UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
-----------
(AMENDMENT NO. 1)
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14012
EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
WASHINGTON 91-1605464
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
(Address of principal executive offices)
(206) 298-2909
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.0001 par value American Stock Exchange, Inc.
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), (2) and has been subject to such filing
requirements for the past 90 days.
Yes () No ( )
Indicate by check mark that there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will 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. ( )
Aggregate market value of voting stock held by non-affiliates of the registrant
as of April 15, 2002 was $24,962,975.
As of April 15, 2002, 10,199,764 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
EMERITUS CORPORATION
Index
Part III
Item 10. Directors and Executive Officers of the Registrant 1
Item 11. Executive Compensation 3
Item 12. Security Ownership of Certain Beneficial Owners and Management 8
Item 13. Certain Relationships and Related Transactions 12
PART III
--------
ITEM 10. DIRECTORS OF THE COMPANY
Daniel R. Baty (age 58), one of Emeritus's founders, has served as its
Chief Executive Officer and as a director since its inception in 1993 and became
Chairman of the Board in April 1995. Mr. Baty also has served as the Chairman of
the Board of Holiday Retirement Corporation since 1987 and served as its Chief
Executive Officer from 1991 through September 1997. Since 1984, Mr. Baty has
also served as Chairman of the Board of Columbia Pacific Group, Inc. and, since
1986, as Chairman of the Board of Columbia Pacific Management, Inc.
Raymond R. Brandstrom (age 49), one of Emeritus's founders, has served as a
director since its inception in 1993 and as Vice Chairman of the Board since
March 1999. From 1993 to March 1999, Mr. Brandstrom also served as Emeritus's
President and Chief Operating Officer. In March 2000, Mr. Brandstrom was elected
Vice President of Finance, Chief Financial Officer and Secretary of Emeritus.
From May 1992 to October 1996, Mr. Brandstrom served as President of Columbia
Pacific Group, Inc. and Columbia Pacific Management, Inc., both of which
companies are wholly owned by Mr. Baty and are engaged in developing independent
living facilities and providing consulting services for that market. From May
1992 to May 1997, Mr. Brandstrom served as Vice President and Treasurer of
Columbia Winery, a company affiliated with Mr. Baty that is engaged in the
production and sale of table wines.
Patrick Carter (age 54) has served as a director of Emeritus since November
1995. From November 1985 until April 1999, Mr. Carter was Chief Executive
Officer and Managing Director of Westminster Health Care Holdings, Plc., a
publicly held operator of skilled-nursing facilities in the United Kingdom.
Charles P. Durkin, Jr. (age 63) has served as a director of Emeritus since
December 30, 1999. Mr. Durkin is one of the founders of Saratoga Partners, a
private equity investment firm. Since Saratoga's formation as an independent
entity in September 1998, he has been a Managing Director of Saratoga Management
Company LLC, the manager of the Saratoga Partners funds. Prior to that, from
September 1997, he was a Managing Director of SBC Warburg Dillon Read, Inc., the
successor entity to Dillon, Read & Co., where Mr. Durkin started his investment
banking career in 1966 and became a Managing Director in 1974.
David T. Hamamoto (age 42) has served as a director of Emeritus since
November 1997. Mr. Hamamoto is a member of NorthStar Capital Partners LLC, a
real estate fund that he founded in July 1997. Between 1983 and July 1997, Mr.
Hamamoto was employed by Goldman Sachs, most recently as co-founder and co-head
of the Real Estate Principal Investment Area of the Whitehall Funds. Mr.
Hamamoto is also Co-Chairman, Co-Chief Executive Officer and Co-President of
NorthStar Capital Investment Corporation, a private investment firm.
Motoharu Iue (age 65) has served as a director of Emeritus since April
1995. Mr. Iue served as Chairman of the Board of Sanyo North America Corporation
("Sanyo NA"), a consumer electronics company, and President of Three Oceans,
Inc. ("Three Oceans") from October 1996 until March 1999. Mr. Iue served as
President of Sanyo NA and as Chairman of the Board of Three Oceans from 1992
until March 1999, and also served as Chief Executive Officer of both of these
companies. He has been a director of Sanyo NA since 1977 and currently serves on
the board of both Sanyo Electric Co., Ltd. and Three Oceans. Three Oceans, Inc.
is a 3.8% shareholder of Emeritus.
David W. Niemiec (age 52) has served as a director of Emeritus since
December 30, 1999. From September 1998 to October 2001, Mr. Niemiec was a
Managing Director of Saratoga Management Company LLC, the manager of a group of
private equity investment funds operated under the name of Saratoga Partners.
Currently, he acts as an advisor to the group. Prior to joining the Saratoga
group, he worked at the investment banking firm of Dillon, Read & Co. beginning
in 1974 and served as Vice Chairman from 1991 through September 1997, when the
firm was acquired by Swiss Bank Corporation. From September 1997 to February
1998, he was Managing Director of the successor firm, SBC Warburg Dillon Read,
Inc.
Our executive officers were described under Item 4 of the Form 10-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Officers and directors of the Company and persons who own more than ten
percent of the Company's stock are required to report to the Securities and
Exchange Commission their ownership and changes in ownership of the Company's
stock. Regulations of the Commission require us to disclose to our shareholders
those filings that were not made on time. Based solely on our review of copies
of the reports received by us, or written representations received from
reporting persons that no such forms were required for those persons, we believe
that, during fiscal year 2001, our officers and directors complied with all
applicable filing requirements, with the exception of one Form 4 Statement of
Changes in Beneficial Ownership that was inadvertently filed late by Patrick
Carter.
[Remainder of page intentionally left blank.]
ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
SUMMARY COMPENSATION TABLE
The following table presents certain information with respect to
compensation we paid in the fiscal years ended December 31, 1999, 2000, and
2001, to our Chief Executive Officer and to our other four most highly
compensated officers as of December 31, 2001:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
-------------------- ---------
Securities
Other Annual Underlying All Other
Bonus Compensation Options Compensation
Name and Principal Position Year Salary($) ($)(1) ($)(2) (#)(3)(4) ($)
- ------------------------------- ------ ------------------ --------- ------------- ------------- -------------
Daniel R. Baty 2001 - - - 244,000 -
Chairman and Chief 2000 - - - - -
Executive Officer 1999 - - 1,560 - -
Raymond R. Brandstrom 2001 185,000 15,000 8,420 162,000 -
Vice President of Finance, 2000 149,747 - 6,098 - -
Chief Financial Officer 1999 92,643 - 618 - -
Gary S. Becker 2001 175,000 15,000 7,124 63,500 -
Senior Vice President, 2000 164,664 15,000 6,000 - -
Operations 1999 134,846 15,000 5,750 - -
Suzette McCanless 2001 175,000 10,000 6,824 63,500 -
Vice President, Operations 2000 165,816 10,000 6,000 - -
- Eastern Division 1999 134,929 10,000 6,000 - -
Russell G. Kubik 2001 162,000 10,000 6,824 54,000 -
Vice President, Operations 2000 152,432 10,000 6,000 - -
- Central Division 1999 122,619 15,000 - - -
(1) Represents amounts earned for the respective calendar year under the
Company's corporate incentive plan which are paid in the first quarter of the
following year.
