 108 managed communities acquired on
March 28, 2003 from MSLS, our operating portfolio increased 55%. This growth resulted primarily
from the addition of 79 new management contracts during 2003, partially offset by the termination
of eight management contracts. In addition, there was a 20% increase in the number of communities
in unconsolidated joint ventures (120 versus 100), many of which are accounted for under contract
accounting, which requires the presentation of reimbursable expenses as revenues in the statements
of income. These revenues are offset by a corresponding amount reflected in the management
services operating expense line item. Resident fees represent operating revenues earned from residents in our consolidated
communities. Resident fees increased $93 million, or 37%, to $341 million for the year ended
December 31, 2003 from $248 million for the year ended December 31, 2002. This increase
includes $155 million due to the acquisition of 18 MSLS communities with operating leases,
net of the termination of three operating leases in 2003, and $7 million due to the acquisition of
the majority interest in seven senior living communities. In addition, there was an increase of
$9 million in resident fees from other consolidated communities driven by increases in occupancy
and average daily rate. Offsetting these increases, in part, was a decrease of $78 million due to
the sale of 33 senior living communities in 2003. -53-




---



##### 



Average resident occupancy for the 119 stabilized communities that we operated in both 2003
and 2002 and in which we have an ownership interest was 90.44% compared to 89.71%,
respectively. We believe occupancy is an important indicator of revenue growth. Due in part to
the larger size of our developments and the general increase in competition, the lease-up period
(period of time from opening to stabilization) is now typically 12 to 20 months. Although the
lease-up period is longer, we have not changed our definition of what we consider a stabilized
community. We define stabilized communities as those we have an ownership interest in and have
operated for at least 12 months or those that have achieved occupancy percentages of 95% or above
at the beginning of the measurement period. The average daily rate paid by residents for the 119 stabilized communities that we operated
in both 2003 and 2002 and in which we have an ownership interest in was $127 in 2003 compared to
$121 in 2002. The increase is primarily due to a general increase in the basic care rate. Operating Expense Management services expenses increased $537 million to $693 million for the year ended
December 31, 2003 from $156 million for the year ended December 31, 2002. This increase is
consistent with the increase in management services operating revenues and is dictated by the
number of unconsolidated joint venture and other third party owned communities accounted for under
contract accounting. Contract accounting requires us to reflect the operating expenses of those
managed communities as operating expenses of Sunrise. An offsetting revenue reimbursement is
reflected in the management services operating revenue line item. Facility operating expenses for the year ended December 31, 2003 increased $87 million, or
52%, to $254 million from $167 million for the year ended December 31, 2002. This increase
includes $116 million due to the acquisition of 18 MSLS communities with operating leases, net of
the termination of three operating leases in 2003, and $6 million due to the acquisition of the
majority interest in seven senior living communities. In addition, there was an increase of $11
million in facility operating expenses from other consolidated communities due to increased
insurance expense, labor expense and employee benefit costs. Offsetting these increases, in part,
was a decrease of $46 million due to the sale of 33 senior living communities in 2003. General and administrative expenses increased to $73 million for the year ended
December 31, 2003 compared to $37 million for the year ended December 31, 2002. The $36
million increase in general and administrative expenses is primarily due to the substantial growth
in the number of communities operated in 2003 and the increased overhead due to the MSLS
acquisition. Included in general and administrative expenses for 2003 is $11 million in
transition expenses related to the acquisition of MSLS. There were no transition expenses
incurred in 2004. -54-




---



##### 



Depreciation and amortization expense for the year ended December 31, 2003 decreased 35% to
$16 million from $25 million for the year ended December 31, 2002. This decrease correlates with
the corresponding 35% decrease in property and equipment and properties held for sale. Facility lease expenses for the year ended December 31, 2003 increased $30 million to $39
million from $8 million for the year ended December 31, 2002. This increase was due to the
acquisition of 18 MSLS communities with operating leases, net of the termination of three operating
leases in 2003. Income from Property Sales Income from property sales fluctuates depending on the timing of property sale transactions
and the satisfaction of certain required operating contingencies in the sales transactions. For the
year ended December 31, 2003, we recognized $35 million of gains previously deferred on property
sales completed during 2002 as a result of certain operating contingencies being met in 2003. In
addition, we recognized $41 million of gains from the sale/long-term manage back transactions
completed in 2003. See Note 13 to our consolidated financial statements for a discussion of our
sale/long-term manage back transactions. Interest Net interest expense for the year ended December 31, 2003 decreased to $17 million from $24
million for the year ended December 31, 2002. In accordance with FASB Statement No. 145,
Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, the extraordinary loss recognized in 2002 of approximately $4 million ($2 million net
of tax) for fees associated with the $92 million term loan and the premium paid for the early
redemption of our 5 1/2% convertible notes was reclassified to interest expense. Excluding this
reclassification, the $3 million decline was due to a decrease of $6 million in interest expense
partially offset by a $3 million decline in interest income. The decrease in interest expense was
due to the decline in the interest rates that we pay on our variable rate debt. The
weighted-average interest rate on our fixed and variable rate debt at December 31, 2003 was 4.50%
compared to 6.02% at December 31, 2002. In addition, debt decreased from $457 million to $223
million, or 51%. The decrease in interest income was due to the decline in interest rates
that we receive on short-term investments, a reduction in short term investments due to the
acquisition of MSLS and the pay-down of notes receivable. Provision for Income Taxes The provision for income taxes was $35 million for the year ended December 31, 2003 compared
to $34 million for the year ended December 31, 2002. The increase was primarily due to an
increase in pre-tax income, which was slightly offset by the use of an effective tax rate of -55-




---



##### 



36% for the year ended December 31, 2003 compared to 38% for the year ended December 31, 2002. The
decrease in the effective tax rate is due to a decrease in our state and international effective
tax rates based upon our operating history and previous tax positions in those jurisdictions. Realization of the deferred tax asset of $24 million at December 31, 2003 is dependent on
generating sufficient taxable income prior to the expiration of the loss carryforwards. We expect
to fully utilize the loss carryforwards prior to expiration. Liquidity and Capital Resources We had $102 million in working capital at December 31, 2004, including $157 million of cash
and cash equivalents. In addition, we had $166 million available under credit facilities. Working capital increased by $31 million to $102 million at December 31, 2004 from $71 million
at December 31, 2003. This increase was primarily due to an increase in cash resulting from the
disposition of properties in the fourth quarter of 2004 and an increase in due from affiliates and
prepaids and other current assets, offset by an increase in accounts payable and accrued expenses
primarily due to an increase in reserves for community insurance programs. Net cash provided by operating activities for 2004 was $89 million and net cash used in
operating activities for 2003 was $12 million. The primary drivers for the change in operating
cash activity are an increase in income from management services, as we have increased the number of
communities managed, and an increase in accounts payable and accrued expenses. We have completed
our transformation from a property owning entity to a manager of senior living facilities and
expect that property sales will not be a driver of our business. The increase in accounts payable
and accrued expenses will fluctuate based on the timing of the payment of vendors of communities
that we operate. The reimbursement for these costs will vary as some costs are pre-funded, such as
payroll, while others are reimbursed after incurred. Therefore, there will not always be a
correlation between increases and decreases of accounts payable and receivables from owners for our
managed communities. Net cash provided by investing activities was $6 million and $288 million for 2004 and 2003,
respectively. During 2004, we had cash provided by the sale of properties of $136 million and cash
used in the acquisition of property of $111 million. In addition, we had a net outflow of cash
of $32 million as we continued to make investments in joint ventures and notes receivable during
the year. During 2003, we used $92 million for the acquisition of MSLS, $2 million for the
acquisition of the majority ownership in seven senior living properties, cash provided by the sale
of properties of $405 million and cash used in the acquisition of properties of $105 million. We
also had a net cash inflow of $73 million from investments in
joint ventures and notes receivable
during 2003. Finally, we had $13 million and $7 million of cash that had restrictions lifted in
2004 and 2003, respectively. -56-




---



##### 



Net cash used in financing activities was $41 million and $346 million for 2004 and 2003,
respectively. Financing activities for the year ended December 31, 2004 and 2003 included
additional borrowings of $113 million and $266 million, respectively, offset by debt repayments of
$119 million and $556 million, respectively. The additional borrowings under our credit facility
were used to fund our continued development of senior living properties and refinance existing
debt. The significant repayments in 2003 are partially a result of our sale/long-term manage back
program. During the year ended December 31, 2004, we repurchased approximately $63 million of our
common stock and received proceeds of $30 million from the exercise of stock options. During the
year ended December 31, 2003, we repurchased approximately $106 million of our common stock and
received proceeds of $53 million from the exercise of stock options. To date, we have financed our operations primarily with cash generated from operations, both
short-term and long-term borrowings and proceeds from the sale of properties pursuant to our
sale/long-term manage back program. At December 31, 2004, we had $192 million of outstanding debt
at a weighted average interest rate of 5.48% including $120 million of convertible notes. Of the
$192 million of outstanding debt, we had $149 million of fixed-rate debt at a weighted average
interest rate of 5.74% and $43 million of variable rate debt at a weighted average interest rate of
4.57%. At December 31, 2004, we had $35 million of debt that is due within the next twelve months.
Of this amount, $17 million relates to seven wholly owned properties. This debt is mortgage
financing, most of which we intend to refinance or extend during 2005. The remaining $18 million
represents borrowings under our credit facility, which were repaid in January 2005. On September 23, 2003, we closed on a $200 million corporate credit facility with a syndicate
of banks. The corporate credit facility provides for both cash borrowings and letters of credit.
It has an initial term of three years with an extension option. Borrowings are used for general
corporate purposes, including investments, acquisitions and the refinancing of existing debt.
Consistent with our transformation to a management services company, the facility is not
secured by real estate and replaced a $265 million syndicated revolving credit facility, which
was primarily used for construction of wholly owned senior living properties. Our debt instruments contain various financial covenants and other restrictions, including
provisions that: (1) require us to meet certain financial tests (for example, our $200 million
line of credit requires us not to exceed certain leverage ratios, to maintain certain fixed charge
coverage ratios and to have a consolidated net worth of at least $387 million as adjusted each
quarter and to meet other financial ratios); (2) require consent for changes in control; and (3)
restrict our ability and our subsidiaries ability to borrow
additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which we are
not the surviving entity, without lender consent. At December 31, 2004, we were in compliance with
all of our debt covenants. -57-




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##### 



Our current contractual obligations include long-term debt, operating leases for our corporate
and regional offices, operating leases for 29 of our communities, 27 contracts to purchase land,
and four contracts to lease land. See Note 9 and Note 14 of our consolidated financial statements
for a discussion of our contractual obligations. Principal maturities of long-term debt, future minimum lease payments, and amounts due on land
purchases and lease commitments at December 31, 2004 are as follows (in thousands): Payment due by periodMoreLess than
    
    
    
    
    
    
    
    
    
    
    than 5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsLong-term debt
    
    $
    191,666
    
    
    $
    35,264
    
    
    $
    28,263
    
    
    $
    120,684
    
    
    $
    7,455Operating leases
    
    
    561,602
    
    
    
    54,444
    
    
    
    108,973
    
    
    
    109,673
    
    
    
    288,512Land purchase contracts
    
    
    100,867
    
    
    
    73,536
    
    
    
    27,331
    
    
    
    
    
    
    
    Land lease commitments
    
    
    152,120
    
    
    
    329
    
    
    
    2,610
    
    
    
    2,768
    
    
    
    146,413Total
    
    $
    1,006,255
    
    
    $
    163,573
    
    
    $
    167,177
    
    
    $
    233,125
    
    
    $
    442,380
 We anticipate future development to occur in joint ventures and expect to be reimbursed for
the majority of the land purchase contracts and land lease costs by our capital partners when the
ventures are formed. As discussed previously in Recent Developments, we expect to complete the acquisition of The
Fountains in mid-2005. Our portion of the acquisition (which is not reflected in this table) is
estimated to be approximately $63 million, which will be funded by cash on hand and existing credit
facilities. In certain transactions, we have provided credit support arrangements and commitments to
advance funds to portfolios of properties that we have
developed or for which we acquired management contracts with an opportunity for
significant occupancy increases.
Generally, credit support arrangements are for limited periods of time and require payments if cash
flow is below stated targets. For portfolios that we sell, we
establish reserves from property sale transaction proceeds to
fund these potential payments. Payments in excess of reserve amounts are expensed unless they are
in the form of contractual advances. At December 31, 2004, we had three joint venture agreements
comprising 25 properties that were subject to credit support arrangements. Generally, these
arrangements terminate within two and 22 months. We expect to
fund $2 million in 2005 under these arrangements. -58-




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##### 



At
December 31, 2004, we have commitments to advance funds on 46
communities, the longest of which is for less than two years. Advances under these commitments are recoverable as loans and are generally
repayable to us from property operating cash flows and/or proceeds from the sale of the property.
We expect to fund $13 million in 2005 under these commitments. We currently estimate that the existing credit facilities, together with existing working
capital, cash flows from operations, financing commitments and financing expected to be available,
will be sufficient to fund our short term liquidity needs, including 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 $55 million to
complete the three communities we currently have under construction. We expect these costs will be
recovered when these communities are contributed to joint ventures before construction is complete.
We have entered into contracts to purchase and lease additional sites. We expect to develop the
majority of the sites under purchase contracts within joint ventures. This business model limits
the amount of capital required of us to complete the development of the communities. We expect
that the cash flow from operations, together with borrowings under existing credit facilities will
be sufficient to fund our investment in the development and construction of these additional
communities for at least the next twelve months. We expect from time to time to seek additional
funding through public or private financing sources, including equity or debt financing. We can
provide no assurance that such financing and refinancing will be available on acceptable terms. Stock Repurchase Programs On July 23, 2002, we announced that our Board of Directors authorized the repurchase of
outstanding shares of our common stock up to an aggregate purchase price of $50 million over the
next 12 months. In 2002, we purchased 581,400 shares at an average price of $25.62 per share
through open-market purchases. On May 7, 2003, our Board of Directors expanded our repurchase
program to an aggregate of $150 million to repurchase outstanding shares of common stock and/or our
outstanding 5 1/4% convertible subordinated notes due 2009. In 2003, we purchased another 3,959,400
shares at an average price of $26.83. On March 11, 2004, our Board of Directors approved an
additional $50 million for the repurchase of outstanding shares of
common stock and/or our outstanding 5 1/4% convertible subordinated notes due 2009. During 2004,
we purchased 1,748,668 shares at an average price of $36.14 bringing the total shares purchased
through December 31, 2004 to 6,289,468 shares at an average price of $29.31. Market Risk We are exposed to market risks related to fluctuations in interest rates on our notes
receivable, investments and debt. The purpose of the following analyses is to provide a framework
to understand our sensitivity to hypothetical changes in interest rates at December 31, 2004. -59-




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##### 



We have investments in notes receivable and bonds. Investments in notes receivable are
primarily with joint venture arrangements in which we have a minority equity ownership interest
ranging from 7% to 50%. At December 31, 2004, we had minority equity ownership interests in 151
senior living properties, 26 of which are under development. We have one property in which we own
less than 10%, 121 properties in which we own between 10% and 20%, nine properties in which we own
between 21% and 30% and 20 properties in which we own more than 30%. Investments in
bonds are secured by the operating properties subject to the debt and are with properties that are
managed by us. The majority of the investments have fixed rates. Six of the notes have an
adjustable rate. We utilize a combination of debt and equity financing to fund our development, construction
and acquisition activities. We seek the financing at the most favorable terms available at the
time. When seeking debt financing, we use a combination of variable and fixed rate debt. For fixed rate debt, changes in interest rates generally affect the fair market value of the
debt, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest
rates generally do not impact fair market value of the debt, but do affect the future earnings and
cash flows. We generally cannot prepay fixed rate debt prior to maturity without penalty.
Therefore, interest rate risk and changes in fair market value should not have a significant impact
on the fixed rate debt until we would be required to refinance such debt. Holding the variable
rate debt balance of $43 million at December 31, 2004 constant, each one-percentage point increase
in interest rates would result in an increase in interest expense for the coming year of
approximately $0.4 million. The table below details by category the principal amount, the average interest rates and the
estimated fair market value of our debt. Some of the notes receivable and some items in the
various categories of debt, excluding the convertible notes, require periodic principal payments
prior to the final maturity date. The fair value estimates for the notes receivable are based on
the estimates of management and on rates currently prevailing for comparable loans. The fair
market
value estimates for debt securities are based on discounting future cash flows utilizing
current rates offered to us for debt of the same type and remaining maturity. The fair market
value estimate of the convertible notes is based on the market value at December 31, 2004. -60-




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##### 



EstimatedFairMaturity Date
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market(dollars in thousands)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    ValueAssetsNotes receivableFixed rate
    
    
    245
    
    
    
    10,620
    
    
    
    5,641
    
    
    
    
    
    
    
    
    
    
    
    12,178
    
    
    
    28,684Average interest rate
    
    
    15.0
    %
    
    
    7.5
    %
    
    
    12.3
    %
    
    
    
    
    
    
    
    
    
    
    9.4
    %
    
    
    Variable rate
    
    
    2,630
    
    
    
    93
    
    
    
    558
    
    
    
    
    
    
    
    7,143
    
    
    
    4,467
    
    
    
    14,891Average interest rate
    
    
    6.0
    %
    
    
    4.7
    %
    
    
    5.2
    %
    
    
    
    
    
    
    5.4
    %
    
    
    5.4
    %
    
    
    InvestmentsBonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,610
    
    
    
    5,610Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    %
    
    
    Sunrise REIT debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,757
    
    
    
    
    
    
    
    20,757Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.75
    %
    
    
    
    
    
    
    LiabilitiesDebtFixed rate
    
    
    4,393
    
    
    
    19,673
    
    
    
    132
    
    
    
    141
    
    
    
