##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  
  FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to             . Commission File Number 1-16499 SUNRISE SENIOR LIVING, INC. 
 Delaware
    
    54-1746596(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)7902 Westpark Drive
McLean, VA
    
    22102(Address of principal
executive offices)
    
    (Zip Code)
 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, par value
$.01 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 x No Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x No The aggregate market value of the common stock held by non-affiliates of
the registrant computed by reference to the price at which the common stock was
last sold as of June 30, 2003 (the last business day of the registrants most
recently completed second fiscal quarter) was $304,602,341. */ The number of shares of the registrants common stock outstanding at March
1, 2004 was 21,187,382. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants 2004 annual meeting proxy statement are
incorporated by reference into Part III hereof.   */Solely for the purposes of this calculation, all directors and executive
officers of the registrant and all stockholders beneficially owning more than
5% of the registrants common stock are considered to be affiliates.




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TABLE OF CONTENTS Page(s)PART I
    
    Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    36Item 3.
    
    Legal Proceedings
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36PART II
    
    Item 5.
        
        Market for Registrants Common Equity and Related
          Stockholders Matters
    
    
    36Item 6.
    
    Selected Financial Data
    
    
    41Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    42Item 7A.
    
    Quantitative and Qualitative Disclosures
About Market Risk
    
    
    64Item 8.
    
    Financial Statements and Supplementary Data
    
    
    64Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    64Item 9A.
    
    Controls and Procedures
    
    
    64PART III
    
    Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    64Item 11.
    
    Executive Compensation
    
    
    65Item 12.
    
    Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
    
    
    65Item 13.
    
    Certain Relationships and Related Transactions
    
    
    65Item 14.
    
    Principal Accountant Fees and Services
    
    
    65PART IV
    
    Item 15.
    
    Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
    
    
    65SIGNATURES
    
    
    
    
    
    
    67
 -2-




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ThisForm 10-Kcontains certain forward-looking statements that involve
risks and uncertainties. Although Sunrise believes the expectations reflected
in such forward-looking statements are based on reasonable assumptions, there
can be no assurance that Sunrises expectations will be realized. Sunrises
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including, but not
limited to, development and construction risks, acquisition risks, business
conditions, competition, changes in interest rates, our ability to manage our
expenses as a percentage of revenues under management, market factors that
could affect the value of our properties, the risks of downturns in economic
conditions generally, success in integrating Marriott Senior Living Services
operations and other acquisitions, 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 its
consolidated subsidiaries. 
 PART I 
 Item 1. Business Overview Sunrise, a Delaware corporation, is a provider of senior living services
in the United States, Canada and the United Kingdom. Founded in 1981, Sunrise
began with a simple but innovative vision  to create an alternative senior
living option that would emphasize quality of life and quality of care. As of
December 31, 2003, Sunrise operated 373 open communities, including 361
communities in the United States, nine communities in Canada and three
communities in the United Kingdom, with a total resident capacity of
approximately 43,000. 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. In 2003, Sunrise completed its long-range strategic objective of
transforming itself into a senior living management services company through
(1) the closing and integration of two significant acquisitions of management
contracts (see Recent Developments), (2) the development of new communities
primarily through joint ventures and (3) the continuation of our sale/long-term
manage back program. Sunrise believes that this transformation has and will
continue to result in more stable and predictable revenue and earnings streams
as they become increasingly based on long-term management contracts. -3-




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To reflect the substantial expansion of Sunrises senior living business
and the broad scope of services resulting from its transformation into a senior
living management services company, Sunrise changed its name in 2003 to Sunrise
Senior Living, Inc. Recent Developments Marriott Senior Living Services In March 2003, Sunrise completed the acquisition from Marriott
International, Inc. of all of the outstanding stock of Marriotts wholly owned
subsidiary, Marriott Senior Living Services, Inc., which owns and operates
senior independent full-service and assisted living communities. Upon the
closing of this transaction, Sunrise assumed management of 129 operating
properties with a total resident capacity of more than 23,000. These
properties consisted of 108 management contracts and 21 operating leases.
Through Sunrises acquisition of all of Marriott Senior Livings outstanding
stock, Sunrise also acquired 11 land parcels, certain other assets of Marriott
Senior Living and Marriott Senior Livings approximately 15,000 employees. Sunrise paid approximately $92 million in cash, subject to certain
adjustments set forth in the purchase agreement, to acquire all of the
outstanding stock of Marriott Senior Living. Sunrise also assumed
approximately $29 million of working capital liabilities and other funding
obligations and 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.
Sunrise used cash on hand, including proceeds from completed sale/long-term
manage back transactions, and capacity under its various credit facilities to
fund this purchase price. The Marriott Senior Living portfolio of 129 properties is located in 29
states with a total resident capacity of more than 23,000. The majority of the
communities are clustered in major metropolitan markets, which is consistent
with Sunrises operating strategy. Approximately 50 percent of the resident
capacity of the portfolio is assisted living, 34 percent is independent living
and 16 percent is skilled nursing. Edencare In November 2003, Sunrise assumed management of 22 EdenCare Senior Living
Services communities located in the southern United States. Sunrise began
managing the 22 communities, with a total resident capacity of approximately
2,000, pursuant to long-term management contracts with CNL Retirement
Properties, Inc., the new owner of these properties. The portfolio of 22
communities (one each in Alabama and North Carolina, six in Georgia, two in
Kentucky, five in South Carolina and seven in Texas) consists of 19 assisted
living and Alzheimer care
communities (ranging from 40 to 90 units) and three full service campuses
providing independent living, assisted living and Alzheimer care (ranging from
190 to 210 units). -4-




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Sale / Long-term Manage Back Transactions In 2003, Sunrise completed the sale of 43 consolidated communities
pursuant to its sale/long-term manage back program. Sunrise continues to
operate all 43 of these communities under long-term management agreements. 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). Sunrise Senior Living Services Throughout its history, Sunrise has advocated a resident-centered approach
to senior living and offers a broad range of service and care options to meet
the needs of its residents. In -5-




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select communities, Sunrise offers independent
living services, which include housing, meals, transportation, activities and
housekeeping, and in some communities, Sunrise provides licensed skilled
nursing services for residents who require 24-hour skilled nursing care. The
substantial majority of Sunrises communities currently are assisted living
communities, which offer basic care and services for seniors who need
assistance with some activities of daily living. Assisted Living Upon a residents move-in to an assisted living community, Sunrise
assesses each resident, generally with input from a residents family and
physician, and develops an individualized service plan for the resident. This
individual service plan includes the selection of resident accommodations and a
determination of the appropriate level of care and service for such resident.
The plan is periodically reviewed and updated by Sunrise, and communicated to
the resident, the residents family, or both. Sunrise offers a choice of care levels in its assisted living communities
based on the frequency and intensity of assistance and care that a resident
needs or prefers. Most of Sunrises 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, Sunrise
believes it is 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 Sunrises 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; -6-




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
    
    health promotion and related programs;
    
    housekeeping services; and
    
    social and recreational activities. Assisted Living Extended Levels of Care Sunrise offers various levels of care for assisted living residents who
require more frequent or intensive assistance or increased care or supervision.
Sunrise charges an additional daily fee based on additional staff hours of
care and services provided. These extended levels of care allow Sunrise,
through consultation with the resident, the residents family and the
residents personal physician, to create an individualized care and supervision
program for residents who might otherwise have to move to a more medically
intensive facility. At December 31, 2003, approximately 29% of Sunrises
assisted living residents participated in extended levels of care. Reminiscence Care Sunrise believes its Reminiscence neighborhoods distinguish it from many
other senior living providers that do not provide such specialized care.
Sunrises 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. At December 31, 2003, approximately 21% of
Sunrises assisted living residents participated in the Reminiscence program. Medication Management Many of Sunrises assisted living residents also require assistance with
medications. To the extent permitted by state law, the medication management
program includes the storage of medications, the distribution of medications as
directed by the residents physician and compliance monitoring. Sunrise
charges an additional fixed daily fee for this service. Independent Living, Skilled Nursing and Other Services In some of its communities, Sunrise also offers independent living for
residents and in other communities Sunrise offers skilled nursing care.
Sunrise has team members specially trained to serve residents in these
communities in compliance with the appropriate state and federal licensing
statutes. Additionally, Sunrise, through its minority interest in a joint
venture, -7-




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offers At Home Assisted Living services in several east coast markets
and in 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 Sunrise serves the vast majority of a residents needs with its own
staff, some services, such as hospice care, physician care, infusion therapy,
physical and speech therapy and other ancillary care services may be provided
to residents at Sunrise communities by third parties. Sunrises staff members
assist residents in locating qualified providers for such health care services. Senior Living Community Resident Fees The average daily resident fee, consisting of daily net resident fees plus
additional care fees combined, for senior living communities owned by Sunrise
or in which it has an ownership interest that have been operated by Sunrise for
at least 12 months, or that have achieved occupancy percentages of 95% or
above, was approximately $127 for 2003, $109 for 2002 and $104 for 2001.
During 2003, approximately 93% of Sunrises resident fee revenues were derived
from private pay sources. Managed Communities In addition to managing its owned communities and communities in which it
retains an ownership interest, Sunrise also manages for third-party owners 187
operating communities and five communities under development with a total
resident capacity of over 24,100. The management contracts for these
properties have various terms, in some cases, running through December 2030.
Sunrise intends to continue to capitalize on its brand and management services
experience by seeking to enter into third-party management and development
contracts with other owners of senior living properties. -8-




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Properties As of December 31, 2003, Sunrise operated 373 senior living properties
with a resident capacity of approximately 43,000. In addition, as of December
31, 2003, Sunrise had 23 properties with a resident capacity of approximately
2,100 under construction. Sunrise manages both properties that it owns or in
which it has an ownership interest and properties owned by third parties. The
following charts summarize Sunrises portfolio of operating properties and
properties under construction as of December 31, 2003. Operating Properties Number of Properties
    
    Total Resident CapacityLocation
    
    Consolidated
    
        Joint Venture
    
    Managed
    
    Consolidated
    
    Joint Venture
    
    ManagedAlabama
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    110Arizona
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    293
    
    
    
    
    
    
    
    881Arkansas
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    163California
    
    
    5
    
    
    
    20
    
    
    
    20
    
    
    
    712
    
    
    
    1606
    
    
    
    2870Colorado
    
    
    1
    
    
    
    6
    
    
    
    3
    
    
    
    74
    
    
    
    558
    
    
    
    479Connecticut
    
    
    2
    
    
    
    1
    
    
    
    3
    
    
    
    168
    
    
    
    102
    
    
    
    518Delaware
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    
    
    
    
    82
    
    
    
    869District of Columbia
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    119Florida
    
    
    7
    
    
    
    
    
    
    
    10
    
    
    
    1,926
    
    
    
    
    
    
    
    1,989Georgia
    
    
    3
    
    
    
    5
    
    
    
    16
    
    
    
    98
    
    
    
    630
    
    
    
    1,217Illinois
    
    
    2
    
    
    
    12
    
    
    
    6
    
    
    
    472
    
    
    
    1,066
    
    
    
    676Indiana
    
    
    4
    
    
    
    
    
    
    
    1
    
    
    
    279
    
    
    
    
    
    
    
    221Kansas
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    371Kentucky
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    953Louisiana
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    161
    
    
    
    113Maryland
    
    
    3
    
    
    
    2
    
    
    
    11
    
    
    
    513
    
    
    
    233
    
    
    
    1,276Massachusetts
    
    
    
    
    
    
    5
    
    
    
    10
    
    
    
    
    
    
    
    332
    
    
    
    868Michigan
    
    
    1
    
    
    
    5
    
    
    
    3
    
    
    
    77
    
    
    
    404
    
    
    
    300Minnesota
    
    
    
    
    
    
    2
    
    
    
    12
    
    
    
    
    
    
    
    200
    
    
    
    516Missouri
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    89
    
    
    
    Nebraska
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    166New Jersey
    
    
    1
    
    
    
    15
    
    
    
    10
    
    
    
    128
    
    
    
    1,255
    
    
    
    1,415New Mexico
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    101
    
    
    
    
    
    
    
    209New York
    
    
    
    
    
    
    11
    
    
    
    2
    
    
    
    
    
    
    
    1,007
    
    
    
    243North Carolina
    
    
    2
    
    
    
    1
    
    
    
    6
    
    
    
    127
    
    
    
    91
    
    
    
    613North Dakota
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
 -9-




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Number of Properties
    
    Total Resident CapacityLocation
    
    Consolidated
    
        Joint Venture
    
    Managed
    
    Consolidated
    
    Joint Venture
    
    ManagedOhio
    
    
    14
    
    
    
    3
    
    
    
    6
    
    
    
    903
    
    
    
    168
    
    
    
    802Oklahoma
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    240Pennsylvania
    
    
    4
    
    
    
    11
    
    
    
    1
    
    
    
    765
    
    
    
    905
    
    
    
    188South Carolina
    
    
    1
    
    
    
    
    
    
    
    7
    
    
    
    39
    
    
    
    
    
    
    
    754Tennessee
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    115Texas
    
    
    1
    
    
    
    
    
    
    
    14
    
    
    
    145
    
    
    
    
    
    
    
    2,678Utah
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    164Virginia
    
    
    8
    
    
    
    5
    
    
    
    15
    
    
    
    1,546
    
    
    
    466
    
    
    
    1,223Washington
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    
    
    
    
    84
    
    
    
    332United Kingdom
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    Canada
    
    
    1
    
    
    
    8
    
    
    
    
    
    
    
    77
    
    
    
    821
    
    
    
    Total Open
Properties/Resident
Capacity
    
    
    66
    
    
    
    120
    
    
    
    187
    
    
    
    8,539
    
    
    
    10,561
    
    
    
    23,651
 Properties Under Construction Number of Properties
    
    Total Resident CapacityLocation
    
    Consolidated
    
    Joint Venture
    
    Managed
    
    Consolidated
    
    Joint Venture
    
    ManagedCalifornia
    
    
    
    
    
    
    7
    
    
    
    1
    
    
    
    
    
    
    
    657
    
    
    
    96District of Columbia
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    Michigan
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    Missouri
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    New Jersey
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    268New York
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    Pennsylvania
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    Washington
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    71
 -10-




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Number of Properties
    
    Total Resident CapacityLocation
    
    Consolidated
    
    Joint Venture
    
    Managed
    
    Consolidated
    
    Joint Venture
    
    ManagedUnited Kingdom
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    212
    
    
    
    Canada
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    Germany
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    Total Properties
Under Construction
/Resident Capacity
    
    
    4
    
    
    
    14
    
    
    
    5
    
    
    
    354
    
    
    
    1,350
    
    
    
    435Total
Properties/Resident
Capacity Open and
Under Construction
    
    
    70
    
    
    
    134
    
    
    
    192
    
    
    
    8,893
    
    
    
    11,911
    
    
    
    24,086
 Facility Development As part of its growth strategy, Sunrise develops and acquires senior
living communities in top U.S. and international major metropolitan markets.
The company develops and acquires these senior living communities for itself,
for joint ventures in which it retains an ownership interest and for third
parties. Sunrise targets sites for development and acquisition in major
metropolitan areas and their surrounding suburban communities. In evaluating a
prospective market, Sunrise considers a number of factors, including:  
    
    population;
    
    income and age demographics;
    
    target site visibility;
    
    probability of obtaining zoning approvals;
    
    estimated level of market demand; and
    
    the ability to maximize management resources in a specific
market by clustering its development and operating activities. -11-




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Development Since its initial public offering in June 1996 through December 31, 2003,
Sunrise has completed development of 136 new model communities with a resident
capacity of approximately 11,840. At December 31, 2003, Sunrise had 23
communities under construction with resident capacity of approximately 2,100
and had entered into contracts to purchase or lease 39 additional sites. These
sites are located in California, Colorado, Illinois, Kansas, Louisiana,
Massachusetts, Maryland, Michigan, Minnesota, New Jersey, New York,
Pennsylvania, Texas, Virginia, United Kingdom, Canada and Germany. Sunrise is
pursuing additional development opportunities as market conditions warrant.
Sunrise bases its development primarily upon its model facility that it has
developed and refined since the first model facility was designed in 1985. Use
of a standard model allows Sunrise to control development costs, maintain
facility consistency and improve operational efficiency. Use of the Sunrise
model also creates brand awareness in Sunrises markets. The primary milestones in the development process are:  
    
    site selection and contract signing;
    
    feasibility;
    
    zoning, site plan approval and building permits; and
    
    completion of construction. For development projects in the United States, once a market has been
identified, site selection and contract signing typically take approximately
three to nine months. Zoning and site plan approval generally take 12 months
and are typically the most difficult steps in the development process due to
Sunrises selection of sites in mature communities which usually require site
rezoning. Community construction normally takes 12 to 15 months. Sunrise
believes its extensive development experience gives it an advantage relative to
certain of its competitors in obtaining necessary governmental approvals and
completing construction in a timely manner. After a community receives a
certificate of occupancy, residents usually begin to move in within one month.
The cost of any particular community may vary considerably based on a variety
of site-specific factors. Consistent with Sunrises transformation into a senior living management
services company, Sunrise expects substantially all of its future development
activities to be conducted with joint venture partners or for third parties.
Sunrise has already entered into unconsolidated joint venture arrangements with
third parties to develop projects in the United States, the United Kingdom,
Germany and Canada. Sunrise is providing management and development services
to the joint ventures on a contract-fee basis with rights to acquire the assets
in the future, but with no -12-




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obligation to acquire such assets. Sunrise has ownership interests in
these joint ventures ranging from seven to 20 percent. Sunrise will manage
these properties pursuant to long-term management contracts. Sunrises development activities are coordinated by its experienced
development staff, which has extensive real estate acquisition, engineering,
general construction and project management experience. Architectural design
and hands-on construction functions are contracted to experienced, outside
architects and contractors. Facility Acquisitions As part of its growth strategy, Sunrise also seeks to acquire attractive
senior living communities in top U.S. and international major metropolitan
markets. Sunrise expects to partner with capital providers for such
transactions. In evaluating possible acquisitions, Sunrise considers various
factors, including:  
    
    location, construction quality, condition and design of the community;
    
    current and projected community cash flow
    
    the ability to increase revenue, occupancy and cash flow by
providing a full range of senior living services;
    
    costs of community repositioning, including any renovations; and
    
    the extent to which the acquisition will complement Sunrises
development plans. Sale/Long-Term Manage Back Program In 2000, Sunrise announced its intention to initiate a program to sell its
consolidated properties, subject to market conditions, while retaining
long-term management agreements. This sale/manage-back program has enabled
Sunrise to reduce debt, re-deploy its capital into new development projects and
realize gains on appreciated real estate. As of December 31, 2003, Sunrise has
completed the sale of interests ranging from 75% to 100% in 100 communities.
Sunrise continues to operate 99 of these 100 communities under long-term
operating agreements. Sunrise has 66 remaining consolidated and majority owned
communities. Since 29 of the communities are leased, Sunrise has 37 remaining
operating communities (2,490 resident capacity) that are wholly owned and
potentially available for the companys sale/long-term manage back program. -13-




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Company Operations Operating Structure Sunrise has centralized accounting, finance and other operational
functions at the corporate headquarters and at regional office levels which
enables community-based personnel to focus on resident care, consistent with
Sunrises operating philosophy. Sunrise maintains its 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 Sunrises development and
acquisition plans within a given geographic region. In the United States, Sunrise is currently organized into three large
geographic regions: East, Central/South and West, with multiple cluster regions
under each. Sunrise has regional offices in Boston, MA, Long Island, NY,
Villanova, PA, Atlanta, GA, Chicago, IL, Columbus, OH and Claremont, CA that
support the currently opened and/or to-be-opened properties in these markets.
Sunrise also has regional offices in London, England, Frankfurt, Germany and
Toronto, Canada supporting the Sunrise communities open or under construction
in those locations. Each regional cluster is headed by either an area vice
president or an area manager of operations with extensive experience in the
senior housing, health care and senior living industries. Each regional
cluster is supported typically by sales/marketing specialists, resident care
specialists, a human resource specialist, a dining specialist and a programming
specialist. Sunrise expects that all regional clusters will create similar
staff positions as the number of communities in those regions increases. Community Staffing Each of Sunrises communities has an executive director responsible for
the day-to-day operations of the community, including quality of care, resident
services, sales and marketing, and financial performance. Each executive
director receives specialized training from Sunrise. Sunrise believes that the
quality and size of its communities, coupled with its competitive compensation
philosophy, have enabled it to attract high-quality, professional executive
directors. The executive director is supported by 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 -14-




