SCHEDULE 14A INFORMATION
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EMERITUS CORPORATION
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EMERITUS CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 23, 2004
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 Wednesday, June 23, 2004, 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 II of the Board of Directors.
2. To elect one director into Class III of the Board of Directors.
3. To ratify the appointment of KPMG LLP as our independent public
accountants for fiscal year 2004.
4. To approve an amendment to the Stock Option Plan for Nonemployee
Directors.
5. 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 April 16, 2004, 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 of the Board
and Chief Executive Officer
Seattle, Washington
April 29, 2004
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 May
11, 2004, 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 at the South Cascade Room of the Harbor Club, Norton Building, 801 Second
Avenue, 17th Floor, Seattle, Washington 98104, on Wednesday, June 23, 2004, at
10:00 a.m., local time 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 April 16, 2004, the record date for the annual meeting, there were
10,555,738 shares of common stock and 35,529 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 B Stock are entitled to
138.5 votes per share, or an aggregate of 4,920,766 votes. Therefore the total
number of votes entitled to be cast at the annual meeting is 15,476,504 votes.
Holders of common 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. Broker non-votes will have no effect on either the
election of the directors or the approval of the proposal to ratify the
appointment of the accountants because broker non-votes will not be considered
votes cast at the meeting. However, brokers who hold shares for the accounts of
their clients have discretionary authority to vote shares as to which
instructions are not given with respect to the election of directors or approval
of the proposal to ratify the appointment of accountants.
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 facsimile. 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 2007. One director will be elected to serve for a term of
one year, 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 December 10, 1999, we 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 our voting securities. Based on a Board of seven directors, Saratoga is
entitled to select at least three directors, but has thus far chosen to select
only two. Since 1999, Messrs. Niemiec and Durkin have been nominated and
elected under this arrangement.
Under the Designation of Rights and Preferences of the Series B Stock, whenever
the cash dividends have not been paid to such shareholders for six consecutive
quarters, the Series B shareholders may designate one director in addition to
the other directors that they are entitled to designate under the shareholders'
agreement. As of January 1, 2002, Saratoga became entitled to designate an
additional director under the Designation of Rights and Preferences, but thus
far has chosen not to do so.
NOMINEES FOR ELECTION
CLASS II DIRECTORS (TERMS TO EXPIRE IN 2007)
Raymond R. Brandstrom (age 51), one of Emeritus's founders, has served as a
director since its inception in 1993 and as Vice Chairman of the Board from
March 1999 to March 2000. 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 previously affiliated with Mr. Baty
that is engaged in the production and sale of table wines.
T. Michael Young (age 59), has been a director of Emeritus since April 2004,
when he was appointed to the Board. He is the President and Chief Executive
Officer of Metal Supermarkets (Canada), Ltd., a privately-held metal distributor
with locations in the United States, Canada, Europe, and the Middle East, and
has held this position since December 2002. In October 2003, he was elected to
the board of directors of that company. Prior to that, from June 1998 to May
2002, Mr. Young was Chairman of the Board of Transportation Components, Inc., a
publicly-held distributor of replacement parts for commercial trucks and
trailers, and also served as its President and Chief Executive Officer from June
1998 to May 2001. Mr. Young is a Certified Public Accountant and former partner
of Arthur Andersen & Co.
CLASS III DIRECTOR (TERM TO EXPIRE IN 2005)
Bruce L. Busby (age 60), has been a director of Emeritus since April 2004, when
he was appointed to the Board. Prior to his retirement, Mr. Busby served as
Chairman and Chief Executive Officer of The Hillhaven Corporation prior to its
merger with Vencor, Inc. in 1995. Hillhaven was a publicly-held operator of
skilled nursing facilities based in Tacoma, Washington, and prior to its merger,
it operated 350 facilities in 36 states. During his tenure with Hillhaven, Mr.
Busby served as the Chief Executive Officer and as a director beginning in April
1991 and as that company's Chairman of the Board from September 1993 until the
merger with Vencor. Mr. Busby, who has been a Certified Public Accountant for
over thirty years, has been retired since 1995.
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CONTINUING DIRECTORS
CLASS III DIRECTORS (TERMS TO EXPIRE IN 2005)
Daniel R. Baty (age 60), 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 65), 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.
CLASS I DIRECTORS (TERMS TO EXPIRE IN 2006)
Patrick R. Carter (age 58), 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. Mr.
Carter is currently Chairman of The Primary Group Ltd., an insurance company
based in Bermuda.
David W. Niemiec (age 54), 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.
INFORMATION ON COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS
The Board of Directors has established an Audit Committee, a Compensation
Committee and a Nominating and Corporate Governance Committee.
THE AUDIT COMMITTEE currently consists of Messrs. Carter (Chairman), Busby, and
Young, each of whom is independent in accordance with applicable rules
promulgated by the Securities and Exchange Commission ("SEC") and American Stock
Exchange Listing standards. The Audit Committee selects and retains the
independent auditors to audit the Company's annual financial statements,
approves the terms of the engagement of the independent auditor and reviews and
approves the fees charged for audits and for any non-audit assignments. The
Board of Directors has adopted a written charter for the Audit Committee, a copy
of which is attached to this Proxy Statement and posted on the Company's website
at http://www.emeritus.com/. The Audit Committee's responsibilities also include
overseeing (1) the integrity of the Company's financial statements, which
includes reviewing the scope and results of the annual audit by the independent
auditors, any recommendations of the independent auditors resulting therefrom
and management's response thereto and the accounting principles being applied by
the Company in financial reporting, (2) the Company's compliance with legal and
regulatory requirements, (3) the independent auditors' qualifications and
independence, (4) the performance of the Company's internal and independent
auditors, and (5) such other related matters as may be assigned to it by the
Board of Directors. The Audit Committee met five times during 2003.
The Board of Directors has determined that Mr. Young qualifies as an "audit
committee financial expert" as defined in Section 401(h) of Regulation S-K
promulgated by the SEC and that the other members of the Audit Committee are
financially literate and independent in accordance with the requirements of the
SEC and the American Stock Exchange.
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Messrs. Busby and Young were appointed to the Board and the Audit Committee on
April 20, 2004, replacing Messrs. Durkin and Niemiec who would not qualify as
"independent" under applicable SEC and American Stock Exchange rules. During
2003, the Audit Committee consisted of Messrs. Carter (Chairman), Durkin and
Niemiec.
COMPENSATION COMMITTEE. Our compensation committee is responsible for
administering our executive compensation programs including salaries,
incentives, and other forms of compensation for directors, officers and making
recommendations with respect to such programs to the Board, and our other key
employees; administering the 1995 Stock Incentive Compensation Plan; and
recommending policies relating to benefit plans to the Board. In April 2004,
the Board of Directors adopted a written Compensation Committee Charter. Our
compensation committee currently consists of Messrs. Niemiec (Chairman), Carter,
and Brandstrom and it held one meeting during 2003.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE. The Board adopted a Nominating
and Corporate Governance Committee Charter in April 2004 and intends to appoint
three directors to the committee and implement the charter in June 2004. Prior
to that time, the entire Board carried out nominating responsibilities. The two
new directors appointed in April 2004 and standing for election at the Annual
Meeting were identified by members of the Board and their nominations were
approved unanimously by the independent directors.
The Nominating and Corporate Governance Committee will be responsible for
identifying individuals qualified to become members of the Board, approving and
recommending director candidates to the Board, developing and recommending to
the Board our corporate governance principles and policies, and monitoring
compliance with these principles and policies. All the members of the
Nominating and Corporate Governance Committee will be independent directors
within the meaning of Section 121(A) of the listing standards of the American
Stock Exchange. The Nominating and Corporate Governance Committee's charter is
available at our website at http://www.emeritus.com/investors/index.htm.
The Nominating and Corporate Governance Committee charter establishes director
selection guidelines (the "Director Selection Guidelines") for guidance in
determining and identifying qualification requirements for directors, board
composition criteria, and the procedure for the selection of new directors. The
Director Selection Guidelines are attached as an annex to our Nominating and
Corporate Governance Committee charter, which can be found on our website at
http://www.emeritus.com/investors/index.htm. In accordance with the Director
Selection Guidelines, the Committee will review the following considerations,
among others, in its evaluation of candidates for nomination: personal and
professional ethics, training, commitment to fulfill the duties of the Board of
Directors, commitment to understanding our business, commitment to engage in
activities in our best interests, independence, diversity, industry knowledge
and contacts, financial or accounting expertise, leadership qualities, public
company board of director and committee experience, and other relevant
qualifications. A director candidate's ability to devote adequate time to Board
of Directors and committee activities is also considered.
The Nominating and Corporate Governance Committee will consider candidates
recommended by shareholders. Shareholders wishing to suggest director
candidates should submit their suggestions in writing to the Nominating
Committee, c/o our Corporate Secretary, providing the candidate's name,
biographical data, and other relevant information outlined in the Director
Selection Guidelines. The Committee will review shareholder-recommended
nominees based on the same criteria as its own nominees. Shareholders who
intend to nominate a director for election at the 2005 Annual Meeting of
Shareholders must provide advance written notice of such nomination to the
Corporate Secretary in the manner described below under "Shareholder Proposals."
To date, the Company has not received any recommendations from shareholders
requesting that the Board consider a candidate for inclusion among the slate of
nominees in the Company's proxy statement.
BOARD AND COMMITTEE MEETINGS. During 2003, there were thirteen meetings of the
Board of Directors. All board members attended at least 75% of the aggregate
number of meetings of the Board of Directors and each committee of which he was
a member.