    151
    
    
    
    3,854
    
    
    
    28,663Average interest rate
    
    
    9.74
    %
    
    
    7.62
    %
    
    
    6.88
    %
    
    
    6.88
    %
    
    
    6.88
    %
    
    
    6.88
    %
    
    
    Variable rate
    
    
    30,871
    
    
    
    8,258
    
    
    
    200
    
    
    
    200
    
    
    
    200
    
    
    
    3,600
    
    
    
    43,329Average interest rate
    
    
    5.05
    %
    
    
    3.59
    %
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,992
    
    
    
    
    
    
    
    162,589Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.25
    %
    
    
    
    
    
    
    
 Impact of Changes in Accounting Standards In December 2004, the Financial Accounting Standards Board issued FASB Statement No. 123
(revised 2004), Share-Based Payment(SFAS 123(R)).
SFAS 123(R) supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employeesand amends FASB Statement No. 95,
Statement of Cash Flows. SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. We will
adopt SFAS 123(R) on July 1,
2005. We believe the 2005 impact of adopting the new standard will be approximately $3.0 million of
compensation expense based on our current share based compensation plan and a mid-year adoption. -61-




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##### 



Impact of Inflation Management services income from communities operated by us for third parties and resident fees
from owned senior living communities are the primary sources of revenue. These revenues are
affected by daily resident fee rates and property occupancy rates. The rates charged for the
delivery of senior living services are highly dependent upon local market conditions and
the competitive environment in which the communities operate. In addition, employee
compensation expense is the principal cost element of community operations. Employee compensation,
including salary and benefit increases and the hiring of additional staff to support our growth
initiatives, have previously had a negative impact on operating margins and may again do so in the
foreseeable future. Substantially all of our resident agreements are for terms of one year, but are terminable by
the resident at any time upon 30 days notice, and allow, at the time of renewal, for adjustments
in the daily fees payable, and thus may enable us to seek increases in daily fees due to inflation
or other factors. Any increase would be subject to market and competitive conditions and could
result in a decrease in occupancy of our communities. We believe, however, that the short-term
nature of our resident agreements generally serves to reduce the risk to us of the adverse effect
of inflation. There can be no assurance that resident fees will increase or that costs will not
increase due to inflation or other causes. -62-




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##### 



Item 7A. Quantitative and Qualitative Disclosure About Market Risk Quantitative and qualitative disclosure about market risk appears in the Market
Risk section of Item 7, Managements Discussion and Analysis of Financial Condition and Results
of Operations. -63-




---



##### 



Item 8. Financial Statements and Supplementary Data The following financial information is included on the pages indicated: PageManagements Report on Internal Control Over Financial Reporting
    
    
    65Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
    
    
    66Report of Independent Registered Public Accounting Firm
    
    
    68Consolidated Balance Sheets
    
    
    69Consolidated Statements of Income
    
    
    70Consolidated Statements of Changes in Stockholders Equity
    
    
    71Consolidated Statements of Cash Flows
    
    
    72Notes to Consolidated Financial Statements
    
    
    73
 -64-




---



##### 



MANAGEMENTS REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Sunrise Senior Living, Inc. (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process designed by, or under
the supervision of the Companys principal executive and principal financial officers and effected
by the Companys Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the consolidated
financial statements in accordance with U.S. generally accepted accounting principles. The Companys internal control over financial reporting is supported by written policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the Companys transactions and dispositions of the Companys assets; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of the
consolidated financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance with authorizations
of the Companys management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In connection with the preparation of the Companys annual consolidated financial statements,
management has undertaken an assessment of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO Framework). Managements assessment included an evaluation of the design of the Companys
internal control over financial reporting and testing of the operational effectiveness of those
controls. Based on this assessment, management has concluded that as of December 31, 2004, the Companys
internal control over financial reporting was effective to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. Ernst & Young LLP, the independent registered public accounting firm that audited the Companys
consolidated financial statements included in this Annual Report, have issued an attestation report
on managements assessment of internal control over financial reporting, a copy of which appears on
the next page of this Annual Report. March 14, 2005 /s/
Paul J. Klaassen
Chief Executive Officer /s/
Larry E. Hulse
Chief Financial Officer -65-




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Stockholders of Sunrise Senior Living, Inc.: We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Sunrise Senior Living, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Sunrise Senior Living, Inc.s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Sunrise Senior Living, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, Sunrise Senior Living, Inc.
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria. -66-




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##### 



We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Sunrise Senior Living, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of income, changes in
stockholders equity and cash flows for each of the three years in the period ended December 31,
2004 of Sunrise Senior Living, Inc. and our report dated March 14, 2005 expressed an unqualified
opinion thereon. /s/ Ernst & Young LLP
 McLean, Virginia
March 14, 2005 -67-




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Sunrise Senior Living, Inc.: We have audited the accompanying consolidated balance sheets of Sunrise Senior Living, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of income, changes in
stockholders equity and cash flows for each of the three years in the period ended December 31,
2004. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Sunrise Senior Living, Inc. as of December 31,
2004 and 2003, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Sunrise Senior Living, Inc.s internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 14, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP
 McLean, Virginia
March 14, 2005 -68-




---



##### 



SUNRISE SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS(dollars in thousands) December 31,2004
    
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    156,783
    
    
    $
    102,548Accounts receivable, net
    
    
    45,509
    
    
    
    46,329Notes receivable  affiliates
    
    
    2,875
    
    
    
    28,976Deferred income taxes
    
    
    25,412
    
    
    
    23,570Due from affiliates
    
    
    50,078
    
    
    
    18,121Prepaid expenses and other current assets
    
    
    29,996
    
    
    
    16,351Total current assets
    
    
    310,653
    
    
    
    235,895Property and equipment, net
    
    
    369,632
    
    
    
    412,228Notes receivable  affiliates
    
    
    40,700
    
    
    
    48,377Management contracts and leaseholds, net
    
    
    83,336
    
    
    
    82,395Costs in excess of assets acquired, net
    
    
    123,713
    
    
    
    106,139Investments in unconsolidated senior living properties
    
    
    93,016
    
    
    
    73,834Investments
    
    
    7,416
    
    
    
    5,610Investment in affiliate
    
    
    20,757
    
    
    
    Other assets
    
    
    36,491
    
    
    
    45,320Total assets
    
    $
    1,085,714
    
    
    $
    1,009,798LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    167,091
    
    
    $
    113,804Deferred revenue
    
    
    6,202
    
    
    
    31,229Current maturities of long-term debt
    
    
    35,264
    
    
    
    19,739Total current liabilities
    
    
    208,557
    
    
    
    164,772Long-term debt, less current maturities
    
    
    156,402
    
    
    
    178,383Deferred income taxes
    
    
    148,790
    
    
    
    129,661Other long-term liabilities
    
    
    46,867
    
    
    
    45,103Total liabilities
    
    
    560,616
    
    
    
    517,919Minority interests
    
    
    1,580
    
    
    
    1,603Stockholders Equity:Preferred stock, $0.01 par value, 10,000,000 shares authorized,
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 60,000,000 shares authorized,
20,576,275 and 20,987,730 shares issued and outstanding
in 2004 and 2003, respectively
    
    
    206
    
    
    
    210Additional paid-in capital
    
    
    248,205
    
    
    
    273,378Retained earnings
    
    
    271,796
    
    
    
    221,109Deferred compensation  restricted stock
    
    
    (4,535
    )
    
    
    (6,564
    )Accumulated other comprehensive income
    
    
    7,846
    
    
    
    2,143Total stockholders equity
    
    
    523,518
    
    
    
    490,276Total liabilities and stockholders equity
    
    $
    1,085,714
    
    
    $
    1,009,798
 See accompanying notes. -69-




---



##### 



SUNRISE SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share amounts) Year Ended December 31,2004
    
    
    2003
    
    
    2002Operating revenue:Management services
    
    $
    1,119,138
    
    
    $
    767,765
    
    
    $
    179,591Resident fees
    
    
    342,786
    
    
    
    340,775
    
    
    
    248,098Total operating revenue
    
    
    1,461,924
    
    
    
    1,108,540
    
    
    
    427,689Operating expenses:Management services
    
    
    1,015,562
    
    
    
    692,917
    
    
    
    156,251Facility operating
    
    
    258,667
    
    
    
    254,203
    
    
    
    167,354General and administrative
    
    
    73,263
    
    
    
    72,596
    
    
    
    36,944Depreciation and amortization
    
    
    21,378
    
    
    
    16,406
    
    
    
    25,317Facility lease
    
    
    47,085
    
    
    
    38,511
    
    
    
    8,298Total operating expenses
    
    
    1,415,955
    
    
    
    1,074,633
    
    
    
    394,164Other income:Income from property sales
    
    
    24,330
    
    
    
    75,579
    
    
    
    74,211Income from operations
    
    
    70,299
    
    
    
    109,486
    
    
    
    107,736Interest income (expense):Interest income
    
    
    8,533
    
    
    
    8,869
    
    
    
    11,338Interest expense
    
    
    (7,069
    )
    
    
    (25,440
    )
    
    
    (35,458
    )Net interest income (expense)
    
    
    1,464
    
    
    
    (16,571
    )
    
    
    (24,120
    )Equity in earnings of unconsolidated senior
living properties
    
    
    9,394
    
    
    
    5,343
    
    
    
    4,707Minority interests
    
    
    (701
    )
    
    
    (1,105
    )
    
    
    (160
    )Income before provision for income taxes
    
    
    80,456
    
    
    
    97,153
    
    
    
    88,163Provision for income taxes
    
    
    (29,769
    )
    
    
    (34,975
    )
    
    
    (33,502
    )Net income
    
    $
    50,687
    
    
    $
    62,178
    
    
    $
    54,661Net income per common share:Basic net income per common share
    
    $
    2.50
    
    
    $
    2.92
    
    
    $
    2.44Diluted net income per common share
    
    $
    2.24
    
    
    $
    2.63
    
    
    $
    2.23
 See accompanying notes. -70-




---



##### 



SUNRISE SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY(in thousands) AccumulatedShares of
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    
    Stock
    
    
    Additional
    
    
    Deferred
    
    
    Retained
    
    
    ComprehensiveStock
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Compensation
    
    
    Earnings
    
    
    Loss
    
    
    TotalBalance at January 1, 2002
    
    
    22,166
    
    
    $
    222
    
    
    $
    310,423
    
    
    $
    
    
    
    $
    104,270
    
    
    $
    (4,214
    )
    
    $
    410,701Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,661
    
    
    
    
    
    
    
    54,661Interest rate swaps, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    610
    
    
    
    610Foreign currency translation, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    649
    
    
    
    649Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,920Issuance of common stock
to employees
    
    
    611
    
    
    
    6
    
    
    
    11,028
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,034Repurchase of common stock
    
    
    (581
    )
    
    
    (6
    )
    
    
    (14,892
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,898
    )Issuance of restricted stock
    
    
    148
    
    
    
    1
    
    
    
    4,020
    
    
    
    (4,021
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    688
    
    
    
    
    
    
    
    
    
    
    
    688Tax effect from the exercise of non-
qualified stock options
    
    
    
    
    
    
    
    
    
    
    2,373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,373Balance at December 31, 2002
    
    
    22,344
    
    
    
    223
    
    
    
    312,952
    
    
    
    (3,333
    )
    
    
    158,931
    
    
    
    (2,955
    )
    
    
    465,818Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,178
    
    
    
    
    
    
    
    62,178Interest rate swaps, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,511
    
    
    
    2,511Foreign currency translation, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,587
    
    
    
    2,587Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,276Issuance of common stock
to employees
    
    
    2,408
    
    
    
    25
    
    
    
    53,052
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,077Repurchase of common stock
    
    
    (3,959
    )
    
    
    (40
    )
    
    
    (106,193
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106,233
    )Issuance of restricted stock
    
    
    195
    
    
    
    2
    
    
    
    4,830
    
    
    
    (4,832
    )
    
    
    
    
    
    
    
    
    
    
    (0
    )Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,601
    
    
    
    
    
    
    
    
    
    
    
    1,601Tax effect from the exercise of non-
qualified stock options
    
    
    
    
    
    
    
    
    
    
    8,737
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,737Balance at December 31, 2003
    
    
    20,988
    
    
    
    210
    
    
    
    273,378
    
    
    
    (6,564
    )
    
    
    221,109
    
    
    
    2,143
    
    
    
    490,276Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,687
    
    
    
    
    
    
    
    50,687Foreign currency translation, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,703
    
    
    
    5,703Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,390Issuance of common stock
to employees
    
    
    1,339
    
    
    
    13
    
    
    
    29,713
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,726Repurchase of common stock
    
    
    (1,749
    )
    
    

    (17
    )
    
    
    (63,176
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63,193
    )Conversion of convertible debt
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Issuance of restricted stock
    
    
    11
    
    
    
    
    
    
    
    400
    
    
    
    (400
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,119
    
    
    
    
    
    
    
    
    
    
    
    2,119Forfeiture of restricted stock
    
    
    (13
    )
    
    
    
    
    
    
    (310
    )
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    Tax effect from the exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    8,192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,192Balance at December 31, 2004
    
    
    20,576
    
    
    $
    206
    
    
    $
    248,205
    
    
    $
    (4,535
    )
    
    $
    271,796
    
    
    $
    7,846
    
    
    $
    523,518
 See accompanying notes. -71-




---



##### 



See accompanying notes. SUNRISE SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31,2004
    
    
    2003
    
    
    2002Operating activitiesNet income
    
    $
    50,687
    
    
    $
    62,178
    
    
    $
    54,661Adjustments to reconcile net income to net cash
provided by operating activities:Income from property sales
    
    
    (24,330
    )
    
    
    (75,579
    )
    
    
    (74,211
    )Equity in earnings of unconsolidated senior living properties
    
    
    (9,394
    )
    
    
    (5,343
    )
    
    
    (4,707
    )Minority interests
    
    
    701
    
    
    
    1,105
    
    
    
    160Provision for bad debts
    
    
    896
    
    
    
    6,541
    
    
    
    850Provision for deferred income taxes
    
    
    17,843
    
    
    
    24,964
    
    
    
    28,559Depreciation and amortization
    
    
    21,378
    
    
    
    16,406
    
    
    
    25,317Amortization of financing costs and discount on long-term debt
    
    
    2,018
    
    
    
    6,517
    
    
    
    5,292Amortization of deferred compensation
    
    
    2,119
    
    
    
    1,601
    
    
    
    688Loss on early debt retirement
    
    
    
    
    
    
    
    
    
    
    4,140Changes in operating assets and liabilities:(Increase) decrease:Accounts receivable
    
    
    2,340
    
    
    
    (25,516
    )
    
    
    (1,194
    )Prepaid expenses and other current assets
    
    
    (20,975
    )
    
    
    (17,038
    )
    
    
    (15,325
    )Other assets
    
    
    (2,517
    )
    
    
    (10,664
    )
    
    
    (13
    )Increase (decrease):Accounts payable and accrued expenses
    
    
    39,335
    
    
    
    5,415
    
    
    
    1Deferred revenue
    
    
    431
    
    
    
    (3,285
    )
    
    
    (174
    )Other liabilities
    
    
    8,546
    
    
    
    1,012
    
    
    
    374Net cash provided by (used in) operating activities
    
    
    89,078
    
    
    
    (11,686
    )
    
    
    24,418Investing activitiesAcquisition of business and property
    
    
    
    
    
    
    (93,407
    )
    
    
    Disposition of property
    
    
    135,785
    
    
    
    405,479
    
    
    
    470,368Acquisition of property
    
    
    (110,662
    )
    
    
    (104,721
    )
    
    

    (174,714
    )Increase in investments and notes receivable
    
    
    (159,825
    )
    
    
    (60,240
    )
    
    
    (52,169
    )Proceeds from investments and notes receivable
    
    
    141,082
    
    
    
    140,395
    
    
    
    64,678Decrease (increase) in restricted cash and cash equivalents
    
    
    12,762
    
    
    
    7,281
    
    
    
    (6,065
    )Distributions from investments
    
    
    15,255
    
    
    
    10,001
    
    
    
    6,343Contributions to investments in unconsolidated
senior living properties
    
    
    (27,987
    )
    
    
    (17,226
    )
    
    
    (22,107
    )Net cash provided by investing activities
    
    
    6,410
    
    
    
    287,562
    
    
    
    286,334Financing activitiesNet proceeds from exercised options
    
    
    29,726
    
    
    
    53,077
    
    
    
    11,034Additional borrowings under long-term debt
    
    
    112,781
    
    
    
    266,423
    
    
    
    392,731Repayment of long-term debt
    
    
    (119,451
    )
    
    
    (555,750
    )
    
    
    (569,167
    )Net investment in minority interest
    
    
    (724
    )
    
    
    (556
    )
    
    
    (750
    )Financing costs paid
    
    
    (392
    )
    
    
    (3,408
    )
    
    
    (6,858
    )Repurchase of stock
    
    
    (63,193
    )
    
    
    (106,233
    )
    
    
    (14,898
    )Net cash used in financing activities
    
    
    (41,253
    )
    
    
    (346,447
    )
    
    
    (187,908
    )Net increase (decrease) in cash and cash equivalents
    
    
    54,235
    
    
    
    (70,571
    )
    
    
    122,844Cash and cash equivalents at beginning of period
    
    
    102,548
    
    
    
    173,119
    
    
    