(2) Consists of amounts paid for parking fees, health club memberships,
health insurance, and cellular telephone expense.
(3) In May 2001, Messrs. Baty, Brandstrom, Becker and Kubik and Ms.
McCanless accepted the Company's offer to exchange their outstanding stock
options for options granted on December 10, 2001, to purchase an equivalent
number of shares at an exercise price equal to $2.11. As a result of this
exchange, the options listed in prior years were cancelled. The new options will
vest and become exercisable 2 1/2 years from the date of grant under the
following schedule: 1/3 will vest six months after the date of grant, 1/3 will
vest 18 months after the date of grant and 1/3 will vest 30 months after the
date of grant. (See "COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION--Stock Options.")
(4) Mr. Baty is not a full time employee of Emeritus and is not currently
paid a salary by us.
OPTION GRANTS IN LAST FISCAL YEAR
The Compensation Committee did not grant options to the executive officers
during the fiscal year ended December 31, 2001.
FISCAL YEAR-END OPTION VALUES
None of the following executive officers exercised options during the
fiscal year ended December 31, 2001. The following table presents certain
information regarding options held as of December 31, 2001, by each of the
following executive officers:
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2001 (#) DECEMBER 31, 2001 ($)(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Daniel R. Baty. . . . - 244,000 - -
Raymond R. Brandstrom - 162,000 - -
Gary S. Becker. . . . - 63,500 - -
Suzette McCanless . . - 63,500 - -
Russell Kubik . . . . - 54,000 - -
__________________
(1) In May 2001, Messrs. Baty, Brandstrom, Becker and Kubik and Ms. McCanless
accepted the Company's offer to exchange their outstanding stock options for
options granted on December 10, 2001, to purchase an equivalent number of shares
at an exercise price of $2.11. As a result of this exchange, the options listed
in prior years were cancelled. The new options will vest and become exercisable
2 1/2 years from the date of grant under the following schedule: 1/3 will vest
six months after the date of grant, 1/3 will vest 18 months after the date of
grant and 1/3 will vest 30 months after the date of grant. (See "COMPENSATION
COMMITTEE REPORT ON EXECUTIVE COMPENSATION--Stock Options.")
(2) None of the options to purchase an aggregate of 587,000 shares held on a
combined basis by the executive officers named above were in-the-money at the
fiscal year-end based on the $2.11 closing price of the common stock on the
American Stock Exchange on December 31, 2001, the last day of active trading for
the year 2001.
OPTION EXCHANGE PROGRAM
The following table provides information on the exchange of options held by
the following executive officers during 2001.
Market
Number of Price of Exercise
Securities Stock at Price at Length of Original
Underlying Time of Time of New Exercise Option Term
Options Exchange Exchange Price Remaining at Date of
Name Date Exchanged(#) ($/Share) ($/Share) ($/Share)(1) Exchange
- ----------------- -------- ------------ --------- --------- ------------- --------------------
Dan Baty. . . . . 6/7/2001 40,000 1.85 7.25 2.11 1 year, 202 days
6/7/2001 164,000 1.85 9.813 2.11 2 years, 194 days
6/7/2001 40,000 1.85 9.625 2.11 2 years, 201 days
Ray Brandstrom. . 6/7/2001 142,000 1.85 9.813 2.11 2 years, 194 days
6/7/2001 20,000 1.85 9.625 2.11 2 years, 201 days
Gary Becker . . . 6/7/2001 20,000 1.85 7.25 2.11 1 year, 202 days
6/7/2001 28,500 1.85 9.813 2.11 2 years, 194 days
6/7/2001 15,000 1.85 9.625 2.11 2 years, 201 days
Suzette McCanless 6/7/2001 20,000 1.85 7.25 2.11 1 year, 202 days
6/7/2001 28,500 1.85 9.813 2.11 2 years, 194 days
6/7/2001 15,000 1.85 9.625 2.11 2 years, 201 days
Russell Kubik . . 6/7/2001 20,000 1.85 7.25 2.11 1 year, 202 days
6/7/2001 19,000 1.85 9.813 2.11 2 years, 194 days
6/7/2001 15,000 1.85 9.625 2.11 2 years, 201 days
(1) In May 2001, Messrs. Baty, Brandstrom, Becker and Kubik and Ms. McCanless
accepted the Company's offer to exchange their outstanding stock options for
options granted on December 10, 2001, to purchase an equivalent number of shares
at an exercise price of $2.11. As a result of this exchange, the options listed
in prior years were cancelled. The new options will vest and become exercisable
2 1/2 years from the date of grant under the following schedule: 1/3 will vest
six months after the date of grant, 1/3 will vest 18 months after the date of
grant and 1/3 will vest 30 months after the date of grant. (See "COMPENSATION
COMMITTEE REPORT ON EXECUTIVE COMPENSATION--Stock Options.")
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee of the Board consists of two nonemployee
directors and our Vice President of Finance. The committee is responsible for
establishing and administering our executive compensation programs. Our
objective is to pay competitively in order to attract quality executive
personnel who best meet our needs, retain and motivate these executives to
achieve superior performances, link individual compensation to individual and
company performance, and align executives' financial interests with those of our
shareholders.
Executive compensation generally consists of three components: base
salary, cash bonuses, and long-term incentive awards. The committee has
established each executive's compensation package by considering (a) the
salaries of executive officers in similar positions in companies in the same
industry as Emeritus and in related industries, (b) the experience and
contribution levels of the individual executive officer and (c) our financial
performance. Companies used as a reference for considering compensation levels
include some, but not all, of the companies constituting the peer group in our
stock performance graph. The committee also relies upon the recommendations of
the Chief Executive Officer in matters related to the individual performance of
the other executive officers because the committee believes that the Chief
Executive Officer is the most qualified to make this assessment. Base salaries
for executive officers generally are designed to be less than those paid by
competitors in the assisted living industry. These lower base salaries are
combined with stock option grants so that a significant portion of the
executives' pay is tied to performance of our stock.
Base Salaries. In 2001, base salaries were established as described above.
Stock Options. We grant stock options to provide a long-term incentive
opportunity that is directly linked to shareholder value. Options are granted
with an exercise price equal to the market value of the common stock on the date
of grant and become exercisable in 33 1/3 % annual increments beginning one year
after the date of grant. To encourage stock retention, all options are granted
as incentive stock options to the maximum extent possible under the Internal
Revenue Code. In 2001, no new stock options were granted to employees.