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AUDIT COMMITTEE REPORT
During 2003, Audit Committee member Patrick Carter was independent as that term
is defined in Section 121(A) of the American Stock Exchange's listing standards.
The Board determined that Mr. Niemiec was not independent under Section 121(A)
because he was employed until November 2001 by Saratoga Management Company LLC,
which may be deemed to be an affiliate of Emeritus. Mr. Niemiec continues to be
an adviser to Saratoga Management Company LLC. However, the Board did not
believe that Mr. Niemiec's past relationship and continuing advisory capacity
with Saratoga Partners impaired his independence and believed that his presence
on the Audit Committee was in the best interests of the shareholders. Mr.
Durkin continued to be a principal of Saratoga Management Company LLC and did
not qualify as independent director under the foregoing standards. As indicated
above, the Board has found that the current Audit Committee members of Messrs.
Busby, Carter, and Young are independent under these standards. On April 19,
2004, the Board of Directors adopted a revised Audit Committee Charter, which is
attached as Appendix A to this proxy statement. The Audit Committee has
reviewed and discussed the audited financial statements for fiscal 2003 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, Communication with Audit Committees. 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 2003.
Audit Committee (2003)
/s/ Patrick Carter
----------------------------
Patrick Carter (Chairman)
David W. Niemiec
Charles P. Durkin
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 Emeritus 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, with the exception of the 2,500 options granted at the
time of a director's initial election or appointment to the Board, which are
vested immediately upon their grant. The exercise price for these options is
the fair market value of our common stock on the grant date.
On April 19, 2004, the Board of Directors revised the compensation program for
nonemployee directors, to be effective immediately following the Annual Meeting.
Nonemployee directors will receive an annual payment of $15,000 and $1,500 for
each board meeting or committee meeting they attend. They will continue to be
reimbursed for all reasonable expenses incurred in connection with their
attendance. In addition, nonemployee directors will receive options to purchase
7,500 shares of our common stock (an increase from 2,000 shares) immediately
following each year's annual meeting of shareholders. The options will be
granted automatically under the Emeritus Stock Option Plan for Nonemployee
Directors, subject to the adoption of the proposed amendment to this plan to be
voted on at the Annual Meeting and described later in this proxy statement.
5
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 16, 2004, certain information with
respect to the beneficial ownership of our common stock, 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.
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 Beneficial
Name and Address Ownership Percent of Class
- ------------------------------------------------ ------------------ -----------------
Daniel R. Baty(1)(2) . . . . . . . . . . . . . . 5,145,110 44.9%
c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Raymond R. Brandstrom(3) . . . . . . . . . . . . 559,576 5.2%
c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Gary S. Becker(4). . . . . . . . . . . . . . . . 108,438 1.0%
Suzette P. McCanless(5) . . . . . . . . . . . . 104,050 *
Russell G. Kubik(6). . . . . . . . . . . . . . . 89,001 *
Patrick Carter(6). . . . . . . . . . . . . . . . 16,500 *
David W. Niemiec(7). . . . . . . . . . . . . . . 45,792 *
Charles P. Durkin, Jr.(8). . . . . . . . . . . . 6,158,539 36.8%
Bruce L. Busby(6). . . . . . . . . . . . . . . . 2,500 *
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T. Michael Young(6). . . . . . . . . . . . . . . 2,500 *
B.F., Limited Partnership(9) . . . . . . . . . . 3,674,839 32.6%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Saratoga Partners IV, L.P.(10) . . . . . . . . . 6,148,039 36.8%
535 Madison Avenue
New York, NY 10022
All directors and executive officers as a group. 12,346,683 67.5%
(14 persons)(1)(10)(11)
* Less than 1%
_________________________________________________
(1) Includes 1,294,136 shares held directly and 2,957,550 shares held by B.F.,
Limited Partnership, of which Columbia-Pacific Group, Inc., 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 405,926
shares of Common Stock into which certain subordinated debentures held by
Columbia Select, L.P., are convertible, and approximately 311,363 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 176,135
shares.
(3) Includes options exercisable within 60 days for the purchase of 202,001
shares.
(4) Includes options exercisable within 60 days for the purchase of 103,501
shares.
(5) Includes options exercisable within 60 days for the purchase of 98,501
shares.
(6) Represents options exercisable within 60 days for the purchase of these
shares.
(7) Includes the following: (i) 1,344 shares of Common Stock into which certain
subordinated debentures held by Mr. Niemiec are convertible; (ii) 28,115
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 10,500 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.
(8) Includes 4,920,766 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
765,766 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 (7) hereof. The
7
Series B preferred stock currently votes with the common stock on
an as-converted basis, which represents approximately 32% 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 10,500 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 held by or voted by affiliates of Saratoga Partners
are convertible. See footnote (7) 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) 63,156 shares of Common Stock issuable upon conversion of Series B
preferred stock.
(9) B.F., Limited Partnership may be deemed to have voting and dispositive power
over some of these shares, based upon publicly available information. Of
these shares, 2,957,550 are held of record by B.F., Limited Partnership,
405,926 are held of record by Columbia Select, L.P., and 311,363 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.
(10) Includes 1,000,000 common shares that are issuable upon exercise of
warrants, 227,273 common shares into which certain subordinated debentures
are convertible, and 4,920,766 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.
(11) Includes options exercisable within 60 days for the purchase of 827,309
shares.
8
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003, regarding
Shares that may be issued under equity compensation plans maintained by the
Company.
Number of shares remaining Total of
Number of shares to be available for future issuance shares
issued upon exercise of Weighted-average exercise under equity compensation reflected in
outstanding options, price of outstanding options, plans(excluding shares columns (a)
warrants and rights warrants and rights reflected in column (a))(1) and (c)
---------------------- ------------------------------- ---------------------------- --------------
Plan Category (a) (b) (c) (d)
Equity compensation plans
approved by shareholders . . 2,151,443 $ 2.89 410,008 2,561,451
Equity compensation plans
not approved by shareholders - - - -
---------------------- ------------------------------- ---------------------------- --------------
Total. . . . . . . . . . . . 2,151,443 $ 2.89 410,008 2,561,451
====================== =============================== ============================ ==============
__________________
(1) Represents 224,025 shares available for purchase under the Employee Stock
Purchase Plan and 185,983 shares available for grant under the 1995 Stock
Incentive Plan, which includes director stock options.
9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents certain information with respect to compensation we
paid with respect to fiscal years ended December 31, 2003, 2002, and 2001, to
our Chief Executive Officer and to our other four most highly compensated
officers as of December 31, 2003:
Long-Term
Annual Compensation Compensation
-------------------------------------- Awards
Other Annual Securities All Other
Bonus ($) Compensation Underlying Compensation
Name and Principal Position Year Salary($) (1) ($)(2) Options (#) ($)
- -------------------------------- ---- --------- -------- ----------- ----------- -------------
Daniel R. Baty (3) 2003 - 250,000 - 50,000 -
Chairman and Chief 2002 - - - 50,000 -
Executive Officer 2001 - - - 244,000 -
Raymond R. Brandstrom 2003 197,783 65,000 6,000 40,000 -
Vice President of Finance, 2002 191,475 50,000 6,000 40,000 -
Chief Financial Officer 2001 185,000 30,000 8,420 162,000 -
Gary S. Becker 2003 194,750 65,000 6,264 40,000 -
Senior Vice President, 2002 181,125 60,000 6,264 40,000 -
Operations 2001 175,000 40,000 7,124 63,500 -
Suzette P. McCanless 2003 187,667 52,600 6,000 35,000 -
Vice President, Operations 2002 181,125 45,000 6,000 35,000 -
- Eastern Division 2001 175,000 30,000 6,824 63,500 -
Russell G. Kubik 2003 175,223 50,000 6,000 35,000 -
Vice President, Operations 2002 167,670 45,000 6,000 35,000 -
- Central Division 2001 162,000 30,000 6,824 54,000 -
(#) The options granted in 2001 include the effect of an option exchange, which
occurred in fiscal year 2001. As a result of this exchange, the options
granted prior to 2001 were cancelled.
(1) Represents amounts paid or to be paid with respect to the corresponding
fiscal year under the Company's corporate incentive plan.
(2) Consists of amounts paid for parking fees, health club memberships, health
insurance, and cellular telephone expense.
(3) From inception through 2002, Mr. Baty did not receive a salary or bonus. In
2003, the Compensation Committee changed this practice.
10
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides additional information regarding options granted
during the last fiscal year to each of the executive officers named in the
Summary Compensation Table.
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Number of Shares % of Total Options Exercise of for Option Term
Underlying Granted to Base Price Expiration ---------------------------
Name Options Granted (1) Employees in 2003 (2) ($/share)(3) Date 5% (4) 10% (4)
- ---------------------- --------------------- ---------------------- ------------- ---------- ----------- ---------------
Daniel R. Baty. . . . 50,000 9.30% $ 3.95 3/11/2013 $ 124,207 $ 314,764
Raymond R. Brandstrom 40,000 7.50% $ 3.95 3/11/2013 $ 99,365 $ 251,811
Gary S. Becker. . . . 40,000 7.50% $ 3.95 3/11/2013 $ 99,365 $ 251,811
Suzette P. McCanless. 35,000 6.50% $ 3.95 3/11/2013 $ 86,945 $ 220,335
Russell G. Kubik. . . 35,000 6.50% $ 3.95 3/11/2013 $ 86,945 $ 220,335
__________________
(1) The options have terms of 10 years and vest 33% per year beginning one year
from the date of grant. The exercisability of the options may accelerate if
certain corporate transactions occur.