    50,275Cash and cash equivalents at end of period
    
    $
    156,783
    
    
    $
    102,548
    
    
    $
    173,119
 See accompanying notes. -72-




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements 1. Organization and Presentation Sunrise Senior Living, Inc. (Sunrise) is a provider of senior living services, with operations in
the United States, Canada, the United Kingdom, and Germany. 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. At December 31, 2004, Sunrise operated 380 open communities,
including 367 communities in the United States, 10 communities in Canada and three communities in
the United Kingdom, with a total resident capacity of approximately 43,100. Sunrise communities
offer a full range of personalized senior living services, from independent living, to assisted
living, to care for individuals with Alzheimers and other forms of memory loss, to nursing and
rehabilitative care. Sunrise also develops senior living communities for itself, for joint
ventures in which it retains an ownership interest and for third parties. Sunrise was incorporated in Delaware on December 14, 1994. The consolidated financial statements
include Sunrises wholly owned subsidiaries that manage, own and develop senior living properties. 2. Significant Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those
estimates. Cash and Cash Equivalents Sunrise considers cash and cash equivalents to include currency on hand, demand deposits, and all
highly liquid investments with a maturity of three months or less at the date of purchase. Due from Affiliates Due from affiliates
represents reimbursements due from joint ventures for
development costs advanced, including development fees, operating costs paid on behalf of
affiliates, including payroll and insurance costs, and management fees. Development costs are
reimbursed when third party financing is obtained by the affiliate. Operating costs are generally
reimbursed within thirty days. Allowance for Doubtful Accounts Sunrise provides an allowance for doubtful accounts on its outstanding receivables based on its
collection history. Details of the allowance for doubtful accounts receivable are as follows (in
thousands): -73-




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##### 



Year Ended December 31,2004
    
    
    2003
    
    
    2002Beginning balance
    
    $
    7,132
    
    
    $
    3,980
    
    
    $
    4,188Provision for bad debts
    
    
    896
    
    
    
    6,541
    
    
    
    850Accounts written off
    
    
    (2,197
    )
    
    
    (3,389
    )
    
    
    (1,058
    )Ending balance
    
    $
    5,831
    
    
    $
    7,132
    
    
    $
    3,980
 Property and Equipment Property and equipment are recorded at cost and include interest and property taxes capitalized on
long-term construction projects during the construction period, as well as other costs directly
related to the development and construction of properties. Maintenance and repairs are charged to
expense as incurred. Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Property and equipment are reviewed for impairment whenever
events or circumstances indicate that the assets undiscounted expected cash flows are not
sufficient to recover its carrying amount. No impairment charge was required in 2004, 2003, and
2002. Construction in progress includes pre-acquisition costs and other direct costs related to
acquisition, development and construction of properties, including certain direct and indirect
costs of a development subsidiary. If a project is abandoned, any costs previously capitalized are
expensed. Assets Held For Sale Sunrise considers assets to be held for sale when management approves and commits to a formal plan
to actively market a property for sale and when other required criteria are met. Upon designation
as an asset held for sale, Sunrise records the carrying value of each property at the lower of its
carrying value or its estimated fair value, less estimated costs to sell, and stops recording
depreciation expense. Sunrise had two properties held for sale at December 31, 2004 with a
combined book value of $10 million, which is included in property and
equipment. Liabilities associated with these properties were not material at December 31, 2004. Intangible Assets Under FASB Statement No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized, but are subject to periodic impairment
tests. Intangible assets relate primarily to the acquisition of Marriott Senior Living Services (MSLS)
and Karrington Health, Inc. in 2003 and 1999, respectively, and are comprised of management
contracts, leaseholds, and costs in excess of assets acquired. Costs in excess of assets acquired
represent costs of business acquisitions in excess of the fair value of identifiable net assets
acquired. Management contracts and leaseholds are amortized using the straight-line method over
the remaining contract term, ranging from 1 to 28 years. Sunrise conducts its annual impairment test of goodwill and indefinite life intangible assets in
the fourth quarter. Based on the results of this review, no impairment charge was required in
2004, 2003, and 2002. The carrying amounts of management contracts and leaseholds are reviewed for
impairment when indicators of impairment are identified. If the carrying amount of the assets
exceeds the undiscounted cash flows over the remaining amortization periods, the carrying amount
will be adjusted. -74-




---



##### 



Self-Insurance Programs Sunrise is self insured for certain levels of property, liability, workers compensation and
employee medical coverage. Sunrise accrues estimated costs of these self-insurance programs at the
present value of projected settlements for known and incurred but not reported claims. Deferred Financing Costs Costs incurred in connection with obtaining permanent financing for Sunrise-owned properties are
deferred and amortized over the term of the financing on a straight-line basis, which approximates
the effective interest method. Investments in Unconsolidated Senior Living Properties Sunrise owned non-controlling interests in 151 senior living properties at December 31, 2004, 26 of
which were under development. Sunrises interests, through limited liability companies and
partnerships, generally range from 7% to 50%. Sunrise has one property in which it owned less than
10%, 121 properties in which it owned between 10% and 20%, nine properties in which it owned
between 21% and 30%, and 20 properties in which it owned more than 30%. Sunrise does not control these entities and is not the primary beneficiary, as major business
decisions require approval by the other majority partners or members. Accordingly, these
investments are accounted for under the equity method. The investments are recorded at cost and
subsequently are adjusted for equity in net income (losses) and cash contributions and
distributions. Sunrise recognizes profits on sales of services to these entities to the extent of the ventures
outside ownership interest. Differences between the carrying value of investments and the
underlying equity in net assets of the investee, excluding goodwill, are amortized on a
straight-line basis over the estimated useful life of the underlying properties. See Note 14 for
information on commitments or contingencies of partnerships or limited liability companies in which
Sunrise is a general partner or managing member. Sunrises underlying equity in net assets of the investees exceeded the carrying value of
investments in the net assets of unconsolidated senior living properties by $52 million at December
31, 2004. Derivatives and Hedging Activities Sunrise recognizes all of its derivative instruments as either assets or liabilities in the
consolidated balance sheets at fair value. The accounting for changes in the fair value of a
derivative instrument depends on whether it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging relationship. For those derivative instruments
that are designated and qualify as hedging instruments, Sunrise must designate the hedging
instrument, based upon the exposure being hedged, as either a fair value hedge, a cash flow hedge,
or a hedge of a net investment in a foreign operation. -75-




---



##### 



For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that is attributable to a particular risk),
the effective portion of the gain or loss on the derivative instrument is reported on the balance
sheet and reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or
loss on the derivative instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in current earnings during the period of
change. Sunrise had no derivative instruments at December 31, 2004 and 2003. Revenue Recognition Operating revenue consists of management services revenue and resident fee revenue. Management
services revenue is comprised of revenue from management contracts, development contracts and
facility contract services. Base management fees are recognized in the month they are earned in
accordance with the terms of the management contract. Incentive management fees are recognized as
revenue in addition to the base management fee in accordance with the contracts. Revenue from
development contracts is recognized over the term of the respective development contracts using the
percentage-of-completion method. The cost-to-cost method is used to measure the extent of progress
toward completion and calculate the percentage of completion based on the costs incurred to date
compared to the expected total costs for the development contract. Revenue from facility contract
services is comprised of reimbursable expenses of properties operated with Sunrises employees
under long-term operating agreements and is recognized when services are rendered. Resident fee
revenue is recognized monthly as services are rendered. Agreements with residents are generally
for a term of one year and are cancelable by residents with thirty days notice. Income from Property Sales Income from property sales is recognized upon consummation of the sale of properties, unless a
portion of the sale is contingent upon future events or performance. Deferred gains are recognized
upon performance or resolution of the contingency. Stock-Based Compensation Stock options are granted for a fixed number of shares to employees with an exercise price equal to
the fair value of the shares at the date of grant. Sunrise accounts for stock based compensation
using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25), and accordingly, does not recognize
compensation expense for stock option grants. In addition, Sunrise grants restricted stock to
officers and other key executives. These grants vest over one to ten years. Unvested amounts are
reflected in the consolidated balance sheet and represent the fair value of shares at the date of
grant, which is amortized as compensation expense over the period of vesting. Had compensation cost for stock based compensation been determined consistent with FASB Statement
No. 123, Accounting for Stock-Based Compensation(SFAS 123), Sunrises net income and earnings
per share would have been impacted as follows: -76-




---



##### 



Year ended December 31,2004
    
    
    2003
    
    
    2002Net income, as reported:
    
    $
    50,687
    
    
    $
    62,178
    
    
    $
    54,661Fair value option expense, net of tax
    
    
    (8,832
    )
    
    
    (14,812
    )
    
    
    (14,076
    )Pro forma
    
    $
    41,855
    
    
    $
    47,366
    
    
    $
    40,585Basic net income per share:As reported
    
    $
    2.50
    
    
    $
    2.92
    
    
    $
    2.44Pro forma
    
    $
    2.06
    
    
    $
    2.22
    
    
    $
    1.82Diluted net income per share:As reported
    
    $
    2.24
    
    
    $
    2.63
    
    
    $
    2.23Pro forma
    
    $
    1.88
    
    
    $
    2.05
    
    
    $
    1.70
 The fair value of each option grant was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for 2004, 2003 and 2002: risk-free interest
rate yield of 3.5% to 5.4%; dividend of 0%; expected lives of 4 to 10 years; and volatility of
48.67% to 53.20%. The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions including the
expected stock price volatility. Because Sunrises employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock
options. In December 2004, the Financial Accounting Standards Board issued FASB Statement No. 123 (revised
2004), Share-Based Payment(SFAS 123(R)). SFAS
123(R) supersedes APB 25 and amends FASB
Statement No. 95, Statement of Cash Flows. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an alternative. Sunrise will adopt
SFAS 123(R) on July 1, 2005. Sunrise believes the 2005 impact of adopting the new standard will be
approximately $3.0 million of compensation expense based on its current share based compensation
plan and a mid-year adoption. Continuing Care Agreements Residents of the Lifecare Communities are required to sign a continuing care agreement (Care
Agreement) with Sunrise. The Care Agreements stipulate, among other things, the amount of all
entry fees and monthly fees, the type of residential unit being provided, and Sunrises obligation
to provide both health care and non-health care services. In addition, the Care Agreements provide
Sunrise with the right to increase future monthly fees. The Care Agreements are terminated upon the
receipt of a written termination notice from the resident or the death of the resident. When the present value of estimated costs to be incurred under Care Agreements exceeds estimated
revenues, the present value of such excess costs are accrued currently. The calculation assumes a
future increase in the monthly revenue commensurate with the monthly cost. The calculation
currently results in an expected positive net present value cash flow and, as such, no liability
has been recorded in the accompanying consolidated financial statements. -77-




---



##### 



The components of the entry fees for lifecare communities are recorded as Other Liabilities within
the consolidated balance sheets and include:  a.
    Lifecare Obligations  This component is refundable to the resident or the
residents estate upon termination or cancellation of the Care Agreement. Lifecare
obligations are primarily non-interest bearing and, depending on the type of plan, are
equal to either 100, 95, 90 or 50 percent of the total entry fee less any additional
occupant lifecare fees. As these obligations are considered security deposits,
interest is not imputed on these obligations in accordance with APB 21, Interest on
Receivables and Payables. Lifecare obligations amount to $26 million and $25 million
at December 31, 2004, and 2003 respectively. None of these refundable advance fees
are amortized into income.b.
    Additional Occupant Lifecare Fees  This is a nonrefundable fee for each
additional occupant in a residential unit. These nonrefundable fees are recorded as
deferred revenues and amortized into income using the straight-line method over the
residents or couples actuarial life, adjusted annually.c.
    Lifecare Fees  This component is nonrefundable and equals the total entry fee
less the two components described in a. and b. above. These nonrefundable fees are
recorded as deferred revenues and amortized into income using the straight-line method
over the residents or couples actuarial life, adjusted annually. Third Party Reimbursements A portion of the revenues from health care services is attributable to patients whose bills are
paid by Medicare or Medicaid under contractual arrangements. Medicare reimburses costs based on a
Prospective Payment System (PPS) for most of the communities. PPS does not require a provision
for estimated Medicare and Medicaid settlements. There are no receivables for estimated
third-party payer settlements at December 31, 2004 or 2003. The healthcare industry is subject to
numerous laws and regulations of federal, state and local governments. While no material regulatory
inquiries have been made, compliance with such laws and regulations can be subject to future
government review and interpretation as well as regulatory actions unknown or unasserted at this
time. Foreign Currency Translation Foreign currency balance sheet accounts are translated into U.S. dollars at the rates of exchange
in effect at year-end. The related translation adjustments are made directly to accumulated other
comprehensive income. Income and expenses are translated at average monthly rates of exchange in
effect during the year. Gains and losses from foreign currency transactions are included in net
income. Variable Interest Entities On February 1, 2003, Sunrise adopted FASB Interpretation No. 46, Consolidation of Variable Interest
Entities(FIN 46). Under FIN 46, companies are required to determine if they are the primary
beneficiary of a variable interest entity. If they are the primary beneficiary, the variable
interest entity -78-




---



##### 



must be consolidated. All companies with variable interests in variable interest
entities created after January 31, 2003 were required to apply the provisions of FIN 46 as of the
date the entity was created (immediately). Public companies with calendar year-end quarters with a
variable interest in a variable interest entity created before February 1, 2003 were required to
apply the provisions of FIN 46 at March 31, 2004. Sunrises joint ventures fall into one of three categories. First, Sunrise enters into development
joint ventures whereby a third-party investor and Sunrise capitalize a joint venture to develop and
operate senior living communities. Second, Sunrise and a third-party investor capitalize a joint
venture to acquire an existing senior living property. Finally, as a part of Sunrises sale
long-term manage back program, Sunrise sells owned properties into a joint venture in which it
holds a minority interest that is capitalized by a third-party investor. These partnerships obtain
non-recourse third-party debt. Sunrise generally does not have future requirements to contribute
additional capital beyond the original capital commitments. All three types of joint ventures are
established as real estate partnerships to own the underlying property. Sunrise will then enter
into a long-term management contract to operate the property on behalf of the joint venture.
Sunrises total investment in these joint ventures is comprised of its direct capital investment in
these joint ventures and, when agreed to, subordinated debt provided and other advances. At
December 31, 2004, this total investment was $170 million not including any guarantees provided to
these joint ventures as described in Note 14. The realization of this investment is dependent upon
the ongoing operations of the joint ventures. See Note 7 for the operating results of the joint
ventures. At December 31, 2004, there are eight joint ventures in which Sunrise had an interest that are
variable interest entities under FIN 46. Five of the variable interest entities are development
joint ventures, which were established between 1999 and 2004 and contain a total of three operating
properties and 15 properties under development. One of the variable interest entities is an
operating joint venture formed in 2000. The other variable interest entity is a sale/long-term
manage back joint venture that contains a total of 28 operating properties. The final variable
interest entity is a newly formed joint venture that contains five operating properties
recapitalized from a development venture, nine operating properties recapitalized from a
sale/manage back venture and two operating properties that were previously wholly owned by Sunrise.
Sunrise is not considered the primary beneficiary for any of these joint ventures and therefore,
continues to account for these investments under the equity method of accounting. Sunrises
maximum exposure from these eight entities was $80 million at December 31, 2004. Reclassifications Certain 2003 and 2002 balances have been reclassified to conform with the 2004 presentation. Income from Property Sales Sunrise has reclassified income from property sales from operating revenues and is now reflecting
income from property sales as other income. These amounts remain a component of income from
operations. In order to provide comparable cash flows from core operating activities, Sunrise has reclassified
all property sale cash flows from operating activities to the investing activities section of the
cash flow statement. Accordingly, certain amounts within investing activities have been
reclassified from the prior period presentation. The impact to the cash flow statement for the
years ended 2003 and 2002 was a reclassification of approximately $40 million and $68 million,
respectively, from operating cash flows to investing cash flows. -79-




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##### 



Lifecare Obligations Lifecare obligations, the component of entry fees for lifecare communities, which are refundable to
the resident or the residents estate upon termination or cancellation of the care agreement, have
been reclassified from Current and Long-term Debt to Other Liabilities at December 31, 2003. These
obligations are primarily non-interest bearing and are considered security deposits, rather than
debt. Lifecare obligations were $26 million and $25 million at December 31, 2004 and 2003,
respectively. Priority Return Income Income received from four joint ventures for priority returns previously recorded in Management
Services Revenue has been reclassified in 2003 and 2002 to a component of Equity in Earnings of
Unconsolidated Senior Living Properties. These amounts totaled $5 million, $4 million, and $4
million in 2004, 2003, and 2002, respectively. Sunrise has also reclassified priority returns and distributions from changes in other assets and
other liabilities in operating activities to distributions from investments in the investing
activities section of the cash flow. Total distributions and priority returns were $15 million,
$10 million and $6 million in 2004, 2003, and 2002 respectively. 3. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): December 31,2004
    
    
    2003Prepaid insurance
    
    $
    13,887
    
    
    $
    5,914Deposits
    
    
    2,735
    
    
    
    2,331Interest receivable
    
    
    2,522
    
    
    
    1,770Prepaid taxes
    
    
    1,156
    
    
    
    763Other
    
    
    9,696
    
    
    
    5,573$
    29,996
    
    
    $
    16,351
 4. Property and Equipment, Net Property and equipment consists of the following (in thousands): December 31,Asset Lives
    
    
    2004
    
    
    2003Land and land improvements
    
    15 years
    
    $
    46,281
    
    
    $
    53,089Building and building
improvements
    
    40 years
    
    
    246,756
    
    
    
    269,107Furniture and equipment
    
    3-10 years
    
    
    78,783
    
    
    
    68,070371,820
    
    
    
    390,266Less accumulated depreciation
and amortization
    
    
    
    
    
    
    (70,392
    )
    
    
    (60,563
    )301,428
    
    
    
    329,703Construction in progress
    
    
    
    
    
    
    68,204
    
    
    
    82,525Property and equipment, net
    
    
    
    
    
    $
    369,632
    
    
    $
    412,228
 -80-




---



##### 



Depreciation expense was $18 million, $13 million, and $20 million for the years ended December 31,
2004, 2003, and 2002, respectively. 5. Notes Receivable  Affiliates Notes receivable  affiliates plus accrued interest consist of the following (in thousands): December 31,2004
    