In May 2001, Emeritus offered an exchange of employee stock options under
the Emeritus Amended and Restated 1995 Stock Incentive Plan (the "Stock
Incentive Plan"). Employees were given the opportunity to tender either all or
none of their options in exchange for the same number of new options to be
granted under the Stock Incentive Plan. Approximately 99 % of the shares
underlying the eligible options were tendered and accepted for exchange,
including all the options held by executive officers. The new options were
granted on December 10, 2001. The new options have an exercise price of $2.11
per share and will vest 2 1/2 years from the date of grant according to the
following schedule: 33 1/3% will vest on June 10, 2002, 33 1/3% will vest on
June 10, 2003, and 33 1/3% will vest on June 10, 2004. In all other respects,
the terms of the new options are identical to the terms of the tendered options.
The Committee approved the exchange offer because it believes that
providing employees, including executive officers, with the benefit of owning
options that increase in value over time fosters employee loyalty and creates
performance incentives that, in turn, maximize shareholder value. Because the
outstanding options under the Stock Incentive Plan had exercise prices
significantly higher than the then current market price of Emeritus common
stock, the Committee found that an exchange offer was an appropriate mechanism
to retain employees and advance the Committee's goal of increasing shareholder
value.
Annual Incentives. To date, the committee has not established a regular
annual incentive or bonus plan for executive officers. Four of our named
executives were awarded cash bonuses for fiscal year 2001 based on the
committee's assessment of their individual performances in 2001.
Our Chief Executive Officer, Mr. Baty, a founder of Emeritus, has a
significant equity position. As of April 15, 2002 Mr. Baty owned shares
(directly and indirectly) and exercisable options representing approximately 41%
of our common stock. Because of his significant equity stake in Emeritus, Mr.
Baty receives no base salary or bonus. This compensation pattern was
established prior to our initial public offering and the committee has continued
it, recognizing that the principal compensation of Mr. Baty will be the inherent
value of his equity stake.
Section 162(m) of the Internal Revenue Code includes potential limitations
on the deductibility for federal income tax purposes of compensation in excess
of $1 million paid or accrued with respect to any of the executive officers
whose compensation is required to be reported in our proxy statement. Certain
performance-based compensation that has been approved by shareholders is not
subject to the deduction limit. Our stock option plans are structured to
qualify options as performance-based compensation under Section 162(m). For
2002, the committee does not expect that there will be any nondeductible
compensation.
Compensation Committee
Patrick Carter (Chairman)
David W. Niemiec
Raymond R. Brandstrom
DIRECTOR COMPENSATION
We currently pay our nonemployee directors $500 for each board meeting or
committee meeting they attend and reimburse them for all reasonable expenses
incurred in connection with their attendance. In September 1995, we established
the Stock Option Plan for Nonemployee Directors. Under the plan, nonemployee
directors receive options to purchase 2,500 shares of our common stock at the
time of their initial election or appointment. In addition, each nonemployee
director automatically receives an option to purchase 2,000 shares of our common
stock immediately following each year's annual meeting of shareholders. All
options granted under the plan fully vest on the date of the annual shareholders
meeting that follows the date of grant, and expire 10 years after the date of
grant. The exercise price for these options is the fair market value of our
common stock on the grant date.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return on shares of our
common stock with the cumulative total return of the AMEX Market Value Index and
a peer group selected by us for the period beginning on December 31, 1996, the
end of the fiscal year following our first day of trading for our common stock,
and ending on December 31, 2001, the end of our last fiscal year.
COMPARISON OF 6 YEAR CUMULATIVE TOTAL RETURN*
AMONG EMERITUS ASSISTED LIVING, THE AMEX MARKET VALUE
INDEX AND A PEER GROUP
[STOCK PERFORMANCE GRAPH]
* $100 INVESTED ON 12/31/96 IN STOCK OR INDEX--INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
Emeritus Corporation Peer Group AMEX Market
December 31, 1996 100 100 100
December 31, 1997 94.44 164.01 120.33
December 31, 1998 78.24 177.63 118.69
December 31, 1999 48.15 52.49 147.98
December 31, 2000 10.65 52.43 146.16
December 31, 2001 15.63 59.88 139.43
Assumes $100 invested in each share of the common stock, the AMEX Market
Value Index and the peer group, with all dividends reinvested. Stock price
performance shown above for the common stock is historical and not necessarily
indicative of future price performance.
Given the relative volatility of the assisted living industry, we revise
our peer group from time to time to include companies that have entered the
assisted living market. As the industry begins to mature and consolidate, we
remove certain companies previously included in our peer group as they are
acquired or as their focus of services shifts away from the assisted living
residences.
The new peer group consists of the following five companies: Alterra
Healthcare Corporation, formerly denoted as Alternative Living Services, Inc.;
American Retirement Corporation; ARV Assisted Living, Inc.; Capital Senior
Living; and Sunrise Assisted Living, Inc. Assisted Living Concepts is no longer
included in our peer group as they have filed for bankruptcy and reorganized in
2001.
CHANGE OF CONTROL ARRANGEMENTS
Option Plan. In the event of (a) the merger or consolidation of Emeritus
in which it is not the surviving corporation or pursuant to which shares of
common stock are converted into cash, securities, or other property (other than
a merger in which holders of common stock immediately before the merger have the
same proportionate ownership of the capital stock of the surviving corporation
immediately after the merger); (b) the sale, lease, exchange, or other transfer
of all or substantially all of our assets (other than a transfer to a
majority-owned subsidiary); or (c) the approval by the holders of common stock
of any plan or proposal for our liquidation or dissolution, each outstanding
option under our stock option plan will automatically accelerate so that it will
become 100% vested and exercisable immediately before such transaction, except
to the extent that options are assumed by the successor corporation. The
vesting of such assumed options accelerates at the time an optionee's employment
is terminated by us for reasons other than "cause" or by the optionee for "good
reason" following a change of control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of April 15, 2002, certain information
with respect to the beneficial ownership of our common stock, and our
subordinated convertible debentures and preferred stock (on an as-converted
basis) by:
* each person that we know owns more than 5% of the common stock,
* each of our directors,
* each current officer named in the compensation tables; and
* all directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the SEC and
includes shares over which the indicated beneficial owner exercises voting
and/or investment power. Shares of stock subject to options, convertible
debentures or warrants currently exercisable or exercisable within 60 days are
deemed outstanding for computing the percentage ownership of the person holding
the options, convertible debentures or warrants, but are not deemed outstanding
for computing the percentage ownership of any other person. Except as otherwise
indicated, we believe the beneficial owners of the common stock listed below,
based on information furnished by them, have sole voting and investment power
with respect to the shares listed opposite their names. Unless otherwise
indicated, the following officers, directors and shareholders can be reached at
the principal offices of Emeritus.
The table presents the beneficial ownership of the subordinated convertible
debentures as converted into common stock. In addition, the table presents the
beneficial ownership of the preferred stock as converted into common stock.
Northstar Capital Partners LLC owns 100% of the outstanding Series A preferred
stock, and Saratoga Partners IV, L.P. and its affiliate own 100% of the
outstanding Series B preferred stock.