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and a director of community relations, who is responsible for selling
Sunrise services. Other key positions include the dining services coordinator,
the program coordinator and the maintenance coordinator. Care managers, who work on full-time, part-time and flex-time schedules,
provide most of the hands-on resident care, such as bathing, dressing and other
personalized care services. 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. Sunrise believes that its communities can be most efficiently managed by
maximizing direct resident and staff contact. Employees involved in resident
care, including the administrative staff, are trained in the care manager
duties and participate in supporting the care needs of the residents. Staff Education and Training Sunrise has attracted, and continues to seek, highly dedicated,
experienced personnel. Sunrise has developed a formal training program, the
five star training program, which focuses on providing every employee with
the appropriate skills that are required to ensure the highest quality of
resident care. All managers and direct care staff must complete a
comprehensive orientation and the core curriculum, which consists of basic
resident care procedures, Alzheimers care, communication systems, and
activities and dining programming. For the supervisors of direct care staff,
additional program levels provide education in medical awareness and management
skills. For department managers, Sunrise has developed the mentor program, which
partners each new manager with an experienced, successful manager. Under this
program, new managers typically receive several weeks of training including
classroom, on the job and corporate orientation. Thereafter, the mentor
maintains regular contact with the new manager to provide ongoing support and
guidance. Region-based classroom training also is provided monthly for
department managers in specialized areas, including Sunrises Reminiscence
Program, social and volunteer programs, human resources, staffing and
scheduling and medication management. Sunrise also has developed the executive director in training program,
which offers a structured curriculum to train individuals to become executive
directors at Sunrise. This program recruits successful, strong leaders from
both Sunrise department head ranks as well as -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 Sunrise coordinates quality assurance programs at each of its communities
through its corporate headquarters staff and through its regional offices.
Sunrises commitment to quality assurance is designed to achieve a high degree
of resident and family member satisfaction with the care and services provided
by Sunrise. In addition to ongoing training and performance reviews of care
managers and other employees, Sunrises quality control measures include: Family and Resident Feedback.Sunrise surveys residents and family
members on a regular basis to monitor the quality of services provided to
residents. Annual written surveys are used to appraise and monitor the level
of satisfaction of residents and their families. A toll-free telephone line
also is maintained which may be used at any time by a residents family members
to convey comments. Regular Community Inspections.Community inspections are conducted by
regional operations staff on a regular basis. These inspections cover: the
appearance of the exterior and grounds; the appearance and cleanliness of the
interior; the professionalism and friendliness of staff; resident care plans;
the quality of activities and the dining program; observance of residents in
their daily living activities; and compliance with government regulations. In
addition, a headquarters-based team visits each community annually to review
these same areas. Third-Party Reviews.To further evaluate customer service, Sunrise
engages an independent service evaluation company to mystery shop Sunrises
communities. These professionals assess Sunrises performance from the
perspective of a customer, without the inherent biases of a company employee.
Each community is shopped at least three times per year in person, as well as
one or more times per month by telephone. To evaluate medication management,
third-party pharmacists conduct periodic reviews of on-site handling and
storage of medications, record keeping and coordination of medications. Sales and Marketing Sunrises sales and marketing strategy is intended to create awareness of
and preference for Sunrises unique product/service positioning, leading to
inquiries and visits to Sunrise communities from potential residents and their
family members as well as positive referrals from key community sources such as
hospital discharge planners, physicians, clergy, area agencies for the elderly,
skilled nursing communities, home health agencies, social workers, financial
planners and consultants, and others. A central marketing staff supports the
field and communities by developing overall strategies, systems, processes and
programs for promoting -16-




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Sunrise in its local markets and monitors the success of overall and
site/region specific marketing efforts. Each community has at least one dedicated sales person responsible for
property-specific sales efforts. 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. Sunrise competes with numerous
other companies that provide similar senior living alternatives, such as home
health care agencies, community-based service programs, retirement communities,
convalescent centers and other senior living providers. Sunrise believes there
are no one or more dominant companies in the senior living segment. In general,
regulatory and other barriers to competitive entry in the independent living
and assisted living segments of the senior living industry are not substantial,
but such barriers to competitive entry are more substantial for the skilled
nursing segment. Although new construction of senior living communities has
declined significantly, Sunrise has experienced and expects to continue to
experience competition in its efforts to develop, acquire and operate senior
living communities. Some of the present and potential senior living
competitors of Sunrise have, or may obtain, greater financial resources than
Sunrise. Consequently, Sunrise may encounter competition that could limit its
ability to attract residents or expand its business, which could have a
material adverse effect on its revenues and earnings. Government Regulation Senior living communities are 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 include or address:  
    
    personnel education, training, and records;
    
    community services, including:  
    
    administration and supervision of medication; -17-




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
    
    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. Communities licensed to provide skilled nursing services generally provide
significantly higher levels of resident assistance. Communities which are
licensed, or will be licensed, to provide skilled nursing services may
participate in federal health care programs, including the Medicare and
Medicaid programs. Such communities must meet certain federal requirements
regarding their operations, including requirements related to physical
environment, resident rights, and the provision of health services.
Communities which participate in federal health care programs are entitled to
receive reimbursement from such programs for care furnished to program
beneficiaries. In several of the states in which Sunrise operates or intends
to operate, senior living communities also require a certificate of need before
the community can be opened. In most states, senior living communities are
also subject to state or local building codes, fire codes, and food service
licensing or certification requirements. Senior living communities are subject
to periodic surveys or inspections by governmental authorities to assess and
assure compliance with regulatory requirements. Surveys occur on a regular
(often annual or bi-annual) schedule, and special surveys may result from a
specific complaint filed by a resident, a family member or a Sunrise
competitor. From time to time in the ordinary course of business, Sunrise receives
deficiency reports, which Sunrise reviews to take appropriate corrective
action. Most inspection deficiencies are resolved through a plan of corrective
action. However, the reviewing agency typically has the authority to take
action against a licensed community where deficiencies are noted. This action
may include imposition of fines, imposition of a provisional or conditional
license, suspension or revocation of a license, loss of certification as a
provider under federal health care programs, or -18-




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other sanctions. If Sunrise fails to comply with applicable requirements,
Sunrises business and revenues could be materially and adversely affected. To
date, none of the deficiency reports received by Sunrise has resulted in a
suspension, fine, or other disposition that has had a material adverse effect
on Sunrises revenues. Regulation of the senior living industry is evolving. Sunrises
operations could suffer if future regulatory developments, such as mandatory
increases in scope and quality of care given to residents or consumer
protection regulations are enacted, licensing and certification standards are
revised, or a determination is made that the care provided by one or more of
Sunrises communities exceeds the level of care for which the community is
licensed. If regulatory requirements increase, whether through enactment of
new laws or regulations or changes in the application of existing rules,
Sunrises operations could be adversely affected. Furthermore, there have been
numerous initiatives on the federal and state levels in recent years for reform
affecting payment of health care services. Some aspects of these initiatives
could adversely affect Sunrise, such as reductions in Medicare or Medicaid
program funding. For example, the Balanced Budget Act of 1997 established a
Prospective Payment System for Medicare skilled nursing facilities under which
facilities are paid a federal per diem rate for most covered nursing facility
services. Under this system, skilled nursing facilities are no longer assured
of receiving Medicare reimbursement adequate to cover the costs of operating
the facilities. The Balanced Budget Act of 1997 also repealed rules which
required state Medicaid payments to nursing facilities to be reasonable and
adequate to cover the costs of efficiently and economically operated
facilities. Sunrise is also subject to certain federal and state anti-remuneration
laws, such as the federal health care programs anti-kickback law, which governs
various types of financial arrangements among health care providers and others
who may be in a position to refer or recommend patients to these providers.
This law prohibits direct and indirect remuneration that is intended to induce
the referral of patients to, the arranging of services by, or the recommending
of, a particular provider of health care items or services. The federal health
care programs anti-kickback law has been interpreted to apply to some
contractual relationships between health care providers and sources of patient
referral. Additionally, in some states, Sunrise operates communities for which
bills are submitted to federal and/or state health care programs, including
state Medicaid waiver programs for assisted living communities, the Medicare
skilled nursing community benefit program, the Medicaid nursing facility
benefit program or some other federal or state health care program.
Consequently, Sunrise is subject to federal and state laws which prohibit
anyone from presenting, or causing to be presented, claims for reimbursement
which are false, fraudulent, or are for items or services that were not
provided as claimed. Billing rules are often complicated, and during the past
several years, a number of health care providers have been investigated and
required to repay funds, including penalties, for what federal or state
enforcement officials deemed to be erroneous, or in some cases, fraudulent
billing practices. Violation of any of these laws can result in loss of
licensure, civil or criminal penalties, and -19-




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exclusion of health care providers or suppliers from furnishing covered items
or services to beneficiaries of the federal health care program. Similar state
laws vary from state to state, are sometimes vague, and have rarely been
interpreted by courts or regulatory agencies. Sunrise is also subject to federal and state laws designed to protect the
confidentiality of patient health information. The U.S. Department of Health
and Human Services (HHS) has issued rules pursuant to the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) relating to the privacy of
such information. Rules that became effective April 14, 2003 govern Sunrises
use and disclosure of health information at certain HIPAA covered communities.
Sunrise established procedures to comply with HIPAA privacy requirements at
these communities. HIPAAs rule requiring that electronic health care
transactions, including bills submitted to third party payors, be conducted in
a standardized format, become effective for most covered entities on
October 16, 2003,
although the HHS Center for Medicare Services has indicated that its contractors will continue to accept
legacy claims for an unspecified period of time while covered entities make good faith efforts to comply.
The HIPAA rule establishing administrative, physical and technical security standards for
health information will become effective in April of 2005. The Company is
addressing these requirements and expects to be in compliance by April 2005.
Although both current and pending HIPAA requirements affect the manner in which
Sunrise handles health data and communicates with payors at covered
communities, Sunrise believes that the cost of compliance will not have a
material adverse effect on our business, financial condition or results of
operations. Employees At December 31, 2003, Sunrise had 31,038 employees, including 18,732
full-time employees, of which 688 were employed at Sunrises headquarters and
business office. Sunrise believes employee relations are good. Website Sunrises Internet website is at http://www.sunriseseniorliving.com.
Sunrise makes available free of charge on or through its website its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission. 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 -20-




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statements are accompanied by meaningful cautionary statements in order to
maximize to the fullest extent possible the protections of the safe harbor
established in the Private Securities Litigation Reform Act of 1995.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause
actual events or results to differ materially from our forward-looking
statements. Risks Relating to Sunrises Business  
    
    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 Marriott Senior Living Services, or of 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 the revenues, expenses and operating results of
Sunrise. Sunrises acquisition of Marriott Senior Living Services poses risks for
the ongoing operations of Sunrise, including that:  
    
    the Marriott Senior Living Services portfolio may not perform as well as Sunrise
anticipates due to various factors, including disruptions caused by the integration of
operations with Sunrise, changes in macro-economic conditions and the termination of
some of the management agreements that comprise the Marriott Senior Living Services
portfolio;
    
    the diversion of management attention to the continued integration of the operations of
Marriott Senior Living Services could have a material adverse effect on the continued
operation and expansion of Sunrises existing business;
    
    Sunrise may not effectively integrate the operations of Marriott Senior Living Services;
    
    Sunrise may experience difficulties and incur greater than anticipated expenses related
to the assimilation and retention of Marriott Senior Living Services employees; and
    
    following the transaction, Sunrise may not achieve expected cost savings and operating
efficiencies, such as the elimination of redundant administrative costs and property
management costs. Sunrises acquisition of other entities in the ordinary course of business may
pose similar risks to us. If Sunrise fails to successfully integrate Marriott
Senior Living Services or such other entities -21-




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and/or fails to realize the intended benefits of such transactions, such
failure could have a material adverse effect on the revenues, expenses and
operating results of Sunrise and the market price of Sunrises common stock
could decline from its market price at the time of completion of such
acquisitions. We expect that the number of our owned and operated communities
will increase substantially as we pursue our future growth plans. This rapid
growth will place demands on our management resources. Our ability to manage
our growth effectively will require that we continue to expand our operational,
financial and management systems and that we continue to 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.  
    
    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 -22-




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negatively affected. Claims against us, regardless of their merit or eventual
outcome, also could have a material adverse effect on our ability to attract
residents or expand our business and could require our management to devote
time to matters unrelated to the operation of our business. We also have to
renew our policies periodically and negotiate acceptable terms for coverage,
exposing us to the volatility of the insurance markets, including the
possibility of rate increases.  
    
    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. We
currently have 23 communities under construction with a resident capacity of
approximately 2,100 residents. As of December 31, 2003, we had entered into
contracts to purchase or lease 39 additional development sites. Of these sites,
we have received zoning approval from the applicable municipal authority to
construct a senior living facility on 15 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 general economic conditions or increases in the costs
of materials; and -23-




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
    
    Increased costs as a result of addressing changes in laws and regulations or how
existing laws and regulations are applied. We cannot assure you that we will not experience delays in completing
facilities under construction or in development or that we will be able to
identify suitable sites at acceptable prices for future development activities.
If we fail to achieve our development plans, our growth could slow 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 assure you 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 $49 million to complete the
communities we currently have under construction. As of December 31, 2003, we
had entered into contracts to purchase or lease 39 additional sites for a total
contracted purchase price of $49 million. We estimate that it will cost Sunrise
or the applicable joint venture approximately $540 million to develop these
communities. We expect that our cash flow from operations, together with
borrowings under existing credit facilities, will be sufficient to fund the
development sites for these additional -24-




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senior living facilities for at least the next twelve months. We expect from
time to time to seek additional funding through public or private financing
sources, including equity or debt financing. If we are not able to obtain
additional financing on favorable terms, we may have to delay or eliminate all
or some of our development projects, which could adversely affect our revenues
and results of operations.  
    
    Our failure to generate sufficient cash flow to cover required
interest, principal and operating lease payments could result in
defaults of the related debt or operating leases. At December 31, 2003, we had mortgage, construction and other indebtedness
totaling $223 million and unused lines of credit totaling $225 million. We
intend to continue financing our communities through mortgage financing and
possibly operating leases or other types of financing, including lines of
credit. We cannot assure you that we will generate sufficient cash flow from
operations to cover required interest, principal and operating lease payments.
Any payment or other default could cause the lender to foreclose upon the
facilities securing the indebtedness or, in the case of an operating lease,
could terminate the lease, with a consequent loss of income and asset value to
us. In some cases, the indebtedness is secured by the community and a pledge of
our interests in the community. In the event of a default, the lender could
avoid judicial procedures required to foreclose on real property by foreclosing
on the pledge instead, thus accelerating the lenders acquisition of the
facility. Further, because our mortgages generally contain cross-default and
cross-collateralization provisions, a payment or other default by us could
affect a significant number of facilities.  
    
    Our failure to comply with financial covenants contained in debt
instruments could result in the acceleration of the related debt. There are various financial covenants and other restrictions in our debt
instruments, including provisions which:  
    
    require us to meet specified financial tests. For example, our
$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. These
tests are administered on a monthly or quarterly basis, depending
on the covenant;
    
    require consent for changes in control of us; and
    
    restrict our ability and our subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business
combinations without lender consent. -25-




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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 assure you 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.  
    
    Interest rate increases could adversely affect our earnings because
a portion of our total debt is floating rate debt. At December 31, 2003, we had approximately $42 million of floating-rate
debt at a weighted average interest rate of 3.27%. 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, 2003.  
    
    Early termination or non-renewal of our management service
agreements could cause a loss in revenues. Approximately $772 million in revenues were generated through third-party
and joint venture management service agreements in 2003. 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, property owners may terminate us as
manager if any licenses or certificates necessary for operation are revoked, if
there is a change in control of Sunrise or if we do not maintain a minimum
stabilized occupancy level in the community. Also, in some instances, a
property owner may terminate the management agreement relating to a particular
community if we are in default under other management agreements relating to
other communities owned by the same property owner or its affiliates. Early
termination of our management agreements or non-renewal or renewal on less
favorable terms could cause a loss in revenues and could negatively impact
earnings. -26-




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
    
    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 represents a substantial portion of our
senior living services, currently are not generally reimbursable under
government reimbursement programs, such as Medicare and Medicaid. Accordingly,
substantially all of our resident fee revenues are derived from private pay
sources consisting of income or assets of residents or their family members. In
general, because of the expense associated with building new facilities and the
staffing and other costs of providing the assisted living services at these
facilities, only seniors with income or assets meeting or exceeding the
comparable median in the regions where our facilities are located typically can
afford to pay the daily resident fees. 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 represents a substantial portion of our
senior living services, are not substantial. Consequently, development of new
senior living communities could outpace demand. Overbuilding in any of our
market areas could, therefore, cause us to experience decreased occupancy,
depressed margins or lower operating results.  
    
    Termination of resident agreements could adversely affect our
revenues and earnings. State regulations governing assisted living facilities 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. -27-




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
    
    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.  
    
    The discovery of environmental problems on any of the communities
we own or operate could result in substantial costs to us. Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of hazardous or toxic
substances, including asbestos-containing materials, that could be located on,
in or under a property. These laws and regulations often impose liability
without regard to whether or not the owner or operator knew of, or was
responsible for, the presence or release of the hazardous or toxic substances.
The costs of any required remediation or removal of these substances could be
substantial. In addition, the liability of an owner or operator is generally
not limited and could exceed the propertys value and the aggregate assets of
the owner or operator. An owner or operator or an entity that arranges for the
disposal of hazardous or toxic substances at a disposal site also may be liable
for the costs of any required remediation or removal of hazardous or toxic
substances at the disposal site. We engage consultants to conduct Phase I environmental studies of
development sites that are placed under contract. If the Phase I study
indicates the existence or the possibility of the existence of hazardous or
toxic substances on the property, a Phase II study is requested and performed.
The Phase I and Phase II studies, as applicable, may not reveal all
environmental liabilities. There could be, therefore, material environmental
liabilities of which we are unaware. In connection with the ownership or
operation of our communities, we could be liable for the costs of remediation
or removal of hazardous or toxic substances. We also could be liable for other
costs, including governmental fines and damages for injuries to persons or
properties. As a result, the presence, with or without our knowledge, of
hazardous or toxic substances at any property owned or operated by us, or
acquired or operated by us in the future, could have an adverse effect on our
financial condition or earnings.  
    
    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 -28-




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medical waste products and incontinence products of those residents diagnosed
with an infectious disease. The management of infectious medical waste,
including handling, storage, transportation, treatment and disposal, is subject
to regulation under various laws, including federal and state environmental
laws. These environmental laws set forth the management requirements, as well
as permit, recordkeeping, notice and reporting obligations. Each of our
facilities has an agreement with a waste management company for the proper
disposal of all infectious medical waste. Any finding that we are not in
compliance with these environmental laws could adversely affect our business
operations and financial condition. Because these environmental laws are amended from time to time, we cannot
predict when and to what extent liability may arise. In addition, because these
environmental laws vary from state to state, expansion of our operations to
states where we do not currently operate may subject us to additional
restrictions on the manner in which we operate our facilities. Risks Relating to the Senior Living Industry  
    
    Competition in our industry is high and may increase, which could
impede our growth and have a material adverse effect on our revenues
and earnings. The senior living industry is highly competitive. We compete with numerous
other companies that provide similar senior living alternatives, such as home
health care agencies, facility-based service programs, retirement communities,
convalescent centers and other senior living providers. In general, regulatory
and other barriers to competitive entry in the independent and assisted living
segments of the senior living industry are not as substantial as in other
health industries, but such barriers to competitive entry are more substantial
for the skilled nursing segment of the senior living industry. In pursuing our
growth strategies, we have experienced and expect to continue to experience
competition in our efforts to develop, acquire and operate senior living
facilities. Consequently, we may encounter competition that could limit our
ability to attract new residents or expand our business, which could have a
material adverse effect on our revenues and results of operations. 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
elderly care 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 of our
communities. A shortage of nurses or other trained personnel or general -29-




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inflationary pressures may require that we enhance our pay and benefits package
to compete effectively for such personnel. We may not be able to offset such
added costs by increasing the rates we charge to our residents. If there is an
increase in these costs or if we fail to attract and retain qualified and
skilled personnel, our business and operating results could be harmed. Employee
compensation, including salary increases and the hiring of additional personnel
to support our growth initiatives, have previously had a negative impact on
operating margins and may again do so in the foreseeable future.  
    