    
    2003LLC Note III, interest accrues at 10.0%
    
    $
    
    
    
    $
    16,920Note II with international joint venture, interest accrues at 12.5%
    
    
    
    
    
    
    14,386Note III with international joint venture, interest accrues at 12.5%
    
    
    1,074
    
    
    
    460Note IV partner loan with international joint venture, interest
accrues at 15.0%
    
    
    245
    
    
    
    9,369Note V with international joint venture, imputed interest rate of 4.37%
    
    
    1,095
    
    
    
    870LLC Note VI, revolving credit agreement, interest accrues at 10.0%
    
    
    9,160
    
    
    
    12,865Promissory Note III, interest accrues at 8.0%
    
    
    300
    
    
    
    280Promissory Note IV, interest accrues at higher of 6% or LIBOR plus 3.0%
    
    
    2,630
    
    
    
    2,681Promissory Note V, interest accrues at 7.5%
    
    
    
    
    
    
    4,325Promissory Note VI, interest accrues at LIBOR plus 3.0%
    
    
    1,304
    
    
    
    1,304Promissory Note VII, interest accrues at LIBOR plus 2.5%
    
    
    1,038
    
    
    
    1,041Promissory Note VIII, revolving credit agreement, interest accrues at
15.0%
    
    
    3,505
    
    
    
    1,591Promissory Note IX, interest accrues at 8.0%
    
    
    1,836
    
    
    
    1,700Promissory Note X, interest accrues at LIBOR plus 3.5%
    
    
    2,125
    
    
    
    2,132Promissory Note XI, credit line, interest accrues at LIBOR plus 3.0%
    
    
    7,143
    
    
    
    7,172Promissory Note XII, interest accrues at LIBOR plus 2.75%
    
    
    558
    
    
    
    Subordinated Loan Agreement I interest accrues at 10.75%
    
    
    849
    
    
    
    Promissory Note XIII, interest accrues at 7.5%
    
    
    10,483
    
    
    
    Other notes receivable
    
    
    230
    
    
    
    25743,575
    
    
    
    77,353Current maturities
    
    
    (2,875
    )
    
    
    (28,976
    )$
    40,700
    
    
    $
    48,377
 In March 1999, Sunrise jointly formed a limited liability company (LLC III) in which it owns a 9%
minority interest. The purpose of LLC III is to develop, construct and own senior living
properties. Sunrise loaned LLC III $16 million (LLC Note III) to partially finance the initial
development and
construction of five properties. All five properties were completed and open at December 31, 2003.
These properties were included in those properties sold to Sunrise Senior Living Real Estate
Investment Trust (Sunrise REIT) in December 2004. During 2004, Sunrise received payments of $12.8
million and -81-




---



##### 



$5.3 million for principal and interest, respectively, to complete the sale of these
properties and there is no outstanding balance remaining on the note. In 2001, Sunrise agreed to make funds available (Note II) to International LLC to partially
finance the initial development and construction of properties in the United Kingdom and Canada.
Interest on amounts outstanding under Note II accrued at 12.5%. The Note II to Sunrise was
subordinated to other lenders of the joint venture. These properties related to this joint venture
were included in those properties sold to Sunrise REIT in December 2004. During 2004, Sunrise
received payments of $13.0 million and $3.2 million for principal and interest, respectively, to
complete the sale of these properties, and there is no outstanding balance remaining on the note. In 2001, Sunrise jointly formed a limited liability partnership (International LLC II) with the
majority owner of International LLC in which Sunrise own a 7% minority interest. The purpose of
International LLC is to develop, construct and own senior living properties in the United Kingdom
and Canada. In 2002, Sunrise agreed to make funds available (Note III) to International LLC II
to partially finance the initial development and construction of properties in the United Kingdom
and Canada. Interest on amounts outstanding under Note III accrues at 12.5%. The Note III is
subordinated to other lenders of the joint venture. Principal and interest become due as each
property is sold by the joint venture. In 2003, Sunrise approved a Partner Loan (Note IV) to the majority owner of International LLC II
to partially finance the initial development and construction of properties in the United Kingdom
and Canada. Interest on amounts outstanding under Note IV accrues at 15.0%. During 2004, Sunrise
received payments of $10.6 million for principal. Interest becomes due upon the sale of the
properties. In 2002, Sunrise jointly formed a limited liability partnership (International LLC III) with the
majority owner of International LLC in which Sunrise owns a 20% minority interest. The purpose of
International LLC is to develop, construct and own senior living properties in the United Kingdom
and Germany. In May 2002, Sunrise approved a Partner Loan (Note V) to the International LLC III
to partially finance the initial development and construction of properties in the United Kingdom
and Germany. Interest on amounts outstanding under Note V accrues at an imputed interest rate of
4.37%. Principal and interest become due as each property is sold by the joint venture. In December 2002, Sunrise jointly formed a limited liability company (LLC VI) in which Sunrise
owns a 20% minority interest. The purpose of LLC VI is to develop, construct and own senior living
properties. Sunrise agreed to loan LLC VI up to $20 million (LLC Note VI) through a revolving
credit agreement to partially finance the initial development and construction of fifteen
properties. Repayment is expected from funding of the other lenders. Eleven properties were
completed and open and four were under construction at December 31, 2004. Interest accrues at 10%.
The LLC Note VI is secured by the properties and is subordinated to other lenders of LLC VI. The
advanced principal amount of the loan and accrued interest are due on the earlier of December 28,
2010 or termination of the management agreement between the parties. During 2004, an additional $4
million was borrowed against the credit agreement and Sunrise received payments of $6.4 and $1.0
million for principal and interest, respectively. In February 2002, Sunrise accepted a secured promissory note in the amount of $250,000 (Promissory
Note III) from an unrelated third party. The Promissory Note III pertains to a development and - 82 -




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##### 



management rights agreement for properties in Georgia and Missouri. Interest accrues at 8% per
annum. Principal and accrued interest are due March 2007. In March 2002, Sunrise accepted a promissory note in the amount of $3 million (Promissory Note
IV) from a limited partnership in which Sunrise has a 20% ownership interest. The Promissory
Note IV is subordinated to other lenders of the limited partnership. Interest accrues at the
higher of 6% or LIBOR plus 3% per annum. Monthly interest payments started on June 1, 2002 and
continued through March 1, 2003. Monthly principal and interest payments started on April 1, 2003
and continued through April 1, 2004. During 2004, the maturity date for this note was extended
through April 1, 2005. Principal and any accrued and unpaid interest are due on April 1, 2005. In March 2003, Sunrise accepted a promissory note in the amount of $4.8 million (Promissory Note
V) from a third party. The Promissory Note V is subordinated to other lenders of the third
party. Interest accrues at 7.5% per annum. Monthly interest payments started on April 20, 2003
and continued through February 20, 2004. Monthly principal and interest payments started on
February 20, 2004 and continue through February 20, 2033. In 2004, Sunrise received payments of
$3.8 and $0.4 million in principal and interest, respectively, and there is no outstanding balance
remaining on the note. In June 2003, Sunrise accepted a promissory note in the amount of $2.1 million (Promissory Note
X) from a limited liability company in which Sunrise has a 10% ownership interest. Interest
accrues at LIBOR plus 3.5% per annum. Monthly interest payments started on July 1, 2003 and
continue through June 1, 2013. Principal and any accrued and unpaid interest are due and payable
on July 1, 2013. In September 2003, Sunrise accepted a promissory note for a credit line in the amount of $7.9
million (Promissory Note XI) from a limited liability company in which Sunrise has a 10%
ownership interest. Sunrise paid an advance of principal of $7.1 million on the credit line during
2003. Interest accrues at LIBOR plus 3% per annum. Principal and any accrued and unpaid interest
are due and payable on September 30, 2008 unless the maturity date is extended. There is an option
for a five-year extension to September 30, 2013. In September 2003, Sunrise accepted a secured promissory note in the amount of $1.3 million
(Promissory Note VI) from a limited liability company in which Sunrise has a 10% ownership
interest. Interest accrues at LIBOR plus 3.0% per annum. Monthly interest payments started on
October 1, 2003 and continue through September 1, 2013. Principal and any accrued and unpaid
interest are due and payable on October 1, 2013. In September 2003, Sunrise accepted a promissory note in the amount of $1 million (Promissory Note
VII) from a limited liability company in which Sunrise has a 10% ownership interest. Interest
accrues at LIBOR plus 2.5% per annum. Monthly interest payments started on October 1, 2003 and
continue through September 1, 2013. Principal and any accrued and unpaid interest are due and
payable on October 1, 2013. In November 2001, Sunrise accepted a promissory note for a revolving credit agreement in the amount
of $3 million (Promissory Note VIII) from a company in which Sunrise has a 3% ownership interest.
Interest accrues at 15% per annum. Monthly interest payments started on the first calendar day
of the month following the first initial draw under the terms of the revolving credit agreement and
continue - 83 -




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##### 



through September 30, 2007. The first draw on the credit agreement was for $1.5 million
during September 2003 and the second draw on the credit agreement was for $1.0 million during
February 2004. The third and final draw on the credit agreement was for $0.5 million during April 2004. Principal
and any accrued and unpaid interest are due and payable on September 30, 2007. In December 2003, Sunrise accepted a promissory note in the amount of $1.7 million (Promissory
Note IX) from a partner of a jointly formed limited liability company in which Sunrise has a 10%
interest. Interest accrues at 8% per annum. Interest is compounded quarterly. Principal and
accrued interest are due and payable on the maturity date. The maturity date is the earlier of the
date the borrower sells, transfers or assigns all or any portion of its membership interest in the
company, the date the company sells substantially all of its assets, or June 30, 2007. In November 2003, Sunrise accepted a promissory note in the amount of $0.5 million (Promissory
Note XII) from a partner of a jointly formed limited liability company in which Sunrise has a 25%
interest. Interest accrues at LIBOR plus 2.75% per annum. Principal and interest are due from cash
flow from the limited liability company. In 2004, Sunrise accepted a subordinated loan (Subordinated Loan Agreement I) in the amount of $1
million from a property which Sunrise manages but has no ownership interest. Interest accrues at
10.75% simple interest per annum. Payments of principal and interest shall be made as funds are
available but are due and payable by November 21, 2024. In May 2004, Sunrise accepted a promissory note in the amount of $10 million (Promissory Note
XIII) from a property which Sunrise manages but has no ownership interest. Interest accrues at
7.5% simple interest per annum. Payments of interest and principal shall be due on the maturity
date of June 1, 2006. Sunrise has an option to purchase alternate property from the borrower, and
under the circumstances that Sunrise chooses to purchase this property, the purchase price of the
alternate property shall be credited against the principal balance of this note. Sunrise believes the net carrying amount of the notes receivable approximates market value at
December 31, 2004 and 2003. Sunrise recorded interest income on these notes from these affiliates of $7 million, $7 million and
$9 million during 2004, 2003 and 2002, respectively. 6. Intangibles and Other Assets Intangible assets consist of the following (in thousands): December 31,
    
    Estimated2004
    
    2003
    
    Useful lifeManagement contracts, less
accumulated amortization of $6,389
and $2,764
    
    $
    77,785
    
    
    $
    76,365
    
    
    2-29 yearsLeaseholds, less accumulated
amortization of $2,440 and $1,960
    
    
    5,551
    
    
    
    6,030
    
    
    2-29 years$
    83,336
    
    
    $
    82,395
 - 84 -




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##### 



Amortization expense was $4 million, $3 million, and $5 million for the years ended December 31,
2004, 2003 and 2002, respectively. Amortization expense is expected to be approximately $4 million
in each of the next five years. Included in Other Assets is restricted cash totaling $11.1 million and $23.9 million at December
31, 2004 and 2003, respectively, consisting of real estate tax escrows, operating reserves, and
capital reserves related to Sunrises debt agreements and resident deposits. 7. Transactions with Unconsolidated Entities Included in due from affiliates are net receivables and advances from related unconsolidated
partnerships or limited liability companies of $50 million and $18 million at December 31, 2004 and
2003, respectively. Net receivables from unconsolidated partnerships or limited liability
companies relate primarily to management activities. Also, see Note 5 for a discussion of notes
receivable from affiliates. Summary financial information for unconsolidated entities (7% to 50% owned) accounted for by the
equity method is as follows (in thousands): December 31,2004
    
    
    2003
    
    
    2002Assets, principally property and
equipment
    
    $
    2,241,246
    
    
    $
    1,915,403
    
    
    $
    1,438,034Liabilities, principally long-term debt
    
    
    1,512,953
    
    
    
    1,343,956
    
    
    
    1,003,627Equity
    
    
    728,293
    
    
    
    571,447
    
    
    
    434,407Revenues
    
    
    487,913
    
    
    
    420,520
    
    
    
    271,348Net income (loss)
    
    
    175,188
    
    
    
    14,353
    
    
    
    (3,158
    )
 Accounting policies used by the unconsolidated entities are similar to those used by Sunrise.
The net income for 2004 includes $155 million from gains on sale of properties. Total management services revenue from related unconsolidated entities was $408 million, $296
million, and $157 million for the years ended December 31, 2004, 2003 and 2002, respectively. The
2003 and 2002 total management services revenue has been adjusted to conform to the 2004
presentation of the priority return payments as discussed in Note 2. 8. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following (in thousands): December 31,2004
    
    
    2003Accrued taxes
    
    $
    672
    
    
    $
    3,260Accrued employee benefits
    
    
    53,103
    
    
    
    42,993Self-insurance reserves
    
    
    70,621
    
    
    
    39,673Other accruals
    
    
    29,174
    
    
    
    19,191Accounts payable
    
    
    9,207
    
    
    
    5,509Other
    
    
    4,314
    
    
    
    3,178$
    167,091
    
    
    $
    113,804
 - 85 -




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##### 



9. Long-Term Debt Long-term debt consists of the following (in thousands): December 31,2004
    
    
    20035 1/4% convertible subordinated notes due 2009
    
    $
    119,992
    
    
    $
    120,000Corporate credit facility
    
    
    18,000
    
    
    
    Other mortgages and notes payable
    
    
    53,674
    
    
    
    78,122191,666
    
    
    
    198,122Current maturities
    
    
    (35,264
    )
    
    
    (19,739
    )$
    156,402
    
    
    $
    178,383
 In January 2002, Sunrise issued and sold $125 million aggregate principal amount of 51/4% convertible
subordinated notes due February 1, 2009. The convertible notes bear interest at 51/4% per annum
payable semiannually on February 1 and August 1 each year beginning on August 1, 2002. The
conversion price is $35.84 (equivalent to a conversion rate of 27.9018 shares per $1,000 principal
amount of the convertible notes). The notes are subordinated to Sunrises existing and future
senior indebtedness. During 2003, Sunrise repurchased $5 million principal amount of the
convertible notes. The convertible notes are redeemable at Sunrises option commencing February 5,
2006, at specified premiums. The holders of the convertible notes may require Sunrise to
repurchase the convertible notes upon a change of control of Sunrise as defined in the convertible
notes. During the third quarter of 2003, Sunrise closed on a $200 million corporate credit facility with a
syndicate of banks. The corporate credit facility provides for both cash borrowings and letters of
credit. It has an initial term of three years with an extension option. Cash borrowings accrue
interest at LIBOR plus 1.75% to 3.00% or the higher of the Federal Funds Rate plus 0.50% and Prime
plus 0.25% to 1.50%. LIBOR-based borrowings have fixed interest periods of one, two, three or six
months. Letters of credit fees are equal to 2.00% of the maximum available to be drawn on the
letters of credit. Borrowings are used for general corporate purposes including investments,
acquisitions and the refinancing of existing debt. Consistent with Sunrises transformation to a
management services company, the credit facility is not secured by real estate and replaced a $265
million syndicated revolving credit facility. Sunrise pays commitment fees of 0.25% to 0.45% on
the unused balance of the credit facility. There were $18 million of cash advances and $39 million
of letters of credit outstanding under this credit facility at December 31, 2004. The cash
advances accrued interest at 4.23% at December 31, 2004. The letters of credit have been pledged
primarily for the benefit of certain municipalities and insurance companies and were unused at
December 31, 2004. The letters of credit issued under the corporate credit facility expire within
two years. At December 31, 2004, Sunrise had an additional $6 million in unused letters of credit that were
issued by other lending institutions. The letters of credit were pledged for the benefit of a
municipality and a lending institution and expire within one year. - 86 -