SHARES OF EMERITUS
COMMON STOCK
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP PERCENT OF CLASS
Daniel R. Baty(1)(2)
c/o Emeritus Corporation . . . . . . . . 4,428,394 40.85%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Raymond R. Brandstrom(3) . . . . . . . . 411,575 4.01%
Gary S. Becker(4). . . . . . . . . . . . 34,008 *
Suzette McCanless(4) . . . . . . . . . . 25,223 *
Russell G. Kubik(5). . . . . . . . . . . 18,000 *
Motoharu Iue(6)(7) . . . . . . . . . . . 395,500 3.87%
Patrick Carter(7). . . . . . . . . . . . 10,500 *
David Hamamoto(8)(9) . . . . . . . . . . 1,382,126 6.39%
David W. Niemiec (10). . . . . . . . . . 1,344 *
Charles P. Durkin, Jr. (11). . . . . . . 5,471,247 34.91%
Sirach Capital Management(12). . . . . . 701,000 6.87%
3323 One Union Square
600 University Street
Seattle, WA 98101
B.F., Limited Partnership(13). . . . . . 3,514,149 32.67%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Northstar Capital Partners LLC (9) . . . 1,373,626 6.31%
299 Park Avenue, 33rd Floor
New York, New York 10022
Saratoga Partners IV, L.P. (14). . . . . 5,466,747 34.89%
535 Madison Avenue
New York, NY 10022
All directors and executive officers as
a group (12persons)(1)(6)(9)(14)(15) 11,538,715 67.12%
* Less than 1%.
_________________________________________________
(1) Includes 832,911 shares held directly and 2,955,950 shares held by B.F.,
Limited Partnership, of which Columbia Pacific, a company wholly-owned by Mr.
Baty, is the general partner and of which Mr. Baty is a limited partner. In
addition, this figure represents approximately 383,199 shares of Common Stock
into which certain subordinated debentures held by Columbia Select, L.P., are
convertible, and approximately 175,000 shares of Common Stock into which certain
subordinated debentures held by Catalina General, L.P., are convertible. B.F.,
Limited Partnership is the general partner of both such limited partnerships.
(2) Includes options exercisable within 60 days for the purchase of 81,333
shares.
(3) Includes options exercisable within 60 days for the purchase of 54,000
shares.
(4) Includes options exercisable within 60 days for the purchase of 21,166
shares.
(5) Represents options exercisable within 60 days for the purchase of these
shares.
(6) Includes 385,000 shares held by Three Oceans, Inc. a U.S. affiliate of
Sanyo, a publicly traded Japanese company. Mr. Iue is a former executive and
current director of U.S. affiliates of Sanyo. Mr. Iue disclaims beneficial
ownership of shares of Common Stock held by Three Oceans.
(7) Includes options exercisable within 60 days for the purchase of 10,500
shares.
(8) Includes options exercisable within 60 days for the purchase of 8,500
shares.
(9) The 1,373,626 shares are convertible Series A preferred stock held by
Northstar Capital Partners LLC, of which Mr. Hamamoto is a principal. (See
"CERTAIN TRANSACTIONS-Northstar Transaction.") Northstar Capital Partners LLC
owns 100% of the Series A preferred stock. The Series A preferred stock
currently votes with both the Series B preferred stock and the common stock, and
is entitled to 687,500 votes. This represents approximately 6.3% of the voting
power of currently outstanding Emeritus common and preferred stock.
(10) Includes 1,344 shares of Common Stock into which certain subordinated
debentures held by Mr. Niemiec are convertible, and options exercisable within
60 days for the purchase of 4,500 shares. Mr. Niemiec, a former principal of
Saratoga Partners and its affiliates (See "CERTAIN TRANSACTIONS - Saratoga
Transactions."), currently serves as an advisor to Saratoga Partners, and is
deemed to have no voting or dispositive powers over the Series B preferred stock
and subordinated debentures currently held by Saratoga Partners and its
affiliates.
(11) Includes 4,239,474 shares issuable upon conversion of Series B
preferred stock currently held by Saratoga Partners and its affiliates, of which
Mr. Durkin is a principal. (See "CERTAIN TRANSACTIONS - Saratoga
Transactions.") Saratoga Partners and its affiliates own 100% of the
outstanding Series B preferred stock, which includes 84,348 shares
(as-converted) that represent dividends paid on the Series B preferred stock to
date. The Series B preferred stock currently votes with both the Series A
preferred stock and the common stock on an as-converted basis, which represents
approximately 28% of the voting power of the currently outstanding Emeritus
common and preferred stock.
Also includes the following: (i) options exercisable within 60 days for
the purchase of 4,500 shares; (ii) warrants held by Saratoga Partners and its
affiliates currently exercisable to purchase 1,000,000 shares; (iii) 3,055
shares of Common Stock into which certain subordinated debentures held by Mr.
Durkin are convertible; and (iv) 224,218 shares of Common Stock into which
certain subordinated debentures held by affiliates of Saratoga Partners are
convertible.
(12) Sirach Capital Management may be deemed to have voting and dispositive
power over the shares, based upon publicly available information reported as of
December 31, 1998, on Schedule 13-G.
(13) B.F., Limited Partnership may be deemed to have voting and dispositive
power over some of these shares, based upon publicly available information as
reported as of April 10, 2002, on Schedule 13-D. Of these shares, 2,955,950 are
held of record by B.F., Limited Partnership, 383,199 are held of record by
Columbia Select, L.P., and 175,000 are held of record by Catalina General, L.P.
The shares held by Columbia Select, L.P. and Catalina General, L.P. represent
the number of common shares into which certain subordinated debentures are
convertible. B.F., Limited Partnership is the general partner of both such
limited partnerships.
(14) Represents 1,000,000 common shares that are issuable upon exercise of
warrants, 227,273 common shares into which certain subordinated debentures are
convertible, and 4,239,474 shares that are issuable upon conversion of Series B
preferred stock. The Series B preferred stock currently votes with both the
Series A preferred stock and the common stock on an as-converted basis.
(15) Includes options exercisable within 60 days for the purchase of 247,497
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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EMERITRUST TRANSACTIONS
In two separate transactions during the fall of 1998 and the spring of
1999, we arranged for two investor groups to purchase an aggregate of 41 of our
operating communities and five communities under development for a total
purchase price of approximately $292.2 million. Of the 46 communities involved,
43 had been, or were proposed to be, leased to us by Meditrust Company LLC under
sale/leaseback financing arrangements, and three had been owned by us. The
first purchase, consisting of 25 communities, which we will call the Emeritrust
I communities, was completed in December 1998 and the second purchase,
consisting of 21 communities, 16 of which we will call the Emeritrust II
Operating communities and five of which we call the Emeritrust II Development
communities, was completed in March 1999.
Of the $168.0 million purchase price for the Emeritrust I communities,
$138.0 million was financed through a three-year first mortgage loan with an
independent third party and $30.0 million was financed through subordinated debt
and equity investments from an investor group. A group led by Holiday
Retirement Corporation, of which Mr. Baty is the Chairman and a principal
shareholder, provided approximately $5.1 million of the equity. This group
included Holiday as to a 40% interest and Columbia Pacific Master Fund '98 as to
a 32% interest, with the remaining 28% interest being held by individual third
party investors. Columbia Pacific Master Fund is a limited partnership of which
Mr. Baty's family partnership is the general partner and shares in 40% of income
and gains after the limited partners of Columbia Pacific Master Fund receive a
return on their investment plus a preferred return.