(2) We granted 536,500 stock options to employees in 2003.
(3) The option exercise price is equal to the closing price of our common stock
on the American Stock Exchange on the date of grant.
(4) The dollar gains under these columns result from calculations assuming 5%
and 10% growth rates as prescribed by the SEC and are not intended to
forecast future price appreciation of the Shares. The gains reflect a
future value, based upon the closing price of a Share on the applicable
grant date, and assume annual growth at these prescribed rates. Options
have value to recipients, including the named executive officers, only if
the price of Shares advances beyond the grant date price shown in the table
during the option term.
FISCAL YEAR-END OPTION VALUES
None of the following executive officers exercised options during the fiscal
year ended December 31, 2003. The following table presents certain information
regarding options held as of December 31, 2003, by each of the following
executive officers:
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 2003 December 31, 2003 ($)(1)
-------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ----------- ------------- ------------ --------------
Daniel R. Baty. . . . 179,318 164,682 $ 1,079,840 $ 1,352,039
Raymond R. Brandstrom 121,324 120,676 $ 728,876 $ 990,750
Gary S. Becker. . . . 55,664 87,836 $ 328,350 $ 721,134
Suzette P. McCanless. 53,997 79,503 $ 319,581 $ 652,720
Russell G. Kubik. . . 47,664 76,336 $ 280,950 $ 626,719
__________________
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at December 31, 2003, and the
exercise price of the options.
11
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee of the Board consists of two nonemployee directors
and our Vice President of Finance. The compensation 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 performance, 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 have been designed to be less than those paid by competitors in the
assisted living industry. These lower base salaries have been combined with
stock option grants so that a significant portion of the executives' pay is tied
to performance of our stock.
Base Salaries. In 2003, base salaries were established as described above.
Stock Options. In 2003, we granted 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 have
been granted as incentive stock options to the maximum extent possible under the
Internal Revenue Code (the "Code"). Although we have granted stock options to
our senior executives in 2003 and prior years, we do not plan to grant any
material stock options in 2004. Management and the compensation committee are
currently evaluating the effectiveness of stock options and other forms of
equity compensation, including restricted stock grants and restricted stock
units, in providing incentives as well as the costs and the accounting impact of
these various alternatives. The compensation committee believes that this is an
opportune time to reassess its long-term incentive compensation in view the
expiration of its current stock option plan in 2005 and changing attitudes
toward the effectiveness, cost and reporting of employee stock options. Any
plan including issuance of common stock as a compensation incentive will require
approval by the shareholders.
Annual Incentives. To date, the committee has not established a regular annual
incentive or bonus plan for executive officers but awards discretionary cash
bonuses based on its review of individual performance and our financial results.
All of our named executives were awarded cash bonuses for fiscal year 2003 based
on management's report and the committee's assessment of individual performance
in 2003.
Our chief executive officer, Mr. Baty, a founder of Emeritus, owns shares
(directly and indirectly) and holds exercisable options representing
approximately 41% of our common stock. Because of this significant equity stake,
Mr. Baty had chosen to receive no base salary in the past. This compensation
pattern was established prior to our initial public offering and the committee
had continued it through 2002, recognizing that Mr. Baty's principal
compensation would be the inherent value of his equity stake. In past years, the
committee granted options to Mr. Baty consistent with grants to other executive
officers. In 2003, however, the committee and Mr. Baty reconsidered this
practice. The committee recognized that Emeritus had grown significantly in size
and complexity in the last several years, and that Mr. Baty had made a
substantial contribution to progress in stabilizing the business and improving
cash flow. The committee of course recognized Mr. Baty's significant investment
in Emeritus, as well as his role as a party in a number of transactions having
to do with the acquisition, financing and management of Emeritus assisted living
communities. These "related party" transactions, which are described in "Certain
Transactions", have been considered and approved by a special committee of
independent directors. In view of these factors, the committee concluded that
Mr. Baty's contribution as Chief Executive Officer should properly be evaluated
separately from his ownership position and his other relationships with us and
should be consistent with the compensation for chief executive officers of other
companies in similar circumstances. Accordingly, in 2003, Mr. Baty was awarded
stock options to purchase 50,000 shares at $3.95 per share and a bonus of
$250,000. The committee has also established a base salary of $300,000 for 2004
for Mr. Baty. These compensation decisions
12
were made taking into account general compensation levels of other similarly
situated companies and the compensation paid to our other senior executives.
Section 162(m) of the 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 2003, the committee
does not expect that there will be any nondeductible compensation.
Compensation Committee (2003)
/s/ David W. Niemiec
-------------------------------
David W. Niemiec (Chairman)
Patrick Carter
Raymond R. Brandstrom
13
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Raymond R. Brandstrom is employed by the Company as its Vice President of
Finance.
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, 1998, and ending
on December 31, 2003, the end of our last fiscal year. In making this
comparison, we have assumed an investment of $100 in shares of the Company's
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.
[GRAPHIC OMITED]
Emeritus Peer AMEX
Corporation Group Market
------------ ---------- ----------
1998 . . . . 100.00 100.00 100.00
1999 . . . . 61.54 29.61 169.96
2000 . . . . 13.61 27.03 141.55
2001 . . . . 19.98 30.66 122.47
2002 . . . . 51.03 27.61 103.02
2003 . . . . 77.73 43.19 144.90
14
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 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.
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
Since 1999, we have managed 46 communities under arrangements with several
related investor groups that originally involved (i) payment of management fees
to us, (ii) options for us to purchase the communities at a price determined by
a formula, and (iii) obligations to fund operating losses of certain of the
communities. These arrangements were modified significantly in 2003. Because
Mr. Baty has financial interests in the entities that own the communities, the
transactions were considered and approved by a committee of independent
directors.
Emeritrust I Communities
The Emeritrust I communities, which consisted of 25 of the 46 communities, were
owned by an investor group in which Mr. Baty had financial interests. The
acquisition of the communities by the investor group was financed by first
mortgage financing of $138.0 million and subordinated debt and equity financing
of $30.0 million. 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 their original investment plus
a preferred return.
Under a management agreement, from January 1, 2002 we received a base management
fee of 3% of gross revenues and an additional management fee of 4% of gross
revenues, payable out of 50% of cash flow, and we were obligated to reimburse
the investor group for cash operating losses of the communities. The agreement
was to have expired June 30, 2003, but was extended to January 2, 2004. In
connection with the extension, we were indemnified against liability under our
obligation to fund cash operating losses by the investor group, including Mr.
Baty. For the second half of 2003, there were no operating losses covered by
this indemnity. During 2003, we received approximately $2.7 million in
management fees under this agreement.
Under the management agreement, we had an option to purchase 22 of the 25
Emeritrust I communities and a right of first refusal to purchase the remaining
three communities. As a result of amendments to the option agreements in January
2002, the option had to be exercised with respect to all Emeritrust I and
Emeritrust II communities (see below) or could not be exercised at all. The
option price was equal to the original cost of the communities, plus an amount
that would provide the investor group with an 18% rate of return, compounded
annually, on their original investment of $30.0 million (less any cash
distributions received). The amended option would have expired on
15
January 2, 2004. On September 30, 2003, in connection with the other Emeritus I
and Emeritus II transactions described below, these options were terminated.
Based on market conditions and valuations, we believe the option purchase price
for these communities exceeded their fair market value at the termination of the
options.
Under related agreements, the investor group had the right to require Mr. Baty
to purchase between ten and twelve of the Emeritrust I and Emeritrust II
communities at prices based on the option price computations described above,
depending on the occurrence of any one of the following events: (a) we failed
to exercise our option to purchase the communities, (b) we defaulted under the
management agreements, (c) Mr. Baty's net worth fell below a certain threshold,
(d) we experienced a change of control or (e) Mr. Baty ceased to be our chief
executive officer. Mr. Baty agreed to pledge additional collateral to secure
his obligation to purchase the communities under these requirements. As a part
of a mortgage restructuring in 2001, Mr. Baty agreed to make additional capital
contributions to the investor groups 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.
In connection with the other Emeritrust I and Emeritrust II transactions
described in this section, on September 30, 2003, Mr. Baty entered into an
agreement with the Emeritrust I investor group pursuant to which he guaranteed
to the investor group (i) on or before September 30, 2005, the repayment of its
invested capital together with a 6% rate of return, compounded annually (less
any cash distributions received), and (ii) the funding of operating deficits
related to the communities. Under these arrangements, Mr. Baty also assumed
responsibility for the underlying mortgage debt. Mr. Baty secured these
obligations through a pledge of unrelated partnership interests and capital
stock in Holiday. The prior agreements under which the investor group could
require Mr. Baty to purchase up to 12 communities were terminated.
As a part of these transactions, the investor group agreed to transfer one
community to Mr. Baty subject to mortgage financing of $3.2 million, the amount
of the underlying financing allocated to this community. Mr. Baty agreed to
lease the community to us under a 10-year lease with rental of (i) debt service
(including interest and principal) computed on a $4.2 million base amount, the
mortgage interest rate, and a 25 year amortization, and (ii) 50% of cash flow
(after accounting for assumed management fees and capital expenditures). The
base amount represents the original principal amount of mortgage debt allocated
to this community before debt reductions funded by Mr. Baty as described above.
This transaction has not yet been completed.