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##### 



In November 2001, Sunrise entered into a $60 million revolving credit facility, expandable to $100
million. The revolving credit facility matures in November 2006, is subject to a five-year
extension, accrues interest at LIBOR plus 1.20% (3.66% at December 31, 2004) and is collateralized
by senior living properties. The revolving credit facility may be converted to a fixed rate
facility at any time during the term. Sunrise pays commitment fees of 0.13% on the unused portion
of the credit facility. In September 2003, Sunrise reduced its revolving credit facility to $16
million. At December 31, 2004, the collateral of the revolving credit facility consisted of two
properties and $8 million was outstanding. In December 2002, Sunrise entered into an $18 million revolving credit facility. The revolving
credit facility matured in January 2005, accrued interest at LIBOR plus 2.50% (5.06% at December
31, 2004) and was collateralized by senior living properties. In June 2003, Sunrise reduced its
revolving credit facility to $11 million due to the sale of one property that served as collateral.
At December 31, 2004, the collateral of the revolving credit facility consisted of seven
properties and no amounts were outstanding. In December 2002, Sunrise received a commitment for a $17 million credit facility. The credit
facility matured in February 2005, was subject to a one-year
extension, accrued interest at LIBOR
plus 3.25% (5.65% at December 31, 2004) subject to a minimum of
5.75% and was collateralized by
three senior living properties. In June 2003, Sunrise reduced its revolving credit facility to $2
million due to the sale of two properties that served as collateral. At December 31, 2004, the
collateral of the revolving credit facility consisted of one property and no amounts were
outstanding. In December 2002, Sunrise received commitments for mortgages on two senior living properties for an
aggregate amount of $16 million. The mortgages were scheduled to mature in January 2005 and were
subject to a one-year extension. Interest accrued at LIBOR plus 2.50% and the mortgages were
cross-collateralized by two senior living properties. In September 2003, Sunrise reduced its
revolving credit facility to $9 million due to the sale of one property that served as collateral.
In September 2004, the line was terminated. In June 2003, Sunrise entered into a $2 million revolving line of credit secured by two senior
living properties. The line of credit matured in January 2005,
accrued interest at LIBOR plus
2.50% (5.06% at December 31, 2004) and was cross-collateralized with the $18 million revolving
credit facility entered into in December 2002. At December 31, 2004, no amounts were outstanding. The other mortgages and notes payable relate primarily to 9 properties whereby outstanding balances
are collateralized by the total assets of the respective property. Payments of principal and
interest are made monthly. Interest rates range from 3.00% to 10.00% with remaining maturities
ranging from less than one year to 22 years. These other mortgages and notes payable have total
borrowings of $46 million at December 31, 2004. During 2001, Sunrise entered into five interest rate swap agreements that effectively converted
$125 million of its variable LIBOR based syndicated revolving credit facility to a fixed-rate
basis. The maturity dates of the swap agreements ranged from June 2003 to June 2004. In December 2002,
Sunrise paid $400,000 to terminate one of the five interest rate swap agreements. In 2003, Sunrise
paid $3 million to terminate the remaining four interest rate swap agreements. For the year ended
December 31, 2003, Sunrise recognized $2 million in interest expense related to the amortization of
the swap balance in - 87 -




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##### 



accumulated other comprehensive income. Sunrise also wrote off $2 million of
the swap balance in accumulated other comprehensive income as debt associated with the swap was
repaid as part of the property sale transactions closed in the second and third quarters of 2003.
At December 31, 2004 and 2003, Sunrise had a zero balance in accumulated other comprehensive income
related to the terminated swap agreements. There are various financial covenants and other restrictions in Sunrises debt instruments,
including provisions that: (1) require Sunrise to meet certain financial tests (for example, the
$200 million line of credit requires Sunrise not to exceed certain leverage ratios, to maintain
certain fixed charge coverage ratios and to have a consolidated net worth of at least $387 million
as adjusted each quarter and to meet other financial ratios); (2) require consent for changes in
Sunrises control; and (3) restrict Sunrise and its subsidiaries ability to borrow additional
funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which Sunrise is not the surviving entity, without lender consent. At December 31,
2004, Sunrise was in compliance with all of its debt covenants. Principal maturities of long-term debt at December 31, 2004 are as follows (in thousands): 2005
    
    $
    35,2642006
    
    
    27,9312007
    
    
    3322008
    
    
    3412009
    
    
    120,343Thereafter
    
    
    7,455$
    191,666
 Interest paid totaled $10 million,$23 million and $36 million in 2004, 2003 and 2002,
respectively. Interest capitalized was $6 million, $3 million and $7 million in 2004, 2003 and
2002, respectively. 10. Stockholders Equity Stock Option Plans Sunrise has stock option plans providing for the grant of incentive and nonqualified stock options
to employees, directors, consultants and advisors. At December 31, 2004, these plans provided for
the grant of options to purchase up to 9,898,910 shares of common stock. The option exercise price
and vesting provisions of the options are fixed when the option is granted. The options expire ten
years from the date of grant and generally vest over a four-year period. The option exercise price
is not less than the fair market value of a share of common stock on the date the option is
granted. On April 25, 1996, the Board of Directors adopted the 1996 Directors Stock Option Plan (the
Directors Plan). Any director who was a member of the Board of Directors but not an officer or
employee of Sunrise or any of its subsidiaries (other than the persons elected as director
representatives of the holders of Series A Preferred Stock) was eligible to receive options under the Directors
Plan. The option exercise price is not less than the fair market value of a share of common stock
on the date the option was granted. The period for exercising an option begins six months after
the option was granted and generally ends ten years from the date the option was granted. Options
granted under the Directors Plan vested immediately. All options granted under the Directors Plan
are non-incentive stock options. The - 88 -




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##### 



Directors Plan was terminated in March 2000. At December 31, 2004, 75,000 options remained outstanding under the plan. A summary of Sunrises stock option activity, and related information for the years ended December
31 are presented below: 2004
    2003
    2002Weighted
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted--Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    -AverageShares
    
    
    Exercise
    
    
    Shares
    
    
    Exercise
    
    
    Shares
    
    
    ExerciseOptions
    
    (000s)
    
    
    Price
    
    
    (000s)
    
    
    Price
    
    
    (000s)
    
    
    PriceOutstanding-beginning of year
    
    
    4,327
    
    
    $
    21.63
    
    
    
    6,411
    
    
    $
    22.07
    
    
    
    6,168
    
    
    $
    21.52Granted
    
    
    214
    
    
    
    35.83
    
    
    
    607
    
    
    
    19.32
    
    
    
    1,049
    
    
    
    22.90Exercised
    
    
    (1,152
    )
    
    
    21.88
    
    
    
    (2,337
    )
    
    
    21.64
    
    
    
    (568
    )
    
    
    17.62Canceled
    
    
    (424
    )
    
    
    26.65
    
    
    
    (354
    )
    
    
    24.33
    
    
    
    (238
    )
    
    
    22.24Outstanding-end of year
    
    
    2,965
    
    
    
    24.29
    
    
    
    4,327
    
    
    
    21.63
    
    
    
    6,411
    
    
    
    22.07Options exercisable at year-end
    
    
    2,146
    
    
    
    
    
    
    
    2,576
    
    
    
    
    
    
    
    3,572Weighted-average fair value of
options granted during the
year
    
    $
    14.87
    
    
    
    
    
    
    $
    16.61
    
    
    
    
    
    
    $
    18.15
 The following table summarizes information about stock options outstanding at December 31, 2004: Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Options
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageRange of
    
    Outstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable
    
    
    ExerciseExercise Prices
    
    (000s)
    
    
    Life
    
    
    Price
    
    
    (000s)
    
    
    Price$3.00 - $8.00
    
    
    20
    
    
    
    0.6
    
    
    $
    3.42
    
    
    
    20
    
    
    $
    3.428.01 - 20.00
    
    
    730
    
    
    
    5.4
    
    
    
    16.82
    
    
    
    680
    
    
    
    16.5820.01 - 25.63
    
    
    1,252
    
    
    
    5.3
    
    
    
    24.17
    
    
    
    934
    
    
    
    24.2825.64 - 44.56
    
    
    963
    
    
    
    7.1
    
    
    
    30.54
    
    
    
    512
    
    
    
    31.052,965
    
    
    
    
    
    
    
    
    
    
    
    2,146
 Restricted Stock Sunrises stockholders approved the 2002 Stock Option and Restricted Stock plan at Sunrises annual
meeting of stockholders held on May 17, 2002. On March 21, 2002 and February 25, 2003, a total of
148,100 and 3,500 shares, respectively, of restricted stock were granted to key executives. - 89 -




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##### 



Sunrises stockholders approved the 2003 Stock Option and Restricted Stock plan at its annual
meeting of stockholders held on May 12, 2003. On May 12 and September 10, 2003, a total of 192,400
shares of restricted stock were granted to key executives. On March 11, 2004, a total of 2,816
shares of restricted stock were granted to a key executive.
On September 8, 2004, and November 17, 2004, a total
of 7,535 shares of restricted stock were granted to key executives. These grants vest over one to ten years. Unvested amounts are reflected in the consolidated
balance sheets and represent the fair value of shares at the date of grant, which will be amortized
as compensation expense over the period of vesting. During 2004, 2003 and 2002 Sunrise recognized
$2.1 million, $1.6 million and $0.7 million in compensation expense, respectively. At December 31,
2004, 74,143 of the 354,351 shares of restricted stock were vested and 12,584 of the 354,351 shares
of restricted stock were forfeited. Repurchase of Outstanding Shares and Conversion of Convertible Debt In July 2002, Sunrise announced that its Board of Directors authorized the repurchase of
outstanding shares of its common stock up to an aggregate purchase price of $50 million over the
next 12 months. In 2002, Sunrise purchased 581,400 shares at an average price of $25.62 per share
through open-market purchases. In May 2003, the Board of Directors expanded the repurchase program
to an aggregate of $150 million to repurchase outstanding shares of Sunrises common stock and/or
its outstanding 5 1/4% convertible subordinated note due 2009. In 2003, Sunrise purchased another
3,959,400 shares at an average price of $26.83 bringing the total shares purchased through December
31, 2003 to 4,540,800 shares at an average price of $26.68. Additionally, in 2003, Sunrise
purchased $5 million of its convertible debt. In 2004, Sunrise purchased another 1,748,668 shares
at an average price of $36.14 bringing the total shares purchased through December 31, 2004 to
6,289,468 shares at an average price of $29.31. Stockholder Rights Agreements The Board of Directors adopted a Stockholders Rights Agreement (Rights Agreement) effective April
25, 1996, as amended. All shares of common stock issued by Sunrise between the date of adoption of
the Rights Agreement and the Distribution Date (as defined below) have rights attached to them.
The rights expire ten years after adoption of the Rights Agreement. Each right, when exercisable,
entitles the holder to purchase one one-thousandth of a share of Series C Junior Participating
Preferred Stock at a price of $85.00 (the Purchase Price). Until a right is exercised, the
holder thereof will have no rights as a stockholder of Sunrise. The rights initially attach to the common stock. The rights will separate from the common stock
and a distribution of rights certificates will occur (a Distribution Date) upon the earlier of
(1) ten days following a public announcement that a person or group (an Acquiring Person) has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding
shares of common stock (the Stock Acquisition Date) or (2) ten business days (or such later date
as the Board of Directors may determine) following the commencement of a tender offer or exchange
offer, the consummation of - 90 -




---



##### 



which would result in the beneficial ownership by a person of 20% or
more of the outstanding shares of common stock. However, neither Paul J. Klaassen nor Teresa M.
Klaassen (nor their affiliates, associates and estates), each of whom, as of the date of adoption
of the Rights Agreement, beneficially owned in excess of 20% of the outstanding shares of common
stock, will be deemed an Acquiring Person, unless they acquire an additional 2% of the common
stock which was outstanding at the time of completion of Sunrises initial public offering. In general, if a person becomes the beneficial owner of 20% or more of the then outstanding shares
of common stock, each holder of a right may exercise the right by purchasing common stock having a
value equal to two times the Purchase Price. If at any time following the Stock Acquisition Date
(1) Sunrise is acquired in a merger or other business combination transaction in which it is not
the surviving corporation (other than a merger which follows an offer described in the preceding
paragraph), or (2) 50% or more of Sunrises assets or earning power is sold or transferred, each
holder of a right shall have the right to receive, upon exercise, common stock of the acquiring
company having a value equal to two times the Purchase Price. The Board of Directors of Sunrise
generally may redeem the rights at a price of $.005 per right at any time until ten days after an
Acquiring Person has been identified as such. 11. Net Income Per Common Share The following table summarizes the computation of basic and diluted net income per common share
amounts presented in the accompanying consolidated statements of operations (in thousands, except
per share amounts): Year ended December 31,2004
    
    
    2003
    
    
    2002Basic Earnings Per Share:Net income
    
    $
    50,687
    
    
    $
    62,178
    
    
    $
    54,661Denominator for basic net income per
common share-weighted average shares
    
    
    20,302
    
    
    
    21,298
    
    
    
    22,357Basic net income per common share:
    
    $
    2.50
    
    
    $
    2.92
    
    
    $
    2.44Diluted Earnings Per Share:Net income
    
    $
    50,687
    
    
    $
    62,178
    
    
    $
    54,661Assumed conversion of convertible
notes, net of tax
    
    
    4,386
    
    
    
    4,584
    
    
    
    4,610Diluted net income
    
    $
    55,073
    
    
    $
    66,762
    
    
    $
    59,271Denominator for basic net income per
common share-weighted average shares
    
    
    20,302
    
    
    
    21,298
    
    
    
    22,357Effect of dilutive securities:Employee stock awards
    
    
    979
    
    
    
    624
    
    
    
    643Convertible notes
    
    
    3,348
    
    
    
    3,452
    
    
    
    3,552Denominator for diluted net income per
common share-weighted average shares
plus assumed conversions
    
    
    24,629
    
    
    
    25,374
    
    
    
    26,552Diluted net income per common share:
    
    $
    2.24
    
    
    $
    2.63
    
    
    $
    2.23
 - 91 -




---



##### 



Certain shares issuable upon the exercise of stock options or convertible notes have been excluded
from the computation because the effect of their inclusion would be anti-dilutive. Options are
included under the treasury stock method to the extent they are dilutive. 12. Acquisitions On March 28, 2003, Sunrise completed its acquisition of all the outstanding stock of Marriott
International, Inc.s wholly owned subsidiary, MSLS, which owns and operates senior independent
full-service and assisted living properties. Sunrise paid approximately $92 million in cash to
acquire all of the outstanding stock of MSLS. Sunrise also assumed approximately $48 million of
working capital liabilities and other funding obligations as well as approximately $25 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. Operations
of MSLS are included in the consolidated statements of income from March 28, 2003 to December 31,
2004. The acquisition of MSLS was accounted for using the purchase method of accounting and the purchase
price was allocated to the assets acquired and liabilities assumed based on their estimated fair
values. The initial purchase price was allocated to assets acquired, including separately
identifiable intangible assets, and liabilities assumed based on current valuations of assets and
liabilities. Certain valuations are subject to adjustment as contingencies are resolved and
additional information on certain estimates becomes available. Net working capital deficit was
adjusted by approximately $5 million, costs in excess of assets acquired and transaction costs were
adjusted by approximately $2 million each and land was adjusted by approximately $1 million during
2003 as additional information was obtained or finalization of working capital balances were
determined. In 2004, costs in excess of assets acquired was adjusted by approximately $18 million
as a result of true-ups of working capital. The purchase price values assigned to the major assets
and liabilities were as follows: Management contracts and leases, net
    
    $63 millionLand
    
    $22 millionLife care endowment obligations
    
    $25 millionNet working capital deficit and other
    
    $48 millionCosts in excess of assets acquired
    
    $91 millionTransaction costs
    
    $12 million
 The portion of the purchase price allocated to management contracts and leases will be amortized
into expense over the specific term of each individual management contract and lease acquired
ranging from two to 29 years. Sunrise also assumed certain guarantees of MSLS and Marriott International, Inc.
in the acquisition. See Note 14 for a description of those guarantees. The year ended December
31, 2003 includes $11 million in transition expenses related to this acquisition which have been
reflected in general and administrative expenses. The following unaudited pro forma information presents the results of operations of Sunrise for the
years ended December 31, 2003 and 2002, respectively, as if the acquisition of MSLS had taken place
at January 1, 2002. - 92 -




---



##### 



Year Ended December 31,2003
    
    
    2002Revenue
    
    $
    1,380,291
    
    
    $
    1,273,870Net income
    
    $
    61,637
    
    
    $
    52,553Basic earnings per share
    
    $
    2.89
    
    
    $
    2.35Diluted earnings per share
    
    $
    2.61
    
    
    $
    2.15
 In June 2003, Sunrise acquired the remaining majority interest, ranging from 50 to 81 percent, in
seven senior living properties in which it previously maintained a minority ownership interest.
The majority interest holder was a not-for-profit entity. In order to acquire the remaining
ownership interest, Sunrise assumed approximately $21 million in debt and paid approximately $2
million in cash. These properties were previously accounted for using the equity method of
accounting. The acquisition was accounted for using the purchase method of accounting. Sunrise
allocated its current investment carrying value and purchase price to the assets acquired and
liabilities assumed. The initial purchase price values assigned to the major assets and
liabilities are $35 million for property, $5 million for land, $3 million for furniture, fixtures
and equipment, and $21 million for debt. The results of operations for these properties are
reflected in Sunrises consolidated financial statements from June 30, 2003 forward. The
acquisition of these interests was immaterial to the pro forma results. 13. Dispositions In 2000, Sunrise announced its intention to sell selected owned properties as a normal part of its
operations and retain long-term management contracts and, in many cases, minority equity interests
in the properties. Sunrise has performed under its 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 Sunrise has a minority ownership interest, generally
ranging from 10% to 25%. If Sunrise sells 100% of a property to a third-party owner, Sunrise
recognizes a gain from the sale for the difference between the purchase price and the book value of
the property, less the costs to sell. Sunrise also removes the book value of the property from the
Property and equipment line item on the consolidated balance sheet and removes from liabilities
any debt repaid or assumed by the new owner in the transaction. If Sunrise sells a property to a
joint venture in which it has a minority ownership interest, Sunrise 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. Sunrise does not record a gain on the portion of the sale associated with its
remaining ownership in the joint venture. Sunrise also records, at historical cost basis, its remaining ownership of the property sold and debt assumed by the joint venture as an
investment. In December 2000, Sunrise completed the sale of two properties for an aggregate sales price of $28
million. Sunrise realized $9 million in gain, subject to certain contingencies being met, of which
$1 million, $5 million and $2 million were recognized in 2002, 2001 and 2000, respectively.
Sunrise continues to operate the properties under long-term operating agreements. In February 2001, Sunrise completed the sale of nine properties for an aggregate sales price of
$131 million to a limited partnership in which Sunrise owns a 25% interest. Sunrise realized $41
million in - 93 -