    The need to comply with government regulation of senior living
facilities may increase our costs of doing business and increase our
operating costs. Senior living facilities are subject to regulation and licensing by
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 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. -30-




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Communities which are licensed, or will be licensed, to provide skilled
nursing services may participate in federal health care programs, including the
Medicare and Medicaid programs. Such communities must meet certain federal
requirements regarding their operations, including requirements related to
physical environment, resident rights, and the provision of health care
services. Communities which participate in federal health care programs are
entitled to receive reimbursement from such programs for care furnished to
program beneficiaries. In several of the states in which we operate or intend
to operate, senior living communities also require a certificate of need before
the community can be opened. In most states, senior living communities also are
subject to state or local building codes, fire codes and food service licensing
or certification requirements. Like other health care communities, senior
living communities are subject to periodic surveys or inspections by
governmental authorities to assess and assure compliance with regulatory
requirements. Surveys occur on a regular (often annual or bi-annual) schedule,
and special surveys may result from a specific complaint filed by a resident, a
family member, or a Sunrise competitor. From time to time in the ordinary course of business, we receive
deficiency reports, which we review to take appropriate corrective action. Most
inspection deficiencies are resolved through a plan of corrective action.
However, the reviewing agency typically has the authority to take action
against a licensed community where deficiencies are noted. This action may
include imposition of fines, imposition of a provisional or conditional
license, suspension or revocation of a license, loss of certification as a
provider under federal health care programs or other sanctions. If we fail to
comply with applicable requirements, our business and revenues could be
materially and adversely affected. 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 for health care services.
Some aspects of these initiatives could adversely affect Sunrise, such as,
reductions in Medicare or Medicaid program funding. For example, the Balanced
Budget Act of 1997 (BBA) established a Prospective Payment System for Medicare
skilled nursing facilities under which facilities are paid a federal per diem
rate for most covered nursing facility services. Under this system, skilled
nursing facilities are no longer assured of receiving Medicare reimbursement
adequate to cover the costs of operating the facilities. The BBA also repealed
rules which required state Medicaid payments to nursing facilities to be
reasonable and adequate to cover the costs of efficiently and economically
operated facilities. -31-




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We also are subject to certain federal and state anti-remuneration laws,
such as the federal health care programs anti-kickback law, which governs
various types of financial arrangements among health care providers and others
who may be in a position to refer or recommend patients to these providers.
This law prohibits direct and indirect remuneration that is intended to induce
the referral of patients to, the arranging of services by, or the recommending
of, a particular provider of health care items or services. The federal health
care programs anti-kickback laws have been interpreted to apply to some
contractual relationships between health care providers and sources of patient
referral. Additionally, in some states, we operate communities for which bills
are submitted to federal and/or state health care programs, including state
Medicaid waiver programs for assisted living facilities, the Medicare skilled
nursing facility benefit program, the Medicaid nursing facility benefit program
or some other federal or state health care program. Consequently, we are
subject to federal and state laws which prohibit anyone from presenting, or
causing to be presented, claims for reimbursement which are false, fraudulent,
or are for items or services that were not provided as claimed. Billing rules
are often complicated, and during the past several years, a number of health
care providers have been investigated and required to repay funds, including
penalties, for what federal or state enforcement officials deemed to be, or in
some cases, fraudulent billing practices. Violation of any of these laws can
result in loss of licensure, civil or criminal penalties, and exclusion of
health care providers or suppliers from furnishing covered items or services to
beneficiaries of the federal health care program. Similar state laws vary from
state to state, are sometimes vague and have rarely been interpreted by courts
or regulatory agencies. Sunrise is also subject to federal and state laws designed to protect the
confidentiality of patient health information. The U.S. Department of Health
and Human Services (HHS) has issued rules pursuant to the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) relating to the privacy of
such information. Rules that became effective April 14, 2003 govern Sunrises
use and disclosure of health information at certain HIPAA covered communities.
Sunrise established procedures to comply with HIPAA privacy requirements at
these communities. HIPAAs rule requiring that electronic health care
transactions, including bills submitted to third party payors, be conducted in
a standardized format, become effective for most covered entities on
October 16, 2003,
although the HHS Center for Medicare Services has indicated that its contractors will continue to accept
legacy claims for an unspecified period of time while covered entities make good faith efforts to comply.
The HIPAA rule establishing administrative, physical and technical security standards for
health information will become effective in April of 2005. The Company is
addressing these requirements and expects to be in compliance by April 2005.
Although both current and pending HIPAA requirements affect the manner in which
Sunrise handles health data and communicates with payors at covered
communities, Sunrise believes that the cost of compliance will not have a
material adverse effect on our business, financial condition or results of
operations. -32-




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
    
    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; -33-




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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 which 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. -34-




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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. As of December 31, 2003, 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. -35-




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Item 2. Properties Sunrise leases its corporate offices, regional operations and development
offices, and warehouse space under various leases. The leases have terms of
five to twelve years. Of the 373 communities operated by Sunrise at December 31, 2003, 37 are
wholly owned, 29 are leased under operating leases, 120 are owned in joint
ventures and 187 are owned by third parties. See Item 1 and Notes to
Consolidated Financial Statements for further detail. 
 Item 3. Legal Proceedings Sunrise Senior Living Services, Inc., formerly known as Marriott Senior
Living Services, Inc. (SLS), a wholly-owned subsidiary of Sunrise which was
acquired from Marriott International, Inc. in March 2003, was a party in two
now-settled lawsuits in which the opposing parties were Senior Housing
Properties Trust (SNH) and Five Star Quality Care, Inc. (FVE), the owner
and lessee, respectively, of 31 senior living communities operated by SLS. The
lawsuits were filed in November 2002, prior to Sunrises purchase of all of the
outstanding stock of SLS from Marriott in March 2003. The lawsuits pertained
to, among other things, purported breaches by SLS of the operating agreements
for the communities at issue, the right of SLS to take certain actions in
connection with the sale of SLS from Marriott to Sunrise, including removal of
Marriott proprietary marks from the communities, and the right of SNH/FVE to
terminate the operating agreements. The lawsuits were settled in January 2004.
Under the stock purchase agreement pursuant to which Sunrise purchased the
outstanding stock of SLS, Marriott indemnified and held Sunrise harmless for
certain attorneys fees, costs and payments made or incurred in connection with
the lawsuit. In addition, Sunrise is involved in various lawsuits and claims arising in
the normal course of business. In the opinion of Sunrises management,
although the outcomes of these suits and claims are uncertain, in the aggregate
they should not have a material adverse effect on Sunrises business, financial
condition, and results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 
 PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters Sunrises common stock is traded on the New York Stock Exchange under the
symbol SRZ. Trading of Sunrises common stock commenced on May 31, 1996.
Our common stock began trading on the New York Stock Exchange on May 23, 2001
under the symbol ''SRZ. -36-




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Prior to that date, our common stock was traded on The Nasdaq National Market
under the symbol ''SNRZ. As of March 3, 2004, there were 263 stockholders of
record. No cash dividends have been paid in the past. The following table
sets forth, for the quarterly periods indicated, the high and low sales prices
of our common stock: Quarterly Market Price Range of Common Stock Quarter Ended
    
    High
    
    LowMarch 31, 2002
    
    $
    32.70
    
    
    $
    20.60June 30, 2002
    
    $
    30.15
    
    
    $
    25.36September 30, 2002
    
    $
    27.50
    
    
    $
    21.00December 31, 2002
    
    $
    29.00
    
    
    $
    19.60
 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
 Equity Compensation Plan Information The following table sets forth the following information as of Sunrises
2003 year-end for (i) all compensation plans previously approved by our
stockholders and (ii) all compensation plans not previously approved by our
stockholders:  (a)
    
    the number of securities to be issued upon the exercise of
outstanding options, warrants and rights;(b)
    
    the weighted-average exercise price of such outstanding options,
warrants and rights; and(c)
    
    other than securities to be issued upon the exercise of such
outstanding options, warrants and rights, the number of securities
remaining available for future issuance under the plans. -37-




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Number ofSecuritiesRemaining AvailableNumber of
        
        
        
        
        
        for Future IssuanceSecurities to be
        
        
        
        
        
        Under EquityIssued Upon
        
        Weighted-Average
        
        Compensation PlansExercise of
        
        Exercise Price of
        
        (ExcludingOutstanding
        
        Outstanding
        
        SecuritiesOptions, Warrants
        
        Options, Warrants
        
        Reflected in ColumnPlan Category(1)
        
        and Rights (a)
        
        and Rights (b)
        
        (a))(c)Equity compensation
            plans approved by stockholders (2)
        
        
        4,044,116
        
        
        
        $
        23.65
        
        
        540,120Equity compensation
            plans not approved by stockholders (4)
        
        
        282,955
        
        
        
        
        16.75
        
        
        2,245Total
        
        
        4,327,071
        
        
        
        $
        23.31
        
        
        542,365
  (1)
    
      Excludes options to purchase 40,665 shares of Sunrise common stock outstanding
        pursuant to the Karrington Health Incentive Plan with a weighted average
        exercise price of $ 35.55.(2)
    
    Consists of the Sunrise Assisted Living, Inc. 1995 Stock Option Plan, as
amended, 1996 Stock Option Plan, 1997 Stock Option Plan, 1998 Stock Option
Plan, 1999 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option
Plan, 2002 Stock Option and Restricted Stock Plan, 2003 Stock Option and
Restricted Stock Plan, Employee Stock Purchase Plan, and options to
purchase up to 50,000 shares of Sunrise common stock under the 1996
Directors Option Plan, as amended.(3)
    
    Includes 108,317 shares available for issuance under the Sunrise Employee
Stock Purchase Plan. -38-




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(4)
    
    Consists of Sunrises 1996 Non-Incentive Stock Option Plan, as amended,
and options to purchase 25,000 shares of Sunrise common stock under a 1997
amendment to the 1996 Directors Option Plan, which amendment was not
approved by Sunrises stockholders. 1996 Non-Incentive Stock Option Plan, as amended The 1996 Non-Incentive Plan was approved by the board of directors on
December 13, 1996 and amended by the board on March 16, 1997. The 1996
Non-Incentive Plan was not approved by our stockholders. The 1996 Non-Incentive Plan authorizes the grant of options to purchase
shares of Sunrise common stock to any employee of Sunrise or any subsidiary of
Sunrise as the board of directors shall determine and designate, as well as any
consultant or advisor providing bona fide services to Sunrise or any subsidiary
of Sunrise, subject to certain limited exceptions. A total of 1,100,000 shares
of Sunrise common stock may be issued pursuant to options granted under the
1996 Non-Incentive Plan. Shares issued under the 1996 Non-Incentive Plan become
available for future grants if any option expires, terminates, or is terminated
or canceled for any reason prior to exercise. Options granted under the 1996 Non-Incentive Plan give the option holder
the right to purchase shares of Sunrise common stock at a price fixed in the
stock option agreement applicable to the option grant. The option exercise
price will not be less than the greater of par value or the fair market value
of a share of Sunrise common stock on the date of grant. Each option will vest
and become exercisable over a period commencing on or after the date of grant,
as determined by the compensation committee. In the event of any changes in the
Sunrise common stock by reason of any recapitalization, reclassification, stock
split-up, combination of shares, exchange of shares, stock dividend or other
distribution payable in capital stock, or other increase or decrease in such
shares effected without receipt of consideration by Sunrise, the number and
kind of shares for the acquisition of which options may be granted under the
1996 Non-Incentive Plan shall be adjusted proportionately and accordingly so
that the proportionate interest of the holder of the option immediately
following such event shall, to the extent practicable, be the same as
immediately before such event. The board may amend, suspend or terminate the 1996 Non-Incentive Plan as
to any shares of Sunrise common stock as to which options have not been
granted. No amendment, suspension or termination, however, may alter or impair
rights or other obligations under any option previously granted under the 1996
Non-Incentive Plan without the consent of the holder. 1996 Directors Option Plan, as amended The board of directors adopted on August 25, 1996 and the stockholders
approved on April 28, 1997, Sunrises 1996 Directors Stock Option Plan. At the
time of the boards adoption -39-




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and the stockholders approval of the 1996 Directors Stock Option Plan,
50,000 shares of Sunrise common stock were reserved for issuance under that
plan. On November 4, 1997, the board of directors amended Sunrises 1996
Directors Stock Option Plan to increase the number of shares available for
issuance under the plan from 50,000 to 75,000 shares of Sunrise common stock.
This amendment was not approved by our stockholders because stockholder
approval was not required under NASDAQ National Market listing requirements
then-applicable to Sunrise. As of December 31, 1999, no shares remained
available for grant under the plan. Under the 1996 Directors Stock Option Plan, upon becoming a director, a
non-executive director of Sunrise would receive an initial grant of options to
purchase 10,000 shares of Sunrise common stock. Following each annual meeting
of stockholders where the director was re-elected, the director would receive
an additional grant of 5,000 options. Options granted under the 1996 Director
Plan give the option holder the right to purchase shares of Sunrise common
stock at a price fixed in the stock option agreement executed by the option
holder and Sunrise at the time of grant. The option exercise price will not be
less than the fair market value of a share of Sunrise common stock on the date
the option is granted. The period for exercising an option begins on the date
of grant and generally ends ten years from the date the option is granted. In
the event of any changes in the Sunrise common stock by reason of stock
dividends, split-ups, recapitalizations, mergers, consolidations, combinations
or other exchanges of shares and the like, appropriate adjustments will be made
by the board of directors to the number of shares of Sunrise common stock
available for issuance under the 1996 Director Plan, the number of shares
subject to outstanding options, or the exercise price per share of outstanding
options. Subject to certain limitations, the board of directors may at any time
suspend or terminate the 1996 Director Plan, and may amend it from time to time
in such respects as the board may deem advisable; provided, however, to the
extent required under Rule 16b-3 under the Securities Exchange Act of 1934 as
in effect at the time of such amendment, the board shall not amend the 1996
Director Plan in the following respects without the approval of stockholders
then sufficient to approve the 1996 Director Plan in the first instance: (a) to
materially increase the benefits accruing to participants under the 1996
Director Plan (for example, to increase the number of options that may be
granted to any Director); (b) to materially increase the maximum number of
shares of Sunrise common stock that may be issued under the 1996 Director Plan;
or (c) to materially modify the requirements as to eligibility for
participation in the 1996 Director Plan. No amendment, suspension or
termination of the Plan, however, shall, without the optionees consent, alter
or impair any rights or obligations under any stock option agreement previously
entered into under the 1996 Director Plan. -40-




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Item 6. Selected Financial Data  The selected consolidated financial data set forth below should be read in conjunction with
Sunrises Consolidated Financial Statements and notes thereto included elsewhere herein. December 31,2003 (1)
    
    2002
    
    2001
    
    2000
    
    1999 (2)(dollars in thousands, except per share amounts)STATEMENT OF OPERATIONS DATA:Operating revenue
    
    $
    1,188,301
    
    
    $
    505,912
    
    
    $
    428,219
    
    
    $
    344,786
    
    
    $
    255,219Management services expenses
    
    
    692,917
    
    
    
    156,251
    
    
    
    82,734
    
    
    
    22,157
    
    
    
    13,623Facility operating expenses
    
    
    254,203
    
    
    
    167,354
    
    
    
    168,602
    
    
    
    169,966
    
    
    
    131,055General and administrative expenses
    
    
    72,596
    
    
    
    36,944
    
    
    
    32,809
    
    
    
    27,418
    
    
    
    20,715Depreciation and amortization expenses
    
    
    16,406
    
    
    
    25,317
    
    
    
    28,475
    
    
    
    33,902
    
    
    
    25,448Interest expense, net
    
    
    16,571
    
    
    
    24,120
    
    
    
    25,315
    
    
    
    37,566
    
    
    
    21,750Net income (3)
    
    
    62,178
    
    
    
    54,661
    
    
    
    49,101
    
    
    
    24,278
    
    
    
    20,213Net income per common share:Basic
    
    
    2.92
    
    
    
    2.44
    
    
    
    2.25
    
    
    
    1.12
    
    
    
    0.96Diluted
    
    
    2.63
    
    
    
    2.23
    
    
    
    2.08
    
    
    
    1.10
    
    
    
    0.94BALANCE SHEET DATA (at end of period):Cash and cash equivalents
    
    $
    102,548
    
    
    $
    173,119
    
    
    $
    50,275
    
    
    $
    42,874
    
    
    $
    53,540Working capital (deficit)
    
    
    71,123
    
    
    
    139,639
    
    
    
    38,803
    
    
    
    (34,063
    )
    
    
    95,480Total assets
    
    
    1,009,798
    
    
    
    1,116,151
    
    
    
    1,177,615
    
    
    
    1,129,361
    
    
    
    1,101,413Total debt
    
    
    222,990
    
    
    
    456,969
    
    
    
    630,756
    
    
    
    674,703
    
    
    
    700,943Stockholders equity
    
    
    490,276
    
    
    
    465,818
    
    
    
    410,701
    
    
    
    354,045
    
    
    
    335,124OPERATING AND OTHER DATA:Ratio of earnings to fixed charges (4)
    
    
    2.97x
    
    
    
        2.50x
    
    
    
        2.49x
    
    
    
    1.57x
    
    
    
    1.52xNet cash provided by operating activities
    
    
    38,818
    
    
    
    98,817
    
    
    
    101,485
    
    
    
    62,477
    
    
    
    42,787Net cash (used in) provided by investing activities
    
    
    237,464
    
    
    
    211,935
    
    
    
    (52,518
    )
    
    
    (34,258
    )
    
    
    (235,065
    )Net cash (used in) provided by financing activities
    
    
    (346,853
    )
    
    
    (187,908
    )
    
    
    (41,566
    )
    
    
    (38,885
    )
    
    
    191,621Properties (at end of period):Owned
    
    
    186
    
    
    
    181
    
    
    
    162
    
    
    
    147
    
    
    
    126Managed
    
    
    187
    
    
    
    28
    
    
    
    24
    
    
    
    17
    
    
    
    14Total
    
    
    373
    
    
    
    209
    
    
    
    186
    
    
    
    164
    
    
    
    140Resident capacity:Owned
    
    
    19,100
    
    
    
    14,278
    
    
    
    12,607
    
    
    
    11,380
    
    
    
    9,756Managed
    
    
    23,651
    
    
    
    2,322
    
    
    
    2,190
    
    
    
    1,503
    
    
    
    1,289Total
    
    
    42,751
    
    
    
    16,600
    
    
    
    14,797
    
    
    
    12,883
    
    
    
    11,045
   (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 $29 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)
    
    On May 14, 1999, we completed our acquisition of Karrington through a tax-free, stock-for-stock transaction in which we issued
2.3 million shares of our common stock in exchange for all outstanding shares of Karrington and Karrington became a wholly owned subsidiary of Sunrise.
The common stock issued in the transaction, together with related merger costs, had a value of $85 million. The transaction was accounted for using the
purchase method of accounting and, accordingly, the results of operations of Karrington since the acquisition are included in our financial information for 1999.(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, 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. -41-




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read together with the information
contained in our consolidated financial statements, including the related
notes, and other financial information appearing elsewhere herein. This
managements discussion and analysis contains certain forward-looking
statements that involve risks and uncertainties. Although we believe the
expectations reflected in such forward looking statements are based on
reasonable assumptions, there can be no assurance that our expectations will be
realized. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including, but
not limited to, development and construction risks, acquisition risks, business
conditions, competition, changes in interest rates, our ability to manage our
expenses as a percentage of revenues under management, market factors that
could affect the value of our properties, the risks of downturns in economic
conditions generally, success in integrating Marriott Senior Livings
operations and other acquisitions, 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 its consolidated subsidiaries. Overview We are a provider of senior living services in the United States, Canada
and the United Kingdom. Founded in 1981, we began with a simple but innovative
vision  to create an alternative senior living option that would emphasize
quality of life and quality of care. As of December 31, 2003, we operated 361
communities in the United States, nine communities in Canada and three
communities in the United Kingdom, with a total resident capacity of
approximately 43,000. Of these, 186 are communities owned by us or in which we
have an ownership interest and 187 are communities managed for third parties.
Our 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.
In addition, we develop senior living communities for ourselves, for joint
ventures in which we retain an ownership interest and for third parties. In 2003, we completed our long-range strategic objective of transforming
ourselves into a senior living management services company through (1) the
closing and integration of two significant acquisitions of management contracts
(see Recent Developments below), (2) the development of new communities
primarily through joint ventures and (3) the continuation of our sale/long-term
manage back program. We believe that this transformation has and will continue
to result in more stable and predictable revenue and earnings streams as they
become increasingly based on long-term management contracts. 42




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Recent Developments On March 28, 2003, we completed our acquisition of all the outstanding
stock of Marriott International, Inc.s wholly owned subsidiary, Marriott
Senior Living Services (MSLS), which owns and operates senior independent
full-service and assisted living communities. With the closing of this
acquisition, we assumed management of an additional 129 operating communities
with a total resident capacity of more than 23,000. These communities
consisted of 108 management contracts and 21 operating leases. At closing, a
majority of MSLS approximately 15,000 employees remained employed by MSLS,
which has been renamed Sunrise Senior Living Services. The MSLS portfolio currently includes 126 communities located in 29 states
with a resident capacity of approximately 22,800, net of the termination of
three operating leases during the third quarter of 2003. The majority of the
communities are clustered in major metropolitan markets, which is consistent
with Sunrises operating strategy. Approximately 50 percent of the resident
capacity of the portfolio is assisted living, 34 percent is independent living
and 16 percent is skilled nursing. On June 30, 2003, we acquired the remaining majority interest in seven
senior living communities in which we previously maintained a minority
ownership interest. The majority interest holder was Catholic Health
Initiatives, ET AL. (CHI), a not-for-profit entity. In order to acquire the
remaining ownership interest, we assumed approximately $21 million in debt and
paid approximately $2 million in cash. Since this acquisition occurred on June
30, 2003, our income statement reflects our minority ownership position in the
communities for the first half of 2003 and complete results of operation for
the communities for the second half of 2003. On September 23, 2003, we closed on a commitment from a syndicate of banks
for a $200 million corporate credit facility with expansion options. The
facility has an initial term of three years with an extension option. Proceeds
will be used for general corporate purposes, including investments,
acquisitions and the refinance of existing debt. Consistent with our
transformation to a management services company, the facility is not secured by
real estate and replaces the $265 million syndicated revolving credit facility,
which was primarily used for construction of wholly owned senior living
properties. In November 2003, we assumed management of 22 Edencare Senior Living
Services communities, located in the southern United States. The 22
communities have a resident capacity of approximately 2,000. This new
management contract transaction is in-line with our growth strategy to
strengthen our presence in existing markets while introducing Sunrise Senior
Living services to new locations. Also, this transaction advances our
strategy to transition into a management services company, as we do not own
the real estate of these communities. 43




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In addition, we also completed the sale of 43 consolidated communities
pursuant to our sale/long-term manage back program. We will continue to
operate all 43 of these communities under long-term management agreements. 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, 2003, we had four wholly owned communities under
construction with a resident capacity of over 350 residents. With respect to
these development communities, 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
wholly owned prototype communities. In 2003, start-up losses for 100% owned
communities that have not reached stabilized occupancy were $3 million and
depreciation expense for our owned communities was $13 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, 2003, these joint ventures have developed or are developing 60
communities (14 of which are under construction) with approximately $220
million of third-party debt and approximately $724 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. As of December 31, 2003, we guaranty $33 million of debt for our
development joint ventures. Of the $33 million, $19 million are last dollar
debt guarantees on international development. Last dollar debt guarantee means
the third-party debt would have to default, the bank would have to enforce any
remedies against the venture, including foreclosure, after which we would have
to provide any required funds to make up any difference between the 44