Of the $124.2 million purchase price for the Emeritrust II Operating
communities and Emeritrust II Development communities, approximately $99.6
million was financed through three-year first mortgage loans with independent
third parties and $24.6 million was financed through subordinated debt and
equity investments from another investor group. A group led by Holiday provided
approximately $4.9 million of the equity. This group included Holiday as to a
40% interest and C.P. '99 Pool G.P. as to a 32% interest, with the remaining 28%
interest being held by individual third party interests. C.P. '99 Pool is a
general partnership, which is comprised of two 50% limited partnerships, the
first of which includes Mr. Baty's family partnership as its 40% general partner
and the other includes Mr. Baty's family partnership as its 20% general partner.
The investor groups retained us to manage all of the communities through
December 31, 2001, and granted us options to purchase the communities during
this period. During 2000, the Emeritrust I communities failed to comply with
covenants under the $138.0 million mortgage loan and in 2001 it became clear
that we would not be able to purchase the communities under the options. As a
result, in January 2002, the mortgage loans were restructured and the management
agreements and options to purchase were extended to June 30, 2003 (to December
31, 2003, in the case of the five Emeritrust II Development communities). The
discussion below reflects the terms of these arrangements as modified.
From January 1, 2002, through June 30, 2003, we will receive for the
Emeritrust I communities a base management fee of 3% of gross revenues generated
by the communities and an additional management fee of 4%, payable out of 50% of
cash flow. The availability of cash flow to pay management fees is subject to
prior payment of expenses and fees related to the restructuring of the mortgage
loan in 2001. For the Emeritrust II Operating communities and the Emeritrust II
Development communities, we have received and continue to receive a base
management fee of 5% of gross revenues and an additional management fee of 2%,
payable to the extent that the communities meet certain cash flow standards.
Prior to January 1, 2001, the management fees for the Emeritrust I communities
were also computed in this fashion.
Under the management agreements, we are obligated to reimburse the investor
groups for cumulative cash operating losses greater than $4.5 million in the
case of the Emeritrust I communities and $500,000 in the case of each of the
five Emeritrust II Development communities. Since these thresholds have been
exceeded, we are currently responsible for most cash operating losses generated
by these communities if they occur. There is no such funding arrangement with
respect to the Emeritrust II Operating communities. Our funding obligations for
the Emeritrust I communities have been $1.3 million, $4.9 million and $1.9
million for 2001, 2000, and 1999, respectively. Our funding obligations for the
Emeritrust II Development communities have been $310,000 and $1.6 million in
2001 and 2000, respectively.
Although the amounts of our funding obligation each year include management
fees earned by us under the management agreements, we do not recognize these
management fees as revenue in our financial statements to the extent that we are
funding the cash operating losses that include them. Correspondingly, we
recognize the funding obligation under the agreement, less the applicable
management fees, as an expense in our financial statements under the category
"Other, net." Conversely, if the applicable management fees exceed our funding
obligation, we recognize the management fees less the funding obligation as
management fee revenue in our consolidated financial statements. Management
fees earned for the Emeritrust I communities have been $4.0 million, $2.1
million, and $1.9 million in 2001, 2000, and 1999, respectively, of which $2.8
million have been recognized in 2001. Management fees earned for the Emeritrust
II Development communities have been $766,000 and $360,000, of which $673,000
and $174,000 have been recognized in 2001 and 2000, respectively. Management
fees earned for the Emeritrust II Operating communities have been $1.9 million
earned and recognized in both 2001 and 2000.
We have an option to purchase 43 of the 46 Emeritrust communities and a
right of first refusal with respect to the remaining three communities, both of
which expire June 30, 2003 (December 31, 2003, in the case of the five
Emeritrust II Development communities). The option must be exercised with
respect to all communities or may not be exercised at all. If investor groups
require Mr. Baty to purchase certain of the communities, upon the conditions
described below, we have the right to exercise our option within 60 days of
receiving notice of this action. The option price for the 43 Emeritrust
communities is equal to the original cost of the communities of approximately
$292 million, plus an amount that would provide the investor groups with an 18%
rate of return, compounded annually, on their original investment of $54.6
million (less any cash distributions received). In connection with the exercise
of the option, we are also obligated to pay certain costs and fees.
The management agreements, including the options to purchase the related
communities, are subject to various termination provisions, including
cross-default provisions among all three groups of communities. The management
agreement for the Emeritrust I communities may be terminated if cash
distributions to the investor group do not meet certain levels or if the
communities fail to meet certain coverage requirements under the mortgage loan.
In addition, certain of the communities have been refinanced and, accordingly,
our ability to exercise the option will depend on whether we can assume or
refinance the debt secured by these communities. Termination of the management
agreements or failure to exercise the options could result in the loss of
management fees and the substantial decrease in the number of communities we
operate.
Under related agreements, the investor groups may require Mr. Baty to
purchase between ten and twelve of the Emeritrust communities, depending on the
occurrence of any one of the following events: (a) we do not exercise our
option to purchase the communities before the option expires, (b) we default
under the management agreements, (c) Mr. Baty's net worth falls below a certain
threshold, (d) we experience a change of control or (e) Mr. Baty ceases to be
our chief executive officer. If Mr. Baty is required to purchase some of the
communities, he will also have the option to purchase all of the Emeritrust
communities on the same terms under which we are entitled purchase the
communities, subject to our prior right to do so within a specified time period.
During 2001 the mortgage financing for the Emeritrust communities was
restructured and extended to June 30, 2003 (December 31, 2003, in the case of
the Emeritrust II Development communities). In connection with these
transactions, our management and option arrangements with the investor groups
were extended to be coterminous with the financing, subject in the case of the
Emeritrust I communities to certain performance-based rights of the investor
group to terminate the agreement early. Before these extensions, the
arrangements for the Emeritus I communities operated separately from the
arrangements for the Emeritrust II Operating and Development communities; the
extensions included cross-default provisions under certain circumstances. In
addition, the options to purchase the communities, which before the extensions
could be exercised separately as to the Emeritrust I communities as a group and
the Emeritrust II Operating and Development communities as a group, must now be
exercised together, as described above. During the extension periods, the
management fees for the Emeritrust I communities were revised as indicated
above. Mortgage restructuring fees and expenses of approximately $703,000 paid
in 2001 related to the Emeritrust I communities were funded by Mr. Baty, subject
to reimbursement by us as to 25% out of 50% of related management fees and an
additional 50% if we exercise our options to purchase the Emeritrust
communities. Mortgage extension fees and expenses of approximately $341,000
paid in 2001 and 2002 related to the Emeritrust I communities are payable out of
related cash flow after payment of our base management fee.
