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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
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14a-6(e)(2))
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/ / Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
EMERITUS CORPORATION
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EMERITUS CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 17, 2002
To the Shareholders of Emeritus Corporation:
The annual meeting of shareholders of Emeritus Corporation will be held in
the South Cascade Room of the Harbor Club, Norton Building, 801 Second Avenue,
17th Floor, Seattle, Washington 98104, on Tuesday, September 17, 2002, at 10:00
a.m., local time, and any adjournments thereof, to consider and act upon the
following matters:
1. To elect two directors into Class III of the Board of Directors.
2. To ratify the appointment of KPMG LLP as our independent public
accountants for fiscal year 2002.
3. To transact such other business as may properly come before the meeting
and any adjournments thereof.
The Board of Directors has fixed the close of business on July 22, 2002, as
the record date for the determination of shareholders entitled to notice of, and
to vote at, the annual meeting and any adjournments or postponements thereof.
Shareholders are cordially invited to attend the annual meeting in person.
By Order of the Board of Directors
/s/ Daniel R. Baty
Daniel R. Baty
Chairman and Chief Executive Officer
Seattle, Washington
August 14, 2002
EMERITUS CORPORATION
3131 ELLIOTT AVENUE, SUITE 500
SEATTLE, WASHINGTON 98121
PROXY STATEMENT
This proxy statement, which was first mailed to our shareholders on or
about August 21, 2002, is furnished to shareholders in connection with the
solicitation of proxies by the Board of Directors for the annual meeting of
shareholders to be held September 17, 2002, and any adjournments or
postponements of the annual meeting. You may revoke your proxy in writing at any
time before it is exercised by filing with our Secretary a written revocation or
a duly executed proxy bearing a later date. You may also revoke your proxy by
attending the annual meeting and voting in person. If the enclosed form of proxy
is properly executed and returned, it will be voted in accordance with the
instructions given, unless revoked.
As of July 22, 2002, the record date for the annual meeting, there were
10,214,934 shares of common stock, 25,000 shares of Series A Convertible
Redeemable Exchangeable Preferred Stock (the "Series A Stock"), and 33,142
shares of Series B Convertible Preferred Stock (the "Series B Stock")
outstanding. Holders of common stock are entitled to one vote for each share.
Holders of Series A Stock are entitled to 27.5 votes for each share, or an
aggregate of 687,500 votes. Holders of Series B Stock are entitled to 138.5
votes per share, or an aggregate of 4,590,167 votes. Therefore the total number
of votes entitled to be cast at the annual meeting is 15,492,601 votes. Holders
of common stock, Series A Stock and Series B Stock representing a majority of
total votes entitled to be cast, present in person or represented by proxy, will
constitute a quorum.
Directors will be elected by a plurality of the votes present by proxy or
in person at the annual meeting. Shareholders are not entitled to cumulate
votes in the election of directors. Abstention from voting on the election of
directors will have no impact on the outcome of the election since no vote will
have been cast in favor of a nominee. The proposal to ratify the appointment of
the accountants will be approved if the votes cast in favor of the proposal
exceed the votes cast against the proposal. Abstentions from voting on this
proposal will have no impact on the outcome since no vote will have been cast
for or against the proposal. There can be no broker nonvotes on either the
election of the directors or the approval of the proposal to ratify the
appointment of the accountants since brokers who hold shares for the accounts of
their clients have discretionary authority to vote such shares with respect to
these matters.
We will bear the cost of soliciting proxies. Certain of our directors, officers,
and regular employees, without additional compensation, will solicit proxies
personally or by telephone or telefax. In addition, we may reimburse brokerage
firms and other persons representing beneficial owners of shares of common stock
for their expenses in forwarding solicitation materials to such beneficial
owners.
As of the date hereof, we are not aware of any matters to be voted upon at the
annual meeting other than as stated in the accompanying Notice of Annual Meeting
of Shareholders. The accompanying proxy gives discretionary authority to the
person named therein to vote the shares in his best judgment if any other
matters are properly brought before the annual meeting.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes. One class is elected
each year by the shareholders. At the annual meeting, two directors will be
elected to serve for a term of three years, expiring on the date of the annual
meeting of shareholders in 2005. All of the nominees are currently directors.
If elected, the nominees will continue in office until a successor has been
elected or until resignation or removal in the manner provided by our Bylaws.
The names of directors nominated for the terms, as well as the directors whose
terms will continue after the annual meeting, are listed below.