---



##### 



gain, subject to certain contingencies being met, of which $1 million and $40 million
was recognized during 2002 and 2001, respectively. Sunrise continues to operate the properties
under long-term operating agreements. In March 2002, Sunrise completed the sale/long-term manage back of 12 assisted living properties to
a real estate investment entity in which Sunrise owns a 20% interest. Sunrise realized $43 million
in gain, subject to certain operating contingencies being met, of which $43 million was recognized
during 2002. Sunrise will continue to operate the properties under long-term management
agreements. In June 2002, Sunrise completed the sale/long-term manage back of two assisted living properties to
a real estate joint venture in which Sunrise owns a 20% interest. Sunrise realized $9 million in
gain, subject to meeting certain operating contingencies, of which $2 million and $7 million was
recognized in 2003 and 2002, respectively. Sunrise will continue to operate the properties under
long-term management agreements. In August 2002, Sunrise completed the sale/long-term manage back of one assisted living property to
a real estate joint venture in which Sunrise owns a 20% interest. Sunrise realized $6 million in
gain, subject to meeting certain operating contingencies, of which $3 million and $3 million was
recognized in 2003 and 2002, respectively. Sunrise will continue to operate the property under a
long-term management agreement. In September 2002, Sunrise completed the sale/long-term manage back of two assisted living
properties to a real estate joint venture in which Sunrise owns a 20% interest. Sunrise realized
$8 million in gain, subject to meeting certain operating contingencies, of which $4 million and $4
million was recognized in 2003 and 2002, respectively. Sunrise will continue to operate the
properties under a long-term management agreement. In December 2002, Sunrise completed the sale/long-term manage back of 11 assisted living properties
to a real estate joint venture in which Sunrise owns a 20% interest. Sunrise realized $36 million
in gain, subject to meeting certain operating contingencies, of which $27 million and $9 million
was recognized in 2003 and 2002, respectively. Sunrise will continue to operate the properties
under a long-term management agreement. In March 2003, Sunrise completed the sale/long-term manage back of its 100% interest in 10 assisted
living properties to a not-for-profit family foundation for an aggregate sales price of $19
million. As part of the sale, Sunrise provided $5 million of seller financing. Sunrise realized
$10 million in gain, subject to certain contingencies being met, of which $5 million was recognized in 2003. During 2003,
Sunrise started to recognize portions of the remaining $5 million gain contingent on the repayment
of the seller financing and the remaining amount was recognized in 2004 upon sale of the note.
Sunrise continues to operate the properties under long-term management agreements. In June 2003, Sunrise completed the sale of 12 consolidated senior living properties and 11 Sunrise
joint venture senior living properties. The properties were sold in two separate transactions to
two ventures in which Sunrise has a ten percent interest. The aggregate purchase price for the 12
consolidated senior living properties was $167 million and $144 million for the 11 Sunrise joint
venture senior living properties. Sunrise realized a $30 million gain from the sale of the 12
consolidated senior living - 94 -




---



##### 



properties, subject to meeting certain operating and financing
contingencies, of which $9 million and $21 million was recognized in 2004 and 2003, respectively.
The sale of the 11 Sunrise joint venture properties from the original joint venture investor to the
new joint venture investor did not result in any income statement impact to Sunrise, however, it
did provide for the repayment to Sunrise of all outstanding notes receivable and advances from the
existing joint ventures, which approximated $46 million. Sunrise will continue to operate all 23
properties under long-term management contracts. In September 2003, Sunrise completed the sale/long-term manage back of five consolidated senior
living properties to a venture in which Sunrise owns a 10 percent interest. The aggregate purchase
price was $94 million. Sunrise realized $14 million in gain, subject to meeting certain operating
contingencies of which $5 million and $9 million was recognized in 2004 and 2003, respectively.
Sunrise will continue to operate all five properties under long-term management contracts. In September, 2003, Sunrise completed the sale/long-term manage back of its 100% interest in 16
consolidated senior living properties to a retirement properties company for an aggregate sales
price of $158 million. Sunrise realized $14 million in gain, subject to meeting certain operating
contingencies, of which $9 million and $5 million was recognized in 2004 and 2003, respectively.
Sunrise continues to operate all 16 properties under long-term management contracts. In 2004, Sunrise recognized $24 million in income from property sales related to sales that
occurred in 2003, which was deferred until certain contingencies were met. Sunrise Senior Living Real Estate Investment Trust In December 2004, Sunrise closed the initial public offering of Sunrise Senior Living Real Estate
Investment Trust (Sunrise REIT), an independent entity established by Sunrise in Canada.
Concurrently with the closing of its initial public offering, Sunrise
REIT issued Cdn. $25 million
(US $21 million at December 31, 2004) principal amount of subordinated convertible debentures to
Sunrise, convertible at the rate of Cdn. $11.00 per unit. The proceeds from the offering and
placement of the debentures were used by Sunrise REIT to acquire interests in 23 senior living
communities from Sunrise and Sunrise joint ventures, eight of which are in Canada and 15 of which
are in the United States. Three of these communities were acquired directly from Sunrise for an
aggregate purchase price of $40 million and 20 were acquired from joint ventures in which Sunrise
participated for an aggregate purchase price of $373 million. With respect to these three communities, Sunrise realized a gain of $4
million, of which $2 million was deferred until certain operating
contingencies are satisfied. In addition, income from property sales was reduced by $2 million for
incentive compensation to certain employees directly related to the establishment of Sunrise
REIT. Sunrise contributed its interest in
the 15 U.S. communities to an affiliate of Sunrise REIT in exchange for a 15% ownership
interest in that entity. Sunrise REIT also acquired an 80 percent interest in a recently completed Sunrise community
that is in lease-up in Canada for a purchase price of $12 million, with Sunrise retaining a 20
percent interest. In addition, Sunrise has identified nine development projects that will be
presented to Sunrise REIT for their potential acquisition. - 95 -




---



##### 



14. Commitments Leases Sunrise leases its corporate offices, regional offices, development offices and warehouse space
under various leases. During 1998, Sunrise entered into an agreement to lease new office space for
its corporate headquarters. The lease commenced upon completion of the building in July 1999 and
expires in September 2013. The lease has an initial annual base rent of $1 million. In September
2003, Sunrise entered an agreement to lease additional office space for its corporate headquarters.
The new lease commenced in September 2003 and expires in September 2013. The lease has an initial
annual base rent of $3 million. The base rent for both of these leases escalates approximately 2.5%
per year in accordance with a base rent schedules. The warehouse lease has a term of ten years,
including a 5-year extension that expires in September 2005. The initial annual base rent payments
amount to $106,000 for the extension term, subject to annual increases of 3%. Sunrise has also entered into operating leases for four properties. Two properties commenced
operations during 1997 and two properties commenced operations in 1998. In May 1999, in connection
with the acquisition of Karrington, Sunrise assumed six operating leases for six senior living
properties and a ground lease. The operating lease terms vary from 15-20 years, with two ten-year
extension options. Sunrise also has three other ground leases related to three properties in
operation. Lease terms range from 15 to 99 years and are subject to annual increases based on the
consumer price index and/or stated increases in the lease. Sunrise is also required to amortize an
additional $118,000 of rent related to the straight lining of rent benefits for its operational
leases. In March 2003, in connection with the acquisition of MSLS, Sunrise assumed sixteen operating leases
and renewed an existing operating lease agreement for another MSLS property in June 2003. Fifteen
of the leases expire in 2013, while the remaining two leases expire in 2018. Future minimum lease payments under office, equipment, ground and other operating leases at
December 31, 2004 are as follows (in thousands): Minimum Lease Payments2005
    
    $
    54,4442006
    
    
    54,4012007
    
    
    54,5722008
    
    
    54,7462009
    
    
    54,927Thereafter
    
    
    288,512$
    561,602
 Sunrise has entered into contracts at December 31, 2004 to purchase and lease additional sites to
be developed. Expected payments under these contracts upon closing are as follows (in thousands): Purchase
    
    
    Lease2005
    
    $
    73,536
    
    
    $
    3292006
    
    
    27,331
    
    
    
    1,2262007
    
    
    
    
    
    
    1,3842008
    
    
    
    
    
    
    1,3842009
    
    
    
    
    
    
    1,384Thereafter
    
    
    
    
    
    
    146,413$
    100,867
    
    
    $
    152,120
 - 96 -




---



##### 



Sunrise anticipates future development to occur in joint ventures and expects to be reimbursed for
the majority of these costs by its capital partners when the ventures are formed. Guarantees As a part of Sunrises operating strategy, Sunrise may provide limited debt guarantees to certain
of its business ventures. Unless otherwise stated, Sunrise would be required to perform under a
debt guarantee if the business venture failed to perform under the debt agreement and the bank
pursued Sunrises guarantee. At December 31, 2004, Sunrise provided $39 million of debt guarantees
to its business ventures, which represents Sunrises maximum exposure under its debt guarantees. Debt guarantees to development joint ventures amount to $23 million at
December 31, 2004. Of the $23 million in debt guarantees to development joint ventures, $10
million will be removed upon achieving certain debt service coverage targets and the remaining $13
million will remain in place throughout the terms of the loans. Debt guarantees to hospital
partnerships and acquisition partnerships amount to $10 million and $4 million, respectively, and
remain in place throughout the terms of the loans. Debt guarantees for Sunrises sale/long-term
manage back partnerships amount to $2 million and are removed upon reaching certain occupancy and
debt service coverage targets. To date, Sunrise has not been required to fund any debt guarantees. Sunrise has provided $78 million in financing obligations associated with management contracts. In
connection with the acquisition of MSLS in March 2003, CNL Retirement Properties, Inc. (CNL)
agreed to assume the obligation to repay life care endowment obligations issued by MSLS with
respect to two continuing care retirement communities ($76 million at December 31, 2004). To the
extent that CNL fails to satisfy this obligation, Sunrise would be required to repay this
obligation, the majority of which is expected to be refinanced with proceeds from the issuance of
new endowment obligations as new residents enter the communities. An additional $2 million
financing obligation related to the acquisition of MSLS is made up of $1 million of obligations to
provide financing under existing credit facilities with respect to four communities and $1 million
of payment guarantees under operating agreements with respect to one community. At December 31, 2004, Sunrise does not believe that it will be required to fund any guarantees
under its current outstanding debt guarantees and financing obligations and therefore no
liabilities are reflected in the consolidated financial statements for these guarantees. As part of Sunrises fee-development for joint ventures, Sunrise typically guarantees 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. Sunrise would be required to fund these guarantees if the actual costs of
development exceeded the approved budgeted costs. At December 31, 2004, 28 properties are under
construction and subject to completion guarantees. Sunrise has over 20 years experience in the
development and construction of senior living properties. Sunrises construction contractors are
experienced in building its 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 Sunrise is required to fund the guarantee, the amounts funded become loans to the
venture and earn interest. Sunrise closely monitors these projects and does not expect to fund
any amounts under these development completion guarantees during 2005. None were funded during
2004 and 2003. - 97 -




---



##### 



On January 1, 2003, Sunrise adopted FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires companies to initially record at fair value guarantees meeting the
characteristics described in this Interpretation, which is different from the general practice of
recording a liability only when a loss is probable and reasonably estimable, as defined by FASB
Statement No. 5, Accounting for Contingencies. The Interpretation also requires a guarantor to
provide new disclosures for guarantees even if the likelihood of the guarantors having to make
payments under the guarantee is remote. The Interpretations initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The adoption of FIN 45 did not have a material
impact on the consolidated financial position or results of operation. Operating Deficit Credit Facilities As a part of certain management contracts, Sunrise may provide an operating deficit credit
facility. 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, Sunrise would provide a loan to the
community to cover the cash shortfall. These loans are generally included with Sunrises
development joint ventures and usually are provided for a limited period of time. At December 31,
2004, 16 operating communities were subject to an operating deficit credit facility and 25
additional properties will be subject to a credit facility upon opening. Sunrise funded $0.6
million under these credit facilities through 2003 related to six communities and $1.8 million in
2004 related to three communities. At December 31, 2004, $0.7 million has been repaid. Sunrise
expects to fund an additional $0.8 million during 2005 related to two Canadian communities. Credit Support Arrangements In certain transactions, Sunrise has provided credit support arrangements and commitments to
advance funds to portfolios of properties that Sunrise has developed
or for which we acquired management contracts with an opportunity for
significant occupancy increases.
Generally, credit support arrangements are for limited periods of time and require payments if cash
flow is below stated targets. For portfolios that we sell, we
establish reserves from property sale transaction proceeds
to fund these potential payments. Payments in excess of reserve amounts are expensed unless they
are in the form of contractual advances. At December 31, 2004, Sunrise had three joint venture
agreements comprising 25 properties that were subject to credit support arrangements. Generally,
these arrangements terminate within two and 22 months. Sunrise
expects to fund $2 million in 2005 under these arrangements. At December 31, 2004,
Sunrise has commitments to advance funds on 46 communities, the
longest
of which is for less than two years. Advances under these commitments are recoverable as loans and are generally
repayable to Sunrise from property operating cash flows and/or proceeds from the sale of the
property. Sunrise expects to fund $13 million in 2005 under
these arrangements. -98-




---



##### 



Legal Proceedings Sunrise is a defendant in a lawsuit filed by CGB Occupational Therapy, Inc. (CGB). CGB provided
therapy services to two nursing home facilities in Pennsylvania that were owned by RHA Pennsylvania
Nursing Homes (RHA) and managed by one of Sunrises subsidiaries. In 1998, RHA terminated CGBs
contract. In its lawsuit, CGB alleged (among other things) that in connection with that
termination, Sunrise interfered with their contractual relationships with (i) RHA and (ii) several
of the therapists that CGB employed on an at-will basis. In June 2002, a jury awarded CGB $685,000
in compensatory damages and $1.3 million in punitive damages. Sunrise appealed this verdict. In January 2004, CGB was awarded $109,000 in compensatory damages for interference with the
relationship between CGB and its therapists (which Sunrise subsequently paid). Because it was
impossible to tell what portion of the $1.3 million punitive damages award was attributable to the
invalid claim, the court of appeals remanded a new trial limited to the issues of liability for and
amount of punitive damages. On January 19, 2005, following the retrial concerning punitive
damages, a new jury awarded CGB $30 million in punitive damages. On January 28, 2005, Sunrise filed a motion seeking a new trial on the grounds that, among other
things, the jurys finding that punitive damages are warranted is against the weight of the
evidence, and that the verdict is the product of the jurys passion and prejudice. In the
alternative, Sunrise is seeking to have the court reduce the jurys award to a constitutionally
permissible amount. Sunrise believes that the courts should vacate the judgment or reduce the
judgment to a constitutionally permissible range. However, Sunrise cannot provide any assurance as
to the outcome of this matter. Sunrise does not believe that a material reserve is required at
December 31, 2004. Sunrise is involved in various lawsuits and claims arising in the normal course of business. In
the opinion of management, although the outcomes of these suits and claims are uncertain, in the
aggregate they should not have a material adverse effect on its business, financial condition, and
results of operations. 15. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the amount used for income
tax purposes. The primary components of Sunrises net deferred tax asset are as follows (in thousands): December 31,2004
    
    
    2003Deferred tax assets:Operating loss carryforward and credits
    
    $
    18,325
    
    
    $
    21,352Accrued expenses
    
    
    5,309
    
    
    
    (35
    )Other
    
    
    1,778
    
    
    
    2,253Total deferred tax assets
    
    
    25,412
    
    
    
    23,570Deferred tax liabilities:Investments in joint ventures
    
    
    (93,714
    )
    
    
    (89,938
    )Property and equipment
    
    
    (55,076
    )
    
    
    (39,723
    )Total deferred tax liabilities
    
    
    (148,790
    )
    
    
    (129,661
    )Net deferred tax liability
    
    $
    (123,378
    )
    
    $
    (106,091
    )
 -99-




---



##### 



At December 31, 2004, Sunrise had regular U.S. federal net operating loss carryforwards available
to offset future taxable income of approximately $31 million and state net operating loss
carryforwards of $52 million, which expire from 2010 through 2022. Additionally, Sunrise had $3.8
million of foreign net operating loss carryforwards that have an unlimited carryforward period to
offset future foreign taxable income. At December 31, 2004, Sunrise had alternative minimum tax credits of approximately $.8 million and
Work-Opportunity tax credits of approximately $3 million available to offset future federal tax
liabilities. The alternative minimum tax credits have no expiration period and the work
opportunity tax credits will expire from 2019 through 2024. Realization of the net deferred tax asset is dependent on generating sufficient taxable income
prior to expiration of the loss and credit carryforwards. Sunrise expects to fully utilize the
loss and credit carryforwards prior to expiration. Significant components of the provision for income taxes are as follows (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    7,728
    
    
    $
    7,447
    
    
    $
    2,495State
    
    
    2,198
    
    
    
    2,564
    
    
    
    2,448Foreign
    
    
    2,000
    
    
    
    
    
    
    
    Total current
    
    
    11,926
    
    
    
    10,011
    
    
    
    4,943Deferred:Federal
    
    
    16,187
    
    
    
    23,018
    
    
    
    25,727State
    
    
    1,921
    
    
    
    3,182
    
    
    
    2,832Foreign
    
    
    (265
    )
    
    
    (1,236
    )
    
    
    Total deferred
    
    
    17,843
    
    
    
    24,964
    
    
    
    28,559$
    29,769
    
    
    $
    34,975
    
    
    $
    33,502
 In 2004, 2003 and 2002, Sunrise paid federal, state and international income taxes, net of refunds
of $6.3 million, $1 million and $2 million, respectively. Current taxes payable for 2004, 2003 and
2002 have been reduced by approximately $8 million, $9 million, and $3 million respectively,
reflecting the tax benefit to Sunrise of employee stock options exercised during the year. The tax
benefit has been recognized as an increase to additional paid-in capital. The differences between the tax provision calculated at the statutory federal income tax rate and
the actual tax provision recorded for each year are as follows: Year Ended December 31,2004
    