As a part of the mortgage restructuring related to the Emeritrust I
communities, Mr. Baty agreed to fund a partial repayment of the mortgage debt of
$1.25 million during the first quarter of 2001, with additional $250,000
reductions each quarter thereafter, and agreed to pledge additional collateral
to secure his obligation to purchase the communities under the circumstances
described above. Before the extension of these agreements, the investor groups
could require Mr. Baty to purchase between six and eight of the Emeritrust I
communities and between four and six of the Emeritrust II Operating and
Development communities; after extension, the investor group can require him to
purchase between 10 and 12 of all Emeritrust communities.
BATY TRANSACTIONS
Columbia House is a Washington limited partnership in which Mr. Baty
indirectly controls the general partner and holds an indirect 60% interest. It
develops, owns and leases low-income senior housing projects. We currently
manage 10 communities owned by Columbia House. The agreements have terms ranging
from two to four years, with options to renew, and provide for management fees
ranging from 4% to 6% of gross operating revenues, payable monthly for
management agreements and fixed fees payable monthly for administrative
agreements, as well as bonuses. We earned fees of $915,000 in 2001 under these
agreements. Columbia House owed us $139,000 as of December 31, 2001,
representing advances made to various Columbia House communities and outstanding
management and administrative fees. These advances bear interest at LIBOR plus
3%.
In April 1998, we assigned our economic interest in a 172-unit assisted
living community located in Fairfield, California, to a limited liability
company for $2.8 million in cash. Our economic interest consisted of a 67%
interest in the profits, losses, and distributions of an operating limited
liability company that owns and operates the community, the right to receive
payments of principal and interest under a $2.4 million promissory note
evidencing a loan by us to the operating company, and the obligation to make
additional capital contributions under the agreement establishing the operating
company. The limited liability company to which we assigned our economic
interest is comprised of a third party investor as to a 25% interest and three
investor pools with interests of 14.1%, 35.9% and 25%. Mr. Baty's family
partnership is the 18.75% general partner in the first two pools and the third
pool includes Mr. Baty individually as its 18.75% general partner. We continue
to manage the operations of the community pursuant to a management agreement and
to manage the affairs of the operating limited liability company. We receive
fees for these management activities equal to 5% of gross revenues of the
community. In January 2000, we repurchased 25% of our original interest in the
community (16.7% of the operating limited liability company) for a total of
$791,000. In 2001, we entered into an agreement with the related party investor
to offset against interest payable any amounts that we had previously funded or
will fund the assisted living community on their behalf. This agreement allowed
for recognition of a note receivable in the amount of approximately $477,000
that had previously been fully reserved. In December 2001, we acquired an
additional 16.7% interest in the community from a third party minority owner for
a purchase price of $250,000 plus the assumption of $77,000 of debt. The
purchase was paid with cash and notes payable due in certain terms ranging from
30 days through January 31, 2005. As of December 31, 2001, our effective
economic interest in the community was 33.3% in the profits, losses, and
distributions. During 2001, we received $204,000 in management fees. At
December 31, 2001, the limited liability company operating the community owed us
$489,000, representing funds advanced as working capital. These advances bear
interest at LIBOR plus 3%.
In June 1998, we sold a 295-unit independent and assisted living facility
located in Texas to a partnership consisting of Columbia Pacific Master Fund, as
to a 99% interest and to Mr. Baty personally, as to a 1% limited partnership
interest. The purchase price for the facility was $6.8 million plus the
assumption of a first mortgage of $14.8 million, which was guaranteed by Mr.
Baty in connection with the transaction, and a release of Emeritus from the
mortgage obligations. The purchase price was paid as follows:
* cash in the amount of $4.5 million;
* a promissory note in the amount of $1.5 million, of which $1.0 million was
repaid in 1999, bearing interest at 9% per annum and maturing in 10 years; and
* an $800,000 promissory note bearing interest at 9% per annum, due on demand.
In addition, in 1999, we loaned the partnership $450,000 for certain
repairs, which is evidenced by a promissory note bearing interest at 9% per
annum. We and the partnership have entered into a management agreement for a
five-year term, with automatic two-year extensions, with management fees of 6%
of gross revenue or $10,000 per month, whichever is greater. We have the right
of first refusal in the event of the sale of the facility. For 2001, we received
$286,000 in management fees. As of December 31, 2001, advances for working
capital to the partnership by us were repaid in full. The balance of the
purchase notes of $500,000 and $800,000, and the repair note of $450,000, with
accrued interest of $569,000, remained outstanding as of December 31, 2001, and
continue to remain outstanding.
In June 1998, we sold a 30% general partnership interest in Cooper George
Partners Limited Partnership, a limited partnership in which we formerly held a
50% general partnership interest, to Columbia Pacific Master Fund. Concurrently,
Columbia Pacific Master Fund purchased a 19% limited partnership interest from
an independent investor who formerly held a 50% limited partnership interest.
Our remaining 20% interest was converted to a limited partnership interest.
Cooper George Partners owns a 141-unit assisted living community in Washington.
The purchase price for the partnership interest was $1.1 million payable in
cash. In connection with the purchase, the partnership agreement was modified to
provide that profits, losses, and distributions would be shared 80% by Columbia
Pacific Master Fund and 20% by us. Also in connection with the transaction, the
facility was refinanced through a $9.7 million first mortgage loan from Deutsche
Bank, guaranteed by Mr. Baty, and we received a distribution of $580,000
consisting of 20% of the net proceeds of $2.9 million resulting from the
refinancing. We and Cooper George Partners have entered into a management
agreement for a five-year term, with automatic two-year extensions, with
management fees of 6% of gross revenue or $10,000 per month, whichever is
greater. We have the right of first refusal in the event of the sale of the
facility. For 2001, we earned $170,000 in management fees. At December 31, 2001,
Cooper George Partners owed us $8,000, representing advances for working
capital. These advances bear interest at LIBOR plus 3%.
During 1999, we began to provide management services to four joint ventures
that opened new assisted living communities. Our management agreements have
terms ranging from two to four years, with options to renew, and provide for
management fees ranging from 4% to 6% of gross operating revenues, payable
monthly. Entities controlled by Mr. Baty held interests in the joint ventures
ranging from 50% to 62%. During 2001, we earned management fees of $463,000
under these management agreements. At December 31, 2001, the joint ventures owed
us, collectively, $137,000, representing advances for working capital. These
advances bear interest at LIBOR plus 3%.
During 2000, we began to provide management services to four newly acquired
assisted living communities owned by Mr. Baty, and continued management services
on one other community. These management agreements have terms ranging from two
to five years, with renewal options, and provide management fees ranging from a
flat fee of $5,000 per month up to either 6% or 7% of gross operating revenues,
payable monthly, depending on the financial performance of the communities. In
2001, we earned management fees of $1.0 million under these management
agreements. At December 31, 2001, the communities owed us collectively $92,000,
representing advances for working capital. These advances bear interest at LIBOR
plus 3%.
On March 22, 2001, we entered into an agreement with Mr. Baty, which
governs the repayment of amounts owed by the foregoing entities in which Mr.