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loan amount and the amount recovered from such enforcement. Of the $33
million in debt guarantees to development joint ventures, $7 million are
removed upon stabilization of the underlying communities, which is generally
within 12 to 20 months. The remaining $26 million will remain in place
throughout the term of the loan. We receive a fee in all situations where we
have provided a debt guarantee. These fees are 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, 2003, 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 line item on our consolidated income statement. As we are
minority owners in these joint ventures, we only record the fee revenue
associated with the third-party ownership percentage of the joint venture. For
example, when our joint venture partner has a 75% ownership interest in the
joint venture, we only record 75% of the fee revenue. As part of our fee-development for joint ventures, we typically guarantee
that 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, 2003, 14 properties are 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 2004.
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 $71 million at December 31, 2003.
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 45




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have not recorded any reserves against these notes based on our analysis
of the preceding factors and, at December 31, 2003, expect that repayment of
these notes will be made. If circumstances were to suggest that any amounts
with respect to these notes would be uncollectible, we would establish a
reserve to write-down the note to its collectible value. In addition
    to the foregoing, we may provide limited debt guarantees to certain of our
    joint ventures. Unless otherwise stated, we would be required to perform under
    a debt guarantee if the business venture failed to perform under the debt
    agreement and the bank pursued our guarantee. At December 31, 2003, we
    have guaranteed $106 million of debt for our business ventures which
    represents our maximum exposure under our debt guarantees. Of the $106 million,
    $2 million of guarantees are for our sale/long-term manage back partnerships.
    These guarantees are removed upon reaching certain occupancy and debt service
    coverage targets within the partnership. Of the $106 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.
    Sunrise has provided $9 million of debt guarantees to hospital partnerships
    that remain in place throughout the term of the loan. In addition, we have
    provided $91 million in debt guarantees and 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 $83 million of life care endowment obligations issued by MSLS
    with respect to two continuing care retirement communities. 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 $8 million of the $91 million in debt
    guarantees and financing obligations associated with management contracts
    is made up of $2 million of obligations to provide financing under existing
    credit facilities with respect to four communities, $5 million of obligations
    to provide credit financing for 22 communities and $1 million of payment
    guarantees under operating agreements with respect to one community. As of
    December 31, 2003, we have not been required to fund any debt guarantees. 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 propertys
revenue. In addition, in certain management contracts, we have the opportunity
to earn incentive management fees based on monthly or yearly operating or cash
flow results. Management fee revenue is included in the Management services
line item on our consolidated income statement. 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 property 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 property reaches stabilization, which is within 12 to 20 months.
Typically, the terms of these loans 46




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provide for no limitation to the maximum potential future payments under
the loans. As of December 31, 2003, 19 operating communities are subject to a
Sunrise operating deficit credit facility and 14 additional communities will be
subject to a credit facility upon opening. Sunrise funded $0.4 million under
these credit facilities in 2003 related to four communities and does not
expect to fund any additional amounts under these credit facilities. The
amounts funded in 2003 were recorded as loans to the ventures and are expected
to be recoverable from cash flows from operations of the ventures. Sale/Long-Term Manage Back Program In 2000, we announced our intention to sell selected owned properties as a
normal part of our operations and retain long-term management contracts and, in
many cases, minority equity interests in the properties. We believe that this
strategy of selling selected properties as part of our normal operations has
and will continue to enable us to reduce our debt, re-deploy our capital into
new development projects and realize cash gains on appreciated real estate.
Under our sale/long-term manage back program, we sell wholly owned properties
that we previously developed. This approach requires that we reflect in our
income statement many expenses associated with these properties prior to their
sale, including certain development expenses, start-up losses and depreciation. We have performed under our sale/long-term manage back program by selling
some properties 100% to third-parties and retaining a long-term management
contract and selling some properties to joint ventures in which we have a
minority ownership interest, generally ranging from 10% to 25%. If we sell
100% of a property to a third-party owner, we recognize as a gain from the sale
the difference between the purchase price and the book value of the property,
less the costs to sell. Generally accepted accounting principles require that
we remove the book value of the property from the Property and equipment line
item on our consolidated balance sheet and remove from liabilities any debt
paid off or assumed by the new owner in the transaction. If we sell a property to a joint venture in which we have a minority
ownership interest, we will recognize as a gain from the sale the difference
between the purchase price and the book value of the property, less the costs
to sell, adjusted to reflect only the gain associated with the third-party
ownership in the joint venture. Generally accepted accounting principles
require that we not record a gain on the portion of the sale associated with
our remaining ownership in the joint venture. Generally accepted accounting
principles also require that we record, at historical cost basis, our remaining
ownership of the property sold and debt assumed by the joint venture as an
investment. This investment is included in the Investment in unconsolidated
senior living properties line item on the balance sheet. Further, as is the
case with the sale of a 100% interest in a property, generally accepted
accounting principles require that we remove the book value of the property
from the Property and equipment line on our consolidated balance sheet and
remove from liabilities any debt assumed by the new owner in the transaction.
We generally do not provide seller financing in these transactions. The recognition of the gain from these sales, as calculated above, in our
consolidated income statement, which is recorded in the Income from property
sales line item, is determined 47




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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
gains until such operating contingencies have been met. If the operating
contingencies are not met for an identified period, we would be required to
repay a portion of the cash proceeds related to the specific contingency and
would not be able to recognize the portion of the gain associated with that
contingency. There have been sale transactions in this sale/long-term manage
back program that have not required such operating contingencies. In these
instances, we would record the gain in the period in which the sale occurred.
The balance of the unrecognized gains on properties sold in prior periods is
included in the Deferred revenue line of our consolidated balance sheet. In certain transactions, we have provided support arrangements for
portfolios that have properties in lease-up. These arrangements are for
limited periods of time and require payments if operating cash flow is below
stated targets. Based on our expectations of operating performance over the
life of the arrangement, we establish a reserve against the gain and proceeds
from sales to fund potential payments. We currently have three joint venture
agreements comprising 47 properties that are subject to lease-up support
arrangements. 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, many 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 by owning a minority interest in the real
estate underlying our long term management contracts, we retain the ability
to influence the owners of our communities, reduce the risk to our
shareholders of real estate ownership and receive potential upside from the
sale of the joint venture. 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). For summary financial information for unconsolidated entities (7% to 50%
owned) in which we have made investments, see Note 6 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 4 and 16 to our consolidated financial statements.
Three 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 three joint ventures. 48




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As discussed in Note 18 to our consolidated financial statements, a
director of Sunrise, Craig Callen, is a managing director of Credit Suisse
First Boston (CSFB) LLC. The parent of CSFB LLC controls through funds
sponsored by an affiliate or subsidiary, which from time to time have included
investments in our joint ventures. We are providing management and pre-opening
services to the joint ventures on a contract fee basis with rights to acquire
the assets in the future. We may allow minority equity ownership interests in joint ventures for our
officers as a means of incentive. Currently, two of our corporate officers,
Christian Slavin and Tiffany Tomasso, have minority ownership interests (less
than 1% combined on a fully diluted basis) in one of our international joint
ventures. Results of Operations We derive our consolidated revenues from three primary sources: (1)
management services income for management services provided to communities
owned by unconsolidated joint ventures and other third parties, (2) resident
fees for the delivery of senior living services to our consolidated communities
and (3) income from property sales. Historically, most of our operating
revenues have come from management services and resident fees. In 2003, 2002
and 2001, management services and resident fees comprised 94%, 85% and 85% of
total operating revenues, respectively. The balance of our total operating
revenues was derived from income from property sales. Management services income represents fees from long-term contracts for
communities owned by unconsolidated joint ventures and other third party
owners. Reimbursable expenses paid by us for the unconsolidated joint ventures
are also reflected as revenues in the income statement, as required by contract
accounting, and are offset by a corresponding amount reflected in the
Management services expense line item. Management services income also
includes management fees for operating communities, which are generally in the
range of 5% to 8% of a managed communitys total operating revenue for
communities in operation, and pre-opening service fees for site selection,
zoning, property design, construction management, hiring, training, licensing
and marketing services. Residents, their families, other responsible parties and Medicare /
Medicaid typically pay resident fees monthly. In 2003, 2002 and 2001,
approximately 93%, 99% and 99% of our resident fee revenue was derived from
private pay sources. As a result of the MSLS acquisition, approximately six
percent of our resident fee revenue in 2003 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, Reminiscencecare and other resident related services.
Additional fees are paid by residents who require personal care in excess of
services provided under the basic care program or services for cognitively
impaired residents. 49




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Income from property sales represents the gain recognized from the sale of
senior living properties. Generally, upon sale of a property, we will enter
into a long-term management agreement to manage the property. We classify our operating expenses into the following categories: (1)
management services, which includes development and pre-opening expense and
operating expenses reimbursable to us with regards to communities owned by
unconsolidated joint ventures and other third party owners; (2) facility
operating, which includes labor, food, marketing and other direct facility
expenses for our consolidated communities; (3) general and administrative,
which primarily includes headquarters and regional staff expenses and other
overhead costs; (4) depreciation and amortization; and (5) facility lease,
which represents rental expenses for communities not owned by us. The following summarized table sets forth the components of our net income
(in thousands): Year Ended December 31,2003
    
    2002
    
    2001Total operating revenue
    
    $
    1,188,301
    
    
    $
    505,912
    
    
    $
    428,219Total operating expenses
    
    
    1,074,633
    
    
    
    394,164
    
    
    
    322,779Non-recurring items
    
    
    
    
    
    
    
    
    
    
    2,307Income from operations
    
    
    113,668
    
    
    
    111,748
    
    
    
    107,747Interest income
    
    
    8,869
    
    
    
    11,338
    
    
    
    13,168Interest expense
    
    
    (25,440
    )
    
    
    (35,458
    )
    
    
    (38,483
    )Equity in earnings (losses) of
unconsolidated            senior
living properties
    
    
    1,161
    
    
    
    695
    
    
    
    (1,169
    )Minority interests
    
    
    (1,105
    )
    
    
    (160
    )
    
    
    (769
    )Income before income taxes
    
    
    97,153
    
    
    
    88,163
    
    
    
    80,494Provision for income taxes
    
    
    (34,975
    )
    
    
    (33,502
    )
    
    
    (31,393
    )Net income
    
    $
    62,178
    
    
    $
    54,661
    
    
    $
    49,101
 Prior to the completion of the MSLS transaction, Sunrise reported the
results of its operations by its two operating divisions  Sunrise Management
Services and Sunrise Properties. With the completion of the MSLS acquisition
and the transformation into a management services organization, Sunrise now
operates within one defined business segment with activities related to
management, development, and acquisition of senior living services both
domestically and internationally. See Note 21 of our consolidated financial
statements. 50




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Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002 During 2003, we continued to capitalize on our brand and management
services experience by adding additional third-party management and
development contracts. 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, partially offset by the
termination of one management contract and three leases acquired through the
MSLS acquisition. Total operating revenue increased by $682 million to $1.2 billion for the
year ended December 31, 2003 from $506 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 $234
million reduction in debt. Operating Revenue Management services revenues increased by $588 million to $772 million
for the year ended December 31, 2003 from $184 million for the year ended
December 31, 2002. This increase was primarily due to the growth in the
number of communities managed by Sunrise 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 income
statement. These revenues are offset by a corresponding amount reflected in
the management services expense line item. Resident fees represent 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. 51




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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 was $127 in 2003 compared to $121 in 2002. The increase is
primarily due to a general increase in the basic care rate. 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 14 to our
consolidated financial statements for a discussion of our sale/long term
manage back transactions. Operating Expenses 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 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 expenses of Sunrise. An offsetting revenue
reimbursement is reflected in the management services 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 52




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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 will be no transition expenses incurred in 2004. 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. 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 145 (see Note 2 to our consolidated financial statements) 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 rate 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 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. We expect that our effective
tax rate will increase in 2004. 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. 53




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Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001 We continued to experience growth in operations in the year ended December
31, 2002 and continued to capitalize on our brand awareness by adding
additional third-party management and development contracts. During 2002, we
began operating 21 additional communities in which we have an ownership
interest and managing 7 additional communities for independent third parties,
partially offset by four third party management contract terminations and the
100% sale of a wholly owned property in Iowa. Total operating revenue increased 18% to $506 million for the year ended
December 31, 2002 from $428 million for the year ended December 31, 2001. Net
income increased 11% to $55 million for the year ended December 31, 2002,
or $2.23 per share
(diluted), from $49 million for the year ended December 31, 2001, or $2.08 per share (diluted). The increase in net income between
the years ended December 31, 2002 and December 31, 2001 was mainly due to our
sale/long-term manage back program which resulted in higher income, reduced
interest expense as a result of a $174 million reduction in debt and lower
depreciation and amortization expense. Operating Revenue Management services revenues include management services revenues from
unconsolidated joint ventures and third-party owners. Management services
revenues increased 74% to $184 million for the year ended December 31, 2002
from $106 million for the year ended December 31, 2001. This increase was
primarily due to the growth in the number of communities managed by Sunrise or
in the pre-opening phase. The total number of communities managed increased 49%
to 128 communities at December 31, 2002, up from 86 communities at December 31,
2001. This growth resulted primarily from the addition of 46 new management
contracts during 2003, partially offset by the termination of four management
contracts. Additionally, there was a 61% increase in the number of communities
in unconsolidated joint ventures (100 versus 62), the majority of which are
accounted for under contract accounting, which requires the presentation of
reimbursable expenses as revenues in the income statement. These revenues are
offset by a corresponding amount reflected in the management services expense
line item. Resident fees represent revenues earned from residents in our
consolidated communities. Resident fees decreased $13 million, or 5%, to $248
million for the year ended December 31, 2002 from $261 million for the year
ended December 31, 2001. This decrease was due primarily to the sale of 12
properties in 2001 resulting in an $18 million decrease in 2002 resident fee
revenue and the sale of 17 properties in the first nine months of 2002
resulting in a $32 million decrease in resident fee revenue in 2002. These
decreases were partially offset by a $37 million increase from the remaining
consolidated communities due to increases in occupancy and rate. Average resident occupancy for the 119 stabilized communities that we
operated in both 2002 and 2001 and in which we have an ownership interest was
91.07% compared to 90.82%, 54




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respectively. We attribute the increase in stabilized occupancy to
improved performance of our current stabilized portfolio. 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 15 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 2002 and 2001 and in which we have an
ownership interest was $117 in 2002 compared to $109 in 2001. The increase is
primarily due to a general increase in the basic care rate. 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, 2002,
we recognized $6 million of gains previously deferred on property sales
completed during 2001 as a result of certain operating contingencies being met
in 2002. In addition, we recognized $68 million of gains from the
sale/long-term manage back transactions completed in 2002. See Note 14 to our
consolidated financial statements for a discussion of our sale/long term
manage back transactions. Operating Expense Management services expenses for the year ended December 31, 2002
increased $73 million to $156 million from $83 million for the year ended
December 31, 2001. This increase is consistent with the increase in management
services 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 expenses of Sunrise. An offsetting revenue
reimbursement is reflected in the management services revenue line item. Facility operating expenses for the year ended December 31, 2002 decreased
$2 million to $167 million from $169 million for the year ended December 31,
2001. This decrease was due primarily to the sale of 12 properties in 2001
resulting in a $11 million decrease in facility operating expenses in 2002 and
the sale of 17 properties in the first nine months 2002 resulting in a $17
million decrease in facility operating expenses in 2002. These decreases were
substantially offset by a $26 million increase from the remaining consolidated
properties due to increases in labor, insurance and utility costs. General and administrative expenses increased by $4 million, or 13%, to
$37 million for the year ended December 31, 2002 compared to $33 million for
the year ended December 31, 2001. The general and administrative expenses
continue to increase due to the substantial growth in the number of communities
operated during this period. 55




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##### 



Depreciation and amortization for the year ended December 31, 2002
decreased 11%, to $25 million from $28 million for the year ended December 31,
2001. This decrease was primarily due to the cessation of amortization of
goodwill in accordance with new accounting guidance (see Note 2 to our
consolidated financial statements) and the timing of property sales. Facility lease expenses for the year ended December 31, 2002 decreased $2
million to $8 million from $10 million for the year ended December 31, 2001.
This decrease was primarily due to the termination of four operating leases in
January 2002. We terminated these leases and acquired the four properties on
the balance sheet. Interest Net interest expense decreased $1 million, or 5% to $24 million for the
year ended December 31, 2002 from $25 million for the year ended December 31,
2001. In accordance with FASB 145 (see Note 2 to our consolidated financial
statements), 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 income. Also, the extraordinary gain
recognized in 2001 of approximately $0.5, net of tax, in connection with the
early extinguishment of $42 million of the outstanding 51/2% convertible
notes was reclassified to interest income. Excluding these reclassifications,
the $6 million decline was due to a decrease of $7 million in interest expense
partially offset by a $1 million decline in interest income. The decrease in
interest expense was due to the decline in the interest rate that we pay on
both our fixed and variable rate debt. Debt decreased from $631 million to
$457 million, or 28%. The weighted-average interest rate on our variable rate
debt at December 31, 2002 was 3.87% compared to 4.36% at December 31, 2001.
The decrease in interest income was due to the decline in interest rates that
we receive on short-term investments. Non-recurring items During 2001, Karrington Health Inc., one of our wholly owned subsidiaries,
received a cash payment in the amount of $10 million to settle a lawsuit filed
by Karrington prior to its acquisition by us. Karrington brought the suit
alleging that Omega Healthcare Investors, Inc. had breached a financing
commitment it had made to Karrington. Expenses incurred to settle the lawsuit
have been netted against the settlement. In 2001, given the industry environment and the increasing number of
opportunities to acquire properties and management contracts, we determined
that the costs to develop five specific sites outweighed the costs of acquiring
properties and/or management contracts in those areas. Accordingly, we elected
not to proceed with our planned development for these five sites and wrote down
associated project costs by $7 million to their estimated net realizable value. Provision for Income Taxes The provision for income taxes for us was $34 million and $31 million for
the years ended December 31, 2002 and 2001, respectively. The increase was due
primarily to an increase 56




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##### 



in pre-tax income which was slightly offset by the use of an effective tax
rate of 38% for 2002 compared to 39% for 2001. The decrease in the effective
tax rate is due to a decrease in our state effective tax rate. Liquidity and Capital Resources At December 31, 2003, we had approximately $103 million in unrestricted
cash and cash equivalents, $225 million available under credit facilities and
$71 million in working capital. Working capital decreased by $69 million to $71 million at December 31,
2003 from $140 million at December 31, 2002 primarily due to the use of $92
million in cash to acquire MSLS and the associated current assets and
liabilities in March 2003. See Note 13 to our consolidated financial
statements for a discussion of the MSLS acquisition. Additionally, we
repurchased approximately $106 million of our common stock and $5 million of
our convertible debt during 2003. Net cash provided by operating activities for 2003 and 2002 was
approximately $39 million and $99 million, respectively. The decline in net
cash provided by operating activities was primarily driven by the non-cash
recognition of property sales in 2003 of $35 million and an increase in
accounts receivable, prepaid assets and other assets due to the acquisition of
MSLS. Net cash provided by investing activities was $237 million and $212
million for 2003 and 2002, respectively. In 2003, we used $92 million for the
acquisition of MSLS and $2 million for the acquisition of the majority
ownership in seven senior living properties. Cash proceeds for the year ended
December 31, 2003 consisted of $132 million from the sale of 33 senior living
properties compared to $128 million from the sale of 28 senior living
properties for the year ended December 31, 2002. Sales proceeds from property
and equipment exceeded investments in property and equipment in the amount of
$128 million and $99 million for the years ended December 31, 2003 and 2002,
respectively. Net cash used in financing activities was $347 million and $188 million
for 2003 and 2002, respectively. Financing activities in 2003 and 2002
included additional borrowings of $270 million and $393 million, respectively,
offset by debt repayments of $559 million and $569 million, respectively. The
additional borrowings under our credit facility during 2003 and 2002 were used
to fund our continued development of senior living communities. The increased
levels of repayments are partially a result of our sale/long-term manage back
program. Additionally, in 2003 we repurchased approximately $106 million of
our common stock and $5 million of our convertible notes in 2003, compared to
the repurchase of approximately $15 million of our common stock in 2002. To date, we have financed our operations primarily with cash generated
from operations, both short-term and long-term borrowings and proceeds from the
sale of properties pursuant to our sale/long-term manage back program. As of
December 31, 2003, we had $223 million of outstanding debt at a weighted
average interest rate of 4.50% including $120 million of convertible notes. Of
the amount of outstanding debt, we had $181 million of fixed-rate debt at a 57