Emeritrust II Communities
The Emeritrust II communities, which consisted of 21 of the 46 communities, were
owned by an investor group in which Mr. Baty had financial interests. The
acquisition of the communities by the investor group was financed by first
mortgage financing of $99.6 million and subordinated debt and equity financing
of $24.6 million. 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 as to
a 32% interest, with the remaining 28% interest being held by individual third
party investors. C.P. '99 Pool was a general partnership, which was comprised
of two 50% limited partnerships, the first of which included Mr. Baty's family
partnership as its 40% general partner and the other of which included Mr.
Baty's family partnership as a 20% general partner.
Under a management agreement, we received 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, and we were obligated to reimburse
the investor group for cash operating losses of five of the communities. The
agreement was to have expired December 31, 2003. During 2003 (through September
30), we received approximately $2.0 million in management fees under this
agreement. There were no cash operating losses during this period.
On September 30, 2003, we acquired the 21 Emeritrust II communities for a cash
purchase price of $118.6 million. The purchase price was established to provide
the investor group with the repayment of their invested capital together with a
10% return, compounded annually (less any cash distributions received), rather
than the 18% rate of return that was the basis for the option prices included in
the management agreements. We obtained funds for the transaction through a real
estate investment trust with a combination of sale/leaseback and mortgage
financing in the aggregate amount of $121.5 million. As part of the purchase
price, we also agreed to issue to the Emeritrust II investors warrants to
purchase 500,000 shares of our common stock, of which 400,000 shares have been
issued. The warrants expire September 30, 2008, and have an exercise price of
$7.60 (subject to certain adjustments). We valued these warrants at
approximately $1.4 million. As described above, entities affiliated with Mr.
Baty were included in the investor group and shared proportionately in the
purchase price, including the warrants.
16
MANAGEMENT AGREEMENTS AND RELATED TRANSACTIONS
During 2003, we managed 21 assisted living communities owned by eight entities
that Mr. Baty controls and in which he and/or his family partnership hold
varying financial interests. The agreements under which we manage these
communities are summarized below.
(a) Management agreements, commencing from 1996 through 1998, cover eight
communities that are owned by entities in which Mr. Baty holds an
indirect 22.2% interest. Of these agreements, five provide for fees
equal to the greater of 6% of revenue or $5,000 per month, one for a
fee of 6% of revenue, one for a fee of $10,000 per month and one for a
fee of 4% or revenue with an additional 2% depending on cash flow. In
five cases, agreements extend for indefinite terms, unless terminated
for cause, and in three cases, may be terminated on short notice. We
have a right of first refusal to purchase these communities. In
September 2003, we ceased to manage one community because it was sold
by the owner and, in April 2004, we agreed to purchase four other
communities in a transaction described below. During 2003, we received
$978,000 in management fees under these agreements.
(b) A management agreement, commencing in 1998 and covering one community
owned by an entity in which Mr. Baty holds an indirect 34.9% interest,
provides for fees equal to the greater of 6% of revenue or $5,000 per
month and extends for an indefinite term, unless terminated for cause.
We have a right of first refusal to purchase this community. In
September 2003, we ceased to manage this community because it was sold
by the owner. During 2003, we received $72,000 in management fees under
this agreement.
(c) Management agreements, commencing from 1999 through 2000, and covering
two communities owned by an entity in which Mr. Baty holds an indirect
33.0% interest, provide for fees equal to the greater of 6% of revenue
or $5,000 per month and extend for an indefinite term, unless
terminated for cause. We have a right of first refusal to purchase one
community. In April 2004, we agreed to purchase one of the communities
in a transaction described below. During 2003, we received $374,000 in
management fees under this agreement.
(d) A management agreement, commencing in 1999 and covering one community
owned by an entity in which Mr. Baty holds an indirect 24.4% interest,
provides for of 5% of revenue and extends for an indefinite term,
unless terminated for cause. We have a right of first refusal to
purchase this community. During 2003, we received $86,000 in management
fees under this agreement.
(e) A management agreement, commencing in 1999 and covering one community
owned by a general partnership in which Mr. Baty's family partnership
holds a 50% interest, provides for fees equal to the greater of 5% of
revenue or $5,000 per month, with an additional 2% depending on cash
flow, and extends for consecutive two-year terms, unless terminated by
the owner 90 days prior to expiration. In April 2004, we agreed to
purchase this community in a transaction described below. During 2003,
we received $151,000 in management fees under this agreement.
(f) Management agreements, commencing in 1999 and 2000, cover five
communities that are owned by entities in which Mr. Baty holds an
indirect 40% interest. Of these agreements, two provide for fees equal
to the greater of 6% of revenue or $5,000 per month, two provide for a
fee of 7% of revenue, with a ceiling of $5,000 per month unless certain
cash flow requirements are met, and one provides for a fee equal to the
greater of 5% or $5,000 per month. Four of the agreements extend for
indefinite terms, unless terminated for cause, and one can be
terminated on short notice. We have a right of first refusal to
purchase four of these communities. In April 2004, we agreed to
purchase these five communities in a transaction described below.
During 2003, we received $1.15 million in management fees under these
agreements.
(g) A management agreement, commencing January 2002 and covering one
community owned by an entity in which Mr. Baty holds an indirect 38.0%
interest, provides for fees equal to the greater of 5% of revenue or
$5,000 per month and is subject to termination by either party on short
notice. During 2003, we received $136,000 in management fees under this
agreement.
(h) Management agreements, commencing January 2002 and covering two
communities owned by an entity in which Mr. Baty holds an indirect
19.0% interest, provide for fees equal to the greater of 5% of revenue
or $5,000 per month and are subject to termination by either party on
short notice. In September 2003, we ceased to manage one community
because it was sold by the owner and, in April 2004, we agreed to
purchase the other community in a transaction described below. During
2003, we received $226,000 in management fees under these agreements.
17
On April 1, 2004, we entered into agreements with entities in which Mr. Baty had
financial interests pursuant to which we would acquire up to 14 assisted living
communities and 10 Alzheimer's communities for an aggregate price of
approximately $187 million, financed through lease financing with a real estate
investment trust. Of the 14 assisted living communities, 13 were managed by us
and are referred to above and one was managed by us as a part of the Horizon Bay
communities described below. Mr. Baty's financial interests in these
communities are also described elsewhere in this section. If the transactions
are completed in full, the entities that Mr. Baty controls and in which he has
financial interests will receive approximately $36.7 million in net proceeds
from the sale of the communities and Mr. Baty or his family partnership will
receive, through loan repayments, partnership distributions and fees,
approximately $7.9 million. In conjunction with the transactions, other
entities wholly owned by Mr. Baty paid in full outstanding notes held by us in
the principal amount of $1,750,000 and accrued interest of $920,362. (see the
following paragraph) On April 1, 2004, the acquisition of nine of the 14
communities was completed. The 10 Alzheimer's communities are owned by entities
that are not controlled by Mr. Baty but in which entities that he controls have
limited financial interests. If the transactions are completed, these entities
will receive approximately $4.7 million and Mr. Baty will receive approximately
$6,000. On April 1, 2004, the acquisition of eight of the 10 Alzheimer's
communities was completed. The acquisition of the remaining six communities is
expected to occur in the second quarter of 2004, although there is uncertainty
with respect to two of the assisted living communities. The prices paid for
these communities were supported by independent appraisals provided to the real
estate investment trust and the transactions were considered and approved by a
committee of independent directors.
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. As a result of the transaction we hold two notes in the
aggregate principal amount of $950,000 that mature in 2008 and bear interest at
9% per annum and one demand note in the principal amount of $800,000 that bears
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 2003, we received $198,000 in management fees. At December 31,
2003, accrued interest on the notes was $881,095. These notes and all accrued
interest were paid in full in connection with our acquisition of communities
from entities in which Mr. Baty had a financial interest, as described above.
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, with an option to purchase the remaining 31%. In
July 1999, Columbia Pacific Master Fund '98 exercised its option to purchase the
remaining 31% from the independent investor. 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. Cooper
George Partners and we 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 2003, we earned $174,000
in management fees.
On March 22, 2001, we entered into an agreement with Mr. Baty, which governed
operating, accounting, and payment procedures relating to the foregoing entities
in which Mr. Baty had a financial interest, including prompt repayment of any
balances that are temporarily outstanding as a result of normal operations and
interest on average outstanding balances at LIBOR plus 3%. As of December 31,
2003, there were no outstanding balances (net of funds held by us for
application to outstanding balances and excluding the notes). As of that date,
we were indebted to entities in which Mr. Baty had a financial interest in the
amount of $1,215,000.
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 previously operated by Horizon Bay Management
L.L.C. In May 2002, we assigned our rights under these agreements to entities
wholly owned by Mr. Baty and entered into five-year management agreements
expiring April 30, 2007, with the Baty entities providing for a management fee
of 5% of gross revenue. As a part of these agreements, we had the right to
reacquire the one community and seven leased communities at any time prior
18
to April 30, 2007, by assuming the mortgage debt and lease obligations and
paying the 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 $2.3 million in the first twelve months and $1.1 million in the second
twelve months following the closing. Under the management agreements with the
Baty entities, we agreed to fund any operating losses in excess of these limits
over the five-year management term. In late 2002, the Baty entities and Horizon
Bay altered their agreement relating to operating losses whereby (i) Horizon Bay
paid the Baty entities $2 million and (ii) the Baty entities waived any further
funding by Horizon of operating losses of the communities. This alteration did
not change our funding commitment. During 2003, we received management fees of
$787,000.