Baty has a financial or other interest. Such amounts are to be repaid as soon as
possible except for the term notes, which are to be paid in accordance with
their terms. Mr. Baty has guaranteed the repayment and a portion of the
outstanding balances are secured by a pledge of the membership interest of a
limited liability company that owns an assisted living facility. The agreement
also establishes future operating, accounting, and payment procedures, including
interest on average outstanding balances at LIBOR plus 3%. Under the agreement,
the related entities paid $3.0 million of the outstanding balances on March 27,
2001. As of December 31, 2001, the aggregate of such outstanding balances
(excluding the notes) was $1.7 million.
SARATOGA TRANSACTIONS
On December 10, 1999, we entered into an agreement to sell 40,000 shares of
our Series B Preferred Stock to Saratoga Partners IV, L.P. and its related
investors ("Saratoga") for a purchase price of $1,000 per share. On December 30,
1999, we completed the sale of 30,000 shares of Series B Stock, and we agreed to
complete the sale of the remaining 10,000 shares during the first quarter of
2000. Messrs. Niemiec and Durkin, two of our directors, are principals of
Saratoga.
Our net proceeds from the sale of all 40,000 shares of the Series B Stock
were to be approximately $38.6 million, after fees and expenses of the
transaction estimated at $1.4 million. The purchase agreement and related
documents provided that we would use $23.0 million to $26.8 million of these
proceeds to purchase certain assisted living communities by June 30, 2000. If we
did not do so, such proceeds were to be placed in a separate bank account, the
disbursement of which would be subject to Saratoga's prior consent. Under a
modification letter agreement dated May 15, 2000, we changed our agreements with
Saratoga to (i) cancel the sale of the remaining 10,000 shares of Series B
Stock, (ii) remove all restrictions and requirements relating to the use of
proceeds received from the sale of the original 30,000 shares and (iii) on or
before August 8, 2000, issue to Saratoga a seven-year warrant to purchase one
million shares of our common stock at an exercise price of $4.30 per share (with
such shares approved for listing on the American Stock Exchange) or, in the
alternative, to make a cash payment to Saratoga. In August 2000, we issued the
warrant to Saratoga.
The holders of the Series B Stock are entitled to receive quarterly
dividends payable in a combination of cash and additional shares of Series B
Stock. From issuance to January 1, 2004, the dividend rate will be 6% of the
stated value of $1,000, of which 2% is payable in cash and 4% is payable in
Series B Stock at the rate of one share of Series B Stock for every $1,000 of
dividend. After January 1, 2004, the dividend rate will be 7%, of which 3% is
payable in cash and 4% is payable in Series B Stock. Dividends accumulate,
whether or not declared or paid. Prior to January 1, 2007, however, if the cash
portion of the dividend is not paid, the cash dividend rate will increase to 7%
("arrearage rate"), until the unpaid cash dividends have been fully paid or
until January 1, 2007, whichever first occurs. Beginning January 10, 2003,
Emeritus can redeem all of the Series B Stock at $1,000 per share plus unpaid
dividends, if the closing price for the common stock on the American Stock
Exchange is at least 175% of the then conversion price for 30 consecutive
trading days. In 2001, we accrued $2.4 million in cash dividends at the higher
arrearage rate, and $1.3 million equivalent to 1,268 shares of Series B Stock as
in-kind dividends, none of which were paid or issued in 2001. Accordingly, we
had a cumulative commitment to issue 1,883 shares of Series B Stock at December
31, 2001.
The holders of the Series B Stock have the right at any time to convert
each share of Series B Stock into a number of shares of common stock equal to
the stated value of $1,000 divided by the conversion price. The conversion price
is currently $7.22 per share, subject to adjustment in certain events, including
an adjustment pursuant to a weighted average formula if we issue additional
shares of common stock, or securities convertible into or exercisable for common
stock, at a price less than the then current conversion price. The number of
shares issuable on exercise of the warrant and the related exercise price is
subject to similar adjustments.
After January 10, 2003, we can redeem all, but not less than all, of the
Series B Stock at $1,000 per share, plus unpaid dividends, if the closing price
of the common stock on the American Stock Exchange is at least 175% of the then
conversion price for 30 consecutive trading days ending not more than 10 days
prior to the date we notify the holders of the redemption. If there is a change
in control of Emeritus, each holder of Series B Stock has the right to require
us to purchase all or a portion of the Series B Stock owned by such holder for
the stated value of $1,000 per share. If we dissolve, liquidate, or wind up our
affairs, the holders of Series B Stock are entitled to receive, before any
payment or distribution is made to the holders of common stock or any other
class of preferred stock ranking junior to the Series B Stock, out of our assets
available for distribution, the stated value of $1,000 per share and all accrued
and unpaid dividends to and including the date of payment to the holder. The
liquidation rights of the holders of Series B Stock are subject to the prior
rights of the holders of Series A Stock.
Each share of Series B Stock is entitled to a number of votes equal to the
number of shares of common stock into which it is convertible. Except as
required by law or as described below, the Series B Stock votes with the common
stock and Series A Stock as a single voting group.
We may not amend or alter the rights and preferences of the Series B Stock
so as to adversely affect the Series B Stock without the consent of the holders
of a majority of the outstanding shares of Series B Stock. In addition, we may
not increase the number of authorized shares of preferred stock or create
another series of preferred stock ranking prior to or pari passu with the Series
B Stock without the consent of the holders of at least 75% of the outstanding
Series B Stock.
Under a shareholders' agreement, Saratoga is entitled to board
representation at a percentage of the entire Board of Directors, rounded up to
the nearest whole director, that is represented by the voting power of the
Series B Stock owned by Saratoga and its related investors. The shareholders'
agreement also provides for a minimum of two Saratoga directors. Saratoga is
currently entitled to designate three of seven members of the Board, although it
has advised us that it will designate only two at this time. Saratoga's right to
designate directors terminates if Saratoga has sold more than 50% of its initial
investment and its remaining shares represent less than 5% of the outstanding
shares of common stock on a fully diluted basis or it is unable to exercise
independent control over its shares.
Under the Designation of Shareholder Rights, included in the shareholders'
agreement, whenever the cash dividends have not been paid for six consecutive
quarters, Saratoga may designate one director in addition to the other directors
that it is entitled to designate under the shareholders' agreement. As of
January 1, 2002, Saratoga became entitled to designate an additional director
under this arrangement.
The shareholders' agreement provides that neither Saratoga nor Mr. Baty is
permitted to purchase voting securities in excess of a defined limit. That limit
for Saratoga and its affiliates is 110% of the number of shares of common stock
(assuming conversion of the Series B Stock) owned by Saratoga and its related
investors immediately after the completion of the financing, plus the Series B
Stock (or underlying common stock) issuable as dividends on the Series B Stock.
That limit for Baty is the greater of 110% of the shares of common stock owned
by Baty as of December 10, 1999, or 100% of the Saratoga ownership described in
the preceding sentence. These restrictions will terminate 18 months after the
date on which Saratoga and its related investors cease to hold securities
representing 5% of the outstanding shares of common stock on a fully diluted
basis.