---



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weighted average interest rate of 4.79% and $42 million of variable rate
debt at a weighted average interest rate of 3.27%. As of December 31, 2003, we had $22 million of debt that is due within the
next twelve months. Of this amount, $20 million relates to six wholly owned
properties. This debt is mortgage financing that we intend to refinance or
extend during 2004. On September 23, 2003, we closed on a commitment from a syndicate of banks
for a $200 million corporate credit facility. The facility has an initial term
of three years with an extension option. Proceeds will be used for general
corporate purposes, including investments, acquisitions and the refinance of
existing debt. Consistent with our transformation to a management services
company, the facility is not secured by real estate and replaces the $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 which require us to meet specified financial
tests. For example, our $200 million line of credit requires us not to exceed
certain leverage ratios, to maintain certain interest coverage ratios and to
have a consolidated net worth of at least $387 million as adjusted each quarter
and to meet other financial ratios. These tests are administered on a
quarterly basis. In January 2002, we issued and sold $125 million aggregate principal
amount of 5 1/4% convertible subordinated notes due February 2009. The
convertible notes bear interest at 5 1/4% per annum payable semiannually on
February 1 and August 1 each year beginning on August 1, 2002. These notes are
convertible into shares of our common stock at the conversion price of $35.84,
which is equivalent to a conversion rate of 27.9018 shares per $1,000 principal
amount of the convertible notes. The notes, which are subordinated to our
existing and future senior indebtedness, are redeemable at our option
commencing February 5, 2006. In addition, the holders of the convertible notes
may require us to repurchase the notes upon a change of control as defined in
the convertible notes. During 2003, we repurchased $5 million face amount of
the convertible notes. In 2001, we entered into five interest rate swap agreements whereby $125
million of advances outstanding on our variable LIBOR based revolving
construction credit facility bear interest at a fixed rate. The maturity dates
of the swap agreements ranged from June 2003 to June 2004. In December 2002,
we paid $400,000 to terminate one of our five interest rate swap agreements.
In 2003, we paid $3 million to terminate our remaining four interest rate swap
agreements. As of December 31, 2003, we had a zero balance in accumulated
other comprehensive income related to the terminated swap agreements. For the
year ended December 31, 2003, we recognized $2 million in interest expense
related to the amortization of the swap balance in accumulated other
comprehensive income. Also, we wrote off $2 million of the swap balance in
accumulated other comprehensive income as debt associated with the swap was
repaid or assumed as part of the property sale transactions closed in the
second and third quarters of 2003. 58




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Our current contractual obligations include long-term debt and operating
leases for our corporate and regional offices in addition to our 29 operating
leases. See Note 7 and Note 16 of our consolidated financial statements for a
discussion of our contractual obligations. Principal maturities of long-term debt and future minimum lease payments
as of December 31, 2003 are as follows (in thousands): Payment due by periodLess thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsLong-term debt
    
    $
    222,990
    
    
    $
    22,162
    
    
    $
    50,450
    
    
    $
    13,609
    
    
    $
    136,769Operating leases
    
    
    606,894
    
    
    
    53,698
    
    
    
    105,980
    
    
    
    106,314
    
    
    
    340,902Total
    
    $
    829,884
    
    
    $
    75,860
    
    
    $
    156,430
    
    
    $
    119,923
    
    
    $
    477,671
 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
$50 million to complete the communities we currently have under construction.
We have entered into contracts to purchase and lease additional sites. The
total contracted purchase price of these sites is $49 million. We expect to
develop the majority of these sites 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 Program On July 23, 2002, we announced that our Board of Directors authorized us
to repurchase outstanding shares of our common stock up to an aggregate
purchase price of $50 million over the next 12 months. 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 of Sunrise 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 bringing the total shares purchased through December
31, 2003 to 4,540,800 shares at an average price of $26.68. Additionally in
2003, we repurchased $5 million of our convertible debt. On March 11, 2004,
our Board of Directors approved an additional $50 million for the repurchase of 59




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##### 



outstanding shares of common stock of Sunrise
and/or our outstanding 51/4% convertible subordinated notes due 2009. 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 as of December 31, 2003. 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, 2003,
    we had minority equity ownership interests in 134 senior living properties,
    14 of which are under development. We have 13 properties in which we own less
    than 10%, 89 properties in which we own between 10% and 20%, 28 properties
    in which we own between 21% and 30% and four 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. Five 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 $42 million at
December 31, 2003 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. Some of the notes
receivable and some items in the various categories of debt, excluding the
convertible notes, require periodic principal payments prior to the final
maturity date. The fair value estimates for the notes receivable are based on
the estimates of management and on rates currently prevailing for comparable
loans. The fair market value estimates for debt securities are based on
discounting future cash flows utilizing current rates offered to Sunrise for
debt of the same type and remaining maturity. The fair market value estimate
of the convertible notes is based on the market value at December 31, 2003. 60




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EstimatedMaturity Date
    
    Fair Market(dollars in thousands)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    ValueAssetsNotes receivableFixed rate
    
    $
    26,290
    
    
    
    
    
    
    $
    137
    
    
    $
    3,571
    
    
    
    
    
    
    $
    32,906
    
    
    $
    62,904Average interest rate
    
    
    11.8
    %
    
    
    
    
    
    
    10
    %
    
    
    11.1
    %
    
    
    
    
    
    
    10.5
    %
    
    
    Variable rate
    
    $
    2,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,172
    
    
    $
    4,591
    
    
    $
    14,449Average interest rate
    
    
    6.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.1
    %
    
    
    4.6
    %
    
    
    InvestmentsBonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,610
    
    
    $
    5,610Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.0
    %
    
    
    LiabilitiesDebtFixed rate
    
    $
    21,642
    
    
    $
    3,115
    
    
    $
    10,310
    
    
    $
    9,785
    
    
    $
    3,424
    
    
    $
    12,969
    
    
    $
    61,737Average interest rate
    
    
    5.6
    %
    
    
    1.3
    %
    
    
    4.5
    %
    
    
    4.2
    %
    
    
    1.0
    %
    
    
    1.7
    %
    
    
    Variable rate
    
    $
    520
    
    
    $
    17,337
    
    
    $
    19,688
    
    
    $
    200
    
    
    $
    200
    
    
    $
    3,800
    
    
    $
    41,745Average interest rate
    
    
    3.1
    %
    
    
    4.3
    %
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    120,000
    
    
    $
    148,350Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.3
    %
    
    
    
 Impact of Changes in Accounting Standards On January 1, 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. In accordance with the
new rule, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually for impairment. Separable intangible assets
that are not deemed to have an indefinite life will continue to be amortized
over their useful lives. Diluted net income and diluted earnings per share
would have been $55 million and $2.11 per share, if SFAS No. 142 had been
applied to 2001. On January 1, 2003, we adopted Statement of Financial Accounting Standards
(SFAS) No. 145, Recission of FASB Statements 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections.SFAS 145 requires companies to no
longer report gains and losses associated with the extinguishment of debt as a
component of extraordinary gains and losses, net of tax. These gains and
losses are required to be presented within the statement of income in
appropriate segregated line items. As required by SFAS 145, the extraordinary
loss recognized in the year ended December 31, 2002 of approximately $4 million
($2 million net of tax) for fees associated with the $92 million term loan and
premium paid for the early redemption of the convertible notes has been
reclassified to interest expense. On January 1, 2003, Sunrise adopted Statement of Financial Accounting
Standards 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 61




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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 disclosure requirements are included in Note 16. 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 of Sunrise. On February 1, 2003, we adopted FASB Interpretation No. 46, Consolidation
of Variable Interest Entities(FIN 46). Under this new Interpretation,
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 must be consolidated. All companies with variable interests in
variable interest entities created after January 31, 2003 must apply the
provisions of the Interpretation immediately. Public companies with calendar
year-end quarters with a variable interest in a variable interest entity
created before February 1, 2003 must apply the provisions of this
Interpretation as of March 31, 2004 in accordance with FIN 46
Revised. Based on our review of FIN 46, we have determined that there are three
joint ventures in which Sunrise has an interest that are variable interest
entities under FIN 46. Two of the variable interest entities are development
joint ventures, which were established in 1999 and 2003 and contain seven
operating senior living communities. The other variable interest entity is an
operating joint venture formed in 2000. We are not considered the primary beneficiary of
these three variable interest entities and therefore will continue to account
for these investments under the equity method of accounting. Our remaining
joint venture interests are not variable interest entities under FIN 46 as,
among other factors, there is adequate equity in the joint ventures to support
expected operations, there is sufficient third party capital and no guarantees
of returns or capital, and we would not be deemed the primary beneficiary in
these ventures. We are in the process of determining the effect of
FIN 46, as passed in December 2003, on these three variable interest
entities. Sunrises maximum exposure from these entities was
$28 million at December 31, 2003. Our joint ventures fall into one of three categories. First, we enter
into development joint ventures whereby a third-party investor and we
capitalize a joint venture to develop and operate senior living communities.
Second, we and a third-party investor capitalize a joint venture to acquire an
existing senior living property. Finally, as a part of our sale long-term
manage back program, we sell owned properties into a joint venture in which we
hold a minority interest that is then capitalized by a third-party investor.
These partnerships obtain non-recourse third-party debt. We do not have future
requirements to contribute additional capital over and above the original
capital commitments. All three types of joint ventures are established as real
estate partnerships to own the underlying property. We will then enter into a
long-term management contract to operate the property on behalf of the joint
venture. Our total investment in these joint ventures is comprised of our
direct capital investment in these joint ventures and, when agreed to,
subordinated debt provided and other short-term advances. As of December 31,
2003, this total investment was $157 million, not including any guarantees
provided to these joint ventures as described in Note 16. The realization of
this investment is dependent upon the ongoing operations of the joint ventures.
See Note 6 for operating results of the joint ventures. 62




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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. 63




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##### 



Item 7A. Quantitative and Qualitative Disclosure About Market Risk Quantitative and qualitative disclosure about market risk appears in the
liquidity and capital resources, market risk section of item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations. 
 Item 8. Financial Statements and Supplementary Data The consolidated financial statements appear on pages F-1 through F-33. 
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. 
 Item 9A. Controls and Procedures We carried out an evaluation, under the supervision and with the
participation of our management, including our 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). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of December 31, 2003 and that no change in internal control over
financial reporting occurred during the quarter ended December 31, 2003 that
has materially affected, or is reasonable likely to materially affect, such
internal control over financial reporting. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant Sunrise has adopted a code of ethics that applies to its principal
executive officer, principal financial officer and principal accounting
officer, which is available on Sunrises website at:
http://www.sunriseseniorliving.com. Any amendment to, or waiver from, a
provision of such code of ethics will be posted on Sunrises Internet website
at: http://www.sunriseseniorliving.com. The information contained in the sections Election of Directors -
Information as to Nominees and Other Directors, -Other Executive Officers,
and Section 16(a) Beneficial Ownership Reporting Compliance in Sunrises 2004
Annual Meeting Proxy Statement, which Sunrise intends to file within 120 days
after its fiscal year-end, is incorporated by reference herein. 64




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##### 



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 Sunrises 2004 Annual Meeting Proxy Statement, which
Sunrise intends to file within 120 days after its 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 Sunrises 2004 Annual
Meeting Proxy Statement, which Sunrise intends to file within 120 days after
its 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 Sunrises 2004 Annual Meeting Proxy Statement, which
Sunrise intends to file within 120 days after its 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 Sunrises 2004 Annual Meeting Proxy Statement, which Sunrise intends to file
within 120 days after its fiscal year-end is incorporated by reference herein. 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K  (a)
    
    List of documents filed as part of Form 10-K. Page(1)
    
    Financial Statements:Report of Independent Auditors.
    
    
    F-1Consolidated Balance Sheets -- December 31, 2003 and 2002.
    
    
    F-2Consolidated Statements of Income
for the years ended December 31, 2003, 2002 and 2001.
    
    
    F-3Consolidated Statements of Changes
in Stockholders Equity
 65




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##### 



for the years ended December 31, 2003, 2002 and 2001.
    
    
    F-4Consolidated Statements of Cash
Flows for the years ended December 31, 2003, 2002 and 2001.
    
    
    F-5Notes to Consolidated Financial Statements.
    
    
    F-6
  (2)
    
    Financial Statements 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 in the Index to Exhibits.  (b)
    
    Reports furnished or filed on Form 8-K. October 15, 2003  Item 2. Acquisition or Disposition of Assets -
Sunrise filed a Form 8-K with the Securities and Exchange Commission
dated September 30, 2003 to report the completion of a 100% sale of 16
consolidated senior living communities to CNL Retirement Properties,
Inc. on September 30, 2003, which report included a pro forma
consolidated balance sheet dated June 30, 2003 and pro forma
consolidated statements of income for the 6 months ended June 30, 2003
and for the year ended December 31, 2002. November 4, 2003  Item 12. Results of Operations and Financial
Condition  Sunrise filed a Form 8-K with the Securities and Exchange
Commission to report its consolidated financial results for the quarter
ended September 30, 2003.* November 14, 2003  Item 9. Regulation FD Disclosure  Sunrise
filed a Form 8-K with the Securities and Exchange Commission dated
November 13, 2003 to update Exhibit 99.1 to be included in its
slideshow presentation.* * Furnished not filed.  (c)
    
    Exhibits.Sunrise hereby files as part of this Annual Report on Form 10-K the
Exhibits listed in the Index to Exhibits.(d)
    
    Financial Statement Schedules.Not applicable. 66




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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 report to be signed
on its behalf by the undersigned, thereunto duly authorized. SUNRISE SENIOR LIVING, INC.RegistrantBy:
    
    /s/ Paul J. KlaassenPaul J. Klaassen
Chairman of the Board and Chief Executive OfficerMarch 11, 2004Date
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. By:
    
    /s/ Paul J. Klaassen
    
    
    
    March 11, 2004Paul J. Klaassen
Chairman of the Board and
    
    
    
    DateChief Executive Officer(Principal Executive Officer)By:
    
    /s/ Larry E. Hulse
    
    
    
    March 11, 2004Larry E. Hulse
    
    
    
    DateChief Financial Officer(Principal Financial Officer)By:
    
    /s/ Carl G. Adams
    
    
    
    March 11, 2004Carl G. Adams
    
    
    
    DateChief Accounting Officer(Principal Accounting Officer)
 67




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##### 



By:
    
    /s/ David W. Faeder
    
    
    
    March 11, 2004David W. Faeder
    
    
    
    DateVice Chairman of the BoardDirectorBy:
    
    /s/ Ronald V. Aprahamian
    
    
    
    March 11, 2004Ronald V. Aprahamian
    
    
    
    DateDirectorBy:
    
    /s/ Craig R. Callen
    
    
    
    March 11, 2004Craig R. Callen
    
    
    
    DateDirectorBy:
    
    /s/ David G. Bradley
    
    
    
    March 11, 2004David G. Bradley
    
    
    
    DateDirectorBy:
    
    /s/ Thomas J. Donohue
    
    
    
    March 11, 2004Thomas J. Donohue
    
    
    
    DateDirectorBy:
    
    /s/ Teresa M. Klaassen
    
    
    
    March 11, 2004Teresa M. Klaassen
    
    
    
    DateExecutive Vice President,Secretary and DirectorBy:Pete A. Klisares
    
    
    
    DateDirectorBy:
    
    /s/ J. Douglas Holladay
    
    
    
    March 11, 2004J. Douglas Holladay
    
    
    
    DateDirectorBy:
    
    /s/ J.W. Marriott, Jr.
    
    
    
    March 11, 2004J.W. Marriott, Jr.
    
    
    
    DateDirector
 68




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##### 



INDEX TO EXHIBITS Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)2.1
    
    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
 69




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##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)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).
 70




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##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)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).2.12
    
    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).
 71




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##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)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).4.3
    
    Amendment No. 1 to Rights Agreement, dated as of
December 17, 1998, between Sunrise and First
Union National Bank of North Carolina
 72




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##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)(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)).4.5
    
    Registration Rights Agreement, dated as of
January 24, 2002, by and among Sunrise and Credit
Suisse First Boston Corporation, Robertson
Stephens, Inc. and First Union Securities, Inc.
(incorporated herein by reference to Exhibit 4.2
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.10.2
    
    + Indemnification Agreement dated as of November
13, 2003 by and between Sunrise and Paul J.
Klaassen.10.3
    
    + Summary of Material Terms of Consulting
Agreement with David W. Faeder.10.4
    
    + 2000 Stock Option Plan.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.
 73




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)(incorporated herein by reference to
Exhibit 10.19 to Sunrises Form S-1
Registration Statement No. 33-2852).10.7
    
    Registration Agreement, dated January 4, 1995,
by and among Sunrise, the Investors (as defined
therein) and Paul and Teresa Klaassen
(incorporated herein by reference to Exhibit 10.3
to Sunrises Form S-1 Registration Statement No.
333-2582).10.8
    
    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.
(incorporated herein by reference to Exhibit
10.15 to Sunrises Form S-1 Registration
Statement No. 333-2582).10.9
    
    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).10.10
    
    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).10.11
    
    Indenture, dated as of June 5, 1997, between
Sunrise and First Union National Bank of
Virginia, as trustee (incorporated herein by
reference to Exhibit 4.1 to Sunrises Form 10-Q
for the quarter ended June 30, 1997).
 74




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)10.12
    
    + Form of Indemnification Agreement
(incorporated herein by reference to Exhibit
10.24 to Sunrises Form S-1 Registration
Statement No. 333-2582).10.13
    
    + 1995 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit
10.20 to Sunrises 1997 Form 10-K).10.14
    
    + 1996 Directors Stock Option Plan, as amended.
(incorporated herein by reference to Exhibit
10.21 to Sunrises 1997 Form 10-K)10.15
    
    + 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).10.16
    
    + 1997 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit
10.25 to Sunrises 1997 Form 10-K).10.17
    
    + 1998 Stock Option Plan, as amended.
(incorporated herein by reference to Exhibit
10.41 to Sunrises 1998 Form 10-K)10.18
    
    + 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).10.19
    
    + 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)10.20
    
    + 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).
 75




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)10.21
    
    + 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)10.22
    
    + 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)10.23
    
    + 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).10.24
    
    + 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).10.25
    
    + 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)10.26
    
    + 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)10.27
    
    Limited Liability Company Agreement of
Metropolitan Senior Housing, LLC, a Delaware
Limited Liability Company, dated as of June 29,
2000 (incorporated herein by reference to Exhibit
10.1 to Sunrises Form 10-Q for the quarter ended
June 30, 2000).10.28
    
    Purchase and Sale Agreement dated as of June
29, 2000, by and between certain Sunrise
affiliates and Metropolitan Senior Housing, LLC
for the sale of three (3) properties
(incorporated herein by
 76




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)reference to Exhibit 10.2 to Sunrises
Form 10-Q for the quarter ended June 30,
2000).10.29
    
    Purchase and Sale Agreement dated as of June
29, 2000, by and between certain Sunrise
affiliates and Metropolitan Senior Housing, LLC
for the sale of eight (8) properties
(incorporated herein by reference to Exhibit 10.3
to Sunrises Form 10-Q for the quarter ended June
30, 2000).10.30
    
    + Employment Agreement, dated as of September
12, 2000, by and between Sunrise Assisted Living,
Inc. and Paul J. Klaassen (incorporated herein by
reference to Exhibit 10.1 to Sunrises Form 10-Q
for the quarter ended September 30, 2000).10.31
    
    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).10.32
    
    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).10.33
    
    + Consulting Agreement, effective as of April 1,
2000, by and between Sunrise and David W. Faeder,
as amended, effective May 31, 2001 (incorporated
herein by reference to Exhibit 10.87 to Sunrises
2001 Form 10-K).10.48
    
    + Amendment to the Consulting Agreement,
effective as of April 1, 2000, by and between
Sunrise and David W. Faeder, as amended,
effective April 1, 2002 (incorporated herein by
reference to Exhibit 10.106 to Sunrises 2002
Form 10-K).
 77




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)10.49
    
    + 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).10.50
    
    + 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).10.51
    
    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).10.52
    
    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).10.53
    
    + 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).10.54
    
    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
 78




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)Company, LLC. (incorporated herein by
reference to Exhibit 10.98 to Sunrises
2002 Form 10-K).10.55
    
    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).10.56
    
    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).10.57
    
    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).10.58
    
    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).10.59
    
    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).
 79




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)10.60
    
    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).10.61
    
    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).10.62
    
    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).10.63
    
    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).10.64
    
    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).10.65
    
    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
 80




---



##### 



Page (bySequentialExhibit
    
    
    
    NumberingNumber
    
    Identity of Exhibit
    
    System)by reference to Exhibit 10.4 to Sunrises
Form 10-Q for the quarter ended March 31,
2003).10.66
    
    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).10.67
    
    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).12
    
    Statements Regarding Computation of Ratios21
    
    Subsidiaries of the Registrant23
    
    Consent of Ernst & Young LLP, Independent
Auditors31.1
    
    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. 81




---



##### 



Report of Independent Auditors Stockholders and Board of Directors
Sunrise Senior Living, Inc. We have audited the accompanying consolidated balance sheets of Sunrise
Senior Living, Inc. as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally
accepted in the 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, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States. As discussed in Note 2 to the Consolidated Financial Statements, in 2002
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. /s/ Ernst & Young LLP
 
 F-1




---



##### 



SUNRISE SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS(dollars in thousands) December 31,2003
    
    2002ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    102,548
    
    
    $
    173,119Accounts receivable, net
    
    
    46,329
    
    
    
    21,648Notes receivable  affiliates
    
    
    28,976
    
    
    
    10,180Deferred income taxes
    
    
    23,570
    
    
    
    15,873Prepaid expenses and other current assets
    
    
    34,472
    
    
    
    33,566Total current assets
    
    
    235,895
    
    
    
    254,386Property and equipment, net
    
    
    412,228
    
    
    
    299,683Properties held for sale
    
    
    
    
    
    
    337,233Notes receivable  affiliates
    
    
    48,377
    
    
    
    77,112Management contracts and leaseholds, net
    
    
    82,395
    
    
    
    12,140Costs in excess of assets acquired, net
    
    
    106,139
    
    
    
    32,749Investments in unconsolidated senior living properties
    
    
    73,834
    
    
    
    64,375Investments
    
    
    5,610
    
    
    
    5,610Other assets
    
    
    45,320
    
    
    
    32,863Total assets
    
    $
    1,009,798
    
    
    $
    1,116,151LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    111,381
    
    
    $
    48,016Deferred revenue
    
    
    31,229
    
    
    
    37,316Current maturities of long-term debt
    
    
    22,162
    
    
    
    29,415Total current liabilities
    
    
    164,772
    
    
    
    114,747Long-term debt, less current maturities
    
    
    200,828
    
    
    
    427,554Investments in unconsolidated senior living properties
    
    
    3,371
    
    
    