Pursuant to a shareholders' agreement dated as of October 24, 1997, Emeritus and
Daniel R. Baty have agreed to take all necessary action to elect a number of
directors selected by NorthStar Capital Partners LLC that would constitute at
least one-seventh of the entire Board. Mr. Hamamoto has been nominated under
the arrangement. Pursuant to another shareholders' agreement dated as of
December 10, 1999, Emeritus and Mr. Baty have agreed to take all necessary
action to elect a number of directors selected by Saratoga Partners IV, L.P.
that would constitute not less than the percentage of the entire Board that
would equal Saratoga's percentage ownership of voting securities of Emeritus.
Saratoga is entitled to select at least two directors. Messrs. Niemiec and
Durkin were nominated under this arrangement.
NOMINEES FOR ELECTION
CLASS III DIRECTORS (TERMS TO EXPIRE IN 2005)
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.
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.
CONTINUING DIRECTORS
CLASS I DIRECTORS (TERMS TO EXPIRE IN 2003)
Patrick Carter (age 56) 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.
Currently, Mr. Carter is retired and is serving on several Board of Directors.
David W. Niemiec (age 52) has served as a director of Emeritus since December
30, 1999. From September 1998 to November 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.
CLASS II DIRECTORS (TERMS TO EXPIRE 2004)
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.
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.
INFORMATION ON COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS
The Board of Directors has established a compensation committee and an
audit committee. We have no nominating committee and the full Board selects
nominees for the election of directors.
Our compensation committee establishes salaries, incentives, and other
forms of compensation for directors, officers, and our other key employees,
administers the 1995 Stock Incentive Compensation Plan, and recommends policies
relating to benefit plans. Our compensation committee currently consists of
Messrs. Carter (Chairman), Niemiec and Brandstrom and it held one meeting during
2001.
Our audit committee reviews our accounting practices, internal accounting
controls, and financial results and oversees the engagement of our independent
auditors. Our audit committee currently consists of Messrs. Carter, Niemiec and
Hamamoto (Chairman), and it held three meetings during 2001.
During 2001, there were nine meetings of the Board of Directors. All board
members attended at least 75% of the meetings of the Board of Directors and each
committee on which he was a member, except Mr. Hamomoto, who only attended three
meetings of the Board of Directors.
AUDIT COMMITTEE REPORT
Audit Committee members Messrs. Hamamoto and Carter are independent as that
term is defined in Section 121(A) of the American Stock Exchange's listing
standards. Mr. Niemiec is not considered independent under Section 121(A)
because Saratoga Management Company LLC, of which Mr. Niemiec was a principal
until November 2001, received a fee from Emeritus in connection with its sale of
Series B Preferred Stock in December 1999 and may, in addition, be deemed to be
an affiliate of Emeritus. Mr. Niemiec continues to be an adviser to Saratoga
Management Company LLC. However, the Board does not believe that Mr. Niemiec's
past relationship and continuing advisory capacity with Saratoga Partners
impairs his independence and that his presence on the Audit Committee is in the
best interests of the shareholders. On May 30, 2000, the Board of Directors
adopted a written Audit Committee Charter, a copy of which was included in
Emeritus's 2001 Proxy Statement. The Audit Committee has reviewed and discussed
the audited financial statements for fiscal 2001 with the management of the
Company. Additionally, the Audit Committee has discussed with the independent
accountants the matters required to be discussed by Statement on Auditing
Standards No. 61. The Audit Committee has received the written disclosures and
the letter from the independent accountants required by Independence Standards
Board Standard No. 1 and has discussed with the independent accountants the
independent accountants' independence. Based on the discussions and reviews
noted above, the Audit Committee recommended to the Company's Board of Directors
that the audited financial statements be included in the Company's Annual Report
on Form 10-K for fiscal year 2001.