On September 30, 2003, we entered into an agreement to lease the eight Horizon
Bay communities. Under the agreement, the Baty entities assigned, and we
assumed, the existing leases relating to seven of the facilities. In lieu of
acquiring the remaining community, which was owned by a Baty entity subject to
mortgage financing, we leased the community for a term of 10 years, with rent
equal to the debt service on the mortgage indebtedness (including interest and
principal) plus 25% of cash flow (after accounting for assumed management fees
and capital expenditures). On April 1, 2004, we acquired this community for
approximately $7.0 million and was sold to a real estate investment trust as a
part of the acquisition of 14 assisted living communities from entities in which
Mr. Baty had a financial interest, as described above. Annual rent relating to
the eight communities was estimated at $4.6 million, with annual adjustments
based upon changes in the Consumer Price Index. We paid the Baty entities
approximately $70,000, which represented their cash investment plus 9% per
annum, as provided in the original agreement related to the management of these
communities between the Baty entities and us. Although this transaction closed
December 31, 2003, the economic and financial terms were effective June 30,
2003. This transaction was considered and approved by a committee of
independent directors.
On October 1, 2002, we entered into a lease agreement with Fretus Investors LLC,
for 24 assisted living communities in six states containing an aggregate of
approximately 1,650 units. Fretus acquired the communities from Marriott Senior
Living Services, a subsidiary of Marriott International. Fretus is a private
investment joint venture between Fremont Realty Capital, which holds a 65%
stake, and an entity controlled by Mr. Baty and in which he holds a 36%
interest, which holds a 35% minority stake. Mr. Baty is guarantor of a portion
of the debt and controls the entity that is the administrative member of Fretus.
Fretus, in turn, leased the communities to us. We have no obligation with
respect to the communities other than our responsibilities under the lease,
which includes an option to purchase solely at our discretion. The Fretus lease
is for an initial 10-year period with two 5-year extensions and includes an
opportunity for us to acquire the communities during the third, fourth, or fifth
year and the right under certain circumstances for the lease to be cancelled as
to one or more properties upon the payment of a termination fee. The lease is a
net lease, with base rental equal to (i) the debt service on the outstanding
senior mortgage granted by Fretus, and (ii) an amount necessary to provide a 12%
annual return on equity to Fretus. The initial senior mortgage debt is for
$45.0 million and interest is accrued at LIBOR plus 3.5%, subject to a floor of
6.25%. The Fretus equity is approximately $24.8 million but may increase as a
result of additional capital contributions for specified purposes and will
decrease as a result of cash distributions to investors. Based on the initial
senior mortgage terms and Fretus equity, current rental would be approximately
$500,000 per month. In addition to the base rental, the lease also provides for
percentage rental equal to a percentage (ranging from 7% to 8.5%) of gross
revenues in excess of a specified threshold commencing with the thirteenth month
of the lease. Total rent expense as of December 31, 2003, was approximately
$5.8 million.
19
SARATOGA TRANSACTIONS
In December 1999, we sold 30,000 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 and, in August 2000, we issued to Saratoga a
seven-year warrant to purchase one million shares of our common stock at an
exercise price of $4.30 per share.
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 was 6% of the stated value of
$1,000, of which 2% was 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 became 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. We have not paid cash dividends since the second
quarter of 2000. As a result, we are accruing dividends at the arrearage rate
and as of December 31, 2003, accrued and unpaid dividends on the Series B Stock
were $8.2 million, of which $2.6 million was accrued during 2003. We have
continued to declare and pay dividends payable in additional shares of Series B
Stock and, as of December 31, 2003, had issued an aggregate of 4,830 shares, of
which 1,357 share were issued in 2003.
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. Under this agreement,
Saratoga is currently entitled to designate three of seven members of the Board,
but thus far has chosen to select only two. 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 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 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 Mr. Baty is the greater of 110% of the shares of common
stock owned by Mr. 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 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.
REPURCHASE OF SERIES A PREFERRED STOCK
In a two-part transaction that was completed August 28, 2003, we repurchased all
the outstanding shares of our Series A Preferred Stock for an aggregate purchase
price of $20.5 million. The Series A Preferred Stock had been issued originally
in October 1997 for $25.0 million. As a part of the repurchase, the holder of
the Series A Preferred Stock waived approximately $10.1 million in accrued and
unpaid dividends. As a result of the transaction, we
20
recognized a gain of approximately $14.5 million. Just prior to the repurchase,
the Series A Preferred Stock was accruing compounded, cumulative dividends of
approximately $3.7 million annually, with mandatory redemption in October 2004
at a price of $25 million plus accrued and unpaid dividends. In completing the
repurchase, we avoided these future obligations. In addition, the director
representing the holder of the Series A Preferred Stock, David Hamamoto,
resigned his position on the Board of Directors.
OTHER TRANSACTIONS
In December 2003, we invested $7.3 million (representing an 11% ownership
interest), net of transaction costs, in a limited liability company that
acquired Alterra Healthcare Corporation, a national assisted living company
headquartered in Milwaukee, Wisconsin that was the subject of a voluntary
Chapter 11 bankruptcy. Alterra operated 304 assisted living communities in 22
states. The purchase price for Alterra was $76 million and the transaction
closed on December 4, 2003, following approval by the Bankruptcy Court. The
members of the limited liability company consist of an affiliate of Fortress
Investment Group LLC, a New York based private equity fund, which is the
managing member, an entity controlled by Mr. Baty, and us. Under the limited
liability company agreement, distributions are first allocated to Fortress until
it receives its original investment of $49 million together with a 15% preferred
return, and then are allocated to the three investors in proportion to their
percentage interests, as defined in the agreement, which are a 50% interest for
Fortress and a 25% interest for each of us and the entity controlled by Mr.
Baty.
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 that 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.
21
PROPOSAL FOR RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected KPMG LLP (KPMG), independent public
accountants, to continue as our independent auditors for the fiscal year ending
December 31, 2004. KPMG has audited our accounts since July 28, 1995. The
Board of Directors is submitting its selection of KPMG to the shareholders for
ratification.
Appointment of the Company's independent accountants is not required to be
submitted to a vote of the shareholders of the Company for ratification.
However, the Board of Directors has chosen to submit this matter to the
shareholders as a matter of good corporate practice. If the shareholders fail
to ratify the appointment, the Board will reconsider whether to retain KPMG, and
may retain that firm or another without resubmitting the matter to the Company's
shareholders. Even if the appointment is ratified, the Board of Directors may,
in its discretion, direct the appointment of different independent accountants
at any time during the year if it determines that such a change would be in the
best interests of the Company and the shareholders.
The following table presents the aggregate fees for professional audit services
rendered by KPMG for the audit of the Company's annual financial statements for
2003 and 2002, and fees billed for other services rendered by KPMG.
2003 2002
-------- --------
Audit fees (1) . . . . $361,100 $406,500
Audit-related fees (2) 64,400 87,400
Tax fees (3) . . . . . 112,600 93,400
All other fees . . . . - -
-------- --------
Total. . . . . . . . . $538,100 $587,300
======== ========
(1) KPMG's aggregate fees billed for the audit of the Company's annual
consolidated financial statements, three quarterly reviews on Form 10-Q,
and various acquisition audits.
(2) KPMG's aggregate fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the
Company's financial statements and are not reported as "Audit Fees",
including fees for assurance services related to accounting consultations
and audits of employee benefit plans and certain partnerships.
(3) KPMG's aggregate fees billed for professional services rendered for tax
compliance, tax advice, and tax planning.
The Audit Committee has considered whether KPMG's provision of non-audit
services is compatible with maintaining the independence of KPMG.
A representative of KPMG 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
22
PROPOSAL TO APPROVE AN AMENDMENT TO THE STOCK OPTION PLAN FOR
NONEMPLOYEE DIRECTORS
The Board of Directors is seeking shareholder approval of an amendment to our
Stock Option Plan for Nonemployee Directors (the "Plan") to increase the number
of shares subject to annual stock option grants for nonemployee directors from
2,000 to 7,500.
The number of shares authorized for issuance under the Plan will not increase.
However, the Board of Directors believes that increasing the number of shares
subject to annual stock options for each nonemployee director is necessary in
order to continue to attract and retain qualified directors, especially in light
of the increased role of the Board of Directors due to dramatic changes in
corporate governance requirements over the past two years.
The following summary of the material terms of the Plan, as amended, is
qualified in its entirety by reference to the full text of the Plan, a copy of
which is attached as Appendix B to the proxy statement and incorporated herein
by reference. Please refer to Appendix B for more detailed information.
Description Of The Stock Option Plan For Nonemployee Directors
Purpose
The purpose of the Plan is to attract and retain the services of experienced and
knowledgeable nonemployee directors by providing them the opportunity to acquire
a proprietary interest in our business.
Administration
The Plan is administered by our Board of Directors. No nonemployee members of
the Board of Directors are eligible to vote on matters materially affecting the
rights of such member under the Plan.
Shares Subject To The Plan
Subject to adjustment as a result of stock splits, stock dividends, and other
changes in capitalization, the number of shares of common stock authorized for
issuance under the Plan is 150,000. Shares subject to options granted under the
Plan that expire or terminate without being exercised in full are available for
issuance under the Plan. The closing price of our common stock on April 27,
2004, was $6.90 per share.
Eligibility
Each member of the Board of Directors elected or appointed who is not otherwise
one of our employees is eligible to participate in the Plan. As of April 27,
2004, there were five directors eligible to participate in the Plan.