    2,901Deferred income taxes
    
    
    129,661
    
    
    
    96,112Other long-term liabilities
    
    
    19,287
    
    
    
    7,158Total liabilities
    
    
    517,919
    
    
    
    648,472Minority interests
    
    
    1,603
    
    
    
    1,861Preferred 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,
20,987,730 and 22,343,815 shares issued and outstanding
in 2003 and 2002, respectively
    
    
    210
    
    
    
    223Additional paid-in capital
    
    
    273,378
    
    
    
    312,952Retained earnings
    
    
    221,109
    
    
    
    158,931Deferred compensation  restricted stock
    
    
    (6,564
    )
    
    
    (3,333
    )Accumulated other comprehensive income (loss)
    
    
    2,143
    
    
    
    (2,955
    )Total stockholders equity
    
    
    490,276
    
    
    
    465,818Total liabilities and
stockholders equity
    
    $
    1,009,798
    
    
    $
    1,116,151
 See accompanying notes. F-2




---



##### 



SUNRISE SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share amounts) Year Ended December 31,2003
    
    2002
    
    2001Operating revenue:Management services
    
    $
    771,947
    
    
    $
    183,603
    
    
    $
    105,541Resident fees
    
    
    340,775
    
    
    
    248,098
    
    
    
    260,524Income from property sales
    
    
    75,579
    
    
    
    74,211
    
    
    
    62,154Total operating revenue
    
    
    1,188,301
    
    
    
    505,912
    
    
    
    428,219Operating expenses:Management services
    
    
    692,917
    
    
    
    156,251
    
    
    
    82,734Facility operating
    
    
    254,203
    
    
    
    167,354
    
    
    
    168,602General and administrative
    
    
    72,596
    
    
    
    36,944
    
    
    
    32,809Depreciation and amortization
    
    
    16,406
    
    
    
    25,317
    
    
    
    28,475Facility lease
    
    
    38,511
    
    
    
    8,298
    
    
    
    10,159Total operating expenses
    
    
    1,074,633
    
    
    
    394,164
    
    
    
    322,779Non-recurring items
    
    
    
    
    
    
    
    
    
    
    2,307Income from operations
    
    
    113,668
    
    
    
    111,748
    
    
    
    107,747Interest income (expense):Interest income
    
    
    8,869
    
    
    
    11,338
    
    
    
    13,168Interest expense
    
    
    (25,440
    )
    
    
    (35,458
    )
    
    
    (38,483
    )Net interest expense
    
    
    (16,571
    )
    
    
    (24,120
    )
    
    
    (25,315
    )Equity in earnings (losses) of unconsolidated senior
living properties
    
    
    1,161
    
    
    
    695
    
    
    
    (1,169
    )Minority interests
    
    
    (1,105
    )
    
    
    (160
    )
    
    
    (769
    )Income before income taxes
    
    
    97,153
    
    
    
    88,163
    
    
    
    80,494Provision for income taxes
    
    
    (34,975
    )
    
    
    (33,502
    )
    
    
    (31,393
    )Net income
    
    $
    62,178
    
    
    $
    54,661
    
    
    $
    49,101Net income per common share:Basic:Basic net income per common share
    
    $
    2.92
    
    
    $
    2.44
    
    
    $
    2.25Diluted:Diluted net income per common share
    
    $
    2.63
    
    
    $
    2.23
    
    
    $
    2.08
 See accompanying notes. F-3




---



##### 



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 December 31, 2000
    
    
    21,596
    
    
    $
    216
    
    
    $
    298,660
    
    
    
    
    
    
    $
    55,169
    
    
    
    
    
    
    $
    354,045Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,101
    
    
    
    
    
    
    
    49,101Interest rate swaps, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,121
    )
    
    
    (3,121
    )Foreign currency translation, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,093
    )
    
    
    (1,093
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,887Issuance of common stock
to employees
    
    
    570
    
    
    
    6
    
    
    
    9,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,116Tax effect from the exercise of non-
qualified stock options
    
    
    
    
    
    
    
    
    
    
    2,653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,653Balance at December 31, 2001
    
    
    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
    
    
    $
    490,276
 See accompanying notes. F-4




---



##### 



SUNRISE SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31,2003
    
    2002
    
    2001Operating activitiesNet income
    
    $
    62,178
    
    
    $
    54,661
    
    
    $
    49,101Adjustments to reconcile net income to net cash
provided by operating activities:Deferred income from property sales
    
    
    (35,336
    )
    
    
    (6,011
    )
    
    
    (20,210
    )Equity in (earnings) losses of unconsolidated senior living properties
    
    
    (1,161
    )
    
    
    (695
    )
    
    
    1,169Minority interests
    
    
    1,105
    
    
    
    160
    
    
    
    769Provision for bad debts
    
    
    6,541
    
    
    
    850
    
    
    
    1,320Provision for deferred income taxes
    
    
    24,964
    
    
    
    26,986
    
    
    
    26,562Depreciation and amortization
    
    
    16,406
    
    
    
    25,317
    
    
    
    28,475Amortization of financing costs and discount on long-term debt
    
    
    6,517
    
    
    
    5,292
    
    
    
    3,488Amortization of deferred compensation
    
    
    1,601
    
    
    
    688
    
    
    
    Loss (gain) on early debt retirement
    
    
    
    
    
    
    4,140
    
    
    
    (861
    )Changes in operating assets and liabilities:(Increase) decrease:Accounts receivable
    
    
    (25,516
    )
    
    
    (1,194
    )
    
    
    (4,576
    )Prepaid expenses and other current
assets
    
    
    (17,038
    )
    
    
    (15,325
    )
    
    
    (2,304
    )Other assets
    
    
    (8,806
    )
    
    
    1,381
    
    
    
    (2,523
    )Increase (decrease):Accounts payable and accrued expenses
    
    
    5,821
    
    
    
    1,574
    
    
    
    18,991Deferred revenue
    
    
    (3,285
    )
    
    
    (174
    )
    
    
    354Other liabilities
    
    
    4,827
    
    
    
    1,167
    
    
    
    1,730Net cash provided by operating activities
    
    
    38,818
    
    
    
    98,817
    
    
    
    101,485Investing activitiesProceeds from sale of properties
    
    
    132,364
    
    
    
    128,001
    
    
    
    52,008(Acquisition) sale of business and properties
    
    
    (93,407
    )
    
    
    
    
    
    
    450Decrease (increase) in property and equipment, net
    
    
    128,151
    
    
    
    99,453
    
    
    
    (98,046
    )Increase in investments and notes receivable
    
    
    (60,240
    )
    
    
    (52,169
    )
    
    
    (123,950
    )Proceeds from investments and notes receivable
    
    
    140,395
    
    
    
    64,678
    
    
    
    130,222Decrease (increase) in restricted cash and cash equivalents
    
    
    7,281
    
    
    
    (6,065
    )
    
    
    (6,196
    )Contributions to investments in unconsolidated
senior living properties
    
    
    (17,080
    )
    
    
    (21,963
    )
    
    
    (7,006
    )Net cash provided by (used in) investing activities
    
    
    237,464
    
    
    
    211,935
    
    
    
    (52,518
    )Financing activitiesNet proceeds from exercised options
    
    
    53,077
    
    
    
    11,034
    
    
    
    9,116Additional borrowings under long-term debt
    
    
    269,637
    
    
    
    392,731
    
    
    
    400,735Repayment of long-term debt
    
    
    (559,370
    )
    
    
    (569,167
    )
    
    
    (444,440
    )Net investment in minority interest
    
    
    (556
    )
    
    
    (750
    )
    
    
    Financing costs paid
    
    
    (3,408
    )
    
    
    (6,858
    )
    
    
    (6,977
    )Repurchase of stock
    
    
    (106,233
    )
    
    
    (14,898
    )
    
    
    Net cash used in financing activities
    
    
    (346,853
    )
    
    
    (187,908
    )
    
    
    (41,566
    )Net (decrease) increase in cash and cash equivalents
    
    
    (70,571
    )
    
    
    122,844
    
    
    
    7,401Cash and cash equivalents at beginning of period
    
    
    173,119
    
    
    
    50,275
    
    
    
    42,874Cash and cash equivalents at end of period
    
    $
    102,548
    
    
    $
    173,119
    
    
    $
    50,275
 See accompanying notes. F-5




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements 1. Organization and Presentation Sunrise Senior Living, Inc. (Sunrise or the Company) is a provider of
senior living services in the United States, Canada and the United Kingdom.
Founded in 1981, Sunrise began with a simple but innovative vision  to create
an alternative senior living option that would emphasize quality of life and
quality of care. As of December 31, 2003, Sunrise operated 373 open
communities, including 361 communities in the United States, nine communities
in Canada and three communities in the United Kingdom, with a total resident
capacity of approximately 43,000. 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. In addition, Sunrise
consolidates two non-wholly owned limited liability companies pursuant to the
consolidation criteria under Generally Accepted Accounting Principles 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. 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): December 31,2003
    
    2002
    
    2001Beginning balance
    
    $
    3,980
    
    
    $
    4,188
    
    
    $
    3,655Provision for bad debts
    
    
    6,541
    
    
    
    850
    
    
    
    1,320Accounts written off
    
    
    (3,389
    )
    
    
    (1,058
    )
    
    
    (787
    )Ending balance
    
    $
    7,132
    
    
    $
    3,980
    
    
    $
    4,188
 Property and Equipment Property and equipment are recorded at the lower of cost or fair value 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 F-6




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements(continued) circumstances indicate that the assets undiscounted expected cash flows are
not sufficient to recover its carrying amount. Sunrise measures an impairment
loss by comparing the fair value of the asset to its carrying amount. Fair
value of an asset is calculated as the present value of expected future cash
flows. 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 Sunrises development
subsidiary. If a project is abandoned, any costs previously capitalized are
expensed. Intangible Assets Intangible assets relate primarily to the merger and acquisition of
Marriott Senior Living Services 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 2 to 29
years. Costs in excess of assets acquired are reviewed annually for impairment.
Based on the results of this review, no charge for impairment was required in
2003. The carrying amounts of management contracts and leaseholds are reviewed
for impairment when indicators of impairment are identified. If the review
indicates that the intangible assets are not expected to be recoverable based
on the undiscounted cash flows of the acquired assets over the remaining
amortization periods, the carrying value of the intangible assets will be
adjusted. The accounting for costs in excess of assets acquired changed
effective January 1, 2002. See Impact of Changes in Accounting Standards. Pre-Opening Costs Costs incurred to initially rent properties are capitalized and amortized
over 12 months. All other pre- opening costs are expensed as incurred. Deferred Financing Costs Costs incurred in connection with obtaining permanent financing for
Company-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 At December 31, 2003, Sunrise owned
non-controlling interests in 134 senior living properties, 14 of which were under development. Sunrises
interests, through limited liability companies and partnerships, generally
range from 7% to 50%. Sunrise has 14 properties in which it owns less than
10%, 90 properties in which it owns between 10% and 20%, 28 properties in which
it owns between 21% and 30% and 4 properties in which it owns more than 30%.
Sunrise does not control these entities, as major business decisions require
approval by the other majority partners or members. Additionally, for
investments entered into subsequent to January 31, 2003, which are variable
interest entities, the Company is not the primary beneficiary, as defined, in
the investments. Accordingly, these investments are accounted for under the
equity method. As such, the investments are recorded at cost and subsequently
are adjusted for equity in net income (losses) and cash contributions and
distributions. Sunrise eliminates profits on sales of services to ventures to
the extent of its ownership interest. Sunrise recognizes interest income to
the extent of the outside partners interest on loans advanced to the ventures.
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. Sunrises interests in accumulated losses of unconsolidated senior
living properties are recorded below Sunrises cost basis to the extent of
other notes and advances to those unconsolidated senior living properties. For
information on F-7




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements(continued) commitments or contingencies of partnerships or limited liability
companies in which Sunrise is a general partner or managing member, see Note
16. As of December 31, 2003, 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 $45 million. Derivatives and Hedging Activities Sunrise recognizes all of its derivative instruments as either assets or
liabilities in the consolidated balance sheet 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, cash flow hedge or a hedge of a net investment in a foreign
operation. 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. As of December 31, 2003, we had no
derivative instruments. Revenue Recognition Operating revenue consists of management services revenue, resident fee
revenue (including resident community fees), and realized gain upon sale of
senior living properties. Resident fee revenue is recognized when services are
rendered. Agreements with residents are generally for a term of one year and
are cancelable by residents with thirty days notice. Management services
revenue is comprised of revenue from management contracts and development
contracts. Revenue from management contracts is recognized in the month in
which it is earned in accordance with the terms of the management contract.
Revenue from development contracts is recognized over the term of the
respective development contracts using the percentage-of-completion method.
Revenue from facility contract services is comprised of management services
fees plus reimbursable expenses of properties operated with Sunrises employees
under long-term operating agreements and is recognized when services are
rendered. 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 then recognized upon performance or
resolution of the contingency. Income Taxes Sunrise accounts for income taxes under the asset and liability approach
which requires recognition of deferred tax assets and liabilities for the
differences between the financial reporting and tax bases of assets and
liabilities. A valuation allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Stock-Based Compensation Sunrise grants stock options 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 option grants using the intrinsic value
method in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees,and accordingly recognizes no compensation expense for the 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 will be amortized as compensation
expense over the period of vesting. F-8




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements(continued) Pro forma information regarding net income and diluted earnings per share
is required by SFAS No. 123, Accounting for Stock-Based Compensationand SFAS
No.148, Accounting for Stock-Based Compensation  Transition and Disclosure,
and has been determined as if Sunrise had accounted for its employee stock
options under the fair value method of these Statements. The fair value for
these options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for 2003,
2002 and 2001: risk-free interest rate of 3.6% to 5.4%; dividend yield of 0%;
expected lives of 10 years; and volatility of 50.85% to 56.22%. 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. For purposes of pro forma disclosures below, the estimated fair value of
the options is amortized to expense, net of taxes, over the options vesting
period. Sunrises pro forma information follows (in thousands, except per
share amounts): Year ended December 31,2003
    
    2002
    
    2001Net income:As reported
    
    $
    62,178
    
    
    $
    54,661
    
    
    $
    49,101Less: Total stock-based employee compensation
expense determined under fair-value
method for all awards, net of tax effects
    
    
    (14,812
    )
    
    
    (14,076
    )
    
    
    (12,642
    )Pro forma
    
    $
    47,366
    
    
    $
    40,585
    
    
    $
    36,459Basic net income per share:As reported
    
    $
    2.92
    
    
    $
    2.44
    
    
    $
    2.25Pro forma
    
    $
    2.22
    
    
    $
    1.82
    
    
    $
    1.67Diluted net income per share:As reported
    
    $
    2.63
    
    
    $
    2.23
    
    
    $
    2.08Pro forma
    
    $
    2.05
    
    
    $
    1.70
    
    
    $
    1.59
 Continuing Care Agreements Residents of 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. The components of the entry fees for lifecare Communities are as
follow:  a.
    
    Lifecare Bonds  This component is refundable to the resident
or the residents estate upon termination or cancellation of the
Care Agreement. Lifecare Bonds are primarily non-interest F-9




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements(continued)  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. Lifecare bonds amount to $26 million and $0 at December
31, 2003 and December 31, 2002, respectively.b.
    
    Additional Occupant Lifecare Fee  This is a nonrefundable fee
for each additional occupant in a residential unit.c.
    
    Lifecare Fee  This component is nonrefundable and equals the
total entry fee less the two components described in a. and b. 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 our 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,
2003. The healthcare industry is subject to numerous laws and regulations
of federal, state and local governments. Management believes they are in
compliance with all relevant government laws and regulations. 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. Impact of Changes in Accounting Standards On January 1, 2002, Sunrise adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In
accordance with the new rule, goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. Diluted net income and diluted
earnings per share would have been $55 million and $2.11 per share, if SFAS No.
142 had been applied to 2001. On January 1, 2003, Sunrise adopted Statement of Financial Accounting
Standards (SFAS) No. 145, Recission of FASB Statements 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections.SFAS 145 requires
companies to no longer report gains and losses associated with the
extinguishment of debt as a component of extraordinary gains and losses, net of
tax. These gains and losses are required to be presented within the statement
of income in appropriate segregated line items. As required by SFAS 145, the
extraordinary loss recognized in the year ended December 31, 2002 of
approximately $4 million ($2 million net of tax) for fees associated with the
$92 million term loan and premium paid for the early redemption of the
convertible notes has been reclassified to interest expense. On January 1, 2003, Sunrise adopted Statement of Financial Accounting
Standards 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 disclosure requirements are included in Note 16. 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 of Sunrise. F-10




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements(continued) On February 1, 2003, Sunrise adopted FASB Interpretation No. 46,
Consolidation of Variable Interest Entities(FIN 46). Under this new
Interpretation, 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 must be consolidated. All companies
with variable interests in variable interest entities created after January 31,
2003 must apply the provisions of the Interpretation 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 must apply the provisions of this Interpretation as of
March 31, 2004 in accordance with FIN 46 revised in accordance with FIN 46 revised. 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 Sunrise holds a minority interest that is then
capitalized by a third-party investor. These partnerships obtain non-recourse
third-party debt. Sunrise does not have future requirements to contribute
additional capital over and above 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 Sunrises direct
capital investment in these joint ventures and, when agreed to, subordinated
debt provided and other short-term advances. As of December 31, 2003, this
total investment was $157 million not including any guarantees provided to
these joint ventures as described in Note 16. The realization of this
investment is dependent upon the ongoing operations of the joint ventures. See
Note 6 for operating results of the joint ventures. Based on Sunrises review of FIN 46, Sunrise has determined that there are
three joint ventures in which Sunrise has an interest that are variable
interest entities under FIN 46. Two of the variable interest entities are
development joint ventures, which were established in 1999 and 2003 and contain
five and two operating senior living communities, respectively. The other
variable interest entity is an operating joint venture formed in 2000. Sunrise is not
considered the primary beneficiary for any of these joint ventures and
therefore will continue to account for these investments under the equity
method of accounting. Sunrises remaining joint venture interests are not
variable interest entities under FIN 46 as, among other factors, there is
adequate equity in the joint ventures to support expected operations, there is
sufficient third party capital and no guarantees of returns on capital, and
Sunrise would not be deemed the primary beneficiary in these
ventures. We are in the process of determining the effect of FIN 46,
as passed in December 2003, on these three variable interest
entities. Sunrises maximum exposure from these three entities
was $28 million at December 31, 2003. Reclassifications Certain 2002 and 2001 balances have been reclassified to conform to the
2003 presentation. Net cash provided by operating activities and net cash used in investing
activities in the Consolidated Statements of Cash Flows for the year ended
December 31, 2001 were reclassified from the amounts previously reported. In
arriving at net cash provided by operating activities, net income is adjusted
by non-cash items. In the previously reported cash flows from operating
activities, Sunrise adjusted net cash from operating activities by the deferred
income recognized during that year from property sales that occurred during
that year and prior years. However, cash flows from operating activities
should have been adjusted for deferred income recognized from property sales
that occurred only during prior years because deferred income recognized in the
current year from property sales that occurred in the current year is an
operating cash item. In addition, overstating the deferred income recognized
during that year from property sales in adjusting net cash from operating
activities had the corresponding effect of understating the increase in
property and equipment in adjusting net cash from investing activities because
cash that should have been attributed to gain from property sales was instead
attributed to the sale of property and equipment. Consequently, Sunrises
prior year presentation had the effect of understating Sunrises net cash
provided by operating activities for the year ended December 31, 2001 and
correspondingly understating Sunrises net cash used in investing activities
for the year ended December 31, 2001. The year ended December 31, 2001
presentation has been reclassified to conform to the 2003 and 2002
presentation. F-11




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) A reconciliation of the previously reported amounts to the reclassified
amounts for the year ended December 31, 2001 is presented below (in thousands). PreviouslyReported
    
    Reclassified
    
    Currently ReportedYear Ended December 31, 2001:Operating activitiesDeferred income from property sales
    
    
    ($50,266
    )
    
    $
    30,056
    
    
    
    ($20,210
    )Net cash provided by operating activities
    
    
    71,429
    
    
    
    30,056
    
    
    
    101,485Investing activitiesIncrease in property and equipment, net
    
    
    (67,990
    )
    
    
    (30,056
    )
    
    
    (98,046
    )Net cash used in investing activities
    
    
    (22,462
    )
    
    
    (30,056
    )
    
    
    (52,518
    )Net Cash Flow Impact
    
    
    
    
    
    $
    0
 3. Property, Equipment and Properties Held for Sale Property, equipment and properties held for sale consist of the following
(in thousands): December 31,Asset Lives
    
    2003
    
    2002Land and land improvements
    
    10-15 yrs.
    
    $
    53,089
    
    
    $
    92,938Building and building
Improvements
    
    40 yrs.
    
    
    269,107
    
    
    
    461,487Furniture and equipment
    
    3-10 yrs.
    