DIRECTOR COMPENSATION
We currently pay our nonemployee directors $500 for each board meeting or
committee meeting they attend and reimburse them for all reasonable expenses
incurred in connection with their attendance. In September 1995, we established
the Stock Option Plan for Nonemployee Directors. Under the plan, nonemployee
directors receive options to purchase 2,500 shares of our common stock at the
time of their initial election or appointment. In addition, each nonemployee
director automatically receives an option to purchase 2,000 shares of our common
stock immediately following each year's annual meeting of shareholders. All
options granted under the plan fully vest on the date of the annual shareholders
meeting that follows the date of grant, and expire 10 years after the date of
grant. The exercise price for these options is the fair market value of our
common stock on the grant date.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents certain information with respect to
compensation we paid in the fiscal years ended December 31, 1999, 2000, and
2001, to our Chief Executive Officer and to our other four most highly
compensated officers as of December 31, 2001:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------------- -------------
Number of
Other Annual Securities All Other
Bonus Compensation Underlying Compensation
Name and Principal Position Year Salary($) ($)(1) ($)(2) Options (3) ($)
- -------------------------------- ------ -------------------- --------- ------------- ------------- -------------
Daniel R. Baty (4) 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 $2.11. As a result of this
exchange, the options listed in prior years were cancelled. The new options will
vest and become exercisable 2 1/2 years from the date of grant under the
following schedule: 1/3 will vest six months after the date of grant, 1/3 will
vest 18 months after the date of grant and 1/3 will vest 30 months after the
date of grant. (See "COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION--Stock Options.")
(4) Mr. Baty is not a full time employee of Emeritus and is not currently
paid a salary by us.
OPTION GRANTS IN LAST FISCAL YEAR
The Compensation Committee did not grant options to the executive officers
during the fiscal year ended December 31, 2001, except pursuant to the Stock
Option Exchange (see "COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION-Stock Options.").
FISCAL YEAR-END OPTION VALUES
None of the following executive officers exercised options during the
fiscal year ended December 31, 2001. The following table presents certain
information regarding options held as of December 31, 2001, by each of the
following executive officers:
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2001 DECEMBER 31, 2001 ($)(1)(2)
-------------------------------------------------- --------------------------
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 G. 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
- ------------------------------- -------- ------------ --------- --------- ------------- --------------------
Daniel R. Baty. . . . . . . . . 6/7/2001 40,000 1.85 7.25 2.11 1 year, 202 days
Chairman and Chief . . . . 6/7/2001 164,000 1.85 9.813 2.11 2 years, 194 days
Executive Officer. . . . . 6/7/2001 40,000 1.85 9.625 2.11 2 years, 201 days
Raymond R. Brandstrom . . . . . 6/7/2001 142,000 1.85 9.813 2.11 2 years, 194 days
Vice President of Finance, 6/7/2001 20,000 1.85 9.625 2.11 2 years, 201 days
Chief Financial Officer
Gary S. Becker. . . . . . . . . 6/7/2001 20,000 1.85 7.25 2.11 1 year, 202 days
Senior Vice President, . . 6/7/2001 28,500 1.85 9.813 2.11 2 years, 194 days
Operations . . . . . . . . 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
Vice President, Operations 6/7/2001 28,500 1.85 9.813 2.11 2 years, 194 days
- Eastern Division . . . . 6/7/2001 15,000 1.85 9.625 2.11 2 years, 201 days
Russell G. Kubik. . . . . . . . 6/7/2001 20,000 1.85 7.25 2.11 1 year, 202 days
Vice President, Operations 6/7/2001 19,000 1.85 9.813 2.11 2 years, 194 days
- Central Division . . . . 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.
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 has
chosen to receive 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
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
[STOCK PERFORMANCE GRAPH]
EMERITUS ASSISTED LIVING, THE AMEX MARKET VALUE INDEX AND A PEER GROUP
* $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.
CERTAIN TRANSACTIONS
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 8
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. 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 June 1998, we sold a 295-unit independent and assisted living facility
located in Texas to a partnership consisting of Columbia Pacific Master Fund
'98, 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 approximated $20,000. 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 '98 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 $960,000 under these management agreements.
At December 31, 2001, the communities owed us collectively $86,000, representing
advances for working capital. These advances bear interest at LIBOR plus 3%.
During 2001, we provided management services to two assisted living communities
directly and indirectly controlled by Mr. Baty. One community is owned by
Columbia Pacific Growth Fund Y2K, a partnership in which Mr. Baty's family
partnership holds a 40% general partner interest and the other community is
owned by Columbia Pacific '99 Pool, a partnership in which Mr. Baty's family
partnership hold a 33% general partnership interest. Management services are
governed by management agreements that have terms of five years, with two-year
extension options, and provide for management fees of the greater of 6% of gross
revenues or $5,000 per month. For the year ended December 31, 2001, we earned
management fees of $148,000. On December 31, 2001, the communities collectively
owed us $13,000, which represents advances for working capital. 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, payable in cash
and notes maturing at various times through January 2005, plus the assumption of
$77,000 of debt. 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
January 2002, we acquired an additional 16.7% interest in the community from a
third party minority owner for a purchase price of $299,000, payable in cash and
notes maturing at various times through February 2003. In March 2002, we
acquired the remaining 50% economic interest in the community from the entities
controlled by Mr. Baty for $2.95 million, which represented the return of the
remaining portion of the entity's original investment, plus a 9% preferred
return on Mr. Baty's investment, compounded annually. The price was paid in
cash, financed through a sale/leaseback arrangement including three other
properties.