    
    2003
    
    
    2002Statutory rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %State taxes, net
    
    
    4
    
    
    
    4
    
    
    
    5Other
    
    
    (2
    )
    
    
    (3
    )
    
    
    (2
    )37
    %
    
    
    36
    %
    
    
    38
    %
 -100-




---



##### 



16. Related-Party Transactions Sunrise Senior Living Foundation Sunrise Senior Living Foundation, Inc. (SSLF), a not-for-profit organization, operates two
schools with day care centers, a leadership center, and a stand-alone day care center (opened April
2004). Paul and Teresa Klaassen, Sunrises founders, are on the
Board of Directors and serve as officers of SSLF. SSLF paid Sunrise a management fee of
$84,000 in 2004, 2003 and 2002 for the provision of office facilities
and support services in those years. Such amounts are included in operating revenue. Sunrise also
accepted a promissory note from SSLF during 2001 (see Note 5). The principal amount of the
promissory note and accrued interest were repaid during 2003. Prior
to August 2003, Sunrise also subleased a portion of a ground lease
to SSLF. See Ground Lease below. As mentioned above, SSLF operates a leadership center. At various times since 2002, Sunrise has
rented the leadership center for management and staff retreats or other corporate events. During
2004, 2003 and 2002, respectively, rents paid to SSLF for use of the leadership center totaled
approximately $259,000, $106,000 and $41,000. In April 2003, Sunrise also began to manage the
center for SSLF and to lease employees to SSLF who work at the leadership center. Salary and benefits for
these individuals totaled approximately $232,000 for 2004 and $193,000 for 2003. In addition, a subsidiary of SSLF formed a limited liability company (LLC) in 2001 to develop and
construct an assisted living facility and an adult day care center for low to moderate-income
seniors in Virginia. In 2004, the LLC agreed to construct the project for a fixed fee of $11.2 million to be
paid by Fairfax County, Virginia upon completion of the project. In the fourth quarter of
2004, the LLC, Sunrise and Fairfax County entered into an agreement
pursuant to which Sunrise will develop and
manage the project for a fee of $180,000. During 2004, Sunrise funded development costs of
approximately $870,000. Subsequent to year-end, SSLF transferred and assigned its membership interest in
the LLC to Sunrise, with Sunrise assuming development and construction of this project. In April 2004, Sunrise began subleasing space to a subsidiary of SSLF to use as a day care center.
The sublease runs though September 30, 2013. The sublease payments are approximately $7,000 per
month currently, which equal payments made by Sunrise to the landlord for this space. These
payments totaled $56,000 for 2004. At December 31, 2004 and 2003, respectively, Sunrise has receivables from SSLF and its affiliates
of $3.4 million and $2.6 million for operating and development expenses. This amount is included in
Accounts Receivable in the consolidated balance sheets. Ground Lease Sunrise
leases the real property on which its Fairfax, Virginia community is
located from Paul and Teresa Klaassen pursuant to a 99-year ground
lease entered into in June 1986. This ground lease was amended in
August 2003. Prior to August 2003, Sunrise subleased approximately
50% of the property subject to the ground lease to SSLF for the
operation by SSLF of a school and day care center on the property,
for monthly rent equal to 50% of all of the rent payable under the
ground lease. In August 2003, the sublease was terminated and the
ground lease was amended to provide for the lease by Sunrise of only
the real property not previously subleased to SSLF and the Klaassens
entered into a separate ground lease with SSLF with respect to such
previously subleased property. Rent expense under this lease was
$317,000, $299,000 and $296,000 for the years ended December 31,
2004, 2003 and 2002, respectively. Sublease rental income was
$158,700, $155,000 and $149,500 for the years ended December 31,
2004, 2003 and 2002, respectively. -101-




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##### 



Joint Ventures Sunrise entered into unconsolidated joint venture arrangements with a third party that is providing
equity capital to develop up to 20 projects in the United States, United Kingdom and Canada. A
director of Sunrise, Craig Callen, is a former managing director of Credit Suisse First Boston
(CSFB) LLC. The parent of CSFB LLC controls through funds sponsored by an affiliate or subsidiary
investments, which from time to time have included investments in the joint ventures. Sunrise
provided management and pre-opening services to the joint ventures on a contract-fee basis and has
agreed to invest up to $7 million of equity capital in the joint ventures. Sunrise recognized
management and contract services fees from these joint ventures of $5 million, $6 million and $8
million, respectively, in 2004, 2003 and 2002. At December 31, 2004, 2003 and 2002, the third
party has provided approximately $52 million, $51 million and $52 million, respectively, and
Sunrise has provided $7 million, $7 million, and $6 million, respectively, of equity capital to the
joint ventures. Sunrise and the third party have sold their interests in certain of the joint ventures over the
past 3 years. At December 31, 2004, the third partys remaining interest in the joint ventures was
approximately $9 million and Sunrises remaining interest was approximately $4 million. 17. Profit-Sharing Plan Sunrise has a profit-sharing plan (the Plan) under Internal Revenue Code Section 401(k). All
employees of Sunrise are covered by the Plan and are eligible to participate in the Plan after
meeting certain eligibility requirements. Deferred salary contributions are made through pre-tax
salary deferrals of between 1% and 100%. Employees with less than 5 years of service will receive an employer contribution of $0.25 for
every dollar that the employee contributes, up to 7% of the employees annual compensation. When an
employee reaches 5 years of service, Sunrise will contribute $0.50 for every dollar that the
employee contributes, up to 7% of the employees annual compensation. Employees vest in their
matching employer contributions 100% over four years at 25% each year. The Plan has no
discretionary matching contributions and all employees who earn $90,000 or less annually are
eligible to receive regular matching contributions provided the employee meets certain eligibility
requirements. Matching contributions expensed were $0.8 million, $0.8 million, and $0.2 million
during 2004, 2003 and 2002, respectively. 18. Fair Value of Financial Instruments The following disclosures of estimated fair value were determined by management, using available
market information and valuation methodologies. Considerable judgment is necessary to interpret
market data and develop estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts Sunrise could realize on disposition of the financial
instruments. The use of different market assumptions or estimation methodologies may have an effect
on the estimated fair value amounts. -102-




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##### 



Cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses,
marketable securities, investments and other current assets and liabilities are carried at amounts
which reasonably approximate their fair values. Fixed rate debt with an aggregate carrying value of $148.4 million has an estimated aggregate fair
value of $191.2 million at December 31, 2004. Estimated fair value of fixed rate debt is based on
interest rates currently available to Sunrise for issuance of debt with similar terms and remaining
maturities. The estimated fair value of variable rate debt is estimated to be approximately equal
to its carrying value of $43.3 million at December 31, 2004. Disclosure about fair value of financial instruments is based on pertinent information available to
management at December 31, 2004. Although management is not aware of any factors that would
significantly affect the reasonable fair value amounts, these amounts have not been comprehensively
revalued for purposes of these financial statements since December 31, 2004 and current estimates
of fair value may differ from the amounts presented herein. 19. Information about Sunrises Segments Sunrise operates within one defined business segment with activities related to management,
development, acquisition and disposition of senior living services both domestically and
internationally. International revenues from operations were $17 million and $5 million for 2004
and 2003, respectively. International expenses from operations were $11 million and $7 million in
2004 and 2003, respectively. 20. Subsequent Events In January 2005, Sunrise announced that it had entered into asset purchase agreements with The
Fountains, a Tucson, Arizona based owner and operator of senior living communities to acquire
management of 19 senior living communities, ownership of 18 of the communities, several undeveloped
land parcels and certain other assets. Sunrises prospective capital partner for this transaction
is an affiliate of Arcapita Inc. (formerly, Crescent Capital Investments, Inc.). The Arcapita
affiliate is expected to acquire an 80 percent interest in the real estate associated with 17
senior living communities, to be held in a joint venture to be formed by Sunrise and the Arcapita
affiliate. Sunrise will acquire the 18th community and assume management of The
Fountains 19 senior living communities (which have capacity for approximately 5,000 residents)
under long-term management contracts. This transaction is expected to close in mid-2005. Sunrises
portion of the asset purchase is estimated to be $63 million. In January 2005, Sunrise secured an increase of its equity development funding for a United Kingdom
(UK) joint venture with an affiliate of Prudential Real Estate Investors that will provide for, in
conjunction with loans provided by third-party lenders, total development funding for this venture
of approximately $864.2 million (462.5 million pounds Sterling), or 118 percent increase over the
ventures initial capital structure which was announced in May 2002. Additionally, Sunrise has
agreed to increase its funding commitment for this UK venture by $18.7 million to approximately
$34.6 million and maintain its 20% equity interest in this venture. Under this joint venture,
Sunrise currently has 14 sites under development in the UK, six of which are under construction
with final planning approval received on an additional two. Sunrise will manage all of these
properties under long-term management contracts. -103-




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##### 



21. Quarterly Results of Operations (Unaudited) The following is a summary of quarterly results of operations for the fiscal quarters: (in
thousands, except per share amounts): 1stQuarter    
    
    2ndQuarter
    
    
    3rdQuarter
    
    
    4thQuarter2004Operating revenue (1)
    
    $
    354,453
    
    
    $
    355,252
    
    
    $
    368,968
    
    
    $
    383,251Net income
    
    
    13,931
    
    
    
    15,132
    
    
    
    8,912
    
    
    
    12,713Basic net income per
common share
    
    $
    0.67
    
    
    $
    0.75
    
    
    $
    0.44
    
    
    $
    0.63Diluted net income per
common share
    
    $
    0.60
    
    
    $
    0.66
    
    
    $
    0.41
    
    
    $
    0.572003Operating revenue (1)
    
    $
    116,163
    
    
    $
    310,428
    
    
    $
    331,693
    
    
    $
    350,257Net income
    
    
    13,416
    
    
    
    16,205
    
    
    
    17,133
    
    
    
    15,424Basic net income per
common share
    
    $
    0.60
    
    
    $
    0.74
    
    
    $
    0.82
    
    
    $
    0.76Diluted net income per
common share
    
    $
    0.56
    
    
    $
    0.67
    
    
    $
    0.74
    
    
    $
    0.67
 The sum of diluted net income per common share for the four quarters in 2004 and 2003 may not equal
diluted net income per common share for the year due to the changes in the number of weighted
average shares outstanding and fluctuations in the market price of Sunrises common stock during
the year.      -104-




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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure Not applicable. Item 9A. Controls and Procedures  (a)
    Evaluation of Disclosure Controls and Procedures. At December 31, 2004, an
evaluation was performed by the Companys management, under the supervision and with
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of Sunrises disclosure controls and procedures as defined in
Exchange Act Rule 13a-15(e) as of the end of the period covered by this Annual Report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that these disclosure controls and procedures were effective.(b)
    Managements Report on Internal Control Over Financial Reporting. Managements
annual report on internal control over financial reporting is set forth under Item 8 of
this annual report and is incorporated herein by reference.(c)
    Attestation Report of the Independent Registered Public Accounting Firm. The
attestation report of Ernst & Young LLP, the Companys independent registered public
accounting firm, on managements assessment of the Companys internal control over
financial reporting is set forth under Item 8 of this annual report and is incorporated
herein by reference.(d)
    Changes in Internal Control Over Financial Reporting. There were no changes in
the Companys internal control over financial reporting that occurred during the
quarter ended December 31, 2004 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting. Item 9B. Other Information None. -105-




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PART III Item 10. Directors and Executive Officers of the Registrant We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer and principal accounting officer, which is available on our website at:
http://www.sunriseseniorliving.com. Any amendment to, or waiver from, a provision of such code of
ethics will be posted on our Internet website. The information contained in the sections Election of Directors  Information as to Nominees
and Other Directors, Other Executive Officers, Corporate Governance and Related Matters 
Meeting and Committees of the Board of Directors and Nominations by Stockholders,and Section
16(a) Beneficial Ownership Reporting Compliance in our 2005 Annual Meeting Proxy Statement, which
we intend to file within 120 days after our fiscal year-end, is incorporated by reference herein. Item 11. Executive Compensation The information contained in the sections Corporate Governance and Related Matters -
Compensation of Directors and Executive Compensation and Other Information in our 2005 Annual
Meeting Proxy Statement, which we intend to file within 120 days after our fiscal year-end, is
incorporated by reference herein. Item 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters The information contained in the sections Stock Owned by Management, Principal Holders of
Voting Securities and Executive Compensation and Other Information  Equity Compensation Plan
Information in our 2005 Annual Meeting Proxy Statement, which we intend to file within 120 days
after our fiscal year-end, is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions The information contained in the sections Executive Compensation and Other Information -
Compensation Committee Interlocks and Insider Participation and Certain Transactions in our 2005
Annual Meeting Proxy Statement, which we intend to file within 120 days after our fiscal year-end,
is incorporated by reference herein. Item 14. Principal Accountant Fees and Services The information contained in the section Independent Public Accountants in our 2005 Annual
Meeting Proxy Statement, which we intend to file within 120 days after our fiscal year-end is
incorporated by reference herein. -106-




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Item 15. Exhibits and Financial Statement Schedules  (a)
    List of documents filed as part of this Annual Report on Form 10-K: (1) Financial statements: Managements Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated
Balance Sheets  December 31, 2004 and 2003 Consolidated
Statements of Income  Years Ended December 31, 2004, 2003 and 2002 Consolidated Statements of Changes in Stockholders Equity  Years Ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows  Years Ended December 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: All schedules for which provision is made in the applicable accounting regulations of the SEC
are not required under the related instructions or are inapplicable or are included in the
consolidated financial statements. (3) Exhibits: Sunrise files as part of this Annual Report on Form 10-K the Exhibits listed on the Exhibit
Index. (b)  Exhibits. Sunrise files as part of this Annual Report on Form 10-K the Exhibits listed on the Exhibit Index. (c)  Financial Statement Schedules. Not applicable. -107-




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 16th day of March, 2005. SUNRISE SENIOR LIVING, INC. By:
    /s/ Paul J. KlaassenPaul J. KlaassenChairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been
signed by the following persons on behalf of the registrant in the capacities and on the date
indicated above. PRINCIPAL EXECUTIVE OFFICER
    
    PRINCIPAL FINANCIAL OFFICERBy:
    
    /s/ Paul J. Klaassen
    
    By:
    
    /s/ Larry E. HulsePaul J. Klaassen
    
    
    
    Larry E. HulseChairman of the Board and Chief Executive Officer
    
    
    
    Chief Financial Officer
 PRINCIPAL ACCOUNTING OFFICER By:
    /s/ J. Barron AnschutzJ. Barron AnschutzChief Accounting Officer DIRECTORS By:
    
    /s/ Ronald V. Aprahamian
    
    By:
    
    /s/ Teresa M. KlaassenRonald V. Aprahamian, Director
    
    
    
    Teresa M. Klaassen, Secretary and DirectorBy:
    
    /s/ Craig R. Callen
    
    By:
    
    /s/ J. Douglas HolladayCraig R. Callen, Director
    
    
    
    J. Douglas Holladay, DirectorBy:
    
    /s/ David G. Bradley
    
    By:
    
    /s/ William G. LittleDavid G. Bradley, Director
    
    
    
    William G. Little, DirectorBy:
    
    /s/ Thomas J. Donohue
    
    By:
    
    /s/ Paul J. KlaassenThomas J. Donohue, Director
    
    
    
    Paul J. Klaassen, Chairman of theBoard and Chief Executive Officer
 -108-




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##### 



Exhibit Index ExhibitNumber
    
    Description2.1
    
    Amended and Restated Operating Agreement of Sunrise First Assisted Living Holdings, LLC by
and between Sunrise Assisted Living Investments, Inc., as the Managing Member and US Assisted
Living Facilities, Inc., as the Investor Member dated as of March 22, 2002 (incorporated
herein by reference to Exhibit 2.1 to Sunrises 2001 Form 10-K).2.2
    
    Amended and Restated Transaction Agreement by and among Sunrise Assisted Living Investments,
Inc., Sunrise Development, Inc., Sunrise Assisted Living, Inc. and certain Sunrise property
owning entities and US Assisted Living Facilities, Inc. dated as of January 30, 2002
(incorporated herein by reference to Exhibit 2.2 to Sunrises 2001 Form 10-K).2.3
    
    Stock Purchase Agreement dated as of December 30, 2002 by and among Marriott International,
Inc., Marriott Senior Holding Co., Marriott Magenta Holding Company, Inc. and Sunrise Assisted
Living, Inc. (incorporated by referenced to Exhibit 2.3 to Sunrises 2002 Form 10-K).2.4
    
    Amendment No. 1 to Stock Purchase Agreement, dated as of March 28, 2003, by and among
Marriott International, Inc., Marriott Senior Holding Co., Marriott Magenta Holding Company,
Inc. and Sunrise Assisted Living, Inc. (incorporated by reference to Exhibit 2.2 to Sunrises
Form 8-K filed on April 9, 2003).2.5
    
    Transaction Agreement by and among Senior Living Investments, Inc., Sunrise Third Senior
Living Holdings, LLC and Other Parties Named Therein dated as of June 30, 2003 (incorporated
by reference to Exhibit 2.1 to Sunrises Current Report on Form 8-K dated June 30, 2003).2.6
    
    Transaction Agreement by and among Senior Living Investments, Inc., Sunrise Fourth Senior
Living Holdings, LLC and Other Parties Named Therein dated as of June 30, 2003 (incorporated
by reference to Exhibit 2.2 to Sunrises Current Report on Form 8-K dated June 30, 2003).2.7
    
    Form of Loan Agreement by and between certain Limited Liability Companies (each as a
Borrower) and Sunrise Senior Living Investments, Inc. (as Lender) dated as of June 30,
2003 (incorporated by reference to Exhibit 2.3 to Sunrises Current Report on Form 8-K dated
June 30, 2003).2.8
    