    
    68,070
    
    
    
    71,598390,266
    
    
    
    626,023Less accumulated depreciation and
Amortization
    
    
    
    
    
    
    (60,563
    )
    
    
    (78,007
    )329,703
    
    
    
    548,016Construction in progress
    
    
    
    
    
    
    82,525
    
    
    
    88,900412,228
    
    
    
    636,916Less properties held for sale
    
    
    
    
    
    
    
    
    
    
    (337,233
    )Property and equipment, net
    
    
    
    
    
    $
    412,228
    
    
    $
    299,683
 Depreciation expense was $13 million, $20 million and $22 million for the
years ended December 31, 2003, 2002 and 2001, respectively. F-12




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) 4. Notes Receivable  Affiliates Notes receivable plus accrued interest consist of the following (in
thousands): December 31,2003
    
    2002LLC Note III, interest accrues at 10.0%
    
    $
    16,920
    
    
    $
    17,861LLC Note IV
    
    
    
    
    
    
    14,322LLC Note V
    
    
    
    
    
    
    22,350Note I with international joint venture
    
    
    
    
    
    
    5,025Note II with international joint venture, interest
accrues at 12.5%
    
    
    14,386
    
    
    
    17,195Note III with international joint venture,
interest accrues at 12.5%
    
    
    460
    
    
    
    407Note IV partner loan with international joint
venture, interest accrues at 15.0%
    
    
    9,369
    
    
    
    Note V with international joint venture,
imputed interest rate of 4.37%
    
    
    870
    
    
    
    LLC Note VI, revolving credit agreement, interest
accrues at 10.0%
    
    
    12,865
    
    
    
    ADG Note
    
    
    
    
    
    
    593AMB Note
    
    
    
    
    
    
    570Credit facility
    
    
    
    
    
    
    1,075Promissory Note I
    
    
    
    
    
    
    306Promissory Note II
    
    
    
    
    
    
    3,992Promissory Note III, interest accrues at 8.0%
    
    
    280
    
    
    
    260Promissory Note IV, interest accrues at higher of 6%
or LIBOR plus 3.0%
    
    
    2,681
    
    
    
    2,717Promissory Note V, interest accrues at 7.5%
    
    
    4,325
    
    
    
    Promissory Note VI, interest accrues at LIBOR plus
2.5%
    
    
    1,304
    
    
    
    Promissory Note VII, interest accrues at LIBOR plus
2.5%
    
    
    1,041
    
    
    
    Promissory Note VIII, revolving credit agreement,
interest accrues at 15.0%
    
    
    1,591
    
    
    
    Promissory Note IX, interest accrues at 8.0%
    
    
    1,700
    
    
    
    Promissory Note X, interest accrues at LIBOR plus 3.5%
    
    
    2,132
    
    
    
    Promissory Note XI, credit line, interest accrues at
LIBOR plus 3.0%
    
    
    7,172
    
    
    
    Other notes receivable
    
    
    257
    
    
    
    61977,353
    
    
    
    87,292Current maturities
    
    
    (28,976
    )
    
    
    (10,180
    )$
    48,377
    
    
    $
    77,112
 In March 1999, Sunrise jointly formed a limited liability company (LLC
III) in which Sunrise 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. The LLC Note III is secured by the properties and is
subordinated to other lenders of LLC III. The principal amount of the loan and
accrued interest were due on July 1, 2002. Sunrise extended the maturity date
of this note to June 2004 for any amounts outstanding at July 1, 2002. During
2003, Sunrise received payments of $2 million. See Note 18 Related-Party
Transactions, Joint Ventures. In March 1999, Sunrise jointly formed a limited liability company (LLC
IV) in which Sunrise owns a 9% minority interest. The purpose of LLC IV is to
develop, construct and own senior living properties. F-13




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) Sunrise loaned LLC IV $6 million (LLC Note IV) to partially finance the
initial development and construction of six properties. In December 1999,
Sunrise and LLC IV amended the LLC Note IV to increase the loan by $10 million.
All six properties were completed and open at December 31, 2002. The LLC Note
IV was secured by the properties and was subordinated to other lenders of LLC
IV. The principal amount of the loan and accrued interest were due on the
earlier of December 31, 2006 or termination of the management agreement between
the parties. The LLC Note IV, including accrued interest, was repaid in June
2003 when the joint venture partners interest was sold in two separate
transactions to two newly formed ventures. Sunrise has a 10% interest in the
new joint ventures. See Note 18 Related-Party Transactions, Joint Ventures. In December 2000, Sunrise jointly formed a limited liability company (LLC
V) with an unrelated third party in which Sunrise owns a 9% minority interest.
The purpose of LLC V is to develop, construct and own senior living
properties. Sunrise loaned LLC V $17 million (LLC Note V) to partially
finance the initial development and construction of five properties. All five
properties were completed and open at December 31, 2002. The LLC Note V was
secured by the properties and was subordinated to other lenders of LLC V. The
principal amount of the loan and accrued interest were due originally on
December 16, 2007. The LLC Note V, including accrued interest, was repaid in
June 2003 when the joint venture partners interest was sold in two separate
transactions to two newly formed ventures. Sunrise has a 10% interest in the
new joint ventures. In 1998, Sunrise jointly formed a limited liability company
(International LLC) with an unrelated third party in which Sunrise owns a 7%
minority interest. The purpose of International LLC is to develop, construct
and own ten senior living properties in the United Kingdom and Canada. Nine of
these properties were completed and open at December 31, 2002. Sunrise agreed
to make available up to approximately $4 million (Note I) to International
LLC under a revolving credit arrangement to partially finance the development
of a property in the United Kingdom. Interest on the first $3 million of
advances made under Note I accrues at 12.0%. Interest on an additional $1
million of advances accrued at a variable rate (5.89% at May 31, 2003). In
2001, Sunrise received payments of $1 million. The outstanding principal and
unpaid accrued interest were due in November 2001. However, Note I was
subordinated to a $17 million mortgage loan on the United Kingdom property that
restricted the repayment of Note I until October 1, 2002. After that date,
International LLC could repay Note I as long as it has met certain debt service
criteria. International LLC has met the debt service criteria and repaid the
principal balance plus accrued interest in 2003. See Note 18 Related-Party
Transactions, Joint Ventures. 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 accrues at 12.5%. The Note II to Sunrise is
subordinated to other lenders of the joint venture. Principal and interest
become due as each property is sold by the joint venture. See Note 18
Related-Party Transactions, Joint Ventures. In 2001, Sunrise jointly formed a limited liability partnership
(International LLC II) with the majority owner of International LLC in which
Sunrise owns 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 to Sunrise
is subordinated to other lenders of the joint venture. Principal and interest
become due as each property is sold by the joint venture. See Note 18
Related-Party Transactions, Joint Ventures. 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%. Principal and interest,
per agreement, is due currently. See Note 18 Related-Party Transactions, Joint
Ventures. F-14




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) 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
majority owner of 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 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 fourteen
properties. Repayment is expected from funding of the other lenders. Six
properties were completed and open and eight were under construction at
December 31, 2003. 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. In January 1999, a property in which Sunrise had a controlling interest
accepted a $500,000 promissory note (ADG Note) from its minority owner. The
ADG Note accrued interest at 10% per annum and was due annually beginning
February 22, 2000. The principal balance plus accrued and unpaid interest were
due originally on February 22, 2009. The ADG Note, including accrued
interest, was repaid in September 2003 when the controlling interest was
acquired by a third party. In 2001, a property, in which Sunrise had a controlling interest,
accepted a $500,000 promissory note (AMB Note) from its minority owner. The
AMB Note accrued interest at 8% per annum and was due annually beginning March
2002. The principal balance plus accrued and unpaid interest were due in March
2010. The AMB Note, including accrued interest, was repaid in September 2003
when the controlling interest was acquired by a third party. In 2001, Sunrise agreed to make available up to approximately $3 million
(Credit Facility) to the owner of a property that Sunrise manages under a
management contract. Interest accrues at LIBOR plus 3.5% per annum.
Principal and accrued and unpaid interest were due at the earlier date of the
third partys full repayment of its mortgage or September 2003. The Credit
Facility principal and accrued and unpaid interest were repaid during 2003. In December 2001, Sunrise accepted a promissory note in the amount of
$400,000 (Promissory Note I) from a joint venture partner to finance a
portion of the acquisition of one-half of Sunrises ownership interest in a
property. Interest accrues at 10% per annum. Principal and interest were due
monthly until the promissory note is paid in full in January 2007. The
Promissory Note I principal and interest were repaid, in advance, during 2003. In May 2001, Sunrise accepted a promissory note in the amount of $4
million (Promissory Note II) from Sunrise Assisted Living Foundation, Inc.
(SALF), a not-for-profit organization that operates two schools. The
Promissory Note II pertains to a school operated on an undivided parcel on
which Sunrise operates an assisted living property and is secured by an
interest in the whole parcel. Interest accrued at LIBOR plus 2.75% per annum.
Principal and interest payments were made monthly based on a twenty-five year
amortization schedule at the rate of 6.689%. The unpaid principal balance plus
accrued and unpaid interest were due in January 2003. Sunrise extended the
maturity date of this note to April 2003. The Promissory Note II principal and
interest were repaid during 2003. See Note 18, Related Party Transactions,
Sunrise Assisted Living Foundation. 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 F-15




---



##### 



and 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 start on June 1, 2002 and
continue through March 1, 2003. Monthly principal and interest payments start
on April 1, 2003 and continue through April 1, 2004. Any unpaid principal
balance plus accrued and unpaid interest are due on April 1, 2004. 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 start on April 20, 2003 and continue through
February 20, 2004. Monthly principal and interest payments start on February
20, 2004 and continue through February 20, 2033. Any unpaid principal balance
plus accrued and unpaid interest are due on February 20, 2033. 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 start 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
2.5% per annum. Monthly interest payments start 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 start 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 30, 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 start on the first calendar day of the
month following the first initial draw under the terms of the revolving credit
agreement and continue through September 30, 2007. The first draw on the
credit agreement was for $1.5 million during September 2003. 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. F-16




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) Sunrise believes the net carrying amount of the notes receivable
approximates market value at December 31, 2003 and 2002. Sunrise recorded interest income on these notes from related parties of
$7 million, $9 million and $9 million during 2003, 2002 and 2001, respectively. 5. Intangibles and Other Assets Intangible assets consist of the following (dollars in thousands): December 31,
    
    Estimated2003
    
    2002
    
    Useful lifeManagement contracts, less
accumulated amortization of
$2,764 and $1,630
    
    $
    76,365
    
    
    $
    5,759
    
    
    2-29 yearsLeaseholds, less accumulated
amortization of $1,960 and
$1,503
    
    
    6,030
    
    
    
    6,381
    
    
    19 years$
    82,395
    
    
    $
    12,140Costs in excess of assets
acquired, less accumulated
amortization of $2,179 and
$2,179
    
    $
    106,139
    
    
    $
    32,749
 Amortization expense was $3 million, $5 million and $7 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Amortization
expense is expected to be approximately $5 million in each of the next five
years. Other assets consist of the following (in thousands): December 31,2003
    
    2002Restricted cash
    
    $
    23,904
    
    
    $
    18,326Deferred financing costs less accumulated
amortization of $7,336 and $14,974
    
    
    6,380
    
    
    
    10,367Pre-rental costs less accumulated amortization of
$3,338 and $9,331
    
    
    625
    
    
    
    2,793Other
    
    
    14,411
    
    
    
    1,377$
    45,320
    
    
    $
    32,863
 Restricted cash consists of real estate tax escrows, operating reserves
and capital reserves related to Sunrises debt agreements and resident
deposits. 6. Transactions with Unconsolidated Entities Included in prepaid expenses and other current assets are net receivables
from related unconsolidated partnerships or limited liability companies of $15
million and $19 million as of December 31, 2003 and 2002, respectively.
Included in other current liabilities are net payables to unconsolidated
partnerships or limited liability companies of $1 million and $1 million as of
December 31, 2003 and 2002, respectively. Net receivables from unconsolidated
partnerships or limited liability companies relate primarily to management
activities. Also, see Note 4 for a discussion of notes receivable from
affiliates. F-17




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) Summary financial information for unconsolidated entities (7% to 50%
owned) accounted for by the equity method is as follows (in thousands): December 31,2003
    
    2002
    
    2001Assets, principally property and
equipment
    
    $
    1,915,403
    
    
    $
    1,438,034
    
    
    $
    858,079Liabilities, principally long-term debt
    
    
    1,343,956
    
    
    
    1,003,627
    
    
    
    640,551Equity
    
    
    571,447
    
    
    
    434,407
    
    
    
    217,528Revenues
    
    
    420,520
    
    
    
    271,348
    
    
    
    169,453Net income (loss)
    
    
    14,353
    
    
    
    (3,158
    )
    
    
    (11,289
    )
 The 2002 net loss amount has been adjusted to conform to the current year
presentation for the exclusion of net loss of certain entities for which
Sunrise provides accounting support but does not have an ownership interest.
No other disclosure balances were affected by this adjustment. The previously
reported net loss for the year ended December 31, 2002 was $23,293. Total management services revenue from related unconsolidated entities was
$300 million, $161 million and $85 million for the years ended December 31,
2003, 2002 and 2001, respectively. 7. Long-Term Debt Long-term debt consists of the following (in thousands): December 31,2003
    
    20025 1/4 % convertible subordinated notes due 2009
    
    $
    120,000
    
    
    $
    125,000Syndicated revolving credit facility
    
    
    
    
    
    
    108,915Multi-property blanket first mortgage
    
    
    
    
    
    
    78,354Revolving credit facilities
    
    
    
    
    
    
    34,852Life care endowment obligations
    
    
    24,869
    
    
    
    Other mortgages and notes payable
    
    
    78,121
    
    
    
    109,848222,990
    
    
    
    456,969Current maturities
    
    
    (22,162
    )
    
    
    (29,415
    )$
    200,828
    
    
    $
    427,554
 On June 6, 1997, Sunrise issued and sold $150 million aggregate principal
amount of 51/2% convertible subordinated notes due 2002. The convertible
notes bore interest at 51/2% per annum payable semiannually on June 15 and
December 15 of each year, beginning on December 15, 1997. The conversion price
was $37.1875 (equivalent to a conversion rate of 26.89 shares per $1,000
principal amount of the convertible notes). The convertible notes were
redeemable at the option of Sunrise commencing June 15, 2000, at specified
premiums. On September 14, 2001, Sunrises Board of Directors authorized the
repurchase of up to an additional $50 million of its outstanding 5.5%
subordinated convertible notes (See Note 8). During 2001, Sunrise repurchased
$42 million face value of the convertible notes, resulting in
interest income of $1 million. In February 2002, Sunrise redeemed the remaining $108 million 51/2%
convertible notes at a redemption price of 101.1% of the principal amount, plus
accrued and unpaid interest from the proceeds of a new term loan (see below).
The aggregate redemption price was $110 million. None of the convertible notes
were converted into common stock. As a result of the redemption in 2002 from
proceeds of other long-term borrowings, the convertible notes were classified
as long-term at December 31, 2001. In January 2002, Sunrise obtained a term loan for $92 million to be used,
in part, to pay off the remaining $108 million of its outstanding 51/2%
subordinated convertible notes. The term loan was F-18




---



##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) collateralized by 14 properties, accrued interest at LIBOR plus 6% and
matured in May 2004, subject to a six-month extension option. In February
2002, Sunrise drew $92 million on the term loan and repaid it the same day.
Sunrise recorded interest expense of $4 million during the first quarter of 2002 for fees associated
with the $92 million term loan and the premium paid for the early redemption of the convertible notes. 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
remaining $120 million convertible notes are redeemable at the option of
Sunrise 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. In February
2002, $92 million of the net proceeds from the 51/4% convertible notes were
used to pay off the term loan. A subsidiary of Sunrise obtained a syndicated revolving credit facility
for $400 million which was used for general corporate purposes, including the
continued construction and development of senior living properties. Sunrise
guaranteed the repayment of all amounts outstanding under this credit facility.
The credit facility was secured by cross-collateralized first mortgages on the
real property and improvements and first liens on all assets of the subsidiary,
consisting of 23 properties. In June 2001, Sunrise refinanced its syndicated
revolving credit facility and reduced it from $400 million to up to $300
million. The maturity date was extended from July 2002 to June 2004 and the
interest rate increased from LIBOR plus 1.75% to LIBOR plus 2.00%. In December
2002, Sunrise reduced its syndicated revolving credit facility to $265 million.
Sunrise paid commitment fees of 0.25% on the unused balance of the credit
facility. During the third quarter of 2003, Sunrise closed on a $200 million
corporate credit facility with a syndicate of banks. The facility has an
initial term of three years with an extension option. The corporate credit
facility accrues interest at LIBOR plus 1.75% to 3.00% (3.37% at December 31,
2003). Proceeds were 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 facility is
not secured by real estate and replaces the $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 no advances outstanding under this
credit facility as of December 31, 2003. As of December 31, 2002, Sunrise had a $79 million multi-property blanket
first mortgage that was collateralized by a blanket first mortgage on all
assets of a subsidiary of Sunrise, consisting of 14 properties. The
multi-property blanket first mortgage, as modified in May 2001, was scheduled
to mature on May 31, 2004, subject to optional extensions, and had a fixed rate
of interest equal to 8.20%. On September 30, 2003, proceeds from the sale of
10 of the 14 properties securing the debt were used to pay off the loan. In November 2001, Sunrise entered into a $60 million revolving credit
facility, expandable to $100 million. The revolving credit facility matures in
November 2006, subject to a five-year extension, accrues interest at LIBOR plus
1.20% (2.32% at December 31, 2003) 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, 2003, the
collateral of the revolving credit facility consisted of three properties and
$16 million was outstanding. In December 2002, Sunrise entered into an $18 million revolving credit
facility. The revolving credit facility matures in January 2005, accrues
interest at LIBOR plus 2.50% (3.62% at December 31, 2003) and is 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, 2003, the collateral of the revolving credit
facility consisted of seven properties and no amounts were outstanding. F-19




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) In March 2003, Sunrise entered into a $50 million unsecured revolving
credit facility. The revolving credit facility was scheduled to mature in one
year and accrued interest at LIBOR plus 2.50%. Sunrise paid commitment fees of
0.10% on the unused portion of the credit facility. In September 2003, the
credit facility was terminated as part of the closing of the $200 million
corporate credit facility. In December 2002, Sunrise received a commitment for a $17 million credit
facility. The credit facility matures in February 2005, subject to a one-year
extension, accrues interest at LIBOR plus 3.25% (4.37% at December 31, 2003)
subject to a minimum of 5.75% and is 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, 2003, the collateral of the revolving credit facility consisted of
one property and no amounts were outstanding. In January 2003, Sunrise entered into a $20 million revolving credit
facility. The revolving credit facility matured in January 2005, was subject
to a one-year extension, accrued interest at Prime subject to a minimum of 5%,
and was collateralized by five senior living properties. In November 2003,
Sunrise terminated the credit facility. In December 2002, Sunrise received commitments for mortgages on two senior
living properties for an aggregate amount of $16 million. The mortgages mature
in January 2005 are subject to a one-year extension. Interest accrues at LIBOR
plus 2.50% (3.62% at December 31, 2003) and the mortgages are cross
collateralized by two senior living properties. In September 2003, Sunrise
reduced its revolving credit facility to $9.2 million due to the sale of one
property that served as collateral. At December 31, 2003, the collateral of the
revolving credit facility consisted of one property and no amounts were
outstanding. In June 2003, Sunrise received commitments for mortgages on two senior
living properties for an aggregate amount of $2.4 million. The mortgages
mature 1.5 year from closing, are subject to a one-year extension, accrue
interest at LIBOR plus 2.50% (3.67% at December 31, 2003) and are cross
collateralized by two senior living properties. At December 31, 2003, no
amounts were outstanding. As part of the MSLS acquisition in March 2003, Sunrise assumed $25 million of
life care endowment obligations related to five communities. The obligations
do not have a maturity date and the majority of them are expected to be
refinanced with proceeds from the issuance of new endowment obligations as new
residents enter the communities. As of December 31, 2003, $26 million of life care obligations were
outstanding. The other mortgages and notes payable relate primarily to 13 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 2.50% to 6.87% with remaining maturities ranging from
less than one year to 20 years. These other mortgages and notes payable have
total borrowings of $62 million as of December 31, 2003. During 2001, Sunrise entered into five interest rate swap agreements
whereby $125 million of advances outstanding on Sunrises variable LIBOR based
revolving construction credit facility bear interest at a fixed rate. 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 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. As of December
31, 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 which: (1) require it to meet certain
financial tests. For example, Sunrises $200 million line of F-20




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) credit requires Sunrise not to exceed certain leverage ratios, to maintain
certain fixed coverage ratios and to have a consolidated net worth of at least
$387 million as adjusted each quarter and to meet other financial ratios.
These tests are administered on a monthly or quarterly basis, depending on the
covenant; (2) require consent for changes in control of Sunrise; and (3)
restrict the ability of Sunrise and Sunrises subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business combinations
without lender consent. Sunrises syndicated revolving credit facility contains a cross-default
provision pursuant to which a default on other indebtedness by Sunrise or any
of its consolidated subsidiaries under the credit facility could result in the
ability of the lenders to declare a default and accelerate the indebtedness
under the credit facility. As of December 31, 2003, Sunrise was in compliance with all of its debt
covenants. Principal maturities of long-term debt as of December 31, 2003 are as
follows (in thousands): 2004
    
    $
    22,1622005
    
    
    20,4522006
    
    
    29,9982007
    
    
    9,9852008
    
    
    3,624Thereafter
    
    
    136,769$
    222,990
 Interest paid totaled $23 million,$36 million and $42 million in 2003,
2002 and 2001, respectively. Interest capitalized was $3 million, $7 million
and $7 million in 2003, 2002 and 2001, respectively. As of December 31, 2003, Sunrise has $41 million in unused letters of
credit that have been pledged for the benefit of certain lending institutions
and municipalities. The letters of credit expire within two years. 8. Stockholders Equity In July 2002, Sunrise announced that its Board of Directors authorized the
repurchase of outstanding shares of Sunrise 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, Sunrises Board of Directors expanded the
repurchase program to an aggregate of $150 million to repurchase outstanding
shares of common stock of Sunrise and/or its outstanding 51/4% convertible
subordinated notes 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. 9. 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, 2003, 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. F-21