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 $898,000.
In January and February 2002, we entered into agreements to manage three
assisted living communities directly and indirectly controlled by Mr. Baty. One
community owned by Columbia Pacific Growth Fund '98, in which Mr. Baty's family
partnership holds a 38% general partner interest. The other two communities are
owned by Columbia Pacific DA '02, in which Mr. Baty's family partnership holds a
19% general partner interest. The
management agreements, which have indefinite terms, can be terminated by either
party on 30 to 90 day notice. Under the management agreements, we receive
management fees equal to the greater of $5,000 per month, or 5% of gross
operating revenues, payable monthly, and a one-time mobilization fee of $15,000,
payable on the later of 10 days after issuance of the license for the community.
In April 2002, we entered into agreements to acquire the ownership interest
of one community and the leasehold interest of seven communities for the
assumption of the mortgage debt relating to the owned community and the lease
obligations relating to the leased communities. The eight communities,
comprising 617 units in Louisiana and Texas, had been operated previously by
Horizon Bay Management L.L.C., a national seniors housing management company
that manages the WHSLH Realty, L.L.C., portfolio of senior housing properties.
In May 2002, we assigned our rights under these agreements to entities wholly
owned by Mr. Baty and entered into a five-year agreement expiring April 30,
2007, with the Baty entities to manage the eight communities for a management
fee of 5% of gross revenue. In completing the agreements with Horizon Bay, Mr.
Baty personally guaranteed the mortgage and lease obligations. As a part of
these agreements, we have the right to acquire the eight communities at any time
prior to April 30, 2007, by assuming the mortgage debt and lease obligations and
paying such Baty entities the amount of any cash investment in the communities,
plus 9% per annum. In the original agreements of acquisition with the Baty
entities, Horizon Bay agreed to fund operating losses of the communities to the
extent of $2.5 million in the first twelve months and $870,000 in the second
twelve months following the closing. Under the management agreements with the
Baty entities, we have agreed to fund any operating losses in excess of these
limits over the five-year term of the management agreement.
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. Mr.
Durkin, one of our directors, is a principal of Saratoga. Another director, Mr.
Niemic, was a principal of Saratoga until November 2001, and he continues to act
as an advisor to 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. 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. On July1, 2002, we issued 2,533 shares of
Series B Stock, representing all in-kind dividends accrued and owing as of June
30, 2002.
Under the Designation of Rights of Series B Preferred Stock, and 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, although it has elected not to do so
at this time.
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 the 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 two of six members of the Board. 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.
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 Rights of Series B
Preferred Stock 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.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of July 22, 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 affiliates own or control the
voting power over 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) . . . . . . . . . . 4,513,574 41.32%
c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Raymond R. Brandstrom(3) . . . . . . . . 411,575 4.01%
Gary S. Becker(4). . . . . . . . . . . . 35,773 *
Suzette McCanless(4) . . . . . . . . . . 25,400 *
Russell G. Kubik(5). . . . . . . . . . . 18,000 *
Patrick Carter(5). . . . . . . . . . . . 12,500 *
David Hamamoto(6)(7) . . . . . . . . . . 1,384,126 6.4%
David W. Niemiec (8) . . . . . . . . . . 40,547 *
Charles P. Durkin, Jr. (9) . . . . . . . 5,823,940 36.31%
Deerfield Capital, L.P.(10). . . . . . . 513,800 5.03%
780 Third Avenue 37th Floor
New York, NY 10017
B.F., Limited Partnership(11). . . . . . 3,582,330 33.04%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Northstar Capital Partners LLC (6) . . . 1,373,626 6.31%
299 Park Avenue, 33rd Floor
New York, New York 10022
Saratoga Partners IV, L.P. (12). . . . . 5,817,440 36.29%
535 Madison Avenue
New York, NY 10022
All directors and executive officers as. 11,589,032 68.31%
a group (11persons)(1)(6)(9)(12)(13)
* Less than 1%.
(1) Includes 849,911 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 243,181 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) 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.