    Form of Note by and between certain Limited Liability Companies (each a Borrower) and
Sunrise Senior Living Investments, Inc. (as Holder) dated as of June 30, 2003 (incorporated
by reference to Exhibit 2.4 to Sunrises Current Report on Form 8-K dated June 30, 2003).2.9
    
    Promissory Note dated June 30, 2003 by and between Sunrise North Naperville Assisted Living,
L.L.C., the Borrower and Sunrise Senior Living Investments, Inc., the Lender in the principal
amount of $1,299,686 (incorporated by reference to Exhibit 2.5 to Sunrises Current Report on
Form 8-K dated June 30, 2003).2.10
    
    Promissory Note dated June 30, 2003 by and between Sunrise Third Plainview SL, LLC, the
Borrower and Sunrise Senior Living Investments, Inc., the Lender in the principal amount of
$296,588 (incorporated by reference to Exhibit 2.6 to Sunrises Current Report on Form 8-K
dated June 30, 2003).2.11
    
    Promissory Note dated June 30, 2003 by and between Sunrise Third Schaumburg SL, LLC, the
Borrower and Sunrise Senior Living Investments, Inc., the Lender in the principal amount of
$2,125,326 (incorporated by reference to Exhibit 2.7 to Sunrises Current Report on Form 8-K
dated June 30, 2003).
 -109-




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##### 



ExhibitNumber
    
    Description2.12
    
    Purchase and Sale Agreement By and Among Sunrise Assisted Living Limited Partnership, Sunrise
Farmington Hills Assisted Living, L.L.C., Atlantic-Sunrise LLC, Sunrise Poland Assisted
Living, L.L.C., Sunrise Raleigh Assisted Living, LLC, Sunrise Assisted Living Limited
Partnership VIII, L.P., and ADG on Sheepshead Bay, LLC, as Seller and CNL Retirement Corp., as
Purchaser and Twenty Pack Management Corp. as
Tenant dated September 29, 2003 (incorporated herein by reference to Exhibit 2.1 to
the Companys Form 8-K filed with the S.E.C. on October 15, 2003).2.13
    
    Form of Purchase and Sale Agreement, dated September 30, 2003, by and among Sunrise Madison
Senior Living, L.L.C., Sunrise Edmonds Assisted Living, Inc., Sunrise Cresskill Assisted
Living, L.L.C. and Sunrise Beverly Hills Assisted Living, L.L.C., as Sellers, CNL Retirement
Corp., as Purchaser, and other named parties therein as Tenant (incorporated herein by
reference to Exhibit 2.2 to the Companys Form 8-K filed with the S.E.C. on October 15, 2003).2.14
    
    Purchase and Sale Agreement by and among Sunrise Five Forks Assisted Living, L.L.C., as
Seller and CNL Retirement Corp., as Purchaser and Sunrise Five Forks Assisted Living, L.L.C.
as Tenant dated September 30, 2003 (incorporated herein by reference to Exhibit 2.3 to the
Companys Form 8-K filed with the S.E.C. on October 15, 2003).2.15
    
    Master Agreement (CNL Q3 2003 Transaction) dated as of the 30th day of September, 2003 by and
among (i) Sunrise Development, Inc., (ii) Sunrise Senior Living Management, Inc., (iii) Twenty
Pack Management Corp., Sunrise Madison Senior Living, L.L.C. and Sunrise Development, Inc.
(collectively, as the Tenant), (iv) CNL Retirement Sun1 Cresskill NJ, LP, CNL Retirement
Edmonds WA, LP, CNL Retirement Sun1 Lilburn GA, LP and CNL Retirement Sun1 Madison NJ LP, and
(v) Sunrise Senior Living, Inc. (incorporated herein by reference to Exhibit 2.4 to the
Companys Form 8-K filed with the S.E.C. on October 15, 2003).3.1
    
    Restated Certificate of Incorporation of Sunrise (incorporated herein by reference to Exhibit
3.1 to Sunrises Form S-1 Registration Statement No. 333- 13731).3.2
    
    Certificate of Amendment to Restated Certificate of Incorporation regarding name change
(incorporated herein by reference to Exhibit 3.1 to Sunrises Form 10-Q for the quarter ended
June 30, 2003).3.3
    
    Amended and Restated Bylaws of Sunrise, as amended (incorporated herein by reference to
Exhibit 3 to Sunrises Form 10-Q for the quarter ended September 30, 1997).4.1
    
    Form of common stock certificate (incorporated herein by reference to Exhibit 4.1 to
Sunrises Form S-1 Registration Statement No. 333-13731).4.2
    
    Stockholder Rights Agreement (incorporated herein by reference to Exhibit 4.2 to Sunrises
Form S-1 Registration Statement No. 333-13731).
 -110-




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##### 



ExhibitNumber
    
    Description4.3
    
    Amendment No. 1 to Rights Agreement, dated as of December 17, 1998, between Sunrise and First
Union National Bank of North Carolina (incorporated herein by reference to Exhibit 99(a) to
Sunrises Form 8-K dated December 18, 1998).4.4
    
    Indenture, dated as of January 30, 2002, between Sunrise and First Union National Bank, as
Trustee (incorporated herein by reference to Exhibit 4.1 to the Companys Form S-3
Registration Statement (No. 333-85622)).10.1
    
    +Amended and Restated Employment Agreement dated as of November 13, 2003 by and between
Sunrise and Paul J. Klaassen (incorporated herein by reference to Exhibit 10.1 to the
Companys 2003 Form 10-K).10.2
    
    +Indemnification Agreement dated as of November 13, 2003 by and between Sunrise and Paul J.
Klaassen (incorporated herein by reference to Exhibit 10.2 to the Companys 2003 Form 10-K).10.3
    
    +Summary of Material Terms of Consulting Agreement with David W. Faeder (incorporated herein
by reference to Exhibit 10.3 to the Companys 2003 Form 10-K).10.4
    
    +2000 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Companys
2003 Form 10-K).10.5
    
    Assignment and Contribution Agreement, effective as of January 4, 1995, by and between Paul
and Teresa Klaassen and Sunrise (incorporated herein by reference to Exhibit 10.1.1 to
Sunrises Form S-1 Registration Statement No. 333-2582).10.6
    
    Letter Agreement, dated January 4, 1995, from Paul J. Klaassen and Teresa M. Klaassen to the
Series A Preferred Stockholders regarding cash distributions from Sunrise Retirement
Investments, Inc., Sunrise Terrace of Gunston, Inc., Sunrise Terrace of Countryside, Inc. and
Sunrise Atrium, Inc. (incorporated herein by reference to Exhibit 10.19 to Sunrises Form S-1
Registration Statement No. 33-2852).10.7
    
    Amended and Restated Lease Agreement and Assignment of Leasehold Right, dated June 6, 1994,
by and among Barbara M. Volentine and Teresa M. Klaassen, the Executor of the Estate of Eldon
J. Merritt, Sunrise Assisted Living Limited Partnership Assisted Living Group  Fairfax
Associates, and Sunrise Foundation, Inc., as amended (incorporated herein by reference to
Exhibit 10.15 to Sunrises Form S-1 Registration Statement No. 333-2582).10.8
    
    Ground Lease, dated June 7, 1994, by and between Sunrise Assisted Living Limited Partnership
and Paul J. Klaassen and Teresa M. Klaassen (incorporated herein by reference to Exhibit 10.16
to Sunrises Form S-1 Registration Statement No. 333-2582).
 -111-




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##### 



ExhibitNumber
    
    Description10.9
    
    Amended and Restated Agreement of Sublease, Indemnification and Easements dated February 5,
1995 by and between Assisted Living Group  Fairfax Associates and
Sunrise Foundation, as amended (incorporated herein by reference to Exhibit 10.17 to
Sunrises Form S-1 Registration Statement No. 333-2582).10.10
    
    +Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.24 to
Sunrises Form S-1 Registration Statement No. 333-2582).10.11
    
    +1995 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.20 to
Sunrises 1997 Form 10-K).10.12
    
    +1996 Directors Stock Option Plan, as amended. (incorporated herein by reference to Exhibit
10.21 to Sunrises 1997  Form 10-K)10.13
    
    +1996 Non-Incentive Stock Option Plan, as amended (incorporated herein by reference to
Exhibit 10.8 to Sunrises Form 10-Q for the quarter ended March 31, 2000).10.14
    
    +1997 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.25 to
Sunrises 1997 Form 10-K).10.15
    
    +1998 Stock Option Plan, as amended. (incorporated herein by reference to Exhibit 10.41 to
Sunrises 1998 Form 10-K)10.16
    
    +1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to Sunrises Form
10-Q for the quarter ended March 31, 1999).10.17
    
    +Executive Deferred Compensation Plan, effective June 1, 2001 (incorporated herein by
reference to Exhibit 10.14 to Sunrises Form 10-Q for the quarter ended June 30, 2001)10.18
    
    +Amendment to Sunrise Assisted Living Executive Deferred Compensation Plan (incorporated
herein by reference to Exhibit 10.2 to Sunrises Form 10-Q for the quarter ended June 30,
2003).10.19
    
    +2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.15 to Sunrises Form
10-Q for the quarter ended June 30, 2001)10.20
    
    +Sunrise employee stock purchase plan (incorporated herein by reference to Exhibit 10.16 to
Sunrises Form 10-Q for the quarter ended June 30, 2001)10.21
    
    +2002 Stock Option and Restricted Stock Plan (incorporated herein by reference to Exhibit
10.1 to Sunrises Form 10-Q for the quarter ended June 30, 2002).10.22
    
    +2003 Stock Option and Restricted Stock Plan (incorporated herein by reference to Exhibit
10.1 to Sunrises Form 10-Q for the quarter ended June 30, 2003).10.23
    
    +Chief Executive Officer Severance Plan (incorporated herein by reference to Exhibit 10.5 to
Sunrises Form 10-Q for the quarter ended March 31, 2000)
 -112-




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##### 



ExhibitNumber
    
    Description10.24
    
    +Senior Executive Officer Severance Plan (incorporated herein by reference to Exhibit 10.6
to Sunrises Form 10-Q for the quarter ended March 31, 2000)10.25
    
    Loan and Security Agreement dated as of May 8, 2001 by and among Sunrise Fairfax Assisted
Living, L.L.C. and Chevy Chase Bank, F.S.B. (incorporated herein by reference to Exhibit 10.1
to Sunrises Form 10-Q for the quarter ended June 30, 2001).10.26
    
    Guaranty of Payment dated as of May 8, 2001 by Sunrise Assisted Living, Inc. in favor of
Chevy Chase Bank, F.S.B. for loan to Sunrise Fairfax Assisted Living, L.L.C. (incorporated
herein by reference to Exhibit 10.2 to Sunrises Form 10-Q for the quarter ended June 30,
2001).10.27
    
    +Form of Sunrise At-Home Senior Living, Inc. Restricted Stock Agreement (incorporated herein
by reference to Exhibit 10.88 to Sunrises 2001 Form 10-K).10.28
    
    +Form of Sunrise Assisted Living Holdings, L.P. Class A Limited Partner Unit Agreement
(incorporated herein by reference to Exhibit 10.89 to Sunrises 2001 Form 10-K).10.29
    
    Master Credit Facility Agreement by and between Sunrise Riverside Assisted Living, L.P.,
Sunrise Parma Assisted Living, L.L.C., Sunrise Wilton Assisted Living, L.L.C., Sunrise Wall
Assisted Living, L.L.C., Sunrise Weston Assisted Living, Limited Partnership and Glaser
Financial Group, Inc. dated as of November 29, 2001, as amended (incorporated herein by
reference to Exhibit 10.6 to Sunrises Form 10-Q for the quarter ended March 31, 2002).10.30
    
    Transaction Agreement by and among Sunrise Assisted Living Investments, Inc., Sunrise Second
Assisted Living Holdings, LLC and the Other Parties Named Therein dated as of September 30,
2002 (incorporated herein by reference to Exhibit 2.1 to Sunrises Form 10-Q for the quarter
ended September 30, 2002).
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##### 



ExhibitNumber
    
    Description10.31
    
    +Sunrise Assisted Living, Inc. Long Term Incentive Cash Bonus Plan effective August 23, 2002
(incorporated herein by reference to Exhibit 10.1 to Sunrises Form 10-Q for the quarter ended
September 30, 2002).10.32
    
    +Amendment 1 to the Sunrise Assisted Living, Inc. Long Term Incentive Cash Bonus Plan.10.33
    
    Limited Liability Agreement of AL U.S. Development Venture, LLC dated as of December 23,
2002 by and between Sunrise Assisted Living Investments, Inc. and AEW Senior Housing Company,
LLC. (incorporated herein by reference to Exhibit 10.98 to Sunrises 2002 Form 10-K).10.34
    
    ROFO Agreement dated as of December 23, 2002 by and between AEW Capital Management, L.P.,
Sunrise Assisted Living, Inc., Sunrise Assisted Living Investments, Inc., Sunrise Assisted
Living Management, Inc., and Sunrise Development, Inc. (incorporated herein by reference to
Exhibit 10.99 to Sunrises 2002 Form 10-K).10.35
    
    Second Amended and Restated Operating Agreement of Sunrise Second Assisted Living Holdings,
LLC dated as of December 20, 2002 by and between Sunrise Assisted Living Investments, Inc. and
US Assisted Living Facilities II, Inc. (incorporated herein by reference to Exhibit 10.100 to
Sunrises 2002 Form 10-K).10.36
    
    Revolving Credit Agreement dated as of December 23, 2002 by and between AL U.S. Development
Venture, LLC, as Borrower and Sunrise Assisted Living, Inc. as Lender (incorporated herein by
reference to Exhibit 10.101 to Sunrises 2002 Form 10-K).10.37
    
    Development Agreement dated as of December 23, 2002 by and between Sunrise Development, Inc.
and certain Sunrise affiliates (incorporated herein by reference to Exhibit 10.102 to
Sunrises 2002 Form 10-K).10.38
    
    Amended and Restated Master Owner/Manager Agreement dated as of December 20, 2002 by and
between Sunrise Second Assisted Living Holdings, LLC, together with its subsidiaries, and
Sunrise Assisted Living Management, Inc. (incorporated herein by reference to Exhibit 10.103
to Sunrises 2002 Form 10-K).10.39
    
    Operating Deficit Loan Agreement dated as of December 23, 2002 by and between Sunrise
Assisted Living Management, Inc. and certain Sunrise affiliates (incorporated herein by
reference to Exhibit 10.104 to Sunrises 2002 Form 10-K).10.40
    
    Pre-Opening Services and Management Agreement dated as of December 23, 2002 by and between
Sunrise Assisted Living Management, Inc. and certain Sunrise affiliates (incorporated herein
by reference to Exhibit 10.105 to Sunrises 2002 Form 10-K).10.41
    
    Financing Agreement dated as of March 24, 2003 by and between Sunrise Assisted Living, Inc.
as Borrower and Bank of America, N.A. as Lender (incorporated herein by reference to Exhibit
10.1 to Sunrises Form 10-Q for the quarter ended March 31, 2003).10.42
    
    Guaranty of Payment dated as of March 24, 2003 by Sunrise Development, Inc., Sunrise
Assisted Living Investments, Inc. and Sunrise Assisted Living Management, Inc. in favor of Bank of America, N.A. (incorporated herein by reference to Exhibit 10.2 to
Sunrises Form 10-Q for the quarter ended March 31, 2003).
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##### 



ExhibitNumber
    
    Description10.43
    
    Revolving Credit Note dated as of March 24, 2003 by Sunrise Assisted Living, Inc. as
Borrower and Bank of America, N.A. as Lender in the principal amount of $50 million.
(incorporated herein by reference to Exhibit 10.3 to Sunrises Form 10-Q for the quarter ended
March 31, 2003).10.44
    
    Assumption and Reimbursement Agreement made effective as of March 28, 2003, by and among
Marriott International, Inc., Sunrise Assisted Living, Inc., Marriott Senior Living Services,
Inc. and Marriott Continuing Care, LLC (incorporated herein by reference to Exhibit 10.4 to
Sunrises Form 10-Q for the quarter ended March 31, 2003).10.45
    
    Assumption and Reimbursement Agreement (CNL) made effective as of March 28, 2003, by and
among Marriott International, Inc., Marriott Continuing Care, LLC, CNL Retirement Properties,
Inc., CNL Retirement MA3 Pennsylvania, LP, and CNL Retirement MA3 Virginia, LP (incorporated
herein by reference to Exhibit 10.5 to Sunrises Form 10-Q for the quarter ended March 31,
2003).10.46
    
    Credit Agreement, dated as of September 23, 2003, by and among Sunrise Senior Living, Inc.
as the Borrower, the subsidiaries of the Borrower as identified therein, as the Guarantors,
Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, Fleet
National Bank, as Syndication Agent and other lender parties thereto (incorporated herein by
reference to Exhibit 10.1 to Sunrises Form 10-Q for the quarter ended September 30, 2003).10.47
    
    Separation Agreement and Release dated July 22, 2004 with Christian B.A. Slavin
(incorporated herein by reference to Exhibit 10.1 to the Companys Form 10-Q for the quarter
ended September 30, 2004).10.48
    
    Purchase and Sale Agreement dated as of December 10, 2004, by and among Sunrise of Lynn
Valley Limited, Sunrise of Beacon Hill Limited, Sunrise of Mississauga Limited, Sunrise of
Markham Limited, Sunrise of Windsor Limited, Sunrise of Richmond Hill Limited, Sunrise of
Oakville Limited, S.A.L. Operations B.H. Inc., S.A.L. Operations (Canada) Inc. and S.A.L.
Operations B.N.S. Inc., as Sellers, and Sunrise Senior Living, Inc., as Purchaser.12
    
    Statements Regarding Computation of Ratios21
    
    Subsidiaries of the Registrant23
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
   +
    
    Represents management contract or compensatory plan or arrangement.


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