Types And Terms Of Awards
The Plan permits the grant of non-qualified stock options. Stock options
entitle the holder to purchase a specified number of shares of our common stock
at a specified price, which is called the exercise price, subject to the terms
and conditions of the option grant. The exercise price of stock options under
the Plan is the closing price or, if there is no closing price, the mean between
the high and the low sales price, of our common stock on the American Stock
Exchange on the day the option is granted. Each option granted under the Plan
has a ten-year term. Options may be exercised, in whole or in part (provided
that no fewer than 100 shares may be exercised), by payment in full of the
purchase price in cash, by check, in shares of common stock already owned by the
optionee for at least six months (valued at the fair market value at the time of
such exercise) or, to the extent permitted by law, by delivery of a properly
executed exercise notice, together with irrevocable instructions to a broker, to
properly deliver to us the amount of sale proceeds to pay the exercise price.
After the optionee ceases to be a director of the Company for any reason other
than death, the optionee will be able to exercise the vested portion of his or
her option for three months. However, if the optionee dies, whether during the
optionee's service as a director or during the three-month period referred to
above, the portion of the option that was vested and exercisable as of the date
of termination will expire on the one-year anniversary of the optionee's death.
23
Automatic Awards
Each nonemployee director automatically receives a nonqualified stock option to
purchase 2,500 shares of common stock immediately following his or her initial
election or appointment to the Board of Directors. These stock option grants
are fully vested on the date of grant. In addition, each nonemployee director
automatically receives a nonqualified stock option to purchase 7,500 shares of
common stock immediately following each year's annual meeting of shareholders.
These annual grants vest fully on the day immediately prior to the next
succeeding annual meeting of shareholders.
NEW PLAN BENEFITS
Stock Option Plan for Nonemployee Directors
Number of Shares Underlying
Name and Position (1) Dollar Value (2) Stock Options (3)
- ------------------------------------------ ------------------- ----------------------------
Non-Executive Director Group (5 persons) 258,750 37,500
__________________
(1) Participation in the Plan is limited to nonemployee directors, therefore the
named executive officers, executive officers and our other employees are
not eligible to participate.
(2) This aggregate dollar value is based on the closing price of our common
stock on April 27, 2004, which was $6.90 per share.
(3) Represents only the number of shares subject to stock options that will be
granted during the initial year of the Plan, as amended subject to
shareholder approval, and assumes that all of the nonemployee director
nominees are elected to the Board of Directors.
Nonassignability Of Awards
No stock option granted under the Plan may be transferred, assigned, pledged or
hypothecated by an optionee, other than by will, by designation of a beneficiary
in a manner established by the Plan or by the laws of descent and distribution.
Each award may be exercisable during the optionee's lifetime only by the
optionee.
Term, Termination And Amendment
The Plan will continue in effect until terminated by our Board of Directors.
The Board may generally amend, terminate or suspend the Plan at any time,
subject to shareholder approval to the extent necessary to comply with Rule
16b-3, stock exchange rules, regulatory requirements or other applicable law or
provisions of the Plan. No amendment may be made more than once every six
months that would change the amount, price, timing or vesting of the options,
other than to comply with changes in the Internal Revenue Code.
Effect Of Liquidation, Reorganization Or Change In Control
Upon certain mergers, a consolidation, an acquisition of property or stock, a
separation, certain reorganizations or a liquidation of Emeritus, as a result of
which our shareholders receive cash, stock or other property in exchange for
their shares of common stock, the vesting of all options granted under the Plan
will accelerate in full and such options will terminate if not exercised prior
to such event. However, if our shareholders receive capital stock of another
corporation in exchange for their shares of common stock in any transaction
involving a merger, consolidation, acquisition of property or stock, or
reorganization of Emeritus, all options granted under the Plan will be converted
into options to purchase shares of the other corporation's stock, unless we and
the other corporation decide that the options will not be converted, but will
instead accelerate and terminate as described in the prior sentence.
U.S. Federal Income Tax Consequences
The following briefly describes the U.S. federal income tax consequences of the
Plan generally applicable to us and to optionees who are U.S. citizens.
24
Non-Qualified Stock Options
An optionee will not recognize taxable income upon the grant of a non-qualified
stock option. Upon the exercise of a non-qualified stock option, an optionee
will recognize taxable ordinary income equal to the difference between the fair
market value of the shares on the date of exercise and the option exercise
price. When an optionee sells the shares, the optionee will have short-term or
long-term capital gain or loss, as the case may be, equal to the difference
between the amount the optionee received from the sale and the tax basis of the
shares sold. The tax basis of the shares generally will be equal to the greater
of the fair market value of the shares on the exercise date or the option
exercise price. Special rules apply if an optionee uses shares already held by
the optionee to pay the exercise price or if the shares received upon exercise
of the option are subject to a substantial risk of forfeiture by the optionee.
Tax Consequences To Emeritus
We generally will be entitled to a deduction at the same time and in the same
amount as an optionee recognizes ordinary income.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
APPROVAL OF AN AMENDMENT TO THE STOCK OPTION PLAN FOR
NONEMPLOYEE DIRECTORS
25
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 person named in the accompanying form of proxy will
have discretionary authority to vote the proxies held by him in accordance with
his 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 to be filed for those persons, we
believe that during fiscal year 2003, our officers and directors complied with
all applicable filing requirements with the exception of the following reports
that were inadvertently filed late with the SEC: (i) Daniel R. Baty filed late
a Form 4 on behalf of himself, B.F., Limited Partnership and Columbia-Pacific
Group, Inc., general partner of B.F., Limited Partnership, with respect to the
purchase of certain subordinated convertible debentures of Emeritus, by two
limited partnerships of which B.F., Limited Partnership is the General Partner;
and (ii) the following executive officers filed late their Form 4 Statements
reporting the grant to them of stock options to purchase shares of Common Stock
of Emeritus: Daniel Baty, Raymond Brandstrom, Gary Becker, Suzette McCanless,
Russell Kubik, Martin Roffe, Kacy Kang, and Susan Scherr.
SHAREHOLDER PROPOSALS
Our bylaws permit shareholders to submit proposals for action at the next annual
meeting of shareholders. Shareholders have until December 30, 2004, for
actions, other than director nominations, to be included in the proxy statement
for consideration at the 2005 annual shareholders meeting. For director
nominations, proposals must be received no earlier than February 10, 2005, and
no later than March 12, 2005.
Such proposals should be directed to the Corporate Secretary, Emeritus
Corporation, 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121. For a
timely submitted shareholder proposal to be included in the proxy statement, it
must meet certain requirements of the Securities and Exchange Commission.
ANNUAL REPORT
A copy of our 2003 Annual Report, which includes our Annual Report on Form 10-K
for the fiscal year ended December 31, 2003, 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
April 29, 2004
26
Appendix A
EMERITUS CORPORATION
AUDIT COMMITTEE CHARTER
PURPOSE AND AUTHORITY:
The Audit Committee (the "COMMITTEE") shall assist the Board in oversight of (1)
the integrity of the Company's financial statements, (2) the Company's
compliance with legal and regulatory requirements, (3) the independent auditor's
qualifications and independence, (4) the performance of the Company's internal
audit function and independent auditors, and (5) compliance with the Company's
code of ethics for senior financial officers and compliance with the Company's
code of conduct for all Company personnel. The Committee shall have the
authority and responsibility to appoint, determine funding for, oversee and,
where appropriate, replace the independent auditor. The Committee shall also
have all authority necessary to fulfill the duties and responsibilities assigned
to the Committee in this Charter or otherwise assigned to it by the Board.
As the Committee deems appropriate, it may retain independent counsel,
accounting and other professionals to assist the Committee without seeking Board
approval with respect to the selection, fees or terms of engagement of any such
advisors.
The Committee when appropriate may form and delegate authority to subcommittees
and may delegate authority to one or more designated members of the Committee.
COMPOSITION:
INDEPENDENCE
The Committee shall be composed of three or more directors, as determined by the
Board, each of whom shall meet the independence requirements established by the
Board, the AMEX, and the SEC and any other regulations applicable to the Company
from time to time, including regulations limiting Committee member compensation.
FINANCIAL LITERACY/EXPERTISE
Each Committee member must, at a minimum, be able to read and understand
fundamental financial statements, including the Company's balance sheet, income
statement and cash flow statement. At least one Committee member shall have
past employment experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or background
which results in the member's financial sophistication, including being or
having been a chief executive officer, chief financial officer or other senior
officer with financial oversight responsibilities, and shall be a "financial
expert" in accordance with such regulations as may be applicable to the Company
from time to time.
SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES
No member of the Committee shall serve on more than two audit committees of
publicly traded companies other than the Company at the same time such member
serves on this Committee,
A-1
unless the Board determines that such simultaneous service would not impair the
ability of such member to effectively serve on this Committee. If a Committee
member serves on the audit committees of both a public company and a wholly
owned subsidiary of such company, such service shall be counted as service on
one audit committee, rather than two.
APPOINTMENT AND REMOVAL OF MEMBERS
The members of the Committee shall be appointed by the Board on the
recommendation of the Nominating/Corporate Governance Committee. The Board may
remove any member from the Committee at any time with or without cause.
DUTIES AND RESPONSIBILITIES:
The Committee shall have the following duties and responsibilities, in addition
to any duties and responsibilities assigned to the Committee from time to time
by the Board.
ENGAGEMENT OF INDEPENDENT AUDITOR
* Select and retain the independent auditor; determine and approve
compensation of the independent auditor; resolve disagreements between
management and the independent auditor; oversee and evaluate the
independent auditor and, where appropriate, replace the independent
auditor, with the understanding that the independent auditor shall report
directly to and be overseen by the Committee.