(7) Includes options exercisable within 60 days for the purchase of 10,500
shares.
(8) Includes the following: (i) 1,344 shares of Common Stock into which
certain subordinated debentures held by Mr. Niemiec are convertible; (ii) 26,870
shares issuable to Mr. Niemiec upon conversion of Series B preferred stock; and
(iii) 5,833 shares issuable to Mr. Niemiec upon exercise of warrants
(collectively, the "Niemiec Shares"). Saratoga Management Company, LLC, an
affiliate of Saratoga Partners, is the attorney-in-fact and agent for the
Niemiec Shares; therefore Mr. Niemiec has no voting power over such shares. Mr.
Durkin, an Emeritus director, is a principal of Saratoga Management Company, LLC
and therefore shares voting power over the Niemiec Shares. This figure also
includes options exercisable within 60 days for the purchase of 6,500 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, the warrants, and the subordinated debentures
currently held by Saratoga Partners and its affiliates.
(9) Includes 4,590,167 shares issuable upon conversion of Series B preferred
stock currently held by or voted by Saratoga Partners and its affiliates, of
which Mr. Durkin is a principal. (See "CERTAIN TRANSACTIONS - Saratoga
Transactions.") Saratoga Partners and its affiliates own or have the power to
vote 100% of the outstanding Series B preferred stock, which includes 435,168
shares (as-converted) that represent dividends paid on the Series B preferred
stock to date. Mr. Niemiec, a director of Emeritus and former principal of
Saratoga, is deemed to have beneficial ownership over some of these shares - See
footnote (8) hereof. 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 29% 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 6,500 shares; (ii) warrants held by or voted by Saratoga
Partners and its affiliates currently exercisable to purchase 1,000,000 shares;
and (iii) 227,273 shares of Common Stock into which certain subordinated
debentures sheld by or voted by affiliates of Saratoga Partners are convertible.
See footnote (8) hereof regarding certain Niemiec Shares included in these
calculations. Mr. Durkin may be deemed to have sole dispositive power over some
of the above warrants, debentures, and Series B preferred stock, as follows: (a)
13,367 warrants; (b) 3,055 shares of Common Stock into which the subordinated
debentures are convertible, and (c) 61,494 shares of Common Stock issuable upon
conversion of Series B preferred stock.
(10) Deerfield Capital, L.P. may be deemed to have shared voting and
dispositive power over the shares, based upon publicly available information
reported as of July 18, 2002, on Schedule 13-G. Deerfield Capital, L.P. and
Deerfield Partners, L.P., both Delaware limited partnerships, are deemed to
share voting and dispositive powers over 287,730 of these shares. Snider
Capital Corp. ("Snider Capital") is the general partner of both of these
Delaware partnerships. Deerfield Management Company, a New York limited
partnership, and Deerfield International Limited, a British Virgin Islands
corporation, are deemed to share voting and dispositive powers over 226,070 of
these shares. Snider Management Company ("Snider Management") is the general
partner of Deerfield Management Company, which is the sole shareholder of
Deerfield International Limited. In addition, Arnold H. Snider, as President
and sole shareholder of Snider Management and Snider Capital, is deemed to share
voting and dispositive powers with these entities over all 513,800 shares.
(11) 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 July 3, 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 243,181 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.
(12) 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 4,590,167 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. Mr.
Durkin, an Emeritus director, is a principal of Saratoga Partners and its
affiliates. Until November 2001, Mr. Niemiec, another Emeritus director, was
also a principal of Saratoga Partners and its affiliates.
(13) Includes options exercisable within 60 days for the purchase of 244,999
shares.
PROPOSAL FOR RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected KPMG LLP, independent public
accountants, to continue as our independent auditors for the fiscal year ending
December 31, 2002. KPMG LLP has audited our accounts since July 28, 1995. The
Board of Directors is submitting its selection of KPMG LLP to the shareholders
for ratification.
The following table presents fees for professional audit services rendered
by KPMG LLP for the audit of the Company's annual financial statements for 2001,
and fees billed for other services rendered by KPMG LLP.
Audit fees, excluding audit related . . . . . . . . . . . . $161,000
========
Financial information systems design and implementation (1) $ -
========
All other fees:
Audit related services (2). . . . . . . . . . . . . . 205,600
Other non-audit services (3). . . . . . . . . . . . . 52,500
--------
Total all other fees. . . . . . . . . . . . . . . . . . . . $258,100
========
(1) KPMG LLP did not provide services related to design and implementation
of financial information systems.