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) 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. In March 2000, the Directors Plan was terminated. An
aggregate of 75,000 shares of common stock is reserved for issuance under
existing option agreements. 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. As
of December 31, 2003, 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: 2003
    
    2002
    
    2001Weighted-Average
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-AverageShares
    
    Exercise
    
    Shares
    
    Average
    
    Shares
    
    ExerciseOptions
    
    (000)
    
    Price
    
    (000)
    
    Exercise Price
    
    (000)
    
    PriceOutstanding-beginning
of year
    
    
    6,411
    
    
    $
    22.07
    
    
    
    6,168
    
    
    $
    21.52
    
    
    
    5,959
    
    
    $
    21.33Granted
    
    
    607
    
    
    
    19.32
    
    
    
    1,049
    
    
    
    22.90
    
    
    
    1,205
    
    
    
    22.27Exercised
    
    
    (2,337
    )
    
    
    21.64
    
    
    
    (568
    )
    
    
    17.62
    
    
    
    (570
    )
    
    
    15.73Canceled
    
    
    (354
    )
    
    
    24.33
    
    
    
    (238
    )
    
    
    22.24
    
    
    
    (426
    )
    
    
    28.98Outstanding-end of year
    
    
    4,327
    
    
    
    21.63
    
    
    
    6,411
    
    
    
    22.07
    
    
    
    6,168
    
    
    
    21.52Options exercisable at
year-end
    
    
    2,576
    
    
    
    
    
    
    
    3,572
    
    
    
    
    
    
    
    3,030Weighted-average fair
value of options
granted during the
year
    
    $
    16.61
    
    
    
    
    
    
    $
    18.15
    
    
    
    
    
    
    $
    16.16
 The following table summarizes information about stock options outstanding
at December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted-AverageRange of
    
    Number Outstanding
    
    Remaining
    
    Weighted-Average
    
    Number Exercisable
    
    Weighted-AverageExercise Prices
    
    (000)
    
    Contractual Life
    
    Exercise Price
    
    (000)
    
    Exercise Price$3.00 - $8.00
    
    
    30
    
    
    
    1.6
    
    
    $
    3.33
    
    
    
    30
    
    
    $
    3.338.01 - 20.00
    
    
    1,137
    
    
    
    6.4
    
    
    
    16.32
    
    
    
    737
    
    
    
    16.2520.01 - 25.63
    
    
    1,832
    
    
    
    6.1
    
    
    
    24.15
    
    
    
    1,249
    
    
    
    24.3825.64 - 44.56
    
    
    1,328
    
    
    
    7.4
    
    
    
    28.60
    
    
    
    560
    
    
    
    30.804,327
    
    
    
    
    
    
    
    
    
    
    
    2,576
 10. Restricted Stock The Companys stockholders approved the 2002 Stock Option and Restricted
Stock plan at the Companys annual meeting of stockholders held on May 17,
2002. On March 21, 2002 and February 25, 2003, a total of 148,100 and 3,500
shares, respectively, of restricted stock were granted to Paul J. Klaassen,
Chairman of the Board and Chief Executive Officer, Thomas B. Newell, President
and Larry Hulse, Chief Financial Officer. F-22




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) The Companys stockholders approved the 2003 Stock Option and Restricted
Stock plan at the Companys annual meeting of stockholders held on May 12,
2003. On May 12, 2003 and September 10, 2003 a total of 192,400 shares of
restricted stock were granted to Paul J. Klaassen, Chairman of the Board and
Chief Executive Officer, Larry Hulse, Chief Financial Officer, Tiffany Tomasso,
Chief Operating Officer, Chris Slavin, Chief Investment Officer, and other 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 2003 and 2002, Sunrise recognized $1.6 and $0.7 million in
compensation expense, respectively. As of December 31, 2003, 20,997 of the
344,000 shares of restricted stock were vested. 11. Stockholder Rights Agreement 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 to occur 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 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. F-23




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) 12. 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 31,2003
    
    2002
    
    2001Numerator for basic net income per share:Net income
    
    $
    62,178
    
    
    $
    54,661
    
    
    $
    49,101Numerator for diluted net income per share:Net income
    
    $
    62,178
    
    
    $
    54,661
    
    
    $
    49,101Assumed conversion of convertible notes, net of tax
    
    
    4,584
    
    
    
    4,610
    
    
    
    4,795Diluted net income
    
    $
    66,762
    
    
    $
    59,271
    
    
    $
    53,896Denominator:Denominator for basic net income per common
share-weighted average shares
    
    
    21,298
    
    
    
    22,357
    
    
    
    21,825Effect of dilutive securities:Employee stock awards
    
    
    624
    
    
    
    643
    
    
    
    651Convertible notes
    
    
    3,452
    
    
    
    3,552
    
    
    
    3,476Denominator for diluted net income per common
share-weighted average shares plus assumed
conversions
    
    
    25,374
    
    
    
    26,552
    
    
    
    25,952Basic net income per common share:Net income
    
    $
    2.92
    
    
    $
    2.44
    
    
    $
    2.25Diluted net income per common share:Net income
    
    $
    2.63
    
    
    $
    2.23
    
    
    $
    2.08
 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. 13. Acquisitions On March 28, 2003, Sunrise completed its acquisition of all 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 $29 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 income statement from March 28, 2003 to December 31, 2003. 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 F-24




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) valuations are subject to adjustment as contingencies are resolved and
additional information on certain estimates become 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. The purchase price values assigned to the major assets and
liabilities are as follows: Management contracts and leases, net
    
    $63 millionLand
    
    $22 millionLife care endowment obligations
    
    $25 millionNet working capital deficit and other
    
    $29 millionCosts in excess of assets acquired
    
    $73 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 16 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 as of January 1,
2002. Year
    
    YearEnded
    
    EndedDecember 31,
    
    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 those interests was immaterial
to the proforma results. 14. 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 it has a minority
ownership interest, generally ranging from 10% to 25%. If Sunrise sells 100%
of a property to a third-party owner, it 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 F-25




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) 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 June 2000, Sunrise completed the sale of three properties for an
aggregate sales price of $44 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise realized $13 million in gain, subject to
certain contingencies being met, of which $2 million and $11 million was
recognized in 2001 and 2000, respectively. In September 2000, Sunrise
completed the sale of eight properties for an aggregate sales price of $111
million to the same venture company. The venture company assumed approximately
$75 million of debt secured by the eight properties. Sunrise realized $26
million in gain, subject to certain contingencies being met, of which $13
million and $13 million was recognized in 2001and 2000, respectively. Sunrise
continues to operate the properties under long-term operating agreements. 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 was 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 gain, subject to certain
contingencies being met, of which, $1 million and $40 million was recognized
during 2002 and 2001. Sunrise continues to operate the properties under
long-term operating agreements. In October 2001, Sunrise completed the sale of one property for an
aggregate sales price of $17 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise realized $3 million in gain, subject to
certain contingencies being met, of which $2 million and $1 million was
recognized in 2002 and 2001, respectively. Sunrise continues to operate the
properties under long-term operating agreements. In December 2001, Sunrise completed the sale of one property for an
aggregate sales price of $8 million. Sunrise realized $1 million in gain,
which was recognized in 2001. In December 2001, Sunrise completed the sale of one property for an
aggregate sales price of $16 million to a real estate venture company in which
Sunrise owns a 25% interest. Sunrise realized $2 million in gain, subject to
certain contingencies being met, of which, $1 million and $500,000 was
recognized in, 2002 and 2001, respectively. In 2002, Sunrise also recognized
an additional $2 million in incentive purchase price based on 2002 operating
performance. Sunrise continues to operate the properties under long-term
operating agreements. In December 2001, one of Sunrises joint venture partners exercised an
option to acquire an additional 25% interest in one property (Sunrise of
Gardner Park). As a result of the transaction, Sunrises ownership in the
property was reduced to 25% from 50%. Sunrise will continue to operate the
property under a long-term management agreement. Sunrise realized up to $1
million in gain, subject to certain contingencies being met, of which, $700,000
and $200,000 was recognized in, 2002 and 2001, respectively. 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. F-26




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) 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 will realize up to $9 million in gain, subject to
meeting certain operating contingencies, of which $2 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 will realize up to $6 million in gain, subject to
meeting certain operating contingencies, of which $3 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 will realize up to $8 million in gain, subject to
meeting certain operating contingencies, of which $4 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 will realize up to $36 million in gain, subject to
meeting certain operating contingencies, of which $27 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 will realize up to
$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. 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 of 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 properties,
which is being recognized over five quarters beginning in the second quarter of
2003, subject to meeting certain operating and financing contingencies. $21
million of gain was recognized in 2003. 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
will realize up to $15 million in gain over three quarters beginning in the
third quarter of 2003, subject to meeting certain operating contingencies. $9
million of gain was recognized in 2003. Sunrise will continue to operate all
five properties under long-term management contracts. In September 30, 2003, Sunrise completed the sale/long-term manage back of
its 100 percent interest in 16 consolidated senior living properties to a
retirement properties company for an aggregate sales price of $158 million.
Sunrise will realize up to $13 million, subject to meeting certain operating
contingencies. $5 million of gain was recognized in 2003. Sunrise will
continue to operate all 16 properties under long-term management contracts. F-27




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) 15. Non-Recurring Items In August 2001, Karrington Health Inc. (Karrington), a wholly owned
subsidiary of Sunrise, received a cash payment in the amount of $10 million to
settle a lawsuit filed by Karrington prior to its acquisition by Sunrise in
1999. Karrington brought the suit alleging that Omega Healthcare Investors,
Inc. had breached a financing commitment it had made to Karrington. Expenses
incurred to settle the lawsuit have been netted against the settlement. Given the current industry environment and the increasing number of
opportunities to acquire properties and management contracts, Sunrise
determined, in the third quarter of 2001, that the costs to develop five
specific sites outweighed the costs of acquiring properties and/or management
contracts in those areas. Accordingly, management elected not to proceed with
its planned development for these five sites and wrote down associated project
costs by $7 million to their estimated net realizable value. 16. Commitments 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 in July 1999 and expires in July 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
schedule. The warehouse lease has a term of seven years and expires in May
2004. The initial annual base rent payments amount to $148,000, subject to
annual increases of 3%. In addition, Sunrise is required to amortize an
additional $88,000 of rent related to the straight lining of rent benefits and
a portion of operating expenses. Various other leases expire between 2003 and
2004. 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 two other ground
leases related to two properties in operation. Lease terms range from 30 to 99
years and are subject to annual increases based on the consumer price index
and/or stated increases in the lease. In March 2003, in connection with the acquisition of Marriott Senior
Living Services, Inc. (MSLS), Sunrise assumed 16 operating leases for 17 senior
living properties. In June 2003, Sunrise renewed an existing operating lease
agreement for another MSLS property. The operating lease terms for these 18
former MSLS properties expire in 2018. Future minimum lease payments under office, equipment, ground and other
operating leases as of December 31, 2003 are as follows (in thousands): 2004
    
    $
    53,6982005
    
    
    52,9482006
    
    
    53,0322007
    
    
    53,1172008
    
    
    53,197Thereafter
    
    
    340,902$
    606,894
 F-28




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) Sunrise has entered into contracts to purchase and lease additional sites.
Total contracted purchase price of these sites is $49 million. Sunrise is
pursing additional development opportunities and also plans to acquire
additional properties as market conditions warrant. 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 the
Sunrise guarantee. At December 31, 2003, Sunrise has provided $106 million of
debt guarantees to its business ventures which represents Sunrises maximum
exposure under its debt guarantees. Of the $106 million, $2 million of
guarantees are for our sale long-term manage back partnerships. These
guarantees are removed upon reaching certain occupancy and debt service
coverage targets within the partnership. Of the $106 million, $4 million
represents a debt guarantee to a joint venture which was acquired in
June 2002. This debt guarantee remains in place throughout the
term of the loan. Sunrise has provided $9 million of debt guarantees to
hospital partnerships that remain in place throughout the term of the loan. In
connection with the acquisition of MSLS in March 2003, CNL Retirement
Properties, Inc. (CNL) agreed to assume the obligation to repay $83 million
of life care endowment obligations issued by MSLS with respect to two
continuing care retirement communities. 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 $8 million related to the acquisition of MSLS is made up of $2
million of obligations to provide financing under existing credit facilities
with respect to four communities, $5 million of obligations to provide credit
financing for 22 communities and $1 million of payment guarantees under
operating agreements with respect to one community. Finally, Sunrise has
provided $33 million of debt guarantees to its development joint ventures. Of
the $33 million, $19 million are last dollar debt guarantees on international
development. Last dollar debt guarantee means the third-party debt would have
to default, the bank would have to enforce any remedies against the venture,
including foreclosure, after which Sunrise would have to provide any required
funds to make up any difference between the loan amount and the amount
recovered from such enforcement. Of the $33 million in debt guarantees to
development joint ventures, $7 million are removed upon stabilization of the
underlying properties. The remaining $26 million will remain in place
throughout the term of the loan. To date Sunrise has not been required to fund
any debt guarantees. At December 31, 2003, Sunrise does not believe that it
will be required to fund any debt under its current outstanding debt guarantees
and therefore no liabilities are reflected in the financial statements of
Sunrise for these debt guarantees. As part of Sunrises fee-development for joint ventures, it 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, 2003, 14 properties are
under construction and subject to completion guarantees. Sunrise has over 20
years experience in the development and construction of senior living
properties. Its 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 amounts are required to be funded by
Sunrise, they would 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 2004. None were funded during
2003. 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 property 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, generally until the property reaches stabilization. Typically, the
terms of these loans provide for no limitation to the maximum potential future
payments under the loans. As of December 31, 2003, 19 operating properties are
subject to a Sunrise operating deficit credit facility and 14 additional
properties will be subject to a guarantee upon opening. Sunrise funded $0.4
million under F-29




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) these credit facilities in 2003 related to four properties and does not
expects to fund any additional amounts under these guarantees. 17. 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 31,2003
    
    2002Deferred tax assets:Operating loss carryforward and credits
    
    $
    17,397
    
    
    $
    11,108Accrued expenses
    
    
    4,038
    
    
    
    3,343Other
    
    
    2,135
    
    
    
    1,422Total deferred tax assets
    
    $
    23,570
    
    
    $
    15,873Deferred tax liabilities:Investments in joint
ventures
    
    $
    (53,800
    )
    
    $
    (23,106
    )Property and equipment
    
    
    (70,254
    )
    
    
    (62,511
    )Operating expenditures
    
    
    (5,607
    )
    
    
    (10,495
    )Total deferred tax liabilities
    
    
    (129,661
    )
    
    
    (96,112
    )Net deferred tax liability
    
    $
    (106,091
    )
    
    $
    (80,239
    )
 At December 31, 2003, Sunrise had regular U.S. federal and state net
operating loss carryforwards available to offset future taxable income of
approximately $39 million, which expire from 2010 through 2022. At December
31, 2003, Sunrise had alternative minimum tax credits of approximately $0.5
million and Work-Opportunity tax credits of approximately $2 million available
to offset future federal tax liabilities. These tax credits do not expire.
Various Sunrise entities have fully utilized their net operating loss
carryforwards for state tax purposes. Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Sunrise expects
to fully utilize the loss carryforward prior to expiration. F-30




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) Significant components of the provision for income taxes are as follows
(in thousands): Year Ended December 31,2003
    
    2002
    
    2001Current:Federal
    
    $
    7,447
    
    
    $
    2,495
    
    
    $
    2,778State
    
    
    2,564
    
    
    
    2,448
    
    
    
    2,389Total current
    
    
    10,011
    
    
    
    4,943
    
    
    
    5,167Deferred:Federal
    
    
    21,782
    
    
    
    25,727
    
    
    
    23,805State
    
    
    3,182
    
    
    
    2,832
    
    
    
    2,421Total deferred
    
    
    24,964
    
    
    
    28,559
    
    
    
    26,226Total tax expense
    
    $
    34,975
    
    
    $
    33,502
    
    
    $
    31,393
 In 2003, 2002 and 2001, Sunrise paid federal and state income taxes, net
of refunds of $1 million, $2 million and $1 million, respectively. Current
taxes payable for 2003, 2002 and 2001 have been reduced by approximately $9
million, $3 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 31,2003
    
    2002
    
    2001Statutory rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %State taxes, net
    
    
    4
    
    
    
    5
    
    
    
    6Other
    
    
    (3
    )
    
    
    (2
    )
    
    
    (2
    )36
    %
    
    
    38
    %
    
    
    39
    %
 18. Related-Party Transactions Sunrise Assisted Living Foundation Sunrise Assisted Living Foundation, Inc. (SALF), a not-for-profit
organization, operates two schools, including day care centers. Paul and
Teresa Klaassen, Sunrises founders, are on the Board of Directors of SALF.
SALF reimbursed Sunrise monthly for use of office facilities and support
services in the amount of $84,000 in 2003, 2002 and 2001. Such amounts are
included in operating revenue. Sunrise had also accepted a promissory note
from SALF during 2001 (see Note 4). The principal amount of the promissory
note and accrued interest were repaid during 2003. During 1999, a subsidiary of SALF provided certain health care services to
residents of Sunrise properties located in Illinois. The SALF subsidiary
entered into various administrative, accounting and collection service
agreements with Sunrise that terminated at the end of 2001. The service
agreements allow for reimbursement of costs of service plus a management fee.
Sunrise recognized management fees of $400,000 in 2001. As of December 31,
2003, Sunrise owed SALF $0.4 million under such service agreements. Ground Lease Sunrise has a 99 year ground lease with one of Sunrises founders. The
ground lease expires in May 2085. The basic monthly rent is adjusted annually
based on the consumer price index. Rent expense under F-31




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) this lease was $310,000, $299,000 and $296,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Sunrise subleases one-half of
this ground lease to SALF. The sublease expires in May 2085 and requires
payments equal to 50% of all payments made by Sunrise under the ground lease.
Sublease rental income was $155,000, $149,500 and $148,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Lease expense is recorded net
of the sublease income. Joint Ventures Sunrise has entered into unconsolidated joint venture arrangements with a
third party that is providing up to $59 million of the equity capital to
develop up to 20 projects in the United States, United Kingdom and Canada. A
director of Sunrise, Craig Callen, is a 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 is providing
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 $6 million, $8 million and $9 million, respectively, in 2003,
2002 and 2001. As of December 31, 2003, 2002 and 2001, the third party had
provided approximately $51 million, $52 million and $51 million, respectively,
and Sunrise has provided $7 million, $6 million and $8 million, respectively,
of equity capital to the joint ventures. For information on committed and
funded loans to this third party, see Note 4. Sunrise may allow minority equity ownership interests in joint ventures
for its officers as a means of incentive. Currently, two of its corporate
officers, Christian Slavin and Tiffany Tomasso, have minority ownership
interests (less than 1% combined on a fully diluted basis) in one of its
international joint ventures. 19. 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%. Effective January 1, 2001, employees vest in their matching employer
contributions 100% over four years at 25% each year. When an employee reaches
5 years of service, Sunrise will contribute $0.50 for every dollar the employee
contributes up to 7% of the employees annual compensation. If the employee
has less than 5 years of service, the employer contribution will be $0.25 for
every dollar the employee contributes up to 7% of the employees annual
compensation. The Plan has eliminated the discretionary matching contributions
and all employees who earn $90,000 or less annually are eligible to receive
regular matching contributions by Sunrise provided the employee meets certain
eligibility requirements. Matching contributions made by Sunrise totaled
$800,000, $200,000, and $500,000 during 2003, 2002 and 2001, respectively. 20. 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. Cash equivalents, accounts 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. F-32




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##### 



Sunrise Senior Living, Inc.
Notes to Consolidated Financial Statements (continued) Fixed rate debt with an aggregate carrying value of $181 million has an
estimated aggregate fair value of $210 million at December 31, 2003. 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 Sunrises variable rate debt is estimated to be
approximately equal to its carrying value of $42 million at December 31, 2003. Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 2003. 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, 2003 and
current estimates of fair value may differ from the amounts presented herein. 21. Information about Sunrises Segments With the completion of the MSLS acquisition (see Note 13) and the
transformation into a management services organization, Sunrise operates within
one defined business segment with activities related to management,
development, and acquisition of senior living services both domestically and
internationally. Management and contract services revenues from operations
internationally were $4 million for the years ended December 31, 2003 and 2002.
International expenses from operations were $7 million and $4 million for the
years ended December 31, 2003 and 2002, respectively. 22. Quarterly Result of Operations (Unaudited) The following is a summary of quarterly results of operations for the
fiscal quarters: (in thousands, except per share amounts): 1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th Quarter2003Operating revenue
    
    $
    136,715
    
    
    $
    334,511
    
    
    $
    353,311
    
    
    $
    363,764Net income
    
    
    13,416
    
    
    
    16,205
    
    
    
    17,133
    
    
    
    15,424Diluted net income per
common share
    
    $
    0.56
    
    
    $
    0.67
    
    
    $
    .74
    
    
    $
    .672002Operating revenue
    
    $
    111,117
    
    
    $
    119,888
    
    
    $
    130,057
    
    
    $
    144,850Net income
    
    
    7,472
    (1)
    
    
    11,463
    
    
    
    15,400
    
    
    
    20,326Diluted net income per
common share
    
    $
    0.32
    
    
    $
    0.47
    
    
    $
    0.63
    
    
    $
    0.82
 The sum of diluted net income per common share for the four quarters in
2003 and 2002 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. (1) Includes interest expense 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 the convertible notes. F-33