* Pre-approve the retention of the independent auditor for all audit and such
non-audit services as the independent auditor is permitted to provide the
Company and approve the fees for such services, other than de minimis
non-audit services allowed by relevant law. The Committee may pre-approve
services by establishing detailed pre-approval policies and procedures as
to the particular service; provided that the Committee is informed of each
service pre-approved, and that no pre-approval shall be delegated to
management. In considering whether to pre-approve any non-audit services,
the Committee or its delegees shall consider whether the provision of such
services is compatible with maintaining the independence of the auditor.
* Ensure that the Committee's approval of any audit services is publicly
disclosed pursuant to applicable laws, rules and regulations.
EVALUATE INDEPENDENT AUDITOR'S QUALIFICATIONS, PERFORMANCE AND INDEPENDENCE
* At least annually, evaluate the independent auditor's qualifications,
performance and independence, including that of the lead partner.
* At least annually, obtain and review a report by the independent auditor
describing the firm's internal quality-control procedures; any material
issues raised by the most recent internal quality-control review, or peer
review, of the firm, or by any inquiry or investigation by governmental or
professional authorities, within the preceding five years, relating to one
or more audits carried out by the firm and any steps taken to deal with any
such issues.
* At least annually, obtain and review the letter and written disclosures
from the independent auditor consistent with Independence Standards Board
Standard No. 1, including a formal written statement by the independent
auditor delineating all relationships between the auditor
A-2
and the Company; actively engage in a dialogue with the auditor with
respect to that firm's independence and any disclosed relationships or
services that may impact the objectivity and independence of the auditor;
and take, or recommend that the Board take, appropriate action to oversee
the independence of the outside auditor.
* Discuss with the independent auditor the matters required to be discussed
by Statement of Auditing Standards ("SAS") No. 61, Communications with
Audit Committee, SAS No. 89, Audit Adjustments, and SAS No. 90, Audit
Committee Communications, all as amended from time to time, together with
any other matters as may be required for public disclosure or otherwise
under applicable laws, rules and regulations.
* Ensure that the independent auditor's lead partner and reviewing partner
are replaced every five years. Consider, from time to time, whether a
rotation of the independent auditing firm would be in the best interests of
the Company and its shareholders.
REVIEW FINANCIAL STATEMENTS AND FINANCIAL DISCLOSURE
* Meet with management and the independent auditor to review and discuss the
annual audited financial statements and quarterly financial statements,
including the Company's disclosures under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the report
of the independent auditor thereon and to discuss any off-balance sheet
structures and significant issues encountered in the course of the audit
work, including any restrictions on the scope of activities, access to
required information, significant disagreements with management or the
adequacy of internal controls.
* Regularly review with the independent auditor any audit problems or
difficulties and management's response, including adjustments noted or
proposed by the independent auditor but not taken (as immaterial or
otherwise) by management, communications between the audit team and the
national office concerning auditing or accounting issues, and any
management or internal control letters issued or proposed to be issued by
the auditor. Review and discuss with the independent auditor the
responsibilities, budget and staffing of any internal audit function of the
Company.
* If so determined by the Committee, based on its review and discussion of
the audited financial statements with management and the independent
auditor, its discussions with the independent auditor regarding the matters
required to be discussed by SAS 61, and its discussions regarding the
auditor's independence, recommend to the Board whether the audited
financial statements should be included in the Company's annual report on
Form 10-K.
PERIODIC ASSESSMENT OF ACCOUNTING PRACTICES AND POLICIES AND RISK AND RISK
MANAGEMENT
* Obtain and review timely reports from the independent auditor regarding (1)
all critical accounting policies and practices to be used, (2) all
alternative treatments of financial information within GAAP that have been
discussed with management, ramifications of the use of such alternative
disclosures and treatments, and the treatment preferred by the independent
auditor, and (3) other material written communications between the
independent auditor and management, such as any management letter or
schedule of unadjusted differences.
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* Review changes in promulgated accounting and auditing standards that may
materially affect the Company's financial reporting practices.
INTERNAL AUDIT REVIEW
* Review the responsibilities, functions and performance of any internal
audit function of the Company, including any internal audit plans and
budget, and the scope and results of any internal audits.
* Review any reports by management regarding the effectiveness of, or any
deficiencies in, the design or operation of internal controls and any
fraud, whether or not material, that involves management or other employees
who have a significant role in the Company's internal controls. Review any
report issued by the Company's independent auditor regarding the Company's
internal controls.
* Periodically review with management, any internal audit personnel and the
independent auditor the scope and adequacy of the internal accounting
controls implemented to comply with the Foreign Corrupt Practices Act
("FCPA").
* Periodically review with management the need for an internal audit function
and personnel, and report to the Board regarding the Company's compliance
with the recordkeeping provisions of the FCPA and SEC rules.
PROXY STATEMENT REPORT OF AUDIT COMMITTEE
* Prepare the report required by the rules of the SEC to be included in the
Company's annual proxy statement.
HIRING POLICIES
* Set clear policies for the Company's hiring of employees or former
employees of the independent auditor who were engaged on the Company's
account, and ensure that such policies comply with any regulations
applicable to the Company from time to time.
ETHICS COMPLIANCE AND COMPLAINT PROCEDURES
* Develop and monitor compliance with a code of ethics for senior financial
officers pursuant to and to the extent required by regulations applicable
to the Company from time to time.
* Develop and monitor compliance with a code of conduct for all Company
employees, officers and directors pursuant to and to the extent required by
regulations applicable to the Company from time to time.
* Establish procedures for the receipt, retention and treatment of complaints
regarding accounting, internal accounting controls or auditing matters.
* Establish procedures for the confidential, anonymous submission by
employees of concerns regarding questionable accounting or auditing
matters.
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REPORTS TO BOARD
* Report regularly to the Board any issues that arise with respect to the
quality and integrity of the Company's financial statements, the Company's
compliance with legal or regulatory requirements, the performance and
independence of the internal and independent auditors and the performance
of the internal audit function.
* Provide minutes of Committee meetings to the Board and report to the Board
on any significant matters arising from the Committee's work.
MEETINGS:
The Committee shall establish a meeting calendar annually, which shall include
at least four quarterly meetings for the year. The Committee may hold such
other meetings as are necessary or appropriate in order for the Committee to
fulfill its responsibilities. In the absence of a member designated by the
Board to serve as chair, the members of the Committee may appoint from among
their number a person to preside at their meetings. These meetings may be
confirmed with the regular Committee Meeting.
The Committee shall meet at least quarterly in separate executive sessions with
management, internal audit personnel and the independent auditor to discuss
matters that the Committee or the other groups believe warrant Committee
attention.
EVALUATION:
The Committee shall review and reassess this Charter at least annually and, if
appropriate, propose changes to the Board.
The Committee shall obtain or perform an annual evaluation of the Committee's
performance and make applicable recommendations for improvement.
It is not the responsibility of the Committee to plan or conduct audits or to
determine whether the Company's financial statements are complete and accurate
or in accordance with generally accepted accounting principles.
NOTE: AMEX Rule 120 requires review and approval of all "related party
transactions" by the audit committee or "a comparable body of the board of
directors." The term "related party transactions" is to be read consistent with
SEC Regulation S-K, Item 404. Another committee, such as an independent
corporate governance committee, may perform this function.
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Appendix B
EMERITUS CORPORATION
AMENDED AND RESTATED STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
SECTION 1 PURPOSES
The purpose of the Emeritus Corporation Stock Option Plan for Nonemployee
Directors (this "Plan") is to attract and retain the services of experienced and
knowledgeable nonemployee directors for Emeritus Corporation (the "Company") and
to provide added incentive to such directors by providing an opportunity for
stock ownership in the Company.
SECTION 2 ADMINISTRATION
The administrator of this Plan (the "Plan Administrator") shall be the Board of
Directors of the Company (the "Board"). Subject to the terms of this Plan, the
Plan Administrator shall have the power to construe the provisions of this Plan,
to determine all questions arising thereunder and to adopt and amend such rules
and regulations for the administration of this Plan as it may deem desirable.
No member of the Plan Administrator shall participate in any vote by the Plan
Administrator on any matter materially affecting the rights of any such member
under this Plan.
SECTION 3 SHARES SUBJECT TO THE PLAN
Subject to adjustment in accordance with Section 6 hereof, the total number of
shares of the Company's common stock (the "Common Stock") for which options may
be granted under this Plan is 150,000 as such Common Stock was constituted on
the effective date of this Plan (the "Shares"). The Shares shall be shares
currently authorized but unissued or subsequently acquired by the Company and
shall include shares representing the unexercised portion of any option granted
under this Plan which expires or terminates without being exercised in full.
SECTION 4 ELIGIBILITY
Each member of the Board elected or appointed who is not otherwise an employee
of the Company or any parent or subsidiary corporation (an "Eligible Director").
4.1 New Director Grants
Each member of the Board who is an Eligible Director shall automatically receive
a nonqualified stock option to purchase 2,500 Shares immediately following his
or her initial election or appointment to the Board (each a "New Director
Grant"). New Director Grants shall be fully vested on the date of grant.
4.2 Annual Grants
Commencing with the 1997 annual meeting of shareholders, each Eligible Director
shall automatically receive a nonqualified stock option to purchase 7,500 Shares
immediately
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following each year's annual meeting of shareholders (each an "Annual Grant").
Annual Grants shall fully vest on the day immediately prior to the next
succeeding annual meeting of shareholders.