(2) Audit related services consisted principally of audits of financial
statements of certain consolidated partnerships and the Company's employee
benefit plan, consultation regarding financial implications of accounting
changes and transactions, review of registration statements and issuance of
consents.
(3) Other non-audit services consisted of tax compliance services.
A representative of KPMG LLP is expected to be present at the annual meeting
with the opportunity to make a statement, if the representative so desires, and
is expected to be available to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RATIFICATION OF KPMG LLP AS OUR INDEPENDENT PUBLIC
ACCOUNTANTS
OTHER BUSINESS
The Board of Directors does not intend to present any business at the
annual meeting other than as set forth in the accompanying Notice of Annual
Meeting of Shareholders, and has no present knowledge that any others intend to
present business at the annual meeting. If, however, other matters requiring
the vote of the shareholders properly come before the annual meeting or any
adjournment or postponement thereof, the persons named in the accompanying form
of proxy will have discretionary authority to vote the proxies held by them in
accordance with their judgment as to such matters.
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 transaction that was
inadvertently filed late by Patrick Carter.
SHAREHOLDER PROPOSALS
Shareholder proposals intended for inclusion in the proxy materials for the
Company's 2003 annual meeting of shareholders must be received in writing by the
Company not later than April 4, 2003.
Such proposals should be directed to the Corporate Secretary, Emeritus
Corporation, 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121.
ANNUAL REPORT
A copy of our 2001 Annual Report, which includes our Annual Report on Form
10-K, as amended, for the fiscal year ended December 31, 2001, accompanies this
proxy statement.
By Order of the Board of Directors
/s/ Daniel R Baty,
Daniel R Baty,
Chairman of the Board and
Chief Executive Officer
Seattle, Washington
August 14, 2002
- --------------------------------------------------------------------------------
EMERITUS CORPORATION
PROXY FOR THE 2002 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER 17, 2002
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoint(s) Daniel R. Baty, as the proxy with full power
of substitution and hereby authorizes him to represent and to vote as designated
below all the shares of Common Stock of Emeritus Corporation held of record by
the undersigned on July 22, 2002, at the 2002 Annual Meeting of Shareholders to
be held at the South Cascade Room of the Harbor Club, Norton Building, 801
Second Avenue, 17th Floor, Seattle, Washington 98104, at 10:00 a.m. on Tuesday,
September 17, 2002, with authority to vote upon the following matters and with
discretionary authority as to any other matters that may properly come before
the meeting or any adjournment or postponement thereof.
IMPORTANT - PLEASE DATE AND SIGN ON THE OTHER SIDE
X FOLD AND DETACH HERE X
- -
- -----------------------------------------------------
Please mark X
your votes
as indicated
in this
example
FOR all nominees
WITHHOLD
listed below
AUTHORITY
(except as marked
to vote for all nominees
to the contrary)
listed below
1. ELECTION OF DIRECTORS:
Election of the following nominees to serve
as directors in the class indicated and for
the term indicated until their successors are
elected and qualified:
Class III (term expiring 2005): WITHHOLD AUTHORITY
01 Daniel R. Baty to vote for the following
02 Charles P. Durkin, Jr.
FOR
AGAINST ABSTAIN
2. RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL YEAR
2002.
(write the name(s) of nominee(s) in this
space)
Unless otherwise directed all votes will be apportioned equally between those
persons for whom authority is given to vote.
_______
|
|
I plan to attend the Annual Meeting
In their discretion, the proxies are authorized to vote upon such other business
as may properly be brought before the meeting or any adjournment or
postponement thereof. This Proxy, when properly executed, will be voted in the
manner directed herein by the undersigned. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1 AND "FOR" ALL THE OTHER ITEMS.
The undersigned acknowledges receipt from the Company prior to the execution
of this Proxy of a Notice of Annual Meeting of Shareholders and a Proxy
Statement
dated August 14, 2002.
Please sign below exactly as your name appears on your stock certificate. When
shares are held jointly, each person must sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such. An
authorized person should sign on behalf of corporations, partnerships and
associations and give his or her title.
YOUR VOTE IS IMPORTANT. PROMPT RETURN OF THIS PROXY CARD WILL
HELP SAVE THE EXPENSE OF ADDITIONAL SOLICITATION EFFORTS.
Signature(s)_______________________________________ Dated___________________,
2002
- -
- -----------------------------------------------------
X FOLD AND DETACH HERE X