The shareholders' agreement also provides that if Mr. Baty contemplates
selling 30% or more of the common stock he owns, Saratoga and its related
investors would have the right to participate in the sale on a proportionate
basis.
Pursuant to a registration rights agreement, Saratoga and its related
investors have the right to two demand registrations, one of which may be a
shelf registration effective for one year, and unlimited piggyback
registrations, subject to marketing restrictions imposed by underwriters.
Pursuant to an investment agreement, commencing January 1, 2007, (a) the
holders of the Series B Stock have the right to elect a number of directors
(together with other directors selected pursuant to the Designation of
Shareholder Rights included in the shareholders' agreement) that would be one
director less than a majority of the Board and (b) we will retain Saratoga
Management Company LLC to provide management and advisory services to evaluate
our strategy relating to shareholder value, real estate and corporate financing,
and other strategic initiatives, at an annual fee of $3.2 million. These rights
and obligations will terminate at such time that the Series B Stock is converted
or redeemed.
NORTHSTAR TRANSACTION
In October 1997, a group of institutional investors led by NorthStar
Capital Partners LLC, of which Mr. Hamamoto is a principal, purchased 25,000
shares of Series A Convertible Exchangeable Redeemable Preferred Stock,
representing approximately 10% ownership of Emeritus, for $25 million. The
Series A Stock is entitled to a 9% annual dividend, payable quarterly. Each
share of Series A Preferred Stock is convertible into that number of shares of
common stock equal to $1,000 (the liquidation value of a share of Series A
Preferred Stock) divided by the conversion price of $18.20 per share. Currently
the Series A Preferred Stock is convertible into an aggregate of 1,373,626
shares of our common stock. The Series A Preferred Stock is also exchangeable
into convertible debt at our option. The conversion price is subject to
adjustment in the event of stock dividends, stock subdivisions and combinations,
and extraordinary distributions. The Series A Preferred Stock has a mandatory
redemption date of October 24, 2004.
Pursuant to a shareholders' agreement entered into in connection with this
investment, Emeritus and Mr. Baty are required to take all necessary action to:
* elect one director selected by NorthStar;
* if NorthStar invests an additional $25 million in Emeritus, elect a second
additional director selected by NorthStar; and
* if the size of our board increases, elect additional directors so that
NorthStar's representation shall not be less than one-seventh of the entire
board.
These rights terminate in certain events relating to NorthStar's sale of
capital stock or a change in control of NorthStar. All NorthStar transfers are
subject to our right of first refusal. In addition, if Mr. Baty sells shares of
common stock representing 50% or more of his ownership position, NorthStar is
entitled to participate in that sale on a pro rata basis. NorthStar has agreed
not to purchase any additional shares of our voting securities, from now until
18 months after it ceases to own 5% of the outstanding common stock on a fully
diluted basis.
In January 2000, we paid NorthStar $2,250,000 and in April 2000, paid an
additional $350,000, which represented all dividends in arrears from 1999. For
the year 2000, we paid two quarters' of dividends that totaled $1.1 million.
Additionally, there are accumulated dividends for two quarterly payments of $1.4
million, accrued at the accelerated default rate of 11%. For the year 2001, the
Company accumulated dividends aggregating $2.7 million at the arrearage dividend
rate of 11%.
Under the Designation of Shareholder Rights, included in the shareholders'
agreement, whenever the cash dividends have not been paid for six consecutive
quarters, NorthStar may designate one director in addition to the other
directors that it is entitled to designate under the shareholders' agreement.
As of January 1, 2002, NorthStar became entitled to designate an additional
director under this arrangement.
OTHER TRANSACTIONS
During 1995, Messrs. Baty and Brandstrom formed Painted Post Partners, a
New York general partnership, to facilitate the operation of assisted living
communities in the state of New York, a state which generally requires that
natural persons be designated as the licensed operators of assisted living
communities. We have entered into administrative services agreements with the
partnership for the term of the underlying leases. The administrative services
agreements provide for fees that would equal or exceed the profit of a community
operated efficiently at full occupancy and, unless reset by agreement of the
parties, will increase automatically on an annual basis in accordance with
changes in the Consumer Price Index. In addition, we have agreed to indemnify
the partners against losses and, in exchange, the partners have agreed to assign
any profits to us. As part of their general noncompetition agreements with us,
each of Messrs. Baty and Brandstrom has agreed that, in the event he ceases to
be a senior executive of Emeritus, he will transfer his interest in the
partnership for a nominal charge to his successor at Emeritus or other person
designated by us.
We have entered into noncompetition agreements with Messrs. Baty and
Brandstrom. These agreements provide that they will not compete with us,
directly or indirectly, in the ownership, operation or management of assisted
living communities anywhere in the United States and Canada during the terms of
their employment and for a period of two years following the termination of
their employment. The agreements also provide, however, that they may hold (1)
up to a 10% limited partnership interest in a partnership engaged in such
business, (2) less than 5% of the outstanding equity securities of a public
company engaged in such business, or (3) interests in the New York partnership
described above. These agreements do not limit Mr. Baty's current role with
Holiday Retirement Corporation. Mr. Baty has agreed, however, that if Holiday
operates or manages assisted living communities, other than as a limited
component of independent living communities consistent with its current
operations, he will not personally be active in the management, operation, or
financing of such facilities nor will he hold any separate ownership or other
interest therein.
In April 1998, we entered into a joint venture with Sanyo Electric Co.
Ltd., of Osaka, Japan, with which Mr. Iue is affiliated, to provide assisted
living services in Japan. The joint venture, Sanyo Emeritus Corporation, has
been formed to provide a residential-based healthcare alternative for Japan's
growing elderly population. Sanyo Emeritus was initially capitalized with (JPY)
50 million, or $384,000 (USD), with Emeritus and Sanyo each providing half the
funds. The joint venture's first assisted living community in Japan was opened
in December 1999. During 2001, we recognized approximately $20,000 of losses
associated with our interest in Sanyo Emeritus in accordance with the joint
venture agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this amendment
to the report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: April 30, 2002
EMERITUS CORPORATION
(Registrant)
/s/ Daniel R. Baty-------
-------------------------
Daniel R. Baty, Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, this amendment to the report has been signed
by the following persons in the capacities indicated below on April 30, 2002.
/s/ Daniel R. Baty
-------------------------
Chairman of the Board and Chief Executive Officer
/s/ Raymond R. Brandstrom
-------------------------
Raymond R. Brandstrom, Vice President of Finance,
Chief Financial Officer,
and Vice Chairman of the Board
/s/ Patrick Carter
Patrick Carter, Director
/s/ Charles P. Durkin
---------------------
Charles P. Durkin, Director
/s/ David Hamamoto
David Hamamoto, Director
/s/ Motoharu Iue
Motoharu Iue, Director
/s/ David W. Niemic
-------------------
David W. Niemic, Director