SECTION 5 TERMS AND CONDITIONS OF OPTIONS
Each option granted to an Eligible Director under this Plan and the issuance of
Shares thereunder shall be subject to the following terms:
5.1 Option Agreement
Each option shall be evidenced by an option agreement (an "Agreement") duly
executed on behalf of the Company. Each Agreement shall comply with and be
subject to the terms and conditions of this Plan. Any Agreement may contain
such other terms, provisions and conditions not inconsistent with this Plan as
may be determined by the Plan Administrator.
5.2 Option Exercise Price
The option exercise price for an option shall be the closing price, or if there
is no closing price, the mean between the high and the low sale price of shares
of Common Stock on the American Stock Exchange on the day the option is granted
or, if no Common Stock was traded on such date, on the next succeeding day on
which Common Stock is so traded.
5.3 Vesting and Exercisability
Subject to shareholder approval of the Plan, each Initial Grant and New Director
Grant shall be fully vested on the date of grant and each annual grant shall
fully vest on the day immediately prior to the first annual shareholders meeting
occurring after such Annual Grant.
5.4 Time and Manner of Exercise of Option
Each option may be exercised in whole or in part at any time and from time to
time, subject to shareholder approval of this Plan; provided, however, that no
fewer than 100 of the Shares purchasable under the option (or the remaining
Shares then purchasable under the option, if less than 100) may be purchased
upon any exercise of any option hereunder and that only whole Shares will be
issued pursuant to the exercise of any option.
Any option may be exercised by giving written notice, signed by the person
exercising the option, to the Company stating the number of Shares with respect
to which the option is being exercised, accompanied by payment in full for such
Shares, which payment may be in whole or in part (a) in cash or by check, (b) in
shares of Common Stock already owned for at least six months by the person
exercising the option, valued at fair market value at the time of such exercise,
or (c) to the extent permitted by law, by delivery of a properly executed
exercise notice, together with irrevocable instructions to a broker, to properly
deliver to the Company the amount of sale proceeds to pay the exercise price,
all in accordance with the regulations of the Federal Reserve Board.
5.5 Term of Options
Each option shall expire ten years from the date of the granting thereof, but
shall be subject to earlier termination as follows:
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(a) In the event that an Optionee ceases to be a director of the Company
for any reason other than the death of the Optionee, the Optionee's vested
options may be exercised by him or her only within three months after the date
such Optionee ceases to be a director of the Company.
(b) In the event of the death of an Optionee, whether during the Optionee's
service as a director or during the three-month period referred to in Section
5.5(a), the Optionee's vested options shall be exercisable, and such options
shall expire unless exercised within twelve months after the date of the
Optionee's death, by the legal representatives or the estate of such Optionee,
by any person or persons whom the Optionee shall have designated in writing on
forms prescribed by and filed with the Company or, if no such designation has
been made, by the person or persons to whom the Optionee's rights have passed by
will or the laws of descent and distribution.
5.6 Transferability
During an Optionee's lifetime, an option may be exercised only by the Optionee.
Options granted under this Plan and the rights and privileges conferred thereby
shall not be subject to execution, attachment or similar process and may not be
transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) other than by will or by the applicable laws of
descent and distribution except that, to the extent permitted by applicable law
and Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Plan Administrator may permit an
Optionee to designate in writing during the Optionee's lifetime a beneficiary to
receive and exercise options in the event of the Optionee's death (as provided
in Section 5.5(b)). Any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of any option under this Plan or of any right or privilege
conferred thereby, contrary to the provisions of this Plan, or the sale or levy
or any attachment or similar process upon the rights and privileges conferred
hereby, shall be null and void.
5.7 Participant's or Successor's Rights as Shareholder
Neither an Optionee nor the Optionee's successor in interest shall have any
rights as a shareholder of the Company with respect to any Shares subject to an
option granted to such person until such person becomes a holder of record of
such Shares.
5.8 Limitation as to Directorship
Neither this Plan, nor the granting of an option, nor any other action taken
pursuant to this Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that an Optionee has a right to continue as a
director for any period of time or at any particular rate of compensation.
5.9 Regulatory Approval and Compliance
The Company shall not be required to issue any certificate or certificates for
Shares upon the exercise of an option granted under this Plan, or record as a
holder of record of Shares the name of the individual exercising an option under
this Plan, without obtaining to the complete satisfaction of the Plan
Administrator the approval of all regulatory bodies deemed necessary by the Plan
Administrator, and without complying, to the Plan Administrator's complete
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satisfaction, with all rules and regulations under federal, state or local law
deemed applicable by the Plan Administrator.
SECTION 6 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
6.1 Recapitalization
The aggregate number and class of shares for which options may be granted under
this Plan, the number and class of shares covered by each outstanding option and
the exercise price per share thereof (but not the total price), and each such
option, shall all be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock of the Company resulting from a
split or consolidation of shares or any like capital adjustment, or the payment
of any stock dividend.
6.2 Effect of Liquidation, Reorganization or Change in Control
6.2.1 Cash, Stock or Other Property for Stock
Except as provided in subsection 6.2.2, upon a merger (other than a merger of
the Company in which the holders of shares of Common Stock immediately prior to
the merger have the same proportionate ownership of shares of Common Stock in
the surviving corporation immediately after the merger), consolidation,
acquisition of property or stock, separation, reorganization (other than a mere
reincorporation or the creation of a holding company) or liquidation of the
Company, as a result of which the shareholders of the Company receive cash,
stock or other property in exchange for or in connection with their shares of
Common Stock, each option shall terminate, but the Optionee shall have the right
immediately prior to any such merger, consolidation, acquisition of property or
stock, reorganization or liquidation to exercise such option in whole or in part
whether or not the vesting requirements set forth in the option agreement have
been satisfied.
6.2.2 Conversion of Options on Stock for Stock Exchange
If the shareholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger, consolidation, acquisition of property or stock,
or reorganization, all options shall be converted into options to purchase
shares of Exchange Stock unless the Company and the corporation issuing the
Exchange Stock, in their sole discretion, determine that any or all such options
shall not be converted into options to purchase shares of Exchange Stock but
instead shall terminate in accordance with the provisions of subsection 6.2.1.
The amount and price of converted options shall be determined by adjusting the
amount and price of the options granted hereunder in the same proportion as used
for determining the number of shares of Exchange Stock the holders of shares of
the Common Stock receive in such merger, consolidation, acquisition of property
or stock, or reorganization.
6.3 Fractional Shares
In the event of any adjustment in the number of shares covered by any option,
any fractional shares resulting from such adjustment shall be disregarded and
each such option shall cover only the number of full shares resulting from such
adjustment.
B-4
SECTION 7 EXPENSES
All costs and expenses of the adoption and administration of this Plan shall be
borne by the Company; none of such expenses shall be charged to any Optionee.
SECTION 8 COMPLIANCE WITH RULE 16B-3
It is the intention of the Company that this Plan comply in all respects with
Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and that Plan
participants remain disinterested persons ("Disinterested Persons") for purposes
of administering other employee benefit plans of the Company and having such
other plans be exempt from Section 16(b) of the Exchange Act. Therefore, if any
Plan provision is later found not to be in compliance with Rule 16b-3 or if any
Plan provision would disqualify Plan participants from remaining Disinterested
Persons, that provision shall be deemed null and void, and in all events this
Plan shall be construed in favor of its meeting the requirements of Rule 16b-3.
SECTION 9 AMENDMENT AND TERMINATION
The Board may amend, terminate or suspend this Plan at any time, in its sole and
absolute discretion; provided, however, that if required to qualify this Plan
under Rule 16b-3 under Section 16(b) of the Exchange Act, no amendment may be
made more than once every six months that would change the amount, price, timing
or vesting of the options, other than to comply with changes in the Internal
Revenue Code of 1986, as amended, or the rules and regulations thereunder;
provided further that if required to qualify this Plan under Rule 16b-3, no
amendment that would
(a) materially increase the number of Shares that may be issued under this
Plan,
(b) materially modify the requirements as to eligibility for participation
in this Plan,
(c) materially increase the benefits accruing to participants under this
Plan, or
(d) otherwise require shareholder approval under any applicable law or
regulation shall be made without the approval of the Company's
shareholders.
SECTION 10 EFFECTIVE DATE AND DURATION
This Plan shall be effective on November 20, 1995, the effective date of the
Company's registration statement filed by the Company under the Securities Act
of 1933, as amended, in connection with the Company's initial underwritten
public offering. This Plan shall continue in effect until it is terminated by
action of the Board or the Company's shareholders, but such termination shall
not affect the then-outstanding terms of any options.
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[PROXY CARD]
[Front]
EMERITUS CORPORATION
PROXY FOR THE 2004 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 23, 2004
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 April 16, 2004, at the 2004 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 Wednesday, June 23, 2004, 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.
X IMPORTANT - PLEASE DATE AND SIGN ON THE OTHER SIDE X FOLD AND DETACH HERE X
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[PROXY CARD]
[Back]
Please mark
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 II (TERM EXPIRING 2007): .
01 Raymond R. Brandstrom . . . . . .
02 T. Michael Young
CLASS III (TERM EXPIRING 2005):
03 Bruce L. Busby
-------------------------------------------------
(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.
2. RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE . . . . . . FOR AGAINST ABSTAIN
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL YEAR 2004
3. APPROVAL OF AN AMENDMENT TO THE STOCK OPTION PLAN FOR . . . . .. . . . FOR AGAINST ABSTAIN
NONEMPLOYEE DIRECTORS
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 May 11, 2004.
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___________________, 2004
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X FOLD AND DETACH HERE X